United States: May Government Contracts Legislative And Regulatory Update

Our May edition of "Government Contracts Legislative and Regulatory Update" offers a summary of the relevant changes that took place during the month of April.

Highlights this month include:

• What all defense contractors should know about new DOD-specific lobbying restrictions 
• GSA updates requirements for SAM registration 
• The Fourth Circuit defines the scope of government contractor sovereign immunity 

This update will also be available in Contract Management Magazine, which is published monthly by the National Contract Management Association (NCMA).

Regulations

What all defense contractors should know about new DOD-specific lobbying restrictions

This article was contributed by Christopher W. K. Fetzer, counsel in Dentons' Public Policy and Regulation Practice, and Benjamin P. Keane, partner in Dentons' Political Law, Ethics and Disclosure team.

Just months into 2018, defense contractors are no doubt tracking the economic and policy implications of the National Defense Authorization Act (NDAA) for Fiscal Year 2018—Congress' more than US$700 billion annual defense policy bill. However, contractors may not be fully aware of the significant impact a small provision in the NDAA might have on their hiring (or current employment) of recently retired Department of Defense (DoD) personnel. This provision, tucked away in Section 1045 of the NDAA, imposes broad lobbying restrictions on certain former DoD officials and employees working on behalf of private sector clients that retired from federal service on or after December 12, 2017 (the date on which the FY18 NDAA became law).

The new restrictions impose a two-year bar on lobbying activities by military general and flag officers in Pay Grade O-9 (lieutenant general or vice admiral) or higher from their time of retirement or separation from service. The two-year bar also applies to civilian employees of the DoD with civilian grades equivalent to O-9—SES Level III—or higher. Additionally, the prohibition imposes a one-year restriction on the lobbying activities of military general and flag officers in grades O-7 (brigadier general or rear admiral (lower half)) and O-8 (major general or rear admiral (upper half)) from their time of retirement or separation from service. An analogous one-year bar also applies to civilian employees with civilian grades equivalent to those same military grades—SES Levels V and IV.

The significance of this new lobbying restriction lies in its expansion of the types of activities former DoD personnel may no longer engage in during the applicable period. Under the current criminal statute subjecting former senior executive branch officials to a lobbying cooling-off period following public service (18 U.S.C. 207(c)), officials are barred from contacting their former government office with an intent to influence policy or other decisions for a period of one year from their leaving government service. However, these officials are permitted to provide background support to lobbyist colleagues who perform outreach to covered government offices. Under the NDAA's new bar, the restriction is much more substantial.

Specifically, Section 1045's bar prevents covered officials from engaging in any "lobbying activities," as defined by the Lobbying Disclosure Act, which encapsulates both direct lobbying contacts and any efforts in support of such contacts, including preparation or planning activities, research and other background activities. In another departure from current law, the NDAA's new bar prohibits both lobbying activities with any covered executive branch officials regarding DoD-related matters and lobbying contacts with any covered executive branch officials in the DoD. This language, albeit ambiguously worded, appears to indicate a prohibition that restricts a covered former DoD official from engaging in any sort of lobbying activities with all DoD components and all covered executive branch officials regarding DoD issues, not just his or her former office within the DoD. The language also seems to indicate that a covered former DoD official is prohibited from engaging in any lobbying activities related to any matter arising within the DoD.

The DoD Standards of Conduct Office will issue further guidance to resolve some of the questions left unanswered by the NDAA's bar language in the coming months. However, until that occurs, contractors should be very cautious in how they utilize employees that may be subject to the new lobbying restrictions.

Dentons' Political Law, Ethics and Disclosure team is available to provide further advice and counsel on this and related contracting compliance matters. For guidance on general government contracts law and related matters, please contact Dentons' Government Contracts team. For strategic counsel on policy and other matters related to the NDAA and other federal legislation, please contact Dentons' Public Policy team.

The Department of Veteran Affairs proposes changes to its purchasing rules

The Department of Veteran Affairs (VA) is proposing to update the VA Acquisition Regulation (VAAR) and VA Acquisition Manual (VAAM) in order to align VA policies with the current Federal Acquisition Regulations (FAR). The VA will make the relevant amendments and updates in phased increments. As the updates are written, they will be published in the Federal Register.

