Last week, the FAR Council issued two final rules designed to reinforce existing restrictions on corporations that relocate overseas in inversion transactions.  The rules, which were issued without change from the proposed and interim rules announced in December 2014, further tighten restrictions on government contracting with inverted domestic corporations (IDCs), but they also impose new tracking and self-reporting obligations on all contractors.  In this sense, and as discussed further below, the new inversion rules represent a continuing trend towards the shifting of compliance monitoring and reporting from government agencies to those in the contracting community.

Existing FAR provisions impose, subject to certain exceptions, a government-wide prohibition on using appropriated funds to enter into prime government contracts with an “inverted domestic corporation,” as that term was defined under the Homeland Security Act of 2002.  As we have previously discussed, both here and elsewhere, the new FAR rules issued last week are designed to assist with the implementation of this existing ban.

The first rule, which became immediately effective on July 2, 2015, revises the language of FAR 9.108 to emphasize “the ongoing nature of the prohibition for as long as Congress extends the prohibition in its current form through subsequent appropriations action.”  Specifically, the revised rule no longer enumerates the annual appropriations bills that have imposed the ban; rather, it simply provides that the ban will continue to apply going forward absent the express removal of “successor provisions” from future appropriations acts.  Additionally, in the event that a company becomes an IDC during the course of performance of a contract, the new rule affirmatively directs contracting officers to “consult with legal counsel,” presumably to determine the impact of the company’s IDC status on its eligibility to continue contract performance.

The second rule, which will take effect on November 1, 2015, arguably has even greater significance, as it imposes entirely new disclosure and reporting obligations on contractors.  In addition to reframing the IDC certification that is required with the submission of an offer,[1] the final rule also will require any contractor that becomes an IDC during contract performance to “give written notice to the Contracting Officer within five business days from the date of the inversion event.”  This obligation raises questions in its own right, most notably whether a contractor would be permitted to continue contract performance following a change in IDC status.  The Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (the “Councils”) carefully avoided this question, noting in commentary that they “are not enforcement agencies” and that it would be the responsibility of the relevant contracting activity to “take appropriate action” in the event a contractor becomes an IDC.

These new rules are notable on two levels.  First, their issuance represents the latest salvo in the Government’s ongoing campaign to limit contracting opportunities for companies that reincorporate overseas.  These efforts reflect the political expediency of cracking down on so-called “corporate tax dodgers,” and contractors that have relocated abroad should not be surprised if additional legislative or regulatory proposals follow in the future.  Second, and more broadly, the imposition of additional reporting obligations on contractors embodies a continuing trend toward outsourcing responsibility to contractors for identifying and reporting their own noncompliances.  This shift towards self-policing, illustrated most clearly by the implementation of the FAR Mandatory Disclosure Rule, undoubtedly helps to preserve the resources of the Government, but it also has the potential to create uncertainty in the contracting community.  This is especially true where, as here, tracking and reporting obligations concern complex legal questions for which a definitive answer may not be readily ascertainable, let alone within the five-day notification window imposed by the new rule.[2]  Given the Government’s focus on anti-inversion rules and its increasing reliance on contractor self-reporting, contractors would be well-advised to ensure that they fully understand the requirements of the new rules, including their own tracking and reporting obligations.

[1] Currently, FAR 52.209-2(c) provides that a contractor’s submission of an offer operates as a representation that it is not an IDC.  The proposed rule would recast this representation to require offerors to affirmatively complete two yes-or-no check-off boxes addressing their IDC status.

[2] Although a company’s status as an IDC may appear to be a straightforward question upon first glance, the statutory definition of “inverted domestic corporation” is, depending on perspective, either highly nuanced or inartfully drafted.  As such, determining whether a company is rightfully considered an IDC often requires a detailed legal analysis.

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Photo of Sandy Hoe Sandy Hoe

Sandy Hoe has practiced government contracts law for more than 40 years.  His expertise includes issues of contract formation, negotiation of subcontracts, bid protests, the structuring of complex private financing of government contracts, preparation of complex claims, and the resolution of post-award contract…

Sandy Hoe has practiced government contracts law for more than 40 years.  His expertise includes issues of contract formation, negotiation of subcontracts, bid protests, the structuring of complex private financing of government contracts, preparation of complex claims, and the resolution of post-award contract disputes through litigation or alternative dispute resolution.  His clients include major companies in the defense, telecommunications, information technology, financial, construction, and health care industries.

Photo of Jennifer Plitsch Jennifer Plitsch

Jennifer Plitsch is co-chair of the firm’s Government Contracts practice group. Her practice includes a wide range of contracting issues for large and small businesses in both defense and civilian contracting. Her practice involves advising clients on contract proposal, performance, and compliance questions…

Jennifer Plitsch is co-chair of the firm’s Government Contracts practice group. Her practice includes a wide range of contracting issues for large and small businesses in both defense and civilian contracting. Her practice involves advising clients on contract proposal, performance, and compliance questions as well as transactional and legislative issues. Her practice also includes bid protest and contract claims and appeals litigation before GAO, agency boards and the federal courts. Ms. Plitsch has particular expertise in advising clients in the pharmaceutical and biologics industry. She advises a range of pharmaceutical and biologics manufacturers on Federal Supply Schedule contracts, including the complex pricing requirements imposed on products under the Veterans Health Care Act, as well as research and development contracts and grants with various federal agencies. She also has significant experience advising on the requirements of various programs under which vaccine products and biodefense medical countermeasures are procured by the Government.

Photo of Michael Wagner Michael Wagner

Mike Wagner helps government contractors navigate high-stakes enforcement matters and complex regulatory regimes.

Combining deep regulatory knowledge with extensive investigations experience, Mr. Wagner works closely with contractors across a range of industries to achieve the efficient resolution of regulatory enforcement actions and government…

Mike Wagner helps government contractors navigate high-stakes enforcement matters and complex regulatory regimes.

Combining deep regulatory knowledge with extensive investigations experience, Mr. Wagner works closely with contractors across a range of industries to achieve the efficient resolution of regulatory enforcement actions and government investigations, including False Claims Act cases. He has particular expertise representing individuals and companies in suspension and debarment proceedings, and he has successfully resolved numerous such matters at both the agency and district court level. He also routinely conducts internal investigations of potential compliance issues and advises clients on voluntary and mandatory disclosures to federal agencies.

In his contract disputes and advisory work, Mr. Wagner helps government contractors resolve complex issues arising at all stages of the public procurement process. As lead counsel, he has successfully litigated disputes at the Armed Services Board of Contract Appeals, and he regularly assists contractors in preparing and pursuing contract claims. In his counseling practice, Mr. Wagner advises clients on best practices for managing a host of compliance obligations, including domestic sourcing requirements under the Buy American Act and Trade Agreements Act, safeguarding and reporting requirements under cybersecurity regulations, and pricing obligations under the GSA Schedules program. And he routinely assists contractors in navigating issues and disputes that arise during negotiations over teaming agreements and subcontracts.