Federal Construction Contracting Blog

Federal Construction Contracting Blog

Legal Information and Resources for Federal Construction Contractors

Sikorsky and its Impact on Claims Submission

Posted in Contractor Information Sources, Federal Procurement Policy, Protection of Contractor Rights

In December 2014, the Court of Appeals for the Federal Circuit issued an important decision that impacts how the 6 year statute of limitations (SOL) is applied under the Contract Disputes Act (CDA).  In Sikorsky Aircraft Corporation v. United States, the Court of Appeals determined that the CDA’s 6 year SOL for filing a claim is not jurisdictional, contrary to  number of lower court opinions.  This ruling has a number of important consequences that Federal Government contractors should understand.

claims handwritten with chalk on a blackboard

The CDA states that, “each claim by a contractor against the Federal Government…and each claim by the Federal Government against a contractor…shall be submitted within 6 years after the accrual of the claim.”  Prior to Sikorsky, this requirement was considered by most to be jurisdictional.  This meant that the 6 year time limit was absolute and, even in extenuating circumstances, could not be missed.  Therefore, any claim brought beyond 6 years simply could not be considered by the court.  The court would not have the jurisdiction.

While the decision in Sikorsky did not eliminate the CDA’s 6 year SOL, it does open the door to “equitable tolling” an important exception in applying a limitations period.  Equitable tolling is a legal concept that, in certain circumstances, allows contractors to bring claims after the time allowed by an applicable SOL.  Specifically related to the 6 year SOL under the CDA, a claim can be equitably tolled if a claimant diligently pursues its rights to bring that claim but extraordinary circumstances stood in its way.  For example, in Sikorsky the activities that brought about that claim began in 1999 but did not become material until 2003.  The claim was eventually brought in 2008 and a dispute ensued regarding whether the claim was timely filed.  The claimant, in this case the Government, argued that because the claim was not material until 2003 the SOL did not start to run until then and, therefore, when the claim was filed with the court in 2008, it was brought within the 6 year SOL.  Sikorsky, on the other hand, argued that the claim accrued in 1999 and was, therefore, barred by the 6 year SOL because it was not brought until 2008.  Ultimately, the court did not decide whether the claim was timely filed because it found that the appellant failed to meet its burden in proving the merits of the claim.  In the process of discussing that issue, however, the court made the important determination that the 6 year SOL was not jurisdictional.

In addition to opening the door for equitable tolling, Sikorsky will also change how SOL issues are litigated under the CDA.  Prior to this decision, because the CDA’s 6 year SOL was largely considered jurisdictional, any challenge to the Court’s jurisdiction had to be decided if and when it was raised.  The issue could not be waived and could come up at any time.  After review, if it was found that the court did not have jurisdiction, the matter would be dismissed because jurisdiction is a prerequisite for the court to decide a matter on the merits.  Based upon Sikorsky, things have changed.  First, a defendant must now raise SOL as an affirmative defense.  An affirmative defense must typically be plead at the first opportunity possible (usually in the Answer to a Complaint) or it is waived.  Second, a non-jurisdictional challenge to the SOL is normally decided when a court renders a decision on the merits.  For contractors doing business with the Federal Government this has an important practical effect.  If a contractor brings a claim against the Federal Government and also argues that equitable tolling should apply, post-Sikorsky a judge or jury will likely decide whether equitable tolling has taken place after all of the evidence on the facts have been heard.  This means that a claimant may have to litigate its entire claim before the court will even determine if the claim was raised within the 6 year SOL.

As a practical matter, if you have a claim, or a potential claim, do not sit on your rights.  While Sikorsky is helpful and important in terms of how the SOL is considered under the CDA, do not take any chances.  6 years represents a very generous limitations period.  Seek professional assistance as early as possible and get the claim submitted.  If you have any questions, please let us know.

Edward T. DeLisle is Co-Chair of the Federal Contracting Practice Group. Ed frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues and dispute resolution.

