The Coalition for Government Procurement

Yesterday the General Services Administration (GSA) published the final rule implementing Transactional Data Reporting (TDR) for GSA’s Federal Supply Schedule (FSS) program, Governmentwide Acquisition Contracts (GWACs) and other Governmentwide Indefinite-Delivery, Indefinite Quantity (IDIQ) contracts.

The Coalition is reviewing and analyzing the rule, including the new clauses, the detailed background information, and the agency’s responses to the public comments received in response to last year’s proposed TDR rule.  The Coalition will be briefing the procurement community on the TDR rule and is seeking feedback from member firms on its impact and the reporting burden, especially concerns regarding monthly reporting for professional services.

The final rule includes a number of changes from the proposed rule.  In large part, the changes demonstrate that GSA is listening to the public and is trying to address industry concerns.  As members review the TDR rule, here are some initial thoughts/observations.

Chief among the changes is the elimination of the Commercial Sales Practices (CSP) format.  As you know, the proposed rule only eliminated the Price Reduction Clause (PRC) tracking requirement while maintaining the CSP.  GSA further stated that it could demand an update to the CSP at any time during the contract thereby creating an ongoing compliance reporting burden and corresponding civil False Claims Act liability risk for FSS contractors.  As a result, maintaining the CSP as explained in the proposed rule essentially undercut any potential burden reduction accruing from the proposed elimination of the PRC.  Moreover, the Coalition, based on feedback from members, indicated that maintaining/updating the CSP information would increase compliance burdens for FSS contractors.  GSA’s elimination of the CSP is a positive step reflecting GSA efforts to balance the government’s desire for information against the cost of collecting, maintaining and reporting data.

The final rule also provides for a pilot test, with a phased implementation.  For non-schedule contracts a Transactional Data Reporting clause is immediately available.  GSA has identified 8 Schedule contracts for the initial pilot.  GSA describes the TDR pilot as voluntary for applicable FSS contractors—current contractors can choose to continue to operate under the current CSP/PRC framework or agree to modify their contracts to eliminate CSP/PRC and accept TDR.  This is a change from the mandatory TDR structure of the proposed rule.  This change is consistent with the Federal Acquisition Streamlining Act’s implementing regulations which require modifications of commercial item contracts, like FSS contracts, to be bilateral.

With regard to areas of potential areas of concern and/or continued dialogue, the Coalition notes that the rule still provides for monthly TDR submissions by contractors to GSA while the Industrial Funding Fee (IFF) reporting is done on a quarterly basis.  This disconnect increased contract reporting complexity, costs, and risk for contractors.  The rule does allow FSS contractors the flexibility to report IFF on a monthly basis consistent with TDR; it also should allow the option for quarterly TDR consistent with the current IFF reporting.

The TDR rule also references a forthcoming notice in the Federal Register regarding a public data extract for information that otherwise would be releasable under the Freedom of Information Act (FOIA) and available to the public.  This effort prompts us to ask how, under the law, GSA will consult with FSS contractors regarding whether the contractor specific data is protected from disclosure as commercial, propriety information.  It would appear that “reverse FOIA” consultations will be required with each contractor reporting transactional data.

The background information included in the public notice also discusses various, potential uses of the data.  Although there is a very positive discussion of best value, other language in the background potentially reaffirms concerns regarding the drive to constantly lower prices on the FSS notwithstanding other price drivers.  Specifically, GSA states that transactional data will be taken into consideration when awarding FSS contracts and evaluating requests to adjust pricing and add new items to the contracts.  Presumably, transactional data also will be used in the negotiation process for the exercise of options to extend contracts.

Any price comparison between the FSS contract level price and an order price must acknowledge the overriding fundamental difference in terms: at the FSS contract level there is a $2500 guaranteed minimum along with the opportunity to compete for future orders while an FSS order reflects a firm commitment to purchase.  Will the data be used to continuously drive down contract pricing?  If so, GSA essentially will be resurrecting an operating rule that a price reduction to one customer agency results in price reduction for all at the contract level.  It is a rule that was abandoned by GSA, customer agencies and FSS contractors over 20 years ago.

GSA notes that there will be training and guidance for FSS contracting officers on uses of transactional data in pricing analysis.  The devil will be in the implementation details regarding training for FSS contracting officers on uses for transactional data.  As such, in the interests of transparency and full stakeholder engagement, GSA should share that training publicly and provide an opportunity for stakeholder feedback.

Communication and collaboration on this effort are critical and can only serve to improve the training for all.

The Coalition stands ready to engage in a wide ranging dialogue regarding implementation of the rule.

Robert Metzger, Rogers Joseph O’Donnell PC

After years of gestation, a final rule was promulgated May 16 to mandate minimum cyber defenses for companies that do government business. This Federal Acquisition Regulations rule – “Basic Safeguarding of Contractor Information Systems” 81 Fed. Reg. 30439 – seeks to protect the confidentiality and integrity of federal contract information (FCI) that resides in or transits through any contractor information system.

 

Why this rule?

Agencies are required by the Federal Information Security Modernization Act to protect federal information. The obligation extends to nonpublic information provided by the federal government to its contractors. Unauthorized cyber extraction of federal information has caused genuine injury to national interests. Using this new FAR provision, every federal agency now will require minimum cyber protection for FCI.

 

What is federal contract information?

FCI is defined as nonpublic information that is “provided for or generated for the government” under a contract to “develop or deliver a product or service to the government, but not including information provided to the public or simple transactional information. The new rule protects “information systems” rather than carefully defined information types, however. If a contractor processes stores or transmits any FCI, its information system becomes subject to minimum enumerated safeguards. Where a contractor information system hosts FCI and other, non-federal information, the rule applies to the whole system.

 

Why now?

The new FAR has been in the works since March 2010 – but the subject is complex. Even “basic” protection of federal information involves many variables and requires resolution of tough questions. This FAR rule of general application will affect thousands of companies, and must align with other federal cyber initiatives.

 

Who is affected?

The new “Basic Safeguarding” contract clause, at FAR 52.204-21, is to be included in every solicitation and resulting contract. It applies below the simplified acquisition threshold, to subcontractors for commercial items, and to services (if there is FCI) – but not to the acquisition of commercial-off-the-shelf items. Flowdown is required: The clause applies to any contract or subcontract that involves receipt, use or generation of FCI, where a contractor information system figures into these functions.

 

How is protection achieved?

The federal government has a surfeit of cyber controls. Those designed for federal information systems, e.g., NIST SP 800-53, are too costly and burdensome to impose on contractors to protect FCI. Instead, the new rule calls out 15 safeguards, each derived from the 2015 NIST Special Publication, SP 800-171.

How will industry respond?

 

Last summer, the Department of Defense issued the ‘Network Penetration’ Defense Federal Acquisition Regulation Supplement that requires defense suppliers to apply the SP 800-171 safeguards to protect what DoD calls covered defense information. The DFARS met with strong industry resistance because of uncertainty over costs and how to comply. Similarly, many companies likely will object to the new FAR, even though it invokes only 15 cyber safeguards and these are performance standards – goals – rather than prescriptive design standards. The new rule presumes that the required safeguards are consistent with “prudent business practices.” Even so, this FAR has been issued because trust in market forces and customary business practices only goes so far.

 

Are there problems in the final rule?

Predictably, as this rule addresses a highly complex area and applies so broadly, there are drafting issues. One issue is whether companies must apply the minimum safeguards to federal information received before the rule. Companies may be uncertain how to reconcile varying federal cyber controls for different types of protected federal information. Some may ask if it the government’s responsibility, in every case, to designate FCI, or whether contractors are to make their own decisions.

Although expressed at a high level, the rule identifies the 15 safeguards as requirements. The rule provides no method to establish compliance. In the absence of stated process, is self-assessment and good faith sufficient? Some companies will have questions as to how much to do, when, with what test, or what validation, and so forth. The regulation concerns contractor information systems and the intent is minimally sufficient security. The government should assure contractors that they can satisfy the new rule without having to embrace the various, often exacting NIST standards developed for federal information systems or for more sensitive federal information types. For FCI, contractors should be encouraged to use sound commercial practices and methods.

This new rule is a major development. While self-described as “just one step in a series of coordinated regulatory actions being taken or planned” to strengthen federal protections of contractor information systems, it reflects a government decision to use its regulatory power and acquisition authority to mandate minimum cyber defenses for all private companies that do government business.

