So-called “sovereign acts” may soon affect the performance of a wide swath of government contracts by shielding the federal government from the fallout of President Trump’s newest tariffs. The sovereign acts doctrine is rarely discussed, but it can have a profound impact on contract profitability.

While a contractor might normally be granted additional compensation when its performance is hindered by government action, the sovereign acts doctrine protects the government from liability where the impact on a particular contract results from the government’s “public and general acts as a sovereign.” In other words, because the federal government’s legislative and regulatory powers take precedence over fidelity to any particular private contract, the government is not responsible when its higher-order actions happen to disrupt contract performance.

In March 2018, the Trump administration began imposing tariffs on steel (25%) and aluminum (10%) imports. These tariffs have since been expanded to a number of close U.S. trading partners, including the European Union, Canada, and Mexico. On July 6, the Trump administration also set a tariff of 25% on approximately $50 billion in Chinese imports, and has announced an additional 25% tariff on approximately $200 billion in Chinese consumer goods.

The question of whether a particular federal action is “public and general” enough to trigger the doctrine varies from case to case, but there is a substantial possibility that tariffs on imported steel and other building supplies may qualify. This would leave contractors to cover recent increases in materials costs that flow directly from these trade policies.

While these national-scale government actions are certainly the most visible examples of the sovereign acts doctrine, contractors should also be prepared to confront more localized government actions that benefit from the same defense.

Work site access restrictions are a common example of such “local” sovereign acts. For example, in Conner Bros. Const. Co., Inc. v. Geren, the Army and one of its commanders made the operational security decision to exclude construction personnel from a worksite within an Army base in the days following the September 11, 2001 terrorist attacks. This was deemed a sovereign act that precluding recovery for the contractor’s delay damages, though the contractor was allowed additional time to perform.

Similarly, in Garco Const., Inc. v. Secretary of the Army, (which also involved administrative deference issues that we have covered in previous posts), the sovereign acts doctrine protected the Army from liability after the more stringent enforcement of its existing base access policy barred entry for a large number of subcontractor workers.

While it can be difficult to plan for circumstances like these, contractors should keep a close eye on the price risks that they and their subcontractors accept when bidding on federal contracts. If there is a substantial chance that an imminent sovereign act could interfere with performance, contractors would be well-advised to ensure that their bids reflect contingencies that account for this possibility.

To learn more about how the sovereign acts doctrine could intersect with these new tariffs, or for information about the potential impact of other governmentwide disruptions, consider attending our upcoming seminar, Navigating Federal Government Contracts Northwest 2018.” The seminar/webinar will include a keynote speech by James Nagle specifically addressing the application of the sovereign acts doctrine to government shutdowns and other current or looming political disputes. 

Regardless of your industry, companies that have business dealings with the federal government face the persistent risk of False Claims Act (FCA) investigations and lawsuits. The FCA, 31 U.S.C. §§ 3729 – 3733, imposes civil and criminal liability for knowingly making a false or fraudulent claim to the United States for money or property; or to avoid an obligation to pay money (reverse false claim). 31 U.S.C. §§ 3279-3733. Under the FCA, the government may bring its own action or may intervene in the existing qui tam complaint, a private right of action brought by a whistleblower (relator), against an individual or company accused of engaging in fraudulent activities against the government. Contractors face the possibility of treble damages.  In addition, the contractor may face civil penalties. 31 U.S.C. 3729(a)(1)(G). In 2018, The maximum per claim penalty is $22,363.

In recent years, FCA claims have been on the rise as the government continues to crack down on fraud, waste, and abuse in order to protect taxpayer dollars. The DOJ reported it obtained over $3.7 billion from FCA cases in FY 2017—making it the eighth straight year the federal government recovered more than $3 billion in FCA cases. This trend does not appear to be changing any time soon.

