Steven Gordon is a Partner in our Washington D.C. office
Richard Duvall is a Partner in our Northern Virginia office

Federal contractors and grantees face increased risk of being suspended or debarred from federal contracts and programs, or of having to negotiate with the government in circumstances where such an exclusion might be imposed if the matter is not resolved satisfactorily. This heightened risk results from a number of factors, including new contractor self-reporting requirements imposed by the Federal Acquisition Regulation, amendments of the False Claims Act that permit more whistleblower suits, and the government's more aggressive use of suspension and debarment. And the stakes of a suspension or debarment are huge. Even a short term exclusion from participation in federal contracts or programs can be devastating; a long term exclusion frequently amounts to the ''death penalty'' for all or a part of a contractor organization.

This new enforcement climate highlights some deficiencies in the current regime for suspension and debarment of government contractors. These deficiencies, in our view, foster arbitrariness, inconsistency, and unfairness. Suspension and debarment are not supposed to punish contractors or grantees for past misconduct; rather, they are intended to protect the government from future dealings with contractors or grantees that are unscrupulous, unreliable, or incompetent. It is short-sighted and counterproductive to exclude competent contractors (or grantees) who err but are willing and able to reform. Thus, the process for excluding a contractor must be fair and produce reasonable results. An unfair or arbitrary system will cause needless harm to contractors, and their employees and shareholders. Ultimately, it will harm the public interest and the public fisc, as well, because it will reduce the number of qualified entities who compete for government contracts and grants.

In this article we reexamine the existing suspension and debarment system and propose changes to it. These proposed reforms would leave intact the government's ability to exclude irresponsible contractors and grantees, but would increase procedural fairness and make the imposition of suspensions or debarments more uniform and predictable, to the benefit of all parties and the public.

I. THE EXISTING SYSTEM. Suspension and debarment from federal programs are governed by two separate, but similar regulatory regimes. Suspension and debarment from federal procurement programs are governed by FAR Subpart 9.4, while exclusion from federal non-procurement (grants and assistance) programs is governed by the OMB Guidance in 2 C.F.R. Part 180 and agency regulations implementing that guidance. An exclusion from federal procurement programs also applies to non-procurement programs, and vice versa. Thus, any suspension or debarment, regardless of its origin, is Government-wide and covers both procurement and non-procurement programs.

Suspension and debarment are prophylactic measures intended to protect the government, and are discretionary in nature. Even where a cause for suspension or debarment has been established, an agency is not required to exclude the contractor; the seriousness of the contractor's acts or omissions and any remedial measures or mitigating factors are all to be considered. Ultimately, the test is whether the contractor is ''presently responsible,'' with this determination being left to the judgment of the agency. Neither the FAR nor the C.F.R. defines ''present responsibility,'' although they do list factors that should be considered. Mitigating factors include whether the contractor had an effective compliance system in place beforehand, whether the contractor has since instituted adequate remedial measures, and whether the contractor has taken disciplinary action against the individuals responsible for the misconduct.

The decision whether to suspend or debar a contractor (or program participant) has historically been made at the agency level. Each agency has the power to exclude a company or individual from all Government contracting and program participation. The agency decision-maker is the Suspending and Debarring Official (''SDO''). There is a profusion of SDOs among the agencies and within different agencies. For example, the Department of Defense (''DOD'') currently has about a dozen different SDOs. Each of the armed services has its own SDO, as does the Defense Logistics Agency. In addition, far smaller entities such as the Defense Threat Reduction Agency and the Missile Defense Agency have their own SDO. Other government departments have even more; as of 2010, the Department of Agriculture had 21 different SDOs. Moreover, there is no uniformity among the SDOs in terms of their position, background, qualifications, or tenure. At DOD, for example, most of the SDOs are attorneys or senior procurement executives. But in two DOD agencies, the SDO is the Agency Head. At the Department of Agriculture, in contrast, most of the SDOs are agency administrators.

