On February 17, 2010, the Department of Defense (DOD) issued a class deviation implementing Section 8116 of the Defense Appropriations Act for Fiscal Year 2010 (Pub. L. 111-118), the so-called Franken Amendment. As implemented by the deviation, the Franken Amendment prohibits DOD from using FY10 dollars to fund certain contracts unless the contractor agrees that employees and independent contractors working under the contract will not be required to resolve certain claims of sexual violence, discrimination, harassment, or other forms of workplace discrimination, through arbitration.

The deviation makes clear, however, that the Franken Amendment does not apply to acquisitions for commercial items or commercially available off-the-shelf (COTS) items. However, bilateral modifications of pre-FY10 contracts and task or delivery orders issued under pre-FY10 contracts are covered by the Amendment if they: (1) are in excess of $1 million; (2) use FY10 funding, and (3) are awarded after February 17, 2010.

The deviation implementing Section 8116 introduces a new DOD contract clause, DFARS 252.222-7999, “Additional Requirements and Responsibilities Restricting the Use of Mandatory Arbitration Agreements.”

As a result, all noncommercial DOD contractors who receive contract awards after February 17, 2010, must carefully review and modify their standard employment agreements and subcontracts to eliminate mandatory arbitration provisions for the enumerated types of claims and refrain from enforcing any such preexisting arbitration provisions in employment agreements and subcontracts.

The Franken Amendment

The Franken Amendment, as implemented by the deviation, prohibits DOD from using FY10 funds for any contract in excess of $1 million that is awarded after February 17, 2010, unless the contractor agrees not to:

  • Enter into any agreement with any of its employees or independent contractors that requires, as a condition of employment, that the employee or independent contractor agree to resolve through arbitration any claim under title VII of the Civil Rights Act of 1964 or any tort related to or arising out of sexual assault or harassment, including assault and battery, intentional infliction of emotional distress, false imprisonment, or negligent hiring, supervision, or retention (the “enumerated claims”); or
  • Take any action to enforce any provision of an existing agreement with an employee or independent contractor that mandates that the employee or independent contractor resolve through arbitration any of the enumerated claims.

In short, the Franken Amendment prohibits the use of FY10 funds on any DOD contract to be awarded after February 17, 2010, in excess of $1 million unless the contractor agrees to abstain from including mandatory arbitration clauses in its employment agreements and subcontracts relating to the enumerated claims. Further, as to existing employment agreements and subcontracts, the contractor must agree not to enforce any extant arbitration provisions relating to any of the enumerated claims.

It is important to note that if the contractor is awarded a contract covered by the Franken Amendment, the contractor cannot enter into or enforce mandatory arbitration agreements with any employees or independent contractors relating to the enumerated claims regardless of whether or not the employees or subcontractors are working on a covered contract.

The Franken Amendment also introduces a new, mandatory certification. As implemented by the deviation, by signing a contract awarded after June 17, 2010, in excess of $1 million using FY10 funds, the contractor certifies that it requires each of its subcontractors to agree not to enter into or enforce arbitration provisions relating to the enumerated claims in future or extant employment agreements or subcontracts for persons working under covered subcontracts. Thus, unlike the restrictions on prime contractors, the subcontractor requirements apply only to employees or independent contractors performing work on the covered subcontract.

Commercial Items, COTS, Waiver and Other Exceptions

In addition to the exemption for contracts for commercial or COTS items, Section 8116 allows the Secretary of Defense to waive the requirements of the Franken Amendment if the Secretary or Deputy Secretary “personally determines that the waiver is necessary” to protect U.S. national security interests. Finally, if a person pursuing an enumerated claim would not have a claim enforceable in a U.S. court, then the requirements of the Franken Amendment would not apply to the arbitration provisions of that agreement.

