The Coalition for Government Procurement

 

For this week’s comment I wanted to share with you a blog post first published on the Federal Times’ Acquisition Blog (www.federaltimes.com). The post highlights GSA’s current cloud RFI. The Coalition appreciates GSA’s decision to extend the comment period to next Thursday, August 21 and will be submitting a response.

Price Reduction Clause could slow cloud on Schedule 70

Last week GSA’s Federal Acquisition Service (FAS) Office of Schedule Programs issued a Request for Information (RFI) seeking feedback on the “GSA Proposed Change to Add a Cloud Computing Special Item Number (SIN) on IT Schedule 70.”

The RFI indicates that the purpose of the new Cloud Computing SIN “would be to improve the way GSA offers cloud computing services through IT Schedule 70, increase visibility and access of cloud computing services to customer agencies, and to provide industry partners the opportunity to differentiate their cloud computing services from other IT related products and services. “ The RFI notes that the proposed change “would support OMB’s ‘Cloud First’ policy by enabling agencies to take advantage of cloud computing benefits to maximize capacity utilization, improve IT flexibility and responsiveness and minimize cost.”

The goals of the RFI are to:

(1)   Gain feedback from industry and any other relevant stakeholders on a proposed new Cloud Computing Services SIN; and

(2)   Better understand how industry partners are selling cloud computing services today on IT Schedule 70, to support a decision on creating a Cloud Computing Services SIN.

The RFI seeks feedback from both customer agencies and industry partners. The due date for submission of comments is August 6th. The RFI can be found here.

The RFI is a positive step on the part of FAS in seeking innovative solutions to customer agency requirements. However, in order to seed the cloud via IT Schedule 70, FAS should address the applicability of the Price Reduction Clause to the proposed Cloud Computing SIN. The PRC is an outdated (from the 1980s) pricing compliance scheme that increases contract administrative costs while restricting the ability of contractors to maximize service solutions with their latest technologies at best value—including best price for agency requirements. Simply put, the PRC is an anti-competitive, anti-innovation contract term.

The origins of the PRC date from a 1982 Multiple Award Schedule policy statement addressing the pricing negotiation and terms of schedule contracts. Under the PRC, a customer or category of customers is identified as the tracking customer for purposes of price reductions. Generally, under the terms of the PRC, if a MAS contractor offers the tracking customer(s) a price reduction during the life of the MAS contract, a corresponding reduction must be provided to the government. Failure to do so results in a breach of contract, and potentially severe consequences, including possible Civil False Claims Act liability. The PRC reflects a time when the MAS program was product-based. It also reflects a time when the MAS program was a mandatory program and when competition was not required at the order level. At the time, given the structure of the program, the PRC was intended to provide price protection for the government. Times have changed!!

Today, services account for approximately two-thirds of annual purchases under the MAS program. The MAS is open to all commercial sources (with the exception of Schedule 75, Office Supplies, which is closed to new offers) and the statutory and regulatory framework governing the MAS program require competition for all orders exceeding the simplified acquisition threshold. Simply put, unlike the MAS program of the ‘80s, task and delivery order competitions for agency specific requirements are driving pricing under the program.

Moreover, task and delivery order competition for agency specific requirements is sound procurement practice when acquiring IT/professional service solutions like cloud computing. With the cloud, each service requirement is unique, reflecting the customer agency’s IT infrastructure, security requirements, mission, workforce, and organizational structure.

The PRC ignores the unique quality of service solutions in the market. Variations in service solutions for each customer mean that an apples-to-apples comparison for purposes of the PRC is problematic at best, if not impossible. Each time an MAS contractor provides a commercial customer with a solution, the contractor must address whether that solution impacts the PRC. The result is an unhealthy restriction on the contractor’s ability to compete in the commercial marketplace. Due to the competitive and administrative challenges in tracking commercial transactions for PRC compliance many contractors will not offer their newest products, services and technologies via IT Schedule 70. As a result, access to the latest commercial innovations is restricted under the MAS program.

Cloud computing solutions are typically tailored to meet customer needs. As with many other complex services, each requirement stands on its own. Applying a costly administrative pricing oversight mechanism like the PRC in such a dynamic, innovative environment makes no business or procurement sense. Waiving the applicability of the PRC to the Cloud Computing SIN is the best way to accelerate best value “cloud computing” solutions and increase access to commercial innovation via IT Schedule 70. Eliminating the PRC and relying on task order competitions for agency specific requirements will drive competition, innovation, value and pricing for cloud services across the MAS program.

Interestingly, there is precedent for such an approach, a little over a year ago FAS waived applicability of the PRC for MAS furniture contractors in order to allow the MAS contractors to fully compete for a series of furniture procurements. Alternatively, FAS could issue a class deviation eliminating the PRC for the Cloud Computing SIN.