The uptick in FCA activity has made insurance coverage for FCA contractors an evolving area of law subject to different interpretations by different courts. Accordingly, any risk management program that should include insurance coverage that may be leveraged to cover FCA investigations and claims.  To proactively manage these risks, companies should make sure they (1) have appropriate liability insurance in place, given their risk profile; (2) if a FCA claim is asserted against the company, to respond in a manner that does not jeopardize coverage; and (3) carefully consider insurance coverage issues prior to resolving an FCA lawsuit.

Review Your Policy Language

Claims under the FCA primarily implicate three types of liability insurance: (1) directors and officers (D&O) liability insurance; (2) employment practices liability (EPL) insurance; and (3) errors and omissions (E&O) insurance. Although the three types of policies provide different coverages, each commonly covers loss resulting from a claim for a negligent act (as defined in the policy).

As with any insurance matter, the starting point is with the policy itself. How is “claim” defined? How is “loss” defined? How are “professional services” defined? It is important to be aware of how these terms are defined in your policy. The term “claim,” for instance, may not be limited to the filing of the lawsuit—it may include the service of subpoena, a written or oral demand for monetary damages or equitable relief, or even a request to toll statute of limitations. Some policies expressly provide that the definition of “claim” includes government investigations and informal investigations. The policy’s definitions not only set the parameters for what is covered, but also may affect your notice obligations. It may be beneficial for policyholders to procure insurance policies with a broad definition of “claim,” but policyholders should note that there may be a corresponding need to make sure notice is provided in a broader set of circumstances.

Likewise, the definition of “loss” is critical. To maximize potential protection for FCA claims and to better navigate inevitable disputes with the insurance company, the definition should expressly include fines and penalties and any damages multipliers. Similarly, policyholders should avoid definitions of “loss” that exclude “matters uninsurable.” For instance, policies may exclude returned money (restitution) from their definition of “loss” under the policy.

Policyholders should anticipate that insurers may attempt to avoid coverage obligations by asserting exclusions in the policies apply. Be wary of language in your policy for exclusions for fraud or intentional, reckless, or even grossly negligent conduct as well as notice provisions that may later bar your ability to seek coverage against an insurer.

Things to Remember While Negotiating FCA Settlements to Preserve your Coverage Rights

Like most claims, many FCA lawsuits are ultimately resolved by settlement. When drafting a settlement agreement, be cognizant of your insurance policy, including how the conduct is characterized, and whether your settlement needs to include language to allocate between covered and non-covered portions based on the “relative legal exposure” of the covered and non-covered claims (so as to streamline future claims against your insurer). Under this method, the portion of the settlement amount that may be allocated to a non-covered loss is determined by the extent that liability motivated the parties to settle. These considerations will be important in determining how settlements are structured and language is drafted. Nonetheless, the policy language, jurisdiction and public policy will determine to what extent the insurance company can allocate an FCA settlement to a non-insured loss.

Join Oles Morrison partner Adam Lasky for Road Map to Federal Bid Protests, a webinar presented by the Pacific Northwest Defense Coalition (PNDC), on Monday, September 17, 2018, from 11:00AM – 12:15PM PDT.

This webinar will provide contractors a look behind the curtain at GAO and U.S. Court of Federal Claims bid protests. Attendees will leave with a much better understanding of how the bid protest process really works at the federal level. The webinar will also cover how contractors can best prepare for a protest by maximizing their debriefing; analyzing which protest avenues are most advantageous; recent protest trends; and debunking common protest myths.

