The author is a member of the Firm’s Government Contracts & Regulated Industries Practice Group. For additional articles and postings concerning this and related topics, please refer to Sheppard Mullin’s Government Contracts Blog, which can be found at www.governmentcontractslawblog.com.
On March 31, 2009, the FAR Councils issued several new interim rules (effective March 31, 2009) implementing the American Recovery and Reinvestment Act of 2009 (P.L. 111-5) (also known as ARRA, The Recovery Act, or the Stimulus Act). See Federal Acquisition Circular (FAC) 2005-32, published at 74 Federal Register 14621-14652. The FAC issued new interim rules on a number of areas required under the Stimulus Act, including:
- Reporting Requirements for Recipients of Recovery Funds (see 74 Federal Register 14639)
- Publicizing Contract Actions (see 74 Federal Register 14636)
- GAO and IG Access to Company Employees (see 74 Federal Register 14646)
- Whistleblower Protections (see 74 Federal Register 14633)
- Buy American Requirements for Construction Materials (see 74 Federal Register 14623)
This blog focuses on the final three sets of rules – those relating to Auditor access; Whistleblower protections; and Buy American requirements. The first set of rules is discussed separately here.
1. GAO and IG Access to Company Employees
The Recovery Act gives GAO increased audit access to recipients of Stimulus monies, including access to documents and employee interviews. See Section 902. Sections 1514 and 1515 also give the Government other broad audit rights. We have previously discussed these new and expansive audit rights here, observing that one of the biggest risks associated with the Government’s ability to conduct employee interviews are potentially making criminal false statements (under 18 U.S.C. § 1001).
The new interim rule has the following effect for any contract or subcontract receiving (in whole or in part) Stimulus monies:
- Modified Contract Clauses. It modifies standard FAR clauses to expand GAO’s and the agency’s Inspector General rights to include:
o Access to Records. The right to "examine any of the Contractor’s or any subcontractors’ records that pertain to, and involve transactions relating to," a covered contract;
o Employee Interviews. The right to "interview any officer or employee" regarding transactions involving Stimulus monies. Curiously, while the authority of GAO to interview employees under the newly modified contract clauses applies at all contract levels (both prime-level and subcontractors), the authority of the IG is limited only to the prime-level.
- Applicability to Commercial and COTS Contracts and Subcontracts. The new interim rule also specifically applies to vendors of commercial and COTS products and services despite the general statutory policy disfavoring government-unique contract provisions for commercial and COTS contracts. The new interim rule extends its reach to subcontractors at all levels that are receiving Stimulus funds, even if a subcontractor is otherwise exempt from the requirement to provide cost or pricing data.
- Applicability to Contracts and Subcontracts Under $100,000. Similarly, the new interim rule extends these increased audit rights to contracts and subcontracts involving Stimulus funds that are below the simplified acquisition threshold (currently $100,000).
While the purported goal of this broad audit authority is to provide "transparency" into the Federal contracting processes and to ensure the ability to monitor how Government monies are properly spent, perhaps a better means to achieve this goal would be to extend the current audit requirements already in force against Government contractors. Creating new regimes of audit rights seems duplicative and unnecessary. But this kind of expansive audit right is something that many Government regulators have wanted for a very long time, and the amount of money at issue with the Stimulus Act does create a very real obligation among Government personnel to ensure that oversight is properly conducted.
2. Whistleblower Protections
Section 1553 of the Recovery Act provides heightened whistleblower protections for employees of companies that receive Stimulus monies. We have previously briefly discussed these new whistleblower provisions here , noting that companies must be extremely cautious in handling employees that might (even potentially) be perceived as "whistleblowers." This includes employees whose job it is to investigate and audit company compliance.
Section 1553 joins a host of other whistleblower protections granting special protections for employees of federal contractors, including (apparently) State and local governments and other grantees that receive Stimulus monies. These numerous whistleblower statutes protect employees from reprisal and retaliation for merely investigating or disclosing information relating to gross misuse of federal money.
- Applicability. Similar to the audit access rule discussed above, the new interim rule for whistleblowers applies to all commercial and COTS contracts receiving Stimulus money, as well as contracts and subcontracts beneath the simplified acquisition threshold.
- Mandatory Flowdowns. This new rule requires that it be flowed down to all subcontracts, regardless of their dollar amount, and regardless of whether the subcontractors are commercial vendors.
- Posted Notice. Employers who receive Stimulus monies are also required under the new rule to post a public notice of employees’ rights and remedies for whistleblower protections under section 1553 of the Recovery Act.
