For years, the contracting community has questioned the effectiveness and fairness of the government’s suspension and debarment process. The process is viewed as ineffective because a suspension or debarment results in reduced competition for goods and services. Moreover, many contractors believe the suspension and debarment process is unfair because it is often used to penalize contractor misconduct, despite regulations that state that penalization is not the purpose of the suspension and debarment regulations.
To address these and other issues, the government is making greater use of Compliance Agreements as an alternative to suspension and debarment. Compliance Agreements are effective and fair because they do not remove contractors from the competitive process.
Moreover, such agreements focus on assisting the contractor with establishing or improving the company’s government contracting compliance program.
The purpose of this article is to alert clients and colleagues to a potential pitfall in the use of Compliance Agreements. When negotiating the terms of a Compliance Agreement, contractors must ensure that an Independent Monitor—an individual assigned by the government to oversee the contractor’s adherence to the agreement—is not an agent of the government.
The government is finding the use of Compliance Agreements to be a viable alternative to suspension and debarment. In a 2004 Federal Times article, the Department of the Army’s then Suspension and Debarment Official stated, “Compliance Agreements provide continuing assurance that the interests of the government will be sufficiently protected without resorting to a suspension or debarment.” See Robert Kittel, “Not Just a Punishment: Debarment Can Be Tool to Improve Acquisition System,” Federal Times (2004). Moreover, Compliance Agreements provide redress for the apparent inequities of the suspension and debarment process. Id. Accordingly, “the Army has encouraged the expanded use of Administrative Compliance Agreements in those circumstances where their use provides appropriate assurances of responsibility coupled with continuing oversight.” See “U.S. Army Contract Appeals Division,” Compliance Agreements (April 24, 2009), at https://www.jagcnet.army.mil (last visited April 30, 2009).
There is no standard template for Compliance Agreements. Rather, the precise terms and conditions of any Compliance Agreement are based upon the specific facts and circumstances of each case. However, in negotiating several Compliance Agreements, we have found that the government always requires the contractor to: (1) recognize the wrongdoing and provide adequate assurance that the issue will not reoccur; (2) discipline or remove the wrongdoers within the company; and (3) appoint an Independent Monitor to oversee the contractor’s compliance with the agreement.
Role of the Independent Monitor
The role of the Independent Monitor is to assess the contractor’s compliance with the terms and conditions of the Compliance Agreement to ensure that the contractor performs its obligations in a timely and satisfactory manner. This position is critical to any successful Compliance Agreement and is usually held by someone who is an independent attorney, certified public accountant, or other expert knowledgeable in the area of government contracts. The general responsibilities of the Independent Monitor under a Compliance Agreement include: serving as the first point of contact for all questions regarding the Agreement; conducting internal audits; and investigating instances of alleged improprieties in government contracting or business ethics.
While employed and paid by the contractor, the Independent Monitor is not under the contractor’s control. In fact, the Compliance Agreement will clarify that the Independent Monitor is not an agent of the Contractor, and the work produced by the Independent Monitor will not be subject to the contractor’s assertion of the attorney-client privilege or the work-product doctrine. However, the Compliance Agreement is usually silent as to whether the Independent Monitor is an agent of the government.
Contractors must take steps to ensure that the Independent Monitor is not an agent, or viewed as an agent, of the government. The most basic and effective step a contractor can take is to ensure that the Independent Monitor’s status as a non-agent of the government is a term and condition to the Compliance Agreement. To support this position, contractors can take advantage of the following legal and practical arguments: (1) the Independent Monitor is not an agent under the general law of agency; (2) he or she is not an employee or agent under relevant federal government laws and principles; (3) deeming the Independent Monitor as an agent of the government would violate 18 U.S.C. § 209; (4) the Independent Monitor cannot effectively perform certain duties under the Compliance Agreement, if designated or appointed as a government agent; and (5) deeming the Independent Monitor to be a government agent would be inconsistent with a Department of Justice policy concerning Independent Monitors.