Click here to register for the webinar.  The webinar is Free for PNDC members, and $35 for non-members

On June 27, 2018, the Armed Services Board of Contract Appeals (ASBCA) held for the first time that the government, much as with commercial customers, does not affirmatively need to agree to or even be aware of a commercial computer software license to be bound by the terms of the license. In Appeal of CiyaSoft Corporation, CiyaSoft appealed a claim asserting that the Army had breached the terms of its license by using more copies of the software than were permitted. Specifically, CiyaSoft objected to the government’s installation of the software on multiple computers, passing the software to non-government personnel and copying of the software thousands of times without CiyaSoft’s consent. When CiyaSoft objected and ultimately filed a claim, the Army denied CiyaSoft’s claim asserting that the contract between the parties contained no specific terms regarding how the government would access, secure and protect the software. Continue Reading Commercial Software License Terms Bind the Government Just Like any Customer

To help you navigate the rough seas of doing business with the federal government in the Trump administration, Washington PTAC, Pacific Northwest Defense CoalitionAGC of Washington, and the Government Contracts team at Oles Morrison have assembled a group of nationally recognized government contracts professionals for a seminar covering topics relevant to government contractors across all industries.

Session topics include:

  • Navigating Tariffs, Shutdowns & Sovereign Acts
  • Roadblocks to Commercial Items Contracting
  • Design-Build Challenges
  • Small Business Certifications & SBA Affiliation Rules
  • Cost/Pricing Audits & Investigations
  • Bribery, Gratuities, Kickbacks and other Government Contract Ethics
  • Labor Compliance Pitfalls (SCA, DBA, FLSA)
  • Hot Topics in Procurement Reform

Speakers:

Two Ways to Attend:

  • In-person, AGC of Washington (Second-floor Conference Room, 1200 Westlake Avenue North, Seattle, WA 98109).  Parking will be validated.
  • Live Webinar

When:

  • October 25, 2018
  • 8:00 a.m. – 3:00 p.m. PST (Breakfast and Lunch included)
  • Networking Reception: 3:30 p.m. – 4:30 p.m.

Click HERE for the program flyer and complete details.

Click HERE to Register.

Questions? Contact Tiffany Scroggs at 360.464.6041 or via email at tscroggs@thurstonedc.com

Many politically charged issues are likely to steal the headlines during the confirmation hearings for President Trump’s nominee for the U.S. Supreme Court, D.C. Circuit Court of Appeals Judge Brett Kavanaugh.  However, one issue unlikely to make headlines is the impact that Judge Kavanaugh’s confirmation may have on the doctrine that gives “controlling weight” to the way government agencies interpret their own regulations — known as the Auer Deference doctrine.

Given the composition of the Supreme Court, recent Judicial attempts to re-examine the doctrine, and Judge Kavanaugh’s previous statements, Judge Kavanaugh’s confirmation signals the probability of the Supreme Court’s eventual overturning of the Auer Doctrine  — which would be good news for government contractors.

What is Auer Deference?

Auer deference (also referred to as Seminole Rock deference) is a principle of administrative law that requires courts to give “controlling weight” to the way government agencies interpret their own regulations, even where the agency’s interpretation is not “the best” reading of the text in question. Developed from the U.S. Supreme Court’s holdings in Auer v. Robbins, 519 U. S. 452 (1997) and Bowles v. Seminole Rock & Sand Co., 325 U.S. 410 (1945), the doctrine mandates that courts credit the agency’s interpretation as controlling as long as it is not “plainly erroneous or inconsistent with the regulation.”

This obviously puts a thumb on the scale for agencies in the context of contract disputes or bid protests tied to certain regulatory interpretations. It can be particularly harmful to contractors when the agency has altered its interpretation during the performance or procurement of a contract, or worse, during the course of litigation. Unlike agencies whose procurements rely on interpretation of the FAR, agencies that draft and enforce their own regulations (such as the Small Business Administration) are sometimes empowered under Aeur to alter their interpretation to suit the agencies’ needs on a case-to-case basis. Continue Reading Why Judge Kavanaugh’s Confirmation Could be Good News for Government Contractors

The federal regulations and procurement framework for design-build project delivery concerning direct government procurements, and indirect federal projects where the government provides funding but does not procure the construction, has been in place for the past twenty-two years (The Clinger-Cohen Act passed in 1996, part of Federal Acquisition Regulation at subpart 36.300 et seq.)  Design-build delivery can provide a streamlined project to federal agencies at many times better value than a design-bid-build delivery

