Look Before You Leap
Selling to the Government Can Be Lucrative, But the Public Contract System May Seem Like Unfamiliar Waters
Posted Oct 5, 2004 1:03 AM CDT
By Allan J. Joseph
The government means business. Companies across the United States have come to appreciate government as an important purchaser of goods and services. The federal government alone spends more than $250 billion a year--about a quarter of its discretionary spending--to purchase goods and services.
And the federal government, along with its major contractors, buys a wide range of products and services. Yes, some of those government needs do involve rocket science, as well as aircraft carriers, jet planes, armored vehicles and sophisticated electronic communications systems. But increasingly, the government is turning to the commercial marketplace to buy commonplace things, such as food, clothing, office supplies and information technology.
Just about any business that deals in those goods and services is a potential supplier to various government entities. Nevertheless, a company starting to do business with the government also should be aware of the potential pitfalls.
It’s easy for commercial contractors to be lulled into complacency by thinking that a contract with the government is essentially the same as a commercial transaction. They come to realize, however, that doing business with the government can differ in significant ways from the standard commercial transactions to which they are accustomed.
Government contract law is an amalgam of familiar principles of common law overlaid by a complex set of statutes, regulations and standard contract clauses designed to protect the public interest and to provide uniformity in outcome. The Uniform Commercial Code provides some guidance, but it is trumped by the web of government law and regulation. At the federal level, the basic rules are set forth in the Federal Acquisition Regulation at section 48 of the Code of Federal Regulations. State and local jurisdictions follow their own procurement rules and procedures.
Even the structure for resolving contract disputes with government entities is different from the private sector.
At the federal level, the Court of Federal Claims shares jurisdiction over contract disputes with boards of contract appeals in the various government agencies. Appeals of their decisions go to the U.S. Court of Appeals for the Federal Circuit, which is generally the last word in government contract law. Together, the boards and courts publish some 400 decisions a year, making them the richest source of contract law in the United States. The following articles focus on issues relating to the federal procurement system, but a lawyer representing a commercial company contracting with a government entity at any level must be familiar with the acquisition procedures and rules that apply to the transaction.
Allan J. Joseph is a shareholder in the San Francisco law firm of Rogers Joseph O’Donnell & Phillips. He is a past chair of the ABA Section of Public Contract Law. He now serves as ABA treasurer.
Acquisition Goes Commercial
By David a. Drabkin and Richard p. Rector
Contracting with the federal government has changed significantly in the past decade. The government no longer buys ordinary things like computers, hammers and maintenance services using detailed specifications, unique inspection requirements and complex contracting procedures.
Instead, Uncle Sam has moved toward “commercial” acquisition practices that more closely resemble those of the private marketplace. This change--truly a paradigm shift--has streamlined the contracting process and lowered barriers of entry to the federal market for companies selling a wide range of products and services.
Many states have long used simplified procedures to purchase commercial items. A number of those jurisdictions also are adopting electronic, volume-based procurement methods.
At the federal level, the principal impetus for the change was the Federal Acquisition Streamlining Act of 1994.
FASA requires federal agencies to perform market research and buy “commercial items” or “nondevelopmental items” when available to meet agency needs. FASA also requires government contractors and subcontractors to incorporate these items to the maximum extent practicable in goods and services supplied to agencies.
As defined in regulations, commercial items generally include supplies and services of a type offered to the general public; nondevelopmental items are supplies that already have been developed for government purposes.
FASA also greatly simplified the contract terms and conditions applicable to commercial item acquisitions. Mandatory terms are fewer in number and are tailored to more closely match commercial contracts. Also, certain traditional requirements in government purchasing that were problematic for companies--such as disclosure of cost or pricing data, compliance with cost accounting standards, surrender of intellectual property rights--are not applicable to commercial item acquisitions.
While Uncle Sam still buys noncommercial items--fighter aircraft, for example--using traditional practices, commercial-item acquisitions represent roughly 40 percent of the government’s annual procurement budget.
An equally seismic change over the past decade has been the expansion of the Federal Supply Schedule program managed by the U.S. General Services Administration. The program gives federal agencies a simplified pro- cess for obtaining commercial supplies and services at prices associated with volume buying.
There are now more than 12,000 companies with one or more FSS contracts, selling more than 7 million different products and services to various federal government entities. During government fiscal year 2003, federal agencies and other authorized buyers spent more than $27 billion on orders placed under the FSS--program a 30 percent increase over FSS orders in fiscal 1993.
The dramatic growth of the FSS program--also known as the GSA Schedules program--or the Multiple Award Schedule program can be attributed to the flexibility it gives both government buyers and commercial sellers. The program allows contractors to form master contracts with GSA that include the “commercial item” supplies and services offered by each contractor. Each contract includes a standard set of terms and conditions, as well as “most favored customer” pricing that is determined by GSA to be fair and reasonable under the circumstances.