Robert Metzger is a shareholder at law firm Rogers Joseph O’Donnell PC, where he’s a member of the Government Contracts Practice Group and head of the Washington, D.C., office.

 

On June 8th, the General Services Administration (GSA) issued a Request for Information (RFI) for a “Proposed Special Item Number (SIN) on IT Schedule 70: Highly Adaptive Cybersecurity Services (HACS).”  The scope of the proposed SIN included proactive cyber services (e.g. network mapping, vulnerability scanning, penetration testing, phishing assessment, web application assessment, and wireless assessment) and post-incident/post assessment remediation services.

The goal is to:

Support initiatives to improve customer procurement of Cybersecurity services and enable agencies to take full advantage of Cybersecurity benefits to maximize capacity utilization, improve IT flexibility and responsiveness, and minimize cost.

On Tuesday, GSA held the first-ever conversation on the Cybersecurity National Action Plan (CNAP), a collaborative workshop for government and industry.  As part of the dialogue, GSA discussed the future addition of the HACS SIN to IT Schedule 70.   GSA highlighted the RFI and encouraged industry feedback.  The Coalition will be submitting comments in response to the RFI and hopes to engage with GSA on this critical effort.  The current due date for comments is June 21st.   Given the significance of the potential new SIN, the Coalition has requested an extension of the due date to ensure all stakeholders have sufficient time to draft effective, responsive comments for GSA’s consideration.

The proposed SIN is part of the Office of Management and Budget’s (OMB) cybersecurity management initiatives.  On October 30, 2015, The Office of Management and Budget (OMB) issued Memorandum M-16-04, Cybersecurity Strategy and Implementation Plan (CSIP) for the Federal Civilian Government.  The memorandum set forth a series of five management objectives designed to improve cybersecurity across the federal government.  Among the goals is the development of strategies/a process for rapid deployment of emerging technologies.  Another management goal directs GSA, in coordination with OMB and the Department of Homeland Security (DHS), to research and identify contract vehicle options for incident response services.

Given OMB’s directive to GSA, the focus on adding HACS to IT Schedule 70, rather than creating a new standalone contract vehicle, is a positive step.  A significant benefit of this approach is fostering access to the commercial market through IT Schedule 70’s continuous open seasons that allow for the submission of proposals and modification for new cyber technologies every working day of the year.  The Coalition looks forward to working with GSA to ensure an efficient, effective implementation of the HACS SIN that reduces administrative processes and avoids unnecessary duplication and/or confusion across IT Schedule 70.

The Coalition’s comments in response to the RFI will address a number of measures to enhance the flexibility of IT Schedule 70’s ability to provide for the “rapid deployment of emerging technologies” from the commercial market.  Here are three recommendations that, if adopted, reduce barriers to entry, increase value, and promote innovation through IT Schedule 70.

  1. Eliminate the Price Reduction Clause (PRC). The PRC increases contract administration costs for government and industry at time when pricing is driven by competition at the task order level. The PRC also creates barriers to entry for new products and services.  Our members consistently indicate that they are unable to add new technologies, products, and services to IT Schedule 70 due to the compliance risk associated with the PRC.  Eliminating the PRC will save government and industry time and money, while fostering increased access to emerging cyber technologies.
  2. Incorporate Other Direct Costs (ODCs). Incorporating ODCs into IT Schedule 70 will enhance access to commercial cyber solutions.  ODCs will allow customer agencies and contractors to compete for and perform comprehensive cyber solutions.  FAR Part 12 and the corresponding commercial item clauses clearly authorize ODCs, and as the largest commercial item IT contract in government, GSA an opportunity to move the entire market forward in providing the latest commercial solutions for cybersecurity.
  3. Return to the standard commercial item order of precedence language for commercial software licenses (i.e. Commercial Supplier Agreement (CSA). The current language in IT Schedule 70 essentially subordinates commercial contract terms and conditions to government unique terms and conditions.  This approach is inconsistent with the Federal Acquisition Streamlining Act of 1994 and its implementing regulations, which call for the utilization of commercial items and terms, to the maximum extent practicable.  The IT Schedule 70 current order of precedence increases barriers to entry for commercial technologies, stifles innovation, and increases administrative costs and risks for IT Schedule 70. Realigning the order of precedence consistent with FASA and FAR Part 12 will increase access to emerging cyber technologies.

Coalition members stand ready to work with GSA on IT Schedule 70 to ensure it serves as the government’s strategic platform for rapid access to emerging commercial cyber technologies.

 

Summer has arrived, but we aren’t going on vacation!  There are several upcoming events and trainings we hope to see you at over the next couple months.  But first, one postponed event to mention.  We were originally scheduled to have our Don’t Get Burned This Summer: Compliance Training for Labor Requirements on June 16th; however, many members requested we hold this event in late summer/early fall as, according to the FAR Council’s Semiannual Regulatory Agenda, the Fair Pay and Safe Workplaces final rule is to be released in August 2016.  Be on the lookout for an updated September or October date for this rescheduled training.  In the interim, please mark your calendars for the following:

SeaPort-e Working Group – June 13

 

The Coalition has formed a working group under the GWAC/MAC Committee to respond to the recently issued SeaPort-e Request for Information. The SeaPort-e multiple award contract will expire in April 2019 and the Navy is looking to develop a new acquisition strategy for the contract. The first meeting of the Working Group will be on Monday, June 13. Responses to the RFI are due on July 1. Members who would like to join the SeaPort-e Working Group or learn more about our activities, please contact Sean Nulty.

What Contractors Need to Know about Cybersecurity – June 29
Coalition members are invited to join the Pricing and Regulatory Compliance Oversight (PRCO) Committee on June 29 for a discussion on What Contractors Need to Know about Current and Upcoming Cybersecurity Requirements. Bob Metzger, Partner with Rogers Joseph O’Donnell, will discuss the current state of cybersecurity regulations and compliance requirements.  Federal Computer Week selected Bob as a 2016 “Federal 100” awardee, saying that “he was at the forefront of the convergence of the supply chain and cybersecurity” and that “his work continues to influence the strategies of federal entities and companies alike.”  Additionally, Michael Wright, Senior Manager at Baker Tilly, will speak about recommendations for complying with the current and expected requirements.  Michael works with the firm’s Technology Risk Services team and over the past 15 years, he has performed project risk reviews, IT risk assessments and audits, IT governance assessments, and application control reviews for a variety of clients across industries. He brings relevant subject matter expertise on cybersecurity and the management of large scale IT projects.

This meeting will take place at 10:00am at Baker Tilly’s office in Tysons, VA.  To RSVP for the June 29th meeting, please send an email to Jason Baccus.

GSA/VA Schedule Training for In-House Counsel – July 14

This class is a “must attend” for lawyers and corporate officials with significant contract management and compliance responsibilities in companies that have GSA Schedule contracts.  Navigating the $50 billion GSA Schedule contracting program correctly can provide huge market success. The contracts provisions must be accurately understood, managed, and monitored to assure that your commercial enterprise realizes anticipated profits. Failure to do so can result in significant monetary, administrative, civil and even criminal penalties. This seminar will provide information and tools to help you understand the GSA/VA Schedule contracting program and provide insightful advice to your in-house clients and business partners.

 

This all day course is taught by Roger Waldron, President, Coalition for Government Procurement; Phil Seckman, Partner, Dentons; and Jason Workmaster, Of Counsel, Covington & Burling LLP.  It should be attended by In-house counsel for current GSA/VA Schedule contractors (or companies considering becoming a GSA/VA Schedule contractor), government attorneys that advise clients who evaluate or buy against Schedule contracts, outside counsel interested in learning more about GSA/VA Schedule contracting, Compliance Officers, non-lawyers with extensive MAS experience, Contract Managers and Contracting Officers.

 

After attending this seminar, you will:

  • Earn 6 hours VA CLE!
  • Understand GSA/VA’s most favored customer pricing policy and major requirements of the government solicitation
  • Understand current audit/oversight procedures
  • Understand current GSA Schedule Price Negotiation Priorities
  • Understand how the GSA Schedule can impact your company bottom line

Plus, you’ll be comfortable advising your in-house clients regarding:

  • Disclosure of company records
  • Establishing management and compliance processes
  • Establishing ethics programs and mandatory disclosure
  • Avoiding penalties
  • Identifying resources to assist with continuing legal support of your internal GSA/VA Schedule programs

To register for the GSA/VA Schedule Training for In-House Counsel course, please click here!