Specifically, the VA plans to revise the following:

• VAAR Part 829, Taxes
• VAAR Part 846, Quality Assurance
• VAAR Part 847, Transportation
• VAAR Part 852, Solicitation Provisions and Contract Clauses
• VAAR Part 870, Special Procurement Controls

Comments must be made on or before June 25, 2018, to be considered. Written comments may be submitted through www.Regulations.gov. (83 Fed. Reg. 17,979, 04/25/2018).

Industry Developments

GSA updates requirements for SAM registration

On April 27, 2018, the General Service Administration (GSA) updated its requirements for registering in the System for Award Management (SAM), the government's central, online hub for government contractor and subcontractor listing and information. Entities are now required to submit an original, signed and notarized letter identifying their authorized Entity Administrator. The GSA implemented this requirement for new SAM registrants last month, and is extending the requirement to existing registrants this month. Existing registrants may submit the required letter upon renewal of their SAM accounts. The new requirement also applies to any entity whose electronic fund transfer (EFT) information has changed within the past year.

The change is part of GSA's recent attempts to stifle third-party fraudulent activity on the SAM website. While the GSA has sent notification to all affected entities, contractors are advised to review and verify their own registration account information, paying particular attention to all associated banking and financial information. Contractors are reminded that FAR 52.232-33(b) and 2 C.F.R. Pt. 25, App. A require contractors to regularly review and update all information associate with their SAM registration. For more information, visit https://www.gsa.gov/about-us/organization/federal-acquisition-service/office-of-systems-management/integrated-award-environment-iae/sam-update.

DoD thresholds for cost and pricing data poised to increase to $2M, reducing contractor risks of defective pricing and CAS liability

This article was contributed by Steven M. Masiello and Thomas A. Lemmer, Partners in Dentons' Government Contracts Practice.

In just over two months, the dollar threshold triggering the requirement for certified cost and pricing data under FAR 15.403-4 and application of the Cost Accounting Standards (CAS) pursuant to FAR 9903.201-1 will increase to $2 million from $750,000 for all DoD contracts.

In a memorandum dated April 13, 2018, the Defense Pricing/Defense Procurement and Acquisition Policy (DP/DPAP) advises DoD contracting officers that, effective July 1, 2018, it will be using $2 million as the threshold for obtaining certified cost and pricing data (a requirement rooted in the Truthful Cost or Pricing Data statute, still commonly referred to as the Truth in Negotiations Act or TINA). See Mem. from Shay Assad, Director, Defense Pricing/Defense Procurement and Acquisition Policy, DARS Tracking No: 2018-O0012 (Apr. 13, 2018) (Memorandum). The $2 million figure represents a 167 percent increase over the previous threshold and will still be subject to periodic updating to keep pace with inflation, pursuant to 41 USC section 1908.

Because the CAS threshold is tied, by statute, to the TINA threshold, the July 1 increase will also raise the threshold for application of the CAS. Id.; see 41 USC §1502(b)(1)(B); 48 CFR §9903.201-1. Therefore, in lieu of FAR clauses 52.230-1 through 52.230-5, where the CAS threshold is referenced, contracting officers will be citing the provisions set forth in Attachment 1 to DP/DPAP's April 13 guidance. Memorandum at 1.

This class deviation implements section 811 of the National Defense Authorization Act for Fiscal Year 2018 (Pub. L. No. 115-91, 131 Stat. 1283) (2018 NDAA), which amends 10 USC section 2306a and 41 USC section 3502. Consistent with FAR 1.404(c) and the Defense Federal Acquisition Regulation Supplement 201.4, this class deviation only applies to DoD contracts. While section 811 of the 2018 NDAA amends Title 41 for both DoD and civilian contracts, neither the General Services Administration (GSA) nor the National Aeronautics and Space Administration (NASA) have yet incorporated these changes. Accordingly, the TINA and CAS thresholds remain at $750,000 for all civilian agency contracts.