Once GSA awards the contracts, federal agencies and other authorized buyers may each place orders with the particular contractor that offers the “best value.” The ordering process is relatively simple and permits an ordering agency to negotiate prices that are even lower than those established in the master FSS contract.
Moreover, agencies placing orders under an FSS contract are not required to publish a synopsis of the requirement or seek competition outside the program.
This type of flexibility makes the FSS program the contracting method of choice both for federal buyers and companies selling products and services.
David A. Drabkin is deputy chief acquisition officer and senior procurement executive for the U.S. General Services Administration. He co-chairs the Acquisition Reform and Experimental Procurement Processes Committee in the ABA Section of Public Contract Law. Richard P. Rector is a partner in the government contracts practice of Piper Rudnick in Washington, D.C. He is a member of the Public Contract Law Section’s council.
By Maryanne R. Lavan
The federal government expects its contractors--those in the defense industry as well as companies dealing in standard commercial products and services--to act ethically and in accordance with all applicable laws and regulations.
This commitment to business ethics and integrity is not mere lip service. There is no room for error in the manufacture of the products and services provided to the government.
Moreover, the government’s expectations of ethical behavior by contractors have teeth. If a government agency determines that a contractor is not “presently responsible” in accordance with the Federal Acquisition Regulation, it can prevent a contractor from doing business with the government through debarment and suspension procedures. Therefore, it is critically important that contractors who do business with the government emphasize workplace integrity and ethics, and cultivate an atmosphere in which employees can bring concerns forward to be addressed quickly.
One of the factors an agency will look at in considering debarment and suspension for a company is whether the contractor has effective standards of conduct and internal controls systems, and whether the contractor has instituted or agreed to institute new or revised review and control procedures and ethics training programs.
The defense industry has taken the lead in developing principles that contractors providing various products and services may follow to meet these government expectations.
In 1986, the President’s Blue Ribbon Commission on Defense Management (known as the Packard Commission) observed that the public held a negative view of the defense industry due to reported instances of fraud, waste and abuse within the industry and the Department of Defense. The commission determined that the environment would vastly improve if contractors placed a greater emphasis on corporate self-governance.
This led to the creation of the Defense Industry Initiative, a gathering of companies that perform work for the government. Among other actions, the DII established a number of principles for companies doing business with the government.
Although membership in the Defense Industry Initiative is entirely voluntary, the group’s principles provide guidance to government contractors in establishing the framework for an effective ethics and compliance program that will meet the government’s expectations for its contractors. Those principles are:
• A written code of ethics. Ethics should be included in any statement of company values. In addition, a company should have a written ethics code that is provided to all employees.
• Ethics training. Employees should receive training about the company’s ethics code. Many defense contractors, for instance, conduct ethics training at orientations for new employees and on an annual basis for all employees. Compliance training courses should be held to ensure that employees are aware of the laws, regulations and policies relating to their specific job responsibilities. A company should evaluate its ethics and compliance program on an ongoing basis, including input from employees.
• Internal mechanisms for reporting ethics code violations. A key feature of a comprehensive ethics and compliance program is a confidential toll-free help line. The help line should be operated in a way that permits employees to report ethics violations without fear of retribution.
• Self-governance. In addition to promoting voluntary disclosure of violations, a company should continuously reinforce its commitment to ethical business conduct.
• Sharing of best practices. A company with an effective ethics program should share its approaches and materials with other companies and groups.
Ethics and compliance programs should not be limited by a company’s size. The DII Web site (www.dii.org), for instance, offers resources for any company that performs business for the federal government. Guidance also is provided in the Department of Defense FAR Supplement, 48 CFR 203.7000.
A sound ethics program has many benefits: Applicants want to work for ethical companies. Employees want to stay with ethical companies. And customers, namely the government, want to and may do business with ethical companies.
Maryanne R. Lavan is vice president for ethics and business conduct at Lockheed Martin Corp. in Bethesda, Md. She is an associate editor for The Procurement Lawyer, published by the ABA Section of Public Contract Law, and she is co-chair of the section’s Strategic Alliances, Teaming and Subcontracting Committee.
Intellectual Property Rights
By Jennifer A. Short and Selwa Masri
The first thing to do in representing a company furnishing technology to the U.S. government is to recognize that the rules for protecting intellectual property rights in commercial transactions do not necessarily apply.
Technology contracts with the government are subject to a unique and complex set of intellectual property rules notably different from those that govern commercial transactions.
These rules are embodied in data and patent rights clauses set forth in the Federal Acquisition Regulation and any supplemental regulations that apply, such as the Department of Defense FAR Supplement. The type and scope of rights the government obtains in a contractor’s technology depend on three factors:
• Whether the technical data and/or computer software furnished to the government is commercial or noncommercial.
• In the case of noncommercial data and/or software, whether the government paid for any or all of its development.