 

4th Annual Joseph P. Caggiano Memorial Golf Tournament – August 24th

This charity tournament is to honor our good friend and colleague, Joe Caggiano, who was not only a 23-year veteran of the federal contracting marketplace but a naval veteran as well.  Once again, this year’s tournament proceeds are going to support the Coalition’s endowment for a qualified veteran concentrating their studies in the field of US Government procurement and pursuing the JD/LLM degree or the interdisciplinary Masters degree at The George Washington University. Joe would be so proud of this endowment as we encourage the next generation of skilled professionals to lead this critically important sector of the US economy.

 

This year’s tournament will once again be held at the beautiful Whiskey Creek Golf Course in Ijamsville, MD.  We have several exciting sponsorships available including title sponsors, beverage cart sponsors, hole sponsors, and many more with all budgets in mind. Please click here to review sponsorship opportunities and contact Matt Cahill at mcahill@thecgp.org or 202-315-1054 with any questions or commitments. Registration will open next week and we look forward to your support!

 

By  Joseph P. Hornyak & Robert K. “Bob” Tompkins, Holland & Knight

The U.S. Small Business Administration (SBA) on May 31, 2016, issued a long-awaited final rule to implement certain small business-related provisions of the National Defense Authorization Act of 2013 (NDAA), including key changes in the Limitations on Subcontracting regulation. For a summary of the NDAA’s small business provisions, see Holland & Knight’s Government Contracts Blog, “National Defense Authorization Act of 2013 Includes Significant Small Business-Related Provisions,” Feb. 1, 2013.

In many instances, the final rule adopts with little or no change to the provisions of the proposed rule issued on Dec. 29, 2014 (see Holland & Knight’s alert, “SBA Proposes Changes to Limitations on Subcontracting and Other Rules,” Jan. 23, 2015). However, in response to public comments on the proposed rule, SBA made important changes, including changes regarding subcontractors that qualify as “similarly situated” for purposes of the limitations on subcontracting, as well as how contracts for both services and supplies – described as “mixed” contracts – are treated for such purposes.

In addition to the limitations on subcontracting provisions, the final rule addresses numerous other SBA programs and requirements, including: the HUBZone program, subcontracting plans, the identity of interest affiliation rule, joint ventures, the calculation of annual receipts, recertification following a merger or acquisition, the Small Business Innovation Research (SBIR)/Small Business Technology Transfer (STTR) programs, size protests and North American Industry Classification System (NAICS) appeals, application of the non-manufacturer rule to software procurements, “adverse impact” analyses on construction contracts and the Certificate of Competency (COC) program.

Limitations on Subcontracting

Section 1651 of the NDAA changed the formula for calculating the limitations on subcontracting under all types of small business set-aside contracts, principally to convert the analysis from one based on costs to one based on contract value. Previously, SBA regulations and the implementing FAR clause (52.219-14, entitled “Limitations on Subcontracting”) required a small business prime contractor to perform with its own personnel a certain percentage of the cost of total direct labor on the contract, depending on whether the contract is primarily for services, supply, construction or specialty trade construction. As revised by section 1651 and now adopted in the May 31 final rule, compliance will be determined by a percentage cap on the total amount of the prime contract that may be paid to subcontractors. In many respects, this should simplify the application of the requirement.

While the final rule alters the approach to making the calculation, the basic percentage limits remain essentially unchanged. For service and supply contracts, small business prime contractors must agree that no more than 50 percent of the total amount paid under the prime contract will be paid to subcontractors. For general construction contracts, the percentage is 85 percent, and for specialty trade construction, the percentage is 75 percent. In all such contracts, amounts paid to “similarly situated” entities are not considered “subcontracted” and thus excluded from the limitation.

Similarly Situated Subcontractors

The primary differences between the May 31 final rule and the Dec. 29, 2014, proposed rule relate to “similarly situated” subcontractors. Consistent with the underlying statute, the proposed rule, and now the final rule, make clear that a small business prime contractor need not include the amounts subcontracted to a “similarly situated” subcontractor – i.e., another business concern that falls into the same size or socioeconomic category for purposes of set-aside contracts – in determining the subcontracted percentage allowed. Put another way, work subcontracted to similarly situated subcontractors will count as work done by the prime contractor for Limitation on Subcontracting purposes. The exception for similarly situated subcontractors applies to all four types of contracts described in FAR 52.219-14 (services, supplies, construction and specialty trade). The exception will also apply to any analysis under the ostensible subcontractor affiliation rule.1

The final rule, however, removed the phrase “at any tier” from descriptions of a similarly situated subcontractor in the proposed rule, so that only first-tier subcontractors will count as similarly situated.2 Thus, any work that a similarly situated subcontractor subcontracts to another entity, large or small, will be counted as a subcontract to a non-similarly situated entity (i.e., treated as if it were subcontracted to a large business). Put simply, second-tier subcontracts will not be treated as similarly situated, even if the first-tier subcontractor is.

Also, in response to public comments, the final rule makes clear that individuals classified as “independent contractors” by the Internal Revenue Service (IRS), also known as “1099” personnel, will be considered subcontractors and may count toward meeting the applicable limitation on subcontracting when the independent contractor qualifies as a similarly situated entity.3 Presumably, this means, for example, that an independent contractor working under a service-disabled, veteran-owned small business set-aside prime contract would count as “similarly situated” only if the independent contractor is also a service-disabled veteran.

The final rule also provides that an entity may qualify as a similarly situated entity if it is small under the size standard corresponding to the NAICS code that the prime contractor assigns to the subcontract.4 This represents a change from the proposed rule, which would have applied the NAICS applicable to the prime contract to determine whether the subcontractor is similarly situated.

In response to public comments, the final rule removed the requirements in the proposed rule that the prime contractor enter into a written agreement with and report to the contracting officer on compliance with respect to similarly situated entities. This removes some of the administrative burden that the proposed rule would have applied to prime contractors seeking to take advantage of the exception for similarly situated subcontractors.

Mixed Contracts/Cost of Materials

The final rule introduces the term “mixed contract” to describe a contract that combines both services and supplies. For such a contract, the contracting officer must select the “single NAICS code which best describes the principal purpose of the product or service being acquired.”5 The code selected is determinative as to which limitation on subcontracting – services or supplies – is applicable.6

The final rule emphasizes that the subcontracting limitation applies only to the portion of the award amount determined to represent the principal purpose. The rule provides the following example of a “mixed contract” that is predominantly for services:

A procuring agency is acquiring both services and supplies through a small business set-aside. The total value of the requirement is $3,000,000, with the services portion comprising $2,500,000, and the supply portion comprising $500,000. The contracting officer appropriately assigns a services NAICS code to the requirement. Thus, because the supply portion of the contract is excluded from consideration, the relevant amount for purposes of calculating the performance of work requirement is $2,500,000 and the prime and/or similarly situated entities must perform at least $1,250,000 and the prime contractor may not subcontract more than $1,250,000 to non-similarly situated entities.7

As this example illustrates, in a “mixed contract” that is assigned a services NAICS code, “the prime contractor can subcontract all of the supplies components to any size business.”

The final rule also clarifies that the “cost of materials” is excluded from the subcontracting limitations in prime contracts for supplies, construction or specialty trade. In other words, the cost of purchased items such as commercial-off-the-shelf items, raw materials or special test equipment or tooling are not considered “subcontracted” for purposes of the limitation.8 Several commenters urged SBA to extend this exclusion to services contracts. SBA declined to do so expressly, but noted that the cost of materials would be excluded from consideration in any mixed contract that is assigned a services NAICS code, as illustrated in the example above. As a practical matter, therefore, the “cost of materials” would not be considered subcontracted in a contract for services.

Contracts of Less Than $150,000 Are Exempt

The final rule adopted SBA’s proposed change to exempt contracts between $3,500 and $150,000 from the Limitation on Subcontracting requirements.

Additional Provisions

Below are some of the more notable provisions in the final rule:

Affiliation: The proposed rule created some bright-line tests for affiliation based upon identity of interest, but they are rebuttable presumptions. As before, affiliation would be presumed between firms owned and controlled by married couples, parties to a civil union, parents and children, and siblings.

In addition, SBA is creating a bright-line provision in its regulations that affiliation would also now be presumed upon economic dependence if the qualifying small business concern derived 70 percent or more of its receipts from another concern in the previously completed fiscal year. This codifies the law established through a series of cases issued by SBA’s Office of Hearings and Appeals. A concern can rebut this presumption by showing it is not solely dependent on the other firm, such as when the concern is new and has only been in business a short amount of time and has secured a limited number of contracts.

