Sign with Caution       6

Opportunities for disagreements with the government during the proposal, contract formation, and administration stages are many. This happens in great part due to different sets of expectations. Decades-long efforts to get the government to contract more like the private sector have been frustrated by inertia, suspicion, and a layering on of management controls that would make it difficult for the government to do so even if there were a strong will.

This chapter takes a look at some of the common reasons for misunderstandings and their remedies.

Protect Your Proprietary Information

The government respects the private sector’s right to control proprietary information and keep ahold of its intellectual property, with the caveat that the onus is on companies to mark what’s proprietary and what’s not, and that accepting federal development dollars can radically alter company rights.

Proprietary data in proposals

Confidentiality in proposals is guaranteed by two main laws: The Trade Secrets Act, which makes it a firing offense and a misdemeanor for a government employee to divulge trade secrets, and the Procurement Integrity Act, which prevents government employees from further distributing proposal information to unauthorized personnel.¹

As an extra safeguard, the government encourages companies to affix a boilerplate passage to the title page and proposal pages where proprietary data is displayed when responding to a competitive solicitation or when submitting an unsolicited proposal.

On the title page, write verbatim the following clause:

Thereafter, each page that contains proprietary data should have this legend affixed to it:

Much as you may feel that the above clauses could use some tightening up, don’t touch them, since doing so could result in the government’s rejecting your proposal without further ado. In fact, if an unsolicited proposal is marked differently, a contracting officer will simply send back your material.³

Defense Department (DoD) contractors should be aware that the Pentagon allows the further redistribution of proposal information to other government officials after a contract award.⁴

Inadvertent disclosures

Should the government accidently reveal proprietary data in a solicitation or during the evaluation process, it can cancel the procurement or proceed with it on the grounds that the disclosure didn’t in fact harm the integrity of the process. In the latter case, the company whose data was revealed will almost certainly file a protest. Whether it will win is another matter.

In an extreme example, should the government not only reveal proprietary data, but then build an entire new solicitation around that data, the protestor whose data was misused will win its case. Such cases have occurred, but they’re exceedingly rare. As far as we can tell, Richard Nixon was president the last time it happened.⁵

Anything more ambiguous—that is, below the threshold of outright theft—is subject to hemming and hawing. The main venue for protests, the Government Accountability Office (GAO), dismissed in 2007 a protest from a company upset that the Environmental Protection Agency had accidently emailed its discussion letter to a competitor. No one contested the fact that the email was sent, but the GAO denied the protest because it found the competitor didn’t make use of the proprietary data within the letter.⁶ The letter contained only information about one of the competitor’s 15 labor rates and 7 of its 73 equipment rates, leading the GAO to conclude that the competitor could not have determined the protestor’s total price from that information, and that the protestor had failed to demonstrate that the competitor had adjusted its price as a result of possession of the letter. The competitor said just one employee had seen the letter and that he had destroyed all copies of it after first notifying EPA of the accidental disclosure. That, by the way, was exactly the right thing to do.

As we discuss in the next chapter, your competitors’ proprietary data assumes radioactive properties during the source selection process. Company policy should be to contain its spread—and that means no forwarding it, even if only to ask what should be done with it. A subordinate should notify a superior that the disclosure occurred, but not by perpetuating the disclosure.

Proprietary data in a blended workforce

Contractors are a heavy presence in the federal government; in some government offices, they outnumber civil servants. Such an arrangement—which is called a blended, mixed, or multisector workforce—wouldn’t be possible unless safeguards over proprietary information existed. Still, blended workforces can get messy, especially if direct competitors find themselves in a situation where one company requires access to another’s proprietary data in order to do the job for which it was hired.

Unfettered use of a competitor’s proprietary data in a blended workforce situation for purposes of developing new business would be a conflict of interest, something the government frowns on deeply. The government’s position is that institutional barriers between companies’ operational and business development units, enforced by contractual agreement, protect company intellectual property, and the record shows it taking very seriously allegations of informational compartmentalization breaches.

Nonetheless, it’s a good idea to know in advance who’s going to have access to your proprietary data and to insist that all safeguards be enacted. Know who’s who in the blended workforce—if you have employees on the ground, they should know when they’re talking to contractor employees versus government employees. If other companies view your proprietary data as part of their duties, enforce a provision of the Federal Acquisition Regulation (FAR) that allows you to extract a nondisclosure agreement from that company.⁷

Freedom of Information Act requests

Companies wanting more information about competitor offers can always try submitting a Freedom of Information Act (FOIA) request. A FOIA (pronounced foi-ya) request forces the government to either justify the withholding of a document or release it to the requestor.⁸

The likelihood of gaining access to a competitor’s proprietary data through FOIA is near zero. Company proposals made in response to a solicitation are exempted outright from FOIA disclosure unless the proposal is incorporated by reference into a contract.⁹ The law defines a proposal as any proposal, including a technical, management, or cost proposal, submitted by a contractor in response to the requirements of a competitive solicitation.

