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UPDATE ON: SUBCONTRACTING AND FLOW-DOWN REQUIREMENTS FEDERAL PRISON INDUSTRIES PROCUREMENT PARTICIPATION AND SOCIAL MEDIA POLICY Presented to the Ability One National Conference May 24, 2011 Meeting Orlando, FL Ruth E. Ganister, Esquire Rosenthal and Ganister 31 Turner Lane West Chester, Pa. 19380 610-430-6890 610-430-6889(fax) Roseganist@aol.com Š Ruth E. Ganister, 2011 III. Subcontracting Issues A. Privity Issues 1. Subcontractors have no privity with the Government. Therefore only the prime contractor may interface with the Government, even if the particular issue pertains solely to the work being performed by the subcontractor. 2. The prime contractor may give the subcontractor the authority to stand in its shoes to be able to communicate with the Government directly in the name of the prime. 3. Unless the prime contractor has an obligation to make payments to a subcontractor, the Government will have no obligation to reimburse the prime contractor for any damages sustained by the subcontractor. If the prime and the subcontractor settle a dispute for a lesser amount than what the subcontractor has claimed, the Government’s liability will be capped at the settlement amount unless specific rights pertaining to the unrecovered amounts are reserved. See Severin Doctrine, Severin v. United States, 99 Ct. Cl. 435, (1943); Folk Construction Co. v. United States, 2 Cl. Ct. 681 (1983).

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B. Flow-Down Requirements 1. Mandatory clauses (See attached schedule) a.

Applicable to all FAR Section 14 and 15 procurements

2. Section 12 acquisitions for commercial items a. FAR 52.212-4 Contract Terms and Conditions - Commercial Items b. Subparagraph (o) relates to Other Compliances and requires the contractor to comply with “all applicable Federal, State and local laws, Executive Orders, rules and regulations applicable to its performance under this contract.� Means many additional provisions will be deemed incorporated by reference. c. FAR 52-212-5 Contract terms and Conditions Required to Implement Statutes or Executive Orders - Commercial Items. d. Subparagraph (e) required mandatory flow-down of FAR 52-219.8 Utilization of Small Business Concerns and Equal Opportunity and Affirmative Action provisions. e. FAR 52.244-6 Subcontracts for Commercial Items 3. Berry Amendment application a. If the Berry Amendment (10 USC 2533a) is applicable to the prime contract it is mandatory that it be applied to all subcontracts and vendor orders and must be flowed down by the subcontractors and vendors to their respective suppliers. b. Berry Amendment compliance is not excused by tiering vendor orders to attenuate from the prime contract. c. The prime contractor is responsible to assure that the Berry Amendment requirements are being fully met. d. Non-compliance can result in rejection of finished items, demand for refund of sums paid for non-complaint goods and/or potential termination of the prime contract.

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4. Buy-American applications a. If the Berry Amendment is not applicable to the prime contract and there is no trade agreement exception to the Buy America Act provisions, the Buy-America Act may be applicable to the prime contract. If so, care needs to be taken to assure that the end item is in fact domestic if so represented in the offer. b. Under the Buy America Act, foreign sourced components may be converted into domestic products if further processed, manufactured or developed in the US. The particulars of any specific transaction need to be carefully reviewed to assure compliance with the statute. c. Non-domestic product may be offered, but will be subject to price evaluation differentials, which in most instances will render the product non-competitive.

C. Choice of Law Issues 1. The relationship between the prime contractor and its vendors and subs will be governed by state contract law. By contract terms, the contractual relationship may include reference to federal law, but ultimately, the contract will be interpreted through reference to state law. 2. For acquisitions of goods, the order terms will be interpreted in accordance with the provisions of Article 2 of the Uniform Commercial Code as that Code is enacted in the particular state whose law is applicable to the order. The codification of the UCC by each state is not entirely the same. Therefore caution is required in drafting the order provisions to assure that the state law which represents the most logical for the order is specifically by the terms of the order made applicable thereto. 3. Disputes between a prime and a sub cannot be heard in the same fora where disputes with the Government are heard. Prime/sub disputes are subject to state law and will be heard in state courts, or if the diversity and financial thresholds are met in United States District Court applying state law provisions, or if the parties have elected arbitration in the selected arbitral forum.

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D. Small Business Subcontracting Requirements 1. Small Business Subcontracting Plans a. Applicable only to large businesses b. Penalty provisions for failure to comply with goals 2.

Purchasing System Reviews a. FAR Part 44.3 b. To evaluate the contractor’s compliance with Government policy when subcontracting.

E.

Subcontracting with NIB/NISH agencies 1. No prohibition on subcontracting with such entities. 2. All such entities are privately held non-profit entities. 3. General commercial law will apply to all contractual arrangements between prime contractors and such entities. 4. Such entities are required to adhere to labor laws. 5. Such entities can accept and be contractually bound by prime contract required flow-down provisions. 6. One agency may subcontract with another.