The SDO's broad discretion in determining whether a contractor should be excluded is coupled with comparable discretion in deciding the scope of any exclusion that is imposed. A debarment or suspension of a business entity extends to all divisions or other organizational elements of the entity unless it is made more limited in scope by the SDO. Furthermore, an SDO may expand a debarment or suspension to include any ''affiliate'' of the sanctioned contractor or grantee. Entities are considered affiliates of each other if either one controls or has the power to control the other, directly or indirectly, or a third party controls or has the power to control both. There is no requirement that an affiliate have any complicity in the underlying misconduct; the rationale for excluding the affiliate is to prevent the actual wrongdoer from using the affiliate to circumvent its exclusion.

Although federal agencies all operate under one of the two common sets of regulations governing suspension and debarment, the procedures and practices for administering the system vary considerably among the agencies. For example, in the Navy and Air Force, the functions of case development (investigation), notice to the contractor of the proposed sanction, and final determination occur within same organizational unit of the agency. In other agencies, such as the Interior Department, the Defense Logistics Agency and Environmental Protection Agency, the case development function is separated from the decision-making process.

The Interagency Suspension and Debarment Committee (''ISDC''), created in 1986, serves as a forum for agencies to share ideas and it assists in coordinating suspension and debarment actions among agencies. It designates a ''lead agency'' in situations where more than one agency has an interest in the proposed suspension or debarment of a particular contractor. But the ISDC relies on agencies' voluntary participation in its processes and member agencies' limited resources to fulfill its mission. The ISDC does not have any governing regulations and its processes appear to be informal.

Not surprisingly, agencies vary greatly in terms of the vigor with which they pursue suspension and debarment actions and the resources they devote to this issue. A 2011 GAO report found that, over the past five fiscal years, the DOD accounted for about two-thirds of all suspension and debarment cases related to federal procurements. DOD had almost 1,600 cases whereas 70 percent of the other agencies had fewer than 20. The DOD agencies are virtually certain to consider or pursue debarment if one of their contractors is convicted of fraud or some other criminal offense constituting a ground for debarment. In contrast, a 2010 report by the Inspector General of the Agriculture Department found that, from 2004 to 2007, 42 participants in Rural Development programs had been convicted of crimes involving those programs, but no debarment actions were taken in response to 40 of the 42 convictions.

Agency debarment and suspension decisions are subject to judicial review under the Administrative Procedure Act. In practice, however, courts have been highly deferential to agency decisions. A court might intervene in the rare instance where an agency fails to follow the governing regulations or acts in a patently arbitrary manner. But, although the courts can reverse an SDO's decision for abuse of discretion, they almost never second guess a determination that a contractor is not presently responsible, or the length of a debarment that the SDO imposes. In the real world, the SDO's resolution of those issues is effectively unreviewable.

II. THE ALTERED LANDSCAPE. In past years, shortcomings in the system of suspension and debarment were of little concern to contractors and program participants because the reality was that exclusion was the administrative ''tail on the dog'' to a criminal prosecution. In 1995, for example, the Administrative Conference of the United States (''ACUS'') reported that 96 percent of suspensions and debarments initiated by the Air Force during the previous year were based on criminal indictments and convictions. Thus, the existence of cause for exclusion had already been established through the judicial system, with its panoply of rights and protections afforded to a criminal defendant. A debarment did not require the agency to make any factual determinations about contractor misconduct.

The landscape has now changed significantly because of recent developments that have magnified the potentially prejudicial impact of deficiencies in the existing system of suspension and debarment. These developments include the following.

A. The rise of ''fact-based''suspensions and debarments. There has been a dramatic increase in the use of ''factbased'' suspension or debarment actions, where the agency adjudicates the facts and decides whether the contractor engaged in misconduct that warrants exclusion. In previous years, agencies almost never undertook such actions. For example, in 1995 ACUS reported that, during the previous five years, none of the armed services nor the Defense Logistics Agency had conducted a fact-based hearing in any case to determine whether a cause for debarment or suspension existed. In contrast, a recent survey of federal Inspectors General showed that 27 percent of suspension referrals and 24 percent of debarment referrals in 2010 were factbased. That same year 62 percent of Air Force suspension/debarment actions were fact-based, i.e. actions in which the Air Force alleged that the contractor had engaged in misconduct that warranted exclusion from government contracting and where it decided that issue for itself.

