white house v. congress: government contractors bracing … · 2015-05-07 · 2015 •s.d.n.y. look...
TRANSCRIPT
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WHITE HOUSE v. CONGRESS:
Government Contractors Bracing for Showdown in
Washington
WELCOME ATTENDEES
May 5-6, 2015
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The Changing Landscape of Internal Investigations
Gail D. Zirkelbach Justin Murphy
Jason Lynch Preetha Chakrabarti
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• District Court: internal investigation not privileged
– Investigation “undertaken pursuant to regulatory law and corporate policy”
– Conducted by in-house counsel only
– Non-attorney interviewers
– Interviewees not told that the purpose was to assist the company in providing legal advice
In re Kellogg Brown & Root, Inc. (Barko I) 756 F.3d 754 (D.C. Cir. 2014)
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• D.C. Circuit: internal investigations are privileged
– But-for test rejected; “one of the significant purposes” was to obtain or provide legal advice
– Outside counsel are not “a necessary predicate”
– Communications by and to non-attorneys serving as agents of attorneys are routinely protected
– No “magic words” necessary to tell employees in order to gain the benefit of the privilege
In re Kellogg Brown & Root, Inc. (Barko I) 756 F.3d 754 (D.C. Cir. 2014)
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• On remand, District Court found waiver through statements made by KBR’s counsel during discovery and at summary judgment: – The shield becomes a sword – Rule 612 – No retraction allowed
• Alternatively, some is fact work product only and Barko has substantial need
• Another mandamus writ filed, with oral argument at 10:00 a.m.
U.S. ex rel. Barko v. KBR (Barko II)
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• Barko I
– Attorney-client privilege is alive and well
– Make clear what your purposes are
• Barko II
– [Maybe…]
• Keep your sword in its sheath
• Minimize deponent prep materials
• Log all responsive, privileged materials
Barko – Lessons Learned
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• SEC’s involvement
– Settlement regarding allegations that KBR required witnesses in internal investigations to sign confidentiality statements that could have kept them from reporting possible securities law violations to outside authorities.
Barko – Securities & Exchange Commission
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Original provision • “I understand that in order to
protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment”
Revised provision • “Nothing in this Confidentiality Statement
prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures”
Barko – Securities & Exchange Commission (cont.)
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• Review existing policies to assess potential risk
• Consider using carve-out language
– Nothing in this agreement shall prohibit you from communicating directly with…
• Affirmative language noting no obligation for prior counsel approval (or anyone else in the company)
Barko – SEC Lessons Learned
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• Wal-Mart Stores, Inc. v. Ind. Elec. Workers Pension Trust Fund IBEW, 95 A.3d 1264 (Del. 2014)
• Wal-Mart shareholder, IBEW, seek access to internal investigation documents during a derivative action
• Del. Court of Chancery orders Wal-Mart to produce investigation files
• Del. Supreme Court agree, applying Garner exception
Wal-Mart Stores, Inc.
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• Garner doctrine allows disclosure of privileged materials to shareholders for “good cause”
• Court found good cause
Wal-Mart Stores, Inc. (cont.)
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• Attorney-client privilege may take a back seat when fiduciary duties are involved
– Wal-Mart unlikely to have sweeping impact on ACP
• Attorneys must be mindful of the fiduciary exception when communicating with corporate officials and conducting internal investigations
Wal-Mart Stores, Inc. Lessons Learned
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• Wultz v. Bank of China Ltd., 979 F. Supp. 2d 479 (S.D.N.Y. 2013)
• Wultz family bring suit against BOC under the Antiterrorism Act for allegedly providing material support and resources to terrorist organization
• Seek production of BOC’s anti-money laundering compliance procedures and investigations
• BOC argue that documents are privileged
Bank of China
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• S.D.N.Y. look at choice of law and determine Chinese law applies to some docs; US law applies to others
• Where Chinese law applies – Chinese law does not recognize ACP or AWP, so neither
privilege applies
• Where US law applies – Unlicensed Chinese in-house counsel not entitled to
privilege
– BOC fail to show that documents were prepared “in anticipation of litigation” so AWP does not apply
Bank of China (cont.)
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• Foreign companies – importance of retaining U.S. counsel when possibility of litigation in the U.S. arises
• Importance of educating foreign clients regarding the attorney-client privilege and attorney work product doctrine in the United States
Bank of China Lessons Learned
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• Where Freeh Firm not retained to provide legal services, its communications were not privileged.
• Court focused on the “Scope of Engagement” section of the firm’s engagement letter: – Engaged to serve as “independent, external legal counsel” –
NOT ENOUGH
• In contrast, the Freeh Firm’s retention of the Freeh Group, “for the purpose of providing legal services”, allowed Penn State to assert privilege over communications with the Freeh Group.
Freeh Investigation
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• Take extra caution when drafting engagement letters
• Beware Subject Matter Waiver
Freeh Investigation Lessons Learned
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Gail Zirkelbach 213-443-5549
Justin Murphy 202-624-2536
Preetha Chakrabarti 212-895-4327
Jason Lynch 202-624-2678
Questions?
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Bid Protests: Avoiding Common Procurement Pitfalls
Daniel R. Forman Thomas P. Humphrey
James G. Peyster Robert J. Sneckenberg
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• Sustain in FY2014 dropped to 13%, the lowest in recent history
• So far in 2015, very few published decisions sustaining protests – Only 15 in first six months of FY2015
• Heavy push to resolve cases through voluntary agency corrective action prior to final GAO decision
• Fewer decisions means less educational guidance to the contract community
State of GAO Bid Protests
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FY 2014 Bid Protest Statistics
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• In era of record-high rates of corrective action, being able to convince the agency to defend your award is critical
• Three areas where contractor mistakes early in the procurement process can lead to major bid protest exposure down the road: 1. Hiring and Use of Former Government Employees 2. Proposed Staffing of New Contracts Via Incumbent
Capture With Overaggressive Compensation Cuts 3. Bidding on Government Contracts While in the Midst of
Corporate Reorganization/Restructuring
Common Procurement Risks Which Can Be Avoided by Early, Smart Intervention
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NAVIGATING THE REVOLVING DOOR
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• Limitations on employment negotiations with current government officials – 18 U.S.C. § 208 – generally applicable
– 41 U.S.C. § 2103 – for officials involved in procurements
• Limitations on compensation/hiring government officials – 41 U.S.C. § 2104
• Representational Bans for Former Gov’t Officials – 18 U.S.C. § 207 – numerous different categories of bans
Revolving Door Statutes
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• Interpretation of the scope and applicability of revolving door statutes are the province of the Designated Agency Ethics Official (“DAEO”)
• DAEOs issue opinions which provide guidance to current and former government officials about what they can and cannot do
• Proceeding without DAEO consultation is a MAJOR RISK
Role of the Ethics Official
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• While DAEOs interpret revolving door statutes, only the Contracting Officer is authorized to make procurement integrity determinations, per FAR subpart 9.5
• A DAEO “clean letter” to be hired by a firm does not mean the former government official is clear to do any and all work for that firm
• Use of former government officials can still give rise to unfair competitive advantages in a procurement
• The Contracting Officer must sign-off on the participation of the former official or else there is a risk of disqualification from the procurement
– Significance of the risk is highly circumstantial
The DAEO vs. The Contracting Officer
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• When a former government officials participates in the effort to obtain a contract, he/she is presumed to use any inside information he/she has which may be competitively useful – Health Net Fed. Servs., LLC, B-401652.3, Nov. 4, 2009,
2009 CPD ¶ 220
– International Resources Group, B-409346.2, Dec. 11, 2014, 2014 CPD ¶ 369
• Entire proposal team may be tainted
Unfair Competitive Advantage
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• The best way to resolve a potential unfair competitive advantage situation is to seek early guidance from the contracting officer – If CO reasonably investigates the situation and deems it
acceptable, that determination is entitled to substantial deference and is very difficult to challenge successfully
• Inadequate investigation may lead to protest sustain – International Resources Group, supra.
– PCCP Constructors, JV et al., B-405036.6 et al., August 4, 2011, 2011 CPD ¶ 156
Early Disclosure to Contracting Officer
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• Risk of disclosure is that the contracting officer may not give you the answer you want – May require onerous mitigation measures
– In rare instances, could disqualify a firm from the competition
• While CO determinations are entitled to deference, mistakes of fact can still be challenged – VSE Corporation, B-404833.4, Nov. 21, 2011, 2011 CPD
¶ 268
Early Disclosure to Contracting Officer
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• For revolving door statutory restrictions, know the rules, obtain DAEO letters before employment or employment discussions, and do due diligence on the disclosures underlying the DAEO letter
• If considering former government official for involvement in competitive procurement proposal strategy or preparation – Disclose fully to contracting officer far enough in advance to permit
agency investigation and determination before official begins involvement in proposal OR
– Wall off the former government official from all involvement in proposal preparation
• Be alert to, and analyze, hires of agency officials by potential competitors
Practical Tips to Navigating the Revolving Door
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RISKS OF RELYING ON INCUMBENT
CAPTURE TO STAFF SERVICE CONTRACTS
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• Common fact pattern: – Contractor bidding on service contract, hoping to
unseat incumbent contractor
– RFP requires a staffing plan to account for challenge of staffing a large or sophisticated contract
– Contractor does not have a sufficient surplus of qualified employees to staff the contract from current ranks
– Contractor wants to rebadge some or all of the incumbent workforce
Proposing Incumbent Capture
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• Common mistakes:
– Relying on incumbent capture while also committing to employee compensation and/or labor rates which reflect substantial reductions from the status quo
– Misrepresenting commitments from key personnel
Proposing Incumbent Capture
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• Relying exclusively on incumbent capture for some or all of staffing creates evaluation risk in many different procurement circumstances:
1. Upward cost adjustment in cost realism review
– Magellan Health Servs., B-298912, Jan. 5, 2007, 2007 CPD ¶ 81: Cost realism evaluation of awardee's proposal improper where, although knowing that awardee had proposed to recruit the incumbent workforce, agency failed to adjust awardee's proposed labor rates as part of its cost realism evaluation where labor rates were unrealistically low
Underpricing Incumbent Employees
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• Evaluation risks (continued) 2. Rejection of price or down-scoring of proposal in price
realism evaluation (firm fixed price procurement)
– Health Net Federal Servs., LLC, B-401652.3, Nov. 4, 2009, 2009 CPD ¶ 220: Evaluation of compensation of awardee’s proposed staff unreasonable where awardee relied on high percentage of incumbent capture yet proposed substantially lower salaries than current incumbent salaries. Price realism review was required to consider risk of unsuccessful incumbent capture.
Underpricing Incumbent Employees
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• Evaluation risks (continued)
3. Direct penalty in technical evaluation
– Alutiiq Pacific, LLC, B-409584, June 18, 2014, 2014 CPD ¶ 196: Even where RFP had no price realism evaluation, awardee’s high staffing evaluation rating in staffing subfactor unreasonable where agency evaluators gave substantial credit for incumbent capture plan, yet gave “no consideration to [the awardee’s] proposed compensation reductions”
Underpricing Incumbent Employees
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• Propose multiple staffing approaches, of which incumbent capture is one
• Avoid quantitative commitments to particular level of incumbent capture (i.e. 50% or 70% capture)
– GAO has recently denied protests where an awardee’s staffing plan did not rely exclusively on incumbent capture and, instead, “identified multiple sources for staffing the task order and the agency’s evaluation reflected that multi-faceted approach”
Best Practices to Avoid Penalties
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• The “bait and switch” definition closely tracks the broader “material misrepresentation” standard
• CACI Technologies, Inc., B-408858, Dec. 5, 2013, 2013 CPD ¶ 283: “In order to establish an impermissible ‘bait and switch,’ a protester must show: 1. that an offeror either knowingly or negligently represented
that it would rely on specific personnel that it did not expect to furnish during contract performance,
2. that the misrepresentation was relied on by the agency, and
3. the agency's reliance on the misrepresentation had a material effect on the evaluation results.”
Bait and Switch, Defined
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• In dozens of cases over the past 20 years, GAO has rejected bait and switch claims in which a new contractor attempts to hire incumbent key personnel after naming other key personnel in the proposal
• PricewaterhouseCoopers LLP; IBM U.S. Federal, B-409885, Sept. 5, 2014, 2014 WL 4923905: – “IBM complains that E&Y engaged in an improper bait and switch
because the awardee began an ‘extensive effort to recruit IBM's incumbent key personnel’ within days of contract award. We have reviewed IBM's allegation and conclude that the protester has not satisfied [the bait and switch] requirements here. The mere fact that E&Y was seeking to hire additional qualified personnel to meet the needs of the RFP does not demonstrate that E&Y failed to propose appropriate personnel in its proposal or misrepresented the availability of the personnel.”
