Transportation is central to mail delivery, so it is no surprise that the companies who move the mail dominate the list of the Top 150 U.S. Postal Service Suppliers in Fiscal Year 2019. Seven of the Top 10 companies are involved in transportation. Federal Express tops the list, as it has since 2002, with just
David P. Hendel
David regularly advises clients on a wide variety of issues arising under federal contracts, including selection and award, protests and disagreements, contract administration, contract interpretation, subcontracting, compliance, changes, equitable adjustments, claims and disputes, false claims and fraud investigations, audits, Freedom of Information Act (FOIA) requests, termination, and debarment. He frequently advises on U.S. Postal Service contracting matters, which are subject to unique laws, regulations, and clauses.
Contractors: get ready for the new DOJ anti-trust task force!
As if over-reaching under the False Claims Act wasn’t bad enough, government contractors will now be subject to a new area of investigation. On November 5, 2019, the U.S. Department of Justice announced its new Procurement Collusion Strike Force, focusing on ferreting out antitrust violations in the government contracts arena.
The PCSF will focus on deterring, detecting, investigating, and prosecuting antitrust crimes under government contracts. These areas include bid-rigging conspiracies and related fraudulent schemes that undermine competition in government procurement. The new strike force is composed of 13 U.S. Attorneys’ Offices, and investigators from the FBI, Office of Inspector General offices of the Department of Defense OIG, the U.S. Postal Service, and other federal agencies.
Buoyed by a guilty plea by five South Korean oil companies, which netted $156 million in criminal fines and $205 million in separate civil settlements, the DOJ Antitrust Division believes this is just the tip of the iceberg. Indeed, in a speech to the American Bar Association, Deputy Assistant Attorney General Richard A. Powers cited a study that eliminating bid rigging could reduce procurement costs by 20% or more. Government contractors, most of whom likely have a profit rate of 10% or less, will find that figure hard to believe.
The problem that government contractors will face is this: If DOJ believes procurement costs are being inflated by 20% due to bid rigging, once DOJ starts looking for it, DOJ will find it, whether it exists or not. And DOJ is looking for criminal antitrust violations, with penalties that include up to 10 years imprisonment, steep fines, and double damages. Corporations can be fined up to $100 million.
Government contractor pleads guilty to fraud for paying drivers as independent contractors
Paying workers as independent contractors instead of as employees may land a former executive in jail for criminal wire fraud. On June 12, 2019, the former operations manager and vice president of a Florida-based mail transportation contractor pled guilty to two counts of wire fraud related to such treatment. The Government’s case was based on pricing estimates for employee-related costs that the contractor later did not incur because it instead used independent contractors.
In the June 1, 2018 indictment of Alexei Rivero, the Government contended that Rivero purposely misclassified the drivers it hired as independent contractors. According to the indictment, this allowed the contractor to “misappropriate” $1.5 million in USPS contract payments “designated” for fringe benefits and $1.2 million designated for payroll taxes.
Transportation companies dominate 2018 list of top U.S. Postal Service suppliers
Transportation companies again dominate this year’s Top 150 U.S. Postal Service Suppliers list. All told, USPS spent nearly $16 billion on purchases in FY 2018, about $900 million more than last year. Not surprisingly for an agency charged with moving the mail, six of the top ten contractors provide transportation services or equipment.
The Top 150 list has been compiled annually since 1999 by David Hendel, a partner in the firm’s Technology, Manufacturing, and Transportation group and leader of the firm’s Postal Contracting team. The list is compiled from data received in response to Freedom of Information Act requests.
The Postal Service spent $15.9 billion on all outside purchases in FY 2018, of which $9.8 billion went to the agency’s Top 150 suppliers. The Top 150 received $540 million more than last year’s Top 150 group, and $1.5 billion more than those in FY 2016.
The top 10 largest suppliers earned $4.2 billion, which is one quarter of the Postal Service’s total spend and $700 million more than last year’s Top 10. They also collected $3 billion more than the next ten largest suppliers.
Can you be forced to sign this contract modification?
