On January 22, 2016, the Federal Acquisition Regulatory (FAR) Council issued a Proposed Rule prohibiting government contractors from using internal confidentiality agreements to restrict employees or subcontractors from making reports of fraud, waste, or abuse to federal officials. This issue attracted congressional attention when reports of the practice surfaced in Washington, D.C. At the end of 2014, Congress reacted by adding Section 743 to Division E, Title VII, of the Consolidated and Further Continuing Appropriations Act, 2015. That provision denies the use of appropriated funds for contracts with companies that utilize this practice. The rule that has been proposed by the FAR Council is intended to implement Section 743. Given the broad reach and serious consequences of the Proposed Rule, and the lead time needed to prepare for it, all government contractors need to understand what the FAR Council has proposed.

1. What Exactly Would the Proposed Rule Require?

The Proposed Rule contains three separate but related requirements. First, it would require that a new clause be included in government contracts and flowed down by contractors to their subcontractors. The clause would prohibit contractors from requiring their employees or subcontractors to sign or comply with internal confidentiality agreements or statements prohibiting or otherwise restricting the employees or subcontractors from lawfully reporting fraud, waste, or abuse to the appropriate federal authorities.

Second, the Proposed Rule would require a prospective contractor to make an affirmative compliance representation at the time the contractor responds to an agency solicitation for contract bids. The representation would require a contractor to attest as follows:  

By submission of its offer, the Offeror represents that it does not require employees or subcontractors of such entity seeking to report waste, fraud, or abuse to sign or comply with internal confidentiality agreements or statements prohibiting or otherwise restricting such employees or subcontractors from lawfully reporting such waste, fraud, or abuse to a designated investigative or law enforcement representative of a Federal department or agency authorized to receive such information.

Third, contractors would be required to notify employees (but not subcontractors) that the prohibitions and restrictions of any internal confidentiality agreements covered by the Proposed Rule are no longer in effect. This requirement is framed in the future tense (i.e., “contractor shall notify…”), suggesting that the notice would need to be given at some point during the period of contract performance.

2. What Contracts Would Be Covered by the Proposed Rule?

The Proposed Rule would apply to (i) solicitations for contracts that are funded with fiscal year (FY) 2015 funds or funds appropriated for subsequent FYs that are similarly subject to the same prohibition on confidentiality agreements; (ii) contracts resulting from those solicitations; and (iii) existing contracts that are funded with those funds. (Existing contracts would need to be modified to include the required clauses before the appropriated funds could be obligated.)  

The range of contracts covered the Proposed Rule is broad. In addition to covering contracts and subcontracts for services, the categories of contracts covered would include contracts and subcontracts for the acquisition of commercial items, including commercially available off-the-shelf items. In terms of contract value, the Proposed Rule also would apply to acquisitions in amounts that fall below the simplified acquisition threshold (which is currently $150,000 for services and $5,000,000 for commercial items). It should be noted that the requirements of the Proposed Rule do not apply to personal services contracts, as long as the services are to be provided directly by the individual under contract.

These requirements will be somewhat familiar to U.S. Department of Defense contractors. Since October of 2015, they have been subject to similar requirements set out in Defense Federal Acquisition Regulation Supplement (DFARS) 252.203-7996 and 252.203-7997 under a class deviation issued by the Under Secretary of Defense for Acquisition, Technology, and Logistics. The DFARS clauses, which mirror the Proposed Rule in most respects, were adopted on an interim basis until the Section 437 funding restrictions could be incorporated in the FAR.

Section 437, the DFARS clauses, and the Proposed Rule all make clear that forms issued by any federal department or agency governing the nondisclosure of classified information are not prohibited by the Proposed Rule. Such forms include Standard Form 312 (Classified Information Nondisclosure Agreement) and Form 4414 (Sensitive Compartmented Information Nondisclosure Agreement). Contractors on programs requiring security clearances for employees can continue to utilize these forms without fear of violating the Proposed Rule.

3. When Will the Proposed Rule Take Effect?

An effective date will not be known until after a final rule is published. Interested parties have until March 22, 2016 to submit comments on the Proposed Rule, and the FAR Council will then consider those comments before publishing a final rule. Once the effective date is identified, bids submitted after that date will require contractors to make the compliance representation referenced above, and the resultant contracts will have to include the required compliance and notice clauses. As noted, existing contracts will have to be modified if they are funded by appropriations for FY 2015 or subsequent fiscal years.