Bait and Switch vs. Incumbent Capture
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• Honesty is the best policy
• NEVER represent a commitment from anyone who has not made such a commitment
• Always clearly represent that your proposed list of key personnel is ready to perform the work as promised, even if you hope to supplement with incumbent personnel
– Of course, this needs to be a truthful representation!
Strategies for Mitigating Bait and Switch Risk
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CONTRACTING DURING CORPORATE RESTRUCTURING
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• All forms of corporate restructuring create potential contracting issues due to questions of privity of contract and the possible need to novate agreements – Many issues relate to contract administration
– But there are also contract formation and procurement-related concerns arising from: • Corporate restructuring
• Mergers
• Acquisitions
• Name Changes
Corporate Changes
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• Corporate structural changes can affect the accuracy and validity of pending proposals – Wyle Laboratories, Inc., B-408112.2, Dec. 27, 2013, 2014 CPD ¶
16: Protest sustained where awardee’s proposal in cost reimbursement procurement contained assertions about corporate finances, including overhead rates, that were rendered inaccurate by mid-procurement split of major defense contractor
• Other potential issues: – Past performance evaluations where newly structured firm relies
on contracts performed by predecessor entity – New OCI risks from newly acquired entities e.g., Guident
Technologies, Inc., B-405112.3, June 4, 2012, 2012 CPD ¶ 166
Changes Affecting Ongoing Evaluations
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• Questions of privity and acceptance - Who is the offeror and who can accept? – What if a company submits a proposal under one name
and that name is changed during the procurement?
– Offeror in ongoing procurement absorbed by another firm and ceases to exist by time of award, e.g., ITT Electronic Sys., B-406405, May 21, 2012, 2012 CPD ¶ 174
– Offerors bidding under predecessor entity’s GSA schedule contract
Other Technical Contracting Issues
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• Some of these challenges are unavoidable
• Others can be mitigated or resolved through careful planning prior to corporate changes being instituted
• Communication with the Contracting Officer can resolve many of these concerns
• Update proposals during proposal revision opportunities to avoid accusation that the proposal contained stale or inaccurate information
Practice Tips
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Dan Forman 202-624-2504
Tom Humphrey 202-624-2633
James Peyster 202-624-2603
Rob Sneckenberg 202-624-2874
Questions?
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Contract Disputes
Chris Haile David Bodenheimer
Agustin Orozco
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• Contract Terminations
• Asserting Defenses to Government Claims: Maropakis and its Progeny
• Government Claims and Abusing Defective Pricing Law
Overview
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Contract Terminations
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• Budget pressures
• Active and critical oversight
• Threats of termination for default and early notices to cure
• More rapid resort to termination / de-scope options
Terminations: Changed Environment
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• Broad but not unlimited discretion for the Government
– Tigerswan, Inc. v. United States, 118 Fed. Cl. 447 (2014)
• Alleged abuse of discretion in T4C followed by sole-source procurement from another contractor
– Applied Business Mgmt. Solutions v. United States, 117 Fed. Cl. 589 (2014)
• Termination and sole-source reprocurement
Termination for Convenience
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• ASBCA reverses course for recoveries under commercial-item procurements
– SWR, Inc. (Dec 2014)
• FAR 52.212-4(l) “reasonable charges [that] . . . have resulted from the termination” read broadly to provide fair compensation.
• Abandons prior position that only costs in the nature of “settlement expenses” were recoverable
Termination for Convenience
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• Increased and earlier use of the threat of termination – New Iraq Ahd Co., ASBCA 58768 (Oct. 2014) (threat of termination
within government rights and not improperly coercive)
• Response challenges – Rapid responses on complex issues – The record to date – The path forward – Managing the relationship
• High stakes – DODS, Inc., ASBCA 57746, 58252 (Jul. 2014) (Contractor terminated
after proposing delayed schedule in response to cure notice)
Termination for Default
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• Identifying affirmative claims and defenses – Government delays and failures to cooperate
– Constructive and directed changes
– Waiver of requirements or schedules
– Waiver / Estoppel by failure to terminate promptly
• Protecting claims and defenses, even before you need them – Comply with notice requirements / alert the CO
– Watch out for inappropriate / overbroad releases
Termination for Default
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Asserting Defenses to Government Claims:
Maropakis and its Progeny
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• M. Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323 (Fed. Cir. 2010) – Contract completed 467 days late
– Maropakis requested 447 day extension
• Letter not certified
• Did not request final decision by CO
– CO issues final decision on government’s claim for liquidated damages
– Federal Circuit
• Reject Maropakis’ argument that the underlying facts of its time extension request could be presented as a defense to the government’s liquidated damages assessment
• “[A] contractor seeking an adjustment of contract terms must meet the jurisdictional requirements and procedural prerequisites of the CDA, whether asserting the claim against the government as an affirmative claim or as a defense to a government action.”
Maropakis
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• Sikorsky Aircraft Corp. v. United States, 102 Fed. Cl. 38 (2011)
– Maropakis involved a defense seeking contract modification and not a “traditional common law defense that [is] independent of the means by which a party seeks equitable adjustment to a government contract.”
• TPL, Inc. v. United States, 118 Fed. Cl. 434 (2014)
– Court ignored “common law” labels Contractor applied to defenses in breach of contract case: impracticability, mutual mistake of fact, and unconscionability.
• Total Eng'g, Inc. v. United States, 120 Fed. Cl. 10 (2015)
– Maropakis did not bar contractor's “defective specifications” defense to a government claim.
• Asfa Int’l., ASBCA No. 57880, 14-1 BCA ¶ 35,736 (Sep 2014)
– Maropakis did not bar Contractor’s defense of waiver by forbearance against Government claim for liquidated damages.
Developments
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• Raytheon Co. v. United States, 747 F.3d 1341 (Fed. Cir. 2014)
– The government’s failure to obtain a CO's final decision on its equitable adjustment defense prohibited the Court from considering the government's defense.
• K-Con Bldg. Sys., Inc. v. United States, 778 F.3d 1000 (Fed. Cir. 2015)
– Contractor sought (1) remission of liquidated damages, asserting the LD clause was unenforceable; (2) remission of LDs, asserting entitlement to time extensions; (3) additional compensation on account of other contract changes.
– Federal Circuit affirms COFC dismissal of the claim for remission based on entitlement to time extension.
– Entitlement to an extension had not been properly submitted for the CO’s final decision, meaning the COFC had no jurisdiction.
Developments
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• “Seeking an adjustment of contract terms”
• “Traditional common law defenses”
• Does the label matter, if the effect is the same?
Where Are We Now?
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• Be mindful of potential impacts
• Identify defenses to government claims early in the claims process
• Recognize this is a developing area of law
• Consider protective claims to the contracting officer
Practical Takeaways
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Contractor Claims:
Bad, Ugly & Never Good
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Welcome to Government Claims
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What’s Bad? • No Accountability
• No Rationality
• No Legality
• No Finality
What’s Good?
“Absolutely
Nothing”
- Edwin Starr
Government Claims: Good or Bad?
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TINA’s Ups & Downs
• Boom Years – 1970s & 80s
– Vietnam & Emergencies
• Lean Years – 2000s
– FASA, IPTs, & De-emphasis
• TINA Redux – 2014-15
– Old Awards (2006-2009)
– Lots of Audit Buzz
– Multiple ASBCA Appeals
Defective Pricing’s Back!
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Remember the 5 “Points”
Government bears burden of proof for “five points” of defective pricing
1. Cost or Pricing Data
2. Data Reasonably Available
3. Not Disclosed or Known to Government
4. Government Reliance on Data
5. Causation of Increased Price
DCAA Audit Manual
Proving Defective Pricing
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Facts vs. Judgments
• DCAA/DOJ Allegations
– Estimates & Escalation
• Pricing Realities
– FAR § 2.101 (judgments)
– Contract Pricing Ref. Guide
• “educated guesses”
Judgments Okay
ASBCA Precedent
“We find that the subject escalation factor was not cost or pricing data.”
UTC, 04-1 BCA 32,556.
DCAM Guidance (14-104.7)
Abusing Judgments
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Use vs. Disclosure
• DCAA/DOJ Allegations
– Failed to use cost data
• Audit Realities (DCAM)
Disclosure Only
ASBCA Precedent
“The plain language of the Act does not obligate a contractor to use any particular cost or pricing data to put together its proposal. Indeed, TINA does not instruct a contractor in any manner regarding the manner or method of proposal preparation.” United Technologies Corp., 04-1 BCA 32,556
Federal Precedent
• Martin-Baker (D.C. Cir. 2004)
• UTC (6th Cir. 2015)
Demanding Use vs. Disclosure
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High-Volatility Pricing
• DCAA Allegations
– Using snapshot of data
• Market Realities
Volatile Data Not Reliable “As for the heavy scrap, we have found that scrap prices vary widely over a period of time and for that reason appellant’s proposed credit was based upon an average of $.01 per pound realized in performing previous contracts for sales of two grades of heavy metal scrap and turnings. On the basis of uncontradicted testimony by Mr. Gaw we have found that no single selling price can reasonably be considered applicable for any extended period of time. The evidence does not establish whether the August 1965 selling price for heavy scrap cited in the DCAA post award audit report was in effect the entire month of August, some lesser period, or a greater period, or whether that price was actually an average of various scrap selling prices in effect during part or all of August 1965.” Norris Industries, Inc., ASBCA No. 15442, 74-1 BCA ¶ 10,482
Cherry-picking Volatile Data
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Forward Pricing Rates
• DCAA Allegations
– Must tell PCO
• Legal Realities
– FAR § 15-407-3 (a) vs. (b)
– DFARS § 215.407-3 (ACO)
– Disclosure & Reliance • FMC, 87-1 BCA 19,544
• Litton, 93-2 BCA 25,707
• Texas Inst., 89-1 BCA 21,489
FAR § 15-407-3 Forward Pricing (a) When certified cost or pricing data are required, offerors are required to describe any forward pricing rate agreements (FPRAs) in each specific pricing proposal to which the rates apply and to identify the latest cost or pricing data already submitted in accordance with the FPRA. All data submitted in connection with the FPRA, updated as necessary, form a part of the total data that the offeror certifies to be accurate, complete, and current at the time of agreement on price for an initial contract or for a contract modification. (See the Certificate of Current Cost or Pricing Data at 15.406-2.)
(b) Contracting officers will use FPRA rates as bases for pricing all contracts, modifications, and other contractual actions to be performed during the period covered by the agreement. Conditions that may affect the agreement’s validity shall be reported promptly to the ACO. If the ACO determines that a changed condition invalidates the agreement, the ACO shall notify all interested parties of the extent of its effect and status of efforts to establish a revised FPRA.
Battling Forward Pricing Rates
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Negotiations vs. TINA Claims
• DCAA Allegations
– Ignoring Negotiation Facts
• Negotiation Realities
– Contractor disclosed facts
– Gov. engineers reported
– Parties negotiated risks
– PCO accepted risk impact
– DCAA 2nd Guesses All
Negotiation Context
“Care must also be taken to try to tie the assessment to a consideration of the parties’ actions at the time and to avoid imposing an after-the-fact perspective on how the negotiations should have been conducted to produce improved results from a particular party’s point of view.” Aerojet Ordnance Tenn., 95-2 BCA ¶ 27,922
Flipflopping after Negotiations
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TINA Claims 6 Years Later
• Agency Allegations
– Final Decisions > 6 Years
• Legal Realities
– 41 U.S.C. § 7103(a)(1)(4(A)
• 6 Years after accrual
– FAR § 33.201 (“accrual”)
• Knew or Should Have Known
ASBCA Precedent
“[T]he Government had established the basis for its defective pricing claim . . . more than six years before the COs’ June 2008 decisions issued.” McDonnell Douglas Servs., 10-1 BCA ¶ 34,325
Missing Deadlines
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TINA vs. Subcontractors
• DCAA Allegations
– Asserting Prime Reliance
• Strategic Realities
– No 2-Front Wars
– 10 Points of Proof
Prime Negotiation Record
“[Boeing] based its negotiation position with Resalab with respect to the estimated labor hours on its own in-house technical evaluation of Resalab’s man-hour estimate which involved a physical survey of Resalab and technical interface with Resalab.” The Boeing Co., ASBCA No. 20875, 85-3 BCA ¶ 18,351
Sandwiching Subcontractors
Prime Sub +
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TINA Fraud
• IG Allegations
– Alleging falsity
• Legal Realities
– COPD (J.T. Construction)
– Judgments (Allison)
– Use (Martin-Baker)
– Fair Market Value (UTC)
– Presumptions (Singer)
DCAA Fraud Indicators
Screaming Fraud + TINA
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Litigation vs. ADR
• PCO Allegations
– Rubberstamping DCAA
• Legal Realities
– Contract Disputes Act • Resolution vs. Litigation
– FAR § 15.407-1(d)
• Due Process
– Opportunity to Rebut • Sooner = Better
3 Party Oversight
• ADR Policy (FAR § 33.204)
• “Agencies are encouraged to use ADR procedures to the maximum extent practicable.”
