4 Considerations For Gov’t Contractor Carveout Deals

[This article was originally published in Law360.]

A steady flow of M&A activity in the government contracts industry continues. Indeed, last year we saw over 100 publicly reported deals involving government contractors, and this pace has continued into 2018. This M&A activity has taken a variety of forms, including a number of “carveout” transactions, where a government-focused business is separated from its existing corporate structure. For instance, earlier this month L3 announced an agreement to sell its Vertex Aerospace to American Industrial Partners in what L3 described as an effort to optimize its portfolio of operations. Similarly, last month Siemens’ sold its federal business Dresser-Rand to Curtiss-Wright in order to allow Siemens to refocus on its core strengths.

Whether a carveout is absorbed by another company — such as Lockheed Martin’s sale of its IS&GS business to Leidos — or a carveout results in a new, stand-alone company — such as iRobot’s sale of its robot defense and security government business to private equity firm Arlington Capital, carveout deals can create great opportunities. They can allow a seller to realize the value of the carved-out business, while also creating exciting opportunities for both the remaining and sold businesses to refocus resources on their missions. Also, carving out a business that is less than a natural fit with its larger organization can allow for the realization of synergies if the carved out business is placed in a structure more suited to the carved out business’s specialties.

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The Future of Novations in Contractor M&A

In corporate transactions involving government contracts, “novation” has become a dreaded process.  Many buyers and sellers express uneasiness and concern about having to subject their deal to the U.S. Government’s discretionary framework for accepting the transfer of a government contract from one party to another.  In particular, they fear the uncertain timeline and arcane requirements for securing approval.

While the cumbersome novation approval process has drawn significant attention in recent years, the National Defense Authorization Act mark-up released by the House Armed Services Committee earlier this month was again silent on the issue.  In the absence of Congressional enthusiasm, the government contracts bar seems to have focused its efforts to fix the novation process on the Section 809 Panel, which is considering ideas to streamline and simplify the defense acquisition system.  The American Bar Association Section of Public Contract Law offered thoughts on the current novation process in comments to the panel late last year, and it remains to be seen how the Section 809 Panel will react to those comments in the two public reports the Panel is expected to publish over the coming months.

The ABA comments focused on three primary issues with the current novation process under FAR 42.1204:  (1) the timing of novation approvals; (2) corporate entity conversions; and (3) the content of novation packages.

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Bipartisan Legislation Aims To Strengthen “Buy American” Requirement Under National School Lunch Program

Last month, Senators Dan Sullivan (R-AK) and Maria Cantwell (D-WA) introduced legislation to “improve the requirement to purchase domestic commodities or products” under the National School Lunch Program (the “NSLP”) and the School Breakfast Program (the “SPB”).  Even if this legislation fails to make it out of Committee, it signals a continued trend to strengthen the “Buy American” requirement under these programs.

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Any Questions? : Department of Defense Implements FY 2018 NDAA Requirement for Post-Debriefing Q&A Process

This past March marked the beginning of a more fulsome required debriefing process for defense contracts.  The Director of Defense Procurement and Acquisition Policy (“DPAP”) issued a class deviation memorandum, effective March 22, 2008, requiring contracting officers to: (1) provide unsuccessful offerors an opportunity to submit additional questions within two days after receiving a debriefing; and (2) hold the debriefing open until the agency delivers written responses.  The class deviation implements Section 818 of the National Defense Authorization Act for Fiscal Year 2018 (“NDAA”). Continue Reading

A Bridge Too Far — Court of Federal Claims Sustains Protest of Fifth (Yes, Fifth) Sole-Source Bridge Contract Awarded to Incumbent During Protracted Bid Protest Litigation

Non-incumbent awardees who are defending their awards against a bid protest often view sole-source “bridge” contracts issued to the incumbent as something akin to death and taxes — an unpleasant, yet seemingly inescapable fact of life.  But a recent Court of Federal Claims decision offers an important reminder that these types of contracts are not inviolate.  They can be successfully protested themselves when the need to sole-source arises from a lack of advance planning on the part of the agency.

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The 340B Ceiling Price and CMP Rule . . . Changes on the Horizon?