Over the longer term, given the growing convergence of IT and services, the time is right for GSA to reform the MAS pricing policies (and eliminate the PRC) to reflect the 21st century marketplace. Such an approach will be a win for customer agencies, the American people, and contractors.

The next step in accelerating cloud computing solutions via IT Schedule 70 is the activation of “Other Direct Costs” through the current FAR Clause that is already in the IT Schedule 70 contracts. But more on that in my next blog.

The Coalition notes that this week GSA recently extended the Cloud RFI Proposal for IT 70 deadline to 4:00pm on August 21, 2014. The Coalition and its memberhsip applaud GSA for allowing more time for companies to respond on this important issue.  Members interested in contributing to the Coalition’s response, please contact Roy Dicharry at rdicharry@thecgp.org.  For more details, see GSA’s RFI posted on FedBizOpps.

Roger Waldron

President


Healthcare Spotlight

By: Donna Lee Yesner, Partner, Morgan Lewis

Violations of the False Claims Act (FCA) subject contractors to high penalties which can be unrelated to any loss actually suffered by government. The Act provides for  treble damages for injury to the government, and a separate civil penalty of not less than $5,500 and not more than $11,000 per violation,.  In recent years, an increasing number of whistleblower cases brought under the False Claims Act have been based on false certification and fraudulent inducement theories. The cases allege that a false representation or certification provided with the proposal induced the government to enter into the contract.  Under this theory, some courts have considered the penalty applicable to every claim for payment as a matter of law, because each is tainted by the single misrepresentation at the contract formation stage.  In such cases, the amount of the penalty will vary greatly depending on the number of individual orders submitted under the contract, as each invoice would be deemed a false claim subject to the penalty provision.  For Multiple Award Schedule contracts, and similar IDIQ contracts, which provide a convenient means for government agencies to place repeat small orders for supplies or services as needed, a false certification can result in excessively high penalties, even if the invoices state the correct amount for work performed and there are no contract damages.   Industry groups are urging the Supreme Court to consider whether such disproportionate penalties violate the Eight Amendment prohibition against excessive fines.

Last December, the Fourth Circuit Court of Appeals considered a whistleblower case involving a false certificate of independent price determination, .  The Circuit Court reversed a lower court’s decision that the FCA penalty of $24 million, derived from application of the penalty to over 9,000 invoices, was grossly disproportionate to the conduct at issue under the Eighth Amendment.  In that case, there were no proven damages and the invoices did not incorporate or reference the certificate at issue.  In reinstating the penalty, the Fourth Circuit acknowledged problems with the “per invoice” rule, but nevertheless found that the penalty appropriately reflected the gravity of the offenses and provided the necessary and appropriate deterrent.  The defendants in the case, United States ex rel. Bunk v. Gosselin World Wide Moving NV, 741 F.3d 390 (4th Cir. 2013), petitioned the Supreme Court for certiorari.  A petition for certiorari is a request that the Court review the decision, as there is no right of appeal to the Supreme Court. The petition is currently pending.  In June, three trade associations, PhRMA, the Chamber of Commerce, and the American Hospital Association submitted a brief as amici curiae, in support of the petitioners due to the importance of the issue and the need for clarification.  The National Defense Industrial Association also submitted an amicus curiae brief.

In their briefs, the industry groups argue that the Fourth Circuit’s decision requiring a mechanical application of the FCA penalty to each invoice 1) results in irrationally large penalties that 2) bear no relationship to the severity of the offense or financial harm to the government. These are two of the four factors governing review of penalties under the Eight Amendment’s Excessive Fines Clause.  The groups assert that the risk of incurring huge penalties leads defendants to settle, even when the claims are weak, and may deter smaller companies that depend on frequent billing from doing business with the government.  This risk is exacerbated in government programs that necessitate a high volume of invoicing.  In such programs, the magnitude of the penalty is determined not by culpability or harm to the government but by contract terms. Whistleblowers target defendants because the penalty is driven by the number of invoices rather than on the severity of the offense. Because there is no correlation between the penalty and culpability or harm, the same type of violation – false certification – can result in grossly disparate penalties.  Industry groups have urged the Supreme Court not to wait for another circuit court decision to address this important issue, and to take this opportunity to provide needed clarification on the constitutional limits of the FCA penalty provision.

This week’s topic is the “Unintended Consequences of the FAR 8.4 Rewrite.”  Simply put, the rewrite removed a strategic acquisition tool, single award Blanket Purchase Agreements (BPAs), from customer agency procurement tool boxes when using the GSA schedule program.    Here is more on the background, result and unintended consequences of the rule.

In 2011 Federal Acquisition Regulation (FAR) subpart 8.4 was rewritten to implement Section 863 of the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 (Section 863).   As you recall, Section 863 mandated new competitive ordering procedures for the GSA schedule program.  Specifically, for orders exceeding the simplified acquisition threshold ($150,000), Section 863 requires agencies to provide notice and an opportunity to compete to all schedule contractors capable of meeting the requirements.  If notice is not provided to all, then the ordering agency must provide notice and an opportunity to compete to as many schedule contractors as practicable to reasonably ensure receipt of at least three quotes.  Ordering activities must also document their files as to the efforts to achieve competition for an order where notice was not provided to all.