Notably, the final rule exempts transactions between businesses owned by Alaska Native Corporations (ANC), Tribes or Native Hawaiian Organizations (NHO) and sister companies from this presumption of affiliation.

Joint Ventures: The proposed rule removed the contract size requirement from the exclusion from affiliation for small businesses seeking to perform as a joint venture. Previously, small businesses could avoid affiliation for size determination purposes only for contracts that were either bundled or met certain dollar thresholds. The final rule removes these provisions limiting joint venture opportunities only to bundled or large procurements. As a result, the exception from affiliation for small business joint ventures applies to any contract regardless of dollar amount, freeing such joint ventures to pursue contracts of any size.

Recertification: The proposed rule purported to “clarify” that if a firm undergoes a merger or acquisition after it has submitted an offer on a government contract but prior to the award, then the firm would be required to recertify its size to the contracting officer prior to award. Previously, SBA regulations required recertification of contracts after a merger or acquisition but did not expressly address recertification of pending offers. The final rule makes clear that a concern with a pending proposal on a set-aside contract must recertify its size for that pending proposal if it undergoes a merger or acquisition event.

Non-Manufacturer Rule Thresholds: The non-manufacturer rule requires that, for small business set-aside contracts for manufactured items, the prime contractor must either manufacture the items itself or acquire them from another small business. The proposed rule clarified that the non-manufacturer rule does not apply to contracts valued between $3,500 and $150,000. The final rule adopts this exclusion, which is consistent with the broader exclusion of such contracts from the Limitation on Subcontracting requirements.

Non-Manufacturer Rule Waivers After Solicitations: The proposed rule authorized a waiver of the non-manufacturer rule for an individual contract award after a solicitation has been issued as long as all potential offerors are provided additional time to respond. The final rule adopts the proposed rule without significant changes in this regard.

Application of Non-Manufacturer Rule to Commercially Available Software:The proposed rule classified unmodified, commercially available software supplied in procurements governed by NAICS code 511210, Software Publishers, as an item of supply instead of a service. This change, implemented through a new footnote 20 to NAICS 511210 in the SBA Table of Size Standards, would mean that the non-manufacturer rule applies to procurements for this type of software. The rule also specifically authorizes SBA to grant waivers of the requirement to supply the end item of small business manufacturer in such procurements. The rule would not, however, apply to customized software, as this type of procurement is classified as a service contract. The final rule adopts the proposed rule without significant changes in this regard.

Closing Observations

  1. Of importance, the final rule states that it is effective on June 30, 2016, but many of these changes, including the Limitation on Subcontracting and similarly situated entity changes, will also require a change to the Federal Acquisition Regulation (FAR). Those revised FAR clauses and provisions will then be added to solicitations or to contracts by way of modification.
  2. A second SBA rulemaking is pending regarding Mentor-Protégé Program changes that will also address other issues regarding the 8(a) program. Like the May 31 final rule, many of these forthcoming changes were mandated by the NDAA of 2013 and prior legislation. Holland & Knight will advise you of important changes.

Notes

1New 13 C.F.R. 125.6(c).

2New 13 C.F.R. 125.6(a)(i), (ii).

3New 13 C.F.R. 125.6(e)(3).

4New 13 C.F.R. 125.1.

513 C.F.R. 121.402.

6New 13 C.F.R. 125.6(b).

7New 13 C.F.R. 125.6(b).

8New 13 C.F.R. 125.6(a)(2).

 

On May 26, Senator Tom Carper (D-DE) submitted several amendments to S. 2943, the Fiscal Year (FY) 2017 National Defense Authorization Act (NDAA). This week’s blog will examine two of these provisions which are of significant interest to the Federal contracting community.  They are proposed Section 829K, “Simplification of the Process for Preparation and Evaluation of Proposals for Certain Service Contracts,” and proposed Section 829N, “Category Management.”

Section 829K: This provision would allow prices to be established through competition for specific requirements at the task order, rather than the contract, level for services that are the same or similar. Specifically, when issuing a solicitation, heads of agencies would have the discretion not to include price or cost as an evaluation criterion for contract award.

The establishment of a so-called “unpriced” Schedules contract for services has long been a position advocated by the Coalition. As set forth in several FAR & Beyond blogs and the Coalition’s 2013 MAS White Paper, this reform effort would streamline the procurement process, enhance competition, and empower the Federal government to leverage technology and improve its efforts to meet end mission goals.  Further, this reform would represent common sense procurement policy. Buying practices, especially for services, of government and commercial buyers are different. Altering acquisition policy to reflect and accommodate these differences is a positive, appreciated step forward.  For these reasons, the Coalition applauds Senator Carper for his leadership and support for the innovative acquisition approach reflected in this provision.  Should it be enacted, the Coalition is ready to assist our government partners in finding similar opportunities to modernize Federal procurement policies to better reflect the realities of the market.

Sec. 829N: Under this provision, the Office of Management and Budget (OMB) would be required to issue guidance to support executive agencies in their implementation of category management. At a minimum, this guidance would address:

  • The use of data analytics, best practices, and market understanding
  • Reducing contract duplication for the same or similar requirements
  • Data collection
  • ”Strengthening demand management practices”
  • Meeting policy objectives associated with socio-economic, sustainability, and accessibility
  • The roles and responsibilities of OMB, GSA, and other agencies in furthering category management principles and practices
  • Performance metrics for category management
  • Adding to CAO authorities establishing and overseeing a category management program

At the outset, it is important to recognize that the category management initiative, as currently constituted, is barely more than a year old.  It is not clear how much objective data exists to support institutionalizing it in statute.  Notwithstanding how much data exists, however, as its name suggests, it is a tool for managing.  Recognizing that management and its associated tools can evolve over time, it is unclear whether it is appropriate for setting forth in statute.  Indeed, doing so could increase government risk by limiting its ability to adjust to new, innovative management paradigms that evolve over time, as doing so may require an act of Congress.

Establishing a management structure in statute, especially for the multiple, diverse enterprises that constitute the federal government, also raises the risks associated with centralization that the government encountered in a bygone era of procurement policy. By way of example, prior to the enactment of the Federal Acquisition Streamlining Act (FASA) and the Clinger-Cohen Act, the government centrally managed the procurement of IT resources pursuant to the Brooks Act of 1965. By the early 1980s, however, the efficiency and practical utility of that approach came under intense scrutiny.  Congress recognized that some unique requirements necessitated flexibility to achieve end-mission goals, flexibility that could not be provided through the existing centralized process, and in the Warner Amendment to the NDAA for Fiscal Year 1982, it enacted an exceptions to the process for certain DoD IT purchases. Ultimately, the administrative cost and delay of the existing process, the evolution of technology, and the need for rapid acquisition in a dynamic environment led to many of the changes included in the aforementioned reforms of the 1990s, including the repeal of the centralized process under the Brooks Act.

The Coalition does not mean to suggest that, in the face of current acquisition challenges, the correct analytical approach to addressing procurement shortcomings is rooted in a simplistic centralize-decentralize decision.  We know that some element of centralization, and by extension, category management, can bring benefits to the government, but implementation and context are critical.  Implementation has to be understood and shaped in the context of agency mission drivers and the requirements, the foundational elements of any procurement, that flow therefrom.

Agencies, under the review of OMB, already are supposed to determine, before making an investment in a new information system to support a function, whether the function should be performed or supported by the private sector or another agency.  Likewise, IT capital planning and control are managed and aligned with agency mission goals via the Exhibit 300 and Exhibit 53 process, and OMB uses this process to determine whether the programs and associated budgets are consistent with the Administration’s priorities and OMB policy.  Before locking category management in statute, it would be helpful to identify and understand any shortfalls in the existing budget-linked capital planning process, or other associated processes, to ascertain how category management will address these shortfalls, and to discern how that management structure will coexist within the existing procurement process.

The Coalition has other substantive language concerns with this provision, but, at bottom, based on the aforementioned discussion, we believe this provision needs further analysis and substantive support.  Notwithstanding these concerns, however, the Coalition sincerely appreciates the leadership showed here, as it manifests a continuing commitment to positive change.  We are most grateful for the proposal to make clear the authority to accept “unpriced” Schedules contracts for services, and we are thankful for the dialog that is promoted on category management.  For these and other initiatives, the Coalition and its members stand ready to assist members of Congress, as well as Federal acquisition leaders, in developing common sense procurement policies that help move Federal contracting into the future.