The FOIA statute itself also protects “trade secrets and commercial or financial information obtained from a person [that is] privileged or confidential” from release.¹⁰ “You get a document that’s basically useless,” said one high-level salesman. There have been a few cases in which the government determined that company information incorporated into a contract didn’t merit protection, even when the company in question said it did. But such disagreements aren’t common.

Unsolicited proposals aren’t covered by the blanket protection against disclosure, which is why it’s wise for unsolicited proposals—all proposals in fact—to invoke the secondary FOIA protection over trade secrets by including a legend at the bottom indicating that “this proposal contains trade secret and confidential business or financial information exempt from disclosure under the Freedom of Information Act.” This legend must be kept separate from the standard legend used to restrict dissemination of data within a proposal to authorized personnel for evaluation purposes.

Despite the provisions protecting trade secrets and confidential information, some analysts believe that deep study of several redacted documents gathered through multiple FOIA requests eventually will produce valuable intelligence—at least for those with sufficient time and patience to piece together small pieces of the puzzle.

If your company decides to start FOIAing, you might want to use a third party to submit the FOIA for you, so your name doesn’t appear on the request. You can find such a service for free online, but if you decide to pay a third party to do it, it shouldn’t cost more than $50 to $250. Also, you might want to wait until after the protest period is over before submitting a request to avoid unnecessarily antagonizing the program office, since even an anonymous request can’t prevent feds from making intelligent guesses about who’s behind it. A FOIA request made while the protest period is open looks like a precursor to a protest, which it most definitely should not be. FOIA requests take a while to process, so by the time you get your requested and highly redacted documents, the window for filing a protest almost certainly will have closed.

Government rights in technical data

Technical data is the information you use to design, produce, support, maintain, and operate your product or service. It consists of drawings, specifications, and standards and it must be recorded on a medium of some sort. But it’s not software—although technical data does include software documentation. This causes no end of mystification, because only lawyers could dream up the situation we’ve just described.

The DoD, as of this writing in 2012, agrees that the line between technical data and software is a bit too fine to be made much of and wants to consolidate the relevant sections of the Defense Federal Acquisition Regulation Supplement (DFARS). Because the DFARS notably diverges from the FAR when it comes to intellectual property, we’ve annotated this section and the next two with references to both the FAR and the DFARS. Citations of the latter are accurate at the time of publication, but by the time you read this, you’ll probably want to double-check.

When you sell a commercial item to the government, you retain the rights to your technical data unless the government pays more for it.¹¹ This is generally known as transferring limited rights, and the technical data protected by limited rights is called limited rights data.

Even as part of a limited rights exchange, you must disclose form, fit, and function (F3) data.¹² This should be no big deal, since your company’s sales force may have done so anyway, although the DoD might require vendors to give more F3 data than is typically disclosed to commercial customers—enough data such that the Pentagon is confident it can install, operate, handle, repair, and maintain the item.¹³ The DoD must protect that data and cannot use it to manufacture additional quantities or distribute it to another company without asking permission, unless it’s for the purpose of receiving independent advice or technical assistance (see the sidebar on the next page).¹⁴

The fulcrum on which government respect for commercial technical data rests is a recognition that intellectual property developed at private expense has value that the government can’t simply assume for itself. The same principle applies to prime contractors on a government contract in their dealings with subcontractors; a prime can’t make a company give up its technical data as a condition of receiving a subcontract.¹⁵

Things obviously change when the funding source for technical data development is the government, in which case the government reasonably expects to hold on to the technical data for itself, under a condition called unlimited rights. Unlimited rights means pretty much what it sounds like—the government can do what it likes with the technical data, including giving it to a competitor, publishing it in a solicitation, posting it online, or folding it into origami swans.¹⁶ (However, if you were to issue a copyright assertion, a competitor’s ability to exploit that data commercially could be limited; see the copyright section later in this chapter.)

Defense alone recognizes a third category, known as government purpose rights, which differs from unlimited rights only in a mainly technical respect.¹⁷ Government purpose rights allow the DoD to distribute your technical data only for “government purposes,” which means distribution to anybody, including in a solicitation, just so long as the recipients don’t use the data for commercial purposes. In other words, the DoD could distribute your technical data to a competitor with the intent that your competitor use the data in the execution of a government contract, but it should prevent your competitor from using that same data to make a product sold in the commercial market.

Most DoD contracts stipulate that government purpose rights convert into unlimited rights after a period of five years.

