Welcome to Jenner & Block’s Government Contracts Legal Round‑Up, a biweekly update on important government contracts developments. This update offers brief summaries of key developments for government contracts legal, compliance, contracting, and business executives. Please contact any of the professionals at the bottom of the update for further information on any of these topics.

• On June 1, 2023, the Supreme Court issued a unanimous opinion on U.S. ex rel. Schutte v. SuperValu Inc. On May 3, 2023, we noted that we would update our readers once the opinion was issued.
• Previously, the Seventh Circuit found that subjective intent is not relevant to False Claims Act scienter when the law says the defendant’s actions were objectively reasonable.
• The Supreme Court instead held that the False Claims Act's scienter element refers to a defendant’s knowledge and subjective beliefs—not to what an objectively reasonable person may have known or believed.

New FAR 52.204-27 Prohibits TikTok on Information Technology Used or Provided by Contractors under Contracts

• On June 2, 2023, the FAR Council issued an Interim Final Rule that prohibits the presence or use of TikTok on information technology used or provided by the contractor under a contract that includes the clause.
• The rule is effective immediately given “urgent and compelling reasons” as a “national security measure to protect Government information and information and communication technology systems.” It is being included in solicitations beginning on June 2, 2023 and must be added to existing solicitations through amendment. It will also be added to existing contracts as part of new orders or option exercises.
• The rule prohibits “[t]he Contractor…from having or using a covered application on any information technology owned or managed by the Government, or on any information technology used or provided by the Contractor under this contract, including equipment provided by the Contractor's employees….”
• Following the statutory language, “information technology” is defined based on an existing—and somewhat confusing when applied here—definition at 40 U.S.C. 11101(6): “any equipment or interconnected system or subsystem of equipment, used in the automatic acquisition, storage, analysis, evaluation, manipulation, management, movement, control, display, switching, interchange, transmission, or reception of data or information by the executive agency, if the equipment is used by the executive agency directly or is used by a contractor under a contract with the executive agency that requires the use—(i) of that equipment; or (ii) of that equipment to a significant extent in the performance of a service or the furnishing of a product;…, but (C) does not include any equipment acquired by a federal contractor incidental to a federal contract.” (Emphases added.)
• Comments can be submitted prior to August 1, 2023.

Dept. of Transportation v. Eagle Peak Rock & Paving, Inc., Fed. Cir. No. 2021-1837 (June 6, 2023)

• A divided Federal Circuit opinion provides a useful reminder of the standard of review applicable in Contract Disputes Act (CDA) appeals.
• A contracting officer terminated a contract for default based on concerns that the contractor was not making sufficient progress to complete performance on time.
• On appeal at the Civilian Board of Contract Appeals, the Board converted the default termination into a convenience termination. The government appealed to the Federal Circuit.
• The majority decision, authored by Judge Taranto and joined by Judge Schall, reversed and remanded the Board’s decision. The opinion focuses on the principle that the Board was required to review de novo the contracting officer’s default termination. The majority concluded that the Board was too focused on identifying flaws in the contracting officer’s rationale, rather than determining in the first instance whether the termination was warranted.
• Judge Newman, dissenting, argued that the Federal Circuit panel should have gone ahead and decided based on the record whether the default termination was justified, rather than remanding to the Board for further litigation.

This decision is a useful reminder of the de novo standard of review that applies to CDA appeals, as compared to more deferential standards of review (abuse of discretion, arbitrary and capricious, etc.) that apply to review of agency decisions in the bid protest and other contexts. These varying standards of review drive significant differences in how disputes are litigated and resolved. Another significant implication of de novo review of CDA claims is that a contractor’s decision to appeal a contracting officer’s decision can place at risk any partial victory the contracting officer may have provided in response to the contractor’s claim. That is: if a contracting officer grants a contractor partial recovery in response to its claim, the Board on appeal may well conclude that no recovery was warranted at all, depriving the contractor of even the partial win. All these factors are worth weighing as companies consider claims litigation.

Kupono Government Services, LLC; Akima Systems Engineering, LLC, B-421392.9 et al. (June 5, 2023)

• GAO sustained a protest challenging the scope of the Department of Energy’s (DOE) corrective action taken in response to earlier protests.
• The proposed corrective action contemplated revisions to cost proposals only. The protesters argued that that their respective cost and technical proposals were inextricably intertwined, and therefore they should be permitted to revise both portions of their proposals.
• As an initial matter, GAO criticized DOE for failing to even articulate the flaws in the procurement process that warranted the corrective action. The agency’s declarations on this point offered no substantive details or explanations. Because GAO was unable to discern the concerns that led the agency to take corrective action, GAO was unable to assess whether the proposed corrective action was appropriate to remedy the unidentified concerns.
• The protesters also demonstrated that because the agency is soliciting for a cost-reimbursement type contract, their respective cost and technical proposals were inextricably intertwined. Citing a few examples, GAO agreed that changes to the protester’s respective cost proposals will necessarily impact their respective technical approaches.
• GAO therefore sustained the protest and recommended that the agency permit offerors the opportunity to revise any aspect of their proposals, or if the agency stuck with only allowing revisions to costs proposals, then offerors should be allowed to revise any aspect of their proposals impacted by changes to their costs proposals.

It is well established that agencies have broad discretion to take corrective action where the agency determines that such action is necessary to ensure a fair and impartial competition. An agency’s discretion when taking corrective action extends to a decision on the scope of proposal revisions, and there are circumstances where an agency may reasonably decide to limit the revisions offerors may make to their proposals. But as this rare sustain decision shows, an agency may not prohibit offerors from revising related areas of their proposals that are materially impacted by an agency’s corrective action.

