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Government contracts Issue update Fall 2013

ALSO IN THIS ISSUE

5 Cybersecurity Developments: Does the NIST “Voluntary” Framework Portend New Requirements for Contractors?

67 After the Flood: Cleaning Up from

Government Shutdown 2013

69 Bollinger Shipyards Sinks False

Claims Act Suit

610 Speeches & Publications

continued on page 2

Push to Consolidate and Expand Suspension and Debarment Continues on the HillBy Kara M. Sacilotto and Craig Smith

Furthering a trend, Congress has continued to give significant attention to the suspension and debarment (S&D) remedies available to federal agencies. Two bills introduced by members of the House Committee on Oversight and Government Reform (Committee) are at the center of the most recent developments: the revamped Stop Unworthy Spending Act (SUSPEND Act; HR 3345) and the Afghanistan Suspension and Debarment Reform Act (HR 2912). Both bills, which have bipartisan sponsorship, could alter how the

federal Government considers and resolves S&D matters, including several significant changes that contractors should carefully monitor.

The SUSPEND Act

In October, the Committee considered and passed the SUSPEND Act, which would consolidate resolution of many S&D matters at a central Government board. (Earlier this year, the Committee’s chair, Rep. (R-CA) Darrell Issa released a discussion draft of the Act, which we described in the last issue of Government Contracts Issue Update. The current bill has been revised from the discussion draft.) The SUSPEND Act aims to achieve the laudable goals of improving efficiency, effectiveness, and transparency of S&D. It aims to do so, however, by overhauling the current S&D practice that has developed incrementally and has taken on increased strength in recent years.

Today, S&D is decentralized within the Government. Agencies have their own suspension and debarment officials (SDOs), with some agencies having SDOs for individual activities or components rather than a single agency-wide SDO. Some SDOs have substantial staffs and operate independently;

other SDOs handle S&D matters as only part of their duties. SDOs also vary in how and when they consult with program teams, contracting officers, offices of inspector general (OIGs), the Department of Justice (DOJ), and other interested parties before taking certain actions. Similarly, SDOs use different combinations of tools, such as show-cause letters and administrative agreements, in addition to the basic S&D remedies.

But despite these differences, there is one constant principle: S&D is a remedy to be used only to protect the Government from contracting with (or providing non-procurement funds to) firms and individuals lacking “present responsibility.” S&D is not to be used as punishment for contractors’ and individuals’ prior bad acts.

The SUSPEND Act aims to centralize S&D without changing this core purpose of protecting the Government from contractors lacking present responsibility. Most notably, the Act would create a new Board of Suspension and Debarment (Board), housed within the U.S. General Services Administration (GSA), that would make S&D determinations that are “conclusive on a Governmentwide basis.” The Act would require nonpartisan appointees to the Board but otherwise defers many details about the Board’s

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operations to rulemaking. The Act further requires the Office of Management and Budget (OMB) to develop “one generally applicable regulation on suspension and debarment for procurement and nonprocurement programs.” Thus, in addition to proposing a new forum for resolution of S&D matters, the Act also proposes a new regulatory regime, which may or may not resemble the current Federal Acquisition Regulation (FAR) provisions or Governmentwide non-procurement procedures.

Still, some existing practices may nevertheless continue. The bill would allow any agency (except GSA—ironically, one of the examples of effective S&D programs cited by prior Government Accountability Office (GAO) reports) to receive a renewable waiver from having the agency’s S&D functions consolidated into the Board. An agency would need to satisfy several requirements to receive the waiver, which would be issued by the OMB. Several requirements appear reasonable: The agency must have a dedicated SDO, agency-specific S&D policies and procedures, and practices that encourage S&D referrals. Two other waiver requirements are more questionable:

▪ An agency with multiple bureaus, offices, or departments would have to consolidate S&D activities with a single SDO. Thus, such agencies can consolidate specialized SDOs, thereby eroding their SDOs’ intimate understanding of components’ businesses and contractors, or they can cede their S&D functions to the Board, which also may eliminate that intimate business understanding altogether.

▪ An agency would have to average 50 or more S&D dispositions (of any outcome) over three consecutive fiscal years before the waiver. The 50 S&D disposition requirement seems arbitrary and inconsistent with the premise of S&D as a remedy used only to protect the Government. In addition, the number of matters an SDO can consider is dependent on the number of matters referred to the SDO; a quota fails to consider that an SDO office does not control its workflow. Furthermore, setting any minimum may encourage agencies with immature or nonexistent S&D programs to churn through S&D matters in pursuit of a waiver. Agencies may have strong incentive

to pursue waivers because, as the Act is drafted, agency S&D activities terminate on October 1, 2016. If an agency has not already qualified for a waiver, it is unclear whether it could ever meet the requirements to earn one after this date.