The Independent Monitor is NOT an Agent Under the General Law of Agency
- The Principal-Agent Relationship – Agency law is concerned with any “principal-agent” relationship, which is a relationship where one person has legal authority to act for another. See Duvall v. Craig, 15 U.S. 45 (1817). The law of agency is based on the Latin maxim: “Qui facit per alium, facit per se,” which means “he who acts through another is deemed in law to do it himself.” See United States v. Gooding, 25 U.S. 460 (1827). Moreover, the “principalagent relationship” creates an “employer-employee” relationship, whereby the principal employs the agent to work on the principal’s behalf. See Meyer v. Holley, 537 U.S. 280 (2002). Thus, a principal-agent relationship permits, and is premised upon, the ability of one person to act with the authority of another. Assent to create a principal-agent relationship is a prerequisite to the existence of a principal-agent relationship.
- Compliance Agreements Do Not Address the Issue of Independent Monitor as Government Agent – Most Compliance Agreements are silent with regard to whether the government intends to create a principal-agent relationship with the Independent Monitor. Under applicable authorities, the principal and agent must each manifest their assent or intention to create the “principal-agent” relationship through written or spoken words or other specific conduct. See Jade Trading, LLC v. United States, 81 Fed. Cl. 173 (2008); Restatement (Third) of Agency § 1.03 (2006). Therefore, because it does not address the issue, the typical Compliance Agreement lacks an express manifestation of assent, which is an essential element of a principalagent relationship.
Another key element of a principal-agent relationship is the power of the principal to control the actions of the agent. See 44 Comp. Gen. 675, B-155602 (May 4, 1965). In the federal acquisition context, the government’s power to control the specific activities of the putative agent is key. “The usual test for determining whether a person is an agent or an independent contractor is to establish whether the employer’s will is represented by the result only, as in the case of an independent contractor, or by the means as well as the result, as in the case of an agent.” See Westinghouse Elec. Corp., ASBCA No. 21634, 80-2 BCA ¶ 14,726 (1980). To reiterate, “the principal must have the right to control both the means and the details of the process by which the alleged agent is to accomplish the task.” See Northwinds Abatement v. Empirs Ins., 258 F.3d 345, 351 (5th Cir. 2001).
With regard to most Compliance Agreements, the government does not control the actions of the Independent Monitor. Rather, the Independent Monitor serves as an independent check on the contractor’s compliance with the agreement. Moreover, the government, through the Compliance Agreement, will describe objectives that the Independent Monitor must ensure the contractor meets (e.g., establish a code of conduct, compliance hotline, government contracting policies and procedures) in order to show that the company is currently responsible. However, the Compliance Agreement does not dictate how the objectives must be accomplished. As such, the government does not expressly control the actions of the Independent Monitor in performing his or her duties under a Compliance Agreement. Therefore, the Independent Monitor is not a government agent under agency law.
The Independent Monitor is NOT an Employee or Agent Under Relevant Federal Government Laws and Principles
In addition to the general principles of agency discussed above, federal laws and principles specifically address the appointment of agents and employees of the government.
To be an agent of the government, the Independent Monitor would have to be designated or appointed as a government employee. All federal government employees must be appointed to their respective positions by an authorized federal employee or officer, must perform a federal function, and must be supervised by a federal employee or officer. See 5 U.S.C. § 2105(a). The federal function element is satisfied if the federal employee is supporting a federal program, law, or regulation. Hedman v. United States, 15 Cl. Ct. 304 (1988). The mechanism for appointing an entity as the agent of the government for purposes of entering into contracts on behalf of the federal government is perhaps the most relevant example of the requirements for an entity to be considered an agent of the government. Contractors are not often designated or appointed as agents of the government. For example, section 29.303 of the Federal Acquisition Regulation (“FAR”) states that prime contractors and subcontractors shall not normally be designated as agents of the government for the purpose of claiming immunity from state or local sales or use taxes. See 48 C.F.R. § 29.303(a).
