Government Contracts Federal Forecaster - Part 1

Relevant News For ENTITIES & INDIVIDUALS With Business Concerns In The Areas Of Government Contracts, Grants & Trade – SPRING 2009, Vol. V, No. 2

INDEPENDENT MONITOR...A GOVERNMENT AGENT OR TRULY INDEPENDENT?
By Keith D. Coleman

For years, the contracting community has questioned the effectiveness and fairness of the government's suspension and debarment process. The process is viewed as ineffective because a suspension or debarment results in reduced competition for goods and services. Moreover, many contractors believe the suspension and debarment process is unfair because it is often used to penalize contractor misconduct, despite regulations that state that penalization is not the purpose of the suspension and debarment regulations.

To address these and other issues, the government is making greater use of Compliance Agreements as an alternative to suspension and debarment. Compliance Agreements are effective and fair because they do not remove contractors from the competitive process. Moreover, such agreements focus on assisting the contractor with establishing or improving the company's government contracting compliance program.

The purpose of this article is to alert clients and colleagues to a potential pitfall in the use of Compliance Agreements. When negotiating the terms of a Compliance Agreement, contractors must ensure that an Independent Monitor—an individual assigned by the government to oversee the contractor's adherence to the agreement—is not an agent of the government.

Compliance Agreements

The government is finding the use of Compliance Agreements to be a viable alternative to suspension and debarment. In a 2004 Federal Times article, the Department of the Army's then Suspension and Debarment Official stated, "Compliance Agreements provide continuing assurance that the interests of the government will be sufficiently protected without resorting to a suspension or debarment." See Robert Kittel, "Not Just a Punishment: Debarment Can Be Tool to Improve Acquisition System," Federal Times (2004). Moreover, Compliance Agreements provide redress for the apparent inequities of the suspension and debarment process. Id. Accordingly, "the Army has encouraged the expanded use of Administrative Compliance Agreements in those circumstances where their use provides appropriate assurances of responsibility coupled with continuing oversight." See "U.S. Army Contract Appeals Division," Compliance Agreements (April 24, 2009), at https://www.jagcnet. army.mil (last visited April 30, 2009).

There is no standard template for Compliance Agreements. Rather, the precise terms and conditions of any Compliance Agreement are based upon the specific facts and circumstances of each case. However, in negotiating several Compliance Agreements, we have found that the government always requires the contractor to: (1) recognize the wrongdoing and provide adequate assurance that the issue will not reoccur; (2) discipline or remove the wrongdoers within the company; and (3) appoint an Independent Monitor to oversee the contractor's compliance with the agreement.

Role of the Independent Monitor

The role of the Independent Monitor is to assess the contractor's compliance with the terms and conditions of the Compliance Agreement to ensure that the contractor performs its obligations in a timely and satisfactory manner. This position is critical to any successful Compliance Agreement and is usually held by someone who is an independent attorney, certified public accountant, or other expert knowledgeable in the area of government contracts. The general responsibilities of the Independent Monitor under a Compliance Agreement include: serving as the first point of contact for all questions regarding the Agreement; conducting internal audits; and investigating instances of alleged improprieties in government contracting or business ethics.

While employed and paid by the contractor, the Independent Monitor is not under the contractor's control. In fact, the Compliance Agreement will clarify that the Independent Monitor is not an agent of the Contractor, and the work produced by the Independent Monitor will not be subject to the contractor's assertion of the attorney-client privilege or the work-product doctrine. However, the Compliance Agreement is usually silent as to whether the Independent Monitor is an agent of the government.

Contractors must take steps to ensure that the Independent Monitor is not an agent, or viewed as an agent, of the government. The most basic and effective step a contractor can take is to ensure that the Independent Monitor's status as a non-agent of the government is a term and condition to the Compliance Agreement. To support this position, contractors can take advantage of the following legal and practical arguments: (1) the Independent Monitor is not an agent under the general law of agency; (2) he or she is not an employee or agent under relevant federal government laws and principles; (3) deeming the Independent Monitor as an agent of the government would violate 18 U.S.C. § 209; (4) the Independent Monitor cannot effectively perform certain duties under the Compliance Agreement, if designated or appointed as a government agent; and (5) deeming the Independent Monitor to be a government agent would be inconsistent with a Department of Justice policy concerning Independent Monitors.