In the next three years, design-build projects are expected to to be just about 20% of all of the total U.S. Construction Put in Place ($1.2 trillion of the $5.4 trillion estimated total; See Fails Management Institute June 2018 Market Study ) Highway and road projects are expected to make-up fourteen percent of the design-build delivered projects over the same time period (Ibid.)  As the twenty-fifth anniversary of design-build procurement at the federal level approaches, we can take a few minutes to look at a couple of the benefits and pitfalls for contractors of design-build projects.

Benefit

Generally speaking, design-build projects take less time to complete than traditional design-bid-build projects.  This benefit is realized by eliminating a second procurement process, reducing the errors and omissions in the drawings, and allowing for concurrent design and construction.

Pitfall

Despite Federal Acquisition Regulation subparts 36.303-1, Phase One, and 36.303-2, Phase Two setting for the criteria for evaluating proposals in phases, the evaluation of the criteria is necessarily subjective when the government is awarding a negotiated contract on best value.  The constraints on the wide discretion of the awarding body are that the decision cannot be arbitrary or capricious, contrary to established procedures, or unsupported by substantial evidence (5 U.S.C. § 706(2)) Meeting this burden during the protest process is a more challenging burden of proof.

Benefit

Because the design team and the contractor are under the same umbrella, often times working together during the programming phase of a project, design-build projects generally have less litigation.  A significant reason is that one of the main points of tension, design vs. contractor, is removed in a design-build project.

 Pitfall

Making sure that the design-build team, and the project, is protected by the appropriate insurance coverage can be a challenge for the design-builder.  In our experience, most of the design-builders are traditionally general contractors that contract with a design or engineering firm to be part of the design-build team.  For example, this creates a potentially problematic situation if a project specific insurance policy will have to cover general and professional liability, which is a non-standard type of coverage requiring savvy brokers, builders, designers, and underwriters.  Care must also be taken when negotiating the design-build contract with the awarding agency to include language and insurance requirements appropriate for both the professional liability side (“design”) and the general liability side (“build”).

Despite presenting unique challenges, design-build delivery can provide a streamlined project to federal agencies at many times better value than a design-bid-build delivery.

Contractors frequently claim that owners have breached the implied duty of good faith and fair dealing, largely as an alternative to more specific claims for constructive change or breach. These good faith and fair dealing claims are difficult to recover on, largely because courts and the boards have required a breach of the implied duty to be tied to an express contract term. However, recently in Relyant, LLC, the Armed Services Board of Contract Appeals (the “Board”) awarded a contractor damages based upon its finding that the government breached the duty of good faith and fair dealing by failing to respond to the contractor’s request to amend its scope of work in a timely manner—notwithstanding the fact that the contract did not contain an express term prescribing a time frame for such responses. The Board found that the government had breached the duty of good faith and fair dealing by “allowing Relyant to, figuratively, ‘twist in the wind’ from late April to early August 2009 as the government considered the change to the [scope of work].”

Implied Duty of Good Faith and Fair Dealing

As explained by the Federal Circuit, the implied duty of good faith and fair dealing exists because “it is rarely possible to anticipate in contract language every possible action or omission by a party that undermines the bargain.” The general rule is that the implied duty of good faith and fair dealing “prevents a party’s acts or omissions that, though not proscribed by the contract expressly, are inconsistent with the contract’s purpose and deprive the other party of the contemplated value.” The “good faith” standard is often judged from the perspective of a contractor’s reasonable expectations. The Restatement (Second) of Contracts § 205 provides that “good faith” excludes conduct that “violate[s] community standards of decency, fairness, or reasonableness,” and cites judicial decisions which have held that “evasion of the spirit of the bargain, lack of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to specify terms, and interference with or failure to cooperate in the other party’s performance” may all violate the implied duty. A party that violates the implied duty may be liable for all damages incurred as a result of the breach.