Tyonek Engineering & Agile Mfg, LLC, B-421547; B-421547.2 (June 2, 2023)

• GAO sustained a protest challenging the agency’s price realism and reasonableness evaluations.
• GAO has consistently explained that price reasonableness concerns whether a price is unreasonably high, while price realism relates to whether a price is too low.
• Here, the protester’s price was more than four times the price of the lowest-priced awardee, and nearly three times the price of the highest-price awardee. The Air Force concluded that the proposed prices of both the protester and the awardees were simultaneously reasonable and realistic. The protester challenged this conclusion.
• GAO agreed with the protester that the agency’s evaluation was unreasonable, internally inconsistent, and did not explain the basis on which prices with a significant disparity could be considered both reasonable and realistic.
• Specifically, the agency relied on a government estimate, but the estimate stated that the final prices of three awardees still presented realism and reasonableness concerns. The agency also claimed that it relied on an analysis of other than certified pricing data, but the contemporaneous record failed to support this assertion.

When a substantial disparity in prices exist, and an agency has concluded that the low price is realistic and the high price is reasonable, GAO will scrutinize the record to ensure that the agency has adequately explained its conclusion.

NAICS Appeal Of: Laredo Technical Services, Inc., SBA No. NAICS-6216 (May 30, 2023)

• The Small Business Administration (SBA) Office of Hearings and Appeals (OHA) granted a challenge to a solicitation’s NAICS code.
• In government contracting, each contract is assigned a single NAICS code “which best describes the principal purpose of the product or service being acquired.” 13 C.F.R. § 121.402(b). For contracts set aside for small businesses, the assigned NAICS code will dictate the size standard for the procurement (i.e., either the number of employees or average annual receipts that a company must be under to be small for purposes of the particular contract).
• Here, the Department of Veterans Affairs solicitation required the contractor to provide radiology technologists to deliver “the full range of radiology imaging care for inpatient and outpatient VA patients.” The VA assigned NAICS code 561320, Temporary Help Services, with a corresponding size standard of $34 million average annual receipts.
• Laredo protested, arguing that the correct NAICS code was 621399, Offices of All Other Miscellaneous Health Practitioners, with a corresponding size standard of $10 million average annual receipts.
• OHA agreed with Laredo that the assigned NAICS code was incorrect because the contractor will not be supplying workers for “limited periods of time” and because the radiologists will be supervised by the contractor. However, OHA concluded that the appropriate NAICS code was 621512, Diagnostic Imaging Centers, with an associated size standard of $19 million average annual receipts. 

This decision is a good reminder that the assignment of the correct NAICS code can have significant implications on a competition. A wrong NAICS code can improperly exclude a company for being too large, or alternatively allow companies to bid when they should be excluded. For small businesses, it is crucial to carefully examine the assigned NAICS code to ensure that the right code is applied, and to challenge when it is not.

The Department of Defense Office of the Inspector General released an audit report finding inconsistent implementation of DoD’s Controlled Unclassified Information (CUI) program.

As background, the CUI program was established in a 2010 Executive Order to standardize the way the Executive Branch handles and marks information that is not classified but is subject to safeguarding or dissemination controls required by law or policy. Previously, agencies used a wide variety of differing markings, such as For Official Use Only or Sensitive But Unclassified for such materials. Agencies similarly instituted inconsistent safeguarding policies, often leading to unclear or overly restrictive dissemination policies.

More than a decade later, implementation is inconsistent. Many agencies have only recently begun to implement a CUI program, others practice varying degrees of adherence to the CUI marking and dissemination requirements, and several DoD components that are also members of the intelligence community operate under an “exigent circumstance waiver” that permits the continued use of legacy FOUO markings in certain situations.

Relevant here, in 2020, DoD issued DoD Instruction (DoDI) 5200.48 establishing the DoD CUI program and providing guidance on its implementation. OIG’s audit assessed the extent to which DoD developed guidance, conducted training, and oversaw the implementation of DoD’s CUI program.

Notably, OIG conducted the audit at the direction of the Senate Armed Services Committee and in response to concerns that Executive Branch officials were improperly using “Limited Dissemination Control” CUI markings to restrict sharing CUI without a legitimate rationale or to impede lawful Congressional oversight.

The OIG’s audit assessed implementation of the CUI program at ten DoD components and three DoD contractors.

• Most significantly, OIG found that DoD components did not effectively oversee the implementation of DoDI 5200.48 to ensure that CUI documents and emails contained required markings and that personnel completed required training.
• For example, personnel at nine of ten DoD components did not consistently include required CUI markings on nearly half of all documents containing CUI.
• A more granular analysis confirms the disparities in implementation: some of the DoD components had correctly marked none of the documents within the sample population, while others correctly marked the vast majority.
• The state of training also differs across DoD. Although two DoD components were found to have no personnel lacking a current CUI training certificate, at eight DoD components, many personnel did not have a current CUI training certificate.

Contractor compliance was assessed more favorably. Of the 103 CUI documents assessed in the sample from three DoD contractors, only 3% did not include CUI headers and footers and only 1% did not include proper portion markings. However, the OIG found that DoD contracting officials did not consistently verify whether DoD contractors completed required CUI training. Overall, contractors had more uniformly implemented the CUI program as compared to DoD components.

Also relevant for contractors, OIG requested that DoD provide additional comments within 30 days describing their plans for developing a DFARS clause to require all DoD contractor personnel to complete DoD CUI training. (Separately, a FAR clause implementing the CUI program for civilian contractors has been under development for six years and was most recently reviewed by OIRA in August 2022.) Contractors should expect continued regulatory developments and attention impacting the implementation of the CUI program at DoD and all federal agencies.