If the SUSPEND Act prompts many agencies to seek waivers, fewer agencies will have their S&D functions consolidated, and the more likely it is that the S&D landscape will remain a decentralized, agency-specific process. The Board, therefore, may ultimately turn out to be an outlier forum.

Contractors should nonetheless carefully evaluate several aspects of the revamped SUSPEND Act. First, the Board’s rules may provide for proceedings resembling litigation, with formal rules of evidence and adversarial briefings, rather than the less formal procedures often now used by SDOs. Such a shift could drive up the costs of responding to and resolving S&D matters, both in dollars and time, for contractors and agencies alike.

Second, as S&D matters become more akin to adversarial litigation, their resolution likely will be based less on the business-oriented considerations that now underlie (or should underlie) resolution of most S&D matters. Certainly, some contractors may favor the more uniform, procedure-based approach to resolution of S&D matters envisioned by the Act. But the loss of the ability to reach a business solution is a negative for other contractors. It also is likely a negative for agencies, which often are better off with a solution that provides the affected component with remedies that further their missions.

Third, even if the Board’s rules retain the less-formal process now used by many SDOs, the Board may still have limited insight into agencies’ (and thus contractors’) business interests. The Act contemplates consolidating dozens of agency SDO offices into a single body. Unless the Board designates members to specialize in S&D matters from particular agencies, then Board members handling matters referred from a broad rotation of agencies will inevitably have less familiarity with any individual agency’s needs than the SDOs who now serve a single agency (or activity within

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an agency). Thus, the Act vests the authority to make “conclusive” determinations in a body that may have little familiarity with the details of an agency’s missions or its relationships with its contractors. As a result, affected agencies may have a lot to lose if a GSA-based Board makes determinations regarding with whom the agency can and cannot do business.

Fourth, an amendment to HR 3345 would allow 30 days for acceptance or rejection of an S&D referral and would require resolution of all S&D matters within six months of the initial referral. These timelines may on their face appear fair, or even generous, but they could hamper agency investigations undertaken after a referral but before implementation of S&D action as well as the agency-contractor exchanges that occur after an action (such as suspension) has been taken or proposed. Contractors and the Board or an SDO would be required to put these activities on a fast track to meet the statutory deadlines, which, while preventing S&D actions from lingering, may prevent full analysis of the facts and issues or implementation of remedial measures.

Fifth, the SUSPEND Act may also inadvertently impact negatively some of the positive features of existing S&D practices. For example, many SDOs encourage contractors to provide preliminary notice to an SDO of matters that may reflect on their present responsibility; sometimes the SDO will ask for periodic updates from the contractor on the matter and any remedial actions, and sometimes the notice may initiate a parallel investigation. Under the FAR today, providing such notice and cooperating with an agency investigation are mitigating factors that the SDO considers in deciding whether S&D is necessary. It is unclear under the SUSPEND Act regime where and how contractors might provide such early notice to demonstrate their present responsibility and stave off S&D proceedings or how cooperation will or will not be considered.

Sixth, the SUSPEND Act mandates a case management system to be used by the Board and all agencies granted waivers. The contents of the database are not to be released to the public unless necessary to protect the Government’s interests. Still, the existence of a centralized case tracking system may raise concerns with contractors of de facto debarments taken before a pending S&D matter is fully resolved.

Seventh, contractors have raised concerns in the past with SDOs taking action, such as suspension or proposed debarment, without providing notice to contractors. In the press release accompanying the Act, the Committee stated that the Act would “[e]nsur[e] [that] accused parties have the opportunity to be heard prior to any adverse action being taken against them by requiring ‘show cause’ letters.” The Act, however, provides less comfort, stating that “advance notice of adverse action” will be provided unless the Board or the SDO for an agency with a waiver “determines that expedient action is necessary to protect the interests of the Government.” Today, SDOs have the ability to issue “show cause” letters if there is no need for immediate protection of the Government’s interests. It is unclear, therefore, whether the Act really provides any “additional” protection, as the press release suggests.

Finally, contractors also rightly may worry that the SUSPEND Act will unfairly draw negative attention to their enterprises. The uniform regulations contemplated under the Act would require “public availability of the outcome of all referred cases, including the rationale for the decision to take or not take an adverse action.” Thus, whether an S&D referral involves a single “bad actor” or is unfounded, the fact of the referral and the disposition will be publicized. In contrast, currently, not all S&D matters are identified publicly. Although agencies must list all contractors and individuals that are suspended, debarred, or proposed for debarment in the public System for Award Management (SAM), they are not required to post information regarding contractors for which a “show cause” notice has been issued or against which no proceedings are ever initiated. There are sound reasons for this limited public notice: Notice that a contractor or individual was referred for S&D consideration draws negative attention, even where none turns out to be warranted, to the individual employee and the contractor. Under the SUSPEND Act, such notice and attention may become a matter of course.