Amy M. Kirby is an Associate in the firm’s Federal Contracting Practice Group

Edward DeLisle and Maria Panichelli Team with Onvia to Publish Periodical Government Contracting Series, Legal Landscape

Posted in Contractor Information Sources, Small Business Contracting

OnviaLegalLandscape

Exciting news!  We recently teamed up with Onvia, a well-known government contracting resource delivering the necessary data, business intelligence, analytics and tools to help clients succeed in the government market.  In addition to our continued posts on this blog, we will now be publishing a series called Legal Landscape on Onvia’s blog.  The quarterly series is specifically designed to provide government contractors with a quick, but thorough, summary of important legal developments, as well as a plain-English explanation of how those developments may affect you.

As government contracting attorneys, a big part of our job is staying on top of legal changes that might affect our clients.  And – as many of you who read this blog know – these changes occur all the time.  In any given month there might be: proposed additions or revisions to the FAR; new SBA rules governing the various small business programs; new legislation that effects the federal procurement process in some way; executive orders that change federal contractors’ compliance obligations; and/or an important new case that alters how a government contractor should approach a problem.  As a practical matter, a lot of these changes aren’t very likely to affect your day-to-day business life.  But every few months, there are at least a few legal developments with the potential to change vital aspects of your business, or put you at risk in the event of non-compliance.  For that reason, smart contractors make every effort to keep current on the legal landscape upon which they operate.  However, because these changes can come from a range of sources, and cover a variety of topics, it’s very easy for even the most conscientious contractor to lose track of the truly important changes.  Knowing this, Onvia decided that its readers would benefit from a regular update of the most important legal developments.  Knowing us, and being familiar with our efforts to keep clients informed through posts to this blog, Onvia thought we might be just the people for the job.  We obviously agreed.

We are very excited to be working with Onvia on this series.  For more than 14 years, Onvia has been helping businesses succeed in the government market.   Their extremely comprehensive website offers a wealth of information relating to products and industries, as well as a specific “Solutions” page for government contractors.  It also has a free resource page filled with informative blogs and articles as well as interesting webinars.  It is no wonder that thousands of companies across the United States rely on Onvia as a comprehensive resource for timely and actionable sales opportunities and the industry-specific information needed to make intelligent sales decisions.   You can learn more about Onvia and their numerous resources here.

The first of what we hope will be many installments of Legal Landscape is available now.  We hope that you enjoy it, and that you check back for more government contracting updates in the next edition of Legal Landscape!

Edward T. DeLisle is Co-Chair of the Federal Contracting Practice Group. Ed frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues and dispute resolution.

Maria L. Panichelli is an Associate in the firm’s Federal Contracting Practice Group. Her practice includes a wide variety of federal contracting and construction matters, as well as all aspects of small business procurement.

New Anti-Trafficking Rule Presents Significant Challenges for Government Contractors

Posted in Contractor Information Sources, Protection of Contractor Rights

Effective today, a new Anti-Trafficking rule will substantially change and increase federal contractors’ compliance and certification requirements.  The Anti-Trafficking rule requires that all federal contractors take certain actions related to combating human trafficking and slavery in their supply and contracting chains.  Human trafficking has been a high-profile issue in government contracting in recent years, drawing attention from Congress, President Obama, and groups such as the American Civil Liberties Union.  It is estimated that forced labor in the private economy generates $150 billion in illegal profits each year.

With today’s far-reaching supply chains, and increasing numbers of businesses obtaining their goods from “high risk” countries, the importance and impact of human trafficking laws will only continue to grow.

The new rule amends the FAR to codify trafficking-related prohibitions involving federal contracts, including new compliance and certification requirements, and puts contractors on the hook for disclosing violations to the government.  The new rule requires contractors to:

  • Develop and maintain a detailed compliance plan for contracts for supplies (other than commercially available off the shelf items) acquired outside the U.S., or services to be performed outside the U.S., with an estimated value exceeding $500,000;
  • Ensure that recruiters adhere to local labor laws;
  • Cooperate with, and provide access to, enforcement agencies investigating compliance with anti-trafficking and forced labor laws;
  • Ensure that workers are not being charged recruitment fees, which are common in many foreign countries;
  • Notify agents and employees of the anti-trafficking policy;
  • Provide return transportation for qualified workers;
  • Disclose (or self-report) that an employee, subcontractor, or subcontractor’s employee is violating the rule; and
  • Annually certify that, (1) it has implemented a compliance plan, and (2) after a due diligence inquiry, there are no violations by the prime contractor, its subcontractors or agents, or, if such a violation exists, it has taken remedial action.