Not only did the 2011 rewrite address task order competitions, it also addressed the documentation, planning and competition requirements for BPAs established under the GSA schedule program.   In an effort to promote competition the new rule created significant procedural barriers to the establishment of single award BPAs.  FAR 8.405-3 establishes a strong policy, procedural and documentary preference for multiple award BPAs in lieu of single award BPAs.  As a result, competitively established single award BPAs containing clear, consistent and firm commitments have been largely taken out of the schedule landscape.

The current procedures for establishing BPAs are counterproductive.  They increase complexity, costs and acquisition lead time for agencies seeking to establish single award BPAs for specific requirements.  As a result, agencies look for alternative acquisition strategies that often lead to contract duplication (a problem that, to date has not been effectively addressed).  Indeed, when a major ordering activity cites the administrative and procedural difficulties in establishing a single award BPA as a prime consideration for creating a duplicative contract for items already on the GSA schedule—something is amiss.  We predicted this would happen.

As the Coalition noted in its comments on the rule back in 2011, the ordering procedures should provide parity for single award and multiple BPAs.  It makes sound business and procurement sense to allow flexibility in acquisition strategies (use of schedule BPAs) to meet agency mission requirements.  Competitively established single award BPAs allow agencies to leverage known, firm requirements increasing value and return when using the GSA schedule program.

GSA schedule single award BPAs for agency specific requirements should be returned to the procurement toolbox—it is the strategic thing to do for the American people.

Roger Waldron

President

Last week’s blog focused on the Federal Acquisition Service’s (FAS’s) notice seeking UPC codes and Manufacturer Part Numbers (MPNs) from all Multiple Award Schedule contractors.  This initiative raises several questions:

  1. Has FAS complied with the Paperwork Reduction Act with regard to this new data reporting requirement?
  2. Can GSA Advantage handle the tsunami of data that will have to be uploaded to the site?
  3. Will there be a schedule by schedule dialogue with industry partners regarding the new requirement?
  4. Does FAS understand commercial practice regarding UPCs and MPNs?
  5. Will there be any corresponding reform to legacy reporting requirements currently in MAS contracts?

As I noted last week, FAS Commissioner Tom Sharpe reached out to the Coalition regarding this initiative seeking a dialogue.  On August 12th we will be hosting Commissioner Sharpe for a discussion focusing on the UPC/MPN requirement.  The meeting will be from 10 to 11 am—the location is to be determined.  The Coalition will update our members as to the location as soon as it is finalized.   This is a great opportunity for our members to share their thoughts, concerns and comments regarding yet another new data reporting requirement!

Now let’s turn to the Coalition Calendar for the Fall!!

Joseph P Caggiano Memorial Golf Tournament | 35th Anniversary Black Tie Gala | 15th Annual Excellence in Partnership Awards | 2014 Fall Training Conference

Mark your calendars and get ready to hit the links at Whiskey Creek on August 27th at our 2nd Annual Joseph P. Caggiano Memorial Golf Tournament.  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.  We believe Joe would be proud of the fact that 100% of this year’s tournament proceeds are going to a brand new cause that will continue to support our nation’s veterans by way of our Coalition for Government Procurement Endowed Government Procurement Scholarship/Fellowship Fund.  

In honor of our 35th Anniversary, and in conjunction with The George Washington University, we have made it a priority to fund and endow a scholarship or fellowship to provide financial support to a deserving veteran.  Qualified veterans concentrating their studies in the field of US Government procurement and pursuing the JD or LLM degree in Government Procurement Law or the interdisciplinary Masters of Science in Government Contracting degree (MSGC) at GWU will benefit from the fund.  We take our goal of common sense acquisition seriously and that starts with education – students enrolled in these programs will become the next generation of skilled professionals leading this critically important sector of the US economy.  There are player slots still available for foursomes and single golfers and we have a variety of sponsorship opportunities remaining, including hole sponsors.  Please consider getting a team together to support this worthy cause and enjoy a fun day golfing with your peers in Joe’s honor.  Registration and sponsorship information can be found on our website here.

Moving on from summer events, it is with great excitement that I share with you important details of our much talked about 35th Anniversary Black Tie Gala and Excellence in Partnership (EIP) Awards banquet in conjunction with our 2014 Fall Training Conference.  These events will be taking place on the evening of November 5th and all day on November 6th.

Our Anniversary Gala and EIP Awards will be held at the Ronald Reagan Building and International Trade Center at 1300 Pennsylvania Ave NW, Washington, DC.  This seemed to be a natural fit for us as the Reagan Building is of course owned by the U.S. General Services Administration.  It is the first and only federal building designated for public and private use and is mandated by Congress to bring together the country’s best public and private resources to create a national forum for the advancement of trade.   The evening’s events will include a reception, silent auction, keynote speaker, and our 15th Annual Excellence in Partnership (EIP) Awards.