While this threshold increase is likely to ease the regulatory burden and liability risk to contractors (and might even facilitate a quicker pre-award phase for solicitations below the threshold), contractors should note that contracting officers may still seek to require cost or pricing data without certification, pursuant to FAR 15.403-3(a)(1)(ii). Accordingly, contractors should review their contract opportunities and amend their internal policies to ensure conformity with the threshold increase in their own proposals as well as their subcontracts. Additionally, the increased threshold means the government will have a smaller population of contracts subject to defective pricing audits, potentially increasing the likelihood of an audit for negotiated contracts in excess of $2 million. On the other hand, civilian agency contractors should continue to apply the $750,000 threshold or risk being found non-responsive to solicitation requirements, at least until similar, applicable GSA or NASA guidance arrives or the FAR Council amends FAR Parts 15 and 30, in accordance with 41 USC section 1303.

We will keep you apprised of all further developments related to the implementation of section 811 of the 2018 NDAA, including its incorporation by the civilian agencies.

Bechtel National: Recent COFC decision helps clarify limits on Tecom's application to Third Party lawsuit settlement cost allowability

This article was contributed with help from K. Tyler Thomas, Managing Associate in Dentons' Government Contracts Practice.

Contractor legal costs, including the costs to settle third-party lawsuits (i.e., suits brought against a contractor by an individual or non-governmental entity), are allowable if the costs are reasonable, allocable, consistent with CAS (or GAAP), comply with the terms of the contract, and are not limited by the cost principles of FAR Subpart 31.2. The primary cost principle relevant to settlement costs is FAR 31.205-47, which disallows contractor settlement costs for a very narrow category of third party "proceedings" brought by relators against a contractor on behalf of the government for violation of False Claims Act or by whistleblowers against a contractor for alleged reprisal, unless the contractor can demonstrate that there was "very little likelihood" the third party would succeed on the merits of its claim. FAR 31.205-47(c)(2). Not long ago, this was understood to mean that contractor costs incurred reasonably to settle a third-party lawsuit constitute allowable costs of doing business. Since the Federal Circuit's decision in Geren v. Tecom, Inc., 566 F.3d 1037 (Fed. Cir. 2009), however, the allowability of settlement costs incurred in just about any type of third-party lawsuit has been unclear.

In Tecom, the Federal Circuit addressed the allowability of settlement costs arising out of a third-party employment discrimination lawsuit. In doing so, it relied on the two-pronged standard earlier adopted by the Court in Boeing: "(1) we ask whether, if an adverse judgment were reached, the damages, costs, and attorney's fees would be allowable; (2) if not, we ask whether the costs of settlement would be allowable." Id. at 1041 (citing Boeing N. Am., Inc. v. Roche, 298 F.3d 1274, 1285-89 (Fed. Cir. 2002)).

Under this framework, the Federal Circuit determined that an employee's Title VII sexual harassment claim, if proven, would establish a contractor breach of its government contract and, therefore, would result in unallowable legal costs—meeting the first prong of the test. The Tecom decision, if read broadly, created a risk that nearly any type of third-party lawsuit could be characterized as a breach of contract and result in unallowable costs., DEAR 970.5204-2 (requiring DOE contractors to "comply with the requirements of applicable Federal, State, and local laws and regulations (including DOE regulations)"). The Federal Circuit then remanded the case for determination of whether the contractor should recover settlement costs based on the second prong of the test. Under the second prong, the Tecom decision stated that, because there is no blanket presumption that a private suit is meritorious, there must be an inquiry to determine whether the plaintiff is likely to prevail. The Federal Circuit determined that, based on the standard for recovery of settlement costs brought by a relator in the False Claims Act (FCA) context, contractors must establish that the private litigant had a "very little likelihood of success" in order to recover third party settlement costs. Tecom, 566 F.3d T1037, 1045-46. The Federal Circuit did not address what evidentiary support is required to establish a "very little likelihood" to succeed. Id.

