Compliance

The line between “white collar crime” and “street crime” is often blurred as prosecutors and investigators deploy all of the tools at their disposal against white collar and regulatory offenses. Principal among these tools is the search warrant. While the execution of a lawfully-obtained search warrant cannot be stopped, a company’s reaction to the search and to the agents conducting it can have a significant impact on the course of a government investigation. A well-executed response may yield intelligence about the nature and scope of the investigation and may limit the amount of information the government obtains.

In this post, we present an overview of the search warrant process and offer some basic guidelines that may be used in preparing for and responding to a search warrant.

Understanding the element of surprise

Government investigators correctly see search warrants as their one chance to use the element of surprise. They make every effort to use it effectively. Long before a warrant is served, agents spend weeks or months on pre-search surveillance. They serve warrants simultaneously at all of a company’s offices. They conduct interviews of key executives at their residences early in the morning before attorneys are available. They use whistleblowers present during the execution of the warrant wired to record employee conversations of the employees. They interview employees on site before company attorneys can inform them of their rights or contact the lead prosecutor. They engage in surveillance of key individuals after the search is executed. They even search nearby dumpsters for evidence. Several weeks later, they may issue a grand jury subpoena requiring the company to produce email and text messages sent during and after the search.

Investigators have the process down to a science, while the company at the center of the investigation likely will be going through it for the first time. Preparation and training on the process will help level the playing field. Here are the five basic elements that should be addressed in an action plan for responding to a search warrant.

No one will argue against the need to improve cybersecurity. We should limit the vulnerability of critical infrastructure and preserve the confidentiality of military technology, private company trade secrets, and individual medical records.

But there is a significant cost to upgrade IT systems in order to achieve this goal. The federal government will pay more to contractors who can meet heightened cybersecurity standards. If cybersecurity standards are too restrictive, qualified contractors will be driven away from federal contracting. At a minimum, new cybersecurity standards will mean more grounds for bid protests, which are the focus of this post.

First, the background

Executive Order No. 13636 (Feb. 12, 2013) [pdf] called for agencies to publish guidance on mitigating cybersecurity threats in federal procurement. In November 2013, DOD and GSA released a joint report recommending that compliance with an established cybersecurity protocol be a precondition to the award of information and communication technology (“ICT”) contracts. See Improving Cybersecurity and Resilience through Acquisition, Final Report of the Department of Defense and General Services Administration (Nov. 2013) [pdf].

The National Institute for Standards and Technology (“NIST”) released its voluntary framework for improving cybersecurity for critical infrastructure in February 2014. See Framework for Improving Critical Infrastructure Cybersecurity, Version 1.0 (Feb. 12, 2014) [pdf]. The NIST Framework is a tool for organizations seeking to measure and improve their cybersecurity programs against an ideal. The Framework encourages organizations to improve their cybersecurity programs “when such a change would reduce cybersecurity risk and be cost effective.” Compliance is not yet mandatory, but legislation incentivizing or requiring compliance should be expected.

These are by no means the first cybersecurity standards for federal contractors, but they would broaden and increase existing requirements. As they are implemented, cybersecurity requirements will certainly lead to an increase in pre- and post-award bid protests for ICT contracts. We see them principally in three areas.

President Obama signed an Executive Order raising the minimum wage for employees of federal contractors on February 12, 2014. Our earlier entry on the issue discusses how a higher minimum wage will affect current contractors. It looks like more waiting will be required before the true impact will be known.

The Executive Order calls for the Secretary of Labor and the FAR Council to draft regulations and contract provisions implementing the new minimum wage and to publish them later this year. But the Executive Order also includes some useful guidance.

