In recent years, the U.S. government has exercised enhanced scrutiny over federal contractors through, among other things, the increased use of its suspension and debarment remedies – fueled in part by reports of contractor fraud and abuse during recent U.S. operations in Iraq and Afghanistan. Two recently issued rulings provide guidance to contractors on both the scope of judicial review over, and the boundaries of, the U.S. government’s authority with respect to the suspension of federal contractors.
As contractors face a new world of lower federal spending and fewer programs, they are likely to increasingly consider their options when faced with such onerous actions. As discussed below, in Agility Defense & Government Services v. United States, (December 31, 2013), the U.S. Court of Appeals for the Eleventh Circuit held that a federal agency can suspend the affiliates of an indicted government contractor for the duration of the legal proceedings against the indicted contractor based solely on the affiliate relationship. Two days later, on January 2, 2014, in Inchcape Shipping Services Holdings Ltd. v. United States, the United States Court of Federal Claims (COFC) granted a contractor’s request for a temporary restraining order (TRO) against a Navy suspension of its contracting privileges. The COFC expressed significant concerns that there was “adequate evidence” to support the Navy Suspension and Debarment Officer’s decision to suspend the contractor and also questioned whether there was an “immediate need” to suspend the contractor given the Navy’s delay in taking action against the contractor. After the TRO was granted, the Navy entered into an administrative agreement and informed the court that it would be terminating the suspension. Taken together, these rulings establish that while the agency has broad discretion to suspend contractors, there are limits and that the courts may look closely at agency suspension decisions – which makes good sense given the severe impact a suspension can have on a contractor.
Agility Defense & Government Services v. United States
In Agility Defense, a grand jury indicted Public Warehousing Company, K.S.C. (Public Warehousing) for a multibillion dollar fraud against the United States in connection with a government contract to supply food to military personnel in the Middle East. The Defense Logistics Agency (DLA), a component of the U.S. Department of Defense, suspended Public Warehousing on November 9, 2009. At that time, DLA extended the suspension to Agility Defense, a Public Warehousing subsidiary, and on November 23, suspended another subsidiary, Agility International. The suspensions of the two affiliates were based solely on Public Warehousing’s alleged wrongdoing. After receiving notice of the suspensions, the two affiliates submitted written responses to DLA arguing that they were not part of the indictment and that they had sufficient compliance procedures in place to guard against any fraud. DLA refused to terminate the suspensions.
Each affiliate then sought TROs enjoining DLA from effectuating the suspensions, but their requests were denied by the United States District Court for the District of Columbia. DLA also rejected requests that it reconsider the suspensions in light of improved compliance procedures and proposed management buyouts that would leave Public Warehousing with only a non-controlling interest in the affiliates. The affiliates then filed an action for injunctive and declaratory relief in the United States District Court for the Northern District of Alabama contending that DLA could not suspend them indefinitely based on their affiliate status.
The Public Warehousing affiliates argued that pursuant to Section 9.407-4(b) of the Federal Acquisition Regulations (FAR), the agency could not suspend any contractor for more than 18 months unless the United States or one of its agencies initiated a “legal proceeding” against that specific contractor. The affiliates argued that in order to justify a suspension of more than 18 months, the “legal proceedings” referred to in Section 9:407-4(b) had to be initiated against the affiliate itself and not against an affiliated company whose conduct may have justified the initial suspension. The affiliates reasoned that the purpose of the 18-month period was for the agency to investigate the affiliate and that if nothing turned up, the suspension against the affiliate should be lifted even if legal proceedings have been instituted against the related entity. The affiliates contended that in their interpretation, FAR treated each affiliate as an independent entity, which is consistent with how an agency treats an affiliate when determining its eligibility and responsibility to perform government contracts. While the Northern District of Alabama granted the affiliates’ summary judgment motion, the government appealed and the Eleventh Circuit reversed.
Consistent with rulings by the U.S. Courts of Appeals for Fourth Circuit and the D.C. Circuit, the Eleventh Circuit found on appeal that FAR affords the government the discretion to impose both suspensions and the more permanent remedy of debarments on entities solely on the basis of their affiliation to a contractor against which legal proceedings have been instituted. While the Eleventh Circuit acknowledged that the CFOC had stated in dicta in OSG Prod. Tankers, LLC v. United States, 82 Fed. Cl. 570, 578 (2005), that a “debarred affiliate” must have been involved in or affected by the contractor’s wrongdoing to be named in the debarment,” it found this dicta unpersuasive given the plain text of the FAR provision and the other circuit court decisions. The Eleventh Circuit further noted that it would not make sense for an agency to have to either terminate the suspension of Agility Defense or initiate separate legal proceedings against it, only to later debar the company if the legal proceedings against its affiliate, Public Warehousing, resulted in a conviction.
In light of this case and other rulings, a firm facing a possible suspension or debarment on the basis of the conduct of an affiliate may want to try to distance itself as much as possible from the bad acting affiliate. To the extent possible, a contractor facing suspension or debarment based on affiliate status might try to convince the agency that (a) the affiliate has not engaged in any wrongdoing and has a good record; (b) the affiliate is not under the control of or controlling the affiliated entity that is alleged to have engaged in wrongdoing; (c) the affiliate has robust (or is adopting improved and robust) compliance procedures and safeguards to ensure that its business will be conducted properly and ethically; and (d) suspending or debarring the affiliate will be detrimental to the government. Nevertheless, it must be recognized that contractors are largely at the mercy of the government if one of their affiliates has engaged in conduct that has led the government to seek its suspension and/or debarment.