Segregability

Things get tricky for vendors when they participate in a mixed-funding effort, whereby a combination of private- and public-sector money funds a project, or when the vendor is paid to develop additional capability for an existing item. Unless the modification is minor (in which case limited rights aren’t affected), the company must take steps to keep it from losing control over the proprietary portions developed at private expense.¹⁸

Hence a concept called segregability, by which a company tracks which components are developed with government funds and makes sure that government funds are kept separate from the privately developed portions. In this way, the contractor keeps limited rights over the data (or restricted rights if the item is software; we discuss software licenses shortly).

Segregability may be easier to maintain for hardware than for software development. For the latter, segregability might force a contractor into designing modules in a less-than-optimal fashion or into turning its original source code into a no-go zone from which application programming interfaces hang in order to connect with the new, government-funded capability.

Segregability requires vigilance and documentation. It’s a fact of life for any company accepting federal research and development money. Unfortunately, the government also throws the burden of asserting limited rights for data developed at private expense onto the contractor. The easiest and preferred way to ensure that the government doesn’t assert anything more than limited rights over technical data developed at your expense is to simply withhold it from the government when permissible.¹⁹

Should a contractor ever need to submit limited rights technical data to the government, it must identify the data with a legend noting the limited rights restriction. Otherwise, the government will assume it has unlimited rights over it.²⁰ If a contractor discovers that it inadvertently failed to include a restrictive legend, it has six months to go back and sheepishly ask for permission to assert limited rights ownership over the data—which the government will generally permit, so long as the contractor acknowledges that the government has no liability over any disclosure, use, or reproduction of the data that might have occurred during the unmarked period.²¹

Software licenses

When it comes to purchasing commercial software, the government theoretically buys it the same way the public does, under the manufacturer’s commercial license.²²

That’s not exactly what always happens, since the government takes issue with some standard commercial clauses and attempts to insert clauses of its own even when the software has been wholly developed at private expense.

Before going further into the licensing horrors the government will attempt to perpetuate, let’s clarify what terms the government uses to denote types of software licenses. Like technical data, the government recognizes two basic flavors of licenses, with a third for the DoD: restricted, unrestricted, and government purpose.

Commercial software developed at private expense gets categorized by the government as restricted computer software, meaning that even if the government were to accept without modification a commercial license, it would classify that license as a restricted rights one.²³ The government also calls a modified commercial license a “restricted rights” license, since the modifications haven’t changed the nature of the software as privately developed intellectual property of the manufacturer.

In other words, the government has set up a situation whereby all commercial licenses are restricted rights licenses but not all restricted rights licenses are commercial licenses.

The government will strike out indemnification clauses in commercial licenses that place the licensor in control of litigation defense, on the grounds it has the Justice Department to defend it. It also will remove indemnification clauses that would create an open-ended commitment for the government to pay the licensor’s legal costs or claims brought by a third party, since that would be a violation of the Antideficiency Act (ADA), which prevents the government from agreeing to a monetary obligation before Congress has appropriated money for it. The government will also reject automatic license renewal language, also on ADA grounds.

Even more worrying to vendors is when contracting officers attempt to stick into a software contract a clause found in FAR 52.227-19 that supposedly doesn’t change the commercial nature of the license but is meant to make clear certain rights of the government when purchasing a commercial application. The six rights listed in the clause are (1) the computer on which the software is installed may be transferred for use to any government installation; (2) the software itself may be copied and used on a backup computer if the original computer becomes inoperative; (3) the software can be archived; (4) the software can be “modified, adapted or combined” with other computer software, provided that the portions of the derived application made up of the original software are protected under the same license rights; (5) the software can be “disclosed to and reproduced [for use by]” government support services contractors or subcontractors; and (6) the software can be transferred onto a replacement computer (whether or not the original computer is inoperative).

The number of assumptions about licensing embedded in this clause are many. FAR 52.227-19 is a relic of the last century, a time when software was tied to a single machine and all machines were created equal. If faced with a contracting officer who insists on inserting this clause, there are a few things you can do.

First, if the transaction is being conducted via a General Services Administration schedule, the license as negotiated through GSA should take precedence.²⁴

Second, the FAR never tells contracting officers they must use the clause, just that they “may” do so when there “is any confusion as to whether the Government’s needs are satisfied or whether a customary commercial license is consistent with Federal law.”²⁵ Ask a contracting officer for an explanation of where confusion lies in the terms of your commercial license. Point out that in the context of licensing done according to number of concurrent users, or Internet protocol address, or per core, or per any number of 21st-century licensing models, 52.227-19 actually introduces more confusion that it resolves.

Third, if it’s the end of your company’s fiscal year and you need to make your numbers and the contracting officer is stubborn, grin and swallow.