The EIP Awards honor acquisition officials who have made significant strides in promoting and utilizing multiple award contracting vehicles.  Awards will be given to individuals, organizations and contractors involved in procurement with GSA, VA, DHS, DoD and other government agencies.  We urge you to take this opportunity to recognize an individual or organization that is deserving of an EIP Award.  Nominations are officially open for the following prestigious award categories:

1.  Lifetime Acquisition Excellence Award
2.  Contractor Savings Award
3.  Government Savings Award (Civilian)
4.  Government Savings Award (DoD)
5.  Myth-Busters Award
6.  Best Veteran Hiring Program
7.  Green Excellence in Partnership Award

Please see additional details and category descriptions, as well as make your nominations, on the EIP section of our website located at http://thecgp.org/eip-awards.

Our 2014 Fall Training Conference will take place the following day, November 6th, at the renowned JW Marriott.  The JW Marriott is conveniently located at 1331 Pennsylvania Ave NW, Washington, DC, directly across the street from the Ronald Reagan Building.  As a note, we will have a limited room block available on a first come first serve basis for the night of November 5th.  Our  conference agenda will consist of  Mythbuster’s discussions on current topics and opportunities in Federal acquisition, training and networking, a keynote speaker, a town hall with Q&A, panel discussions, and of course our very popular breakout sessions in the afternoon.

Thank you for your continued support of The Coalition.  We are thrilled to celebrate our 35th anniversary milestone with you in November and look forward to our biggest and best conference yet!

Roger Waldron

President

 

Yesterday GSA issued a notice to its Multiple Award Schedule (MAS) contractors entitled “Improving Product Number Data Quality on GSA Schedules.” The notice states the GSA is seeking “to improve product data quality on MAS through submission of all awarded base products and associated descriptive data on GSA Advantage.” According to the notice, GSA is asking MAS contractors “to improve the integrity of your schedule offerings by submitting Universal Product Codes (UPC) and Manufacturer Part Number (MPN) for each awarded contract item.”

The notice further directs MAS contractors to upload all base product contract line items with UPCs and MPNs to GSA Advantage via SIP within 90 days.  The notice also includes a set of frequently asked questions (FAQs).  The FAQs confirm the requirement to upload to GSA Advantage all base products with the corresponding UPC or MPN.

Interestingly, the notice cites compliance with clause I-FSS-600 Contract Price Lists (Oct 2013) and clause 552.238-71 Submission and Distribution of Authorized FSS Schedule Price Lists as one of the goals of this initiative.  However, neither of the clauses requires submission of a UPC or MPN.  For example, subparagraph (b)(3) of Clause I-FSS-600 lists over  26 data elements that MAS contractors must include in their price lists.  UPC and MPN are not among those specific data elements.  Clause 552.238-71 sets forth the requirement for submission and distribution of the price list but does not specifically identify/list the data elements to be included in the price list.  That these clauses are silent regarding the submission of the UPC and MPN raises questions whether the notice is consistent with the requirements of the Paperwork Reduction Act.

Generally, the Paperwork Reduction Act requires that where the government is seeking to collect data from the public, it must provide the public with notice and an opportunity to comment on the paperwork burden associated with the proposed new data reporting requirement.   The notice and opportunity to comment for procurement data collection requirements is done through the Federal Register.  The Paperwork Reduction Act ensures that the costs/burdens on the public of any proposed data reporting requirement are appropriately and transparently considered by the government.   It is an important tool to ensure accountability when the government seeks to impose new reporting burdens.

In this case GSA should address why it is not following the process called for by the Paperwork Reduction Act, as the burden on the public (MAS contractors) will be significant.  Indeed, given the millions of potential variations in models, parts, specifications and products, many MAS contractors will find compliance with the notice impossible, or at the very least cost prohibitive.  The Coalition has already heard from MAS contractors indicating that the notice will require significant changes to their electronic systems.  Here again is a situation where GSA is adding additional contract reporting requirements that increase operational costs for contractors without any real assessment of the burdens.

Moreover, although FAS has sought some feedback regarding the notice, to date there has been no real direct, fulsome dialogue with MAS contractors regarding the new requirements.  Perhaps the notice is intended to begin that dialogue.  However, the notice does not make that clear.  Rather it directs submission of the information to the extent it is available.   At the same time, FAS Commissioner Tom Sharpe has reached out to the Coalition seeking a dialogue regarding the notice.  To that end, the Coalition will be hosting a meeting with the FAS Commissioner and our members focusing on the notice and its impact.

As soon as we have worked out the logistics we will let you know the time and place of the meeting.