Most recently, the Court of Federal Claims (COFC) in Bechtel National, Inc. v. United States had the opportunity to analyze the Tecom standard for the first time since that decision. Bechtel specifically addressed the allowability of contractor settlement costs arising out of discrimination suits brought by employees in the context of a Department of Energy (DOE) contract that included a contract provision designed to shift the risk of third-party liability arising out of the hazardous nuclear activities work from contractors to the government. Bechtel asserted that the contract's inclusion of the DOE contract clause meant that Tecom should not apply in the context of a dispute involving that clause. The COFC disagreed and determined that, based on the "expansive public policy" against employee discrimination, Tecom applied irrespective of the DOE contract clause.

The COFC, however, declined to endorse a broader application of Tecom. Specifically, the COFC observed that:

Bechtel Nat'l, Inc. v. United States, No. 17-657C, 2018 WL 1603333, at *5 (Fed. Cl. Apr. 3, 2018) (emphasis added).

Importantly, in a footnote that coincides with the emphasized language above, the Bechtel decision highlights that its narrow interpretation of Tecom is "difficult to square" with the broadly worded language used in Tecom that "costs resulting from a breach of a contractual obligation are not allowable under the contract." Id. at *8 fn. 5. The COFC, however, appropriately sought to limit the relevance of this language by pointing to Tecom's holding, rather than its dicta: "the holding in Tecom was that where a contract contains a non-discrimination clause, costs resulting from the breach of that clause are not allowable under the terms of the contract. This Court's decision is faithful to that holding." Id. (emphasis added).

Consequently, as related to employment discrimination actions, contractors should continue to assess the allowability of private settlement costs under the Tecom standard, meaning the costs are unallowable unless the contractor can establish that the plaintiffs had very little likelihood to succeed. Unfortunately, the Bechtel decision did nothing to advance a clearer understanding of what level of evidence is necessary to prove the negative—that the plaintiff involved in a settlement had very little likelihood of success on the merits. Greater clarity on that confusing standard remains for another day.

As related to actions not involving employment discrimination, contractors should continue to assess the allowability of private settlement costs under the two-prong test articulated in Boeing and Tecom, understanding that despite Bechtel's clarification of Tecom and its scope, there may be continued future litigation concerning the relevance of Tecom to third-party lawsuits not involving employment discrimination. Such an assessment of the potential allowability of settlement costs is relevant to a contractor's evaluation and comparison of the appropriateness of pursuing a lawsuit to conclusion, which could be more expensive but result in allowable costs if the contractor were to prevail, with the decision to settle and potentially have the costs deemed unallowable.

The Fourth Circuit defines the scope government contractor sovereign immunity

On April 24, 2018, the Fourth Circuit determined that General Dynamics Information Technology Inc. (General Dynamics) is immune to suit under contractor derivative sovereign immunity for using an autodialing system to provide consumers with health insurance eligibility information. (No. 17-1592). Plaintiff alleged that General Dynamics violated the Telephone Consumer Protection Act when autodialing to inform consumers about health care.

Government contractors are immune to suit if (i) the government authorized the contractor's actions and (ii) the government conferred the authorization while acting within its constitutional power. General Dynamics argued that it was immune to suit because it was acting under a government authorized contract, which was within the government's constitutional powers.

The Fourth Circuit agreed with General Dynamics and held that General Dynamics was immune to suit for contractor sovereign immunity. Additionally, the Court clarified that contractor derivative sovereign immunity applies to both state and federal claims. This case clarified the strength of contractor derivative sovereign immunity and clearly laid out the two-step test for its application.

