[co-author: Ryan Harrigan - Associate]

While contractors (and their HR departments) dodged a serious bullet with Trump’s recent invalidation of the 2016 FAR blacklisting rule, they need to be alert to a new HR-related compliance requirement as a result of a rule promulgated on the final day of the Obama Administration.

The Substance of the Rule:

The rule, which became effective on January 19, 2017, prohibits Federal contractors from requiring employees or subcontractors to comply with internal confidentiality agreements that restrict “lawfully reporting waste, fraud, or abuse related to the performance of a government contract.”  Federal Acquisition Regulation (FAR) 52.203-19; 82 Fed. Reg. 4717-01.  The rule requires Federal agencies to include the following provisions in new solicitations and existing contracts that are funded with fiscal year (FY) 2015 funds or subsequent FY funds:

• FAR 52.203-18: Prohibition on Contracting with Entities that Require Certain Internal Confidentiality Agreements or Statements—Representation; and

• FAR 52.203-19: Prohibition on Requiring Certain Internal Confidentiality Agreements or Statements.

To the extent that a company has existing confidentiality agreements with current employees or subcontractors that are inconsistent with the new requirement, the company must notify the individuals that the contractual language that conflicts with the new rule are no longer in effect.  82 Fed. Reg. at 4723.  The final rule also requires that the FAR clauses be incorporated into all subcontracts.  FAR 52.203-19(f).

The final rule broadly defines “internal confidentiality agreements” as any written statement regarding nondisclosure of contractor information that the contractor requires employees, or subcontractors, to sign.  FAR 52.203-19; 82 Fed. Reg. at 4722.  Notably, after industry comment, the FAR Council adopted two exceptions to the blanket rule that extend to (1) confidentiality agreements arising out of civil litigation, and (2) agreements signed at the behest of a Federal agency.  Id.

The new rule also institutes a new representation and certification for all contractors regarding confidentiality agreements.  See 81 Fed. Reg. at 4723; FAR 52.204-8; FAR 52.212-3; FAR 52.202-3.  In submitting a proposal, potential Federal contractors certify that they are in compliance with the new limitation, and a subsequent failure to meet this new standard could potentially expose a contractor to liability under the False Claims Act.  See, e.g., United States v. Toyobo Co. Ltd., 811 F. Supp. 2d 37, 46 (D.D.C. 2011).

What Must a Contractor Do?

While the rule became effective in January, the requirements apply to a contractor only when FAR 52.203-18 or FAR 52.203-19 are incorporated into at least one of the contractor’s Federal contracts, either through a new contract award that includes these clauses or through a modification to an existing contract.  Contracting officers have started to include these clauses in new awards.  For example, the Centers for Disease Control and Prevention’s newest Vaccine for Children contracts incorporate FAR 52.203-19.  Other contracts, however, such as the VA’s Federal Supply Schedule contract, have not yet been updated to include these clauses.

It is only a matter of time before these new provisions make their way into all government contracts.  Therefore, Federal contractors would be well served by spending some time reviewing their confidentiality agreements and nondisclosure provisions to ensure that they are prepared for compliance with the final rule’s new requirement.