Roger Waldron

President

Last week GSA’s Federal Acquisition Service (FAS) Office of Schedule Programs issued a Request for Information (RFI) seeking feedback on “GSA Proposed Change to Add a Cloud Computing Special Item Number (SIN) on IT Schedule 70.”  The RFI indicates that the purpose of the new Cloud Computing SIN “would be to improve the way GSA offers cloud computing services through IT Schedule 70, increase visibility and access of cloud computing services to customer agencies, and to provide industry partners the opportunity to differentiate their cloud computing services from other IT related products and services. “ The RFI notes that the proposed change supports “OMB’s “Cloud First” policy by enabling agencies to take advantage of cloud computing benefits to maximize capacity utilization, improve IT flexibility and responsiveness and minimize cost.”

The goals of the RFI are to:

(1) Gain feedback from industry and any other relevant stakeholders on a proposed new Cloud Computing Services SIN; and

(2) Better understand how industry partners are selling cloud computing services today on IT Schedule 70, to support a decision on creating a Cloud Computing Services SIN.

Importantly the RFI seeks feedback from both customer agencies and industry partners.

The Coalition applauds FAS for issuing the RFI.  It is a thoughtful, positive step towards implementing efficient, effective and best value delivery of commercial cloud computing services for agency customers and the American people.  The due date for submission of comments is 4 pm, August 6th.  The RFI can be found here.

The Coalition will be submitting comments.  As a first step we are working with our IT Committee members to identify and develop consensus comments.  Over the longer term, as I previously mentioned in my June 27, 2014 FAR& Beyond Blog, the Coalition is on track to launch our Coalition Innovation Task Force (CITF).  The task force is charged with building on our earlier work setting forth a vision for transforming IT Schedule 70 into the IT Commercial Innovation Schedule.  In addition to the transformation of IT Schedule 70, the CITF will be identifying innovation opportunities across the federal enterprise.  For example, share-in-savings contracting mechanisms remain an opportunity to more cost-effective, flexible contractor support to meet mission needs.  The CITF will identify procurement practices and procedures that reduce barriers to innovation and solutions based contracting that leverages the growing convergence between information technology and services—like cloud services.  The Coalition and the CITF look forward to a robust dialogue with FAS on bringing best value innovation and solutions based contracting to customer agencies.

 

Roger Waldron

President

Utilization of small business concerns is a top priority of the current administration. A plethora of new laws, policies, and changing strategies impact this important aspect of federal contracting. The Coalition is fortunate to have a membership that includes innovative businesses of all sizes.  Important objectives of the Coalition include being an information conduit regarding matters affecting small business policies and providing a voice for our vibrant small business members.  Two years ago the Coalition launched a Small Business Committee that  serves as an open forum for members to discuss acquisition policy and compliance issues, as well as Federal contracting opportunities that are unique to small businesses. The committee creates opportunities for members to have access to federal and industry experts and to work together to understand and succeed in the federal market.   We have also sought to provide opportunities for small and large businesses to jointly leverage their capabilities to foster success in the federal market.

Continuing these important objectives, on July 23, 2014 the Coalition will host a Small Business ForumHot Topics Impacting Small Businesses and their Large Business Partners. Presenters include outstanding representatives from the Hill, government agencies, and industry.  The Keynote speaker is Emily Murphy, Senior Counsel, House Committee on Small Business.  The forum will feature a panel on Contractor Teaming Arrangements and Joint Ventures.These tools are important to all businesses, but particularly allow small businesses to develop new strategies for tackling the federal market.  Despite the potential, there are many questions about the risks and rewards of these new strategies.  From formation to payment, the Small Business Forum will provide a venue to have your questions answered by an outstanding panel with real world experience.  The panelists include:

  • Kenneth Dodds,  Director, SBA
  • Joseph Hornyak,  Partner, Holland and Knight, LLP
  • Mark Lee, Deputy Director, GSA, Office of Government-wide Policy
  • Marian Morley, Vice President Government Sales and Operations, Allsteel

Chairmen of the Coalition’s Small Business Committee will moderate this session.

  • Jim Connal, Vice President, Contracts and Compliance, Red River Computing
  • Tom Walker, Government Manager, Nucraft, Furniture

The Small Business Forum will also be a great opportunity to:

  • Catch up on initiatives such as strategic sourcing, and find out what to expect next for small businesses in the federal acquisition arena, and
  • Network with companies that offer opportunities for teaming and subcontracting relationships.  Companies already registered include some of the most successful contractors on the professional services, furniture GSA IT schedules and GWACs.

We hope that you will be able to join us for this engaging small business discussion.  For additional information, click here.

Correction:  Last week’s Flash stated that Vicksburg surrendered to the Army of the Potomac.  Actually, Vicksburg surrendered to the Army of the Tennessee.   Thanks to all those who pointed this out to me. 