The Independent Monitor is NOT an Agent Under the General Law of Agency

• The Principal-Agent Relationship – Agency law is concerned with any "principal-agent" relationship, which is a relationship where one person has legal authority to act for another. See Duvall v. Craig, 15 U.S. 45 (1817). The law of agency is based on the Latin maxim: "Qui facit per alium, facit per se," which means "he who acts through another is deemed in law to do it himself." See United States v. Gooding, 25 U.S. 460 (1827). Moreover, the "principalagent relationship" creates an "employer-employee" relationship, whereby the principal employs the agent to work on the principal's behalf. See Meyer v. Holley, 537 U.S. 280 (2002). Thus, a principal-agent relationship permits, and is premised upon, the ability of one person to act with the authority of another. Assent to create a principal-agent relationship is a prerequisite to the existence of a principal-agent relationship.
• Compliance Agreements Do Not Address the Issue of Independent Monitor as Government Agent – Most Compliance Agreements are silent with regard to whether the government intends to create a principal-agent relationship with the Independent Monitor. Under applicable authorities, the principal and agent must each manifest their assent or intention to create the "principal-agent" relationship through written or spoken words or other specific conduct. See Jade Trading, LLC v. United States, 81 Fed. Cl. 173 (2008); Restatement (Third) of Agency § 1.03 (2006). Therefore, because it does not address the issue, the typical Compliance Agreement lacks an express manifestation of assent, which is an essential element of a principal agent relationship.
  
  Another key element of a principal-agent relationship is the power of the principal to control the actions of the agent. See 44 Comp. Gen. 675, B-155602 (May 4, 1965). In the federal acquisition context, the government's power to control the specific activities of the putative agent is key. "The usual test for determining whether a person is an agent or an independent contractor is to establish whether the employer's will is represented by the result only, as in the case of an independent contractor, or by the means as well as the result, as in the case of an agent." See Westinghouse Elec. Corp., ASBCA No. 21634, 80-2 BCA ¶ 14,726 (1980). To reiterate, "the principal must have the right to control both the means and the details of the process by which the alleged agent is to accomplish the task." See Northwinds Abatement v. Empirs Ins., 258 F.3d 345, 351 (5th Cir. 2001).
  
  With regard to most Compliance Agreements, the government does not control the actions of the Independent Monitor. Rather, the Independent Monitor serves as an independent check on the contractor's compliance with the agreement. Moreover, the government, through the Compliance Agreement, will describe objectives that the Independent Monitor must ensure the contractor meets (e.g., establish a code of conduct, compliance hotline, government contracting policies and procedures) in order to show that the company is currently responsible. However, the Compliance Agreement does not dictate how the objectives must be accomplished. As such, the government does not expressly control the actions of the Independent Monitor in performing his or her duties under a Compliance Agreement. Therefore, the Independent Monitor is not a government agent under agency law.

The Independent Monitor is NOT an Employee or Agent Under Relevant Federal Government Laws and Principles

In addition to the general principles of agency discussed above, federal laws and principles specifically address the appointment of agents and employees of the government.

To be an agent of the government, the Independent Monitor would have to be designated or appointed as a government employee. All federal government employees must be appointed to their respective positions by an authorized federal employee or officer, must perform a federal function, and must be supervised by a federal employee or officer. See 5 U.S.C. § 2105(a). The federal function element is satisfied if the federal employee is supporting a federal program, law, or regulation. Hedman v. United States, 15 Cl. Ct. 304 (1988).

The mechanism for appointing an entity as the agent of the government for purposes of entering into contracts on behalf of the federal government is perhaps the most relevant example of the requirements for an entity to be considered an agent of the government. Contractors are not often designated or appointed as agents of the government. For example, section 29.303 of the Federal Acquisition Regulation ("FAR") states that prime contractors and subcontractors shall not normally be designated as agents of the government for the purpose of claiming immunity from state or local sales or use taxes. See 48 C.F.R. § 29.303(a).