As for the other two types of licenses, unlimited and government purposes, they correspond to the same rights the government exerts under unlimited and government purpose technical data contracts. Only the DoD recognizes government purpose software licenses.

We mentioned earlier that even though the government can do pretty much what it likes with technical data under unlimited rights, an assertion of company copyright could still limit competitors’ ability to exploit that intellectual property commercially. The same is true for an unrestricted software license.

Copyright

For any seller of privately developed intellectual property sold as limited rights technical data or under a restricted software license, retaining copyright shouldn’t be a problem any more than it is in the private-sector market. Selling to the government doesn’t require giving up your copyright.

In fact, what’s really interesting about government copyright regulations is that they allow companies to assert copyright even for technical data or software code developed at government expense. Such an assertion would in no way affect the government’s ability to reproduce or distribute or otherwise cast to the four winds intellectual property for which it’s paid the private sector to develop.²⁶ But, a copyright assertion could prevent a competitor that receives the technical data or software source code from exploiting that intellectual property in the commercial marketplace. In effect, a copyright assertion could turn an unrestricted rights license into a government purpose license, even within civilian agencies.

We’ve stocked up the preceding paragraphs with qualifiers (“… could …”) because this is untested legal ground. While some attorneys we spoke with lean toward the interpretation above, there’s another line of argument that holds that a third party receiving intellectual property developed at government expense receives a “sublicense,” making the issue of commercial use less clear-cut. Still, any corporate counsel presented with a question of whether it’s legally okay to commercially exploit such intellectual property would probably have reservations about saying yes.

Asserting copyright under DoD contracts requires nothing more than affixing a copyright notice onto the intellectual property in question.²⁷ With civilian contracts, the FAR requires companies other than basic and applied research contractors to first ask permission to assert copyright, unless it’s for purposes of publishing scientific and technical articles in a journal or symposia proceedings, etc., in which case permission isn’t necessary.²⁸

As for who can assert copyright, it’s the author of the intellectual property, whether that be the prime contractor or a subcontractor. In the case of intellectual property, the government says it has a direct legal relationship with the subcontractor even if in other matters its privity is solely with the prime.

Stand Up for Your Rights

One of the advantages of selling commercial items (again, commercial services are an “item”) to the government is that you avoid the obligation to comply with a great many government rules. Unfortunately, government notions of commercial contracting practice are such that it nonetheless attempts to enact many commercially unacceptable terms and conditions.

Fortunately, the FAR instructs contracting officers to consider commercial practices when writing out a contract for a commercial item.²⁹ There’s a notion among many contracting officers that all government contractual clauses are nonnegotiable. That’s not true, especially since some commercial item clauses facilitate seller input at the order stage. Contracting officers are supposed to listen to company objections and act to accommodate actual private-sector practices instead of enforcing a federal version of them.

Do they? Not always. You’ll undoubtedly face at some point an intractable contracting officer who has neither time nor patience nor sympathy and who tells you to either accept the government terms and conditions as written or get lost. Whether to do so or not is a business decision. The terms and conditions we discuss in this section also apply to GSA schedule contracts, which is one situation in which you might want to hold fast, since schedules set precedents for other contracts and they last for five years.

The clauses we discuss here are found in FAR 52.212-4. Rather than attempt to negotiate each section of government boilerplate individually, you might find it more useful to have your version of these contractual clauses already prepared for attachment as an addendum to commercial-item contracts.

Acceptance

The government makes acceptance of commercial items contingent on a vague assertion that it has a right to inspect items before accepting them.³⁰ The problem is that the clause as written is open ended. It simply states that the government “reserves the right to inspect or test any supplies or services that have been tendered for acceptance” without specifying a time period. Since in practice the government almost never performs inspection or testing on a commercial item, the only proof of acceptance a typical company will ever get is a paid-up invoice. The lag between shipment and de facto acceptance makes it difficult for a company—especially a publicly-held corporation—to recognize revenue.

The solution is to make contractual acceptance contingent on satisfactory delivery, but in such a way that allays government fears about receiving a damaged or defective product. Delivery is the earliest point at which the government is willing through negotiation to make acceptance—it’ll never accept freight on board.

Stipulate that the government has a right to inspect items for damage or defects, but that once the government signs a delivery receipt, the inspection is over. Make clear, however, that you’re not asking the government to give up its right to remedy for defects—you’re simply clarifying that defects revealed after delivery are a matter to be addressed by the warranty, not a reason to extend the acceptance phase.

The government-written contract clause suggests this approach is the correct one anyway, even though it does so in a less-than-clear fashion. The clause says that “the government must exercise its postacceptance rights (1) within a reasonable time after the defect was discovered or should have been discovered; and (2) before any substantial change occurs in the condition of the item, unless the change is due to the defect in the item” (italics added).

