On July 31, 2008, a federal jury in the District of Columbia found that Science Applications International Corporation (SAIC) violated the False Claims Act (FCA) by failing to disclose conflicts of interest that had the potential to bias its work as an advisor to the Nuclear Regulatory Commission (NRC) on the development of rules governing the release and recycling of radioactive materials. In awarding the United States $1.97 million in damages—which are tripled to $5.91 million under the FCA—the jury found that SAIC knowingly submitted 60 false claims for payment and knowingly made 17 false statements to get claims paid on two NRC contracts in the 1990s. Under the FCA, SAIC must also pay penalties of between $5,000 and $10,000 (currently $5,500 to $11,000) for each of the 77 false claims and statements that it submitted to the NRC.

The SAIC case is only the latest example of the Government's increasingly intense scrutiny of conflicts of interest in the federal marketplace. Indeed, in just the past two years, Congress, the DOJ and federal acquisition regulators have all taken significant actions aimed at combating both organizational conflicts of interest (OCIs) and personal conflicts of interest (PCIs). As a result, conflicts of interest are becoming an increasingly important risk area of which companies doing business with the Government must be aware. Today—more than ever—contractors must closely scrutinize their contracts with the Government and their relationships with other contractors to avoid actual or potential conflicts of interest.

U.S. v. Science Applications Int'l Corp., No. 04-1543 (D.D.C. filed Aug. 22, 2007)

The SAIC case involves two contracts awarded to SAIC in 1992 and 1999 to assist the Nuclear Regulatory Commission (NRC) in the formulation of guidelines for the clearance, recycling and reuse of radioactive waste. Among other things, the contracts required SAIC to conduct research and collect data regarding the recycling and reuse of material from nuclear facilities, prepare an options paper outlining possible approaches for the NRC's rulemaking and perform a cost/benefit analysis of the impact of potential rules regarding the reuse and recycling of radioactive materials on various stakeholders.

During the time it was performing these contracts for the NRC—and unbeknownst to the Government—SAIC had business relationships with several companies that performed activities regulated by the NRC. For example, in 1996, SAIC teamed with British Nuclear Fuels, Ltd. (BNFL), on a contract with the Department of Energy (DOE) to dismantle, decommission, decontaminate and recycle the radioactive metals located in several buildings at a DOE complex in Oak Ridge, Tennessee. In addition, SAIC entered into a subcontract with Bechtel Jacobs Company (BJC) in 1999 under which it performed research and review of various metal recycling processes and industrial use of metals in support of BJC's prime contract with the DOE. During this same time period, an SAIC executive held a leadership role with the Association of Radioactive Metal Recyclers (ARMR), a trade association formed by industry to facilitate and advocate the reuse of radioactive and contaminated materials.

The jury found that SAIC's business relationships with companies that stood to benefit from its work with the NRC constituted a conflict of interest that could potentially affect its ability to provide impartial assistance to the NRC. According to the jury, SAIC knowingly failed to disclose these conflicting relationships to the Government in violation of the FCA and its contracts with the NRC.

Recent Government Efforts to Combat Conflicts of Interest

The SAIC case is emblematic of recent attempts Government-wide to bring more attention to conflicts of interest in the federal marketplace. Another high-profile example of this heightened focus can be seen in the decision by the DOJ to intervene in whistleblower suits against companies such as Sun Microsystems and Accenture. The Government alleges, among other things, that these companies violated OCI regulations by failing to disclose what the Government perceives to be an impairment of objectivity due to the companies' involvement in the industry-wide practice of entering alliance agreements. According to the Government, these agreements between IT manufacturers, resellers and consultants involved favorable treatment between alliance members in exchange for help securing contracts with or selling products to the Government. The Government's OCI allegations appear to call for an expansive application of the OCI regulations, which would find a duty of objectivity even in the absence of a contract to advise the Government on technology purchases.

Congress has also been paying increasingly close attention to both organizational and personal conflicts of interest. The fiscal year 2009 National Defense Authorization Act, which recently cleared Congress and is awaiting presidential signature, contains a provision requiring the Administrator for Federal Procurement Policy to develop a policy to prevent PCIs among contractor employees performing acquisition functions associated with inherently governmental functions and to develop a PCI clause or set of clauses to be included in solicitations and contracts for the performance of these acquisition functions. The Act also calls for a review of the Federal Acquisition Regulation (FAR) to determine whether revisions are necessary to address PCIs, prevent and mitigate OCIs and identify contracting types that raise heightened concerns for potential PCIs and OCIs.

Similar OCI and PCI concerns have prompted proposed changes to the FAR. In March 2008, the FAR Council issued two advance notices of proposed rulemaking, one addressing the need for standard PCI clauses in service contracts and one addressing the need for standard OCI clauses that would extend to contractor employees. These proposed rules followed a Government Accountability Office (GAO) report on Department of Defense personal conflict of interest safeguards, "Defense Contracting: Additional Personal Conflict of Interest Safeguards Needed for Certain DOD Contractor Employees," GAO 08-169 (March 2008), available here. For more information on both the proposed rules and the GAO report, please see the article by Jon Burd and Tracye Winfrey Howard in the Summer 2008 Government Contracts Issue Update, "Upcoming Additional Regulations Concerning Conflicts of Interest Due to Blended Workforce," available here.

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As demonstrated by the SAIC case and other recent Government efforts to bring attention to this issue, conflicts of interest will continue to be an increasingly important risk area for federal contractors in the future. Wiley Rein has extensive experience advising contractors in this area. In addition, this month, Rand L. Allen and Kevin J. Maynard will speak at the American Conference Institute's National Forum on Government Contracting Ethics & OCIs. Click here for more information.