Given the rulings that allow the suspension and debarment of contractors and subcontractors based solely on affiliate status, companies may want to consider whether they have strong safeguards and oversight in place even with respect to smaller entities, including those operating in foreign countries where procurement rules are loose, and corruption and bribery are more commonplace. In addition, entities targeting other companies for acquisition may want to analyze the potential risk of suspension or debarment as part of its due diligence because the acquisition of a company that later becomes the subject of suspension or debarment could jeopardize the acquirer’s future ability to contract with the government.
Inchcape Shipping Services Holdings Ltd. v. United States
In Inchcape Shipping, the Navy suspended Inchcape Shipping Services Holdings Ltd. and a number of its affiliates on November 26, 2013. The basis for the suspension decision was the Navy Suspension and Debarment Officer’s (SDO) findings that (a) Inchcape had failed to reconcile its accounts properly on one of its affiliate’s government contracts; and (b) Inchcape failed to disclose to the government its improper reconciliation and finding of overpayments. In reaching these findings, the SDO relied upon an Inchcape internal audit that was completed on March 5, 2008, more than five years before the suspension was imposed. The 2008 internal audit was not formally disclosed to the government by Inchcape until November 21, 2012, but the Navy had informally obtained a copy at some time prior to June 9, 2011.
Inchcape challenged the suspension and sought a TRO. In assessing whether Inchcape met the heavy burden to receive a TRO, the court evaluated (1) Inchcape’s likelihood of success on the merits; (2) the prospect of irreparable harm to Inchcape in the absence of injunctive relief; (3) the balance of hardships; and (4) the public interest.
Likelihood of Success on the Merits
In order to withstand court scrutiny, a government’s suspension of a contractor must be (a) imposed based on “adequate evidence” (akin to probable cause); and (b) based on a determination that “immediate action” is necessary to protect the government’s interests. FAR 9.407-1(b)(1). Inchcape contended that the Navy failed to meet either prong in this case, and the court looked favorably on its arguments.
In its ruling, the COFC expressed “significant concerns” on whether the SDO’s decision was based on “adequate evidence.” In so finding, the court expressed concern that the SDO confined her assessment to the relevant contract and the one internal audit report, and failed to examine a “myriad of additional, potentially relevant documents relating to both account reconciliations and disclosures of overbilling” that were in the Navy’s possession at the time the suspension was imposed. The court found that FAR 9.407-1(b)(1) provides that when determining whether to suspend a contractor, the SDO should consider the body of available information, weigh its credibility, look for corroboration, and draw reasonable inferences. The court found that it did not appear that any meaningful investigation had been conducted even though there was sufficient time to conduct one.
The court also stated that it “appear[ed] unlikely that the government can demonstrate an immediate need to suspend Inchcape.” It noted that the suspension notice was conclusory, and the record did not contain an explanation of why the government waited more than a year after formally receiving the audit report to suspend the Inchcape entities. The court found the year-plus delay “cast serious doubt on the government’s claim that immediate action was necessary.” Noting the absence of any explanation of why the 2008 overbilling matter suddenly became an emergency in November 2013 even though the Navy had knowledge of it since 2011, the court opined that the suspension looked more like a punishment rather than a protective measure. Pursuant to FAR 9.402(b), suspension and debarment may not be imposed for purposes of punishment.
The court easily found that depriving Inchcape entities of the opportunity to compete on future government contracts constituted irreparable harm.
Balance of Hardships
The court found that the irreparable harm that Inchcape would suffer from an unwarranted suspension (the opportunity to compete on contracts worth millions of dollars) would outweigh the short delay in procuring goods and services the government would face if it must wait to suspend Inchcape until after a ruling on the merits. Here, the court noted that this was particularly true given the government’s long delay in acting on the 2008 audit.
The COFC held that enjoining the enforcement of Inchcape’s suspension temporarily while the court rules upon the merits of its claim that it has been wrongfully suspended is not against the public interest.
In short, rather than granting great deference to the Navy’s decision, the COFC took a hard look at the Navy’s actions in suspending Inchcape. In this case, the combination of a seemingly incomplete investigation and a delay in acting was difficult for the Navy to overcome at the TRO stage. The Navy could not argue that its delay in suspending was the result of the Navy performing a thorough investigation before acting as it might assert in other cases. In reality, the Navy’s decision to suspend appears to have been triggered by a determination to “crack down” on shipping contractors in response to a bribery investigation involving three Navy officials and its primary shipping contractor in the Pacific region. Shortly after the COFC granted Inchcape’s motion, the Navy announced its intent to take corrective action, including terminating the suspension of Inchcape and its affiliates.
The Inchcape ruling thus is an important one for contractors considering action in a suspension or debarment contest and suggests that courts will closely examine the basis for such extraordinary remedies in light of their potential impact on federal contractors.