After more than eight years in the making, the 340B Drug Pricing Program Ceiling Price and Manufacturer Civil Monetary Penalties Regulation (the “Rule”) seems to be a rudderless ship on a shoreless sea. On Monday, the Health Resources and Services Administration (HRSA) issued a notice of proposed rulemaking delaying the implementation date of the final Rule from July 1, 2018 to July 1, 2019. The final Rule was published eighteen months ago (January 5, 2017) and the implementation date has since been delayed on four different occasions. HRSA has cited a variety of reasons for each delay—compliance with the Regulatory Freeze issued by the incoming Trump Administration; providing stakeholders additional time to prepare for compliance with the Rule; yet more time for compliance preparations; and additional time for HRSA to “fully consider the substantial questions of fact, law, and policy raised by the [R]ule.”

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DoD Final Rule to Promote Post-Award Disclosure of Defective Pricing Arms Contractors with Potentially Impactful Information

On May 4, 2018, the Department of Defense (“DoD”) issued a final rule amending the Defense Federal Acquisition Regulation Supplement (“DFARS”) to state that, in the interest of promoting voluntary disclosures of defective pricing identified by contractors after contract award, DoD contracting officers have more discretion to determine the scope of the involvement of the Defense Contract Audit Agency (“DCAA”) in assessing such a disclosure. 83 Fed. Reg. 19645. This is a change from DoD’s November 2015 proposed rule, which required contracting officers to request at least a limited-scope audit when a contractor voluntarily discloses defective pricing. While arguably a step in the right direction, the permissive language of the final rule continues to provide only limited information to defense contractors about what to expect following a voluntary defective pricing disclosure. Nonetheless, by listing the types of information that the contracting officer must consider when deciding whether to request an audit, the rule arms contractors with potentially impactful information.

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When Not to Pass Go and Go Directly to GAO: Decision Highlights Risk of Protesting Purchase Orders and Other Time-Sensitive Contracts at the Agency Level

For contractors who are concerned that filing a bid protest in the Government Accountability Office or Court of Federal Claims may alienate their customer, agency-level protests are a welcome, less-confrontational alternative that allows them to raise their concerns in a discreet, non-public fashion.  But as shown by GAO’s recent decision in GovSmart, Inc. – Protest and Costs, B-415871.3 et al., Apr. 19, 2018, 2018 CPD ¶ __, an agency-level protest of a proposed purchase order or other time-sensitive contract may ultimately preclude an offeror from obtaining meaningful relief in a subsequent GAO protest of that same procurement.

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UPDATED: Covington’s Escobar Tracker

In Universal Health Services v. United States ex rel. Escobar, 136 S. Ct. 1989 (2016), the Supreme Court changed the landscape for False Claims Act litigation. The Court endorsed implied certification liability in certain circumstances, but set a high bar for demonstrating the materiality of a violation of law, regulation, or contract to the government’s payment decision.

Nearly two years after the Escobar decision, lower courts continue to grapple with the case’s key holdings. It is essential that government contractors, practitioners, and other stakeholders keep abreast of how the courts are interpreting Escobar. To that end, Inside Government Contracts hosts Covington’s Escobar tracker, an index of district and circuit court cases applying the Court’s implied certification and materiality rulings. Our tracker provides a brief summary of each case and its Escobar-related holding.

This latest version of our tracker, available here, has been updated to include notable FCA decisions interpreting Escobar from the past few months. These recent cases include a series of important rulings underscoring the demanding nature of the FCA’s materiality standard, including the Fifth Circuit’s detailed discussion of post-Escobar materiality and a careful analysis of materiality under federal country-of-origin laws. The tracker also includes cases addressing the contours of implied certification under Escobar, including decisions out of the Eleventh and D.C. Circuits reaffirming limitations on the implied certification theory of liability.

We will continue to update the list periodically with new cases. We hope you find the tracker useful.

New FAR Rule Implements Increased Minimum Dollar Threshold for GAO’s Protest Jurisdiction Over DoD, NASA, and Coast Guard Task Orders

In a new rule announced yesterday, the FAR Council implemented prior statutory changes to GAO’s bid protest jurisdiction.  For task orders issued by the Department of Defense, NASA, or the Coast Guard, the rule provides that GAO will have jurisdiction only over task orders “valued in excess of $25 million.”

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