Unreasonable Government Delay in Responding to Contractor Can Implicate Implied Duty of Good Faith and Fair Dealing

Relyant involved a contract to supply pre-fabricated relocatable buildings (“RLBs”) to two sites in Afghanistan. The dispute focused on the RLBs interior finishes: the Scope of Work (“SOW”) accompanying the solicitation required a gypsum drywall interior over three-inch thick fiberglass insulation. Relyant proposed a sandwich panel using a polystyrene insulation. The government awarded the contract to Relyant but the contract did not incorporate a revision to the SOW for Relyant’s proposed sandwich panel.

The first order issued under the contract required Relyant to deliver six RLBs to Forward Operating Base Sharana, Afghanistan, the first being required for First Article Testing (“FAT”) within 180 days. Subsequent delivery orders required Relyant to deliver additional RLBs to Bagram Airfield, Afghanistan. Due to tight scheduling concerns, Relyant could not wait for its first delivery to Sharana to pass FAT testing before it began manufacturing the remainder of the RLBs for the Bagram deliveries. The government accepted the RLB’s delivered to Sharana (with knowledge of the noncompliant sandwich panels), but then rejected the sandwich panels during FAT for the deliveries to Bagram.

As Relyant had already delivered a number of the RLBs to Bagram, it requested a modification to the SOW first in November 2008 and then again in April 2009, both times requesting that the government permit its “as-bid” sandwich panel construction. The government, despite knowing that Relyant was incurring costs while waiting for its response, did not finally reject the proposed modification until August 2009. While the contract did not specify how long the government could review a request for a modification to the scope of work, the government was actually able to review the request and obtain the contracting officer’s concurrence in less than a week—which the Board found would have been a reasonable time for a response.

The Board ultimately held that the implied duty imposes “certain obligations with regard to timeliness of government responses to Relyant’s request to amend the SOW, for which Relyant is entitled to certain relief.” The Board held that the Government had breached the duty of good faith and fair dealing by failing to respond to Relyant’s request in a timely manner.  The Board clarified that “the proper inquiry regarding the duty often boils down to questions of “reasonableness” of the government’s actions. In Relyant, the government’s delay was unreasonable when the request could be evaluated and responded to within a week, but the government took over three months to respond despite being aware that the contractor was incurring extra costs as a result of the delay.

Take Away

The decision serves as a reminder to contractors that the duty of good faith and fair dealing is a valuable claim when a contractor is damaged as a direct result of the government’s failure to respond in a reasonable amount of time to a contractor’s request during contract performance. As the government’s knowledge that the contractor was incurring additional costs was a key factor in allowing Relyant to recover its damages, contractors should remember to notify the government in writing of the type and estimate of any damages that it is incurring as a result of the government’s delayed decision-making.

 

Image courtesy of Flickr (licensed) by Dave Bleasdale.  

The continued initiative from Alaska Senators has recently brought about a reinterpretation of the requirements imposed by the Small Business Administration’s “8(a)” program – aimed at helping companies owned by minorities and disadvantaged groups compete in federal contracting.  In 1986, Congress expanded the “8(a)” program to include Alaska Native Corporations (ANCs) and Indian tribes.  After the 1986 8(a) expansion, ANCs received many sole source federal defense contracts.  ANCs thrived under this procurement model, but their success in federal contracting was scrutinized by some in Washington D.C.

The 2010 National Defense Authorization Act (NDAA) changed the law relating to 8(a) procurement and specifically to sole source procurements then valued at over $20 million.  For defense contracts, the 2010 law required, among other things, the contracting officer obtain approval from the respective secretaries of the military branches.  DoD entities interpreted the language to mean that, rather than securing approval from a designee, they had to obtain approval from the actual branch secretary.  The burden associated with this perceived requirement proved so prohibitive that contracting officers largely abandoned their sole source authority for ANCs for any procurements affected by the new law.  The change to sole source contracting (which became effective through the Federal Acquisition Regulation in March 2011) had a significant adverse impact on ANCs, drastically reducing the use of this once abundant procurement model.  Indeed, by some accounts, the change has decreased awards of federal defense contracts to ANCs by over 80%, thus significantly impacting what was once a powerful economic growth engine for ANCs and village corporations.