 

 

BNA INSIGHTS

Reproduced with permission from Federal Contracts Report, Vol. 105 No. 19, 05/17/2016. Copyright _ 2016 by The

Bureau of National Affairs, Inc. (800-372-1033) http://www.bna.com

Brian D. Miller is a Shareholder in Rogers Joseph O’Donnell, PC and a member of the firm’s Government Contracts, White Collar Criminal Defense and Complex Commercial Litigation practice groups.

Last month, the U.S. Supreme Court heard oral arguments in one of the most important False Claims Act (FCA) cases of this century. At stake is stability for government contractors. Unfortunately, some clear direction to determine the difference between a breach of contract and an FCA violation seems unlikely.

For a federal contractor, FCA liability could mean millions of dollars in litigation and settlements and then a referral for a potential debarment/exclusion1 from federal programs — in some cases, for what they didn’t say. At least, that is what the petitioner, Universal Health Services, Inc., argues is contrary to the clear language of the FCA, which requires a “false” claim. Petitioner argues that a bare submission of a request for payment is not false.

It is a request that contains no falsehood or untruths and contains only the information prescribed by the government — no other. And yet, the U.S. Court of Appeals for the First Circuit in this case, implied a certification and imposed liability without a word — false or otherwise from the petitioner.

How did we get here?

It all starts with the “Lincoln Law,” the False Claims Act, which was enacted in 1863 during the Civil War to go after unscrupulous contractors who provided sawdust instead of ammunition, shoes made of cardboard, lame horses and guns that couldn’t shoot.

The unusual part of the law is it allows private citizens to file suit on behalf of the federal government, under the theory of “it takes a rogue to catch a rogue.” The idea is that the government gets more enforcement this way. These citizens, called “relators” and acting as “private attorneys general,” would then receive as a reward a share of the recovery.

Relators are important, because a relator may notice noncompliance that the government does not notice, or seemingly does not care about, and bring suit under the False Claims Act. The government may then intervene and take over the lawsuit, but, even if the government does not, the relator may proceed to bring the case to trial.

In 1986, Congress trebled the damages recoverable under the False Claims Act and added civil penalties. This made the reward to the relator substantial. The 1986 amendments also eased the burden of proving a False Claims Act case. Subsequent amendments in 2009 and 2010 eased the burden even more. As a result, more False Claims Act cases are now brought and recoveries for the United States are sizable — and so are the rewards for a successful relator.

This often puts companies that do business with the federal government in a tough spot. If they are not careful, they may become a defendant in a False Claims Act suit filed by a relator, who may be one of their employees or, more likely, a former employee. If the False Claims Act suit is successful, the company would be liable to pay triple damages and civil damages of up to $1,100 for every single time a request for payment was made. For example, one company paid $7 million in just civil penalties — not counting the actual and treble damages. They are still litigating the amount of damages.2

Government contractors must be ever vigilant to avoid violating the FCA. As regulation keeps increasing, companies are finding it nearly impossible to keep tabs on whether every single aspect of every regulation is punctiliously complied with. It’s possible that some may be so microscopic as to prescribe where staplers are purchased — in the U.S. or elsewhere — to use Chief Justice John G. Roberts’ example. Not surprisingly, many contractors focus on the most important requirements in a contract: Getting a good product to the government at a good price. Without more, such as an effective compliance program, this could land them in a world of hurt under the FCA.

Now, remember that a relator is someone who may bring a False Claims Act suit on behalf of the government. If a relator finds a problem with a contractor’s compliance with a term of the contract or compliance with a regulation — whether or not the government noticed — the relator may bring an FCA suit. If the relator is right about the contractor’s noncompliance, then the contractor may have impliedly certified full compliance by submitting a claim for payment. When the government pays that claim, the claim becomes a “false claim” under the FCA.

The Case Before the Court

All of these issues come together in the case now before the U.S. Supreme Court, United States ex rel. Escobar v. Universal Health Services, Inc.3 Briefly, in this case, the petitioner operated a mental health clinic in Lawrence, Mass.,4 that provided psychological counseling services to the daughter of the relators. The daughter suffered a fatal adverse reaction to medication. The Massachusetts Department of Public Health (DPH) imposed a fine of $1,000 and required improved documentation of the clinic’s supervision of nonpsychiatrists. The Massachusetts Medicaid agency (MassHealth) took no action. The Medicaid reimbursement claims were filled out accurately describing the services at the proper charges.

The relators (parents of the daughter who suffered a fatal reaction to medication) filed an FCA claim based on the DPH’s finding of a regulatory violation in failing to adequately supervise those providing psychiatric services.5 Neither the Commonwealth of Massachusetts nor the federal government intervened in the relator’s FCA lawsuit.

The Supreme Court heard oral arguments in this case on April 19. The arguments from all sides were relatively straightforward. The petitioner (the health care provider) argued that “a claim” under the FCA cannot be a “false claim” if it does not state anything untrue. The petitioner’s claim for payment from the MassHealth Medicaid program had an accurate description and the correct charge, as required by the form MassHealth designed. This argument is rooted in the text of the FCA, which appears to require an affirmative misstatement for liability. The petitioner also argued that there is no duty under the FCA requiring a claimant to disclose a regulatory violation.

Depending on how the Supreme Court rules, it may be that every requirement is important. A failure to comply with just one tiny aspect could result in a judgment of millions of dollars. A contractor doesn’t even have to say it has complied with every small aspect of the contract and regulations. It’s implied now with the “implied certification doctrine.”

Every time a contractor submits a bill, the contractor is saying that it has complied with every aspect of the contract and regulations. Any slip may be deemed a violation of the False Claims Act, resulting in a multimillion-dollar judgment and/or settlement. 6

By making a request for payment — even just an invoice stating an amount and nothing more — a contractor is deemed to be saying, “I am eligible for payment because I performed everything under the contract.” This is not an explicit statement, but an implied statement under the “implied certification” theory.

The relator’s argument was that an express false statement is not required under the FCA, because the submission of the claim is a representation that the claimant has fulfilled all of the obligations under the contract and deserves to be paid.

By not adequately supervising those providing care, the petitioner is submitting a false claim under the FCA. In other words, submission of the claim is an implied statement or “certification” that the workers were adequately supervised.

The U.S. supported the relator’s argument by arguing that so long as the claimant knows that it failed to comply with a term of the contract or regulation when it submitted the claim for reimbursement and knows that the government considers this term to be material, the claim is false. The material omission with knowledge makes it false, which in this case would be the alleged lack of supervision.

Oral Argument: Trying to Distinguish Important Noncompliance Leading to FCA Liability From Unimportant Noncompliance Not Leading to FCA Liability

From the start, the Supreme Court in Escobar never expressed any inclination to follow the plain meaning of the FCA’s text. The Supreme Court never came to terms with the first element in a False Claims Act case: falsity.

Justice Stephen Breyer began by skipping over this element and moving directly to the “materiality” element. Others assumed falsity by the nature of the claim. The nature of the claim was for medical treatment, which is assumed to be under a doctor’s care. As Justice Elena Kagan said, “[A] doctor’s care is a doctor’s care.” Tr. at 18.7

The argument is that, if Medicaid did not receive a doctor’s care, then it is false. The problem is that it is not that simple. It’s not just a doctor but others, such as psychologists, social workers and nurses, who are authorized to give care under the Massachusetts regulations. And they did actually provide the care in this case.

One of the biggest problems in trying to find the important conditions of the contract or regulation is that the contract or regulatory scheme is sometimes a morass of conflicting, confusing and contradictory conditions.

One of the most confusing parts of this case is the MassHealth requirements. Which regulation was violated? Does it make a difference that this particular regulation is enforced by a different state agency? If so, how can it be a condition for payment for Medicaid? In a moment of candor about which regulation applied, Justice Sonia Sotomayor said: “[T]his confuses me to no end.” Tr. at 22. That’s because it is confusing. Petitioner’s counsel seemed exasperated when he called it a “morass.” Tr. at 55.

Justice Sotomayor went on to say what she thinks is the right solution: “I don’t know why the lower court relied on the Section 423 [qualifications of the Administrator, Director of Clinical Services, Medical Director, and Psychiatrist], this — the director’s qualifications and responsibilities when there’s a direct regulation that says that the health service will only pay for services rendered by a staff member who’s qualified.” Tr. at 22.