Procurement agents must be authorized to pledge the credit of the United States and be designated as an agent of the United States before they may assume legal obligations of the United States. See 22 Comp. Gen. 183, B-28052 (Sept. 7, 1942). A contractor is considered a procurement agent for the government only when three conditions are met: (1) the contractor is acting as a purchasing agent for the government; (2) the agency relationship between the government and the prime contractor is established by clear contractual consent; and (3) the contract states that the government will be directly liable to the vendors for the purchase price. See United States v. New Mexico, 455 U.S. 720, 742 (1982); United States v. Johnson Controls, Inc., 713 F.2d 1541, 1551-52 (Fed. Cir. 1983).

Under applicable law, the government must designate or appoint its agents in writing. Likewise, contractors should make clear in the Compliance Agreement that the Independent Monitor is not an agent of the government.

Deeming the Independent Monitor to Be an Agent of the Government Would Violate 18 U.S.C. § 209

Assuming that the Independent Monitor was deemed to be an agent of the government under a compliance agreement, the Compliance Agreement in question would violate 18 U.S.C. § 209 ("Section 209"). Section 209 was enacted in 1962 as part of a general revision of the criminal statutes dealing with bribery, graft, and conflicts of interest. It is the successor to 18 U.S.C. § 1914, which prohibited government employees from receiving any salary from a private source in connection with their government service, and any non-governmental person or organization from contributing to, or supplementing, an employee's salary.

Under most Compliance Agreements, the contractor (not the government) is required to pay the reasonable fees and expenses associated with the services performed by the Independent Monitor. Indeed, a government agent, who is also considered an employee of the government, is prohibited by law from receiving compensation from any third party. As such, a designation by the government that the Independent Monitor is a government agent would be contrary to well established law.

Moreover, agency law establishes that an agent has a duty not to acquire a material benefit from a third party in connection with transactions conducted, or other actions taken on behalf of the principal or otherwise through the agent's use of the agent's position. See Restatement (Third) of Agency § 8.02 (2006). According to 18 U.S.C. § 209, whoever receives any salary, or any contribution to or supplementation of salary, as compensation for services as an officer or employee of the government from any source other than the government shall be subject to civil and criminal penalties prescribed at 18 U.S.C. § 216. See 18 U.S.C. § 209(a). This statute also imposes civil and criminal penalties on corporations that make such payments to government officers or employees. Therefore, if the Independent Monitor is designated or appointed as an agent of the government, the government must pay the reasonable expenses of the Independent Monitor or be subject to the consequences of 18 U.S.C. § 209.

Independent Monitor Cannot Effectively Perform Certain Duties Under a Compliance Agreement if Designated or Appointed as a Government Agent

Designating or appointing the Independent Monitor as a government agent would adversely affect the Independent Monitor's ability to effectively perform certain duties under a Compliance Agreement. Of the required duties, an Independent Monitor will have difficulty conducting audits and investigations if he or she is designated or appointed as a government agent under a Compliance Agreement. Such is the case because, if the Independent Monitor was a government agent, the Independent Monitor would: (1) lose impartiality; (2) lose discretion; and (3) be bound to act to guarantee the Constitutional rights of contractor employees.

• Independent Monitor nn Loses "Impartiality" – Generally, a Compliance Agreement is written such that the Independent Monitor is to be impartial so that the government and the contractor may benefit from consultation by the Independent Monitor. According to agency law, an agent has a fiduciary duty to act loyally for the principal's benefit in all matters connected with the agency relationship. See Kennametal, Inc., GSABCA No. 457, 1963 GSBCA LEXIS 62; Restatement (Third) of Agency § 1.03 (2006). If designated or appointed as a government agent, the Independent Monitor would lose such impartiality. Such is the case because agents cannot be considered impartial when serving in a principal-agent relationship.
  