Recently, however, the Army, Navy and Air Force through a series of internal memoranda have adopted a more sensible reading of the statue, agreeing to reinterpret the approval requirements imposed by the 2010 NDAA law.  Instead of requiring the actual signature of the secretary of these branches, the Army, Navy and Air Force now agree that contracting officers can once again award sole source contracts to ANCs by obtaining approval from a proper designee of the secretary of the agency, without getting the actual signature of the secretary themselves, a prohibitively burdensome requirement.  This more sensible interpretation may reopen the door to federal contracting for ANCs and again provide an important economic boon to the Alaska economy.  While the door has now been reopened, it is left to be seen whether the sole source procurements for ANCs will return to its pre-2011 activity.  Stay tuned.

Six months into Trump’s presidency, we wrote about how Trump’s $1 trillion infrastructure plan was likely to include more federal deregulation, including possible repeal or suspension of the Davis Bacon Act (DBA).  Two months after that article, comments from the House Transportation and Infrastructure Committee suggested Trump had changed his tune and would retain the DBA protections perhaps in part to gain support from typically pro-DBA democrats for the administration’s infrastructure plan.

While media sources have reported that the administration’s infrastructure plan all but “died” several months ago, Trump’s Supreme Court nominee somewhat refocuses on the DBA and other government contract industry related legislation.  And while nominee Brett Kavanaugh’s confirmation won’t mean repeal of the DBA, his confirmation could mean the reach and application of the Act (and other related legislation) to federally funded projects could be even further limited.

Such potential limitations are foreshadowed in a decision Kavanaugh issued during his time on the D.C. Circuit in the case of District of Columbia v. Dep’t of Labor, 819 F.3d 444 (D.C. Cir. 2016).  There, the contract at issue was one for the lease of certain property that would be used to construct a privately-funded mixed-use development, known as CityCenterDC.  The Department of Labor made the determination that CityCenterDC was a “public work” within the meaning of the DBA, and thus the contract – between the property lessor and the private developer – was subject to the prevailing wage requirements of the Act.  Finding that the lease agreement was not one “for construction,” and was separate and apart from the construction agreements that would follow between the developers and general contractors, Kavanaugh found the DBA was not intended to have such far-reaching application:

The text of the Act is straightforward.  As relevant here, the Act covers contracts “for construction” to which the District Columbia is a party. . . Contrary to the U.S. Department of Labor’s suggestion, moreover, neither the lease agreements nor the development agreements between D.C. and the developers are themselves contracts for construction to which D.C. is a party. . .

The Department’s interpretation of the statutory term “contract…for construction” would significantly enlarge the scope of the Davis-Bacon Act.  The Department’s interpretation would embrace any lease, land-sale, or development contract between the Federal Government or D.C. and another party, so long as to the agreements required the counterparty in turn to undertake more than an incidental amount of construction.  The terms of the Davis-Bacon Act are not so malleable.  A contract for construction is a contract for construction.  And a lease, land-sale, or development agreement that contemplates one of the parties entering into a future contract for construction with a third party construction contractor is not itself a contract for construction.

In applying his hallmark strict constructionist views, Kavanaugh’s decision in District of Columbia could be a sign of what’s to come – i.e., more limitations on what some in the industry consider bureaucratic overreach.  While it is rare that a decision directly impacting the government contracting industry reaches the United States’ highest court, Kavanaugh’s judicial “style” could mean legislation such as the DBA and other, ancillary legislation becomes more limited in its reach.