• ADR Procedure (FAR § 33.214)
• Objective: inexpensive & expeditious
• Agreement (e.g., ASBCA sample forms)
• Other Ideas
• Contracting Officer as Neutral
• Government Counsel as Gatekeeper
Resolving TINA Disputes
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Chris Haile 202-624-2898
David Bodenheimer 202-624-2713
Agustin Orozco 213-443-5562
Questions?
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The Fair Pay and Safe Workplaces Executive
Order: What Will Come to Pass, and When?
Kris Meade
Rebecca Springer Jason Crawford
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Who Needs Congress Anyway?
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• Administration issued EO 13673 on July 31, 2014.
• The stated purpose of the EO is to ensure that “parties who contract with the Federal government . . . understand and comply with labor laws.”
• The FAR Council will issue a final rule and the Department of Labor (“DOL”) will develop guidance to help contracting officers make these newly required determinations.
Fair Pay and Safe Workplaces EO
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• Contractors required to represent whether there has been any “administrative merits determination, arbitral award or decision, or civil judgment” rendered against the contractor within the preceding 3-year period for violations of certain labor laws.
• EO lists 14 federal statutes: including the FLSA, Service Contract Act, Davis-Bacon, ADA, ADEA, FMLA, NLRA, OSHA, Title VII of the Civil Rights Act, EO 11246
• EO also applies to violations of “equivalent State laws”
Key Provisions: Pre-award
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• EO requires that COs consider—as part of the responsibility determination—whether an offeror has a satisfactory record of integrity and business ethics.
• Prime contractors required to include provisions in their subcontracts requiring subcontractors to disclose and update such information.
• Prime Contractors then required to disclose similar information for subcontractors.
Key Provisions: Pre-award
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• During contract performance, contractors—and subcontractors—required to provide updated information every 6 months.
• Information brought to the attention of the government can result in remedial measures, decisions not to exercise an option, contract termination, or referral to the agency SDO.
Key Provisions: Post Award
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• Each federal agency required to designate a senior agency official to be a “Labor Compliance Advisor”
• Duties – Facilitate contractor compliance with labor laws
– Help agency officials determine the appropriate response to address violations of the requirements of the labor laws.
• On March 5, DOL and OMB issued a memorandum directing all agencies to designate a senior agency official no later than 90 days after the issuance of the memorandum.
“Labor Compliance Advisors”
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Dispute Resolution. • On contracts >$1 million, contractors required to
agree that the decision to arbitrate claims arising under Title VII or any tort related to sexual assault or harassment may only be made with the voluntary consent after such disputes arise. – Applies to subcontractors where the estimated value meets
the dollar threshold.
• This element is essentially an expansion of the “Franken Amendment” to contractors other than DoD contractors.
Dispute Resolution
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• Huge data collection burden—a large government contractor could have thousands of sub-contractors.
• Alter the relationship between prime and subcontractors. Will primes learn information that they could use against subs in future bid protests?
• Threatens to grind procurement process to a halt – FY 2014 - almost 100,000 contract actions. – The EO will require the government to take multiple steps for
each of these contract actions before award…and then repeat the steps every six months.
Practical Implications
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• At a budget hearing in March, Labor Secretary Perez downplayed the reporting requirements as a simple “check the box” exercise for “the vast majority” of contractors.
• The reality is that there will be enormous amount of data that federal contractors will have to collect and analyze.
• There’s the possibility of FCA and False Statements liability arising out of the required
certification.
Check the Box Exercise?
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• On March 6, 2015, the proposed rule and proposed guidance were submitted to the Office of Information and Regulatory Affairs (“OIRA”) for regulatory review.
• OIRA is supposed to complete its review within 90 calendar days of when it receives the proposed rule.
• The review process can be extended once, by no more than 30 calendar days.
Status
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• Consistent without change.
• Consistent with change—some substantive changes. • Returned—OIRA has serious concerns with the
agency’s proposed rule and does not approve the publication of the notice of proposed rulemaking (“NPRM”).
• The proposed rule is published in the Federal Register in the form of an NPRM.
OIRA’s Options
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• Outside counsel to the Chamber of Commerce, the CEO of the Professional Services Council, and C&M Chair Angela Styles testified before the House Subcommittee on Workforce Protections.
• Congress could invalidate EO by passing a statute, but this is unlikely.
• Contractors have participated in “listening sessions” with OMB, DOL, and senior White House officials.
Response from Industry
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Only two executive orders have been invalidated by the courts:
– Steel Seizure (1952)
– Reich (1996)
Potential Legal Challenge
EO 13673 issued pursuant to the Procurement Act of 1949. Seeks to increase efficiency and cost savings by ensuring that contractors understand and comply with labor laws.
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• Challenged EO 13465 - requires contractors to use the E-Verify system to determine employment eligibility.
• Standard - Courts will uphold EOs if there is a requisite “nexus” between the EO and the Procurement Act’s goals.
• Deference to the executive branch — even when the explanation is conclusory or speculative.
• District Court of Maryland - accepted the President’s rationale that contractors will become more efficient and dependable because contractors that “adopt rigorous employment eligibility confirmation policies are much less likely to face immigration enforcement actions.”
Chamber of Commerce v. Napolitano
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Chamber of Commerce v. Reich
• Challenged EO 12954 - Directed Labor Secretary to promulgate regulations providing for the debarment of contractors who hired permanent replacements for striking workers.
• The right to hire permanent replacements was firmly established under the National Labor Relations Act (“NLRA”).
• D.C. Circuit - EO was invalid because it conflicted with NLRA provisions.
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• An EO cannot have the force of law if it is in conflict with an express statutory provision. There are at least three areas where EO 13673 may conflict with existing law. – Alters the remedial schemes that Congress has
established for the underlying labor statutes.
– Conflicts with the existing suspension and debarment procedures established under FAR Subpart 9.4
– Conflicts with Federal Arbitration Act
Grounds for Legal Challenge
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Conflict with Federal Arbitration Act
• FAA – Permits employers to resolve specific types of employee disputes through arbitration, including through pre-dispute agreements.
• The EO tracks language from an Amendment that was included in DoD appropriations legislation in FY 2010 – No enforcement actions under the DoD bill
– No act of Congress has applied these limitations to any other set of federal contractors.
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• Under the APA, a reviewing court can set aside rules that the agency finds unlawful. A court reviewing the validity of final rules typically asks the following three questions: 1. Was the final rule promulgated in excess of statutory
authority;
2. Is the rule arbitrary, capricious or otherwise not in accordance with law; and
3. Did the agency follow the appropriate APA procedures?
Challenge to Final Rule Implementing EO
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• Argued that Final Rule conflicted with provisions of FASA because the rule required certification regarding violations of labor laws in connection with proposals for commercial item contracts.
• The FAR Council failed to submit a cost-benefit analysis along with an assessment of the costs and benefits of any reasonable alternatives.
• The Contractor Responsibility rule was defeated—but not in court.
Lessons learned from the “Blacklisting Rule”
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• Defunding option?
• 2016 elections a mere 19 months away. . .
Potential Political Solutions
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Kris Meade 202-624-2854
Rebecca Springer 202-624-2569
Jason Crawford 202-624-2562
Questions?
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The False Claims Act: Does the Road (to Liability) Go On Forever?
Mark Troy Andy Liu
Mana Lombardo Brian Tully McLaughlin
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• FCA Statistics & Enforcement Trends
• Fraud on Tap at the High Court
• FCA Liability Trends
• The Courts’ Continuing Struggles in Calculating Damages
Agenda
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• $5.7 Billion recovered (new record)
– $3 Billion from qui tam suits
– $435 Million paid to relators (second highest recovery)
• $46 Billion recovered since 1986
• $23 Billion recovered since 2009
FCA Statistics: FY 2014
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• Qui Tam activity continues to be high
– 713 new qui tam suits (second highest ever) out of 804 FCA matters initiated
– More than 1/3 of all FCA qui tam actions since 1986 filed in past 5 years
• Qui Tam plaintiff’s bar expanding
• Just 1% of the government's FCA proceeds came from declined cases
FCA Statistics: FY 2014
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• Industry Expansion shown through recoveries:
– $2.3 Billion – health care industry
– $65 Million – Department of Defense
– $3.1 Billion – settlements from banking industry
FCA Enforcement Trends
Source: DOJ Office of Public Affairs (Nov. 20, 2014)
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• Increased Criminal Prosecution – Jan. 2012 – AG Holder Memo re “Coordination of
Parallel Criminal, Civil, Regulatory, and Administrative Proceedings” • “deterrence of future misconduct”
• “secure the full range of the government’s remedies”
– Sept. 2014 – AAG Caldwell tells relator’s counsel gathering that the Criminal Division will “redouble our efforts to work alongside you. Qui tam cases are a vital part of the Criminal Division’s future efforts.”
FCA Enforcement Trends
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• Increased Prosecution of Individuals
– AG Holder (and others): Focus on individuals provides accountability, fairness and deterrence
FCA Enforcement Trends
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• Implications of the Supreme Court’s “Pending” Decision in Kellogg Brown & Root Servs., Inc. v. United States ex rel. Carter – Argued Jan. 13, 2015
– Wartime Suspension of Limitations Act, 18 U.S.C. § 3287 – Does the WSLA apply to toll the civil FCA’s 6-year statute of limitations? • Court appears ready to rule “no”
– First-to-File Bar, 31 U.S.C. 3730(b)(5) – Does the bar apply only while the earlier action remains “pending”? • Court appears ready to rule “yes” (if it reaches the question)
Fraud on Tap at the High Court
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• Failure to state a claim
– Rule 9(b): How much detail must complaint contain? • U.S. ex rel. Escobar v. Universal Health (1st Cir.) • U.S. ex rel. Reiber v. Basic Contract Services Inc. (9th Cir.)
– Rule 8(a): Is the alleged fraud “plausible?” • Gonzales v. Planned Parenthood of L.A., (9th Cir.) • Urquilla-Diaz v. Kaplan University (11th Cir.) • U.S. ex rel. Pecht v. Ducommun (C.D. Cal.)
FCA Liability Trends
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• Implied Certification Gains Ground
– U.S. ex rel. Badr v. Triple Canopy, Inc., 775 F.3d 628 (4th Cir. 2015)
– Where is the line between fraud and breach of contract/regulatory non-compliance?
• Omnicare – regulations governing drug packaging
• WMATA – failure to openly compete subcontracts
• Sanborn Map – use of unapproved subcontractors
FCA Liability Trends
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• Qui Tam Developments – Public Disclosure Bar: actual vs. legal notice to the gov’t
• U.S. ex rel. Wilson v. Graham Cnty. Soil & Water Conserv. Dist., 777 F.3d 691 (4th Cir. 2015)
• U.S. ex rel. Whipple v. Chattanooga-Hamilton Cnty. Hosp. Auth., --- F.3d --- (6th Cir. Feb. 25, 2015)
– Original Source: hardening the knowledge requirement? • U.S. ex rel. Schumann v. AstraZeneca Pharm. L.P., 769 F.3d 837 (3d
Cir. 2014)
• U.S. ex rel Osheroff v. Humana, Inc., 776 F.3d 805 (11th Cir. 2015)
FCA Liability Trends
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• The Continuing Struggle Among the Courts to Calculate Damages – Government continues to assert that damages for some
false certifications – those which are pre-conditions to the award of the contract – are the entire contract value.
