03 January 2012

Recent DOD Regulations Increase FCA Liability Risk

The Department of Defense (DoD) recently issued a final regulation, requiring prospective government contractors to represent, as part of their offers, that certain former DOD officials employed by the offeror are in compliance with the post-employment restrictions contained in 18 § U.S.C. 207, 41 U.S.C. §§ 2101–07, 5 CFR parts 2637 and 2641, as well as FAR § 3.104–2. See Defense Federal Acquisition Regulation Supplement: Representation Relating to Compensation of Former DoD Officials (DFARS Case 2010–D020), Final Rule, 76 Fed. Reg. 71,826 (Nov. 18, 2011). Those statutes and regulations are designed to combat the so-called “revolving door” problem of contractors hiring former government employees in order to do business with their former agencies.

Although the new requirement does not change the underlying post-employment restrictions, the new required “representation” opens contractors to greater penalties should they fail to comply. Of course, the point is that should a contractor’s representation prove to be false, the contractor is looking at a possible False Claims Act violation, assuming the requisite scienter is also present. U.S. ex rel. Wilson v. Kellogg Brown & Root, Inc., 525 F.3d 370, 376 (4th Cir. 2008) (quoting Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 788 (4th Cir. 1999), for the proposition that “the term ‘false or fraudulent claim’ includes those instances ‘when the contract or extension of government benefit was obtained originally through false statements or fraudulent conduct'”); United States ex rel. Willard v. Humana Health Plan of Texas, Inc., 336 F.3d 375, 384 (5th Cir. 2003) (explaining that FCA liability may be imposed “when the contract under which payment is made was procured by fraud”).

DOD, on the other hand, specifically indicated that it “elected to employ a representation rather than a certification.” 76 Fed. Reg. 71826. In that regard, one comment that DOD received argued that the Clinger-Cohen Act prohibits the creation of contractor certifications that are not required by law. In response, DOD acknowledged that “[t]he Clinger/Cohen Act prohibited the creation of contractor certifications that are not required by law,” but asserted that “[t]he FAR and DFARS regularly employ the distinction between a representation and a certification, and representations have regularly been deemed not subject to the Clinger/Cohen Act ban.” Id. at 71828. Indeed, DOD went so far as to say that the new rule does not require the creation of new compliance systems and additional costs should not be incurred.

There are a number of problems with DOD’s explanations.

First, section 4301(b)(1) of the Clinger-Cohen Act of 1996, P.L. 104-106, amended 41 USC § 425 to restrict the inclusion of nonstatutory certification requirements in the FAR. Federal Acquisition Circular 97-11 explained that this statutory provision “apparently” responded to an industry perception that a “certification” requires a high level of attention within the company, may entail personal accountability of the signing official, and is more likely to be subject to criminal prosecution. 64 Fed. Reg. 10530, 10531 (Mar. 4, 1999). Indeed, prior to the enactment of Public Law 104-106, there were over 100 certifications required by law. See 40 No. 14 Gov’t Contractor ¶ 172. Some of the certifications that were specifically eliminated by the Act include the certification of procurement integrity (§ 4304) and the certification regarding a drug-free workplace (§ 4301(a)). Id.

Contractors, however, may well argue that the representation is, in effect, an invalid certification. There do not appear to be any cases addressing when a representation is really nothing more than a prohibited certification, although the GAO has held, in a bid protest decision, that “[a] certification is ‘the formal assertion in writing of some fact.'” Sea-Land Service, Inc., B- 278404 (February 09, 1998). In that regard, the new representation is made pursuant “to the best of its [i.e., the contractor’s] knowledge or belief.” 76 Fed. Feg. 71827. One comment complained about the vagueness of that phrase. In response, DOD asserted that the meaning of the phrase “is a recognized legal term of art,” but the example DOD cited for that assertion is, ironically, the certification required by the Truth in Negotiations Act. 10 U.S.C. § 2306a(a)(2). And, similar language is found in the Contract Disputes Act’s certification requirement. 41 U.S.C. § 7103(b).

Second, DOD does not even attempt to explain what the practical distinction is between a representation and a certification, which is particularly troubling given DOD’s assertion that “[b]y the terms of the representation, an offeror is prohibited from submitting an offer if it cannot make the representation.” 76 Fed. Feg. 71829 (emphasis added). That statement, of course, is an attempt to use the representation as a hook for False Claim Act liability.

In sum, the entire point of the new regulation is to require offerors to verify their employees’ compliance with existing laws and regulations in order to deter non-compliance. The DOD cannot have it both ways. Either the new the new rule is designed to force contractors to be extra careful regarding how they employ and monitor the employment of former DOD officials, or the rule imposes no particular additional duties or costs – but those possibilities are mutually exclusive.

The bottom line is that a representation employing standard certification language is a distinction without a difference for the purposes of the FCA and, notwithstanding any DOD disclaimers to the contrary, contractors should not be lulled into a false sense of security by the “representation” label.