In plainer English, it appears that the government itself says that remedy of defective items is a matter of postacceptance, which by definition is a matter for the warranty.

Acceptance of services

The government’s acceptance clause has an obvious bias toward products; despite the growth of the government services industry, many FAR clauses haven’t kept pace with changes to the federal marketplace.

With a time-and-materials contract, companies can in most cases tie acceptance for purposes of revenue recognition to submission of an invoice for hours worked. Problems arise in what to do with a fixed-price services contract, since the essence of a fixed-price contract is billing based on price, not cost.

The answer is to address this matter in your quote or proposal. When preparing a response to a fixed-price solicitation for services, incorporate in your response certain milestones, completion of which triggers acceptance by the government.

The more complex a services contract, the more finesse you’ll need in defining when delivery and acceptance occur. Complex projects likely require delivery in increments, with lots of systems integration. The government increasingly demands that intricate problems be solved with commercial items, as if a mere requirement for commercial items were a substitute for systems engineering and robust program management. There’s good money to be made in such situations—just be aware that the contract language can get dense and that revenue recognition might involve a degree of risk acceptance.

Warranty

It’s one thing to warrant an item; it’s another thing to affirm that commercial items “are merchantable and fit for use for the particular purpose described in this contract,” as the government wants you to do.³¹

The words merchantable and purpose are particularly volatile. Merchantability is a legal term appropriated from the Uniform Commercial Code, a term fraught with problems for technology vendors because it requires items to conform with trade standards and be fit for the purpose for which they are ordinarily used. But which trade standards? As for fitness, interactions with technology created by other vendors can have unintended consequences; your product may still be fit but encounter problems within a technology environment that are completely beyond your control.

In short, you should not be held responsible for things over which you have no control, and this clause should be eliminated. Ensuring this clause doesn’t cause future liability requires more than striking it out. It must be expressly disclaimed.

Damages

The boilerplate clause in FAR 52.212-4 sounds pretty good at first glance. It says that “except as otherwise provided by an express warranty, the contractor will not be liable to the government for consequential damages resulting from any defect or deficiencies in accepted items.”³²

Unfortunately, there’s the matter of direct liability that’s not addressed in the boilerplate, since “consequential damages” covers indirect damages only. Most businesses want to limit their direct liability, too—which in contracting with the government means convincing the contracting officer to agree to your standard commercial limitation of direct damages clause.

SAFETY Act

For a tiny corner of the technology market—including computer systems—the government is essentially willing to extend sovereign immunity to sellers of “qualified antiterrorism technology” in the event of a civil lawsuit arising in connection with a terrorist act.

The Support Anti-terrorism by Fostering Effective Technologies (SAFETY) Act of 2002 allows sellers of Homeland Security Department–certified technology and antiterrorism services to claim the “government contractor defense” in a civil lawsuit.³³ Under certain conditions, this defense immunizes certified sellers from tort liability because they’ve acted on behalf of the government.

If you’re wondering whether you qualify for the government contractor defense under ordinary circumstances, the answer is probably not. The Supreme Court case that created the defense, Boyle v. United Technologies Corp., established three tests for its application: Companies must receive precise government specifications, manufacture to that specification, and warn the government about any dangers they discover.³⁴ In the main, only for military systems does the government submit precise specifications to the degree required for the government contractor defense to stick. Nonmilitary manufacturers can try to claim it, but they would have to show that the government exercised what lawyers call a discretionary function. That means that the government made, not merely approved, key choices and was intensely and directly in oversight over the project.

What the SAFETY Act does is extend the government contractor defense to qualified sellers of antiterrorism technology and services that under regular circumstances would have no claim to it, since the government had no discretionary function. But remember that SAFETY Act tort immunity is only good in lawsuits arising from a terrorist act. Under any other circumstance, a SAFETY Act seller cannot claim the government contractor defense.

Gaining a “certification” under the SAFETY Act is different from getting a “designation.” Designation is an intermediary and less robust protection that merely limits, not eliminates, tort liability. Designation is a prerequisite to certification, though companies can (and probably should) apply for both simultaneously.

Applying for certification and designation is free; go to the Department of Homeland Security (DHS) Office of SAFETY Act Implementation. Be extra careful about the information you provide to it during the certification process. A plaintiff could successfully challenge the government contractor defense of a protected seller if they can show evidence that the seller acted fraudulently or with willful misconduct when submitting information about the technology during the DHS certification process.

Also, although certification offers immunity from torts, DHS nonetheless makes SAFETY Act sellers purchase terrorism insurance, usually the same dollar amount of coverage from their general liability policy.