  This loss of impartiality will have an obvious and direct impact on essential activities such as conducting interviews of contractor employees by the Independent Monitor. Contractors would have to advise their employees of the Independent Monitor's status as an agent of the government. In doing so, employees may become hesitant or less forthright with the Independent Monitor and, in some instances, may request an attorney be present during the interview.
• Independent Monitor Loses Discretion – Generally, the Independent Monitor is granted the discretion to investigate complaints concerning the contractor's compliance with the terms of the Compliance Agreement. As an agent of the government, the Independent Monitor will lose the ability to exercise discretion with regard to such complaints. According to agency law, an agent must always act for the principal's benefit. See Restatement (Third) of Agency § 1.03 (2006). In so doing, the Independent Monitor must always investigate every allegation and must advise the government before conducting an investigation. Such would impair the Independent Monitor's ability to quickly resolve issues that are unsubstantiated.
• Independent Monitor Must Act to Guarantee the Constitutional Rights of Contractor Employees – If the Independent Monitor was a government agent, he or she would be required to demonstrate the use of procedural safeguards effective to secure the privilege against self-incrimination when conducting interviews of contractor employees and requesting documents as part of an investigation. In other words, the Independent Monitor would be required to advise interviewees that he or she is a government agent and provide a Miranda warning, if appropriate.
  
  The Independent Monitor may conduct investigations where there are possible criminal violations of government contract law or business ethics. To facilitate investigations, the contractor is required to cooperate with the Independent Monitor by allowing employee interviews and submitting documents upon request. However, the Independent Monitor, as a government agent, may be required to provide a Miranda warning before speaking with company employees. By analogy, one court has held that Miranda warnings were required where a person being interviewed by IRS agents was denied his freedom and was compelled to furnish statements and documents. See United States v. Prudden, 424 F. 2d 1021 (5th Cir. 1970). As part of a Miranda warning, the Independent Monitor must inform individuals that: (1) they have a right to remain silent; (2) statements they make can be used against them; (3) they have a right to an attorney during questioning; and (4) an attorney will be appointed for them if they cannot afford one. See Miranda v. Arizona, 384 U.S. 436, 472 (1966).

Designating or Appointing the Independent Monitor as Government Agent is Inconsistent with Department of Justice Policy

On March 7, 2008, Craig S. Morford, Acting Deputy Attorney General, Department of Justice ("DoJ") issued a memorandum to all heads of department components under the United States Attorneys Office. See Memorandum for Heads of Department Components, United States Attorneys, Craig S. Morford, Acting Deputy Attorney General (March 7, 2008) ("DoJ Memorandum"). The purpose of the DoJ Memorandum was to present a series of principles for drafting provisions pertaining to the use of Independent Monitors in connection with Deferred Prosecution Agreements ("DPA") and Non-Prosecution Agreements ("NPA") with corporations.

The DoJ Memorandum includes nine principles addressing an Independent Monitor's selection, scope of duties, and duration. Although the Memorandum only applies to criminal matters and does not apply to agencies other than DoJ, two principles are worth noting in this instance because they provide best practices when engaging an Independent Monitor as a result of entering into a Compliance Agreement.

• Independent Monitor Must Remain "Independent" – DoJ promulgated a best practices principle to ensure that the Independent Monitor remains "independent." According to the DoJ Memorandum, "A monitor is an independent third-party, not an employee or agent of the corporation or of the Government." See DoJ Memorandum § III.A.2. The Independent Monitor is not the corporation's attorney. Accordingly, the corporation may not seek to obtain legal advice from the Independent Monitor. Conversely, an Independent Monitor also is not an agent or employee of the government. See DoJ Memorandum § III.A.2 cmt.
• Independent Monitor Must Have "Discretion" to Disclose Matters to the Government – Understanding the importance of allowing discretion, DoJ prepared a best practices principle that grants the Independent Monitor the appropriate discretion to report issues to the government. According to the DoJ Memorandum:
  
  The agreement should clearly identify any types of previously undisclosed or new misconduct that the monitor will be required to report directly to the government. The agreement should also provide that as to evidence of other such misconduct, the monitor will have the discretion to report this misconduct to the government or the corporation or both. Moreover, where the allegations of such misconduct are not credible or involve actions of individuals outside the scope of the corporation's business, the monitor may decide, in the exercise of his or her discretion, that the allegations need not be reported directly to the government.
  
  The above DoJ principles provide "best practices" guidance that should be observed when entering into a Compliance Agreement. Following the above DoJ guidance, the Independent Monitor will maintain "independent" status and will have the necessary discretion to report matters to the government.

Conclusion

Compliance Agreements are an essential tool in rehabilitating contractors without taking the extreme measures of suspension and debarment. However, when entering the Compliance Agreement, contractors should ensure that the agreement specifies that the Independent Monitor is not an agent or employee of the government.

