An undisclosed organizational conflict of interest (OCI) can lead to trouble even after a contractor completes a Government contract, and even if it is tenuous. On September 14, the United States District Court for the District of Columbia upheld a jury verdict against Science Applications International Corporation (SAIC), finding that SAIC violated the False Claims Act (FCA) by failing to disclose perceived OCIs under two contracts with the Nuclear Regulatory Commission (NRC) dating back to 1992. United States v. Science Applications International Corp., No. 04-1543 (D.D.C. Sept. 14, 2009). As damages, the jury required SAIC to disgorge all of the money paid under the contracts, even though SAIC had rendered full performance. The decision illustrates yet again the expanding reach of both OCI rules and the FCA. Contractors should view the decision as another warning of the myriad risks inherent in OCIs and the need to police, document and address potential OCIs carefully, especially in the current regulatory environment.
OCIs in the Crosshairs
We previously addressed OCIs and the SAIC case in the Fall 2008 Government Contracts Issue Update, pointing out then a host of statutory and regulatory initiatives dealing with OCIs. This continuing trend requires contractors to pay close attention to their compliance with OCI rules.
The SAIC case illustrates that even the appearance of attenuated OCIs not fully disclosed and addressed could create problems for a contractor well beyond the bid protest context. In SAIC, the NRC contracted with SAIC to provide technical assistance related to the recycling and reuse of radioactive materials, present an options paper outlining the possible approaches to rulemaking for the release of those materials and assess regulatory alternatives regarding the release of reusable materials. According to the court, "SAIC's neutrality was critical under both contracts." To that end, SAIC promised in both of its NRC contracts to avoid consulting or other contractual arrangements with any organization that could create a conflict of interest, warranting both that it did not have any OCIs and that it would disclose any that might arise during its performance. The contract incorporated an agency-unique OCI clause that defined an OCI as:
A relationship . . . whereby a contractor or prospective contractor has present or planned interests related to the work to be performed under an NRC contract which: (1) may diminish its capacity to give impartial, technically sound, objective assistance and advice or may otherwise result in a biased work product, or (2) may result in its being given an unfair competitive advantage.
41 C.F.R. § 20-1.5402(a) (1979). According to the court, "SAIC repeatedly certified throughout the periods its contracts were in force that it had no OCIs and would notify the NRC of any changes resulting in an OCI."
The court upheld the jury's finding that SAIC, contrary to its certifications, had breached its OCI obligations by failing to disclose relationships with organizations that created an "appearance" of bias. SAIC had entered into subcontracts with two companies in support of the Department of Energy (DOE), but at trial SAIC argued that its work for DOE with these two companies was excluded from NRC regulation. Nevertheless, the court concluded that these companies also performed other work or had wholly owned subsidiaries that were subject to NRC regulations that would be affected by SAIC's advisory work for NRC. Hence, the court reasoned, those relationships should have been disclosed. An SAIC vice president who provided management support to the NRC contract was also involved in a trade association that had an interest in the outcome of SAIC's recommendations to the NRC, and the court concluded that this also "placed SAIC in a conflicting role where it may have been biased."
The SAIC decision reminds Government contractors yet again of the care and attention that real or apparent OCIs demand, both prospectively during business capture and throughout contract performance. Contractors need to develop a systematic way to ensure awareness of the work that their various divisions and business units are performing, as well as the work of their business partners and affiliates; make informed assessments; and err on the side of disclosing and mitigating potential OCI issues.
It is unclear whether the SAIC court would have reached a different result had the contracts included the standard Federal Acquisition Regulation OCI clauses, instead of the more stringent agency-specific clause. In those more typical contexts, the Government Accountability Office has addressed similar business relationships and the potential for "impaired objectivity" OCIs in bid protests, but concluded that business relationships between a contractor and third party on other efforts unrelated to the contract at hand are too remote or attenuated to create the kind of OCI that the court found here. See, e.g., L-3 Services, Inc., B-400134.11, Sept. 3, 2009 ("[W]e look for some indication that there is a direct financial benefit to the firm alleged to have the organizational conflict of interest.").
Implied Certifications: The FCA Riptide
In SAIC, the Government relied on an "implied certification" theory to establish that each and every invoice SAIC submitted under the contract was a false claim. Its theory was that the NRC would not have awarded contracts or made payments to SAIC had the contracting officers known that SAIC had apparent or actual OCIs, even though there was no regulation, law or other requirement that expressly conditioned payment on SAIC's compliance with the OCI disclosure.
The FCA penalties imposed on SAIC were also severe. In addition to civil penalties, the court concluded that the Government was entitled to recover all of the payments it made under both contracts, since "no money would have been paid to SAIC under its contracts," but for the false implied certifications. "[W]here, as here, the government alleges that it would not have accepted or paid for such advice from the defendant if it had known of the defendant's false or fraudulent claims, the government can properly contend and prove that its damages are all amounts paid because of the false claims that would not have been paid out if the defendant had not made the false claims." Thus, Government contractors should be mindful that undisclosed OCIs-even if not identified by the Government or a protester during the source selection process-may continue to put a contract at risk throughout performance. The clear message is that contractors should take immediate actions to assess and respond to potential OCIs regardless of when they arise.