Tell the Truth (Even If Somebody’s Been Fooling You)

Lying or misrepresentation, perhaps even unintentionally, is an easy way to incur liability and not just because the government can be a vengeful beast when it believes it’s been wronged. Two important federal laws create penalties for lying to the government—the False Statements Act and the False Claims Act. Companies with contracts subject to the Truth in Negotiations Act can also pay civil damages if they submit false certified cost-or-pricing data.

While conviction under the False Statements Act is a felony, it’s the False Claims Act—which incurs only civil penalties—that companies should be most worried about, since it’s perfectly possible to get successfully sued under it over a claim a company executive had legitimate reason to believe wasn’t false, or wasn’t individually false. Let’s look at the two laws one by one.

False Statements Act

With enough evidence of an actual wrongdoing, the False Statements Act is a relatively easy way for the Justice Department to secure a felony sentence against a wrongdoer. But unless you’re willfully lying to the government, there’s little reason to be anxious. In order to be convicted of a false statement, you must make an intentional falsehood.³⁵ To mitigate risk, set up centralized internal processes to review communications to the government, fact check your assertions, don’t be willfully ignorant of facts that would put the truthfulness of an assertion into question, have documentation of your internal controls on hand in case something does go wrong, and things should in the main be fine. Honest mistakes are not prosecutable.

False Claims Act

It’s far easier to be successfully sued in civil court under the False Claims Act. A “claim” is basically an invoice. Although there does exist a criminal statute against false claims, the vast majority of false claims litigation is civil, where the burden of proof for the prosecution is far lower. Criminal conviction requires proof “beyond reasonable doubt,” whereas liability under the False Claims Act requires a less onerous “preponderance of the evidence” standard. In case you’re wondering, the difference between a criminal false statement and a criminal false claim is that all false claims are also false statements, but not all false statements are false claims. A lie (a false statement) doesn’t require an invoice (i.e., a claim) to have occurred.

But the real reason to be wary of the False Claims Act is that any member of the public can bring forward a False Claims Act lawsuit against you on behalf of the government. A whistleblower (officially, a “relator”) can initiate a false claims lawsuit under the qui tam provision of the False Claims Act; qui tam is shorthand for a Latin phrase from 13th-century English common law, Qui tam pro domino rege quam pro se ipso in hac parte sequitur. It means “he who brings the suit in this matter for the king and for himself.” A relator need not have been personally harmed to initiate a False Claims Act lawsuit.

Disgruntled employees, legitimate whistleblowers, fortune seekers—all can and have filed False Claim Act suits. The Justice Department reviews qui tam suits and can take over primary responsibility for prosecution from the relator. It does so in about a quarter of all cases. Successful qui tam relators get up to 30 percent of a settlement, plus attorney fees. The government has collected more than $24 billion in False Claim Act suits since 1986, when Congress strengthened the act.

Avoiding a False Claims Act lawsuit is a little more difficult than making a mere commitment to shunning fraud, although that obviously goes a long way. In order for a claim to be false, it must be submitted with knowledge of its falsity, including in deliberate ignorance or reckless disregard of the truth. But under the legal doctrine of collective knowledge, knowledge of the falsity could apply even if individual employees made only what they considered to be truthful statements. Under collective knowledge, which some courts have upheld while others have not, if one employee certifies that a company complies with federal regulations but another employee knows it does not, the company is liable to claims litigation.

Also, if a company makes an initial false representation or certification during the formation of a contract, each subsequent invoice can be considered a false claim of its own under another legal doctrine known as implied certification. Company earnings made through contract vehicles or GSA schedules are particularly prone to being wiped out by a False Claims Act lawsuit, since all subsequent awards are made under the terms and conditions of that initially negotiated contract. If a plaintiff can find a materially false statement in the original contract language, then subsequent sales made under those terms and conditions might also be considered fraudulent.

False Claims Act liability applies to subcontractors as well as prime contractors. So long as the false claim—the invoice—is paid with federal dollars directly or indirectly through a prime contractor to a sub, the act applies. The act doesn’t apply to false claims made by private individuals paid with federal money, either through a salary or an income subsidy such as Social Security benefits.

As for the direct consequences of losing a False Claims Act lawsuit, companies pay treble damages and a fine of between $5,500 and $11,000 per claim. Damages are the difference between what the government actually paid and what it says it would have paid if not for the false claim; plaintiffs and defendants wrangle a fair amount over what constitutes that figure.

To do your best to avoid False Claims Act suits, limit the number of people who make material claims to the government, and make sure their internal authority is such that they always know what they need to know. Implement a system of controls and appoint a company contract compliance officer, likewise someone with sufficient authority, who can sound the alarm bell when something appears wrong. Conduct periodic but random audits on invoices to ensure they’re for the correct amount and that the company hasn’t inadvertently violated the terms and conditions of the contract.