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II. Additional Contract Provisions and Flow Down Requirements 1. Executive Order 13496 a. Requires all Executive Departments to include in all contracts in excess of the simplified acquisition threshold a provision requiring the contractor to post a notice in conspicuous places such that its employees will be able to see and read it advising the employees that they have the right under the National Labor Relations Act to engage in “...association, self-organization, and designation of representatives of their own choosing, for the purpose of negotiation the terms and conditions of their employment.” b. The EO states: “Relying on contractors whose employees are informed of such rights under Federal labor laws facilitates the efficient and economical completion of Federal Government contracts.” c. Provides for contract termination and potential suspension and/or debarment of the contractor for failure to comply with the requirement. d. Requires that the prime contractor flow down the provision to subcontractors and to monitor subcontractors to assure compliance with the requirement and to report any non-compliance by subcontractors to the Secretary of Labor. e. The provision is dependent on a clause incorporating the requirement being in the prime contract. f. Applies to all contracts awarded after June 21, 2010. 2. Executive Order 13502 a. Applicable to the construction trades. Requires that for all construction contract in excess of $25,000, the prime contractor have entered into a Project Labor Agreement with a labor organization. b. Under the NLRB, 29 USC 152, a labor organization is defined as any organization of any kind, or any agency or employee representation, committee or plan. The definition does not specify that a labor organization has to be a union.

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III. Federal Prison Industries Update A. Federal Prison Industries is now required to compete under certain circumstances 

     

Section 827 of Public Law 110-181 codified at 10 USC 2410(b) provides that for DOD procurements where FPI has a “significant” market share of a product, DOD must use competitive procedures for such procurements and FPI may compete therein. The statute defines “significant market share” as being 5% or more of the DOD market for the category of products in which the product being procured is located. The Secretary is required to publish a list of the product categories in which FPI has a significant market share. The list is required to be updated periodically. DFAR provisions are located at 208-602. There is no definition what will constitute “competition” by FPI. FPI may choose to offer at pricing that is significantly below the competitive market. FPI may not be subject to the anti-trust laws. B. FPI summary a. Is a Government owned corporation - not an agency of the Executive Department. b. Is a non-appropriated fund activity. (NAFI) Contract Disputes Act does not apply to FPI. See Core Concepts of Florida v. US (CAFC) c. Enabling legislation permits it to produce items for “sale to the departments or agencies of the United States, but not for sale to the public in competition with private enterprise.” 18 USC 4122(a) d. FPI cannot adhere to all mandatory contractual and statutory and regulatory provisions applicable to prime contracts and required by prime contractor to be flowed down to subcontractors and vendors. e. FPI’s Board must approve all additions of products to the inventory of items produced by the corporation. Consideration must be given not to create a situation where any industry bears an undue burden of competition from FPI and to reduce to a minimum competition with private industry and free labor. f. Sales from FPI to Government agencies are considered intragovernmental transfers. Deposits are made directly into the FPI account (Prison Industries Fund) held at the US Treasury g. The Government Accountability Office has audit rights over the FPI funds held at the Treasury and funds can only be disbursed therefrom pursuant to warrants issued by the GAO. Ruth E. Ganister, Esquire 6


h. Gov’t cannot require contractors to purchase from FPI. Coalition for Government Procurement v. FPI (CA-6, 2004) C. Federal Prison Industries v. Ability One 1. FAR 8.603 addresses circumstances where both FPI and Ability One produce or provide identical goods and/or services. 2. For supply acquisitions, where that is the case, FPI’s request for the procurement shall take precedence over that of Ability One. See 41 USC 48. 3. For service acquisitions, Ability One’s request for the procurement shall take precedence over that of FPI. 4. Pursuant to FAR 8.602©), where FPI and Ability One provide the same goods and/or services, FPI may grant a waiver to the procuring agency to permit the agency to purchase all or part of the requirement from an Ability One participating agency.

IV. Social Media Policy Issues A. Loose Lips Sink Ships/ Loose Tweets Sink Fleets 1. Navy Command Social Media Handbook issued October 15, 2010 2. Army Social Media Handbook released January, 2011. 3. Other services have social media policies. B. Need to have a Social Media Policy 1. Protection of trade secrets 2. Gives a qualified “Safe Harbor” under FTC endorsement guidelines. 3. Can provide brand protection. 4. Can protect security clearances of company, officers, employees. 5. Most individuals do not understand the reach of social media and the potential for damage from improper comments or postings. 6. Can protect from libel actions 7. C. Use of Social Media 1. For employment review a. Can be improper if used inappropriately b. May be used by employees to claim discrimination c. Do not use a candidate/employee’s public information to make decisions based on protected factors - race, creed, sex, national origin, age, disability, sexual orientation D. Elements of a Social Media Policy 1. Educate employees about improper disclosures, wire fraud elements, libel

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2. Address trade secret issues; confirms company’s policies and actions to protect its trade secrets and confidential information. This may be critical in any breach of confidentiality action. 3. Educate employees about the difference between posting their own information and posting information that may pertain to the company and/or the company’s customers, vendors, etc. 4. Educate employees how games may be used to access corporate computer systems. 5. Beware of “Friends” - contacts can lead to more contacts. 6. Segregate personal social media from all business accounts. 7. Beware of following blogs and tweets - North Korea has a Twitter Page. 8. Set up a system so employees can ask questions about the use of social media and what is and is not permitted by the employer. 9. Do not use the corporate social media policy to restrain free speech. 10. Sensitize all employees that anything posted on the internet is discoverable and can be used in any litigation matter. By posting, one puts the information in the public domain.