- "Covered Information." The new rule prohibits reprisals against employees who disclose "covered information," which includes information that the employee reasonably believes is evidence of:
o Gross mismanagement of the contract or subcontract related to Stimulus funds;
o Gross waste of Stimulus funds;
o A substantial and specific danger to public health or safety related to the implementation or use of Stimulus funds;
o An abuse of authority related to the implementation or use of Stimulus funds;
o A violation of law, rule, or regulation related to an agency contract awarded or issued relating to Stimulus funds.
- Includes Internal Reporting. Notably, the protected conduct includes all employees – even those who make internal disclosures to company personnel in the regular course of their job duties. The functional impact of this broad scope of protections is that even a company’s internal auditors may qualify as a "whistleblower" simply by doing their job. The formulation under Section 1553 and the new interim rule may be counter-productive from the Government’s perspective, because it may inevitably force companies to treat their internal auditors differently than the rest of their workforce – because the mere fact that these employees are routinely engaged in activities designed to ensure compliance with the law means that all such employees could automatically be entitled to claim protection under Section 1553, regardless of whether they are, in fact, a bona fide "whistleblower." Any adverse employment decision taken by a company against an internal auditor could be viewed as a "discriminatory" or "adverse" employment action that an employee may later challenge under Section 1553.
- Complaints with the Inspector General. Employees who feel that they have been mistreated because they have engaged in protected conduct may file a complaint with the relevant agency’s Inspector General, which may decline to pursue a formal action, but which will liberally construe all whistleblower allegations. Generally speaking, the IG should have approximately 30 days to conduct their investigation and make a recommendation to the agency head.
- Uneven Burdens of Proof. In order to prevail on a whistleblower claim, an employee need only demonstrate that engaging in the protected conduct was merely a "contributing factor" in whatever reprisal the employee claims the employer took against him or her. The employer, on the other hand, must demonstrate by clear and convincing evidence (i.e., contemporaneously documented; not merely anecdotal) that the adverse action would have been taken regardless of the employee’s participation in the protected conduct. Obviously, this burden of proof greatly favors the whistleblowers and places employers at a disadvantage. Employers must be careful, therefore, not only to document all decisions fully, but also to handle all potential whistleblowers very carefully.
- Private Right of Action. If no action is taken by the IG within 210 days of an employee filing a complaint or if the Agency declines to grant the employee relief, the employee is free to file suit in federal court. Note however that because the Recovery Act does not include a statute of limitations for bringing such claims, companies will be forced to let the courts decide whether and when such actions are "timely."
- Waiver Unavailable. Though not specifically spelled out in the interim rule, Section 1553(d) is clear that these whistleblower rights cannot be waived by employees. Moreover, the Recovery Act whistleblower rights do not preempt other whistleblower rights (see Section 1553(f)) – so most whistleblowers could easily have different remedies available under different statutes (including, for example, 10 U.S.C. § 2409, 41 U.S.C. § 265, and 31 U.S.C. § 3730(h)) that provide whistleblower protections.
Attempting to enlist an army of "deputized" whistleblowers is not a new Government strategy. It is one that the Government has long used to great advantage in connection with the civil False Claims Act (31 U.S.C. §§ 3729-3730). In fact, there are at least two different bills currently before Congress that would encourage expanded whistleblower activities under the FCA, discussed here, in addition to the increased whistleblower protections under the Recovery Act. If history is any indicator, disgruntled employees of companies that receive Stimulus monies will inevitably cast themselves as "whistleblowers" – filing a suit under the civil False Claims Act, while simultaneously claiming protections under the host of statutes preventing adverse actions against the "whistleblower."
3. Buy American Requirements for Construction Materials
One of the most widely discussed sections of the Recovery Act relates to the Buy American provision – Section 1605 (previously discussed here), which prohibits Stimulus money from being spent on public works unless the iron, steel, or other construction materials are produced in the U.S. The interim rule creates a new, modified hybrid regime, borrowing from the regulatory concepts currently in place relating to the Buy American Act (BAA) and the Trade Agreements Act (TAA). Not surprisingly, this new "hybrid" regime is complicated and will well prove maddening to companies trying to comply with the Section 1605 Buy American requirements.
- Applies to Construction Contracts. Notably, based on the plain language of the interim rule, it seems that the Section 1605 restrictions apply only to construction contracts – not more broadly to contracts for goods or services from foreign suppliers, as formulated under the TAA or under FAR Subpart 25.1 for the BAA. It is unclear at the present time whether this plain language means that the section 1605 Buy American restrictions are, in fact, limited only to construction contracts for "public buildings" and "public works" (including those under $100,000) or whether the Government views all purchases (including those for goods and services) under the Recovery Act as those falling under a broad umbrella of "construction contracts," such that the Section 1605 restrictions apply universally to all purchases using Recovery Act funds. While the latter formulation seems strained and unlikely, clarification from the Government would be appreciated.