Every year or so, the U.S. Postal Service changes the standard Terms and Conditions that apply to its newly awarded Highway Contract Route (HCR) and Contract Delivery Service (CDS) contacts. When this occurs, the new terms only apply to newly awarded contracts–existing contracts are unaffected and retain the same terms as when awarded.
But this year, the Postal Service has sought to apply new Terms and Conditions to existing CDS contracts as well as newly awarded ones. In an email to its CDS contractors, the Postal Service asked them to sign, without any “alterations or additions,” a contract modification that incorporated the new terms. If the contractor did not so, the Postal Service’s email threatened contract termination:
“Because of the Postal Service’s interest in maintaining consistency across its many CDS contracts, please note that a failure to respond to this correspondence … may lead the Postal Service to consider termination of the subject contract.”
After receiving this email, many contractors asked me: “Can the Postal Service really do this?” In my opinion, several legal arguments, if upheld, would make the resulting modification unenforceable. For example, the modification might fail for lack of consideration, because it gave the Postal Service what it wanted without giving anything that contractors valued in return. And it might fail for violation of the implied covenant of good faith and fair dealing, because it seeks to recapture benefits that were foreclosed at the time of contract award. But I think the best argument against its enforceability is based on the legal theory of coercion and duress. Normally, this is a difficult argument to make, but here the elements seem apparent from the Postal Service’s email itself.
What the Lance Armstrong settlement agreement tells us about the Government’s case
While the settlement of the False Claims Act case against Lance Armstrong has generated a press release, a quick online search didn’t produce a copy of the actual agreement. So I filed a Freedom of Information Act request and the next day the Department of Justice provided me a copy of the Lance Armstrong settlement agreement. Thank you, Team DOJ! Below is my take on that agreement and what it tells us about the case.
The settlement amount
The settlement agreement provides that Lance Armstrong will pay $5 million to the Government and $1.65 million to the relator Floyd Landis. To put this in context, the Postal Service had paid about $40 million to sponsor Team Postal. Trebling that amount, and throwing in civil penalties and investigative costs, bumps up potential damages to well over $100 million. The settlement amount was thus less than 7 cents on the dollar.
Damages was always the Government’s weakness – because there weren’t any. This should have been apparent at the outset from the contemporaneous USPS reports on how much publicity and new revenue the Team Postal sponsorship had generated. These reports were poppycock, of course, but they still posed insurmountable problems for the Government’s case.
Top 150 U.S. Postal Service suppliers get more in FY 2017
As part of our postal industry practice, we annually compile a list of the Top 150 USPS suppliers based on data received under the Freedom of Information Act.
In FY 2017, USPS spent $13.9 billion on outside purchases and rental payments, an increase of $181 million over last year. The biggest increase went to the top 10 USPS suppliers. That group received a total of $3.9 billion, up $400 million from last year and accounting for 28 percent of the Postal Service’s total spend. The Top 150 suppliers received $9.2 billion, about two-thirds of the agency’s total spend. Only 81 suppliers collected revenues exceeding $25 million in 2017.
As it has since 2002, Federal Express Corporation lands atop the list, this year with $1.61 billion in revenues—about a $68 million drop from its 2016 earnings. FedEx carries package and letter mail for the Postal Service. FedEx’s air cargo network contract with the Postal Service has been extended several times, and the latest extension takes it to September 29, 2024.
Government ordered to pay contractor’s attorney’s fees in False Claims Act case
After nearly a decade of litigation, justice was finally meted out in an extreme case of Government over-reach against a government contractor. The Government had sought to recover over $1.6 million from a government contractor whose subcontractor had underpaid a handful of employees by $9,900.
When all was said and done, a federal appellate court finally rejected the Government’s legal theory as essentially frivolous and ordered it to pay the contractor’s attorney fees, estimated at roughly $500,000. When the Government expressed concern that this would have a “chilling effect” on its efforts to vigorously enforce the False Claims Act, the court stated: “One should hope so.” The case is called U.S. ex rel. Wall v. Circle C Constr., LLC, No. 16-6169, (6th Cir. Aug. 18, 2017).