The press release accompanying the legislation states that the vast majority of contractors perform responsibly. Yet, the Act currently proposes a one-size-fits-all solution for S&D (except for agencies where it will not on account

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of waivers) without regard for agencies’ business and other needs. Although GAO has noted concerns with various agency S&D programs in the past, its June 12, 2013, report noted three features of successful programs: (1) dedicated S&D staff; (2) detailed policies and procedures;

and (3) active referral of matters. All of these best practices can be met under the existing system with less disruption than the SUSPEND Act may usher in. Moreover, GAO noted that of the agencies it examined in 2011, those with less-effective programs had taken actions to improve them. The Interagency Suspension and Debarment Committee (ISDC), which is already dedicated to coordinating S&D activities and promoting best practices, had also taken actions to improve coordination and emphasize S&D governmentwide. Thus, with progress being made

and most contractors behaving responsibly, it is unclear how necessary the SUSPEND Act is.

The bill has been reported from committee; as of the date of this newsletter, there has been no action taken.

The Afghanistan Suspension and Debarment Reform Act

In August, the Afghanistan Suspension and Debarment Reform Act was introduced with sponsorship and co-sponsorship from three members of the House Committee on Oversight and Government Reform and one other cosponsor. The Act prescribes procedures for how the Special Inspector General for Afghanistan Reconstruction (SIGAR) refers potential S&D matters to an agency SDO or to the ISDC for determination of which agency SDO should be the “lead agency” in these matters.

More important, the Act would allow the ISDC to designate SIGAR as the SDO if the designated lead agency SDO declines the matter or does not respond. The Act limits the matters in which SIGAR can act as SDO to those involving “a person that is an Afghan national or foreign national or foreign company operating in Afghanistan” that has received, is receiving, or may receive funds from certain contracts and subcontracts. Even with these limitations, the Act commingles SIGAR’s investigative function with the business-oriented decision-making function performed by an SDO. Indeed, the very entity that will have referred a matter for suspension or debarment will then be tasked with objectively determining whether these remedies are warranted. Ironically, the Fiscal Year 2013 National Defense Authorization Act (NDAA) took pains to separate SDOs from the investigative wings of their agencies. Specifically, the FY 2013 NDAA required that the SDOs at DOD (including the military departments), the U.S. Department of State, and the United States Agency for International Development not “report to or be subject to the supervision” of their respective acquisition offices or OIGs. See FY 2013 NDAA §861(a)(2), Pub. L. No. 112-239, 126 Stat. 1857-58. It is not clear why SIGAR should be exempt from this policy determination.

Congress has taken no action on the Act since it was introduced, and referred it to the Committee on Oversight and Government Reform and the Committee on Foreign Affairs in August.

For more information, please contact:

Kara M. Sacilotto 202.719.7107 ksacilotto@wileyrein.com

Craig Smith 202.719.7297 csmith@wileyrein.com

Second, as S&D matters become more akin to adversarial litigation, their resolution likely will be based less on the business-oriented considerations that now underlie (or should underlie) resolution of most S&D matters.

Court of Federal Claims Holds Injunctive Relief Not Available to Prevent Posting of Unsatisfactory Past Performance Rating in PPIRS continued from page 12

Push to Consolidate and Expand Suspension and Debarment Continues on the Hill continued from page 3

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Cybersecurity promptly reemerged as a hot topic for the federal acquisition community shortly after the Government reopened from the shutdown. On October 22, the National Institute of Standards and Technology (NIST) released a much-anticipated preliminary “framework” of standards and practices designed to assist critical infrastructure organizations addressing and managing cybersecurity risk. The same day, DOD issued a final rule expanding the Defense Industrial Base (DIB) Voluntary Disclosure Program, finalizing an interim rule issued in May. Both steps reflect further progress in implementing President Obama’s Executive Order (EO) 13636, but questions still remain eight months after the EO as to the ultimate content and structure of the NIST framework and the impact both programs will have on government contractors. Chief among those questions for government contractors is whether, and how, the programs could eventually sprout new minimum requirements for companies doing business with the federal Government. On November 18, DOD moved forward with a final rule imposing new basic security requirements for certain types of technical data and mandatory disclosure obligations for certain cyber incidents and breaches.