Furthermore, many of these fact-based actions were instituted pursuant to the catch-all FAR provision that covers ''any other cause of so serious or compelling a nature that it affects the present responsibility of the contractor,'' rather than commission of a criminal offense or some other defined misconduct. This means that the range of contractor conduct or derelictions that may trigger a debarment has expanded considerably. In addition, the burden of proof for these ''fact-based'' exclusions is only a ''preponderance of the evidence'' rather than the proof ''beyond a reasonable doubt'' that is required to obtain a criminal conviction.

The number of fact-based suspensions and debarments is likely to keep growing. Both Congress and the Office of Management and Budget are encouraging agencies to become more aggressive about suspending and debarring contractors. And a 2011 report by the Council of Inspectors General on Integrity and Efficiency urged that there are many occasions when protecting the government's interest warrants pursuit of fact-based suspension or debarment actions, which do not rely on a judicial finding. Thus, other agencies are likely to follow the Air Force in aggressively pursuing more fact-based actions.

B. Growth in False Claims Act litigation. The increasing number of actions brought under the civil False Claims Act (''FCA'') also has changed the suspension/ debarment landscape. Since the FCA was revised in 1986, the number of FCA actions has increased each year, sometimes exponentially. Furthermore, recent amendments to the FCA have further expanded its reach and eliminated or reduced barriers to certain suits brought by whistleblowers. The likely result of these amendments will be a significant increase in the number of whistleblower suits that proceed to trial. In addition, because the FCA is a civil remedy, liability only needs to be proved by a preponderance of the evidence.

A finding of liability under the FCA constitutes a cause for debarment and so can result in the exclusion of a contractor unless the SDO makes the discretionary judgment that it is outweighed by other factors in the contractor's favor. Any DOD contractor that is found liable under the FCA is virtually certain to be contacted by an SDO and at least asked to explain itself, if not confronted with a notice of proposed debarment. Thus, an increase in FCA actions probably will result in an increase in related suspension or debarment actions whose outcome will be determined by an exercise of discretion by the SDO.

C. The increase incontractor self-disclosures. The new regime of mandatory disclosure imposed on contractors by the FAR has created a ''sea change'' in the relationship between the government and its contractors, and has further increased the risk of suspension or debarment in federal procurement programs. Contractors are now required to disclose to the government any credible evidence that, in obtaining or performing a contract, there was a violation of federal criminal law or the FCA, or a significant overpayment on the contract. Obviously, a violation of federal criminal law or the FCA would be a potential cause for debarment, and the circumstances surrounding a significant overpayment might provide cause for debarment. Furthermore, a contractor's failure to timely disclose such events to the government has now been made a cause for suspension or debarment.

These self-disclosures will increase the number of situations in which an SDO makes a discretionary judgment about the present responsibility of a contractor. Some number of self-disclosures will result in the institution of a formal suspension or debarment action. Beyond that, some contractors who make a self-disclosure will initiate a dialog with the SDO about their present responsibility in order to forestall any suspension or debarment action. Regardless of whether the dialog between the contractor and the SDO precedes or follows the commencement of a formal action, the SDO will ultimately have to assess the contractor's responsibility under the same set of regulatory standards and with the same considerable latitude afforded to him or her under those standards.

Moreover, in a recent case the Air Force suspended an entire office of a prominent contractor that had made a voluntary disclosure (not required by the FAR) about its receipt of inappropriate procurement-related information. The Air Force SDO took the position that the contractor's internal investigation and corrective actions had been inadequate and that its disclosure was flawed, as well. Thus, deficiencies in a contractor's investigative and disclosure process can themselves lead or contribute to suspension or debarment problems.

D. Increasing use of administrative agreements. The use of administrative agreements as a method for resolving proposed debarment actions is increasing. A 2012 GAO report found that the DOD used administrative agreements in 30 cases over the three-year period from fiscal year 2009 - fiscal year 2011. In many instances, it is in the best interests of both the contractor and the agency to rehabilitate the contractor through remedial administrative measures rather than disqualify the contractor. As noted in a 2005 article in the Army Lawyer: ''Administrative compliance agreements offer a viable alternative to the perceived draconian suspension and debarment process. In addition to restoring the government's confidence in the company's present responsibility, these agreements provide the government an unprecedented opportunity to assess and influence a company's corporate ethical climate.''