- New Regulations and Clauses. The new interim rule creates a new FAR Subpart 25.6, and adds new contract and solicitation clauses at FAR Part 52 (all referring to construction materials). The regulations are complicated, and any company performing work on construction contracts should carefully evaluate the risks under these new provisions.
- Component Requirements. FAR 25.602 requires that the public building be located in the U.S. and that the iron, steel, or other manufactured goods be produced in the U.S. This requires that all manufacturing processes must take place in the United States, "except metallurgical processes involving refinement of steel additives." This does not, extend to the component materials (as under the BAA), merely to the final manufacture of the construction materials. The interim rule does seem to indicate, however, that the "component test" does separately apply to "unmanufactured construction materials."
- BAA-Like Evaluation Preferences. Similar to the BAA (albeit in a more complicated fashion), FAR 25.605 requires that a contracting officer must consider whether the cost of domestic construction material is unreasonably high in comparison to the foreign alternative. Consequently, contracting officers are directed to use the following evaluation scheme in considering all offers:
1. Use an evaluation factor of 25%, applied to the total offered price of the contract (not merely the foreign products) if foreign iron, steel, or other manufactured goods are incorporated in the offer as construction material based on an exception for unreasonable cost requested by the offeror.
2. Additionally, use an evaluation factor of 6% applied to the cost of foreign unmanufactured construction material incorporated in the offer based on an exception for unreasonable cost requested by the offeror.
3. Total evaluated price = offered price + (.25 × offered price, if Factor #1 applies) + (.06 × cost of foreign unmanufactured construction material, if Factor #2 applies).
Exactly how this evaluation scheme should or will be employed in actual practice remains a mystery. Clearly, it is confusing and it will be difficult to segregate the costs of the various foreign unmanufactured construction materials. Looking into our crystal ball, we see many future bid protests sustained on procurements using Stimulus funds because the agency has had difficulty properly applying this complicated evaluation requirement.
- TAA-Like Approved Foreign Countries. For purposes of construction contracts valued at $7,443,000 or higher, certain Recovery Act Designated Countries can qualify for equal treatment with domestic companies and domestic products (similar to the TAA). For purposes of the Recovery Act, the countries to which this exception applies include: World Trade Organization Government Procurement Agreement (WTO GPA) signatories; U.S. Free Trade Agreement partners; and Least Developed Countries. Notably, this list does not include companies that might normally qualify under the Trade Agreements Act, such as Caribbean Basin countries.
While the Recovery Act Buy American regime represents a hybrid of both the BAA and the TAA, the new rule does not exactly mirror either pre-existing regime, which lends itself to significant confusion. And confusion, when taking money from the federal Government, is not the emotion that companies want to experience. Hopefully, the public comments and the final rule will address the more ambiguous aspects of this new interim rule.
4. Effective Date
All of these new rules apply to solicitations issued or contracts awarded after March 31, 2009 and that incorporate any Stimulus monies (either in whole or in part). For contracts that have already been awarded, the Government will issue a bilateral modification to the contract to incorporate the new clause. If a contractor does not agree to a bilateral modification, then absolutely no Stimulus monies should be spent on the subject contract. These new rules are non-negotiable and contractors hoping to receive Stimulus monies will not be able to escape the additional regulatory and administrative requirements by claiming a unilateral "change" to their contract.
Accepting these new rules is the price that companies must pay if they accept Stimulus funds. Companies would be wise to consider whether they are willing (or even able) to comply with these terms and conditions, which impose massive burdens and carry significant risks, before participating in a mad dash for the Stimulus funds. As we have already discussed previously, accepting Stimulus monies comes at a high cost and contractors will be striking a Faustian bargain. As recipients of the TARP funds have learned, the Government may later change the rules, regardless of the deal that was originally struck. There are always risks associated with taking money from the U.S. Government.
The Government is accepting public comments on these new interim rules until June 1, 2009. Since no one in Congress appears to have read the Stimulus Act before passing it, this may be the first real opportunity for the public to engage in any type of meaningful debate about the impacts of the Act and how it should be implemented. We encourage citizens everywhere to express their comments on these proposed rules, so that a reasonable (and, hopefully, workable) regulatory regime may ultimately emerge, and so that the risks associated with receiving Stimulus monies can be properly managed.
For further information concerning our Government Contracts Practice, contact our Practice Group Leaders, Bryan Daly in Los Angeles at (213) 617-5466 and Anne Perry in Washington, D.C. at (202) 218-6875.
David S. Gallacher