The new rule also prohibits contractors from confiscating passports or other immigration documents, using deceptive recruitment practices, and providing housing that fails to meet local housing and safety standards. Tag or word cloud human trafficking awareness day related

These changes will have an immediate and significant impact on federal contractors.  Most significant is the thorny position contractors are placed in by having to perform due diligence on their subcontractors (at every tier), and then continuing to monitor them for violations.  This is particularly difficult, as trafficking activity is notoriously hard to detect.  Adding to concerns is that ambiguity in the rule makes adherence more of an art than a science.  Particularly, regarding compliance plans, the plan must be “appropriate” for the “size and complexity of the contract and to the nature and scope of the activities performed, including the risk that the contract will involve services or supplies susceptible to trafficking.”  However, the rule provides contractors with little guidance as to what an “appropriate” plan should look like.  Further, what is considered “appropriate” may vary widely across various federal agencies.

Finally, and obviously, all of this will come at an additional cost to contractors, many of whom will now be forced to play catch-up to ensure they are in compliance, or risk severe penalties including debarment, as well as criminal and civil sanctions.  Given the uncertainties and costs of compliance, and severe penalties for non-compliance, it is imperative that government contractors fully appreciate and understand the import of this new rule and its requirements, and take appropriate steps to ensure compliance.

In a related effort to strengthen human trafficking protections, the House Foreign Affairs Committee approved a bill last Friday that would provide for a definition of the prohibited recruitment fees.  Under the Trafficking Prevention in Foreign Affairs Contracting Act, H.R. 400, the secretary of state and the administrator of the U.S. Agency for International Development would be required to submit reports defining what constitutes a recruitment fee in order to promote better compliance with federal anti-trafficking law.

Please let us know if you have any questions or concerns.

Edward T. DeLisle is Co-Chair of the Federal Contracting Practice Group. Ed frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues and dispute resolution.

Robert G. Ruggieri is a Senior Associate in the firm’s Federal Contracting Practice Group.

Guilty By Affiliation

Posted in Contractor Information Sources, Protection of Contractor Rights, Small Business Contracting, Webinar

Vector podcast concept in flat styleRecently, Maria Panichelli was interviewed by Raymond Thibodeaux from AOC Key Solutions for a podcast entitled “Guilty by Affiliation.”  During this podcast, Maria and Ray spoke about a variety of affiliation-related issues. Topics covered included the various types of affiliation, the consequences of being deemed “affiliated” with another business, and, perhaps most importantly, how to avoid a finding of “affiliation.”  James McCarthy was also interviewed. Catch the whole podcast here.

Maria L. Panichelli is an Associate in the firm’s Federal Contracting Practice Group. Her practice includes a wide variety of federal contracting and construction matters, as well as all aspects of small business procurement.

The 4th Circuit Expands Liability Under the False Claims Act

Posted in Contractor Information Sources, Federal Procurement Policy, Protection of Contractor Rights

On January 8, 2015 the U.S. Court of Appeals for the Fourth Circuit issued a decision in United States v. Triple Canopy, which broadened the reach of the False Claims Act (FCA) by embracing the theory of implied certification. While it is too early to speculate about the impact of the decision, it certainly could result in a rise in whistle blower and government initiated actions under the FCA.

Money Exchange

The case stems from a security services contract at Al Asad Airbase in Iraq, which was awarded to Triple Canopy in 2009. As a part of the contract, Triple Canopy was required to provide security personnel who possessed specific firearms training and who were able to pass a U.S. Army qualifications course with a minimum score. Scorecards indicating that personnel passed the qualifications course were to be maintained in each employee’s personnel file.

Triple Canopy hired 332 Ugandan guards to work at the Airbase. The guards’ personnel files indicated that they met the training requirements; however, once they arrived on site and were retested, it was discovered that they were unable to properly perform. To overcome this, Triple Canopy falsified scorecard sheets indicating that its personnel were, in fact, qualified.