DAEWOO ENGINEERING & CONSTRUCTION: ATTEMPTED ADJUSTMENT OF UNDERBID CONTRACT YIELDS FALSE CLAIMS PENALTIES*
By Jason P. Matechak & Anne E. Borkovic

The U.S. Court of Appeals for the Federal Circuit recently affirmed a U.S. Court of Federal Claims assessment of more than $50 million in penalties and forfeiture of claims against a government contractor for violation of the certification provision of the Contracts Disputes Act and the False Claims Act. The case highlights the harsh penalties contractors can face if all claims to the government are not submitted in good faith, or if overestimated claims are used as negotiating tactics.

In 1998, the U.S. Army Corps of Engineers solicited bids for the construction of a 53-mile road in Babeldaob in the Republic of Palau and estimated the cost of construction to be between $100 million and $250 million, and required completion within 1,080 days. Daewoo Engineering and Construction Co., Ltd. submitted a $73 million bid, $27 million lower than the next-lowest bid. After the government questioned the bid, Daewoo revised it to $88.6 million and was awarded the contract.

Daewoo encountered delays in construction, and attributed them to rainy weather and moist soil. Daewoo convinced the government to reduce the amount of required soil compaction. It then submitted a certified claim under the Contract Disputes Act for an adjustment of the contract price and performance time, alleging defective specifications and breach of duties to cooperate and disclose superior knowledge. Daewoo sought approximately $13.3 million in additional costs incurred and $50.6 million in projected costs for a total of $64 million. The request was eventually denied, and Daewoo filed a complaint with the U.S. Court of Federal Claims for the money. The government counterclaimed and sought $64 million under the Contract Disputes Act and $10,000 under the False Claims Act. Daewoo Eng'g & Constr. Co. v. United States, 73 Fed. Cl. 547 (2006).

The Court of Federal Claims found— and the U.S. Court of Appeals for the Federal Circuit upheld its decision—that Daewoo's $64 million claim with the government was filed in bad faith, with the expectation of using the $50.6 million projected costs portion as a "negotiating ploy." The courts reviewed the base calculations and methodologies underlying Daewoo's claim, and found that the claim was based on erroneous assumptions, such as the assumption that the government was responsible for then-current daily expenditure costs, and also did not consider basic facts such as what portion of the expected delays were the fault of the government. The Court of Federal Claims further found, "Whether Daweoo wanted the money or wanted the government's attention, $64 million was not the amount the government owed the plaintiff at the time of certification, and plaintiff knew it." Id.

The courts then assessed Daewoo a penalty equal to the fraudulent claim—$50.6 million—for violating the fraud provisions of the Contracts Disputes Act, plus a statutory $10,000 penalty for violating the False Claims Act. Daewoo's certification of the $64 million claim was a certification that it was made in good faith. However, because its claim was baseless, the court found, the claim was fraudulent. The courts further found that Daewoo's entire $64 million claim was forfeited under 28 U.S.C. § 2514 (Forfeiture of False Claims), despite the fact that a $13.3 million portion of the claim was not fraudulent. The penalties assessed to Daewoo amounted to approximately 57 percent of the total contract award, not including the forfeited $13.3 million of costs incurred.

The decisions in Daewoo highlight the dangers of submitting claims to the government that are not well-calculated or that are over-cost with the expectation of negotiating the claim to reach a settlement for a lesser amount. Contractors should remember that claims are certified and must be made in "good faith." Convincing explanations for the basis and underlying assumptions used when calculating a claim should be available. Contractors should be aware that when a claim is found to be fraudulent, even good faith portions can be forfeited. Daewoo demonstrates the danger of relying on claims negotiations during a contract to cover costs—over-estimating costs could lead to losing all claims and facing severe penalties.

^{* Daewoo Eng'g & Constr. Co. v. United States, Case No. 2007-5129 (Fed. Cir. Feb. 20, 2009).}

NEW REPORTING REQUIREMENTS FOR CONTRAC TORS RECEIVING RECOVERY ACT FUNDS
By Lorraine M. Campos & Brett D. Gerson

On March 31, 2009, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council issued an interim rule in the Federal Register that will amend the Federal Acquisition Regulation ("FAR") to implement section 1512 of Division A of the American Recovery and Investment Act of 2009 ("the Recovery Act"). This amendment, if accepted, will require government contractors receiving funds under the Recovery Act to report to the federal government on a quarterly basis regarding how the contractors are utilizing the accepted funds. 74 Fed. Reg. 14639 (March 31, 2009). The proposed rule would add a new subpart to the FAR at Part 4.15 and a new clause at Part 52.204-11. The interim rule took effect March 31, 2009, and the final regulations will go into effect after the end of the comment period, June 1, 2009.