NIST’s Preliminary Cybersecurity Framework. The preliminary framework represents months of collaboration between NIST, Government, and industry stakeholders to identify and characterize cybersecurity best practices. EO 13636 instructed NIST to develop “a prioritized, flexible, repeatable, performance-based and cost-effective approach” to “align policy, business, and technological approaches to address cyber risks.” Over the past six months, NIST has engaged industry participants through a series of national workshops to gather input on existing industry standards, guidance and best practices to achieve outcomes that can assist organizations in managing their cybersecurity risk. The voluntary framework is designed to enhance critical infrastructure organizations’ existing business or cybersecurity risk management processes and cybersecurity programs by identifying potential gaps and filling them with standardized

best practices. Comments on the preliminary framework are due in early December, and a final framework is anticipated in February 2014.

The framework is intended to complement existing business and cybersecurity operations for organizations with formal existing plans and policies, or to serve as a template for organizations that create new programs. It features a series of four progressive “Implementation Tiers” to describe how an organization manages cybersecurity risk. This risk-based assessment “describe[s] an increasing degree of rigor and sophistication in cybersecurity risk management practices and the extent to which cybersecurity risk management is integrated into an organization’s overall risk management practices.” Framework participants will use the four-tier structure to characterize the organization’s existing risk management profile and compare it with the tier that best aligns to the organization’s cyber risk profile. The expectation is that framework participants will align the organization’s profile to the best practices established for each successive tier.

The NIST framework is intended to be a voluntary program. Industry has insisted, however, that voluntary participation should be encouraged through a series of incentives, which remain very much in the ether. In August, a post to the White House blog by the President’s Cybersecurity Coordinator highlighted areas in which potential incentives were being analyzed and discussed by “the Administration, Congress, and private sector stakeholders.” Those areas include (1) cybersecurity insurance; (2) grants; (3) process preferences (primarily for technical assistance in responding to cyber incidents); (4) legislation to limit liability for cyber incidents for framework participants; (5) streamlined regulatory structures and reduced audit burdens; (6) public recognition; (7) rate recovery for price-regulated industries; and (8) Government assistance with cyber-related research initiatives.

For government contractors, in particular, one “incentive” agencies could adopt—either through

Cybersecurity Developments: Does the NIST “Voluntary” Framework Portend New Requirements for Contractors?By Jon W. Burd

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formal rulemaking or on an ad hoc basis—is a preference for framework participants in competitions for federal information technology (IT) or cyber-related contracts. Contractors are also wary that the voluntary NIST framework could be a prelude to new “mandatory” cybersecurity requirements for federal acquisitions, either through contract-specific standards of care requirements or through formal rulemaking. Much as the FAR Councils required contractors to implement standards of business ethics and conduct (FAR 52.203-13) in 2008, the NIST framework could serve as the template for new cyber requirements. The new DOD final rule on Safeguarding Unclassified Controlled Technical Information (discussed below) appears to be a first step in that direction.

Some industry participants have also expressed concern that the NIST framework will lead to a de facto baseline for all industry participants if it is recognized as the new industry standard of care. In that case, they argue, any cyber program that falls short of the NIST framework could expose an organization to liability for not following established best practices. In this respect, the “voluntary” NIST framework would exert a gravitational pull that would force industry participants to align their practices—either to obtain the benefits of Government “incentives” or to avoid the risk of having a cyber program that no longer measures up to the new standard.

Final DIB Voluntary Disclosure Rule. DOD finalized its interim rule on the DIB voluntary disclosure program. See 78 Fed. Reg. 62431 (Oct. 22, 2013). The final rule reflects DOD’s effort to continue to grow the program to include more DIB participants and increase the Government and DIB situational awareness of the extent and severity of cyber threats to DOD information residing on DIB networks. The program has grown to more than 100 participants, and is part of DOD’s approach to enhance and supplement DIB information assurance and threat awareness capabilities. We previously covered DOD’s interim rule in May 2012, and the final rule leaves the interim rule largely unchanged, although DOD did clarify the scope of “U.S.-based” systems on which participants may deploy countermeasures based on government-furnished information received

under the program. The final rule also deleted a statement that DOD “may request from any DIB participant additional information or assurances” from the DIB participant regarding the organization’s cyber policies or practices, based on industry concerns that this could implicate attorney-client privileges. DOD clarified in its preamble comments, however, that it retained the authority to request additional information from participants.