For the 12 month contract period Triple Canopy presented monthly invoices to the government and received payments totaling over 4 million dollars. Sometime later, a former employee filed a qui tam action in the Eastern District of Virginia alleging that the FCA had been violated. The government intervened alleging that Triple Canopy knowingly presented false claims to the government. Specifically, the government alleged “that Triple Canopy knew the guards did not satisfy [the contract’s] marksmanship requirement but nonetheless billed the government the full price for each and every one of its unqualified guards and falsified documents in its files to show that the unqualified guards each qualified as a Marksman on the U.S. Army Qualification course.”

Triple Canopy filed a motion to dismiss. The basis for this motion was the government’s failure to sufficiently plead that Triple Canopy submitted a demand for payment that contained a false statement. The motion went on to state that the government failed to prove that a false record was created by Triple Canopy, which the government relied upon in paying Triple Canopy. The Court agreed. In its opinion, the Court asserted that the government did not plead “that Triple Canopy submitted a demand for payment that contained an objectively false statement.” In other words, because the actual claim for payment did not contain a false statement, there was no violation of the FCA. Further, the Court held that the “Government … failed to allege that the [Contracting Officer’s Representative] ever reviewed the scorecards,” demonstrating that the government did not rely upon a false record because it did not examine the scorecards before it made payment. The United States (along with the former employee) appealed to the Fourth Circuit.

On appeal the Fourth Circuit reversed the District Court’s ruling. The Court held that the “Government pleads a false statement when it alleges that the contractor, with the requisite scienter, made a request for payment under a contract and withheld information about its noncompliance with material contractual requirements. The pertinent inquiry is whether, through the act of submitting a claim, a payee knowingly and falsely implied that it was entitled to payment.” The Fourth Circuit further found that, although Triple Canopy had not submitted certifications that were false on their face, the government plead sufficient evidence to sustain a FCA claim under a theory of implied certification.

In making this finding, the Court acknowledged the broad purpose of the FCA by stating that “claims can be false when a party impliedly certifies compliance with a material contractual condition [which] gives effect to Congress’ expressly stated purpose that the FCA should reach all fraudulent attempts to cause the Government to pay out sums of money or to deliver property or service.” Here, the material contractual condition was the guards’ qualifications, which Triple Canopy falsified. As the Court explained “common sense strongly suggests that the government’s decision to pay a contractor for providing base security in an active combat zone would be influenced by knowledge that the guards could not, for lack of a better term, shoot straight….[and further] if Triple Canopy believed that the marksmanship requirement was immaterial to the government’s decision to pay, it was unlikely to orchestrate a scheme to falsify records on multiple occasions.” Essentially, the Fourth Circuit found that the claim itself did not have to be false as long as the underlying information that formed the basis of the claim was material and false.

Prior to this ruling, it was difficult to bring a claim under the FCA under circumstances such as these because it was generally only permissible where there was fraud found in an actual certification for payment. Based upon this decision, a FCA claim can be sustained as long as the material upon which payment is based is false. This is yet another example of the expansive nature of the FCA. If you are a government contractor beware of its implications and if you have any questions, call a legal professional.

Edward T. DeLisle is Co-Chair of the Federal Contracting Practice Group. Ed frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues and dispute resolution.

Amy Kirby is an Associate in the firm’s Federal Contracting Practice Group.

SBA Proposes Sweeping Changes to Small Business Affiliation Rules

Posted in Small Business Contracting

The SBA is on a roll!  It seems that ringing in the new year has invigorated the agency, prompting it to act on the various outstanding directives set forth in the National Defense Authorization Act for Fiscal Year 2013 (“NDAA”).

Game_Changer

Last Thursday, the agency issued its long-awaited proposed rule on the expansion of the Mentor-Protégé Program.  There were also proposed changes impacting the 8(a), HUBZone, and other small business programs. We gave you a sneak preview of that rule here, the day before it was issued.  In addition to those proposed mentor-protégé changes, the SBA also recently rolled out a second proposed rule ,which included various changes to the small business regulations. Over the next several weeks, we will provide you with our take on various aspects of these two proposed rules. For purposes of this article, though, we’re going to focus on the changes to the affiliation regulations set forth in the December 29, 2014 proposed rule.  These proposed changes would fundamentally alter the SBA’s analysis regarding the “ostensible subcontractor” rule, economic dependence, and “identify of interest” affiliation.