The Reporting Requirements

Prime contractors, regardless of their size, will be required to submit reports to the federal government regarding the use of received Recovery Act funds. These reports will be submitted through a new online reporting tool available at http://www.federalreporting.gov (currently under construction). Reports from contractors for all work funded by the Recovery Act, and for which an invoice is submitted prior to June 30, 2009, are due no later than July 10, 2009. Thereafter, reports must be submitted to the federal government no later than the tenth day after the end of each calendar quarter.

It is important to note that the proposed rule applies to: (1) contracts at or below the simplified acquisition threshold; (2) commercial item contracts; and (3) commercial off-the-shelf ("COTS") item contracts, as defined by section 2.101 of the Federal Acquisition Regulation, 48 C.F.R. § 2.101. Contracting officers who utilize Recovery Act funds on existing contracts or orders must modify those contracts to include the new clause.

The Content of the Required Reports

Under the proposed rule, all reports to the federal government must include: (1) the dollar amount of the contractor's invoices; (2) the supplies delivered or services performed under the contract; (3) an assessment of the completion status of the work to be performed; (4) an estimate of the number of jobs created and the number of jobs retained as a result of the Recovery Act funds; (5) the names and total compensation of each of the five most highly compensated officers for the calendar year in which the contract is awarded if, in its preceding fiscal year, the contractor received 80 percent or more of its annual gross revenues and $25 million or more in annual gross revenue from federal funds, and such information is not publicly available through SEC filings; and (6) information on first-tier subcontractors, including the same executive compensation information required from prime contractors.

Reporting requirements for subcontractors themselves are less burdensome; subcontractors are only required to submit basic information, including their DUNS numbers, address, and the location of the performance under the awarded contract.

Government Requests for Comments in the Federal Register Notice

The notice in the Federal Register requested public comments regarding the proposed rule, and posed the following questions:

• Should the government provide a list of broad c nn ategories of work under the Recovery Act from which the contractor would select and, if so, what should these be?
• With respect to the methodology described in the proposed rule for estimating jobs created or retained (using the "Full-time Equivalent" method), is this consistent with business practices and systems? Should the government allow contractors to develop any method consistent with their own business practices, or should the government standardize calculation methods?
• If the government were to require companies to separately invoice for all supplies or services funded by the Recovery Act, what challenges would this pose? Are there any benefits?
• Is there information not customarily provided that would make it easier for companies to segregate their invoices to separately identify items funded by the Recovery Act?
• Are there challenges to obtaining the information required from first-tier subcontractors? If so, how could the rule be changed to ease the submission of information from both a prime contractor and subcontractor perspective?
• Does the term "total compensation" (referring to the contractors' five most highly compensated officers) require further clarification?
• Would it be useful to provide an alternate clause that would allow agencies to identify meaningful distinct "projects" within a contract, as opposed to providing information about the contract as a whole?
• Would a contractor be able to identify when Recovery Act funds were received and be able to identify the payment to particular deliverables? How difficult would this be to track and report on a quarterly basis?

Pre-Award Reporting Requirements

Another proposed rule issued March 31, 2009 would require acquisition officials to publish public notices prior to the award of government contracts worth more than $25,000 in a format that is easy for the public to understand. 74 Fed. Reg. 14637 (March 31, 2009). This interim rule implements section 6.2 of a recent Office of Management and Budget ("OMB") Memorandum, M-09-10, titled "Initial Implementing Guidance for the American Recovery and Reinvestment Act of 2009." In order to implement Section 6.2 of OMB's M-09-10, the interim rule would amend the FAR as follows:

• FAR Part 4 would require the contracting officer to enter data in the Federal Procurement Data System on any action funded in whole or in part by the Recovery Act, in accordance with the instructions listed at https://www.fpds.gov.
• Subpart 5.7 of the FAR would be added to direct the contracting officer to use the government-wide Point of Entry (https://www.fedbizopps.gov) to: (1) identify the action as funded by the Recovery Act; (2) post pre-award notices for orders exceeding $25,000 for "informational purposes only"; (3) describe supplies and services (including construction) in a narrative that is clear and unambiguous to the general public; and (4) provide a rationale for awarding any action, including any modification or order that is not both fixed-priced and competitive, and include the rationale for using other than a fixed-price or competitive approach.
• Parts 8, 13, and 16 of the FAR would be amended to reflect the new posting requirements for orders at Subpart 5.7.