Here are the key takeaways—

As part of the Obama Administration’s push to raise the minimum wage, the President announced during his State of the Union speech that he intends to issue an Executive Order raising the minimum wage for workers on federal contracts to $10.10 per hour. We’ll wait for the Executive Order itself before offering specific guidance on its requirements, but it’s not too early for contractors to begin thinking about how this might impact their business. Here are a few things to consider—

1.  The new minimum wage could apply to some current contracts.

The Obama Administration has asserted that the wage increase will apply only to new federal contracts—i.e., those awarded after the effective date of the Order. But the regulations implementing the prevailing wage requirements could mean that the $10.10 minimum will also apply to some current contracts.

The McNamara-O’Hara Service Contract Act requires contractors and subcontractors performing service contracts to pay their workers not less than the locally prevailing wage or the amount paid by the predecessor contractor under a collective bargaining agreement. The Department of Labor prepares wage determinations establishing the minimum wages and fringe benefits based on surveys of local prevailing wages or existing collectively bargaining agreements.

FAR provisions implementing the Service Contract Act contemplate that the prevailing wages may change during the course of a service contract. Under FAR 22.1007, the contracting officer is required to obtain and incorporate a new wage determination for modifications that extend the term of an existing contract or make a change in the scope of work “whereby labor requirements are affected significantly.” FAR 22.1007(b). A new wage determination is also required on the annual or biennial anniversary date of multi-year service contracts. FAR 22.1007(c). Depending on how the Executive Order implementing the new minimum wage is worded, the wage determination applicable to contract modifications or to multi-year service contracts could require current contractors to pay the new $10.10 minimum wage.

The FAR permits the government to suspend or debar a contractor based solely on its affiliation with another contractor that has been suspended. See FAR 9.406-1(c) & FAR  9.407-1(c). The Eleventh Circuit’s decision in Agility Defense & Government Services v. U.S. Dept. of Defense, 739 F.3d 586 (11th Cir. 2013), significantly expands the impact of a suspension due to affiliation. The court held that the initiation of legal proceedings (such as an indictment) permits the indefinite suspension of the contractor’s affiliates, even if the affiliates have not been accused of any wrongdoing. The decision overturned a 2012 Alabama district court decision that was a limitation on suspension due solely to corporate affiliation. We discuss the district court case in an earlier blog post.

Public Warehousing Company was indicted for fraud related to a government contract in November 2009 and was suspended as a result of the indictment. The Defense Logistics Agency then suspended Agility Defense & Government Services and Agility International, Inc., subsidiaries of Public Warehousing. The affiliates submitted written requests for reinstatement because they were not implicated in the indictment. After the agency’s refusal to reinstate them, the affiliates undertook several actions attempting to end their suspension, including a proposed management buyout that would have resulted in Public Warehousing retaining only an indirect 40-percent ownership in one of the affiliates.

As their suspension approached three years, the affiliates filed suit in the United States District Court for the Northern District of Alabama. The court found in their favor, ending the suspension. The district court reasoned that the applicable regulation limited the automatic suspension to 18 months. In the district court’s view, suspension beyond 18 months required the agency to initiate legal proceedings directed to the affiliates’ involvement. The Eleventh Circuit Court of Appeals reversed.

New OFCCP rules amending the nondiscrimination and affirmative action provisions of the Vietnam Era Veterans Readjustment and Assistance Act and Section 503 of the Rehabilitation Act are expected to be effective March 24, 2014. OFCCP has published a set of forms that are to be used in implementing the new rules, which are available in this client alert from Husch Blackwell’s OFCCP compliance team.

As we have discussed in several earlier posts, the new rules represent an aggressive move by OFCCP. They impose significant new recordkeeping obligations on federal contractors and subcontractors. They set high placement goals and hiring benchmarks for veterans and individuals with disabilities. They authorize OFCCP to obtain more contractor information during compliance reviews.

One of the key issues with the new rules is that they require federal contractors and subcontractors to ask job applicants and current employees whether they are individuals with disabilities. Such questioning is normally prohibited by the Americans with Disabilities Act.  Needless to say, there has been a lot of opposition to the new OFCCP rules.