V. Organizational Conflicts of Interest/Post Government Employment Restrictions 1. Organizational Conflicts of Interest (OCI’s) may occur when a contractor has participated in the design/development/evaluation of a product, system or service that is subsequently procured by the Government or where a contractor hires former Government employees to assist is with its acquisition activities. 2. Where an entity has participated significantly in the design/development/evaluation of a product, system or service that is subsequently procured by the Government, the Government may preclude that entity from participating in the competition for acquisition of the same. In such instances, the procuring agency will include a provision prohibiting such entity from participating in the competitive procurement for the same. The prohibition will generally extend to related or affiliated concerns. However, the determination whether an offeror will be precluded from participating in the acquisition will be determined by the procuring agency itself and is subject only to a reasonableness standard. See Software Engineering Services, Inc., B401645, October 23, 2009; Aetna Government Health Plans, Inc. B-254397.15 et. al., 95-2 CPD 129.

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3. Post Government Employment Restrictions a. Generally covered by 18 USC 207 et. seq. and implementing regulations at 5 CFR 2637 and 2641. b. The FAR addresses the issues at 3.104 and 3.601. c. The post employment restrictions pertain to the hiring of former Government employees as well as to the hiring or use of organizations owned or controlled by them. d. Violation of the provisions can have serious ramifications for the contractor who hires the former Government employee as well as for the former employee. Those ramifications can include loss/termination of contracts, audit and refund of profit from an affected contract, exclusion from participation in certain procurements, suspension, debarment and in some instances criminal charges if founded. FAR 3.104-7. e. The provisions apply to all Government personnel who is or has acted on behalf of the United States with regard to any procurement and by virtue of that position has or had access to procurement information. f. If communication occurs between such a Government employee and a contractor regarding possible employment by the contractor, the Government employee is required to either terminate all such discussions and report the same, or report the same and refrain from participation in pertinent procurement actions until such time as all such discussions have concluded and the agency has authorized the person to resume participation in the covered procurement actions. g. Depending on the position of the Government employee, the prohibition may affect only some procurement actions, or it may affect all activities of the person with the agency. h. Unsolicited offers from contractors or persons acting on behalf of contractors will be deemed to be “contacts� covered by the pertinent statutes and regulations and must be disclosed. I. In general, a person who has been a Government employee involved with procurement actions may not accept compensation in any form (whether as an employee, officer, director, representative, agent or consultant) from a contractor for one year after the person’s employment with the Government has terminated. FAR 3.104-3(d). This prohibition will apply if the person has served as a procuring contracting officer, source selection authority, member of a source selection evaluation board or chief of a financial or technical evaluation board, program manager, deputy program manager, administrative contracting officer, or otherwise was authorized to and made award decisions, or established contract rates or approved contract payments for any contract in excess of $10,000,000 awarded to the contractor with whom possible employment is contemplated. FAR 3.104-3. j. For senior government employees the restrictions generally will be for a twoyear period, but in some instances, the restrictions may be absolute. Ruth E. Ganister, Esquire 9


k. All such contacts should be reported to the pertinent agency’s ethics office. Contractors may make such reporting as well as Government employees. Ethic s advisory opinions may be obtained from the pertinent agency ethics office. FAR 3.104-6. l. A Government employee may accept employment from a separate division, subsidiary or affiliate of the contractor provided that entity did not participate in the procurements with which the Government employee was involved. FAR 3.104-3(d)(3). m. The restrictions are applicable to civilian and military Government personnel. 4. New DOD Restrictions a. P.L. 110-181 provides that covered DoD officials who expect within 2 years after leaving Government service to receive compensation from a contractor shall request a written opinion from the appropriate DOD ethics office regarding the applicability of post-employment restrictions to his/her anticipated activities. See DFAR 203.171-2. b. Covered DOD officials include persons who have served in the Government in an Executive Schedule position, as a member of the Senior Executive Service, in a general or flag officer position with a pay grade of O-7 or higher, or as a program manager, deputy program manager, procuring contracting officer, administrative contracting officer, source selection authority, member of a source selection evaluation board, or chief of the financial or technical evaluation team for procurements valued in excess of $10,000,000. DFAR 252.203-7000. c. A contractor may not knowingly employ such a person within said 2 year period unless the contractor has determined that the person has received or applied for such an ethics opinion. Failure to comply with this requirement may result in termination of contracts and/or suspension or debarment proceedings against the contractor. d. Deliberate violations of the requirements may also subject the violators (both Government personnel and contractors) to criminal sanctions. Notice and Disclaimer: The information contained herein is provided for instructional purposes for the Ability One 2011 National Conference only. The information is believed to be current and accurate as of the time of authorship. The law (statutory, regulatory and by court decision) is subject to change. The information contained herein is not provided as legal counsel and may not be relied upon as such. The reader is cautioned always to check any legal reference or citation for current accuracy and applicability before relying on the same.

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