– Sampling and extrapolation can substitute for proof of actual damages – U.S. ex rel. Martin v. Life Care Ctrs. (E.D. Tenn.)
– Estimates of how much was improperly paid were calculated by expert witnesses – U.S. ex rel. Wall v. Circle C Constr. (M.D. Tenn.)
FCA Damages
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Mark Troy 213-443-5576
Andy Liu 202-624-2907
Mana Lombardo 213-443-5563
Brian Tully McLaughlin 202-624-2628
Questions?
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Commercial Contracting in a Global Procurement Market
Adelicia R. Cliffe Maria Alejandra (Jana) del-Cerro Alan W. H. Gourley
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Compliance with Export Controls in a Changing World Managing Global Compliance Risk in GSA Scheduling Contracts Managing Global Supply Chain Risk
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• Goal of “Higher Fences on Fewer Items”
• Final rules effective:
– Cat. IV, V, IX, X, and XVI (July 1, 2014)
– Cat. XV (Nov. 10, 2014)
– Cat. XI (Dec. 30, 2014)
• Remaining Categories – Cat. XII – Proposed Rule (May 5, 2015) – Cat. XIV & XVIII (this Spring) – Cat. I, II, III (no news)
Export Control Reform Continues
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• Department of State reports 36% drop in licensing volume.
– Resulted in internal reorganization of licensing personnel
• Goal of a single IT system, USXPORTS:
– State Department transitioned July 2014, Commerce (BIS), Treasury (OFAC), and Department of Energy still underway
• Agencies’ periodic review of revised USML and CCL:
– Public comments on Cat. VIII and XIX and related 600 series ECCNs
ECR Update
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• Cloud computing issues:
– New definition of “export”: controlled information encrypted to the specified government standard will not constitute an export
• Harmonized definitions in the ITAR and EAR:
– “reexport,” “technology,” “fundamental research,” and “public domain”
• Yet another PR for “defense services”
• Discrete changes to EAR encryption regulations
Regulatory Changes to Come
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• Is your product still ITAR controlled?
– High rate of licenses Returned Without Action
– Contractual requirements to notify customers
• Did the technology/technical data associated with your product also transition to CCL?
• Does company need to remain ITAR registered?
• End User/End Use screening requirements for CCL items?
Industry Questions to Consider
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• Crimea Region of Ukraine/Russia – Comprehensive prohibitions on transactions with Crimea (EO
13685) – OFAC and BIS restrictions on transactions in support of
deepwater, Arctic offshore, or shale exploration or production projects
– DDTC will deny applications for “high technology” items
• Cuba – New General Licenses authorizing travel to Cuba – Expanded BIS License Exceptions and new licensing policies
• Iran – P5+1 Framework Agreement
U.S. Economic & Trade Sanctions
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• Recent False Claims Act cases underscore: – MAS contractor is responsible for certifying that
products and services offered comply with Trade Agreements Act;
– But, MAS contractor may rely on supplier’s certification; and
– Compliance with Price Reductions clause remains a challenge: • Monitoring
• Commercial Price Lists
Major Risks in GSA Schedule Contracting
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• “Complex or Meaningful” vs. “Minimal or Simple”
• Customs considers: – Origin of components;
– Extent of processing;
– Different character & use than components;
– Product design & development;
– Post-assembly inspection & test;
– Worker skill & number of operations
• Case-by-Case decisions
Substantial Transformation Defines COO
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• HQ H215555 (2012) – Pwn Plug, full security testing suite
• HQ H206977 (2013) – NEC iPASOLINK, hybrid digital
microwave radio
• HQ H248027 (2014) – Voyager LegendTM cordless headset
• HQ H240199 (2015) – EliteBook 840-G1 notebook
Recent TAA Rulings – Role of SW
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• HQ H192146 (2012) – Non-binding Advisory Opinion
– Database management / application integration SW
– Place of SW Build: process converting source code files, routines etc. into machine executable object code.
• HQ H243606 (2013) – Final Determination
– DocAve SW suite for MS SharePoint®
– Source code converted to Object code by US team
Recent TAA Rulings – Software
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• Pwn Plug Ruling
• HQ H248696 (2014)
– Elliptical Exercise machine
• HQ H259326 (2015)
– Powered exoskeleton
TAA Rulings – Accessories?
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• Historical approach – Price Reduction Clause (PRC) and Basis of Award (BOA)
customer price monitoring
• GSA Proposal: – Monthly transactional data reporting
– Largely eliminate the Price Reductions clause
• Some initial reactions: – GSA IG objects to losing its hammer
– Industry concerned about burden
Price Reductions Clause – A New World?
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• Increasing scrutiny of security risks related to commercial global supply chains
– See, e.g., White House National Strategy for Global Supply Chain Security (2012)
• Laws and regulations focused on information technology and information systems, but expect to see broader application going forward
Global Supply Chain Security
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• DOD Procurements: Section 806 – Statutory authorization for DOD to address IT supply chain risk first
provided in the FY2011 NDAA, as amended by Section 806 of the FY2013 NDAA)
– Pilot program sunsets in 2018 – Interim rule issued 2013 (final rule expected in 2015); DFARS 252.239-
7017, 7018 • Applies to procurements related to “National Security Systems” (NSS) • Applies to contracts for commercial items and COTS items • Provides for exclusion of source (prime or subcontractor) that fails to meet
qualification standards or achieve an acceptable rating for supply chain risk evaluation factor
• Not subject to bid protest review • No specific compliance requirements; leaves measures up to individual
contractors to protect supply chain
Global Supply Chain Security
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• Intelligence Community Directive (ICD) 731 – Issued in December 2013 – Applies to procurement of “mission-critical” products,
materials, and services (as deemed by heads of IC elements)
– Directs member agencies of intelligence community to consider supply risks in IT procurements
– When acquiring IT products, contractors, subcontractors or vendors may be excluded from competing based on supply chain risk factors identified in risk assessment, and disclosure of exclusion may be limited when necessary to protect national security
Global Supply Chain Security
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• Section 515 of Consolidated Appropriations Act of 2014 (“Wolf Provision”) – Restricts spending by DOJ, DOC, NASA, NSF on “high impact” and
“moderate impact” information systems until supply chains risks have been assessed
– Agencies to assess “risk associated with such system[s] being produced, manufactured, or assembled by one or more entities identified by the United States Government as posing a cyber threat, including but not limited to, those that may be owned, directed, or subsidized by the People’s Republic of China.”
– Agencies to coordinate with FBI and other agencies to obtain threat information for assessments
Global Supply Chain Security
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• December 2014 GSA request for information (RFI) on industry capabilities to perform due diligence research on federal contractors’ supply chain security
• GSA collaborating with customer agencies to establish risk indicators; e.g., – Foreign ownership, control and influence of contractors,
suppliers, and manufacturing hubs – Product and component countries of origin – Manufacturing practices
• Information to be used by federal acquisition, grant, and oversight communities
• GSA anticipates 100-500 due diligence reports per month
Global Supply Chain Security
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Addie Cliffe 202-624-2816
Jana del-Cerro 202-624-2843
Alan Gourley 202-624-2561
Questions?
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Small Business Regulatory Shake-Up
Amy L. O’Sullivan Olivia Lynch
Gordon Griffin
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• FINALLY! Two Recent Sets of Proposed SBA Regulations to Implement FY13 NDAA and Other Changes – Revamp of Calculations for Limitations on Subcontracting – Expansion of and Changes to SBA and Other Agency
Mentor-Protégé Programs – Challenges and Opportunities for Large and Small
Businesses
• Additional Proposed Revisions to WOSB Regulations and Pending Bills in Congress
• What’s on the Horizon – Impact of Proposed Changes
Agenda
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79 Fed. Reg. 77955 (12/29/14) Proposed SBA Regulation (comment period extended through 4/6/15) – 215 comments received • Complete overhaul of formula for calculating compliance
with limitations on subcontracting – intended to be easier • Shift from cost-based formula to comparison of amount paid
to prime versus other than “similarly situated” subcontractors at any tier (defined as small business that is qualified the same as prime for the type of set aside)
• New compliance certification and harsh fine (greater than $500K or amount exceeding limitation on subcontracting )
Limitations on Subcontracting
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• “Subcontractor” is undefined – i.e., does it include 1099’s?
• Will the cost of materials exclusion in current regulations be carried forward?
• Exclusion for similarly situated subs “at any tier” requires more oversight by prime
• For ID/IQ contracts, does calculation apply at contract or order level?
Limitations on Subcontracting – Questions and Challenges
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• CO requirement to notify potential offerors of applicable waiver(s)
• N-M Rule does not apply to acquisitions < $150K • Certain software treated as supplies (N-M Rule applies) but some
eligible for waivers; custom designed software or modified for Gov’t contract not subject to N-M Rule
• Tough new change for IT re-sellers • Does not resolve lingering confusion on N-M application
associated with COFC decision Rotech v. United States, 118 Fed. Cl. 408 (2014) – COFC held that the N-M Rule applies to any supplies even if the NAICS
code assigned is for services – Decision is contrary to unambiguous SBA regulations, and will require
Federal Circuit reversal or a statutory amendment to rectify
Non-Manufacturer Rule
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• Exclusion for “similarly situated” contractors in application of ostensible subcontractor rule
• Changes to test for “identity of interest” affiliation: – Rebuttable presumption of affiliation if firms do
business together and are owned/controlled by married couple, parties to civil union, parents and children, or siblings
– Presumption of affiliation based on economic dependence if a company derives ≥ 70% of revenues from single company in prior fiscal year
Affiliation
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• New requirement to recertify size before award if merger/acquisition occurs after proposal submission but before award – What is impact?
– When is size determined?
• Prime contractors have to notify small businesses prior to their inclusion in bid, proposal, or subcontracting plan – Mechanisms for reporting bad faith or fraud if in connection
with subcontracting plan
– Sanctions include liquidated damages, material breach finding, consideration in past performance evaluation
Recertification/Notification
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80 Fed. Reg. 6618 (2/5/15) – Proposed SBA Regulation (comment period extended through 5/6/15) – over 70 comments received already • Significant expansion of 8(a) M-P program to all categories of
small businesses (SDVO/HUBZone/WOSB/EDWOSB ) – Concern for how SBA can process influx of applications, even
with set open/closed periods – Annual review to determine of M-P agreement should be
allowed to continue another year – Limit on duration proposed at 3 years and a total of 2 M-P
agreements for protégé (either with same or different mentor) – Same affiliation exemption for JVs extended
Expansion to Mentor-Protégé Program
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• Relationship Limitations – Generally no more than 1 protégé per mentor; max of 3 but no
adverse impact on protégé development
– Protégé cannot also be mentor
– Generally no more than 1 mentor per protégé; may have 2 if not competing/conflicting
– Delete current size restrictions for 8(a) protégé for consistency
– Prohibit non-profits from qualifying as mentor
– Need to chose counterpart wisely in light of limitations – are there more opportunities (set asides) with a specific category of SB?
Expansion to Mentor-Protégé Program
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• Except for DoD, other agencies have 1-year grace period then must obtain SBA approval
• Raise question of whether subcontracting incentives should be included as part of SBA M-P Program
• Annual reporting for agencies on participants, assistance to protégés, and protégé progress competing for prime and subcontracts
Revamp of Agency M-P Programs
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• JV must be reduced to written agreement • Does not require JV to be separate legal entity – but SBA questions
whether all JVs formed under M-P agreements should be separate legal entities
• JVs cannot be populated with individuals to perform awarded contracts (for tracking and ensuring protégé is benefitting)
• New certification on compliance with JV regs and JV agreement at multiple points in time with sanctions
• New requirement to allow SBA to track award to JVs but SBA requesting guidance on how (separate DUNS, SAM)
• Non-HUBZone firms permitted to JV with HUBZones • Authorize size protests of SBA approved JVs (previously off limits based on
OHA precedent)
M-P Joint Ventures
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• New exception to tribally owned (e.g., ANC) internal affiliation exemption if more than one subsidiary has “substantial unfair competitive advantage within an industry category”
• One individual cannot be responsible for management and daily operations of more than two 8(a) tribally-owned concerns
• SBA has ability to change the primary NAICS code of 8(a) participant in appropriate circumstances
Revisions to 8(a) Regulations
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• 80 Fed. Reg. 24846 (5/1/15) - Proposed SBA Regulation with new sole source authority for WOSBs, EDWOSBs – Permitted if contract value ≤ $6.5M for manufacturing
contracts and ≤ $4M for all others
• H.R. 1481, the Small Contractors Improve Competition Act of 2015 and S. 958, the Small Business Fairness Act propose to modify the way agencies evaluate the past performance and capabilities of small businesses proposing as a team or a JV
Next Changes in the Pipeline
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• Unknown timeline for issuance of final SBA regulations – M-P Program changes will take the longest because of volume of SBA questions
• Continued confusion, particularly on limitations on subcontracting until FAR also amended
• Greater incentives and authorization for SB alliances (teaming and JVs) – fewer competitors and stronger teams on set-asides and full and open
• More JVs and teams increase confidence in agency set-aside determinations – contributing to increase in percentage of annual spending/awards to small business
• Explosion of JVs fueled by M-P expansion, but likely reduction in 8(a) M-P relationships
• Need to invest in development of M-P JV templates – we can help! • Further backlog and delays within SBA – more M-P agreements and JVs to
approve and more size protests • Disappearance of non-DoD agency-level M-P Programs?