The story starts when the prime contractor, Circle C Construction, won a contract to construct buildings at the Fort Campbell military base. Circle C hired a subcontractor, Phase Tech, to perform the electrical work. The prime contract required compliance with the Davis-Bacon Act, which is similar to the Service Contract Act but applies to construction work. Like the Service Contract Act, the Davis Bacon Act requires the prime contractor and all subcontractors to pay construction workers the prevailing wages and benefits set by the Department of Labor. The Davis-Bacon Act also requires that the contractor submit certified payrolls as a condition of contract payment.
While Circle C did not have a written contract with its subcontractor Phase Tech, it did provide Phase Tech with the Wage Determinations from its prime contract. But Circle C did not verify whether Phase Tech was in compliance with the Davis Bacon Act. Phase Tech did not submit payroll certifications for two years after the project commenced, and later contended it was not aware it had to do so.
Eventually, one of Phase Tech’s employees brought a qui tam False Claims Act action against both Phase Tech and Circle C based on the under-payment of wages. Phase Tech settled the case by agreeing to pay $15,000, leaving Circle C as the remaining defendant. The Government agreed to take over the case from the employee and pursued the claim against Circle C.
Initially, the case did not go well for Circle C. The federal trial court hearing the case granted plaintiff’s motion for summary judgment and damages of $555,000 (the entire cost of the electrical scope of work on the project), which was trebled to a total award of $1.66 million against Circle C.
The unique Changes clause in Postal Service HCR contracts
The U.S. Postal Service spends about $3 billion per year to move the mail by truck and does so under a special type of contract called a Highway Contract Route (HCR) contract. These contracts have unique contract clauses, and even their own lingo. For example, an HCR “amendment” is what the rest of the government contracting world would call a contract “modification.”
One of the biggest differences between HCR contracts and other government contracts is the Changes clause. Under an HCR contract, the contracting officer has limited ability to direct unilateral changes. The CO may only issue a unilateral change, called a “minor service change,” if the price impact would be $5,000 or less. Under a Contract Delivery Service (CDS) contract – a subset of HCR contracts for mailbox deliveries – unilateral changes must be $2,500 or less. Even for these changes, a contractor who disagrees with the CO’s determination may file a claim for additional compensation.
In addition to these monetary thresholds, unilateral changes are further restricted to certain types of changes. The only unilateral changes a CO can direct are an extension, a curtailment, a change in line of travel, a revision of route, and an increase or decrease in frequency of service or number of trips. The CO has no authority to unilaterally direct any other change, even if the price impact would be $5,000 or less. For example, the contracting officer may not unilaterally direct a contractor to change equipment or buy new equipment.
Three legal principles that limit the Termination with Notice clause
Similar to a Termination for Convenience clause, a Termination with Notice clause (often found in U.S. Postal Service contracts) allows a party to end a contract without breaching it. Under the clause, either party may terminate the contract without cost consequences by providing advance written notice – usually 60 days – to the other party. The Postal Service Board of Contract Appeals (PSBCA) addressed the limits that apply to the exercise of this clause in a decision on two closely related cases. Cook Mail Carriers, Inc., PSBCA No. 6583, and Patricia Joy Sasnett, PSBCA No. 6584, issued on March 24, 2017.
Cook and Sasnett each had separate Highway Contract Route contracts to transport mail at designated times between various points in Alabama. In March 2014, the Postal Service made changes to its processing network that affected several contractors, including Cook and Sasnett. While the network changes could have been effected by modifying their contracts, the Contracting Officer (CO) instead exercised the Termination with Notice clause.
When he terminated the contracts, the CO misunderstood the network changes. He thought the changes were needed because the Gadsden, AL mail processing facility was closing. In fact, the Gadsden facility was already closed and revised routes were needed because other mail transportation hubs were being relocated.
Propriety of the termination
Cook and Sasnett filed claims asserting the terminations were improper and the case ended up at the Postal Service Board of Contract Appeals (PSBCA). Examining the Termination with Notice clause, the PSBCA noted that while it does not include any express limitations, its use “is not truly unlimited.” The PSBCA then considered whether the CO’s action was proper under three separate legal principles.