Law360, New York (November 3, 2016, 2:35 PM EDT) -- Just hours before they were set to take effect on Oct. 25, 2016, a federal district court in Texas issued a nationwide preliminary injunction stopping the government from moving forward with most aspects of the Fair Pay and Safe Workplaces executive order and its final rules and guidance (the rules). For a more fulsome analysis of the rules, see our previous article here.

The injunction — issued by U.S. District Court Judge Marcia A. Crone, from the Eastern District of Texas — resulted from a complaint and emergency motion for a temporary restraining order and preliminary injunction filed on Oct. 7, 2016, by three national and local trade associations (the Associated Builders and Contractors, the Associated Builders and Contractors of Southeast Texas, and the National Association of Security Companies). The court held a preliminary injunction hearing and oral argument on Friday, Oct. 21, 2016, and the court issued its memorandum and order late in the day on Oct. 24, 2016.

The Court's Order

In its decision in Associated Builders and Contractors of Southwest Texas et al v. Rung, the court found that the plaintiffs had established all four factors supporting a preliminary injunction to stop the rules’ reporting and disclosure requirements and restrictions on mandatory arbitration agreements from going into effect: (1) a substantial likelihood of success on the merits; (2) a substantial threat of irreparable injury; (3) the threatened injury outweighs any damage that the injunction might cause to the defendants; and (4) the order will not be adverse to the public interest.

In particular, the court took issue with the fact that the rules would require contractors to publicly disclose and report so-called "violations" of federal labor laws, and risk potential suspension and debarment, even where those alleged violations had not been fully adjudicated, were subject to appeal or were potentially not even true. The court did not enjoin the rules' paycheck transparency requirements from going into effect on Jan. 1, 2017.

The court found that the plaintiffs were substantially likely to succeed with their challenge on five separate grounds, summarized briefly below:

  1. The rules exceeded the president's, Federal Acquisition Regulatory Council's and U.S. Department of Labor's authority and are preempted by other federal labor laws. The public disclosure requirements and potential penalties (including disqualification) imposed on contractors and subcontractors are not authorized by the Procurement Act. In addition, by permitting suspension or debarment of government contractors based on nonfinal and/or nonadjudicated determinations, the rules conflict with federal labor laws that spell out specific procedures and penalties for violations and that offer greater due process protections.
  2. The rules violate the First Amendment. The rules require contractors to publicly disclose and report any "violations" of the 14 specified labor laws, regardless of whether such alleged violations occurred while performing government contracts, whether such violations were finally adjudicated, or whether they occurred at all. Thus, the requirements are overbroad and force contractors to engage in public speech on matters of considerable controversy which could adversely affect their reputations.
  3. The rules violate contractors' due process rights. The rules require contractors to report and defend against nonfinal agency allegations of labor law violations, under threat of potential disqualification from performing government contracts, without any of the standard due process rights employers are typically entitled to under the various labor laws (i.e., administrative hearing, appeal and judicial review).
  4. The rules are arbitrary and capricious and entitled to no deference. The court questioned the FAR Council's and DOL’s explanations for imposing "drastic new requirements" and pointed out the likelihood that the"cumbersome new process" would bog down the procurement process and impose significant additional costs and expenses on contractors, without any quantifiable benefits.
  5. The rules violate the Federal Arbitration Act. The rules' restriction on mandatory arbitration agreements (in the Title VII and sexual assault/harassment context) conflicts with the FAA and Congress' strong federal policy in favor of arbitration. Unlike the Franken Amendment, which reflects Congress' command, the executive branch may not limit arbitration policies or practices through executive order.

The court found a substantial threat of irreparable harm to government contractors if the rules went into effect, including the potential loss of work, compelled disclosure of alleged violations of labor laws (in violation of the First Amendment), increased costs, loss of due process rights, and loss of arbitration rights. At the same time, the court found that the government was unlikely to suffer any significant harm if there was a delay in implementing the rules, since any delay would simply preserve the status quo that has been in effect for decades. Finally, the court found that the public interest would be served because an injunction would protect contractors from becoming impaired by the arbitrary and unnecessary burdens imposed by the rules.

Consequences of the Injunction

For the time being, government contractors and subcontractors should be aware of the following consequences of the injunction.

First, the rules' reporting and disclosure requirements are enjoined. These requirements were set to take effect on Oct. 25, 2016, for all prime contractors bidding on covered contracts valued at $50,000,000 or more after the effective date, and on later dates for smaller contractors and subcontractors. This means that contractors bidding on covered prime contracts worth at least $50,000,000 will not be required, as of now, to start reporting and disclosing labor law violations, and all other contractors and subcontractors expected to enter into contracts worth $500,000 or more in the future will also have a reprieve from the rules. (As a reminder, the rules only applied to: (1) new prime contracts worth $50,000,000 or more bid on or entered into after Oct. 25, 2016; (2) new prime contracts worth $500,000 or more bid on or entered into after April 25, 2017; and (3) new subcontracts worth $500,000 or more bid on or entered into after Oct. 25, 2017, and not pre-existing contracts or basic option renewals.)

Second, the rules' prohibition on mandatory predispute arbitration agreements covering Title VII or sexual assault/harassment claims has been enjoined. This requirement was set to kick in on Oct. 25, 2016, for contractors and subcontractors with covered contracts of more than $1,000,000, not including commercial items.

Third, the rules' paycheck transparency and independent contractor notice requirements were not enjoined, and remain scheduled to go into effect on Jan. 1, 2017, for contractors and subcontractors with covered contracts of more than $500,000 (other than commercially available off-the-shelf items).

Next Steps

Immediately following the court's decision, the government's Office of Federal Procurement Policy issued a memorandum to its chief acquisition officers, senior procurement executives, defense acquisition regulations council and civilian agency acquisition council, instructing federal agencies to take all steps necessary to comply with the court order and ensure that the enjoined sections, provisions and rules are not implemented. Agencies were, however, instructed to continue conducting evaluations of contractors/offerors, including responsibility determinations, in accordance with the laws and regulations previously in effect.

The government has several choices for how to proceed. First, it may seek an immediate interlocutory appeal to the Fifth Circuit. It could try to stay the injunction pending appeal, or seek expedited briefing, although stays of preliminary injunctions in these circumstances are not common. Second, the government could consent to a permanent injunction and take an appeal from that final judgment. Third, the government could continue to litigate before the district court and then ultimately appeal to the Fifth Circuit if it is unsuccessful on the merits. Fourth, in addition to or instead of the above options, the government could also seek to revise the rules to address some or all of the issues and concerns raised by the plaintiffs and the court.

Although we anticipate that, at a minimum, there will be a prompt appeal of the injunction, precisely when and how the government chooses to proceed will also be based on political considerations, including the upcoming election results. Given all of this uncertainty, we continue to recommend that contractors and subcontractors that expected to be covered by the rules should carefully monitor further developments and continue to plan and prepare as if they will need to comply with all aspects of the rules in the future.