Impact of Changes
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Amy O’Sullivan (202) 624-2563
Olivia Lynch (202) 624-2654
Gordon Griffin (202) 624-2819
Questions?
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WHITE HOUSE v. CONGRESS:
Government Contractors Bracing for Showdown in
Washington
WELCOME ATTENDEES
May 5-6, 2015
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Protecting Your Intellectual Property from the Government’s Assault
John McCarthy Jon Baker
Joelle Sires
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• Recent Developments
• Be Sure to Read the Fine Print – Government IP Provisions that Will Keep You Up at Night
• What to Do When the Government Comes Knocking – Preventing & Responding to Data Rights Challenges
Overview
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Recent Developments
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• Builds on previous versions
• Consistent themes: increased use of commercial technology and innovation – Seeks to eliminate unproductive processes and
bureaucracy
– DoD will “scan the commercial sector to identify and capture emerging disruptive technology”
– BUT, proposes greater oversight for IRAD, including prior DoD approval of each IRAD project
Recent Developments
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• Better Buying Power 3.0 - Highlights
– Remove barriers to commercial technology utilization
• Handbook of methods and best practices by July 2015
– Improve return on investment from DoD laboratories
– Increase productivity of corporate IR&D
• Reduce IR&D spending on near term competitive opps
– Increase use of prototyping and experimentation
Recent Developments
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• Better Buying Power 3.0 - Highlights (continued) – Emphasize technology insertion and refresh in program
planning – Use modular open systems architecture to stimulate
innovation • Modularity and Openness metrics to be published in Oct. 2015
– Increase access to and return on Small Business R&D • Transition SBIR technology to fielded systems • Engage with non-traditional suppliers, entrepreneurs and
inventors
– Improve DoD outreach for technology and products from global markets
Recent Developments
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• DoD Looks to Silicon Valley for Innovation
• Talking points come straight out of BBP 3.0 – Silicon Valley presence will help DoD access and use
commercial technologies. “Our potential adversaries are already doing so”
– Will offer commercial firms a route to use technology for both commercial and military purposes
– DoD will reduce bureaucracy and trim onerous IP impediments to attract high tech
• Can DoD have it both ways?
Recent Developments
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• GSA Aims to Override Certain Commercial Supplier Agreement Terms – RFI on proposed class deviation, 80 Fed. Reg. 15011,
March 20, 2015 – Renders unenforceable 15 types of Commercial Supplier
Agreement terms & conditions – Implements certain standard terms & conditions to reduce
need to negotiate commercial terms on a contract-by-contract basis
– FAR 52.212-4 takes precedence over conflicting terms in Commercial Supplier Agreements
Recent Developments
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• GSA Class Deviation Terms – Definition of contracting parties – Contract formation – Patent indemnity (contractor assumes control of proceedings) – Automatic renewals of term-limited agreements. – Future fees or penalties – Taxes – Payment terms or invoicing (late payment) – Automatic incorporation/deemed acceptance of third party terms – State/foreign law governed contracts – Equitable remedies, injunctions, binding arbitration – Unilateral termination of Commercial Supplier Agreement by supplier – Unilateral modification of Commercial Supplier Agreement by supplier – Assignment of Commercial Supplier Agreement or Government contract by supplier – Confidentiality of Commercial Supplier Agreement terms and conditions – Audits (automatic liability for payment
Recent Developments
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• Government’s assault on contractor intellectual property continues
• Proliferation of solicitation and contract provisions that disproportionately favor the Government
• Consideration of IP rights grants often included as an evaluation criteria
• Proliferation of agency unique clauses
Government IP Provisions that Will Keep You Up at Night
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• Intellectual Property considerations in the evaluation criteria:
Factor: Data Rights, Computer Software Rights and Patent Rights • “In evaluating the Data Rights and Patent Rights, the Government will use information in the proposal to assess the extent to
which the rights in technical data (TD), computer software (CS), computer software documentation (CSD), and inventions/patents offered to the Government ensure unimpeded, innovative, and cost effective production, operation, maintenance, and upgrade of the [SYSTEM NAME] throughout its life cycle; allow for open and competitive procurement of [SYSTEM NAME] enhancements; and permit the transfer of the [SYSTEM NAME] non-proprietary object code and source code to other contractors for use on other systems or platforms.”
Subfactor 2. Interface Design and Management • “The Government will evaluate the extent to which the Offeror's open system architecture approach, as documented in the
Offeror's Open Systems Management Plan (OSMP), clearly defines and describes all component and system interfaces; defines and documents all subsystem and configuration item (CI) level interfaces to provide full functional, logical, and physical specifications; identify processes for specifying the lowest level (i.e., subsystem or component) at and below which it intends to control and define interfaces by proprietary or vendor-unique standards; and identifies the interface and data exchange standards between the component, module or system and the interconnectivity or underlying information exchange medium.”
DoD’s Open Systems Architecture Contract Guidebook, v.1.1. https://acc.dau.mil/adl/en-US/664093/file/73330/OSAGuidebook%20v%201_1%20final.pdf.
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• Intellectual Property considerations in the evaluation criteria: Subfactor 3. Treatment of Proprietary or Vendor-Unique Elements • “The Government will evaluate the extent to which the Offeror's Life Cycle Management and Open Systems
Strategy, as documented in the Offeror’s Open Systems Management Plan (OSMP), explains the use of proprietary, vendor-unique or closed components or interfaces; defines its process for identifying and justifying use of proprietary, vendor-unique or closed interfaces, code modules, hardware, firmware, or software; and demonstrates to the Government that proprietary elements do not preclude or hinder other component or module developers from interfacing with or otherwise developing, replacing, or upgrading open parts of the system.”
Subfactor 4. Life Cycle Management and Open Systems • “The Government will evaluate the extent to which the Offeror's Life Cycle Management and Open Systems
Strategy, both of which should be documented in the Offeror's Open Systems Management Plan (OSMP), demonstrates a thorough, adequate, and feasible, strategy for the insertion of COTS technologies and other reusable NDI into the SYSTEM NAME and demonstrates that COTS, other reusable NDI, and other components can be logistically supported throughout the system's life cycle.”
DoD’s Open Systems Architecture Contract Guidebook, v.1.1. https://acc.dau.mil/adl/en-US/664093/file/73330/OSAGuidebook%20v%201_1%20final.pdf.
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Intellectual Property considerations in the evaluation criteria:
Factor: Data, Software and Patent Rights • “The Government will evaluate Data, Software and Patent Rights using information in the proposal to assess the extent to
which the rights in Technical Data (TD), Computer Software (CS), Computer Software Documentation (CSD), and inventions/patents offered to the Government ensure unimpeded, innovative, and cost effective production, operation, maintenance, and upgrade of the [SYSTEM NAME] throughout its life cycle; allow for open and competitive procurement of [SYSTEM NAME] enhancements; and permit the transfer of [SYSTEM NAME] TD, CSD and CS to other systems or platforms.”
• “Proposals will not be rated as less than ACCEPTABLE on this factor solely because an Offeror does not offer a price for the Government Purpose Rights Option CLIN. However, ratings on this factor for proposals to deliver TD, CSD, or SW with less than the minimum rights specified for the Government by applicable statute (10 U.S.C. 2320) and regulation (DFARS 252.227-7013, 252.227-7014, and 252.227-7015) may be negatively impacted. For noncommercial acquisitions, these rights include: Unlimited Rights in TD (as specified in DFARS 252.227-7013(b)(1)) and CS and CSD (as specified in DFARS 252.227-7014(b)(1)); Limited Rights in TD (as specified in DFARS 252.227-7013(b)(3)); and Restricted Rights in CS (as specified in DFARS 252.227-7014(b)(3)). The minimum rights considered for TD associated with commercial item acquisitions are specified in DFARS 252.227-7015(b)(1). For commercial SW acquisitions, evaluation of the offered rights will assess their consistency with Federal procurement law and satisfaction of Government user needs in accordance with the policy in DFARS 227.7202-1(a). Ratings on this factor for proposals to deliver TD, CSD, or SW with more than the minimum rights specified for the Government by applicable statute and regulation may be positively impacted.”
DoD’s Open Systems Architecture Contract Guidebook, v.1.1. https://acc.dau.mil/adl/en-US/664093/file/73330/OSAGuidebook%20v%201_1%20final.pdf.
Government IP Provisions that Will Keep You Up at Night
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• Well known problem clauses: – FAR 52.227-17, Rights in Data Special Works
• Includes broad rights grant in all data delivered under the contract
• Imposes use restriction on data produced in the performance of the contract
• Requires Contractor to indemnify the USG
– Reach back clauses • DFARS 252.227-7026, Deferred delivery clause (2 years; only predesignated
tech data and computer software))
• DFARS 252.227-7027, Deferred ordering clause (3 years; any tech data or computer software generated in the performance)
• FAR 52.227-16, Additional Data Requirements (3 years; “any data first produced or specifically used in the performance of th[e] contract”)
Government IP Provisions that Will Keep You Up at Night
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• Sleeper clauses: – DFARS 252.227-7015, Technical Data – Commercial Items
• Grants unlimited rights in certain categories of data (FFF, OMIT) • Permits release to Government support contractors • No liability for release if “not marked to indicate that such data are
licensed data subject to use, modification, reproduction, release, performance, display, or disclosure restrictions.”
– FAR 52.227-19, Commercial Computer Software License • Purports to take precedence over commercial software licenses • Grants non-commercial restricted rights in software • Requires contractors to label their commercial software with a specific FAR legend:
– Notice—Notwithstanding any other lease or license agreement that may pertain to, or accompany the delivery of, this computer software, the rights of the Government regarding its use, reproduction and disclosure are as set forth in Government Contract No. ________________.
Government IP Provisions that Will Keep You Up at Night
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• Original clauses:
Government IP Provisions that Will Keep You Up at Night
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• The Granddaddy of them all – VA “Governing Law” – No commercial license effective unless attached
• No clickwrap • No incorporation by reference (3rd P, OSS)
– Restrictions re Government’s use, duplication and disclosure of data “are included and made a part of this contract, and only to the extent that those provisions are not duplicative or inconsistent with Federal law, Federal regulation, the incorporated FAR clauses and the provisions of this contract”
– Other license provision – other than Government’s use, duplication and disclosure of data – not part of the contract
Government IP Provisions that Will Keep You Up at Night
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• The Granddaddy of them all – VA “Governing Law” – Federal law and regulation, including without limitation,
the Contract Disputes Act (41 U.S.C. §601-613), the Anti-Deficiency Act (31 U.S.C. §1341 et seq.), the Competition in Contracting Act (41 U.S.C. §253), the Prompt Payment Act (31 U.S.C. §3901, et seq.) and FAR clauses 52.212-4, 52.227-14, 52.227-19 shall supersede, control and render ineffective any inconsistent, conflicting or duplicative provision in any commercial license agreement.