Like the first proposed rule summarized above, this proposed rule became effective March 31, 2009, and the comment period ends June 1, 2009.

Conclusion

These proposed amendments to the FAR, if accepted, will impose significant new reporting requirements for all prime contractors receiving federal funds under the Recovery Act. It is important that all contractors become familiar with the new reporting requirements, review the final rule when it is published this summer, and visit http://www.federalreporting.govwhen the website is activated.

Attorneys at Reed Smith can assist government contractors in navigating the new reporting requirements, preparing comments regarding the proposed rule changes, and complying with the new regulations once they enter into effect this summer.

GSA CONTRACTOR NETAPPAGREES TO PAY THE GOVERNMENT $128 MILLION TO RESOLVE CONTRACT FRAUD ALLEGATIONS
By Lorraine M. Campos & Brett D. Gerson

On April 15, 2009, the U.S. Department of Justice entered into an agreement with NetApp Inc. and NetApp U.S. Public Sector Inc. (collectively, "NetApp") to settle allegations that NetApp submitted false claims to the U.S. government and violated the terms of Price Reductions Clauses included in its contracts with the U.S. government. NetApp neither admitted nor denied any of the allegations involved, but agreed to pay the U.S. government $128 million plus interest, the largest contract fraud settlement in General Services Administration ("GSA") history.

From 1997 to 2005, NetApp provided computer hardware, software, and data storage management services to various government entities through the GSA's Multiple Award Schedule ("MAS") program. The U.S. government alleged that during contract negotiations and throughout the course of the contracts' administration, NetApp knowingly failed to meet its obligations to provide the GSA with current, accurate, and complete information regarding its sales practices and that NetApp knowingly made false statements to the GSA about its discounts to other customers. By failing to disclose and offer to the government discounts that it gave to commercial customers, NetApp violated the Price Reductions Clauses included in its contracts with the GSA. The GSA allegedly relied on these fraudulent acts and, as a result, accepted lower discounts and paid more than it should have for NetApp products and services.

The lawsuit was initially filed under the False Claims Act on behalf of the U.S. government by former NetApp Manager of Administration and Procurement, Igor Kapuscinski, who will receive a 15 percent share of the recovery, or $19.2 million. The settlement agreement alleges that a GSA analyst contacted Kapuscinski in February 2003 for assistance with reviewing several NetApp orders. Kapuscinski notified NetApp senior managers of the GSA's request, pointing out that NetApp had failed to give the GSA the same price decreases that it had offered to commercial customers. The NetApp senior managers allegedly dismissed Kapuscinski's concerns, and threatened him with a demotion if he continued to press for the relevant records. At that point, Kapuscinski filed his complaint in U.S. District Court in Washington, D.C. under the False Claims Act, sparking the Department of Justice investigation.

The investigation was conducted by the Department of Justice's National Procurement Fraud Task Force, an entity established by Deputy Attorney General Paul J. McNulty in 2006. The thoroughness with which this investigation was pursued by the Task Force and the unprecedented settlement amount demonstrate increased attention and commitment to enforcing government contract compliance via False Claims Act actions. As such, government contractors must take all steps to ensure that they provide the government with current, accurate, and complete information regarding sales practices, and must make certain to comply with the Price Reductions Clause.