Contract Modifications and Orders Under Pre-FY10 Contracts

The Franken Amendment applies to bilateral contract modifications and task or delivery orders, issued after February 17, 2010, that are in excess of $1 million and use FY10 funds. Accordingly:

  • An order exceeding $1 million placed after February 17, 2010, against an indefinite-delivery/indefinite quantity (IDIQ) contract is subject to Section 8116 requirements regardless of whether the basic IDIQ contract is covered by Section 8116.
  • Orders issued after February 17, 2010, exceeding $1 million and using FY10 funds placed against a GSA Schedule for an applicable item or service are subject to the Franken Amendment’s requirements.
  • Bilateral modifications issued after February 17, 2010, exceeding $1 million, using FY10 funds and adding new work to the contract are covered by Section 8116, but modifications that merely add more than $1 million in funding to an existing contract are not subject to Section 8116’s requirements.

Existing Contracts

The deviation directs contracting officers to modify, on a bilateral basis, in accordance with FAR 1.108(d)(3), existing contracts, if FY10 funds will be used for bilateral modifications or orders exceeding $1 million, issued after February 17, 2010. If a contractor refuses to accept such conditions, the contractor will not be entitled to receive FY10 funds on such modifications or orders. FAR 1.108(d)(3) explicitly recognizes that modifications of the sort anticipated by the deviation are to include appropriate consideration to the contractor.

Lingering Issues

The text of the deviation presents some uncertainties as to the extent of its reach in certain areas. For example, the Amendment defines “covered subcontractor” as “an entity that has a subcontract in excess of $1,000,0000 on a contract subject to subsection (a),” that is, on a contract subject to the Franken Amendment. This language suggests that the subcontractor requirements apply only to “first-tier” subcontractors. The deviation’s DFARS clause, on the other hand, defines “covered subcontract” (it does not define “covered subcontractor”) as “any subcontract, except a subcontract for the acquisition of commercial items or commercially available offthe- shelf items, that is in excess of $1 million and uses Fiscal Year 2010 funds.” By using the term “any subcontract,” as opposed to the Amendment’s more limiting application to a subcontract “on a contract [subject to Section 8116(a)],” the DFARS clause leaves open the question as to whether second tier subcontracts are implicated by the deviation’s certification requirements. Hopefully, this will rectified in the upcoming DFARS interim rule.

Further, as discussed above, contractors subject to the Franken Amendment’s restrictions are prohibited from taking “any action to enforce” the mandatory arbitration provisions relating to the enumerated claims of an existing employment agreement or subcontract. It is not clear, however, whether a contractor that received an arbitration decision, or court order compelling arbitration, prior to February 17, 2010, pursuant to an employment agreement or subcontract may seek to enforce that decision after February 17, 2010.  

Finally, the prohibition on entering into agreements with employees or independent contractors that contain mandatory arbitration provisions relating to the enumerated claims applies only if the contractor requires the employee or subcontractor to agree to the subject provisions “as a condition of employment.” It would seem, therefore, that a carefully drafted employment agreement or subcontract that provides the prospective employee or subcontractor with a choice as to whether or not the employee or subcontractor wishes the enumerated claims to be resolved by arbitration, would be acceptable.

Impact

As of February 17, 2010, noncommercial defense contractors that receive contract awards, orders or modifications in excess of $1 million using FY10 funds must not include mandatory arbitration provisions in any employment agreements for the enumerated claims. Contractors must also refrain from enforcing any such arbitration provisions already in existence. Contractors who anticipate receiving awards after June 17, 2010, should be prepared to flow-down the Franken Amendment’s requirements to covered subcontracts.

As a result, contractors with covered contracts must be very careful to review and revise their standard employment agreements to remove any offending mandatory arbitration provisions. For existing contracts, you should expect contracting officers to require you to enter into contract modifications that include the new DFARS clause introduced by the deviation. Be aware, however, that the inclusion of this clause into existing contracts should only be accepted with appropriate consideration to the contractor.

DOD intends to publish an interim DFARS rule incorporating the deviation. Comments received within two weeks of February 17, 2010, will be considered in formulating the interim rule. Comments received after that period will be considered for the final rule.