You also might want to hire an outside firm to monitor your company’s contract compliance for you. It’s never a bad idea to have independent eyes (disconnected from the internal scrum of conducting day-to-day business) review your work.

Handling Terminations

Being a government contractor at times is like being married to a spouse who bottles up anger. Everything seems to be going fine until one day—bam! But rather than merely ruin your Sunday afternoon, a sufficiently upset government will send you what’s known as a cure notice. Such a notice is the first step in the process of termination for default, an action second only to debarment in severity (we cover debarment in the next chapter).

Receiving a cure notice really can be like a thunderbolt from a blue sky. There’s a propensity in government to absorb discontent until somebody declares a breaking point has been reached.

On receipt of a cure notice, you’ll of course want to do everything possible to head off a premature end to your contract. Notices typically give contractors ten days to rectify the problem cited in the notice.³⁶ If that’s not possible, maybe because the government has failed to recognize its part in causing the problem, your next priority is to ensure that the termination is recorded as being for government convenience (a T for C), which has no deleterious effect on your record, rather than a termination for default (T for D), which does.

If a contracting officer insists on recording the termination as one for default, you’ll probably want to appeal that decision with a contracting board of appeals or the Court of Federal Claims. Although both venues are open to you, many companies go first to a board, where appeals against a T for D decision are common. A T for D is a pretty serious affair, even apart from the likely financial ramifications for your company, which can include payment of damages to the government.³⁷

T for Cs are not uncommon and occur for many reasons, including the government changing its mind about the contract requirements. The government can dismiss contractors for any reason, although it still must pay for work rendered.³⁸ In fact, it can do so even if a contracting officer forgets to include the T for C clause in a contract; termination for convenience is enforceable even if it’s not explicitly included in a government contract. That’s thanks to a universally recognized government contracting precept called the Christian Doctrine, so named after a 1963 lawsuit against the government involving a construction firm named G.L. Christian & Associates.³⁹ The court found the termination clause to be a “deeply ingrained strand of public procurement policy” and therefore “incorporated [it], as a matter of law” into all contracts.

An executed termination notice—for whatever reason—requires the contractor to immediately stop work and cancel subcontracts and orders with suppliers. The threat of sudden termination means that prime contractors do, or should, indeed insert termination clauses that are similar to the government’s into their subcontractual arrangements. The Christian Doctrine doesn’t apply to subcontracts, which means that if a prime terminates a subcontract for its own convenience but does not have a T for C clause physically incorporated into the subcontract, the subcontractor can sue the prime for breach of contract.

The regulations do, in the case of T for Cs with noncommercial-item contracts, require primes to settle with subcontractors along the same lines that the government settles with them, despite the fact that a subcontractor has no privity with the government and will be rebuffed if it tries to assert it.⁴⁰ Commercial-item subcontractors lack that federal guarantee, meaning that it’s up to the subcontractors to ensure in advance a fair compensation model for a possible T for C handed down to a prime.

Contractors in possession of a noncommercial T for C have one year from the effective date of the termination to submit a settlement proposal.⁴¹ The FAR doesn’t specify a deadline for submitting a proposal for a commercial-item contract T for C—although no sane commercial company would want to go longer than necessary with an unsettled termination on its books.

The methodology for determining a contractor settlement under a T for C differs depending on whether the contract is for a commercial item or not. Commercial-item settlements come under a formula that takes into account the price of completed work and the costs resulting from termination, whereas noncommercial-item settlements are calculated by a cost-pricing formula.

Still, even with noncommercial-item T for C settlements, contracting officers are enjoined to calculate settlements according to a principle of “fair compensation,” which holds that “the use of business judgment, as distinguished from strict accounting principles, is the heart of a settlement” and that the settlement should include “a reasonable allowance for profit.”⁴²

However, if the government determines that the contract, if done to completion, would have incurred a loss for the contractor, then the contracting officer can not only disallow profit considerations, but reduce the settlement (other than termination costs) by the percentage of the loss the contractor would have suffered.⁴³ Should a loss be demonstrably apparent, but a company feels that it’s due to government mismanagement, it can request an equitable adjustment.

If the government and contractor can’t come to an agreement with a noncommercial T for C, or if in the case of noncommercial contracts, the company never proposed a settlement figure within the time allotted, then the terminating contracting officer is allowed to make a unilateral (though evidence-based) determination of the final amount.⁴⁴ After that determination, the contractor has 15 days to respond with additional evidence, but it must be pretty overwhelming for it to change the determined amount. A contractor still determined to pursue a greater settlement figure at this point has no choice but to file a claim with a contract board of appeals or the Court of Federal Claims—unless the company failed to submit the settlement proposal within the time provided in the contract and didn’t request an extension, in which case the contracting officer’s decision is final.⁴⁵

Most companies shouldn’t attempt a T for C settlement on their own. The odds of failing to recoup money are high, as are the chances for screwing something up. Fortunately, you can submit your bills for outside help to the government as a termination-related cost.

ENDNOTES

1. The Procurement Integrity Act is implemented in FAR 3.104; the Trade Secrets Act is 18 USC 1905.

2. FAR 52.215-1(e).

3. FAR 15.609(c).

4. DFARS 225.227-70169(c).

5. U.S. General Accounting Office. B-165542. July 11, 1969.

6. U.S. Government Accountability Office. Kemron Environmental Services, Inc, B-299880. September 7, 2007.

7. FAR 9.505-4(b).

8. The Freedom of Information Act is 5 USC 552.

9. 41 USC 253b(m) and 10 USC 2305(g).

10. 5 USC 552(b)(4).

11. FAR 12.211 and DFARS 252.227-7013(b)(3).

12. FAR 27.401 defines form, fit and function data as “data relating to items, components, or processes that are sufficient to enable physical and functional interchangeability, and data identifying source, size, configuration, mating and attachment characteristics, functional characteristics, and performance requirements. For computer software it means data identifying source, functional characteristics, and performance requirements, but specifically excludes the source code, algorithms, processes, formulas, and flow charts of the software.” DFARS 252.227-7015(a) defines it as “data that describes the required overall physical, functional, and performance characteristics (along with the qualification requirements, if applicable) of an item, component, or process to the extent necessary to permit identification of physically and functionally interchangeable items.”

13. DFARS 227.7102-1(a)(2).

14. DFARS 227.7102-2(a).

15. FAR 27.304-3(c) and DFARS 227.7103-15.

16. In the FAR, unlimited rights means the government can “use, disclose, reproduce, prepare derivative works, distribute copies to the public, and perform publically, and display publically, in any manner and for any purpose, and to have or permit others to do so” (FAR 52.227-14(a)). The DFARS says essentially the same thing: “‘Unlimited rights’ means rights to use, modify, reproduce, perform, display, release, or disclose technical data in whole or in part, in any manner, and for any purpose whatsoever, and to have or authorize others to do so.”

17. DFARS 227.7103-5 (b).

18. FAR 27.401: “‘Limited rights data’ means data, other than computer software, that embody trade secrets or are commercial or financial and confidential or privileged, to the extent that such data pertain to items, components, or processes developed at private expense, including minor modifications.” (italics added)

19. FAR 27.404-2(a) and DFARS 225.227-7015(e)(2).

20. FAR 27.404-5(b) and DFARS 227.7103-10(c).

21. FAR 27.404-5(b) and DFARS 227.7103-10(c).

22. FAR 12.2129(a).

23. FAR 27.401.

24. FAR 27.405-3(a) states that “when contracting other than from GSA’s Multiple Award Schedule contracts for the acquisition of commercial computer software, no specific contract clause prescribed in this subpart need be used….”

25. FAR 27.405-3(a).

26. FAR 52.227-14(c) and DFARS 227.7203-9 (for software) and 227.7103-9 (for technical data).

27. DFARS 252.227.7013(f) for technical data and DFARS 252.227-7014(f) for software. The DFARS says to “conspicuously and legibly mark the appropriate legend,” which is prescribed under 17 USC 401 or 402. Copyright assertions that “interfere” with or delay the operation of software can’t be placed into applications that might be used in combat or situations that simulate combat conditions.

28. FAR 52.227-14(c) via 27.409(b).

29. FAR 12.213(f).

30. FAR 52.212-4(a).

31. FAR 52-212-4(o).

32. FAR 52.212-4(p).

33. The SAFETY Act is implemented in FAR 50.2.

34. Boyle v. United Technologies. No. 86-492. Supreme Court of the United States. June 27, 1988.

35. 18 USC 1001(a).

36. FAR 49.607(a).

37. FAR 49.402-7.

38. FAR 49.1 to 49.3 discusses termination for convenience for noncommercial-item contracts; contracting officers may apply the principles in those sections to commercial-item terminations for convenience, the much less specific rules for which are in FAR 12.402(d).

39. G. L. Christian & Associates v. United States. No. 56-59. United States Court of Claims. July 12, 1963.

40. FAR 49.108-3(a) and FAR 49.108-1.

41. FAR 49.206-1(a) for fixed-price contracts and Part 49.303-1for cost-reimbursement contracts.

42. FAR 49.201(a).

43. FAR 49.203(a).

44. FAR 49-109-7(a).

45. FAR 49-109-7(f).