– Super order of precedence clause
– Bottomline: Commercial license agreements eviscerated
Government IP Provisions that Will Keep You Up at Night
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• What to do
– Bilateral negotiations – just say no
– Competitive procurement
• Ask questions
• Interpret provisions as a part of the proposal
• Pre-award protest
• Subcontractor – reject flowdown
Government IP Provisions that Will Keep You Up at Night
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• What to do – Order of precedence
• Custom order of precedence • FAR 52.212-4(s)
(1) “the schedule of supplies/services;” (2) “the Assignments, Disputes, Payments, Invoice, Other Compliances,
Compliance with Laws Unique to Government Contracts, and Unauthorized Obligations paragraphs of this clause;”
(3) “the clause at FAR 52.212-5;” (4) “addenda to this solicitation or contract, including any license agreements
for computer software;” (5) “solicitation provisions if this is a solicitation;” (6) “other paragraphs of this clause;” (7) “the Standard Form 1449 ; (8) “other documents, exhibits, and attachments; :and (9) “the specification”
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• Increasing numbers of data rights disputes
Preventing & Responding to Data Rights Challenges
Prechallenge RFIs Data Rights Challenge
DFARS 252.227-7037(d) DFARS 252.227-7037(e)
Request for written explanation for data rights assertions
Formal challenge to contractor’s data right assertions
CO establishes timeline for response, but can be extended by mutual agreement
60 days to respond, but must be extended upon written request showing need for additional time
Response is not certified Response is certified
If unsatisfied with response, CO can ask for more information or issue formal challenge
CO may request more information or issue final decision
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• How to respond?
– Take it seriously!
– Provide complete and accurate response to create fulsome record
– Request more time if necessary
Preventing & Responding to Data Rights Challenges
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• What to include in response:
– Summary of technology
– Timeline of development history
– Legal support for data assertions
Preventing & Responding to Data Rights Challenges
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• What to include in response, cont’d: – Documents justifying the data right assertion
• E.g.: – Documents demonstrating development at private expense,
e.g., » Timekeeping records » Records showing development occurred prior to USG
investment, such as test reports, specifications, dated drawings
– Documents demonstrating segregability of technology, e.g., » Drawings » Software diagrams » Software code analysis
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John McCarthy (202) 624-2579
Jon Baker (202) 624-2641
Joelle Sires (213) 443-5579
Questions?
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Troy Barsky Jim Flood
David Ginsberg David Hammond
HEALTH CARE
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ACA: The Supreme Court Decision
• The Case: King v. Burwell
• The Issue: Can Federal Govt. provide ACA Tax Subsidies to People on Federal Exchanges?
• The Four Words: “Established by the State”
• The Timing of a Decision: June/July 2015
• The Likely Result: The Government wins & ACA subsidies for federal exchanges upheld
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An Update on ACA: The Supreme Court
• Why Does the Government Likely Win?
• Solid Votes for the Government: 4 votes – Justices Sotomayor/Breyer/Kagan/Ginsburg
• Solid Votes for the Plaintiff: 3 votes – Justices Scalia/Thomas/Alito
• Swing Votes: Justices Roberts & Kennedy
• Justice Kennedy as Swing Vote Likely to Back the Government which is 5/9 votes for ACA
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The Congressional Response
• What Does Congress Do if Plaintiff Wins?
• Option # 1 – Nothing – “Let Them Eat Cake”
But leave 5-8 million people w/o coverage
• Option # 2 – Pass New Law to Kill ACA
But Lack Senate Democratic Votes & Veto
• Option # 3 – Pass New ACA Temporary Fix
• Likely Bi-partisan Support for Temporary Fix through 2015 & maybe 2016 elections
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The Congressional Response: Why Does Republican Congress Do Temporary Fix?
• Answer – the 2016 Elections
• (1) Rs Want to Hold the Senate – many of 24 Senate Rs up for election in impacted fed exchange states
• (2) Senate Finance Committee – 7/24 of Rs Senators on this key Committee that created ACA in those states
• (3) States Won’t Fix Problem – Most impacted federal exchange states have Republican state legislatures
• (4) Can’t Ignore Millions Losing Insurance – People who lose ACA insurance are angry voters in key R states
• (5) Presidential Election – Rs Want to Win Red States
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What Will Congress Do: A Peak at Senate Finance Committee & 2016 Election
• (1) Senator Charles Grassley (R-IA): YES 2016
• (2) Senator John Thune (R-SD): YES 2016
• (3) Senator Richard Burr (R-NC): YES 2016
• (4) Senator Johnny Isakson (R-GA): YES 2016
• (5) Senator Rob Portman (R-OH): YES 2016
• (6) Senator Pat Toomey (R-PA): YES 2016
• (7) Senator Dan Coats (R-IN): YES 2016
• (8) Senator Tim Scott (R-SC): YES 2016
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2012 Presidential Election
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States Using Federal Exchange
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What Will Congress Do: Current Senate & House Starter Proposals to “Fix” ACA
• Senate Bill – Senate Finance Committee Chairman Hatch (R-UT) along with Senators Burr (R-NC) & Representative Upton (R-MI) “The Patient CARE Act”
• House Bill – Three Chairmen – Ways & Means, Energy & Commerce & Education & Workforce - Ryan-Kline-Upton Bill
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What will Congress do if ACA Loses? Senate Bill: The Main Features Are:
• (1) Repeal of ACA
• (2) Means tested tax credits
• (3) Caps Employer Health Plan Tax Exclusion
• (4) Replace Medicaid Expansion - Tax Credits
• (5) Converts Medicaid to “Per-Capita Cap” Program
• (6) Med-Mal Reform: Caps Non-Economic Damages and Limits Attorneys Fees
• (8) More Hospital Pricing Transparency
• (9)Allows Interstate Insurance Purchasing
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What Will Congress Do if ACA Loses?: The House Bill: The Main Features Are:
• (1) Eliminate individual & employer mandate
• (2) Allow Interstate Sale of Insurance
• (3) Med-Mal Liability Reform
• (4) Let small businesses pool & buy together
• (5) Allow Kids on Parents’ Plans Until Age 26
• (6) Prohibit Lifetime Limits on Benefits
• (7) Guaranteed renewability if enrolled
• (8) Adjustable, advanceable tax credit
• (9) Expand Access to HSAs
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Electronic Health Records
• Tangible growth since 2009 passage of the HITECH Act
• Providers face new “Meaningful Use” Rules
• EHR companies face new IT certification requirements & push for interoperability
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Electronic Health Records: Background
• The HITECH Act of 2009:
• (1) Fostered adoption & “meaningful use” of EHR technology across the U.S.
• (2) Gave the HHS Office of National Coordinator for Health Information Technology authority to certify EHR & set standards for EHR technologies
• (3) Created financial incentives to Medicare/Medicaid health providers who demonstrated “meaningful use” of HER & penalties for failure to do so
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Electronic Health Records
• The “Meaningful Use” Program was implemented by HHS in 3 Stages Stage 1 & 2 implemented
• March 2015 – HHS put out Draft Stage 3 Rules or “meaningful use” criteria for Medicare & Medicaid professionals to get EHR incentive payments & avoid downward adjustments
• March 2015 – ONC put out 2015 Edition Health IT Certification Criteria to match up with Nationwide Interoperability Roadmap
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Electronic Health Records: The Problems Being Addressed Right Now • Interoperability
• Antitrust Concerns
• Privacy & Security
• Cost
• Quality of Data
• Congress/HHS very focused on EHR now
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Conclusion
• The Affordable Care Act is Here to Stay
• ACA Solidified if Government Wins SC Case
• ACA Subsidies Stay Through 2015/16 if Govt Loses Because Congress Will Do Temporary Fix
• Electronic Health Record Growth Continues
• Critical Time for EHR Technology Companies & Providers Required to Make “Meaningful Use”
• Companies Should Engage Congress & Federal Agencies on Both Issues Right Now
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• Accelerating data migration to cloud
– Cloud-based vertical solutions allows greater innovation
– Patient-centered and data-driven
– Greater sharing and accessibility of health data
• Increased statutory and regulatory enforcement
Big Data and Healthcare
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• HIPAA now provides for more aggressive enforcement
– Heightened demand for more control over health data
– Adoption of electronic medical record (“EMR”) systems a top priority within industry
• Omnibus HIPAA Rule provisions most significant for cloud computing are those pertaining to liability
Big Data and Healthcare
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• Healthcare providers, health plans, and other healthcare entities covered by HIPAA (“covered entities” or CEs) impacted
• Liability can extend down the chain beyond CEs to certain subcontractors
• A cloud service provider that creates, receives, maintains, or transmits PHI on behalf of a covered entity may fall within HIPAA's definition of business associate (“BA”)
Big Data and Healthcare
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• CEs remain responsible for a host of Privacy Rule and Security Rule requirements aimed at safeguarding PHI
– adopt written privacy policies and procedures
• designate a privacy official to implement these policies and procedures
• train workforce with respect to these policies
– maintain reasonable and appropriate administrative, technical, and physical safeguards to prevent disclosure of PHI and limit its incidental use and disclosure pursuant to otherwise permitted or required use or disclosure
Big Data and Healthcare
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• Breach – A CE is responsible for making the notifications to
individuals, the media, and the Secretary
– CE fails to comply with an administrative simplification provision, it is directly liable for civil, and in some cases criminal, penalties
• Rule eliminated the affirmative defense to avoid a penalty if it: – “did not know and with the exercise of reasonable diligence
would not have known of the violation”
Big Data and Healthcare
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• BAs are required to
– Provide notification to the CE in the event of a breach of unsecured PHI
– to comply with the minimum necessary rule; to cooperate with the Secretary during complaint investigations and compliance reviews
– to provide an accounting of disclosures of PHI; and to make an electronic copy of PHI available to an individual or CE when an individual requests it
Big Data and Healthcare
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Latest Legislative Developments: MACRA
• Medicare Access and CHIP Reauthorization Act of 2015 (MACRA)
• Signed into law April 16, 2015
• In a nutshell:
– Repeals SGR formula and changes Medicare payment system
– New Program Integrity Provisions
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• § 501 – Removal of SSN from Medicare Cards
• § 502: Preventing Improper Payments
• Recovery Audit Contractor Review of Improper Payments:
• Incarcerated Beneficiaries
• Not Lawfully Present
• Deceased Beneficiaries
• § 503 –Study of Smart Card Technology for Medicare Beneficiaries
MACRA’s Fraud and Abuse Provisions
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MACRA’s Fraud and Abuse Provisions • § 505 – Medicare Administrative Contractor Improper Payment Outreach
and Education Program
• Gives providers and suppliers information from Recovery Audit Contractor program data regarding:
• Most frequent and expensive payment errors (quarterly);
• Instructions on correcting and avoiding such errors;
• Notice of new topics for RAC audits; and
• Instructions on preventing issues related to such audits.
• Imposes restrictions on the use of recovered funds (no capital investments or IT infrastructure)
• § 509 – Renewal of MAC Contracts • Changes renewal cycle from 5 years to 10 years
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CMS Developments
• Center for Medicare
– Release of Medicare Payment Data
– Focus on Quality and Data Reporting
• Center for Medicaid & CHIP Services
– Shift to Managed Care
– Focus on Alternative Payment Models
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CMS Developments
• Center for Medicare and Medicaid Innovation
– Accountable Care Organizations
– Bundled Payment
– Innovation Grants
• Center for Program Integrity
– Transparency Programs
– Data Analytics
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Recovery Audit Contractors (RACs)
What do they do?
• Identify improper payments from Medicare Part A and B claims. • Analyze claims and review those most likely to contain improper payments, which
may include:
• (1) payment for items or services that do not meet Medicare’s coverage and medical necessity criteria;
• (2) payment for items that are incorrectly coded; and • (3) payment for services where the documentation submitted did not
support the ordered service.
Who are they?
• Four private companies that run Medicare’s Recovery Audit Program
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Controversy What’s the big deal?
• RACs are paid on a contingency-fee basis.
• CMS coding standards are complex and constantly changing.
• RACs can audit healthcare providers for up to three
years.
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Understanding the RACs Appeals Process The five-levels of appeal include:
• Redetermination by the Fiscal Intermediary • Reconsideration by a Qualified Independent Contractor; • Administrative Law Judge Hearing; • Medicare Appeals Council Review; and • Judicial Review in U.S. District Court.
Problems with the process:
• Overloaded system, causing at least a two-year delay at the ALJ level
• High cost of RAC appeals
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• President’s Budget Proposal for FY 2016 Includes Several Medicare Appeals Legislative Proposals • Provide Office of Medicare Hearings and Appeals and Departmental Appeals
Board Authority to Use Recovery Audit Contractor Collections
• Establish a Refundable Filing Fee
• Sample and Consolidate Similar Claims for Administrative Efficiency
• Remand Appeals to the Redetermination Level with the Introduction of New Evidence
• Increase Minimum Amount in Controversy for Administrative Law Judge Adjudication of Claims to Equal Amount Required for Judicial Review
• Establish Magistrate Adjudication for Claims with Amount in Controversy Below New Administrative Law Judge Amount in Controversy Threshold
• Expedite Procedures for Claims with No Material Fact in Dispute
Potential Solutions
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David Ginsberg (213) 443-5545
David Hammond (202) 624-2510
Troy Barsky (202) 624-2890
Jim Flood (202) 624-2716
Questions?