But the increasing use of administrative agreements also creates cause for concern because this process is almost completely unregulated. There is a single provision in the Department of Defense FAR Supplement (209.406-1) which simply authorizes a SDO who decides that debarment is not necessary to require the contractor to enter into a written agreement to establish and maintain standards of conduct and internal control systems and other requirements the SDO considers appropriate. The FAR itself says nothing about the substance of administrative agreements or the criteria for entering into them. In 2010 a provision was added to the FAR that merely provides for collecting and disclosing information about administrative agreements. Likewise, 2 C.F.R. Part 180 contains several brief references to administrative agreements but nothing of substance.

Because administrative agreements are essentially unregulated, they amplify the discretion and the authority of the SDO. The SDO has unbridled discretion about whether to enter into an administrative agreement and on what terms. The SDO, if he or she chooses to do so, can scrutinize virtually all of a contractor's internal controls and its compliance program and demand any changes that are deemed appropriate or desirable. Likewise, the SDO can insist upon the removal of officers or employees whom the SDO deems responsible for the misconduct that is the focus of the proposed debarment. The contractor is in no position to complain or resist.

III. THE NEED FOR REFORM. The altered landscape of suspension and debarment highlights shortcomings in the current process and changes the calculus of what process should be ''due'' to affected contractors or grantees. The fairness and adequacy of agency suspension/ debarment procedures become far more important where the agency defines the offense, lodges the charge, and acts as prosecutor and adjudicator, rather than simply following up on a criminal conviction or civil judgment that already has been adjudicated by a court.

Furthermore, this new landscape underscores the enormous range of discretion that is given to the SDO in resolving suspension and debarment actions. Assuming that a ''cause'' for suspension or debarment exists, it is almost entirely up to the SDO, based on his or her assessment of the relevant circumstances, to determine whether or not to apply the sanction. In comparison, we do not grant federal judges the authority — and discretion — to decide whether to put out of business a company that has been convicted of a criminal offense. Likewise, the Department of Justice was roundly criticized for effectively putting Arthur Andersen out of business by pursuing a criminal prosecution of the company. And commentators have cast a wary eye on the Department's recent practice of using deferred prosecution agreements and similar arrangements to secure the adoption of sweeping internal corporate reforms in order to avoid criminal prosecution. They correctly note that this practice raises questions about the reach of federal executive branch power.

This is not to suggest that the determination of a contractor's present responsibility is or can be anything other than a judgment call, nor is it to suggest that the exercise of discretion in making that call can or should be channeled through detailed guidelines. (The Sentencing Guidelines provide a cautionary lesson in that regard). But the question arises whether such a momentous and discretionary decision should be delegated to a single individual without any truly effective avenue of review. Giving a government official so much unbridled power creates a risk of overreaching that is at odds with the ideal that we are ''a nation of laws, not of men.''

Finally, this new landscape amplifies the impact of inconsistent enforcement practices among the different agencies and between SDO's in the same or related agencies. Contractor missteps that would be ignored by one agency can trigger an exclusion by another agency. Congress is rightfully concerned about lax enforcement by certain agencies while contractors and grantees are concerned about overly aggressive enforcement actions by other agencies. The overall system operates too inconsistently.

IV. WHAT REFORMS ARE NEEDED. What steps can and should be taken to address these concerns? We propose the following reforms.

A. Separation of adjudication and investigation/ prosecution functions. There should be a clear separation between the functions of prosecution and adjudication. Lodging the prosecution and adjudicative functions within the same organizational unit of an agency carries a serious potential for arbitrariness and abuse, and violates basic notions of due process. The investigative function and the prosecution function could remain with the various agencies while, as discussed below, the adjudication function is shifted to a central authority. Alternatively, if both the prosecution function and adjudication function are shifted to a central authority, there must be a complete separation between them.

B. Centralized adjudications Because the effect of a suspension or debarment is government-wide, there is a strong argument for centralizing the adjudication function rather than have decisions depend on the vagaries of each federal agency or a particular SDO within the agency. Such centralization would promote consistency and high quality not only in decisions about whether a party should be suspended or debarred, but also in the negotiation of appropriate administrative agreements to settle suspension or debarment actions.