• And whether the contractor has complied with the government’s marking, notice and identification requirements when furnishing data or software that it developed at private expense or with a mix of private and government funding.
Generally speaking, software and data are considered to be commercial if they have been developed primarily for nongovernmental purposes and are sold, leased or licensed to the general public. When the government acquires commercial software, it obtains the rights set forth in the contracting company’s standard commercial license--just as any private company would.
The government receives “unlimited rights” to noncommercial data and software developed exclusively at its expense. In effect, that means the government has joint ownership because those rights allow it to use, modify, reproduce, release, perform, display and disclose the software and data as it wishes, for any purpose and in any manner.
The government receives a more limited license in noncommercial data and software developed with a mix of government and private funds. That license allows the government to use and disclose the data or software internally, but not for commercial purposes.
Finally, the government receives only specified “limited rights” in data and “restricted rights” in noncommercial software or data developed at private expense. Complying with the marking requirement, which applies to virtually all government contracts, is critically important to avoid giving the government what amounts to joint ownership in data or software produced by a company. Under the requirement, a contractor must mark every item it delivers to the government with less than unlimited rights by adding certain legends prescribed by the applicable regulation. In the absence of the proper markings, the government is entitled to presume that it has unlimited rights to those items--which means the government can sell or give them away to anyone, even the contractor’s fiercest competitors.
The notice and identification requirements are particularly important when dealing with military agencies. The DFARS requires contractors, even before they are awarded a contract, to notify the government that they intend to deliver data or software with less than unlimited rights and to specifically identify those items. Even though the IP rules of the road in government contracting can be tricky, companies should not be deterred from taking advantage of the boom in public sector business.
Jennifer Short is a litigation partner with Holland & Knight. Selwa Masri is a senior associate in Holland & Knight’s business group. Both are based in the firm’s McLean, Va., office.
By Linda T. Maramba
Four key elements distinguish the dispute resolution process for commercial companies doing business with the government from the way things are normally done in the private sector:
• Bid protests. Challenges to the validity of a government agency’s bid solicitation or the award of a contract are common. Bid protests are filed with either the procuring agency itself, the U.S. Government Accountability Office or the U.S. Court of Federal Claims. Filing bid protests with the agency or the GAO are not a mandatory precondition to filing an action in the Court of Federal Claims, but parties often turn to them first because they are less formal and less expensive than court proceedings. Particularly attractive procedural characteristics of GAO protests include the availability of an automatic stay of contract award or performance until the protest is resolved and the issuance of a decision within 100 days after the protest is filed.
• Contract Disputes Act. Unlike contracts in the private sector, most federal government contracts contain a clause that sets forth detailed procedures for resolving disputes while the contractor continues to perform. Such clauses are required by the Contract Disputes Act of 1978, beginning at 41 U.S.C. § 601.
Under these procedures, the contractor first presents its written claim to a government contracting officer demanding payment or other relief as a matter of right. If the CO denies the claim, the contractor may appeal to the appropriate agency board of contract appeals within 90 days of the CO’s decision or appeal to the Court of Federal Claims within 12 months. Exclusive jurisdiction to review these decisions lies with the U.S. Court of Appeals for the Federal Circuit.
• FOIA requests. Agency records subject to disclosure under the Freedom of Information Act may contain a cache of information pertinent to a contract dispute, such as agency solicitation-related documentation and proposals submitted by contractors competing for the contract. Accordingly, contractors use FOIA requests as a relatively inexpensive means of obtaining information from an agency that is potentially valuable in litigation relating to the contract dispute.
In some cases, the competitor of a government contractor may use FOIA to seek information from the government about the contractor. A contractor seeking to prevent such disclosure must invoke one of the nine FOIA exemptions. If the contractor fails to persuade the agency that a FOIA exemption applies, the contractor may sue the agency to prevent disclosure. U.S. district courts have exclusive original jurisdiction to hear these “reverse FOIA” suits.
• Qui tam actions. The civil provisions of the False Claims Act allow the government to recover treble damages from any party--including a business organization--who knowingly submits a false claim to a federal agency. Because a contractor submits a “claim” every time it submits an invoice for work performed under a government contract, the financial risk for wrongdoing in this regard can be significant.
With no corollary in commercial contracts between private parties, the qui tam provisions of the False Claims Act allow private individuals to initiate civil false claims suits on behalf of themselves and the government and, if successful, to recover a significant percentage of the amount recovered by the government.
Government procurement has become a more welcoming environment for businesses of myriad types and sizes. But companies should venture into government contracting with a clear recognition that it is a different environment from the private sector, with distinctive risks as well as rewards.
Linda T. Maramba is a senior litigation attorney with the Northrop Grumman Corp. in Washington, D.C. She is a vice-chair of the ABA Section of Public Contract Law’s committees on Alternative Dispute Resolution and Contract Claims.