On January 22, 2016, the FAR Council published a proposed rule that, if adopted, would impose a government-wide prohibition on contracting with companies that limit the ability of employees or subcontractors to lawfully report fraud, waste, and abuse to the government.  Given the proposed rule’s near-universal application and potentially devastating consequences for violators, contractors would be wise to take a hard look at their confidentiality policies and procedures to ensure that they will not run afoul of the proposed rule’s restrictions.

Proposed Rule

The proposed rule implements Section 743 of the Consolidated and Further Continuing Appropriations Act, 2015 (Pub. L. 113-235) (hereinafter, “Section 743”) and successor provisions in subsequent appropriations acts and continuing resolutions.  Section 743 prohibits the federal government from using appropriated funds to enter into contract “with an entity that requires employees or subcontractors of such entity . . . to sign internal confidentiality agreements or statements prohibiting or otherwise restricting such employees or contactors from lawfully reporting such waste, fraud, or abuse” to the government.

The new proposed rule aims to implement this prohibition on a government-wide basis.[1]  Given its wide application and significant potential consequences, it is particularly important for contractors to understand the rule’s key components:

•  Prohibition. The proposed rule contemplates a new provision in Part 3 of the FAR that, drawing on the language of Section 743, provides as follows:

The Government is prohibited from using certain appropriated funds for a contract with an entity that requires employees or subcontractors of such entity seeking to report waste, fraud, or abuse to sign internal confidentiality agreements or statements prohibiting or otherwise restricting such employees or subcontractors from lawfully reporting such waste, fraud, or abuse to a designated investigative or law enforcement representative of a Federal department or agency authorized to receive such information.[2]

Notwithstanding the verbosity of the prohibition, the implication is clear:  contractors will be ineligible to receive contracts issued with appropriated funds if they prevent or hinder employees or subcontractors from reporting waste, fraud, or abuse.

•  Representation. To implement this contracting prohibition, the proposed rule also would impose, as a condition of eligibility to receive federal contract awards, a requirement that all offerors represent that they do not “prohibit[] or otherwise restrict[] employees or subcontractors from lawfully reporting” suspected fraud, waste, or abuse to the Government. The proposed rule does not require an affirmative representation; rather, such a representation would be implied “by submission of [the contractor’s] offer.”

•  Notification. For any contractor that has (or previously had) a policy that runs afoul of the prohibition on restricting reporting of fraud, waste, and abuse, the proposed rule also would require that contractor to notify employees that “the prohibitions and restrictions of [the confidentiality policy] are no longer in effect.” In this respect, the proposed rule makes clear that merely revoking a non-compliant confidentiality policy is not sufficient to ensure the contractor’s eligibility to contract with the federal government; unless the contractor also performs the required employee notification, it still is subject to the prohibition on receiving appropriated federal funds.

•  Applicability. Perhaps most striking about the proposed rule is its broad applicability, as it would apply to “all solicitations and resultant contracts” receiving appropriated federal funds, with only a limited exception for personal services contracts with individuals. Notably, this coverage would include all contracts and subcontracts: (i) below the simplified acquisition threshold; (ii) resulting from small business set-aside procurements; and (iii) for the acquisition of commercial items (including COTS items). The proposed rule also contains an express flow-down requirement that would obligate contractors to include the substance of the proposed regulation in all resulting subcontracts. And finally, the proposed rule also mandates that existing contracts be modified to include the new prohibition and requirements before any appropriated federal funds could be obligated. Thus, if the proposed rule were adopted in its current form, it would immediately apply to nearly every contractor doing business with the federal government.

Implications

The consequences of noncompliance with the proposed rule would be significant:  a contractor in violation of the rule’s requirements would be immediately disqualified from receiving a federal contract award, no matter how well-positioned it might be to perform the contract.  This, in turn, could lead to potentially significant implications in several contexts.

First, the proposed rule raises the specter of increased bid protests based on a disappointed awardee’s suspicion that an awardee does not comply with the rule’s requirements.  In such a case, the disappointed bidder could lodge a bid protest asserting that the awardee was actually ineligible for award. Even if such a protest were found to be without merit, it nonetheless could result in potentially costly delays in performance and investment of resources to defend the protest.

