Guilt by Affiliation: A Recent Court Decision that Every Government Contractor Should Consider

by Snell & Wilmer
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One of the many business strategies to win more government contracts is to “team” with other companies that provide specific specialties or qualify for socio-economic benefits. Sometimes, these partnerships are formal through a “teaming agreement” or “joint venture,” or informal without a written agreement. Under any arrangement, a government contractor is usually concerned about officially being considered “affiliated” with its project partners because of the possible loss of the socio-economic benefits the government contractor possesses. Now, a recent Eleventh Circuit case, Agility Defense & Government Services v. United States Department of Defense,[1] has taken fears of “affiliation” to a new level.

A traditional government contractor was concerned about an affiliation determination in regard to socio-economic preferences, usually concerning small business and certification status (such as HUBZone, 8(a), veteran, etc.). Typically, the small business would bid on a set aside project and promise to do the required portion of the scope of work, while subcontracting the remainder to a large company. Prior to bidding, as referenced above, some partners would solidify the arrangement through a teaming agreement or joint venture. But, any agreement, division of scope of work, and control had to be carefully crafted and assigned to avoid being considered affiliated by the government, which would result in the small business losing its status for a period of time (in addition to not being awarded the government contract).

To determine whether two separate business concerns are effectively affiliated, the government applies a totality of the circumstances test. In a Size Protest, the Small Business Administration will evaluate the incorporating documents of both companies, the agreements between both companies and the realistic relations that exist (i.e., sharing of employees, facilities, back office support, etc.) to determine if affiliation exists.

Affiliation is not always negative. Potential contractors might be able to affiliate with a partner to show that the company is of the appropriate size to complete the project, has the necessary capital or bonding capacity necessary for the project and has a track record of responsibility before being considered for a contract.

But as a recent decision from the Eleventh Circuit Court of Appeals shows, government contractors must now be aware of a new pitfall of any affiliation with their partners. In Agility Defense, the Eleventh Circuit held that an affiliate can be suspended indefinitely based solely on its status as an affiliate with a potentially-seedy entity. In that case, Agility Defense & Government Services and Agility International, Inc. (Affiliates) were suspended by the Defense Logistics Agency (DLA)[2] pursuant to 48 C.F.R. § 9.407-1, after its parent company, Public Warehousing Company, K.S.C., was indicted for fraud.[3]

The Affiliates then sued the DLA, claiming that the agency could not indefinitely suspend them while legal proceedings against Public Warehousing continued. Because the DLA had not brought legal proceedings against the Affiliates within the timeline required by 48 C.F.R. § 9.407-4, the district court ordered the DLA to terminate their suspensions.[4]

On appeal, the Eleventh Circuit reversed the district court after concluding that the term “legal proceedings,” as used in 48 C.F.R. § 9.407-4(b), means “legal proceedings against the indicted government contractor.”[5] But, more importantly, the appellate court held that in order to suspend an affiliate under the regulations, an agency must satisfy only three requirements: (1) it must establish that the affiliate has the power to control the indicted government contractor or be controlled by the indicted government contractor; (2) it must specifically name the affiliate; and (3) it must provide notice of the suspension and notice of an opportunity for the affiliate to respond.[6] “Together,” the Court stated, “the suspensions of an indicted government contractor and its affiliate constitute one ‘suspension decision’ because an affiliate is ‘include[d]] in the suspension of the indicted government contractor.”[7] What’s more, “no showing of wrongdoing by the affiliate is required for suspension or disbarment.”[8]

As one might imagine, the Eleventh Circuit’s decision carries tremendous implications for affiliates of government contractors. Not only might such an affiliate be indefinitely suspended based on actions of the contractor, but the affiliate might be debarred—a more permanent prohibition against the affiliation—as a result of a contractor’s conviction.[9] Losing a socio-economic benefit is bad enough if “affiliation” is determined when such determination is unwanted because of the lost business opportunities associated with such benefits. Now, the risk of being debarred should cause all government contractors to review their current partnership arrangements and perform solid due diligence before entering into future “teaming” arrangements.

As referenced above, “affiliation” is determined utilizing a “totality of circumstances” test. So there is not a “checklist” that a government contractor can easily follow to ensure affiliation does not exist, while still ensuring adequate legal protections in any partnership relationship. The bottom-line is that the government is concerned about “control.” Control is not only reflected in a team’s written agreements, but also in regard to a factual analysis concerning common ownership, past projects for which the team partnered, bonding arrangement, and practical control on any project.

Partnering with other companies provides a competitive advantage against other bidders on government projects. But the decision to partner should be made after careful consideration, so as to avoid the unintended consequence (indeed, a potential death sentence) of becoming a suspended or debarred government contractor. Consulting with knowledgeable legal counsel who understands the regulatory environment of government contracting and procurement law can also help a company get and maintain an edge in government contracting—and possibly avoid guilt by affiliation.

Notes

[1] Agility Def. & Gov’t Servs., Inc. v. United States Dept. of Def., No. 13-10757, 2013 WL 6850891 (11th Cir. Dec. 31, 2013).

[2] The Defense Logistics Agency is a combat support agency of the Department of Defense. Id. at *2.

[3] Id.

[4] Id.

[5] Id. at *3-4.

[6] Id. (citing 48 C.F.R. §§ 9.403, 9.407-1(c)). Providing the affiliate with notice of and an opportunity to respond to its suspension in writing are “are constitutionally adequate procedures” to negate a due process violation from the affiliate’s indefinite suspension. Id. at *5.

[7] Id. at *4 (citing 48 C.F.R. §9.407-1(c)).

[8] Id. at *3.

[9] Id. at *4.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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