Procurement agents must be authorized to pledge the credit of the United States and be designated as an agent of the United States before they may assume legal obligations of the United States. See 22 Comp. Gen. 183, B-28052 (Sept. 7, 1942). A contractor is considered a procurement agent for the government only when three conditions are met: (1) the contractor is acting as a purchasing agent for the government; (2) the agency relationship between the government and the prime contractor is established by clear contractual consent; and (3) the contract states that the government will be directly liable to the vendors for the purchase price. See United States v. New Mexico, 455 U.S. 720, 742 (1982); United States v. Johnson Controls, Inc., 713 F.2d 1541, 1551-52 (Fed. Cir. 1983).
Under applicable law, the government must designate or appoint its agents in writing. Likewise, contractors should make clear in the Compliance Agreement that the Independent Monitor is not an agent of the government.
Deeming the Independent Monitor to Be an Agent of the Government Would Violate 18 U.S.C. § 209
Assuming that the Independent Monitor was deemed to be an agent of the government under a compliance agreement, the Compliance Agreement in question would violate 18 U.S.C. § 209 (“Section 209”). Section 209 was enacted in 1962 as part of a general revision of the criminal statutes dealing with bribery, graft, and conflicts of interest. It is the successor to 18 U.S.C. § 1914, which prohibited government employees from receiving any salary from a private source in connection with their government service, and any non-governmental person or organization from contributing to, or supplementing, an employee’s salary.
Under most Compliance Agreements, the contractor (not the government) is required to pay the reasonable fees and expenses associated with the services performed by the Independent Monitor. Indeed, a government agent, who is also considered an employee of the government, is prohibited by law from receiving compensation from any third party. As such, a designation by the government that the Independent Monitor is a government agent would be contrary to wellestablished law.
Moreover, agency law establishes that an agent has a duty not to acquire a material benefit from a third party in connection with transactions conducted, or other actions taken on behalf of the principal or otherwise through the agent’s use of the agent’s position. See Restatement (Third) of Agency § 8.02 (2006). According to 18 U.S.C. § 209, whoever receives any salary, or any contribution to or supplementation of salary, as compensation for services as an officer or employee of the government from any source other than the government shall be subject to civil and criminal penalties prescribed at 18 U.S.C. § 216. See 18 U.S.C. § 209(a). This statute also imposes civil and criminal penalties on corporations that make such payments to government officers or employees. Therefore, if the Independent Monitor is designated or appointed as an agent of the government, the government must pay the reasonable expenses of the Independent Monitor or be subject to the consequences of 18 U.S.C. § 209.
Independent Monitor Cannot Effectively Perform Certain Duties Under a Compliance Agreement if Designated or Appointed as a Government Agent
Designating or appointing the Independent Monitor as a government agent would adversely affect the Independent Monitor’s ability to effectively perform certain duties under a Compliance Agreement. Of the required duties, an Independent Monitor will have difficulty conducting audits and investigations if he or she is designated or appointed as a government agent under a Compliance Agreement. Such is the case because, if the Independent Monitor was a government agent, the Independent Monitor would: (1) lose impartiality; (2) lose discretion; and (3) be bound to act to guarantee the Constitutional rights of contractor employees.
- Independent Monitor nn Loses “Impartiality” – Generally, a Compliance Agreement is written such that the Independent Monitor is to be impartial so that the government and the contractor may benefit from consultation by the Independent Monitor. According to agency law, an agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship. See Kennametal, Inc., GSABCA No. 457, 1963 GSBCA LEXIS 62; Restatement (Third) of Agency § 1.03 (2006). If designated or appointed as a government agent, the Independent Monitor would lose such impartiality. Such is the case because agents cannot be considered impartial when serving in a principal-agent relationship.
This loss of impartiality will have an obvious and direct impact on essential activities such as conducting interviews of contractor employees by the Independent Monitor. Contractors would have to advise their employees of the Independent Monitor’s status as an agent of the government. In doing so, employees may become hesitant or less forthright with the Independent Monitor and, in some instances, may request an attorney be present during the interview.
- Independent Monitor Loses Discretion – Generally, the Independent Monitor is granted the discretion to investigate complaints concerning the contractor’s compliance with the terms of the Compliance Agreement. As an agent of the government, the Independent Monitor will lose the ability to exercise discretion with regard to such complaints. According to agency law, an agent must always act for the principal’s benefit. See Restatement (Third) of Agency § 1.03 (2006). In so doing, the Independent Monitor must always investigate every allegation and must advise the government before conducting an investigation. Such would impair the Independent Monitor’s ability to quickly resolve issues that are unsubstantiated.