Final DOD rule on Safeguarding Unclassified Controlled Technical Information. DOD also finalized a proposed rule on safeguarding certain types of controlled technical information that is stored on or transits across contractors’ unclassified information systems. See 78 Fed. Reg. 69273 (Nov. 18, 2013). The new final rule reduces the scope of an earlier proposed rule that would have imposed data security requirements on a broad range of unclassified DOD information, and restricts the rule to “unclassified controlled technical information,” which includes all technical data and computer software (as defined in DFARS 252.227-7013) with military or space application that is subject to DOD access controls. This includes, for example, research and engineering data, engineering drawings, specifications, manuals, technical reports, and computer software. The final rule requires affected contractors to “provide adequate security to safeguard unclassified controlled technical information from compromise.” The minimum standards to be applied to affected unclassified information technology systems are drawn from fairly standard commercial practices outlined in NIST Special Publication (SP) 800-53 to control and protect affected systems. The NIST SP 800-53 standards are already fairly ubiquitous in DOD contracts, and DOD anticipates that the new requirements will therefore come at little additional cost to the industry, overall. At a minimum, contractors must implement access controls, awareness and training, contingency planning, identification and authentication, and maintenance.

The potentially more onerous and significant obligation imposed by the new rule is a mandatory reporting requirement where

Cybersecurity Developments: Does the NIST “Voluntary” Framework Portend New Requirements for Contractors? continued from page 5

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In “Step 3” of our September 30 alert, Déjà vu All Over Again—Five Steps to Prepare for a Government Shutdown, we advised contractors to record everything in order, among other things, to capture and, if necessary, be ready to assert requests for equitable adjustment (REAs) if shutdown-related Government actions led to increased costs or delays. For all those who took this advice, congratulations, but read on for how to make certain that your efforts can be translated into maximum recovery. For those who did not have the opportunity to keep good records regarding those confusing and hectic weeks, there is still hope, but every day is critical.

By now you should have a better idea as to whether the shutdown has had a cost impact on your company, at least at a high level. If you can confidently assess the quantum (or net

amount) of such costs as relatively small, you may wish to absorb them and thereby promote your company’s reputation as a “team player.” However, among the types of relief that should be considered are acceleration, unabsorbed overhead, delay and disruption, furlough costs, and recruitment costs to replace personnel lost due to inactivity or contract downtime. To make an assessment of whether to assert one or more such legal theories, you may want to consider current customer relations, customer temperament, and the specific budgetary circumstances in which your customer finds itself going forward, among other factors. These considerations are actually relevant regardless of how much money is involved, and of course, this is fundamentally a business judgment rather than a legal call.

unclassified, controlled technical information residing on or transiting through a contractor’s unclassified system is potentially exfiltrated, manipulated, or otherwise lost or compromised. Contractors must also report any incidents resulting in unauthorized access to their covered systems. These triggering events are subject to some ambiguity, and contractors will need to give careful consideration to whether a cyber incident triggers the reporting obligation. If so, the new reporting obligation requires contractors to report cyber incidents to DOD within 72 hours of discovering the incident. Incident reports will trigger significant additional obligations for the contractor to assess its networks and capture information related to the reported incident, and potentially support DOD damage assessments.

DOD’s initial proposed rule had included additional “basic” security requirements for a broader range of unclassified nonpublic information. That aspect of the rule was subsequently overtaken by a proposed FAR rule, FAR case 2011-020, Basic Safeguarding

of Contractor Information Systems, that would impose similar safeguarding requirements on all federal contractors. In its preamble comments on the final rule, DOD indicated that a final FAR rule would be forthcoming to address those “basic” safeguarding requirements. As a practical matter, many DOD contractors are already subject to these “basic” safeguarding requirements, which have been incorporated into many DOD contracts by reference to DOD Instruction 8582.01, Security of Unclassified DOD Information on Non-DOD Information Systems (June 6, 2012).

For more information, please contact:

Jon W. Burd 202.719.7172 jburd@wileyrein.com

After the Flood: Cleaning Up from Government Shutdown 2013By Richard B. O’Keeffe, Jr.

Cybersecurity Developments: Does the NIST “Voluntary” Framework Portend New Requirements for Contractors? continued from page 6

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Page 8 Government Contracts Issue Update

But the important thing is not to simply abandon, through inaction, the right to assert such requests. Thus, if the potential damage from the shutdown is significant and if, to this point, you have not done a great job of “recording everything,” the time to capture the facts and data necessary to assert any REAs (and, if necessary, claims under the Disputes Clause) is now. Every day that passes, memories dim, other projects distract, and critical documents are lost or destroyed. If the shutdown really hurt your company, assemble a team of project personnel and cost estimators now to inventory the damages attributable to Government actions or inactions, to identify key persons and documents with information relevant to those costs or schedule impacts, and to safeguard and capture those documents and experiences required to prove any REAs or claims. Where necessary documents do not exist, consider documenting what happened through memos or declarations, while memories are still reasonably fresh. Finally, when the anticipated quantum of shutdown-related damages is high, legal counsel should be involved early in order to maximize the capture of the right evidence and to help determine which costs are most feasibly recoverable.