The rule proposes that a small business would be exempt from ostensible subcontractor affiliation where it subcontracts with a “similarly situated entity.”  In fact, the rule proposes a complete overhaul of contractor performance requirements set forth in 13 C.F.R § 125.6.  Rather than mandate the percentage of work a prime must perform, the revised 125.6(a) limits how much work a prime can subcontract to other contractors, a subtle but important distinction.  Subcontracts issued to “similarly situated entities” are not counted toward the subcontracting limit. For example, under the proposed rule, an 8(a) contractor performing a general construction contract cannot subcontract more than 85% of the contract work to non-8(a) entities.  Similarly, a SDVOSB prime contractor cannot subcontract more than 75% of a specialty construction contract to non-SDVOSB concerns. In these examples, the required 15% or 25% of the work would have to be performed by either the prime itself, or by the prime in combination with a “similarly situated entity” – i.e. a concern that is eligible for the same small business program as the prime.  Strangely enough, the language of the revised regulation does not require any of the work to be self-performed by the prime, so long as the requisite percentage is performed by a combination of the prime and entities that are “similarly situated.”  Consistent with this concept, the proposed revision to §125.6(b) creates an exception to ostensible subcontractor affiliation for prime contractors who subcontract in this manner.  The revised rule would ensure that a prime that subcontracts a majority of its work will not be “affiliated” with its subcontractors, so long as its subcontractors are “similarly situated.”

The second major change to affiliation is the adoption of a bright line test based on economic dependence. Pursuant to the proposed rule (to be inserted at 13 CFR 121.103(f)(2)), if a concern derives 70% or more of its revenue from another company over a fiscal year, the SBA will presume that the concern is economically dependent on that company, and, therefore, that the two businesses are affiliated.  It is not entirely clear from the language of the rule itself whether this will be considered a rebuttable presumption.  But an SBA representative who spoke about the proposed rule last week at the National 8(a) Association’s Winter Conference indicated that it would be rebuttable.

The third major affiliation change set forth in the proposed rule relates to “identity of interest” affiliation under 13 CFR 121.103(f).  In its current form, the regulation provides that:

Affiliation may arise among two or more persons with an identity of interest. Individuals or firms that have identical or substantially identical business or economic interests (such as family members, individuals or firms with common investments, or firms that are economically dependent through contractual or other relationships) may be treated as one party with such interests aggregated. Where SBA determines that such interests should be aggregated, an individual or firm may rebut that determination with evidence showing that the interests deemed to be one are in fact separate.

However, the current rule does not identify what types of family members are subject to the presumption identified in the rule.  The proposed rule would clarify this.  The revised regulation would state, in relevant part:

Firms owned or controlled by married couples, parties to a civil union, parents and children, and siblings are presumed to be affiliated with each other if they conduct business with each other, such as subcontracts or joint ventures or share or provide loans, resources, equipment, locations or employees with one another. This presumption may be overcome by showing a clear line of fracture between the concerns. Other types of familial relationships are not grounds for affiliation on family relationships.

This will certainly make it easier for contractors to tell if they are venturing into dangerous territory when doing business with a family member.

It is very important to keep in mind that these are just proposed changes.  The final rule may vary, so pay attention.  Comments to the rule are due February 27, 2015.  We will keep you posted on the status of the final rule.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Ed frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues and dispute resolution.

Maria L. Panichelli is an Associate in the firm’s Federal Contracting Practice Group. Her practice includes a wide variety of federal contracting and construction matters, as well as all aspects of small business procurement.

Three Provision Pitfalls in Small Business Corporate Governance Documents

Posted in Small Business Contracting

You probably already know about set-aside programs offered by the Small Business Administration (SBA) and the Department of Veterans Affairs (VA), but did you know that provisions in your corporate governance documents could ruin your eligibility for those programs? Ed DeLisle and Maria Panichelli’s new article for Onvia covers critical corporate governance provisions that could potentially destroy your status under the VA’s new guidelines. “Three Provision Pitfalls in Small Business Corporate Governance Documents” contains critical information and the most problematic governance provisions for Service-Disabled, Veteran-Owned and Veteran-Owned Small Businesses (SDVOSB/ VOSB) including definitional clauses or clauses dealing with authority, supermajority provisions and involuntary transfer provisions as well as limitations on transfer provisions. Learn more in the full article below:

The federal government offers a multitude of programs designed to assist small businesses. The Small Business Administration (SBA) is certainly at the forefront of such programs, but it is not the only agency. The Department of Veterans’ Affairs’ (VA) has created a very popular program of its own for Service-Disabled, Veteran-Owned and Veteran-Owned Small Businesses (SDVOSB/ VOSB). Many contractors generally know about the benefits of participating in these programs. Some may even know about the applicable eligibility requirements. But what many contractors don’t know is that provisions in their corporate governance documents could destroy their eligibility for such programs. This article seeks to educate contractors about the three most common provisions affecting small business program eligibility.

The federal government’s Small Business Programs – the SBA’s 8(a)HUBZone,
VOSB/SDVOSB and WOSB/EDWOSB Programs, as well as the VA’s VOSB/SDVOSB Program – share certain eligibility requirements. Specifically, in addition to the threshold requirement of being a “small” business, each program requires at least 51% “unconditional ownership,” as well as “unconditional control,” of that business by particular individuals. For example, a veteran or service-disabled veteran has to unconditionally own at least 51% of a company and unconditionally control that company in order for that company to be considered a VOSB or SDVOSB, respectively. Similarly, a woman or an economically disadvantaged woman needs to unconditionally own and control a business if that business wishes to be considered an eligible WOSB or EDWOSB.

Figuring out who must have ownership and control of the concern is the easy part: Definition sections of the applicable regulations are found here: 13 C.F.R. §§§ 124.01124.03 and 124.04  for 8(a) businesses; 13 C.F.R. § 126.200 for HUBZone concerns; 13 C.F.R. Part 125  for the SBA VOSB/SDVOSB program; 38 C.F.R. § 74.2 for the VA VOSB/SDVOSB program; and 13 C.F.R. §§ 127.102 and 127.200 for the WOSB/EDWOSB program. The difficult part is figuring out how the definitions are defined: How must these individuals own and control the company? The regulations tell us that ownership and control must be unconditional. But what does unconditional really mean? Said a different way, under what circumstances do these agencies consider ownership or control to be conditional? That is where trouble often lurks. Many times, a finding of conditional ownership or control is based on a provision or requirement found in a company’s operating agreement, shareholder’s agreement or by-laws. Several of the most problematic provisions are discussed below.

1) Definitional Clauses or Clauses Dealing with Authority

Corporate governance documents almost always contain a provision outlining who the members or owners are, or defining who will manage the entity. While these provisions are not problematic per se, they can cause issues when roles are not clearly defined or authority appears to be shared.

Example
The powers of the Company shall be exercised by or under the authority of, and the business and affairs of the Company shall be managed under the direction of, one or more managers. The Manager(s) shall be: Jane Doe, John Doe and Yogi Berra.

The problem with this clause is that it gives the impression that all three of these individuals have equal decision-making authority. What if Mr. Berra is the majority owner, and the service-disabled veteran upon whom the company’s SDVOSB eligibility depends? This provision, as written, would seem to indicate that he does not have ultimate authority over the company but, rather, shares control with the other two managers. Even if the corporate governance document otherwise demonstrates that Yogi is the 66% owner, or specifies that no decision can be made by the company without Yogi’s approval, the SBA and VA could very well question whether unconditional control exists based upon this clause. For that reason, it often makes more sense to name only the majority owner(s), upon whom eligibility depends, as managers or managing members. The remaining individuals can be given other titles.

2) Supermajority Provisions

As the name indicates, supermajority provisions are provisions that require an ownership vote of more than a simple majority to effectuate material change.

Example
Removal of Members: Members may be removed from the LLC by an affirmative vote of more the 66% of the LLC members.

The problem with these types of provisions is that they can divest a majority owner of his or her power to unconditionally control the company. Consider the following example: Bob, a service disabled veteran, owns 51% of Bob’s Electric Company, LLC and has applied for SDVOSB verification through the VA. The operating agreement contains a supermajority provision which requires at least a 2/3 vote to remove a member. Because Bob owns only 51%, he cannot, without the consent of other members, effectuate this change. In other words, Bob does not have unfettered authority to remove another member on his own. Therefore, in the eyes of the VA, Bob does not unconditionally control his company and Bob’s Electric is not a legitimate SDVOSB. For this reason, supermajority provisions should be avoided if a business wishes to participate in the Small Business Programs. The sole exception is if the majority owner owns more than is required under the supermajority provision (using the example above, this would mean Bob owned 67% or more) and therefore, could effectuate change without the consent of the minority owners.