The trouble is that the staff members do not have to be doctors to be “qualified” to render services — in this case, counseling.9 The MassHealth regulations contemplate even “unlicensed counsellors” providing services under supervision from a qualified professional staff member, such as a psychiatrist, psychologist, social worker or psychiatric nurse. 130 Mass. Code Regs. § 429.424. And, of course, Section 424 is not a condition for payment — only participation. That’s probably why the lower court stretched for Section 423.

Even the First Circuit conceded: “There is at least some ambiguity as to whether the MassHealth regulation in question, 130 Mass. Code Regs. § 429.422, independently requires each satellite clinic to employ its own psychiatrist.” U.S. ex rel.Escobar, 780 F.3d at 516 n. 15. The First Circuit further admitted: “On this reading of the definition of ‘mental health center,’ a satellite that does not employ a psychiatrist is not out of compliance with the staffing regulation so long as the parent has a psychiatrist on staff.” Id. As required, the parent facility in Malden did have a board-certified psychiatrist on staff. As the First Circuit seems to concede, the petitioner has arguably complied with the Medicaid regulations.

The Implied Certification Theory

Under the False Claims Act, falsity must be established. In other words, the government or a relator must find a “false” statement or claim. Here, there is just a bare but accurate request for payment. So how does this become a “false” request or claim for payment?

To prove the existence of a false claim, the Supreme Court seemed to be happy to rely upon the implied certification theory. The Deputy Solicitor General summed it up well:

  [A] person who submits a claim is not simply asking for money; he is representing that he has a legal entitlement to be paid. And you can say, if a person asserts that he is legally entitled to be paid, and he knows that he has no such legal entitlement, the claim is false. Tr. at 36.

The missing premise is that the person knows that he is not entitled to be paid, because he is in breach of a material term of the contract. The Deputy Solicitor General went on to explain:

  And so a person who knew himself to be in breach of a nonmaterial term and requested payment anyway wouldn’t be making a false claim. He would be claiming a legal entitlement to be paid; he would be entitled to be paid because the breach wouldn’t excuse the government’s payment obligation. But if the term that was being breached was material, the claim of legal entitlement would be false. Tr. at 36-37.

The natural follow-up question is: What is material and nonmaterial? Chief Justice Roberts put a fine point on it, when he asked:

  So the contract is to provide all these health services, and by the way, you’ve got to buy, you know, staplers made in the United States, not — not abroad. And they do everything, but they don’t buy staplers made in the United States.

  I would say the government … [i]s going to withhold $100, right? Tr. at 40.

The answer is jarring. We do not usually look to where a stapler is purchased to determine if the government got what it paid for in a delicate, complex and critical surgery. OK, we may have trouble distinguishing exactly what is important, but, under almost any analysis, where staplers are purchased is not important. The Deputy Solicitor General answered:

  … [I]f under the terms of the agreement and the — the law of contracts, the government would be legally entitled to withhold payment or a portion or the payment in that circumstance, then that would be a false claim. (Emphasis added.). Tr. at 40.

Even more shocking is that there doesn’t seem to be any term of the contract or regulations that is not material, so that even the most insignificant requirement could become a false claim. Chief Justice Roberts gave the logical response: “[A]nd [if] a relator can sue for that, then I don’t understand the difference between material and immaterial.” Tr. at 41.

Later, the Deputy Solicitor General added: “I don’t know if there are any terms that are wholly immaterial, because if there were, presumably they wouldn’t be in the — the agreement or the — the regulations.” Tr. at 45. This does not help contractors trying to determine whether they are in compliance with all of the material terms of the contract and regulations.10 What he threw in may help: “But there are certainly terms that would be immaterial to particular claims.” Tr. at 45. However, this raises more questions than it answers. In an effort to explain, he added a hypothetical:

  So, for example, if the government had a rule that said at all times, a hospital that is receiving Medicaid reimbursement has to have the following equipment in its operating room. It might well be the case that a violation of that requirement would disentitle the claimant to payment for — for surgical services performed, but would not disentitle the claimant to payment for services that had nothing to do with use of the operating room. Tr. at 45.

The Deputy Solicitor General is making a little wiggle room here. In his hypothetical, not using the precise equipment prescribed by the contract or regulation may disqualify the claimant for that surgery, but not for an unrelated service, such as treatment for a broken arm where the noncompliant equipment plays no role in the services. What he appears to be saying is that compliance with a regulation may be material for one service and not material for another. It all depends. So much for bright lines.

A Lawyer’s Game?

To recap: This case came before the Supreme Court as an appeal from a ruling on a motion to dismiss, so we don’t know all of the facts. There are no disputes that the services were, in fact, rendered and that these services are covered. The dispute is whether they were adequately supervised and whether a board-certified psychiatrist had to be on site at the satellite office where the services were rendered or whether the board-certified psychiatrist could be at the parent facility.

Massachusetts Medicaid regulations did not address this question, but a regulation from a different Massachusetts agency, the DPH, did have a regulation stating that a satellite facility must have a board-certified psychiatrist present. The Medicaid regulations do not incorporate or reference the DPH regulations. Nevertheless, the First Circuit has made the connection between the two sets of regulations and concluded that it was a condition for payment.

The issue the petitioner raises is: What exactly is false about its request for payment? As counsel for the petitioner states at the end of the argument: All that was submitted was a request for payment. The government controls what it will require in a request for payment. There is no allegation of a false statement in the request for payment. The only allegation is that every jot and tittle of every MassHealth regulation is incorporated.

Unfortunately, without bright lines, such as an express condition for payment, government contractors are left with little to go by. This results in many judgment calls that will inevitably be second-guessed by relators, who will file suit under the FCA and expose the contractor to liability, potential debarment and, possibly, closure. Lawyers will then have to step in and continue to second-guess the contractor arguing for or against materiality and whether scienter was present. While calling it a lawyer’s game may be a little harsh, it is truly a lawyer’s world and will benefit lawyers.

Conclusion: Implied Certification Limited Only by Scienter and Materiality

A majority of the justices expressed sympathy for the implied certification theory so that the First Circuit opinion will probably stand. The Supreme Court did not seem at all interested in the distinction between conditions for payment compared to conditions for participation in the program. This distinction has been employed usefully by the Second and Sixth Circuits and other courts to put some limits on the implied certification theory.11 Tr. at 30-31.

Predicting how the Supreme Court will come out is risky business. In this case, I think four or five justices will likely accept the implied certification theory. Justices Sotomayor, Kagan, Ginsburg,12 Breyer13 and Kennedy14 made comments that indicate that they accepted the theory under the False Claims Act. Four justices is enough to allow the First Circuit opinion to stand on this issue.

Although I do not think a majority of the court will do so, the court could adopt a “worthless services” theory that the services provided by allegedly unsupervised and unqualified staff were so worthless that the claim for payment is a lie (much like the Civil War examples of cardboard shoes and misfiring guns that Justices Kagan and Sotomayor used, see e.g., Tr. at 12, 15, and 16.) Justice Kagan set it forth clearly:

  Let’s say there’s a contract … it says I commit to providing a doctor’s care … And then it turns out that the medical care that was provided was not by a doctor. It was by a nurse or … and then the person who enters into the contract makes a statement, demands payment and says the care was provided.

  Now, some care was provided; it is true. But medical care, a doctor’s care was not provided. Now, by withholding that fact and by just saying the care was provided, have I not committed fraud under the common law? Tr. at 8.15

 

Instead, I believe the court will adopt the relator’s counsel’s suggestion: “[T]he two elements of materiality and knowledge are going to solve the vast bulk of the problems.” Tr. at 33.16 These two elements have already proved useful to the D.C. Circuit in deciding implied certification cases. See U.S. ex rel. Purcell v. MWI Corp., 807 F.3d 281, 284 (D.C. Cir. 2015) (“[T]he FCA’s objective knowledge standard … did not permit a jury to find that MWI ‘knowingly’ made a false claim … .”);17U.S. ex rel. Davis v. District of Columbia, 793 F.3d 120, 125 (D.C. Cir. 2015) (“Davis has not met his burden to show that the District was in knowing violation … .”).

Although the scienter requirement may be as little as reckless disregard for the truth and falsity of the claim, the Supreme Court will adopt the Deputy Solicitor General’s language that knowledge “applies both to knowledge of the breach, and knowledge that it is material to the government.” Tr. at 43 (emphasis added).

What this means is that only a court (summary judgment) or a jury can decide. So, more litigation is the answer. This is not good news for companies doing business with the government. Every jot and tittle of often complex and contradictory regulatory schemes may be the basis of a False Claims Act case. There will be no bright lines. It’s still a “lawyer’s game” because lawyers will be arguing for or against scienter and materiality — in court. And after years of litigation, the contractor may be faced with a multimillion-dollar judgment/settlement and then potential suspension or debarment. The only industry this helps is the legal industry.