Second, because the proposed rule would require the modification of current contracts, it also means that contractors likely would have very limited time to implement these changes.  For contractors already subject to the DOD and VA class deviations, a gap analysis of what they would need to do to comply across all agencies would be prudent.  Meanwhile, contractors that currently have no compliance obligations on this issue would be wise to develop a compliance plan to ensure that they are in a position to respond quickly and efficiently.

Third, the proposed rule raises the possibility of False Claims Act exposure related to the requirement that a contractor represent that it is in compliance with the rule’s requirements.  Under the proposed rule, the mere submission of an offer would constitute a representation that the contractor does not prevent or otherwise restrict whistleblowing to the Government.  If that representation is subsequently determined to be untrue, some government regulators could assert that the contractor secured the contract by “fraudulent inducement.” In light of this risk, it is important that contractors carefully assess their compliance with the proposed rule and — especially if the rule takes immediate effect — appropriately caveat any proposals that are submitted before full compliance is achieved.

Fourth, compliance with the proposed rule also could be important in the event that a contractor is the subject of an internal or government investigation.  If, in the course of that investigation, there are allegations that the contractor’s policies prevented or discouraged employees from disclosing potential fraud or abuse earlier, this failure to comply with the proposed rule would be viewed negatively by any enforcement agencies involved.

Conclusion

Comments on the proposed rule are due on or before March 22, 2016, and it is possible that some changes will be made before a final rule is issued.  For instance, the proposed rule does not explicitly address consultants or teaming partners, but this may be clarified in the final rule (and indeed, the rationale for applying the requirement to consultants and teaming partners would be similar to that of employees and subcontractors).  In any event, given the clear statutory mandate embodied in Section 743, it seems likely that the final rule will be substantially similar to the current proposed version.

Accordingly, contractors should be prepared to confirm that their employment, intellectual property, non-disclosure, and similar agreements with employees and subcontractors clearly state an exception to the standard requirements to keep sensitive commercial information confidential.  In this respect, the safest course may be to mirror the language contained in the proposed FAR clause, although contractors also should continue monitoring developments to ensure that any revisions to their confidentiality policies and procedures reflect the final language of rule that is ultimately promulgated.

 

[1] Certain federal agencies have previously issued class deviations implementing this prohibition on an agency-specific basis.  For example, the Department of Defense issued a class deviation implementing the prohibition with respect to DOD contractors in February 2015, and the Department of Veterans Affairs followed suit by issuing its own class deviation in April 2015.

[2] The proposed rule clarifies that this prohibition “does not contravene requirements applicable to Standard Form 312 (Classified Information Nondisclosure Agreement), Form 4414 (Sensitive Compartmentalized Information Nondisclosure Agreement), or any other form issued by a federal department of agency governing the nondisclosure of classified information.”

Tags: Fraud Reporting, Proposed Rule
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Photo of Susan B. Cassidy Susan B. Cassidy

Susan is co-chair of the firm’s Aerospace and Defense Industry Group and is a partner in the firm’s Government Contracts and Cybersecurity Practice Groups. She previously served as in-house counsel for two major defense contractors and advises a broad range of government contractors…

Susan is co-chair of the firm’s Aerospace and Defense Industry Group and is a partner in the firm’s Government Contracts and Cybersecurity Practice Groups. She previously served as in-house counsel for two major defense contractors and advises a broad range of government contractors on compliance with FAR and DFARS requirements, with a special expertise in supply chain, cybersecurity and FedRAMP requirements. She has an active investigations practice and advises contractors when faced with cyber incidents involving government information, as well as representing contractors facing allegations of cyber fraud under the False Claims Act. Susan relies on her expertise and experience with the Defense Department and the Intelligence Community to help her clients navigate the complex regulatory intersection of cybersecurity, national security, and government contracts. She is Chambers rated in both Government Contracts and Government Contracts Cybersecurity. In 2023, Chambers USA quoted sources stating that “Susan’s in-house experience coupled with her deep understanding of the regulatory requirements is the perfect balance to navigate legal and commercial matters.”