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For Sale by Owner: Seizing Opportunities in
a Seller’s Market
Bryan Brewer Peter Eyre
Karen Hermann
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• 2014 announced deals up 25% over 2013; expectation that 2015 will continue that trend
• Private equity backed strategics remain active – as both buyers and sellers
• Credit markets remain friendly
• Priority areas still: health, cyber, intel, big data and cloud migration
• Traditional primes continue to shed non-core assets
Current Trends and Predictions for 2015
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• More auction processes
• More potential buyers, so potentially higher valuations, particularly in priority sectors
• Indemnity caps are trending lower
• Decreased appetite for deep-dive diligence
• More pressure on deal timelines means less time for integration planning
What do Buyer’s Need to Know?
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• Increased use of Transactional Risk Insurance, even in the regulated industries
• According to one industry broker (Marsh):
– 2010: $387 million in policy limits / 25 transactions
– 2014: $2.73 billion in policy limits / 130 transactions
• More buy-side policies (approx. 90%) than sell-side policies
Transactional Risk Insurance
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• Not useful for “known” risks
• Must meet underwriter’s requirements
• Underwriters will review diligence process, including diligence reports prepared by outside counsel and accounting firms
• Consider binding the policy at signing, rather than at Closing
Insurance Considerations
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• Greater focus on “business” due diligence – continue to proactively monitor data room access
• Review the target company’s non-compete and exclusivity obligations
• Consider corporate culture and structural integration
• Review key personnel clauses and consider implementing a retention plan
• Carefully evaluate requirements of post-Closing integration activities: novations, change-of-name agreements and government approval of IT systems
Integration
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Costs
Terry Albertson Steve McBrady
Skye Mathieson
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I. Update on Audit Delays and Statute of Limitations Issues
II. Statutory and Regulatory Update and Related Guidance
III. Discussion of Cost Cases
Agenda
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CDA Statute of Limitations
• The Contract Disputes Act, 41 U.S.C. §§ 7101-7109, includes a 6-year SOL • Claims submitted more than six years after accrual are barred by the CDA • CDA does not define the term “accrual.” The Board (and the Court) rely on
the Federal Acquisition Regulation 33.201 definition: … the date when all events, which fix the alleged liability of either the
Government or the contractor and permit the assertion of the claim, were known or should have been known ...
• Until recently, SOL was held to be “jurisdictional,” which meant that the boards and COFC lacked jurisdiction over claims beyond the 6-year window -- SOL could be raised at any time, by either party, or the court, and it could not be waived or tolled by agreement of the parties
• In Sikorsky, the Federal Circuit made a significant change in the SOL landscape
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Sikorsky Aircraft Corp. v. United States, 2013-5096, -5099 (December 10, 2014) • Government alleged that Sikorsky had allocated certain costs in
noncompliance with CAS 418 during the 1999 to 2005 period. • COFC held that the CDA SOL had not run, and concluded that the
government had not shown that Sikorsky’s allocation practice failed to comply with CAS 418.
• Government appealed the COFC’s ruling on the merits, and Sikorsky cross-appealed, arguing that the CDA SOL had run and that the COFC’s ruling on SOL had to be addressed before the merits because the CDA SOL is jurisdictional.
• Court held that the statute of limitations is "not jurisdictional" and "need not be addressed before deciding the merits."
CDA Statute of Limitations
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The Boeing Co., ASBCA 58660 • Facts: Boeing unilaterally changed its cost accounting practice.
– Over 6 years before the final decision, Boeing submitted a revised Disclosure Statement and made a PowerPoint presentation to the Gov’t on its FPRP.
– Under 6 years, Boeing submitted its general dollar magnitude cost impact analysis.
– Gov’t claim for increased costs resulting from Boeing’s unilateral change to cost accounting practice.
• Held: Denied Boeing’s motion to dismiss (interlocutory): – Need evidence re: contents of the “shorthand” PowerPoint briefing. – Board had held in Raytheon that Disclosure Statement revision, alone,
does not trigger the 6-year CDA clock.
CDA Statute of Limitations
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Combat Support Associates, ASBCA 58945 (Oct. 22, 2014)
• Facts: Contractor submitted its adequate incurred cost submission. Over 6 years later, Gov’t brought claim to disallow costs.
• Held: Denied contractor’s motion to dismiss. – Submission of adequate incurred cost submission does not,
alone, trigger running of CDA 6-year clock.
– Clock starts when contractor submits the underlying “supporting data” from which the Gov’t learned, or should have learned, of the basis of its claim.
– Interlocutory decision – subject to modification after hearing.
CDA Statute of Limitations
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Kellogg Brown & Root Services, Inc., ASBCA No. 58492 (August 18, 2014)
• Claims arising under a cost-type services contract for dining facilities in Iraq.
• ASBCA held that it lacked jurisdiction to hear claims under CDA statute of limitations:
– Contractor’s claim did not “relate back” to an earlier claim submitted and then withdrawn before the CO issued a final decision (which the Board considers the “functional equivalent” of a voluntary dismissal under Fed. R. Civ. P. 41);
– Rejected contractor’s argument that claims on a cost-type contract accrue only after the Government’s refusal to pay the contractor’s reimbursement for incurred costs;
– Contractor’s extended negotiations with its subcontractor did not meet the standard for equitable tolling, which is applicable only “in situations where the claimant has actively pursued his judicial remedies by filing a defective pleading during the statutory period, or where the complainant has been induced or tricked by his adversary's misconduct into allowing the filing deadline to pass.”
CDA Statute of Limitations
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Laguna Construction Co., ASBCA 58569 • Issue: Claim accrual for direct (subcontract) costs. • Facts: Cost-type task orders for Iraq reconstruction. Laguna’s
invoices since 2005 contained subcontract costs. Gov’t reimbursed. – Feb. 2006 DCAA audit revealed subcontract awards based on
inadequate competition and awards to other than lowest bidders. DCAA forwarded “flash report” to ACO.
– Gov’t claim to disallow subcontract costs in Dec. 2012 (>6 yrs).
• Held: For Laguna. Clock triggered by Feb. 2006 flash report. – Because these were direct costs, ASBCA didn’t look to Incurred
Cost Submission.
CDA Statute of Limitations
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Coherent Logix. Inc., ASBCA 59725 (Apr. 2, 2015) • Facts: In 2008, Contractor submitted indirect rate proposal
which included $89K in “legal fees.” General ledger showed that these were for patent legal costs. Contractor provided the general ledger to DCAA in 2013.
• Claim: Gov’t claim in 2014 for Level 1 penalties on expressly unallowable patent legal costs. Over 6 years after rate proposal.
• Held: For Gov’t. Claim accrued in 2013 (gen. ledger). • On the merits, Board upheld the penalties because inclusion
was not inadvertent. Rather, Contractor believed patent costs were allowable under FAR 31.205-30(c) (Patent Costs).
CDA Statute of Limitations
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DCAA Memorandum for Regional Directors (January 7, 2015 ) • DCAA issued guidance to auditors for determining whether certain costs
are "expressly unallowable" – and therefore subject to penalties – even when the regulations "do not state in direct terms that the cost is unallowable"
• Guidance is intended to "enhance" the December 18 guidance to similar effect
• This guidance is inconsistent with the CAS 405 definition of "expressly unallowable cost" (i.e., "a particular item or type of cost which, under the express provisions of an applicable law, regulation, or contract, is specifically named and stated to be unallowable")
• Will likely lead to confusion in the audit process and undoubtedly result in DCAA auditors assessing more penalties against contractors on dubious grounds
DCAA Guidance on “Expressly Unallowable Costs”
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• Rule effective March 2, 2015. 80 Fed. Reg. 4992 (Jan. 29, 2015). • Amends FAR 52.237-10, Identification of Uncompensated Overtime:
– (b)(1) Whenever there is [UCOT], the adjusted hourly rate (including [UCOT]), rather than the hourly rate, shall be applied to all proposed hours, whether regular or overtime hours.
– (2) All proposed labor hours subject to the adjusted hourly rate (including [UCOT]) shall be identified as either regular or overtime hours.…This includes [UCOT] hours that are in indirect cost pools for personnel whose regular hours are normally charged direct.
• Problem: Some contractors use the overhead method of accounting for UCOT. – DCAA recognizes the overtime method in its audit manual. – New rule requires contractors to apply the adjusted labor rate to bid hours, which is inconsistent
with the overhead method of accounting.
• Questions: Is the new rule just a disclosure requirement, or do contractors have to use the adjusted rate method for estimating (which would require the same method for accounting)? – If the new rule is not just a disclosure requirement, complying with it will require some
contractors to make a change in accounting practice. If they change, is this a required change?
Uncompensated Overtime (UCOT) – Stealth Regulation
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FAR 31.205-47 Costs related to legal and other proceedings
• New rule amends FAR 31.205-47 to make legal costs related to whistleblower proceedings unallowable if the contractor is found liable for fraud or similar misconduct in the whistleblower proceeding
• Gives the same treatment of costs for settled whistleblower complaints as is currently provided for settlement of proceedings brought by a third party under the False Claims Act in which the United States does not intervene (i.e., costs may be allowable if there was very little likelihood that the whistleblower would have been successful).
Allowability of Legal Costs Related to Whistleblower Proceedings
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• Apr. 24, 2014 – DCAA Guidance re DFARS 231.205-18(c)
• Applies to “major contractors” with $11M in IR&D and B&P costs during previous Fiscal Year
• To claim IR&D costs as allowable, contractor must report all “project” information to the Def. Tech. Info. Ctr. (1) NLT 3 months after end of FY in which costs first incurred, and (2) update annually NLT 3 months after end of each FY until completed.
• In performing incurred cost audits, auditors should question unreported IR&D project costs as expressly unallowable costs (penalties).
• If amount is “significant,” auditor should also consider:
– CAS 405 noncompliance
– Inadequate internal controls significant deficiency in accounting system
Independent Research & Dev. (IR&D) Reporting
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• On May 30, 2014, the FAR Councils adopted as final the interim rule amending FAR 31.205-6(p), implementing Section 803 of the NDAA and expanding the senior executive compensation benchmark to all employees for DoD, NASA, and Coat Guard contracts
• On June 24, 2014, an interim rule amended FAR 31.205-6(p) to implement the Bipartisan Budget Act of 2013’s compensation cap ($487,000 )
• The new cap applies to the cost of compensation for all contractor and subcontractor employees under contracts awarded on or after June 24, 2014
• As a result of the interim rule, many contractors would have contracts subject to both the current and earlier compensation caps in 31.205-6(p)
• October 2014 memorandum from Shay Assad deemed contractors’ use of blended rate approach as “practical and cost efficient” solution to implementing the new requirements
Compensation Caps
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• Final Rule effective Mar. 31, 2014; amends DFARS. • PBPs provide for alternative financing for fixed-price
contracts based on achieving milestones. • New Rule: Essentially converts PBPs into progress payments
based on costs: – For PBP request, contractor must provide cumulative: (1) PBP
value requested, and (2) costs incurred to date. – Rule: Cum. PBPs cannot exceed cum. incurred costs. Gov’t
verification into Contractor’s books. PBPs paid monthly.
• Outcome: Defeats purpose of PBPs if contractor cannot get any more than progress payments. PBPs cannot include profit.
Performance Based Payments (PBPs)
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DoD Inspector General Review of DCAA Quality Control
• Aug. 21, 2014, DoD Inspector General issued a system review report rating DCAA’s system of quality control as “pass with deficiencies.” – Found 11 of 92 DCAA engagements to contain errors for
lacking sufficient documentation and not following the DCAA Contract Audit Manual.
• Sept. 2014, follow-up DoD IG report found 13 of 16 audit reports reviewed contained one or more “significant deficiencies”
Statutory & Regulatory Update & Guidance
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• Four recent cases where Government required to file a Complaint at the ASBCA – Appeal of Beechcraft Defense Co., ASBCA No. 59173 (April 24, 2014) – Appeal of BAE Systems Land & Armaments Inc., ASBCA No. 59374
(Nov. 18, 2014) – Appeal of Dynport Vaccine Company LLC, ASBCA No. 59298 (Jan. 15,
2015) – Appeal of Kellogg Brown & Root Services Inc., ASBCA No. 59557 (Jan.