THE MULTIPLE AWARD SCHEDULE ADVISORY PANEL: THIS MAY BE THE END OF THE PRICE REDUCTION CLAUSE AS WE KNOW IT
By James P. Gallatin, Jr. & Brett D. Gerson

In 2008, the General Services Administration ("GSA") Administrator established the Multiple Award Schedule ("MAS") Advisory Panel ("the Panel"), composed of experts in both government and private industry. The purpose of the Panel is to review the relevancy and effectiveness of the MAS program, and the Price Reductions Clause in particular. The Price Reductions Clause applies to government contractors that provide products, services, and solutions to government agencies utilizing GSA schedules. It requires contractors to reduce the prices they charge to MAS customers if they reduce the prices they charge to specific "basis of award" customers, which usually is a class or category of commercial customers. This development should be of interest to companies that sell commercial items to federal government agencies, as the work of the Panel could lead to changes in, or termination of, the use of the Price Reductions Clause.

The GSA utilizes the MAS program to establish long-term, government-wide contracts with private firms to provide federal, state, and local government customers with access to a wide variety of commercial products, services, and solutions. The GSA Administrator requested that the Panel produce a set of recommendations upon the conclusion of its review, considering a wide variety of opinions about the current system, and include suggestions for improvements. Since May 2008, this panel has met 14 times, and has received considerable written and oral testimony from many stakeholders in the industry, both in the public and private sector. The Panel most recently convened May 1, 2009, and is close to finalizing its report for the GSA Administrator. Reed Smith obtained a draft version of the report, and the Panel's findings and recommendations are summarized below:

The Panel's Findings Concerning the Price Reductions Clause

Many stakeholders who spoke before the Panel questioned the value of the Price Reductions Clause. For example, representatives of schedule contractors repeatedly cited inconsistency within the GSA regarding how the Basis of Award and Most Favored Customer determinations are made, and how the Price Reductions Clause is applied. Representatives from the GSA questioned the usefulness of the Price Reductions Clause, as sales to other federal customers and one-time discounts do not trigger its use. Those representatives also pointed out that most schedule prices are established in ways that do not implicate the Price Reductions Clause.

Representatives from the GSA's Office of Inspector General stated that their office does not employ a sufficient number personnel to provide the amount of oversight required to effectively oversee the implementation of the Price Reductions Clause. Others expressed that it is unrealistic to maintain a determination that a particular method pricing is fair and reasonable for any schedule contract item for five years. Overall, few comments regarding the value and effectiveness of the Price Reductions Clause were positive in nature.

The Panel's Recommendations Concerning the Price Reductions Clause

• For sales of services: Eliminate the Price Reductions Clause from services contracts and adopt an approach similar to section 803 of the National Defense Authorization Act of 2002, which requires the Department of Defense, on all task and delivery orders above $100,000, to: (1) solicit all contractors offering services under the MAS contract; (2) receive offers or quotes from at least three qualified contractors; or (3) prepare a justification that explains why maximum practicable competition was not obtained if the agency fails to comply with (1) or (2).
• For sales of products: Remove the Price Reductions Clause from contracts for products in phases as the GSA Administrator develops strategies to encourage competition and price transparency at the contract level and task order level. During its discussions, the Panel repeatedly emphasized encouraging competition at the task order level.
• For sales of solutions: The Panel believes that the Price Reductions Clause cannot and should not apply to contracts for solutions. Rather, as with services and products, procurements for solutions should be subject to competition at the task order level. The Panel recommended that the GSA Administrator update the MAS program guidance to clarify that prices for solutions must be determined to be fair and reasonable at the task order level. Orders for solutions under the schedules program should be firm-fixed-price and performance-based.
• The GSA Administrator should use whatever data is available to regularly review and refresh prices on schedule contracts to reflect current market prices, consistent with each market segment. In doing so, the GSA Administrator should capture pricing and establish competition at the task order level (making such information available to the contracting officers at both the schedule and task order level), and determine fair and reasonable pricing at the contract level.
• The GSA should disclose the basis upon which contracting officers determine that MAS program contract prices are fair and reasonable.

Conclusion

If adopted by the GSA Administrator and Congress, the Panel's recommendations will dramatically transform the landscape of government contracting by creating significant changes in the government's acquisition and procurement policies. Government contractors offering services, products, and solutions to the government using the MAS program should expect to compete at the task order level in the near future. Attorneys at Reed Smith can help government contractors assess how these impending changes might affect their operations, and help prepare for acquisition and procurement without the utilization of the Price Reductions Clause.

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This article is presented for informational purposes only and is not intended to constitute legal advice.