- Independent Monitor Must Act to Guarantee the Constitutional Rights of Contractor Employees – If the Independent Monitor was a government agent, he or she would be required to demonstrate the use of procedural safeguards effective to secure the privilege against self-incrimination when conducting interviews of contractor employees and requesting documents as part of an investigation. In other words, the Independent Monitor would be required to advise interviewees that he or she is a government agent and provide a Miranda warning, if appropriate.
The Independent Monitor may conduct investigations where there are possible criminal violations of government contract law or business ethics. To facilitate investigations, the contractor is required to cooperate with the Independent Monitor by allowing employee interviews and submitting documents upon request. However, the Independent Monitor, as a government agent, may be required to provide a Miranda warning before speaking with company employees. By analogy, one court has held that Miranda warnings were required where a person being interviewed by IRS agents was denied his freedom and was compelled to furnish statements and documents. See United States v. Prudden, 424 F. 2d 1021 (5th Cir. 1970). As part of a Miranda warning, the Independent Monitor must inform individuals that: (1) they have a right to remain silent; (2) statements they make can be used against them; (3) they have a right to an attorney during questioning; and (4) an attorney will be appointed for them if they cannot afford one. See Miranda v. Arizona, 384 U.S. 436, 472 (1966).
Designating or Appointing the Independent Monitor as Government Agent is Inconsistent with Department of Justice Policy
On March 7, 2008, Craig S. Morford, Acting Deputy Attorney General, Department of Justice (“DoJ”) issued a memorandum to all heads of department components under the United States Attorneys Office. See Memorandum for Heads of Department Components, United States Attorneys, Craig S. Morford, Acting Deputy Attorney General (March 7, 2008) (“DoJ Memorandum”). The purpose of the DoJ Memorandum was to present a series of principles for drafting provisions pertaining to the use of Independent Monitors in connection with Deferred Prosecution Agreements (“DPA”) and Non-Prosecution Agreements (“NPA”) with corporations.
The DoJ Memorandum includes nine principles addressing an Independent Monitor’s selection, scope of duties, and duration. Although the Memorandum only applies to criminal matters and does not apply to agencies other than DoJ, two principles are worth noting in this instance because they provide best practices when engaging an Independent Monitor as a result of entering into a Compliance Agreement.
- Independent Monitor Must Remain “Independent” – DoJ promulgated a best practices principle to ensure that the Independent Monitor remains “independent.” According to the DoJ Memorandum, “A monitor is an independent third-party, not an employee or agent of the corporation or of the Government.” See DoJ Memorandum § III.A.2. The Independent Monitor is not the corporation’s attorney. Accordingly, the corporation may not seek to obtain legal advice from the Independent Monitor. Conversely, an Independent Monitor also is not an agent or employee of the government. See DoJ Memorandum § III.A.2 cmt.
- Independent Monitor Must Have “Discretion” to Disclose Matters to the Government – Understanding the importance of allowing discretion, DoJ prepared a best practices principle that grants the Independent Monitor the appropriate discretion to report issues to the government. According to the DoJ Memorandum:
The agreement should clearly identify any types of previously undisclosed or new misconduct that the monitor will be required to report directly to the government. The agreement should also provide that as to evidence of other such misconduct, the monitor will have the discretion to report this misconduct to the government or the corporation or both. Moreover, where the allegations of such misconduct are not credible or involve actions of individuals outside the scope of the corporation’s business, the monitor may decide, in the exercise of his or her discretion, that the allegations need not be reported directly to the government.
The above DoJ principles provide “best practices” guidance that should be observed when entering into a Compliance Agreement. Following the above DoJ guidance, the Independent Monitor will maintain “independent” status and will have the necessary discretion to report matters to the government.
Compliance Agreements are an essential tool in rehabilitating contractors without taking the extreme measures of suspension and debarment. However, when entering the Compliance Agreement, contractors should ensure that the agreement specifies that the Independent Monitor is not an agent or employee of the government.