Roger Waldron

President


Legal Corner

By: Jack Horan, Partner, McKenna Long & Aldridge LLP, Jason Workmaster, Partner, McKenna Long & Aldridge LLP and Sandeep Nandivada, Associate, McKenna Long & Aldridge LLP

On June 27, 2014, the U.S. Court of Appeals for the D.C. Circuit granted Kellogg Brown & Root’s (KBR) petition for a writ of mandamus and vacated the District Court’s order in United States ex rel. Barko v. Halliburton Co., No. 05-cv-1276, 2014 WL 1016784 (D.D.C Mar. 5, 2014) compelling KBR to produce internal investigation documents.  In Re: Kellogg Brown & Root, Inc., No. 1:05-cv-1276 (D.C. Cir. June 27, 2014).  The D.C. Circuit’s ruling has upheld important protections for companies conducting internal investigations pursuant to statute or regulation, and affirmed the continued vitality of the Supreme Court’s decision in Upjohn Co. v. United States, 449 U.S. 383, 389 (1981) for companies claiming the attorney-client privilege.

District Court Proceedings

In Barko, the relator sought documents created by KBR during its internal investigation of the allegations that are the basis for the relator’s qui tam case.  KBR’s legal department oversaw the investigation, which was conducted pursuant to KBR’s Code of Business Conduct.  KBR asserted the attorney-client privilege over the investigation, arguing that KBR created the documents so that KBR’s internal lawyers could provide legal advice to the company.  The relator argued that the documents were not privileged because they were ordinary business records.  The District Court applied a “but for” test for determining whether the purpose of the documents was to obtain legal advice – analyzing whether the documents would have been created “but for” the need for legal advice.  The District Court reasoned that because regulations and KBR’s own corporate policy required KBR to conduct the investigation, KBR had not created the documents solely to obtain legal advice.  The Court concluded that the documents were not privileged because KBR created them to satisfy regulatory and corporate requirements.

KBR immediately requested that the District Court certify the privilege question for interlocutory appeal and to stay its order compelling production pending a petition for a writ of mandamus from the D.C. Circuit.  The District Court denied those requests.  Left with no other choice, KBR took the extraordinary action of filing a petition for writ of mandamus with the D.C. Circuit.  The D.C. Circuit stayed the District Court’s order pending a ruling on the mandamus petition.

D.C. Circuit’s Analysis

KBR had two difficult hurdles to clear to prevail on mandamus – it had to show legal error and that the error justified the extraordinary writ of mandamus.  It cleared both of them.

The Circuit found two fundamental legal errors.  First, the District Court improperly used a “but for” causation analysis when applying the “primary purpose test.”  The correct formulation of the “primary purpose” test requires legal advice to be a significant purpose of the communication.  The significant purpose of legal advice is not undermined simply because the internal investigation is also required by statute, regulation or a company’s compliance program.

Second, the District Court misinterpreted Upjohn.  The D.C. Circuit noted that Upjohn does not require any of the following for the privilege to apply: (1) the involvement of outside counsel to claim the attorney-client privilege; (2) that attorneys personally conduct employee interviews when the investigation is conducted at the direction of counsel; or (3) the use “magic words” informing employees of the purpose of the interview.

The D.C. Circuit noted that KBR’s assertion of the privilege was “materially indistinguishable” from the basis upheld in Upjohn.  As in Upjohn, KBR initiated an internal investigation in response to reports of potential misconduct and as part of a concerted effort to gather facts and ensure compliance with applicable laws and regulations.  As in Upjohn, KBR’s in-house legal counsel coordinated the investigation.  In short, the Circuit confirmed the continuing validity of Upjohn procedures in establishing the attorney-client privilege.

After finding clear legal error, the D.C Circuit applied the three factors required for mandamus as set forth in Cheney v. U.S. District Court for the District of Columbia, 542, U.S. 367, 380 (2004): (1) no other adequate means to secure the desired relief; (2) the right to relief must be clear and indisputable; and (3) the writ is appropriate under the circumstances.  KBR easily met the first two factors.  Mandamus provided KBR with the only meaningful remedy.  The District Court had denied KBR’s motion for interlocutory appeal, and an interlocutory appeal under the collateral order doctrine is not available for attorney-client privilege orders.  An appeal after final judgment would be too late to protect the documents that KBR was ordered to produce.  The DC Circuit’s finding of clear legal error itself made KBR’s right to relief clear and indisputable.

The third factor, “a relatively broad and amorphous totality of the circumstances consideration”, also favored KBR.  The potential for grave harm to the attorney-client privilege if the District Court’s decision remained in effect made mandamus “appropriate under the circumstances.”  Left in place, the District Court’s decision could “work a sea change in the well-settled rules governing internal corporate investigations”:

Because defense contractors are subject to regulatory requirements of the sort cited by the District Court, the logic of the ruling would seemingly prevent any defense contractor from invoking the attorney-client privilege to protect internal investigations undertaken as part of a mandatory compliance program.  See 48 C.F.R. § 52.203-13 (2010).  And because a variety of other federal laws require similar internal controls or compliance programs, many other companies likewise would not be able to assert the privilege to protect the records of their internal investigations.  See, e.g., 15 U.S.C. §§ 78m(b)(2), 7262; 41 U.S.C. § 8703.  As KBR explained, the District Court’s decision “would disable most public companies from undertaking confidential internal investigations.”  KBR Pet. 19.