3) Involuntary Transfer Provisions and Limitations on Transfer Provisions

Involuntary transfer provisions encompass an array of provisions, each of which operates to divest an owner of his or her ownership interest without consent. Common examples include a transfer upon insolvency or bankruptcy, a transfer upon criminal conviction or a transfer upon incapacity or death.

Example
Transfer Upon Insolvency:
 Upon the insolvency of any member, that member must transfer his or her shares to the other member at a price determined by [document pricing provisions].

Similarly, limitations on transfer provisions prevent a member or shareholder from freely transferring his or her ownership interest. Some examples include provisions that provide for a right of first refusal (i.e., a requirement that the selling or transferring member/shareholder must offer to sell his or her interests to other members/shareholders before any other individual or entity) or provisions that require consent of other members before a sale of ownership interest can be made.

Example
Restrictions on Transfer:
 No Member shall sell, assign, pledge, give or otherwise transfer or encumber in any manner or by any means whatsoever, any interest in a Membership Interest whether now owned or hereafter acquired without having obtained the prior written consent of all of the members of the Company.

The SBA and VA commonly view provisions like this as placing “conditions” on ownership. In the agencies’ view, if an owner can be divested of its ownership without his or her consent, or if an owner does not have unfettered freedom to sell his or her ownership interest, that owner does unconditionally own the company. That said, in a 2013 case litigated by our firm, the Court of Federal Claims ruled that in certain cases, rights of first refusal are permissible, and do not render an owner’s control as conditional. However, it is important to keep in mind that the COFC’s decision in that case addressed VA regulations that pertain to SDVOSBs under that program only. It is not entirely clear if the SBA’s similarly-worded regulations would be interpreted in the same way. For this reason, and just to be safe, it is probably a better idea to exclude these types of provisions altogether.

Conclusion

The provisions identified here are not the only provisions that can cause eligibility issues — but contractors who learn to avoid these three common pitfalls will be way ahead of the game! Of course, the advice in this article represents general guidelines only and each company must assess for itself how best to draft its corporate governance documents. Drafting an operating agreement, shareholders agreement or by-laws that simultaneously address all of the company’s needs, balance the interests of the various owners, and comply with all relevant SBA and VA regulations can be a daunting task. If contractors have any questions about how to draft the best corporate governance documents for their company, the best course of action is to contact a legal professional to assist.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Ed frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues and dispute resolution.

Maria L. Panichelli is an Associate in the firm’s Federal Contracting Practice Group. Her practice includes a wide variety of federal contracting and construction matters, as well as all aspects of small business procurement.

Get the Inside Scoop on the Government Contract Selection Process!

Posted in Small Business Contracting, Webinar

Vector webinar button

The Construction Industry offers tremendous opportunities and challenges for any business owner. However, when your customer is the federal government, there is an extra layer of requirements that can either make or break your business. Just putting together a bid or proposal is a test of skill and attention to detail, but what comes next? The Government’s selection process for the ultimate awardee of the contract is unlike any other. Join Jennifer Horn and Maria Panichelli for the WIPP/Give Me 5 webinar The Fundamentals of the FAR, Part 2: The Source Selection Process on Wednesday, February 25th at 2:00pm. In this presentation, you will learn about “best value” and “trade off”, the source selection process, and tips that will help you use the selection process to your advantage to win more contracts! To register for the webinar or access previous webinars presented by Jennifer and Maria click here.

WIPP is a national nonpartisan public policy organization advocating on behalf of its coalition of 4.7 million businesswomen including 75 business organizations. WIPP identifies important trends and opportunities and provides a collaborative model for the public and private sectors to increase the economic power of women-owned businesses. Give Me 5%, named after the 5% federal contracting goal for women-owned businesses, was created to educate women business owners on how to apply for and secure federal procurement opportunities. GiveMe5 is working to improve the WOSB Procurement Program to increase access to contracts for women entrepreneurs.