4. Are There Any Uncertainties in the Rule?

The Proposed Rule is concise. It does not define the terms it uses, nor does it offer details or illustrations to explain them. For example, the phrase “internal confidentiality agreement or statement” is not defined. It is not clear whether the prohibition applies only to confidentiality statements that restrict reporting of fraud, waste, or abuse or to any statements that restrict reporting on these matters. The phrase could be read in good faith to refer only to agreements and statements that deal with confidentiality expressly. That reading could lead the contractor to represent that it is in compliance with the Proposed Rule (then the Final Rule), even though, perhaps, the ethics manual utilized by that contractor mandates that employees bring instances of fraud to the company’s chief executive officer or its chief compliance officer. It is possible that agency debarment officials could view the rule as prohibiting any statement of any kind that restricts employees from reporting fraud, waste, or abuse.

There is also uncertainty around the affirmative obligation to notify employees that offending agreements are no longer in effect. The Proposed Rule fails to state whether the notice is required in all instances as a routine notice obligation, or only in cases in which an offending “internal confidentiality agreement or statement” exists that must be remedied. Another question is whether the notice obligation applies with respect to former employees who may have signed problematic agreements in the past either during their employment or as part of severance agreements.  

The legal significance of the notice also is unclear. On one hand, the requirement could be intended to be a stand-alone notice obligation that must be performed periodically so contractor employees remain informed that prohibitions on the reporting of fraud, waste, or abuse to the federal government are unenforceable. On the other hand, it could be intended to have a substantive legal effect, such that the giving of the notice nullifies any existing agreements and thereby entitles a contractor to represent that it “does not require” employees to comply with agreements or statements that restrict the reporting of fraud, waste, or abuse. Given the brevity of the Proposed Rule, it is possible that the final rule may leave these questions unanswered.  

5. What Do Companies Need to Do?

The Proposed Rule’s representation requirement is the proverbial “long pole in the tent.” It is this element of the Proposed Rule that exposes contractors to the greatest legal and business risk. Until now, the risk of having some policy or practice that could be attacked on grounds that it inhibits employees from reporting fraud, waste, or abuse could be managed simply by not enforcing the policy or practice in a manner that would have that effect. The duty to make affirmative compliance representations to the federal government is a game changer. If the representations turn out to be inaccurate, it can lead to severe ramifications, including loss of funding, cancellation of the underlying contract, and, depending on the circumstances, civil and criminal liability under the False Claims Act.

Contractors need to understand that the representation of compliance requires more than just the absence of signed agreements that, on their face, bar reports to government agencies. In fact, as noted above, it is possible to read the Proposed Rule as covering any statements made verbally or in policies, manuals, or handbooks that could be read to “otherwise restrict” the reporting of fraud, waste or abuse to the federal government. Importantly, even if a contractor does not have any intention of enforcing terms buried in boilerplate provisions of lengthy contracts or in old policies, that present intention may not be sufficient to entitle him to approve the representation of compliance. In the eyes of a procurement or debarment official, objective evidence of the contractor’s intentions may turn out to be equivocal.

Another important point to bear in mind relates to the scope of the required representation and compliance obligation. These provisions are not limited to direct and indirect charge employees on government contracts subject to the Proposed Rule. They appear to apply to all employees employed by that same contractor, even those engaged solely in purely commercial operations.

Although compliance with the substance of the Proposed Rule will not be required for some time, prospective contractors should start to position themselves now so they can make the required representation once a Final Rule takes effect. Contractors should cast a wide net in terms of the agreements, policies, practices, and areas of concern they need to review. As a starting point, contractors should review the following items:

• clauses in employment agreements, new hire forms, or applications regarding proprietary information, trade secrets, confidential information, or intellectual property;
• releases of claims in severance or separation agreements, especially as they may relate to False Claims Act or qui tam actions, or to confidentiality;
• terms of nondisclosure agreements or teaming agreements with third parties;
• terms of agreements or forms that employees, subcontractors, or visitors must sign to obtain facility access;
• contracts for audits, security, information technology support, or other outsourced functions;
• provisions of handbooks or manuals dealing with confidentiality, information security, or proprietary information;
• practices or policies concerning ownership or control of information, reports, or data on company networks, information security, or network usage;
• practices or policies concerning human resources, ethics, or other internal investigations;
• practices or policies regarding ethics and compliance programs; and
• mandatory arbitration or dispute resolution programs.

Whether and to what extent any agreement, form, policy, or other document needs to be revised is a decision that should be made by or with the advice of legal counsel. In some cases, significant changes may be needed. In others, a caveat or clarifying sentence or two may be all that is necessary.

The idea of training also is worth considering, at least for certain employee populations. For example, managers who interview employees as part of internal human resources, security, or ethics investigations may reflexively instruct interviewees that the subject of the investigation is confidential and cannot be disclosed. Undoubtedly, it will take time to correct such practices and educate employees. In view of the expansive reach of the Proposed Rule, it is advisable for contractors to be far along in their preparations by the time a final rule is released.