The potential advantages of centralizing the system of suspension and debarment already have drawn the attention of Congress. In February 2013, the chairman of the House Oversight and Government Reform Committee issued a discussion draft of legislation that would create a single Board of Civilian Suspension and Debarment, under the General Services Administration, to manage all suspension and debarment activities of the 41 civilian executive agencies and eliminate the suspension and debarment function in those agencies. This legislation would also consolidate the current non-procurement and procurement suspension and debarment regulatory schemes into one generally applicable regulation.

Such centralization of the suspension and debarment process, whether limited to the civilian agencies or extended to include the military agencies as well (either jointly with the civilian agencies or through a separate central authority), would be a dramatic change and doubtless would engender considerable resistance from the affected agencies. But the current system that allows each agency to take its own approach will continue to produce disjointed and inconsistent results that will dismay Congress on one hand and contractors/ grantees on the other hand.

C. Panel decision-making for companies or organizations As discussed above, the determination of a contractor's or grantee's present responsibility is a judgment call, and we do not believe that the exercise of discretion in making this judgment can be effectively channeled through guidelines. But because this judgment is so momentous and is so highly discretionary, we submit that it should not be made by a single individual. Instead, we propose that this decision be made by a panel of three persons, each of whom has equal stature, operating through majority rule if there is a division among them. Three-judge panels have long been used in our judicial system and their track record is admirable. They are far less likely than a single judge to overlook salient issues or render a flawed decision. The collective wisdom and judgment of three qualified persons generally will result in a sound decision.

If there are disputed issues of material fact relating to a proposed exclusion, they would be referred to a single Administrative Law Judge for resolution through an evidentiary hearing. Once the facts are determined, however, the ultimate decision whether to exclude the contractor would be made by a three-person panel. The panel would also decide the length and scope of the debarment if it is imposed. Likewise, if a company is attempting to negotiate an administrative agreement to resolve a proposed exclusion, it might deal with a single point person at the debarring authority. But, again, the ultimate decision on whether the terms of the agreement are acceptable would be made by the three-person panel, not a single individual. Because the panel is the decision-maker, the contractor would have the right to appear before the panel to submit information and argument in opposition to the proposed debarment.

For practical reasons, however, we would limit the use of such panels to cases involving the proposed exclusion of an organization, not an individual. The number of individuals who are considered for debarment is relatively large and the cost of employing a three-person panel for each of them could be substantial. Moreover, in cases involving an individual respondent, it is far less likely that mitigating circumstances or corrective actions may outweigh the existence of cause for debarment — because it is difficult for an individual to demonstrate his present responsibility notwithstanding proof that he personally engaged in misconduct.

D. Expanded right to an evidentiary hearing. In many or most debarment cases involving a company or organization, there will not be a dispute about whether the cited ''cause'' for debarment occurred. Rather, the critical issue will be whether the contractor or grantee can demonstrate sufficient mitigation and/or remediation to establish its present responsibility. Given the importance of mitigating factors, a respondent should be entitled to an evidentiary hearing if there is a dispute about the existence of a particular factor. Moreover, any prospect for meaningful judicial review of an adverse decision requires that the factual record be fully developed.

E. Limiting exclusions of affiliates. Under current regulations, a blameless ''affiliate'' of a wrongdoer may be suspended or debarred to prevent the wrongdoer from using the affiliate to circumvent its exclusion. In order to exclude an affiliate on this basis, the government should be required to establish that it is likely that the wrongdoer will use the affiliate for this purpose. And, if there are disputed material facts relating to this issue, the respondent should be entitled to an evidentiary hearing.

V. Conclusion. These reforms, we submit, would provide greater assurance that contractors and program participants are treated fairly when their future ability to deal with the federal government is at stake. They would make the imposition of suspensions or debarments more uniform and predictable, to the benefit of all parties and the public.

Legislation or rule making would be required to implement many of these recommended changes, and the prospects for such reform are unclear. But we believe that the time has come to commence the discussion and to address candidly what changes are needed, not simply what changes may be possible.

Originally published in Bloomberg BNA Federal Contracts Report

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