The Department of Defense (DoD) issued a class deviation to the Federal Acquisition Regulation (FAR) prohibiting the award of DoD contracts to companies – including companies selling commercial items under FAR Part 12 – that fail to represent that they do not require employees or subcontractors to sign or comply with confidentiality agreements that prevent the reporting of fraud to federal authorities. Class deviations such as this permit deviations from the FAR and DFARS to affect more than one contract action.

The restriction on DoD contracting imposed by this class deviation is also the subject of a proposed FAR rule issued by the FAR Council on January 22, 2016. The Steptoe advisory on that rule, Proposed FAR Rule Asks for Contractor Representation on 'Internal Confidentiality Agreements’ is available here.

What is Required?

The class deviations provide that when utilizing funds made available by the § 103 of the Continuing Appropriations Act of 2017 (Pub. L. 114-223), or any other act that extends the same requirement to FY 2017 funds, the contracting officer must:

1. Incorporate in all solicitations, including solicitations for the acquisition of commercial items under FAR Part 12, the provision at DFARS 252.203-7994 Prohibition on Contracting with Entities that Require Certain Internal Confidentiality Agreements—Representation. This provision requires a representation that:

By submission of its offer, the Offeror represents that it does not require employees or subcontractors of such entity seeking to report fraud, waste, or abuse to sign or comply with internal confidentiality agreements or statements prohibiting or otherwise restricting such employees or contactors from lawfully reporting such waste, fraud, or abuse to a designated investigative or law enforcement representative of a federal department or agency authorized to receive such information.

2. Incorporate in all solicitations and contracts, including solicitations and contracts for the acquisition of commercial items under FAR Part 12, the provision at DFARS 252.203-7995 Prohibition on Contracting with Entities that Require Certain Internal Confidentiality Agreements. This provision requires that:

(a) The contractor shall not require employees or subcontractors seeking to report fraud, waste, or abuse to sign or comply with internal confidentiality agreements or statements prohibiting or otherwise restricting such employees or contactors from lawfully reporting such waste, fraud, or abuse to a designated investigative or law enforcement representative of a federal department or agency authorized to receive such information.

(b) The contractor shall notify employees that the prohibitions and restrictions of any internal confidentiality agreements covered by this clause are no longer in effect.

In addition, DFARS 252.203-7995 addresses the following remedies:

The government may seek any available remedies in the event the contractor fails to perform in accordance with the terms and conditions of the contract as a result of government action under this clause.

3. Modify existing contracts awarded on or after October 1, 2016, to the maximum extent practicable, to include DFARS 252.203-7995.

Earlier Proposed Rule

The proposed Federal Acquisition Regulation (FAR) rule issued on January 22, 2016, implements Section 743 of Division E, Title VII of the Consolidated and Further Continuing Appropriations Act of 2015 (Pub. L. 113-235), prohibiting the use of appropriated funds for a contract, grant, or cooperative agreement with an entity that requires its employees or subcontractors “seeking to report fraud, waste, or abuse to sign internal confidentiality agreements or statements prohibiting or otherwise restricting such employees or contactors from lawfully reporting such waste, fraud, or abuse to a designated investigative or law enforcement representative of a federal department or agency authorized to receive such information.”

The proposed FAR rule would apply to all agencies, and like the class deviation, would apply to contracts and subcontracts for the acquisition of commercial items. In addition, the proposed rule and the DoD class deviation do not apply to Standard Form 312 (Classified Information Nondisclosure Agreement) or Standard Form 4414 (Sensitive Compartmented Information Nondisclosure Agreement) or any other form issued by a federal department or agency governing the nondisclosure of classified information.

What Should Contractors Consider?

As discussed in our earlier advisory on the proposed FAR rule, the Securities and Exchange Commission (SEC) issued a similar regulation pursuant to the Dodd-Frank Act and brought an enforcement action against a company that allegedly included improperly restrictive language in a confidentiality statement presented to employees during internal investigations. Without admitting SEC’s allegations, the company agreed to pay a civil penalty and to take other remedial actions, including amending its confidentiality statement to ensure that it did not prohibit an employee from reporting violations of federal law to the government or require them to tell the company that they had made such a disclosure or report. The SEC’s administrative order in that matter is available here. In addition, at the time of that settlement, the SEC said that “[o]ther employers should similarly review and amend existing and historical agreements that in word or effect stop their employees from reporting potential violations to the SEC.” The SEC press release is available here.

Our earlier advisory also noted several existing legal and regulatory provisions applicable to government contractors that relate to internal reporting, protection of whistleblowers, and disclosure to appropriate government agencies. This DFARS class deviation now adds another element to that matrix. In light of this new class deviation, DoD contractors may want to consider SEC’s guidance above – to review and amend confidentiality agreements used in their government contracting compliance programs that “in word or effect” could be construed as “prohibiting” the lawful reporting of waste, fraud, or abuse to the government.