Her clients range from new entrants into the federal procurement market to well established defense contractors and she provides compliance advices across a broad spectrum of procurement issues. Susan consistently remains at the forefront of legislative and regulatory changes in the procurement area, and in 2018, the National Law Review selected her as a “Go-to Thought Leader” on the topic of Cybersecurity for Government Contractors.

In her work with global, national, and start-up contractors, Susan advises companies on all aspects of government supply chain issues including:

  • Government cybersecurity requirements, including the Cybersecurity Maturity Model Certification (CMMC), DFARS 7012, and NIST SP 800-171 requirements,
  • Evolving sourcing issues such as Section 889, counterfeit part requirements, Section 5949 and limitations on sourcing from China
  • Federal Acquisition Security Council (FASC) regulations and product exclusions,
  • Controlled unclassified information (CUI) obligations, and
  • M&A government cybersecurity due diligence.

Susan has an active internal investigations practice that assists clients when allegations of non-compliance arise with procurement requirements, such as in the following areas:

  • Procurement fraud and FAR mandatory disclosure requirements,
  • Cyber incidents and data spills involving sensitive government information,
  • Allegations of violations of national security requirements, and
  • Compliance with MIL-SPEC requirements, the Qualified Products List, and other sourcing obligations.

In addition to her counseling and investigatory practice, Susan has considerable litigation experience and has represented clients in bid protests, prime-subcontractor disputes, Administrative Procedure Act cases, and product liability litigation before federal courts, state courts, and administrative agencies.

Susan is a former Public Contract Law Procurement Division Co-Chair, former Co-Chair and current Vice-Chair of the ABA PCL Cybersecurity, Privacy and Emerging Technology Committee.

Prior to joining Covington, Susan served as in-house senior counsel at Northrop Grumman Corporation and Motorola Incorporated.

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Photo of Michael Wagner Michael Wagner

Mike Wagner represents companies and individuals in complex compliance and enforcement matters arising in the public procurement context. Combining deep regulatory expertise and extensive investigations experience, Mike helps government contractors navigate detailed procurement rules and achieve the efficient resolution of government investigations and…

Mike Wagner represents companies and individuals in complex compliance and enforcement matters arising in the public procurement context. Combining deep regulatory expertise and extensive investigations experience, Mike helps government contractors navigate detailed procurement rules and achieve the efficient resolution of government investigations and enforcement actions.

Mike regularly represents contractors in federal and state compliance and enforcement matters relating to a range of procurement laws and regulations. He has particular experience handling investigations and litigation brought under the civil False Claims Act, and he routinely counsels government contractors on mandatory and voluntary disclosure considerations under the FAR, DFARS, and related regulatory regimes. He also represents contractors in high-stakes suspension and debarment matters at the federal and state levels, and he has served as Co-Chair of the ABA Suspension & Debarment Committee and is principal editor of the American Bar Association’s Practitioner’s Guide to Suspension & Debarment (4th ed.) (2018).

Mike also has extensive experience representing companies pursuing and negotiating grants, cooperative agreements, and Other Transaction Authority agreements (OTAs). In this regard, he has particular familiarity with the semiconductor and clean energy industries, and he has devoted substantial time in recent years to advising clients on strategic considerations for pursuing opportunities under the CHIPS Act, Inflation Reduction Act, and Bipartisan Infrastructure Law.

In his counseling practice, Mike regularly advises government contractors and suppliers on best practices for managing the rapidly-evolving array of cybersecurity and supply chain security rules and requirements. In particular, he helps companies assess and navigate domestic preference and country-of-origin requirements under the Buy American Act (BAA), Trade Agreements Act (TAA), Berry Amendment, and DOD Specialty Metals regulation. He also assists clients in managing product and information security considerations related to overseas manufacture and development of Information and Communication Technologies & Services (ICTS).

Mike serves on Covington’s Hiring Committee and is Co-Chair of the firm’s Summer Associate Program. He is a frequent writer and speaker on issues relating to procurement fraud and contractor responsibility, and he has served as an adjunct professor at the George Washington University Law School.

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