And in parallel with these efforts, for all companies wanting to pursue shutdown cost reimbursement or schedule extensions, you should consider the Notification of Changes Clause, FAR 52.243-7. This clause, often overlooked in the heat of a crisis, requires the contractor to make a “prompt” report of actions deemed by the contractor to be a constructive change to the contract. While the clause does not define “prompt,” it is safe to say that the longer the delay, the greater the risk that the Government will be able to argue, successfully, that it was prejudiced by the failure to receive notification. The prescriptive language from the main FAR text, FAR 43.104(a), specifies the principle reasons for the notice requirement as follows:

▪ (a) When a contractor considers that the Government has effected or may effect a change in the contract that has not been identified as such in writing and signed by the contracting officer, it is necessary that the contractor notify the Government in

writing as soon as possible. This will permit the Government to evaluate the alleged change and—

(1) Confirm that it is a change, direct the mode of further performance, and plan for its funding;

(2) Countermand the alleged change; or

(3) Notify the contractor that no change is considered to have occurred.

The clause spells out what should be included in the notification, to include the anticipated cost and schedule impact. The notification is not an actual REA or claim, and thus it does not need to be certified, or prepared with the same level of detail as would be required for either an REA or claim. Nevertheless, companies must exercise due care to ensure accuracy and completeness as far as possible, and the notification should specify, as appropriate, when the matters set forth in it are based on partial or undeveloped data. In deciding when to make notification, the company, ideally with the assistance of legal counsel, should balance the need for prompt notice, against the time required to achieve an adequate level of confidence in the matters conveyed to the contracting officer. In certain situations, it may be prudent to make a very high-level initial notification, with little detail, and inform the contracting officer that a more detailed notification will be transmitted as soon as possible. We also recommend that, in advance of making any written notifications under the clause, the contractor have a conversation with the contracting officer and program manager to preview the letter, answer questions, and address concerns and any misunderstandings, or Government “sticker shock.”

But in any event, the clock is ticking. Companies that have suffered financial damage because of untimely, inconsistent or unsound Government action in response to the recent fiscal unpleasantness should take action now to preserve their rights to be made whole.

For more information, please contact:

Richard B. O’Keeffe, Jr. 202.719.7396 rokeeffe@wileyrein.com

After the Flood: Cleaning Up from Government Shutdown 2013 continued from page 7

Page 9©2013 Wiley Rein LLP

Bollinger Shipyards Sinks False Claims Act SuitBy Mark B. Sweet and Erin K. Nord

Bollinger Shipyards won an important victory for government contractors in October when the Eastern District of Louisiana dismissed the Government’s $400 million fraud suit against the Louisiana-based shipbuilder. Represented by Wiley Rein, Bollinger secured dismissal with prejudice of all claims under the False Claims Act (FCA) and common law fraud.

In 2011, after years of investigations by the U.S. Coast Guard and DOJ, the United States alleged that Bollinger made false statements and claims for payment on the Coast Guard’s Deepwater Program, a massive long-term effort to update the Coast Guard’s fleet and computer and communications systems. The Government alleged that Bollinger misled the Coast Guard by knowingly submitting false engineering data about the structural strength of Coast Guard cutters that Bollinger was lengthening from 110 feet to 123 feet and refurbishing.

The Government originally filed suit in the District of Columbia, but Bollinger successfully transferred the case to the Eastern District of Louisiana in April 2012. Bollinger then moved to dismiss the case, arguing, among other things, that the United States had failed to state a claim under the FCA or plead fraud with particularity. The court agreed, and earlier this year dismissed the complaint, but gave the Government leave to amend some of its claims.

In February 2013, the United States filed an amended complaint. Bollinger renewed its arguments that the complaint was pled improperly and still failed to adequately allege fraud. While that motion was pending, Bollinger scored a series of smaller victories in discovery disputes, culminating in sanctions against the United States and dismissal of more than $100 million of damages claims in July 2013.