22, 2015)
• When will the Board require the Government to file Complaint? • Strategic considerations for contractors
Cost Cases – Gov’t Required to File Complaint
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Sikorsky Aircraft Corp. v. United States (Fed. Cir. 2014) • Facts: Sikorsky allocated OH costs of purchasing & handling materiel
to cost objectives in proportion to the direct labor costs of each contract (labor base).
• Claim: Gov’t $80 million claim for noncompliance with CAS 418 (re: proper allocation of direct and indirect costs)
• Held: For Sikorsky. – Test under CAS 418.50(e) turns on whether the “indirect cost pool includes a
material amount of the costs of management or supervision” (CAS 418.50(e)) – Held “material” means “a significant amount” – not merely more than de minimis. – Compared the costs of mgmt. within the pool to the costs of the total pool and
determined that the managers comprised 7 to 14% of the total cost. – Held that 7 to 14% of a very large materiel overhead cost pool was not
“significant.” – Because it was not significant, it was “not a material amount.”
Cost Cases – Materiality & CAS 418
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BAE Systems San Francisco Ship Repair, ASBCA No. 58809, 58810 • Two claims under multiple-award, task order contract for the programmed
maintenance of a Logistics Support Vessel • Contractor argued that it was entitled to the amounts verified by the
DCAA audit reports as having been incurred • The contractor bears the burden of demonstrating that costs were
reasonable • Board rejected contractor’s assertion that “DCAA has sole authority to
audit and to express conclusions” regarding the allowability of claimed costs
• “As a matter of law, it is he CO’s prerogative to accept all or part of a contractor’s claim or reject the claim entirely. There should be no confusion on this point.”
Cost Reasonableness
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SOS Int’l, Ltd. v. DOJ, CBCA 3678 (Sep. 26, 2014) • Facts: T&M contract for linguistic services. RFP specified
that hourly rates included G&A, profit, and “all costs necessary to perform.” – Separate CLIN for “travel,” which listed exceptions to hourly rate
as “transportation, lodging, meals, and incidental expenses” – SOS billed G&A on travel costs. Gov’t paid, but later rejected.
• Held: For Gov’t. G&A not permitted on travel costs because T&M rates were inclusive of “all costs necessary to perform.” – Travel was not a “material” cost under T&M. Rather, it was
“ancillary to” and “not independent of” providing the linguist services.
Cost Cases – G&A on T&M Travel
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Kellogg, Brown & Root Services, Inc., ASBCA Nos. 56358 et al. • KBR provided the Army with logistical support in Iraq following the 2003 invasion • When Army could not fully protect subcontractors' convoys from attacks, KBR
utilized private security companies • In December 2005, the Army issued a policy statement that said use of private
security companies in Iraq would be authorized on a case-by-case basis • KBR sought reimbursement for private security costs already incurred, but Army
deemed $44 million in private security costs unallowable • Board held that Government failed to meet its burden of proof in establishing
that the cost was unallowable by operation of a specific statute or regulation, because no regulation or contract clause prohibited the use of private security contractors
• Board held the use of private security forces under the circumstances, and the cost of the services, to be reasonable
Private Security Company Costs
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Raytheon Co. v. United States, 747 F.3d 1341 (Fed. Cir. 2014) • Issue: Are pension segment closing adjustments (CAS 413; FAR 31.205-
6(j)(4)) “pension costs” subject to “timely funding” requirement ((j)(2)-(3)) • Facts: Raytheon sought $80M in costs arising out of its adjustment deficit.
Costs allocable under CAS 413. Gov’t denied costs as unallowable because not “timely funded,” a requirement for “pension costs.”
• Held: For Raytheon. Segment closing adjustments are not “pension costs” and not subject to the timely funding requirements: – Broadens the authority of the CAS when in conflict with the FAR:
• The CAS's authority over "measurement of a cost" includes defining the components of costs…The CAS therefore has the exclusive authority to define the components of a pension cost, while the FAR determines whether that cost — as defined by the CAS — is allowable and will be reimbursed by the Government.”
– Gov’t bears the burden to prove segment closing adjustments do not comply with CAS, even where contractor filed claim for adjustment.
Cost Cases – CAS vs. FAR
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Appeal of Teledyne Brown Eng’g, Inc., ASBCA No. 58636 • Dispute arising out of an incrementally funded CPFF task order • Government moved for summary judgment, contending that Teledyne was
not entitled to the full fixed fee because only approximately one-half the total cost ceiling contemplated by the contract was reached
• Government argued that Teledyne was only entitled to the percentage of the fee corresponding to the percentage of funding actually allocated to the contract
• Teledyne argued that it performed all work required and is entitled to the entire fixed fee
• Board denied Government’s motion, holding that Teledyne’s entitlement to fixed fee depends on whether its cost-plus-fixed-fee contract is completion form or term form, and material facts remained in dispute on this point
Fixed Fee
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Questions? Terry Albertson
202-624-2635 [email protected]
Steve McBrady 202-624-2547
Skye Mathieson 202-624-2606
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Evan Wolff Maida Lerner
Peter Miller Kate Growley
CYBERSECURITY RISK MANAGEMENT
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• Cybersecurity Risk Overview
• Cybersecurity Trends
• Selected Cybersecurity Topics
– Critical Infrastructure
– DFARS Safeguarding Rule
– Internet of Things
• Assessing and Managing Cybersecurity Risk
Roadmap
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Cybersecurity Risk Overview
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• Insider threats Snowden
Negligent employees
• Vendors/Supply Chain Target
• Nation States China
Russia
Iran
• Hacktivists
• Organized Crime
• Dude in his Mom’s basement
What Are The Threats?
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• Intellectual property/trade secrets
• Damage and disruption to infrastructure
• Financial gain (PCI, PII, PHI)
• Reputational harm (email)
• National security impact
What Are They After?
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• Claims and Recovery – Negligence – Breach of Contract – Unfair Trade Practices – Tort Claims – Federal privacy and
cybersecurity laws – State laws – e.g., CMIA – Shareholder actions
• Direct impact/business harm
• Reputational harm • C-Suite impact
What are the Potential Consequences?
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Cybersecurity Trends
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• Increased White House Involvement – Summit on Cybersecurity and Consumer Protection – Executive Orders, Legislation
• More Federal Entities, More “Guidance,” More Compliance Challenges – Alphabet Soup: DOD, DOJ, DHS, HHS, FAA, FCC, FDA, FTC, CFPB,
SEC, NIST, NTIA, OIGs...
• Reporting Cybersecurity Incidents: “Gotcha” or Centralized Clearing House? – Criminal authorities – Federal regulatory authorities – State authorities
Cybersecurity Trends
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• More Legislative Initiatives – Federal and state legislative focus – hearings and bills – Tension between federal and state authority
• More Litigation – Federal and State Enforcement Actions – Breach Litigation (Sony/Anthem) – Victim or Defendant?
• Public/Private Collaboration • Insider Threat Initiatives
Cybersecurity Trends (cont.)
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Cybersecurity and Critical Infrastructure
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• Infrastructure is aging and becoming obsolete.
• Industrial Control Systems and Supervisory Control and Data Acquisition Systems were built with efficiency and safety – NOT SECURITY – in mind.
• Use of commercially available (“off the shelf”) ICS and SCADA technology reduces costs but increases vulnerability.
• On/Off operation and lack of redundancy
Critical Infrastructure Vulnerabilities
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• 100 % increase in attacks on SCADA systems in 2014. – 2015 Dell Security Annual Threat Report
• In 2014, ICS-CERT received and responded to 245 incidents reported by facility and asset owners. – ICS-CERT Monitor (9/2014-2/2015)
• Several foreign governments have already hacked into U.S. energy, water and fuel distribution systems. – NSA Director Rogers testimony before
House Intelligence Committee (11/2014)
Scary Times for Critical Infrastructure…
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• Obama Administration recommended $15 billion in new spending programs or tax credits to carry out a major overhaul of the nation’s energy infrastructure (April 2015 Quadrennial Energy Review).
• Executive Order 13631 (Improving Critical Infrastructure Cybersecurity) – shifted federal government’s regulatory focus to voluntary, risk-based standards.
Federal Initiatives to Improve Critical Infrastructure
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• NIST Cybersecurity Framework
– Core: Activities to help organizations address cybersecurity risks and respond to and recover from cyber-attacks
– Tiers: Metric to help organizations assess their implementation of Core
– Profiles: Snapshot of risk management posture (e.g., “as-is” and “to be”)
Federal Initiatives to Improve Critical Infrastructure (cont.)
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• Chemical Facility Anti-Terrorism Standards (CFATS)
• The Maritime Transportation Security Act (MTSA) regulations
• FERC’s Critical Infrastructure Protection (CIP) Standards
• Transportation Security Administrative (TSA) Pipeline Security Standards
Critical Infrastructure Regulations and Best Practices
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• Risk-based cybersecurity program, including governance framework
• Risk management tools (SVAs and SSPs)
• Vendor management agreements • Cybersecurity training and reporting • Support Anti-Terrorism by Fostering
Effective Technologies Act of 2002 (“SAFETY Act”)
• Cybersecurity insurance • Cybersecurity Framework • Public and private information-
sharing opportunities • Familiarity with cybersecurity trends,
standards, and best practices
Risk Reduction for Critical Infrastructure
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Cybersecurity and DFARS
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• Incorporated into all defense contracts with mandatory flowdowns
• Applicable to defense contractors with controlled technical or scientific information on their information systems
• Requires “adequate security” and cyber incident reporting
What’s the DFARS Safeguarding Rule?
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• Procedures, Guidance, and Instructions 204.73 (12/2014)
• Guidance to Requiring Activities for Implementing DFARS Clause (2/2015)
• DoD Memorandum on DFARS Compliance (2/2015)
What’s New Since Last Year?
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• Uncertain whether actual presence of technical information triggers requirements
• DoD responsible for noting when contract involves technical information
What Should I Know Up Front?
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• Report as much as possible and supplement later
• Subs report to primes, and primes report to DoD
• Additional DIB reporting voluntary
Is There Anything New About Reporting?
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• DoD may request self-assessment of DFARS compliance and vulnerabilities
• Suffering cyber incident does not mean you’re non-compliant
• Failure to implement adequate security constitutes breach of contract
What Happens After I Report an Incident?
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• Not retroactive
• Expect a contract modification
What If My Contracts Don’t Have the DFARS Safeguarding Clause?
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Cybersecurity and the Internet of Things
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• IoT “refer[s] to ‘things’ such as devices or sensors – other than computers, smartphones, or tablets – that connect, communicate or transmit information with or between each other through the Internet.
FTC Staff Report, Internet of Things: Privacy & Security in a Connected World (Jan. 2015)
• IoT is a “a global infrastructure for the information society, enabling advanced services by interconnecting (physical and virtual) things based on existing and evolving interoperable information and communication technologies.”
Cloud Security Alliance, Security Guidance for Early Adopters of the Internet of Things (IoT) (April 2015) (quoting International Telecommunications Union Recommendation ITU-T Y.2060 (June 2012))
• “It really ought to be called the Internet of Things and Humans.” Tim O’Reilly, radar.oreilly.com (April 16, 2014)
Defining (?) the Internet of Things
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• Absence of regulations, standards, and best practices
• Ease of market entry
• By design, IoT devices interact with other devices, networks, and systems with limited oversight and limited user involvement
• Limited ability to control data flow
• Limited ability to detect unauthorized users and unauthorized data access
• Difficulty of detecting and remediating security flaws in deployed devices
• Security vulnerabilities result not only from individual devices and systems, but also from interactions among devices, systems, and users
• Responsibility for detecting, reporting, and remediating IoT incidents
• IoT vulnerabilities already being exploited
Internet of Things – Cybersecurity Challenges
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Cybersecurity Risk Management
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1. Identify and Classify Sensitive Data and Regulated Systems
2. Establish Clear Governance 3. Review and Update P&P 4. Prepare for an Incident 5. Review Vendor Management Process 6. Analyze Audit and Reporting Processes 7. Conduct Training 8. Participate in Industry and Government
Partnerships 9. Implement Controls to Protect Data and Systems
Assessing and Managing Cybersecurity Risk
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Peter Miller 202-624-2506
Evan Wolff 202-624-2615
Maida Lerner 202-624-2596
Kate Growley 202-624-2698
Questions?
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