1 Often, a referral for suspension/debarment of the contractor follows a False Claims Act case. This will cut off the government contractor from any federal business, and often is the death knell for the company.

2 See U.S. v.United Technologies Corp., No. 13-4057, Slip Op. at 2 (6th Cir. April 6, 2015)(“The first appeal established that Pratt violated the False Claims Act and that it owed the government $7 million in statutory penalties due to the false cost estimates it provided to the government in 1983.”).

3 780 F.3d 504 (1st Cir. 2015), cert. granted 136 S. Ct. 582 (2015).

4 The petitioners operated health care facilities in Malden, Mass., and Lawrence, Mass.. See Brief for Petitioners at 9. Both provided mental health services, and the Lawrence clinic is the “satellite” office of the Malden facility, which is the “parent” facility. See Petition for a Writ of Certiorari at 6.

5 The MassHealth regulations contemplate even “unlicensed counsellors” providing services under supervision from a qualified professional staff member, such as a psychiatrist, psychologist, social worker, or psychiatric nurse. 130 Mass. Code Regs. §429.424.

6 The phrase “implied certification” appears to have been used for the first time in Ab-Tech Construction, Inc. v. United States, 31 Fed. Cl. 429, 434 (1994), aff’d., 57 F.3d 1084 (Fed. Cir. 1995) (unpublished table decision); see Brandon J. Murrill, Contractor Fraud Against The Federal Government: Selected Federal Civil Remedies, 78 Cong. Res. Service 10 (Apr. 1, 2014).

7 A transcript of the argument before the Supreme Court, as well as the parties’ briefs and other materials, is available athttp://www.scotusblog.com/case-files/cases/universal-health-services-v-united-states-ex-rel-escobar/.

8 See authorities attached as an appendix to Petitioner’s Brief. Specifically, 105 Mass. Code Regs. Section 140.530 and 130 Mass. Code Regs. Section 429.422-424 require a multidisciplinary staff including psychologists, nurses, social workers, therapists and counselors.

9 Contractors cannot even raise their prices to cover the risk, as Chief Justice Roberts’ question brought out. See Tr. at 32. (“[If a contractor is] going to get in trouble [for every single thing under the] False Claims Act… . So our bid is going to be a little bit higher to cover that potential risk.” The response from relator’s counsel was that, in the health care area, rates are set by the government, so contractors cannot raise their prices.).

10 Mikes v. Straus, 274 F.3d 687, 702 (2nd Cir. 2001) (The Mikes decision required an express condition for payment: “Since §1320c-5(a) does not expressly condition payment on compliance with its terms, defendants’ certifications on the HCFA-1500 forms are not legally false. Consequently, defendants did not submit impliedly false claims by requesting reimbursement for spirometry tests that allegedly were not performed according to the recognized standards of health care.”); Chesbrough v. VPA, P.C., 655 F.3d 461, 468 (6th Cir. 2011)(Likewise requiring an express condition for payment: “Medicare does not require compliance with an industry standard as a prerequisiteto payment. Thus, requesting payment for tests that allegedly did not comply with a particular standard of care does not amount to a ‘fraudulent scheme’ actionable under the FCA.”)(Emphasis added).

11 Justice Ginsburg seemed to correct the petitioner’s counsel’s statement that “false” does just mean “false.” Under her view, it also means “deceptive, misleading.” Tr. at 4. In other words, a bill may be misleading because the bill may imply that certain conditions were complied with, which is essentially the implied certification theory. Justice Kennedy seemed to agree: “There is a failure to make an additional [statement] or qualifying matter in order to make that statement not false.” Tr. at 9.

12 Justice Breyer accepted implied certification and was looking for a limit in materiality. Justice Kennedy seemed to agree: “It — it seems to me we just can’t think about fraud unless we have materiality in some sense. And it could be a very strict standard of materiality.” Tr. at 14.

13 Justice Kennedy asked questions that implied that the submission of an invoice would be false if it failed to disclose noncompliance. See Tr at 8.

14 Justice Sotomayor even seemed to become a bit annoyed with the petitioner’s counsel when she asked: “Do you think that anybody, except yourself, would ever think that it wasn’t a fraud to provide guns that don’t shoot if that’s what the — the government contracted for?” Tr. at 13.

15 This is the approach taken by the D.C. Circuit in U.S. v. SAIC, 626 F.3d 1257, 1270 (D.C. Cir. 2010) (“ … this very real concern [that the implied certification theory is prone to abuse] can be effectively addressed through strict enforcement of the Act’s materiality and scienter requirements.”).

16 The court adds: “Under the FCA’s knowledge element, then, the court’s focus is on the objective reasonableness of the defendant’s interpretation of an ambiguous term and whether there is any evidence that the agency warned the defendant away from that interpretation.”U.S. ex rel. Purcell,807 F.3d at 290.

 

In 1960, the General Services Administration (GSA) delegated the management and operation of the Federal Supply Schedules (FSS) for medical supplies, pharmaceuticals, and services to the Department of Veterans Affairs (VA).  The VA FSS program and its contractors provide vital products and services to VA hospitals, medical facilities, and professionals directly supporting the healthcare needs of veterans. Accounting for approximately $14 billion in purchases in FY2015, the VA FSS program is currently the largest integrated market within the federal government for medical products and services.

The VA FSS program is managed by the National Acquisition Center located in Hines, Illinois.  The Coalition has been encouraged to see increased communication and coordination between GSA and the VA regarding the shared operation and management of the VA FSS program.  The Coalition strongly believes this heightened cooperation between the two organizations provides an opportunity to improve service to our veterans.

In particular, GSA’s electronic tools are a potential game changer for the VA.  Working together, GSA and the VA have the opportunity to create and leverage a shared services model to provide the VA with access to, and use of, those electronic tools to support the VA FSS contracting process.  As will be noted in the Coalition’s soon-to-be-released VA Multiple Award Schedule White Paper: 

GSA uses a web-based application that allows companies to prepare and submit electronically GSA Schedule contract proposals and modifications to the government. The purpose of the system is to create an interactive, secure electronic environment that simplifies the contracting process, from submission of proposal to awards. VA does not have a similar system; although, it is considering changes that would move away from its current paper-based environment…  A collaboration between the stakeholders could enhance the use of best practices. Moreover, for companies that hold both GSA and VA contracts, use of the same system could increase consistency, enhance compliance, and reduce costs.

Looking beyond GSA’s e-offer and e-modification applications, GSA and VA also should examine opportunities to leverage other electronic tools to facilitate hosting electronic catalogs for customer facilities across the VA.  Collaborating and leveraging shared services across the FSS program makes good business sense for GSA, the VA, the federal government, and, most importantly, veterans.

In closing, it is fitting that this column discusses ways to improve support for our veterans, as Memorial Day weekend is upon us.  In the spirit of this hallowed day, we pause to reflect on the words of Katherine Lee Bates in America the Beautiful:

O beautiful for heroes proved

In liberating strife.

Who more than self their country loved

And mercy more than life!

America! America!

May God thy gold refine

Till all success be nobleness

And every gain divine!

The Coalition and its members join their fellow citizens in offering a prayer of remembrance and gratitude to all who have served and made the ultimate sacrifice.  Let it never be forgotten that there is no higher moral obligation of a nation than to honor and support those who have kept it safe and free.

 

 

 

 

 

On March 23rd, GSA issued a post on GSA Interact seeking “feedback on Cloud ConFIG’s (Cloud Contract Fostering Innovation in Government) Scope Statement.”  GSA’s most recent post on market research is its latest communication regarding the possible creation of a separate cloud IDIQ GWAC, a draft RFP which is expected sometime in Fiscal 2016.  The proposed Cloud ConFIG GWAC represents GSA’s “next generation cloud vehicle” that would expand GSA’s current information technology (IT) contract portfolio. That portfolio already includes, or will include, cloud services:

  • IT Schedule 70 (scope includes cloud added April 2015)
  • Alliant and Alliant SB GWACs
  • The follow-on Alliant 2 and Alliant 2 SB (release of the two solicitations is anticipated this June),
  • 8(a) Stars II set aside GWAC
  • VETS II set aside GWAC for SDVOSB
  • Networx, GSA’s government-wide telecommunications contract vehicle
  • Enterprise Infrastructure Solutions (EIS) (the follow-on to Networx; offers have been received by GSA)
  • EaaS Blanket Purchase Agreement

The scope of each of these government-wide IT vehicles includes comprehensive cloud services or a subset of cloud services. In light of the depth and breadth of cloud capabilities already offered through GSA vehicles, the proposed Cloud ConFIG GWAC prompts questions in some quarters, and among Coalition members, about contract duplication and the impact of that duplication on operational costs and market competition for government and industry.