It should come as no surprise that the contracting policy changes in the National Defense Authorization Act for 2014 [pdf] reflect a continued focus on reducing spending. But they also encourage collaboration between the government and the private sector and emphasize the need for innovative contracting strategies and greater flexibility in the procurement process, which may benefit contractors in the long run. Here is a breakdown of a few of the highlights:

  • Extension of restrictions on contractor services spending. Section 802 of the 2014 NDAA amends Section 808 of the 2012 NDAA to extend the temporary limit on the amounts obligated for DOD spending on contract services in FY 2014 to the amount requested for contract services in the President’s budget for FY 2010. It also requires that the heads of each Defense Agency continue the 10-percent-per-fiscal-year reductions in spending for staff augmentation contracts and contracts for inherently governmental function for FY 2014, and requires that any unimplemented amounts of the 10 percent reductions for FY 2012 and FY 2013 be implemented in FY 2014.

The United States Defense Department has published a final cybersecurity regulation concerning unclassified “controlled technical information.” See 78 Fed. Reg. 69,273 (Nov. 18, 2013) [pdf]. The objective of the regulation is to require contractors to maintain “adequate security” on unclassified information systems on which CTI may reside or transit and to implement detailed reporting requirements for “cyber incidents.” The final rule is narrower than the proposed regulation, which sought to safeguard unclassified DoD information generally.  See 76 Fed. Reg. 38,089 (June 29, 2011) [pdf].

Definition of CTI

The final rule includes a new DFARS provision (DFARS 204.7300) and a DFARS contract clause (DFARS 252.204.7012), which impose new security measures and reporting requirements on contractors and subcontractors whose work involves unclassified “controlled technical information resident on or transiting through contractor information systems.”

The rule broadly defines CTI as “technical information with military or space application that is subject to controls on the access, use, reproduction, modification, performance, display, release, disclosure, or dissemination.”  DFARS 204.7301.

The term “technical information” is further defined to mean “recorded information, regardless of the form or method of the recording, of a scientific or technical nature . . . .” See DFARS 252.227-7013. Examples of technical information include research and engineering data, engineering drawings and associated lists, specifications, standards, process sheets, manuals, technical reports, technical orders, catalog-item identifications, data sets, studies and analyses and related information, and computer software executable code and source code.

While this is a broad definition, comments on the new rule limit its application to information requiring controls pursuant to DoD Instruction 5230.24 [pdf] and DoD Directive 5230.25 [pdf]. Contractors should not have to devote resources simply to the task of determining whether information is CTI or not.

De-regulation of the U.S. Postal Service’s purchasing policies has stymied the prosecution of defective pricing fraud cases, according to a September 18, 2013 report issued by the USPS Office of Inspector General (OIG).  U.S. Attorney’s offices have thus declined to criminally prosecute suppliers for submitting defective cost or pricing data in procurement actions valued at $36 million. The OIG therefore recommends that the Postal Service require suppliers to certify that cost or pricing data are accurate, complete, and current. USPS management, however, disagrees. The Postal Service believes its interests are already fully protected and the disadvantages of imposing a new certification requirement would outweigh any benefits.

Flight delays resulting from the furloughs of air traffic controllers are certainly not the only impact of sequestration. All federal contractors and grant recipients will have to adapt to reduced federal spending. According to the OMB report to Congress on sequestration reductions for FY 2014, $109 billion will be cut from the federal budget next year with equal reductions of approximately $54.7 billion in the defense and non-defense categories. Discretionary defense spending will see a $53.9 billion reduction, while direct defense spending will be reduced by $749 million. Non-defense discretionary spending will decrease by $37.2 billion, and non-defense direct spending will shrink by $17.5 billion, $11.2 billion of which will come from reductions in Medicare spending.

As agencies struggle with these mandatory budget cuts imposed by sequestration, incrementally funded contracts are particularly vulnerable. Despite the apparent need for their goods or services and the high caliber of their work, contractors holding incrementally funded contracts may find that funds are simply not available. Here are three strategies contractors can take to limit the risk of performing without compensation: