Does Your State Contract Prohibit Offshore Outsourcing?

Merle M. DeLancey Jr.

So your company has been diligently trying to comply with state and federal government contracting regulations. You pay your service employees in accordance with the Service Contract Act, you file your EEO-1s and VETS 100s, you monitor state campaign contributions, and you follow all of the additional requirements in your compliance plan. You think your company is “golden.” Right? Maybe. Are you “offshoring” services under your contract, or the data related to your state and/or Medicaid government contracts? This easily overlooked issue has been percolating to the top of the list for government agencies, state attorneys general, and perhaps, qui tam plaintiffs’ attorneys.

Offshoring, or “the import from abroad of goods or services that were previously produced domestically,”[1] is a major part of today’s business landscape, and government contracting at both federal and state levels is no exception. The issue of offshore outsourcing of services first drew attention in the world of government contracts in 2004, when the media reported that call centers in India were answering customer service calls from Food Stamp recipients.[2] The controversy faded from the public spotlight, but in response to public outcry some states passed legislation or issued executive orders prohibiting or limiting the practice.

A recent (April 11, 2014) report[3] from the Department of Health and Human Services (DHHS) Office of the Inspector General (OIG) resurfaced the issue of offshoring restrictions in the context of Medicaid contracts. The report reminded contractors that offshoring prohibitions and limitations remain in full force today, and government contractors need to be aware of them. Government contractors must review each individual state contract to ensure compliance with any offshore outsourcing prohibition or restriction. Running afoul of an offshore outsourcing prohibition could have serious consequences. Noncompliance could expose a contractor to suspension, debarment, or even liability under the state’s version of the False Claims Act under the theory that the contractor implicitly certified compliance with a material term of the contract.[4] Continue reading “Does Your State Contract Prohibit Offshore Outsourcing?”

Supreme Court Grants Petition for Review in Carter; Will Address FCA First-to-File Bar and Wartime Suspension of Limitations Act

David M. Nadler

David M. NadlerOn July 1, 2014, the Supreme Court granted the petition for certiorari in Kellogg Brown & Root Services v. United States ex rel. Carter, and now has the opportunity to determine the proper application of the False Claims Act’s first-to-file bar, as well as the inapplicability of the Wartime Suspension of Limitations Act (WSLA) to the civil FCA due to the WSLA’s criminal law context, two critical issues of statutory interpretation that have become increasingly problematic to FCA litigation over the last several years.

The Supreme Court will address two questions presented, which are: (1) whether the WSLA applies to civil FCA claims brought by private relators “in a manner that leads to indefinite tolling,” and (2) whether the FCA’s first-to-file bar, which prohibits parasitic claims, creates a race to the courthouse and encourages relators to promptly disclose fraud, instead “functions as a ‘one-case-at-a-time’ rule allowing an infinite series of duplicative claims so long as no prior claim is pending at the time of filing.” Petition for Writ of Certiorari at *I, Kellogg Brown & Root Services, Inc. v. United States ex rel. Carter, 2013 WL 3225969 (U.S. June 24, 2013) (No. 12-1497).

There is a reasonable chance the Supreme Court will reverse the Fourth Circuit on both issues. The petitioners are seeking review of the Fourth Circuit decision United States ex rel. Carter v. Halliburton Co., 710 F.3d 171 (4th Cir. 2013), which suspended the FCA statute of limitations in the civil context through its application of the WSLA, and also transformed the FCA’s first-to-file bar into a “one-case-at-a-time” rule. The defendants petitioned the Supreme Court in June 2013 after a petition to the Fourth Circuit for rehearing was denied. The Court’s decision to grant the petition runs contrary to the recommendation of the Solicitor General, who filed a brief on May 27, 2014 requesting that the petition be denied and defending the Fourth Circuit rulings. Continue reading “Supreme Court Grants Petition for Review in Carter; Will Address FCA First-to-File Bar and Wartime Suspension of Limitations Act”

The Expansion of the Business Systems Rule Beyond DoD

David M. Nadler, Justin A. Chiarodo, David Yang, and Stephanie M. Harden

David M. NadlerJustin A. ChiarodoDavid YangStephanie Marie ZechmannWith the potential for millions of dollars in withholdings on contract payments, Department of Defense (DoD) contractors have become all too familiar with the Business Systems Rule since it was first implemented in 2011. The Department of Energy (DoE) is now following in the steps of DoD and promulgating its own Business Systems Rule. On April 1, 2014, DoE issued a Notice of Proposed Rulemaking for its Business Systems Rule, which is largely modeled off of the DoD rule. This expansion of the Business Systems Rule beyond DoD warrants careful attention by contractors who may not have previously been covered, as effective and proactive compliance is essential to mitigating the risk of withholdings under the rule.

Overview of the DoD Business Systems Rule

The DoD Business Systems Rule permits DoD to withhold contractor payments on covered contracts if one or more “significant deficiencies” are found in any of the six business systems covered by the rule. The term “significant deficiency” is broadly defined as “a shortcoming in the system that materially affects the ability of officials of DoD and the Contractor to rely upon information produced by the system that is needed for management purposes”–a definition which leaves great discretion to the Contracting Officers responsible for determining system acceptability. Continue reading “The Expansion of the Business Systems Rule Beyond DoD”

Final Rule Expanding the FAR’s Compensation Cap to All Contractor Employees on DoD, NASA, and Coast Guard Contracts

Scott Arnold and Stephanie M. Harden

Scott ArnoldStephanie Marie ZechmannOn May 30, 2014, the Federal Acquisition Regulatory Council issued a final rule expanding the FAR’s executive compensation cap—which is currently set at $952,308—to all contractor employees on contracts for the Department of Defense (DoD), NASA, and the Coast Guard. The final rule adopts without any changes the interim final rule issued on June 26, 2013, as modified by a subsequent technical amendment.

Overview of the Final Rule

The FAR’s executive compensation cap limits the allowability of executive compensation to an amount set each year by the Administrator of the Office of Federal Procurement Policy. The rule, which is implemented by FAR 31.205-6(p), previously applied only to the CEO and the next four most highly compensated employees in management at the company’s headquarters, as well as the five most highly compensated employees at certain other home offices of the contractor. The updated rule expands the applicability of the cap to all contractor employees on DoD, NASA, and Coast Guard contracts awarded on or after December 31, 2011.

The final rule was issued pursuant to Section 803 of the National Defense Authorization Act (NDAA) for Fiscal Year 2012 (Pub. L. 112-81). In response to a comment that the final rule will reduce contractors’ ability to attract and retain experienced and talented individuals, the comments to the final rule explain that a June 2013 GAO report found that less than .4 percent of defense contractor employees would be affected by a cap set at the President’s salary of $400,000. The comments also note that GAO found that fewer than .1 percent of employees covered by the existing cap were affected by the cap from 2010 to 2012. The final rule also indicated that the DoD is not prohibited from considering an exception to the cap for scientists and engineers. Continue reading “Final Rule Expanding the FAR’s Compensation Cap to All Contractor Employees on DoD, NASA, and Coast Guard Contracts”

State False Claims Act Enforcement Explodes in 2014

Merle M. DeLancey Jr.

Merle DelanceyOver the last decade, False Claims Act (“FCA”) litigation has exploded, and actions asserting new theories of liability are resulting in increasingly large recoveries. Last year the U.S. Department of Justice (DOJ) announced that it had recovered $3.8 billion under the federal FCA in FY 2013. From all appearances FY 2014 promises to be another “banner year for civil fraud recoveries,” and the DOJ has already put up impressive numbers, particularly against pharmaceutical and medical device companies, including a massive $2.2 billion settlement with Johnson & Johnson, as well as settlements with Endo Health Solutions Inc. ($192.7 million), Halifax Hospital Medical Center ($85 million), and Amedisys, Inc. ($150 million).

While the DOJ continues to vigorously pursue FCA cases against companies in the health care and other sectors, cash-strapped states are now following suit. State Attorneys General (AGs) have increasingly pursued novel and creative FCA actions, as have private plaintiffs, who are authorized by qui tam provisions to stand in the shoes of states to sue and receive part of any recovery. A driver of this action was the Deficit Reduction Act (DRA) of 2005, which authorized states to receive, in addition to their own recoveries, 10 percent of the federal government’s share of recovered Medicaid funds if their FCAs are at least as robust as the federal FCA. As a result, since 2005 nearly a dozen states have either enacted false claims statutes or have amended existing statutes to make them equally or more robust than the federal FCA, including incorporating qui tam provisions and broadening the circumstances under which companies can be found liable for violations.

For example, late last year, in response to the DRA, New York state amended its FCA (New York State Finance Law § 187, et seq. (NY FCA)), to bring its false claims law more in line with the federal FCA. The New York statute now includes a “reverse false claims” provision that imposes liability as broadly as the federal FCA, providing that a person may be held liable for violating the NY FCA if that person “[k]nowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the state or a local government, or conspires to do the same….” (NY FCA § 189(1)(h)). The New York amendments also allow the state, as intervenor in a qui tam case, to relate back to the qui tam plaintiff’s filing date for statute of limitations purposes, expanding the period for which the state can seek recoveries. In addition, the law provides attorneys’ fees for successful qui tam plaintiffs, incentivizing the plaintiff’s bar to partner with the state or pursue their own cases under the NY FCA. Continue reading “State False Claims Act Enforcement Explodes in 2014”

KBR Ruling Threatens Privilege in Mandatory Disclosure Investigations

David M. Nadler, David Yang, and Christian N. Curran

David M. NadlerDavid YangChristian N. CurranRecently, the U.S. District Court for the District of Columbia ruled that a company’s work product created during an internal mandatory disclosure investigation was not protected by the attorney-client privilege or attorney work-product doctrines. During discovery in United States ex. rel. Barko v. Halliburton Co. et al., KBR sought to withhold internal investigation reports relating to alleged fraudulent activities during its performance of the Logistics Civil Augmentation Program (LOGCAP III) contract in Iraq. The ruling casts doubt on whether documents created pursuant to internal investigations are protected by the attorney-client privilege or work-product doctrines and could significantly impact how companies conduct internal investigations, including their mandatory disclosure practices.

The Barko Case

The relator filed his case against KBR under the False Claims Act (FCA) in 2005, alleging that KBR had overcharged the government in a variety of ways under KBR’s LOGCAP III contract. During discovery, the relator requested that KBR produce documents relating to internal audits and investigations of alleged misconduct that was reported by KBR employees under LOGCAP III. KBR asserted that the material was protected by the attorney-client privilege and work-product doctrine. After the relator moved to compel, the court conducted an in camera review of the documents. Continue reading “KBR Ruling Threatens Privilege in Mandatory Disclosure Investigations”

Recent Changes to Federal Employment Regulations

Merle M. DeLancey Jr. and Deborah P. Kelly

Deborah P. KellyIn the past two months, three important changes took place that will affect the federal workplace. First, in early February, President Obama signed an Executive Order raising the minimum wage for federal contractors from $7.25 to $10.10. On the heels of that Executive Order, in March, the President signed a memorandum directing the Department of Labor (“DOL”) to “propose revisions to modernize and streamline” the existing Fair Labor Standards Act’s overtime regulations. Finally, three days ago, the DOL’s new federal contract affirmative action regulations took effect—a development we first analyzed in this alert. Below, we summarize these three events and how each could affect your federal contracting business.

I.     Obama’s Executive Order Regarding Federal Contractor’s Minimum Wage

With the March Executive Order, President Obama raised the minimum wage for federal contractors. How will this new Executive Order affect your federal contracts? Below, we highlight the critical questions and answers regarding the scope and substance of this new Executive Order. Continue reading “Recent Changes to Federal Employment Regulations”