Jennifer M. Horn is a Partner at Cohen Seglias and a member of the Construction Group. She concentrates her practice in the areas of construction litigation and real estate.

Maria L. Panichelli is an Associate in the firm’s Federal Contracting Practice Group. Her practice includes a wide variety of federal contracting and construction matters, as well as all aspects of small business procurement.

HOT OFF THE PRESSES: SBA TO RELEASE PROPOSED RULE ON NEW MENTOR-PROTEGE PROGRAM ON THURSDAY

Posted in Small Business Contracting

My firm is a big supporter of the National 8(a) Association and a proud sponsor of its Winter Conference, which is taking place right now in Orlando, Florida. I just left a presentation given by the SBA and several other SBA experts and found out that the SBA will finally issue its new proposed regulations governing the Mentor-Protege Program.

breaking news

The proposed regulations follow the Jobs Act of 2010 and the National Defense Authorization Act of 2013, where Congress asked the SBA to expand the Program to firms other than 8(a) companies. There has been much speculation over the last several years regarding what this overhaul would look like. Well, we’re about to find out. Here are some highlights that I learned today:

First, the SBA is going to create two distinct and different Mentor-Protege Programs, one for 8(a) companies and one for other small businesses. The one designed for other small businesses will be geared to servicing SDVOSBs, HUBZone companies, WOSBs and small businesses, generally. Mentors will still have to demonstrate good financial health, among other things, to qualify as a mentor, but there were indications during today’s presentation that the new regulations would better define the meaning of “good financial health.” For Protégés, it appears as if the proposed regulations will make it easier to qualify. If you are a participant in any of the small business programs covered by the proposed regulation, you can be a protege.

The most important aspect to the proposed rule may be the following: all companies who become Mentor and Protege through the revamped program will be able to take advantage of the exclusion from affiliation. Many speculated that this exclusion might remain with the 8(a) Mentor-Protege Program and not extend to those newly covered by the revised regulations. That does not appear to be the case. All companies will benefit from the exclusion.

There are many more changes coming as part of the proposed rules. Once they are issued on Thursday, we will share our thoughts with you.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Ed frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues and dispute resolution.

Proposed Rule Would Give Federal Contractors a New Way to Report Agency Mismanagement and Misconduct

Posted in Protection of Contractor Rights, Small Business Contracting

Over the last few years the world of federal contracting has seen an increased focus on the False Claims Act, the prevention of fraud, and the strengthening of fraud-related penalties. 2015 will certainly be no different. However, the new year brings with it a slightly different take on fraud prevention, one aimed not at the contractor, but on the government. Mobile phone with scam message speech bubble

On January 22, 2015, the United States’ Office of Special Counsel (“OSC”) issued a proposed rule that would give federal contractors and subcontractors a new way to report agency wrongdoing. The rule implements a “pilot program” identified in the National Defense Authorization Act (“NDAA”) of 2013, the purpose of which is to “enhance contractor protection from reprisal for a disclosure of information that the contractor reasonably believes is evidence of gross mismanagement of a Federal contract or grant; a gross waste of Federal funds; an abuse of authority relating to a Federal contract or grant; a substantial and specific danger to public health or safety; or a violation of law, rule or regulation related to a Federal contract or grant.” (Public Law 113-1421, 41 U.S.C. 4712). Consistent with the NDAA, the proposed rule would allow employees of federal contractors and subcontractors to disclose wrongdoing of government employees if they work at, or on behalf of, a U.S. government component for which OSC has jurisdiction to accept disclosures. (See OSC’s Website for more detail.)

So what does this mean for federal contractors and subcontractors? Well, it means that federal contractors and subcontractors who observe mismanagement or misconduct by a federal agency can bring their complaints directly to the OSC. Contractors can also go to OSC if they believe they have suffered retaliation for prior disclosures or statements made about agency misconduct. The hope is that this new program can provide contractors a more effective way to report wrongdoing within the government.

Comments to the rule are due March 24, 2015. We will keep you posted on any new developments.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Ed frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues and dispute resolution.

Maria L. Panichelli is an Associate in the firm’s Federal Contracting Practice Group. Her practice includes a wide variety of federal contracting and construction matters, as well as all aspects of small business procurement.