On October 21, 2013, the court granted Bollinger’s second motion to dismiss, this time refusing to give the United States another chance to fix its allegations. In her decision, Judge Vance emphasized that for purposes of proving a “knowing” violation under the FCA, one must demonstrate that a person either “has actual

knowledge of the information,” “acts in deliberate ignorance of the truth or falsity of the information,” or “acts in reckless disregard of the truth or falsity of the information.” The Government alleged that Bollinger had made three calculations about the lengthened section’s longitudinal strength, using what turned out to be incorrect inputs, and submitted only the highest calculation to the Coast Guard. The Government argued that this and other facts led to the inference that “Bollinger knowingly input false data . . . to obtain a false . . . result high enough to avoid further Coast Guard scrutiny and . . . review of the vessel’s structural integrity.” Judge Vance held that this inference was not reasonable. The three incorrect calculations suggest that Bollinger did not know the correct inputs, not that it knew the correct inputs, but nonetheless reported a result based on incorrect inputs.

Judge Vance wrote, “[t]he United States has failed to allege facts that allow the inference that Bollinger acted knowingly or with reckless disregard or deliberate ignorance of the truth. Because its First Amended Complaint lacks a plausible theory of fraudulent inducement of acceptance of delivery or of payment, the Court must dismiss the United States’ FCA claims.” This decision demonstrates that the requirement for the Government to prove a “knowing” violation of the FCA still has teeth, and that the fact that the Government may, in retrospect, be able to show that certain information it received was incorrect does not support an inference of an FCA violation.

The opinion is available here.

For more information, please contact:

Mark B. Sweet 202.719.4649 msweet@wileyrein.com

Erin K. Nord 202.719.7183 enord@wileyrein.com

Page 10 Government Contracts Issue Update

speecHes & puBLIcatIonsFederal Circuit Year-in-Review 2012: Guarding the Gates of Government Contracts LitigationDaniel P. Graham, Brian G. Walsh, W. Barron A. Avery, Tracye Winfrey Howard, Tara L. Ward, Collin Swan, and Laura E. Sherman Public Contract Law Journalsummer 2013

6The Affordable Care Act: Questions for Contractors Daniel P. Graham, PanelistProfessional Services CouncilJuly 25, 2013 | alexanDria, Va

6Wiley Rein Government Contracts Boot Camp Series: “The Inspection, Acceptance and Warranty Continuum” Daniel P. Graham and W. Barron A. Avery July 31, 2013 | Webinar

6Surviving a Congressional InvestigationRalph J. Caccia, Robert L. Walker, and Shane B. KellyThe Metropolitan Corporate CounselJuly/auGust 2013

6CLE Program – New Frontiers in Fraud and Compliance?Ralph J. Caccia, Moderator 2013 ABA Annual MeetingauGust 12, 2013 | san francisco, ca

6The Shutdown, GAO and CICA — The Sky May Not Be Falling Brian G. WalshLaw360october 15, 2013

6Recent Developments in Small Business Contracting and Implementation of the 2010 Small Business Jobs Act: New Opportunities (and Risks) for Small and Large BusinessJohn R. Prairie and Benjamin KohrNational Contract Management Association Free State Chapter Breakfast Meeting october 23, 2013 | Laurel, MD

You Want a New PBM? It’s Not a BMW, so Buyer Beware! Dorthula H. Powell-Woodsonand Rachel A. Alexander, PresentersBlue Cross Blue Shield Association Annual Lawyers Conferenceoctober 28, 2013 | Phoenix, aZ

6Where AIA Meets Bayh-Dole Act: Beware the Ticking ClockScott A. Felder and Rachel K. HunnicuttLaw360october 29, 2013

6DCAA Access Rights to Your Internal Audit Reports: How to Respond to Government Requests and Minimize the Risks of Disclosure Nicole J. Owren-Wiest, Panelist ACI’s 5th Annual Advanced Forum on DCAA Audits, noVember 5, 2013 | arlinGton, Va

6Improving Health Care Quality: Impacts of the Affordable Care Act Now and BeyondRachel A. Alexander, Presenter District of Columbia Healthcare Quality Associations Annual Educational ConferencenoVember 8, 2013 | WashinGton, Dc

6Industry PanelScott M. McCaleb, Moderator Army JAG School Year in ReviewnoVember 14, 2013 | charlottesVille, Va

6Year-in-Review on IP in Government Contracts Scott A. Felder, Presenter 2013 Contract and Fiscal Law New Developments Course, Army JAG SchoolnoVember 14, 2013 | charlottesVille, Va

continued on page 11

Page 11©2013 Wiley Rein LLP

Speeches & Publications continued from page 10

“Change and Termination Clauses: Successful Clause Negotiation and How to Obtain Compensation upon Execution” and “Effective Enforcement of European IP and Data Rights”Nicole J. Owren-Wiest, PanelistUS Defence Contracting & FAR Compliance in EuropeDecember 4, 2013 | Frankfurt, Germany

6Gathering and Using Past Performance InformationPaul F. Khoury, Panelist2013 Nash & Cibinic Report Roundtable December 5, 2013 | WashinGton, Dc

