On March 30, 2013, the U.S. District Court for the District of Columbia issued a decision imposing certain socio-economic contract requirements on subcontractors operating hospitals associated with the University of Pittsburgh Medical Centers. See UPMC Braddock, et al. v. Harris, Civ. 09-1210 (PLF) (D.D.C. Mar. 30, 2013) (“UPMC Braddock”). Even though the hospitals’ subcontracts did not include these socio-economic clauses, the court applied the age-old “Christian Doctrine,” which assumes that certain contract requirements reflecting a “significant or deeply ingrained strand of public procurement policy” will apply to a Government contract even if those requirements have been omitted from the text of the actual contract. See G.L. Christian & Associates v. United States, 312 F.2d 418, 426 (Ct. Cl. 1963). Even though no court has ever before held in the 50-year history of the Christian Doctrine that this legal rule applies to subcontractors (Christian and its progeny apply only to prime contractors doing business directly with the U.S. Government), the court has now radically expanded the doctrine.
The plaintiffs in UPMC Braddock were three hospitals affiliated with the University of Pittsburgh Medical Center (the “Hospitals”). In 1995, the Hospitals entered into subcontracts with a health maintenance organization (the “HMO”) to provide medical services and supplies to individuals enrolled in its coverage program. On January 1, 2000, the HMO contracted with the U.S. Government through the Office of Personnel Management (“OPM”) to provide insurance coverage for federal employees. The HMO’s agreement with OPM required the HMO to comply with several socio-economic requirements promulgated by the U.S. Department of Labor (“DOL”); but these requirements were not included in the HMO’s subcontracts with the Hospitals, even when the subcontracts were renegotiated after 2000. The DOL requirements implement various statutory and regulatory socio-economic requirements relating to “equal opportunity” for employees, disabled individuals, and veterans of the Vietnam era:
- Executive Order 11246 (30 Fed. Reg. 12319 (Sept. 24, 1965), as amended by Executive Order 11375 (32 Fed. Reg. 14303) (Oct. 13, 1967) (the “Executive Order”) – directing the use in Government contracts of clauses that prohibit discrimination on the basis of race, color, religion, sex, or national origin, requiring prime contractors to include the clauses in “every subcontract or purchase order unless exempted by rule, regulations, or orders of the Secretary of Labor,” and mandating that subcontractors furnish DOL with audit rights to ensure compliance with the clauses.
- Section 503 of the Rehabilitation Act of 1973, as amended, 29 U.S.C. § 793 (the “Rehabilitation Act”) – which requires that any Government contract or any subcontract in excess of $10,000 for the procurement of “personal property” or “nonpersonal services” contain a provision requiring “affirmative action to employ and advance in employment qualified individuals with disabilities.”
- Section 402 of the Vietnam Era Veterans’ Readjustment Assistance Act of 1974, 38 U.S.C. § 4212 (“VEVRAA”) – providing that any Government contract or any subcontract in excess of $100,000 for the procurement of “personal property” or “nonpersonal services” contain a provision requiring “take action to employ and advance in employment qualified covered veterans.”
DOL also issued regulations implementing the socio-economic provisions (“DOL Regulations”), requiring that these equal opportunity clauses “shall” be included in “every” covered “contract and subcontract . . . whether or not it is physically incorporated in such contracts and whether or not the contract between the agency and the contractor is written.” 41 C.F.R. § 60-1.4(e). The DOL Regulations define the following key terms:
- Subcontract: “any agreement or arrangement between a contractor and any person … for the purchase, sale or use of personal property or nonpersonal services which, in whole or in part, is necessary to the performance of any one or more contracts.” 41 C.F.R. § 60-1.3.
- Subcontractor: “any person holding a subcontract” in the requisite monetary amount. 41 C.F.R. §60-1.3.
- Nonpersonal Services: those that “include but [are] not limited to … [u]tilities, construction, transportation, research, insurance, and fund depository.” 41 C.F.R. §60-1.3.
Because the HMO required the Hospitals to render medical services to federal employees, among other people, the DOL’s Office of Federal Contract Compliance Programs (“OFCCP”) determined that the Hospitals qualified as Government “subcontractors” under 41 C.F.R. § 60-1.3, and were thus subject to the socio-economic contract requirements. Despite the fact that nothing in the Hospitals’ subcontracts obligated them to comply with these specific programs, OFCCP nonetheless demanded in that it be allowed to audit the Hospitals to monitor their compliance with the clauses. The Hospitals did not supply the information to OFCCP, arguing that they were not subject to the auditing authority of OFCCP because they held no Government subcontracts.
In November 2006, OFCCP filed administrative complaints against the Hospitals to enforce the socio-economic provisions. The Administrative Law Judge (“ALJ”) hearing the case agreed with OFCCP, and DOL’s Administrative Review Board (“ARB”) upheld the ALJ’s conclusion. See OFCCP v. UPMC Braddock, ARB Case No. 08-048 (2009) (previously discussed in our blog here). The ARB’s final decision and order permanently enjoined the Hospitals from failing or refusing to comply with the socio-economic requirements, reasoning that under the Christian Doctrine, the clauses were implied in the Hospitals’ subcontracts. The U.S. District Court for the District of Columbia affirmed the ARB’s decision.
Three New Wild Cards
In affirming the ARB’s ruling, the court reached a number of questionable key conclusions – all of which ignore the time-tested principle that a contract reflects the parties’ agreement and also introduce a number of “wild cards” into the contracting process.
- Pay No Attention to the Plain Meaning of the Contract (or the Regulations, for that Matter)! The court concluded that the Hospitals qualified as “subcontractors” within the broad meaning of the DOL Regulations, even though the OPM procurement regulations, see 48 C.F.R. 1602.17-15, and the plain language of the OPM/HMO contract specifically limited the definition of “subcontractor” to exclude “providers of direct medical services or supplies,” such as the Hospitals. The court reasoned that, because the separately issued DOL Regulations do not define “subcontractor” as exempting direct medical service providers, and because it was the DOL (not OPM) that was empowered to enforce the socio-economic clauses, the separate DOL definition would over-ride. Furthermore, the court concluded that the Hospitals were providing “nonpersonal” services – even though they were plainly providing direct and personal medical services to individual patients (e.g., proctology exams and colonoscopies) – in concluding that the Hospitals were covered by the DOL definition of “subcontractor” from 41 C.F.R. § 60-1.3. Ignoring the plain meaning of the words, the contract, and the OPM regulations, the court concluded that the DOL regulations should separately override what the parties negotiated.
- You’re A “Necessary” Subcontractor Because The Government Needed You Even If You Didn’t Need Them! Arguing that they did not meet the definitional requirement under 41 C.F.R. § 60-1.3 (relating only to subcontracts “necessary to the performance” of the prime contract), the Hospitals pointed out that providing services to federal employees was only part of their responsibility under their subcontract, where the Hospitals were also required to provide services to all other types of patients. But the court rejected this argument, reasoning that, because the Hospitals provided a portion of the medical care that the HMO agreed to supply to federal employees under the OPM contract, the Hospitals’ agreements with the HMO are “necessary to the performance of that contract” and therefore covered under the DOL definition of “subcontractor.” The problem with this result is that what is “necessary” to the performance of a prime contract may change during the course of performance, such that, based on the court’s reasoning, a lower-tier supplier may unwittingly become a “subcontractor” even if that was not the parties’ intent when they structured the supplier relationship.
- Silly Rabbit! You Should Have Known What Constitutes a “Significant or Deeply Ingrained Strand of Public Procurement Policy.” Even though the Hospitals did not consent to enter into Government contracts, the court nonetheless held that the Christian Doctrine required that the socio-economic provisions be incorporated into the Hospital’s so-called “Government subcontracts” by operation of law because they reflected a “significant or deeply ingrained strand of public procurement policy.” In so holding, the court charged the Hospitals with “constructive knowledge” of the statutory and regulatory authority containing the socio-economic provisions, even though the Code of Federal Regulations and the procurement regulations are often a maze of impenetrable (and sometimes even conflicting) requirements. Taking a gigantic and unprecedented leap, the court concluded that there is essentially no distinction between incorporating extra-contractual regulations into a Government prime contract or a private subcontract.
Know When to Hold ‘Em; Know When to Fold ‘Em
The UPMC Braddock decision reflects exactly why you should not play cards with cheaters. Companies are reminded that any company doing business in the Government-space (whether medical, defense, energy, or the ever-growing civilian market) is doing business with a shifty customer – one that often cannot be trusted and cannot be taken at its word. Where the Government is empowered to swoop in at any time (as the OFCCP is often wont to do) and to impose extra-contractual obligations on any company in a supply-chain line, the risks of doing business in that market are incalculable. Moreover, granting the Government such a “right” simply tramples on the rights of the other commercial entities – entities that have actually negotiated and reached agreement as to the contractual terms that will control their ongoing relationship. But those considerations were simply brushed off by the court, which preferred to allow for the broad incorporation of regulations into private contracts, irrespective of the consequences.
The equal opportunity provisions that were incorporated into the prime contract between the HMO and OPM serve a valid and useful purpose. But there is simply no supportable rationale for transforming a private contract between two commercial entities into a Federal Government contract, and then further redefining that once-private contractual relationship by using the Christian Doctrine to impose a maze of complex, invasive, and extra-contractual legal requirements that were not even remotely foreseeable by the original parties to the agreement. Indeed, allowing the Government to swoop in at any time to impose extra-contractual obligations not only renders the risk of doing business incalculable – thereby increasing costs for both consumers and the Government – but also ignores the rights of commercial entities that have actually negotiated and reached agreement as to the contractual terms that will control their ongoing relationship. Those considerations were simply brushed off by the UPMC Braddock court, which preferred to allow for the broad incorporation of regulations into private contracts, irrespective of the consequences. One can only hope that the UPMC Braddock decision will be reversed on appeal or, at the very least, that it will not be expanded beyond its facts to apply to additional flow-down clauses.
This article first appeared in the Government Contracts Blog.