Eleventh Circuit decision deepens circuit split over FCA statute of limitations

At a time when litigation under the FCA remains on the rise, there is a growing split among the federal courts as to how the FCA's statute of limitations rule (or tolling provision) ought to be applied. Pursuant to 31 USC section 3731, an allegation of an FCA violation must be brought before the later of (i) six years after the date of the violation, or (ii) three years after the date when the facts giving rise to the action are known (or should have been known) to the government. Over the years, courts have debated whether the second, more plaintiff-friendly prong applies only in circumstances where the government is a party. Earlier this month, in United States ex rel. Hunt v. Cochise Consultancy, Inc. (Hunt II), the Eleventh Circuit found that relators (i.e., private parties bringing suit on behalf of the government, in exchange for a percentage of any monetary award) may also invoke the second prong of the tolling provision, even in circumstances where the government decides, in full knowledge of the facts, not to intervene. See Hunt II, 887 F.3d 1081 (11th Cir. 2018). The Eleventh Circuit decision deepens a split among federal courts over this issue, teeing up the prospect for future Supreme Court review.

In Hunt II, the relator, Mr. Billy Joe Hunt, claims that two defense contractors defrauded the DoD when they allegedly conspired to oust and replace a subcontractor providing security services in support of a $60 million prime contract to clean up excess munitions in . The allegation alleges that the contractors bribed and/or manipulated multiple employees for the prime contractor and one US Army Corps of Engineers contracting officer, resulting in a series of rescinded awards, threatened firings and a fraudulent contract re-assignment. Id. The facts of the allegation first came to light in November 2010, when Hunt reported the situation to agents of the Federal Bureau of Investigations (FBI) during an inquiry into Hunt's role in an entirely separate kickback scheme. Id. After pleading guilty to the separate kickback scheme and serving 10 months in federal prison, Hunt was released in November 2013 and filed the FCA claim, 2 years and 362 days after his interview with the FBI. Id. As stated, the claim is potentially worth tens of millions of dollars. Id.

Under the FCA, allegations of fraud by government contractors may be brought by either the government or by private relators (after the government has declined to intervene). When an FCA claim is brought by a relator, rather than the government, the action is often referred to as a "qui tam" suit. Federal courts have three differing interpretations of the second, more plaintiff-friendly, prong of the FCA's statute of limitations [found at 31 U.S.C. § 3731(b)(2)]. The first interpretation holds that section 3731(b)(2) simply does not apply to qui tam relators. The second provides that section 3731(b)(2) applies to qui tam relators, but the period runs from the date the relator knew (or reasonably should have known) of the facts material to the right of action. Finally, under the third interpretation, relators are entitled to invoke the provisions in section 3731(b)(2), and the tolling clock only begins to run when the government knew or should have known about the right of action. See United States v. Cochise Consultancy, Inc., No. 5:13-CV-02168-RDP, 2016 WL 1698248 ("Hunt I"), at *2 (N.D. Ala. Apr. 28, 2016), rev'd sub nom. Hunt II, 887 F.3d 1081 (11th Cir. 2018) (recounting all federal case law history related to the second prong of the FCA tolling provision). The Fourth, Fifth and Tenth Circuit Courts (along with numerous federal district courts) have adopted the first interpretation, above. Id. The Ninth Circuit Court has adopted some version of the second or third. See United States ex rel. Hyatt v. Northrop Corp., 91 F.3d 1211, 1216 (9th Cir. 1996) (holding only that "Congress . . . intended the tolling provision to apply to qui tam plaintiffs as well [as the government]"). (In addition to the Ninth Circuit, a handful of federal district courts also adopt a version of the second or third interpretation, above, permitting qui tam relators to invoke the second prong of the tolling provision. Hunt I at *4)

Adhering to the interpretation that section 3731(b)(2) does not apply to qui tam relators, the US District Court for the Northern District of Alabama dismissed Hunt's claim in 2016. Alternatively, the Eleventh Circuit held that section 3731(b)(2) both applies to qui tam relators and depends on the government's knowledge, not the relator's, adopting the third interpretation outlined above. Accordingly, the Eleventh Circuit reversed the district court, finding that the statute of limitations had not begun to run until Hunt's November 2010 interview with FBI agents and that his claim was, therefore, permissible. In ruling as it did, the Eleventh Circuit not only adopted the minority view on section 3731(b)(2) but bucked the more recent trend among its sister courts. This deepening split among the federal courts combined with the increasing use and relevancy of FCA claims, more generally, makes Hunt II a prime candidate for potential, future Supreme Court review.

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