Creating a new government-wide IT contract vehicle can be resource-intensive; indeed, it takes a lot of time and costs a lot of money.  It will require significant government resources in conducting a business case review to receive an executive agent designation from OMB for the new IT GWAC for cloud.  In response to the Cloud ConFIG, industry also will spend significant time and tens of millions of dollars in administrative and bid and proposal costs in pursuit of that vehicle.  Thus, before undertaking this effort, GSA may wish to consider studying alternative approaches to understand whether administrative and cost efficiencies might be available. For instance, it could assess whether the Alliant 2 procurements and/or enhancing IT Schedule 70 might provide a cost-effective approach for GSA, customer agencies, and industry, especially in light of the fact that these two strategic contracting programs already include cloud services.  Such an assessment would enable GSA to know conclusively whether these current, multi-year, government-wide contract vehicles would provide savings in cost and administrative burden over a newly created contract vehicle, affording the agency the ability to reduce cost and other burdens in a time of budget austerity.

With regard to Alliant 2 and Alliant 2 SB, small, medium, and large IT business across the federal market have been gearing up for the impending competitions. Indeed, industry already has made significant investments/expenditures on the Alliant 2 program (e.g., pulling together and maintaining proposal teams, responding to RFIs and draft RFPs, and participating in public meetings/industry days) leading up to the targeted June release of the formal RFP.

The scope of Alliant 2 and Alliant 2 SB includes cloud services. Coalition members appreciate the open, Myth-Busters dialogue throughout the Alliant 2 planning process.  This dialogue plays a vital role in ensuring that the Alliant 2 program meets customer needs while providing sound business opportunities. Thus, we anticipate that the flexible, innovative, and comprehensive scope of Alliant 2 and Alliant 2 SB will provide a sound and powerful contract vehicle for cloud services.

Alliant 2 and Alliant 2 SB’s flexibility means that GSA, customer agencies, and contractors have worked, and will continue to work, together to develop a tailored approach to cloud, thereby ensuring that cross-cutting, leading-edge cloud services are available to meet mission needs.  Alliant 2 also provides an evolving scope and capability, meaning it will stay abreast of technical, security, and IT compliance requirements from all customer agencies, including DoD.

The scope of IT Schedule 70 includes cloud services.  A year ago, GSA added Cloud Special Item Number (SIN) 132-40 to IT Schedule 70.  A May 2015 GSA blog post entitled, “Schedule 70 Cloud Special Item Number (SIN) the Cloud One-Stop Shop,” provides a powerful statement endorsing the new SIN and IT Schedule 70 as a cost effective, comprehensive tool to acquire commercial cloud services.  As the blog observes, the cloud SIN provides a clear roadmap/structure for customer agency cloud needs, rather than distributing them across multiple SINs.  The cloud SIN also allows customer agencies to create custom cloud BPAs easily and bring new technologies to contract.  Moreover, with continuous open seasons, new contractors and cloud offerings can be added to SIN 132-40 at any time.

The Coalition and its members share GSA’s fundamental belief in Alliant 2 and IT Schedule 70 as important channels available to GSA’s customers to meet their IT needs.  Because those needs include the use of cloud services, the utility of those channels needs to be explored and understood completely in order to promote contracting efficiency and to reduce duplicative contracting.  The Coalition and its members are pleased to offer GSA any assistance we can in this endeavor.

 

Donna Lee Yesner

Partner, Morgan, Lewis & Bockius, LLP

As reported in articles published in the April 22, 2016 issue of the Friday Flash, the VA has posted a change in policy regarding the necessity to add covered drugs (SIN 42-2A) to Federal Supply Schedule (FSS) 65IB contracts.  Covered drugs include single source drugs and innovator multi-source drugs as defined in 42 USC §1396r-8, and biological products.  Although manufacturers of covered drugs must offer them on the FSS in accordance with the Veterans Health Care Act (VHCA), 38 USC §8126, the VA is bound by the Trade Agreements Act (TAA) prohibition against procuring items manufactured in non-TAA countries under contracts subject to the TAA, including FSS contracts, unless the contracting officer determines that the item is not available in sufficient quantities to meet the agency’s needs.  For many pharmaceuticals, the country of origin under the TAA is India or China, neither of which is a TAA country.  When necessary, the VA has made non-availability determinations for its own “national” requirements contracts, enabling manufacturers to bid non-TAA drugs for those contracts.  However, VA policy has prevented it from adding covered drugs to FSS contracts, as contemplated by the VHCA, because the VA administers the FSS contracts under a delegation of authority from GSA and GSA policy prohibited FSS contracting officers from issuing non-availability determinations. The VA’s policy reversal now allows covered drugs to be available on the FSS.

Pursuant to the new policy, manufacturers of covered drugs that are not TAA compliant must sign a letter requesting a non-availability determination and submit it with their addition Request for Modification form.  The form letter requires the manufacturer to verify that the listed NDCs for which the request is sought “have no TAA compliant version, including authorized generics,” and to state the requester understands that the contracting officer may make a non-availability determination based upon the statements in the letter.  Thus, it appears that the VA intends to consider, as it should, whether a TAA compliant generic version of an innovator multi-source drug is available for purchase.  This validation raises an interesting issue.  Why is the VA requiring manufacturers provide information on competing products instead of simply verifying itself that the drug is offered on the FSS by one or more contractors under its generic name?  Manufacturers do not have ready access to information on the country of origin of competing versions of a multi-source drug and cannot validate whether a generic version of its drug is or is not TAA compliant.  On the other hand, if an FDA-rated generic version is on the FSS, the VA can presume it is TAA compliant.[1] Moreover, if a TAA compliant version exists but is not offered on the FSS, as a practical matter, it isn’t available to the VA.  Thus, for purposes of making a non-availability determination, the simplest means for a contracting officer to determine if a TAA compliant version of a multi-source drug is actually available is to check the FSS.

Another significant issue for manufacturers of covered drugs being added to the FSS under the new policy time table is that the need for all manufacturers to add their drugs at the same time will create a backlog of drugs for which FSS prices need to be negotiated.  Adding these products to the FSS at the statutory price (76% of Non-Federal Average Manufacturer Price or NFAMP) should not be problematic as manufacturers of covered drugs are likely calculating and reporting a NFAMP for drugs that do not comply with the TAA (and were not on the FSS) pursuant to the VA’s prior guidance on this issue.  The real concern is negotiating a price by September 30, 2016, the deadline for setting the Max Cap for 2017.  In years after the first year of the FSS contract, the price of a covered drug cannot exceed the prior year contract price plus CPIU, which is referred to as the Max Cap.  Although the VA uses the negotiated FSS price as the prior year contract price rather than the statutorily calculated price to set the Max Cap, it is VA policy to use the contract price in effect on September 30th.  Manufacturers that do not have a negotiated FSS price by September 30th must use the statutorily calculated price to set the Max Cap for 2017.  Given the expected volume of negotiations between June and October for these newly added products, the VA should waive the deadline for companies that submit their CSPs by August 1st.

Finally, even if the reason for allowing FSS contracting officers to make non-availability determinations is to enable the VA to fulfill the intent of the VHCA that manufacturers offer covered drugs for sale on the FSS, the manner in which Schedule 65 I B contracts are awarded must still comply with procurement rules.  Just as a non-availability determination applies equally to all vendors interested in offering the same multi-source drug in response to a national contract solicitation, once a contracting officer determines a particular pharmaceutical is not available from a TAA country for purposes of Schedule 65 I B, so that the TAA prohibition need not apply to that drug, the determination should extend to all sources of the drug.  If a vendor selling an FDA-rated generic version wants to offer it on the FSS, and the VA determines neither the reference drug nor any generic version is available from a TAA country, it would be unfair to exclude the generic version from the FSS simply because offering it is not required by the VHCA.

[1] A drug is a multi-source drug if there is an FDA-rated generic equivalent to the innovator reference drug listed in the Orange Book.  The FDA does not rate an “authorized generic” for equivalence to the reference drug because an authorized generic is the reference drug sold under a different label.

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