6Suspension and Debarment in Government Contracting Kara M. Sacilotto and Craig Smith, Speakers Federal Publications Seminars December 12, 2013 | Webinar

6Cybersecurity Hot Spots: The Evolving Role ofCybersecurity in Federal AcquisitionsJon W. Burd, Panelist Feeling the Heat, Burning Issues in Government Contracts, ABA Section of Public Contract Law, December 13, 2013 | WashinGton, Dc

6What Every Legal Practitioner Should Know about State-Level False Claims Statutes, Cases and Enforcement: An In-Depth Review of State-Specific Statutes Ralph J. Caccia, Speaker Big Ticket Cases and Emerging Risk FactorsAmerican Conference Institute’s False Claims & Qui Tam Enforcement, January 29, 2014 | neW york, ny

Statutes & RegulationsRand L. Allen, PanelistThe Government Contracts Year in Review Conferencefebruary 19, 2014 | WashinGton, Dc

6Risk Allocation in State Health Care IT Contracting Under the ACADaniel P. Graham and Nooree Lee Public Contract Law JournalWinter 2014

6Inspection, Acceptance, and Warranty: Fundamental Government Contracting Principles Take on Heightened Importance in Wake of Federal Budget Uncertainty Daniel P. Graham, W. Barron A. Avery, and Gary Ward Procurement LawyerWinter 2014

Page 12 Government Contracts Issue Update

Government Contracts TeamPartners/Of CounselRand L. Allen, Chair 202.719.7329 rallen@wileyrein.comWilliam A. Roberts, III, Co-Chair 202.719.4955 wroberts@wileyrein.comTodd A. Bromberg 202.719.7357 tbromberg@wileyrein.comMegan L. Brown 202.719.7579 mbrown@wileyrein.comKathryn Bucher 202.719.7530 kbucher@wileyrein.comJon W. Burd 202.719.7172 burd@wileyrein.comRalph J. Caccia 202.719.7242 rcaccia@wileyrein.comPhilip J. Davis 202.719.7044 pdavis@wileyrein.comScott A. Felder 202.719.7029 sfelder@wileyrein.comDaniel P. Graham 202.719.7433 dgraham@wileyrein.comPaul F. Khoury 202.719.7346 pkhoury@wileyrein.comEric W. Leonard 202.719.7185 eleonard@wileyrein.comKevin J. Maynard 202.719.3143 kmaynard@wileyrein.comScott M. McCaleb 202.719.3193 smccaleb@wileyrein.comChristopher M. Mills 703.905.2810 cmills@wileyrein.comRichard B. O’Keeffe, Jr. 202.719.7396 rokeeffe@wileyrein.comNicole J. Owren-Wiest 202.719.7430 nowrenwiest@wileyrein.comDorthula H. Powell-Woodson 202.719.7150 dpowell-woodson@wileyrein.comKara M. Sacilotto 202.719.7107 ksacilotto@wileyrein.comKay Tatum 202.719.7368 ktatum@wileyrein.comRoderick L. Thomas 202.719.7035 rthomas@wileyrein.comJennifer S. Zucker 202.719.7277 jzucker@wileyrein.com

Other ProfessionalsJohn A. McCullough, Special Counsel 202.719.7254 jmccullo@wileyrein.com

AssociatesRachel A. Alexander 202.719.7371 ralexander@wileyrein.comW. Barron A. Avery 202.719.7263 bavery@wileyrein.comStacie L. Gonsalves 202.719.7526 sgonsalves@wileyrein.comMichael P. Grogan* 202.719.3242 mgrogan@wileyrein.comTracye Winfrey Howard 202.719.7452 twhoward@wileyrein.comBenjamin J. Kohr 202.719.7493 bkohr@wileyrein.comNooree Lee 202.719.7278 nlee@wileyrein.comSamantha S. Lee 202.719.7551 sshinsato@wileyrein.comCori Lombard 202.719.7037 clombard@wileyrein.comErin K. Nord 202.719.7183 enord@wileyrein.comWilliam M. Novak 202.719.7488 wnovak@wileyrein.comJohn R. Prairie 202.719.7167 jprairie@wileyrein.comTyler E. Robinson 202.719.7497 trobinson@wileyrein.comLaura E. Sherman 202.719.7568 lsherman@wileyrein.comCraig Smith 202.719.7297 csmith@wileyrein.comJillian Volkmar 202.719.7527 jvolkmar@wileyrein.comBrian G. Walsh 202.719.7469 bwalsh@wileyrein.comTara L. Ward 202.719.7495 tward@wileyrein.com

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