Id. at 15.  Thus, although not binding, the incorrect “but for” analysis could gain traction in other district courts.  To protect against these harms to both KBR and the attorney-client privilege more broadly, the D.C. Circuit granted KBR’s petition for a writ of mandamus.

Government contractors (and the many other companies subject to statutory and regulatory requirements to conduct internal investigations) can now breathe a sigh of relief – the application of the attorney-client privilege to corporate internal investigations required by law or regulation has been vindicated and upheld.  Companies following Upjohn procedures can conduct their internal investigations with the assurance that the attorney-client privilege will protect candid and full communications.

Happy 4th of July!

July 3rd, 2014

This week the FAR & Beyond blog is dedicated to the Fourth of July.  The blog highlights a speech given by President Abraham Lincoln during the Civil War.  We hope everyone has a wonderful July 4th weekend!

On July 4th, 1863, Confederate forces at Vicksburg, Mississippi surrendered to the Union Army of the Tennessee, a major military victory for the North during the Civil War. Word of Vicksburg’s surrender did not reach Washington until the day of July 7th. The news quickly spread throughout the District, and a military parade to the White House was organized by officers of the Massachusetts Thirty-Fourth Regiment, accompanied by a crowd numbering in the thousands. President Lincoln, who had refrained from publicly celebrating Independence Day on the Fourth while the fate of Vicksburg was uncertain, felt compelled to address the assembled citizens, bands and soldiers. Around 8:30 PM, Lincoln appeared at the window of the portico of the White House, and issued this speech (as reported by the Washington Evening Star, July 8, 1863):

“Fellow-citizens: I am very glad to see you to-night. But yet I will not say I thank you for this call. But I do most sincerely thank Almighty God for the occasion on which you have called. How long ago is it? Eighty odd years since, upon the Fourth day of July, for the first time in the world, a union body of representatives was assembled to declare as a self-evident truth that all men were created equal.

That was the birthday of the United States of America. Since then the fourth day of July has had several very peculiar recognitions. The two most distinguished men who framed and supported that paper, including the particular declaration I have mentioned, Thomas Jefferson and John Adams, the one having framed it, and the other sustained it most ably in debate, the only two of the fifty-five or fifty-six who signed it, I believe, who were ever President of the United States, precisely fifty years after they put their hands to that paper it pleased the Almighty God to take away from this stage of action on the Fourth of July. This extraordinary coincidence we can understand to be a dispensation of the Almighty Ruler of Events.

Another of our Presidents, five years afterwards, was called from this stage of existence on the same day of the month, and now on this Fourth of July just past, when a gigantic rebellion has risen in the land, precisely at the bottom of which is an effort to overthrow that principle “that all men are created equal,” we have a surrender of one of their most powerful positions and powerful armies forced upon them on that very day. And I see in the succession of battles in Pennsylvania, which continued three days, so rapidly following each other as to be justly called one great battle, fought on the first, second and third of July; on the fourth the enemies of the declaration that all men are created equal had to turn tail and run.

Gentlemen, this is a glorious theme and a glorious occasion for a speech, but I am not prepared to make one worthy of the theme and worthy of the occasion. I would like to speak in all praise that is due to the the [sic] many brave officers and soldiers who have fought in the cause of the Union and liberties of this country from the beginning of this war, not on occasions of success, but upon the more trying occasions of the want of success. I say I would like to speak in praise of these men, particularizing their deeds, but I am unprepared. I should dislike to mention the name of a single officer, lest in doing so I wrong some other one whose name may not occur to me.

Recent events bring up certain names, gallantly prominent, but I do not want to particularly name them at the expense of others, who are as justly entitled to our gratitude as they. I therefore do not upon this occasion name a single man. And now I have said about as much as I ought to say in this impromptu manner, and if you please, I’ll take the music.”

