Statistics show that proposed and actual debarment and suspension actions are on the rise. Moreover, the current federal contracting environment reflects Congress’ mandate that executive agencies aggressively seek to take action against companies and individuals who are not responsible contractors, or who have wasted, defrauded, or otherwise abused public funds.

The brief suspension of International Business Machines Corporation (“IBM”) provided a reality check for industry and government. Industry now realizes that no company is too large to be exempt from the suspension process. Government learned that while it can suspend a large company like IBM, the adverse effects of taking such action may seriously restrict the amount of time that the Government can prohibit a major provider from participating in federal contracting.

Suspension Imposed on “Adequate Evidence” of Wrongdoing

The decision to suspend a contractor from federal contracting must be based on whether such action is in the public interest for the government’s protection and not for purposes of punishment. See FAR 9.402(b). However, contractors or individuals can be suspended on the existence of very little concrete evidence of wrongdoing. Specifically, the government may suspend a contractor or individual upon a finding of “adequate evidence.”

Adequate evidence is defined as “information sufficient to support the reasonable belief that a particular act or omission has occurred.” See FAR 2.101. Courts addressing this issue have opined that an indictment, among other things, constitutes adequate evidence for the purposes of suspension. Accordingly, a contractor or individual could be suspended based on the government’s reasonable belief or suspicion that an act took place.

According to regulations, a suspending official may suspend a contractor suspected of: “(1) commission of a fraud or criminal offense in connection with --- (i) obtaining; (ii) attempting to obtain; or (iii) performing a public contract or subcontract”; (2) “violation of Federal or State antitrust statutes relating to the submission of offers”; (3) “Commission of embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statement, tax evasion, or receiving stolen property”; (4) “violations of the Drug-Free Workplace Act of 1988”; (5) “intentionally affixing a false ‘Made in America’ label; or (6) “commission of an unfair trade practice.” See FAR 9.407-2 (a)(1)- (6). Notwithstanding the above, the government is provided with a “catch-all” justification for suspension as well. Accordingly, the government may suspend a contractor or individual, who is suspected of committing any other offense indicating a lack of business integrity or business honesty that seriously and directly affects the current responsibility of the company or individual. See FAR 9.407-2(a)(7).

As discussed below, IBM was suspended for being suspected of improper activity in connection with obtaining a public contract.

IBM Suspension

On March 27, 2008, the Environmental Protection Agency (“EPA”) suspended IBM and listed the company on the Excluded Parties Listing System (“EPLS”) maintained by the General Services Administration (“GSA”). However, EPA lifted the suspension one week later, on April 3, 2008.

Approximately one week prior to the suspension, EPA and Department of Justice (“DoJ”) investigators approached the EPA debarring official to provide evidence that IBM employees allegedly violated federal rules by improperly obtaining protected source selection information from an EPA employee. The acquisition at stake was a financial management system modernization project worth approximately $84 million. After receiving information from EPA and DoJ investigators, the EPA debarring official suspended IBM on March 27, 2008, while the agency continued to receive information from government investigators. To facilitate notice of the suspension, EPA listed the company on EPLS. Surprisingly, EPA did not send IBM any prior notification that it was going to be suspended. In accordance with applicable regulations, agencies were instructed to not solicit offers; award new contracts; place new task, delivery or purchase orders; consent to subcontractors; evaluate pending proposals, quotations or offers, add new work; exercise options; or extend the duration of current contracts or orders with IBM. Upon learning of the suspension, IBM pledged to cooperate with government investigators and launched an internal investigation.

Sometime in early April 2008, IBM and EPA reached an agreement whereby IBM agreed to: (1) withdraw its offer for the EPA financial management system modernization contract; (2) continue its internal investigation; (3) examine its compliance program; (4) continue to cooperate with Government investigators; and (5) reimburse the Government for the costs associated with the investigation. As a result, EPA agreed to lift the suspension on April 3, 2008. IBM is currently undertaking the above tasks per the agreement with EPA. Moreover, EPA and DoJ are continuing to investigate this matter.

Lessons Learned

For years, critics have argued that only small companies get debarred or suspended. Such is the case because the government could ill-afford to debar or suspend a large firm that provides mission-critical goods and services. However, the IBM suspension dispels that theory. IBM is an extremely large provider to the government. According to GSA Schedule sales figures, IBM’s contract sales reached $537 million in fiscal year 2007, representing a 31 percent increase from fiscal year 2006.

It is important to note that the suspension covered the entire company rather than a specific IBM business segment. Generally, a suspension applies to all divisions of a company. However, the regulations allow the suspending official to isolate or limit the suspension to specific divisions, organizational elements, or commodities. See FAR 9.407-1(c). Here, the EPA debarring official felt that suspending only one division of IBM would be ineffective. Therefore, suspension applied to the entire company.

Suspending a company as large as IBM adversely affected other government vendors, which would impact the performance of several federal contracts. Moreover, the government was not prepared to address the impact of the IBM suspension. Pursuant to EPA’s notice of suspension, all executive agencies were prohibited from accepting bids and proposals where IBM products would be used. Recognizing the overall impact of the suspension, vendors and resellers who rely heavily on IBM products when bidding on federal contracts were very concerned as to whether they would be allowed to continue to compete for federal work. Although GSA issued guidance regarding the IBM suspension on April 2, 2008, the guidance did not squarely address the issue. Instead, the guidance merely referenced the procurement regulations that address the suspension of contractors. Fortunately, the suspension was lifted a day later.

Upon learning of its suspension, IBM did the right thing. IBM immediately met with government officials and offered its cooperation. The company also initiated an internal investigation into the allegations raised by EPA and DoJ investigators. Although EPA had the authority to suspend IBM, one wonders whether suspension was necessary in this instance. Given its reaction to the suspension, IBM would likely have undertaken the same actions had EPA provided notice of the suspension prior to listing the company on the EPLS.

Conclusion

Contractors must clearly understand that the government will suspend large companies upon a finding of adequate evidence where such action is in the government’s best interests. At the same time, the government must understand and be prepared to address the impact on executive agencies and other vendors and suppliers when making such a suspension decision.