Government Contracts Update

This article provides an overview of several legal developments in the past month that may affect government contractors.

In the Courts

Subcontracts and Reduced Scope of Work. The United States District Court for the District of Columbia (the DDC) denied a prime contractor's motion for summary judgment on a subcontractor's breach of contract claim, even though the prime contractor argued that it had properly terminated the subcontract for convenience after the government terminated the prime contract for convenience. The DDC found that there remained a factual dispute as to whether the prime contract had been terminated for convenience, because the prime contractor had not received an actual notice of termination, but rather a change order letter reducing or delaying the scope of work. This case is a good reminder that prime contractors may wish to consider subcontract clauses that address not only government terminations, but also government-directed work scope changes.

Claims against Inspectors General. The United States Court of Appeals for the District of Columbia Circuit recently held that there is no Bivens claim for contractors alleging Due Process and Fifth Amendment violations by federal agencies' offices of inspector general (OIG), because alternative remedies exist in the form of bid protests and claims under the Contract Disputes Act and the Privacy Act. In effect, the Court's ruling prohibits a contractor from suing an OIG for violating the U.S. Constitution when the OIG allegedly has issued an erroneous report causing a contractor to lose business, unless a specific statute provides a cause of action.

Contractor Liability for Acts Abroad. The United States District Court for the Eastern District of Virginia recently permitted a group of non-U.S. citizen plaintiffs to continue pursuing a lawsuit against a defense contractor in federal district court for alleged violations of international law committed abroad, pursuant to the Alien Tort Statute.

Regulatory Enforcement

Effect of DOJ Guidance Documents. The U.S. Department of Justice (DOJ) issued a memorandum in late January indicating that, "effective immediately for ACE [affirmative civil enforcement] cases, the Department may not use its enforcement authority to effectively convert agency guidance documents into binding rules" because "[g]uidance documents cannot create binding requirements that do not already exist by statute or regulation." Thus, DOJ "litigators may not use noncompliance with guidance documents as a basis for proving violations of applicable law in ACE cases." However, DOJ "may use evidence that a party read such a guidance document to help prove that the party had the requisite knowledge of the mandate." The memorandum specifically notes that it applies to False Claims Act litigation.

Anti-Poaching Agreements. DOJ's anti-trust division has announced that industry can expect increased enforcement actions related to anti-poaching agreements (agreements between employers not to recruit or hire certain prospective employees, or not to compete on their compensation).

Prohibited Clauses in Commercial Supplier Agreements. The General Services Administration issued a final rule, effective February 22, 2018 (following comments received on the proposed rule), prohibiting some clauses commonly found in commercial supplier agreements that may be inconsistent with federal law. These include certain clauses addressing jurisdiction, venue, and arbitration in disputes; automatic renewal and extension clauses; and clauses allowing unilateral termination by the contractor. The new rule also permits contractors to unilaterally revise terms only if they are not material.

Inflation Adjustments to Civil Penalties. The U.S. Small Business Administration has issued a final rule, effective February 21, 2018, adjusting for inflation certain civil monetary penalties. This includes an adjustment to penalties for lobbying activities by recipients of federal financial assistance under 13 C.F.R. Part 146.

U.S. Department of Defense

Defense Budget. The Office of the Under Secretary of Defense (Comptroller) Chief Financial Officer released its Fiscal Year 2019 Budget Request this month. The materials include an update on FY17 efforts to improve Department of Defense (DoD) acquisition processes (Strategic Objective 3.3), current acquisition reform efforts (Chapter 7-2), and FY19 Program Acquisition Costs by Weapon System.

DoD Acquisition of Commercial Items. In late January, the DoD issued a new Guidebook for Acquiring Commercial Items, rescinding a prior version from November 2001.

U.S. Government Accountability Office

DoD Acquisition Workforce. The U.S. Government Accountability Office released a report this month, "Defense Acquisition Workforce: Opportunities Exist to Improve Practices for Developing Program Managers." The report found that while a number of leading practices for developing program managers were in place at the U.S. Air Force, Army, and Navy (such as training classes that allow program managers to share experiences), other practices were implemented only partially (identification of high-potential talent by senior leaders) or not extensively (financial rewards for good performance).

Legislative Developments

Reporting on Beneficial Owners in Bids and Proposals. The Senate Judiciary Committee heard testimony this month on the bipartisan Senate Bill 1454 (the TITLE Act). The bill would require a revision to the Federal Acquisition Regulation (FAR) to mandate that non-exempt federal contractors provide in all bids and proposals information concerning their "beneficial owners," including name, residential or business address, and a non-expired passport or state driver's license or ID number. With certain exceptions, a "beneficial owner" is "each natural person who, directly or indirectly…exercises substantial control over a corporation or limited liability company through ownership interests, voting rights, agreement, or otherwise; or…has a substantial interest in or receives substantial economic benefits from the assets of a corporation or the assets of a limited liability company." Any business concern that employs more than 20 employees on a full-time basis in the United States, files income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales, has an operating presence at a physical location within the United States, and has more than 100 shareholders, would be exempt from this requirement. Co-sponsor Senator Chuck Grassley stated in support, "In the defense industry, anonymous companies can obtain contracts with the Department of Defense. One report uncovered an Afghan company that was contracted to supply our troops but was secretly owned by the Taliban. That's scary." The U.S. Chamber of Commerce fears that the requirement "would simply further tilt the federal contractor playing field further against new entrants, especially small and mid-size businesses that do not qualify for an exemption" and that it would make it "easier for bad actors in the government to steer contracts to entities owned or controlled by favored interests or to keep them away from parties they do not like for reasons unrelated to the merits of the bid or proposal."

Review of FEMA Contractors' Past Performance. Fourteen Democratic lawmakers in the U.S. House of Representatives have co-sponsored H.R. 4995 (Due Diligence for FEMA Disaster Contractors Act of 2018), which would require the administrator of the Federal Emergency Management Agency, prior to awarding a covered contract in response to a major disaster or emergency, to "conduct a review of the potential contractor" and "after considering the results of the review, determine whether the past performance and resources of the contractor are adequate for performance of the covered contract."

Design-Build Construction. On February 14, 2018, the House Committee on Homeland Security and Governmental Affairs ordered that the bipartisan Senate Bill 2113 (the Construction Consensus Procurement Improvement Act of 2017) be reported favorably by a voice vote. The bill would require two-phase selection procedures for the design and construction of public buildings or facilities valued at more than $3,000,000 (procurements below that threshold may remain subject to the contracting officer's determination).

Bridge Contracts. The bipartisan Senate Bill 2413 (the Bridge Contract Transparency and Accountability Act of 2018) would require reporting to the Office of Federal Procurement Policy and Congress concerning bridge contracts awarded by federal agencies. It would also require, with some exceptions, "[t]he head of each executive agency" to "develop policies and procedures, to the greatest extent practicable, that seek to minimize the use of bridge contracts while providing for continuation of services to be performed through contracts and ensure appropriate planning by contracting officials."