- President Abraham Lincoln

 

Roger Waldron

President


Healthcare Spotlight

By Jack Horan, Partner, McKenna Long & Aldridge LLP

Sales to the Department of Defense under its Distribution and Pricing Agreement program are very important to many VA FSS contractors.  The VA, itself, views DAPA sales as integral to the success of VA Schedule contracts, telling contractors that “success of your VA FSS contract requires the development of a strong federal customer base and active promotion of your business to these customers” and “[p]articipation in the Defense Logistics Agency’s (DLA) Troop Support Distribution and Pricing Agreements (DAPA) program is a surefire way to penetrate the federal healthcare marketplace.”  See VA FSS eNewsletter, No. 55 (March 2014) at 1

Despite the importance of these sales to VA FSS contractors, DOD and the VA are in the midst of a disagreement over whether VA FSS contractors are required to pay the industrial funding fee on sales of items through the DAPA when those items are also listed on the contractor’s VA Schedule Contract.  The VA’s position is explicitly set forth in a somewhat unusual appendage to the standard Industrial Funding Fee and Sales Reporting Clause, GSAR 552.238-74, included in VA Schedule contracts:

NOTICE REGARDING DISTRIBUTION AND PRICING AGREEMENTS (DAPA)

If your firm has a DAPA with the Department of Defense, items available therein that are also awarded under FSS contract must, during the course of the FSS contract, be reported as FSS sales and included in quarterly FSS Sales Reports and Industrial Funding Fee (IFF) remittance.

See, e.g. RFP 797-FSS-99-0025-R9, Solicitation Document at 38.

The VA recently confirmed (and justified) its position that FSS Contractors must pay the IFF on DAPA sales in its FSS eNewsletter:

One of the questions we most often receive is “I have a DAPA, do I need to report those sales on my quarterly sales report?”  In 1999, DoD and the VA signed a memorandum of understanding indicating that FSS pricing is the preferred method of pricing for products identified on DAPAs and as such sales for items awarded under a VA FSS contract that are also available under a DAPA must be reported as FSS sales.

Any delivery/task order placed against a VA Schedule contract – whether for a base contract item, blanket purchase agreement, or DAPA, is a reportable sale and must be included in the quarterly sales report & IFF payment.  Additionally, all sales made to agencies other than the VA, state & local governments, and through prime vendor programs & direct-to-patient distribution must be reported.  Direct all FSS sales reporting & IFF remittance questions to the VA Sales Desk.

See VA FSS eNewsletter, No. 55 (March 2014) at 5 (emphasis in original).

So the VA’s answer is a firm “yes” – VA Schedule contractors must pay the IFF on DAPA sales.  Based on the VA’s eNewsletter, the VA appears to believe it has two justifications for the requirement: (1) a 1999 memorandum of understanding with DOD; and (2) its apparent view that items purchased under a DAPA is “placed against a VA Schedule contract.”  Id.

A major problem with the VA’s position is that DOD apparently does not agree.  The Defense Logistics Agency, the DOD Executive Agent for Medical Material. responsible for administration of DAPAs, is instructing its DAPA holders not to pay the IFF for sales to prime vendors under a DAPA:

The following is specific DAPA guidance:

• There is no direct relationship between a Federal Supply Schedule (FSS) and DAPA.

• A DAPA does not require a vendor to establish or have a FSS.

• Prime Vendor contracts are separate acquisitions and sales thereunder using the DAPA catalogue do not require reporting or payment through the Department of Veterans Affairs (DVA) Industrial Funding Fee (IFF) process.

Any DAPA holder given contrary guidance should immediately contact DLA.

See DLA Memorandum to Prime Vendor DAPA Program, found at https://www.medical.dla.mil/Portal/.

DLA views DAPAs as “DLA pricing vehicles used to establish and manage pricing with manufacturers and/or distributors for medical materialpurchased under DLA’s Prime Vendor contracts” rather than orders “placed against a VA Schedule contract,”   Compare, id and VA FSS eNewsletter at 5.  DLA also sees its Prime Vendor contracts – “FAR Par 12 acquisitions that use pricing vehicles such as DAPA under FAR Part 16 as single source awards within a region” — as separate from VA’s FSS contracts.  Id.  Thus, these opposite views on the IFF grow out of a fundamentally different view of the role of VA Schedule contracts in DAPA orders.  VA views the DAPA orders as “placed against” Schedule contracts while DLA views them as placed under DLA’s Prime Vendor contracts independent of the VA’s Schedule contracts.  In its instruction to DAPA holders, DLA does not address the 1999 memorandum referenced in the VA’s eNewsletter.

So, FSS contractors with a DAPA, at least for now, are caught between the conflicting views of the VA and DLA – one telling them that they have to pay the IFF and the other telling them that they should not.  Each relying on a fundamentally different view of the status of orders placed through DLA Prime Vendors based on DAPA pricing.

Moreover, a contractor faces risk in following either position.  By excluding DAPA sales from the IFF, as instructed by DLA, the contractor risks a claim by the VA that it is not complying with its FSS contract, or worse, a potential claim under the False Claims Act.  By paying the IFF, the contractor faces at least the financial risk of paying a fee that it is not obligated to pay.  To the extent the fee is included in the cost in its DAPA, the DAPA holder also faces a potential request for a price reduction under the DAPA to eliminate the IFF.  Given these risks, the VA and DLA have an obligation to their contractors to resolve this issue.

VA and DLA are involved in a discussion of these issues and we hope to report a resolution soon.

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