January Government Contracts Legislative and Regulatory Update

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2019 Defense Policy Outlook -- Welcome to the 116th Congress and Year Three of the Trump Presidency

From disagreement over the topline defense spending level for Fiscal Year 2020 (“FY20”) in the face of possible re-imposition of defense and domestic budget caps, to maintaining military readiness in an era of big power competition while the US simultaneously remains engaged on multiple continents in the global fight against terrorism, to the selection and confirmation of a new Secretary of Defense, Congress and the Trump Administration will grapple with a host of complex defense policy and related issues in 2019. Following Secretary of Defense Jim Mattis’ resignation in December 2018, Deputy Secretary of Defense (the number two role in the Pentagon) and former Boeing executive Patrick Shanahan began serving as Acting Secretary of Defense effective January 1. Shanahan is on the short list of possible permanent replacements for Mattis, alongside Senator Tom Cotton (R-AR), retired Army General Jack Keane, and Director of National Intelligence Dan Coats, among others. The long-term job may prove to be Shanahan’s by default, as President Trump stated during a surprise trip to Iraq this past December 26 that he has no plans to tap a successor for Mattis in the near future. While there is ongoing debate surrounding how long Shanahan can fill the position in an acting capacity, some believe that the next few months could serve as an audition before the White House decides whether to nominate him for the permanent role. In one of his first orders of business as Acting Secretary, Shanahan announced that current DOD Chief Financial Officer and Comptroller, David Norquist, will perform the duties of Deputy Secretary of Defense.

With Shanahan safely ensconced at the helm of the Pentagon for the indefinite future, the total amount of DOD’s FY20 budget request, which is scheduled to be submitted to Congress on February 4 if delivered on time, is a top priority issue for defense lawmakers in both chambers of Congress. In October 2018, Pentagon policymakers were hard at work in developing a $733 billion request when the President surprised DOD leadership and lawmakers in his own party by stating that DOD should cut its FY20 request to $700 billion. Following Trump’s announcement and the Pentagon’s corresponding decision to draft separate $733 billion and $700 billion budget requests, concerned members of Republican leadership, including incoming Senate Armed Services Committee (“SASC”) Chairman Jim Inhofe (R-OK), made a beeline for the White House and appear to have convinced the President that DOD’s forthcoming budget request should be increased to $750 billion. The final figure of the request is expected to be between $733 billion and $750 billion, a level that will please many GOP defense hawks. However, with the House of Representatives now under Democratic control during the 116th Congress (effective as of January 3), former House Armed Services Committee (“HASC”) Ranking Member turned Chairman, Adam Smith (D-WA 9th), will have increased leverage during negotiations on the topline defense spending level. This will be a key sticking point during consideration of the FY20 National Defense Authorization Act (“NDAA”), Congress’ massive annual defense policy bill. Smith is on the record stating he believes the Pentagon can and should do more with less, emphasizing his position that $750 billion in funding for DOD is unnecessary. Regardless of the final FY20 topline defense spending level, prioritization of modernization over growth, including increased investment in technology and the national security innovation base, will be a core theme of both the Pentagon’s budget request and FY20 NDAA.

Issues at the intersection of defense, national security, and foreign policy will also dominate debate among defense lawmakers in 2019. Driven by grave concerns expressed by defense policy thought leaders on both sides of the aisle in response to Trump’s December 2018 decisions to withdraw American military personnel from Syria and draw down troops in Afghanistan, Republican and Democratic leaders on HASC and SASC will use the hearing process to investigate and evaluate the Administration’s Syria and Afghanistan strategies and their corresponding implications for US national security interests and geopolitical stability. Additionally, although he will now be pushing his legislative agenda as the new Ranking Member of HASC, Rep. Mac Thornberry (R-TX 13th) is expected to continue to lead defense acquisition reform and other DOD organizational reform efforts on Capitol Hill.

Other topics set to take center stage in the defense policy arena in 2019 include:

  • Next-generation missile defense systems and offensive capabilities such as hypersonic weapons;
  • Establishment of a Space Force as the sixth service of the US military and improvement of the US military’s space-based platforms; and
  • Integration and strengthening of DOD’s defensive and offensive cyber capabilities.

As the year progresses, stay tuned for future insights into key defense policy developments, including close monitoring of the status of the FY20 NDAA and the bill’s provisions of interest to the government contracting community.

Small Business Runway Extension Act of 2018 (H.R. 6330) Signed Into Law

On December 17, 2018, President Trump signed into law H.R. 6330, the Small Business Runway Extension Act of 2018. The law is a bipartisan effort that amends certain requirements of the Small Business Act (“SBA”) that prescribe size standards for small businesses. Specifically, with the new amendments in affect, size standards will now be calculated using average annual gross receipts of such businesses from the previous five years. Before the amendments, size standards were calculated using three years. The change will allow smaller federal contractors to qualify as small businesses longer, eligible for federal set-aside contracts and assistance from the Small Business Administration.

Partial Government Shutdown

On December 22, 2018, a partial government shutdown went into effect as several federal departments and agencies’ legal authority to spend money lapsed. Affected agencies have ceased operations for all non-essential personnel, which may include contracting officers, technical representatives, inspectors, and finance personnel that government contractors typically interact with in performing federal contracts. Concerns about the shutdown and its effects are compounded by its unknown duration. For more information, read Dentons’ alert, “The appropriations Grinch brings a partial government shutdown this Christmas.”

Industry Developments

DoD Issues New Other Transactions Guide

On December 3, 2018, the DoD issued a revised Other Transactions (OT) Guide to replace the January 2017 Other Transactions Guide for Prototype Projects. DoD’s original OT authority is granted in 10 U.S.C. § 2371, which permits DoD to enter OTs for basic, applied and advanced research projects. The 2016 NDAA added to DoD’s authority to enter OTs for prototype projects. This expanded authority, codified at 10 U.S.C. § 2371b, allows DoD to enter prototype OTs when: (1) all participants are small business or non-traditional; (2) at least one non-traditional defense contractor or nonprofit research institution participates to a significant extent in the prototype project; or (3) at least one third of costs are contributed by the nongovernmental parties. Finally, DoD may enter follow-on production OTs if competitive procedures were used to award the prototype OT and the prototype project in the transaction was “successfully completed.” The new OT Guide provides expanded guidance and case studies, and provides clarification regarding the use of OTs. In addition, it includes changes in policy from the prior guide, many of which provide enhanced flexibility that could be beneficial to contractors. Unlike the 2017 Prototype OT Guide, the new guide provides policies applicable to various kinds of OTs for which DoD has statutory authority: research, prototypes and follow-on production. Overall, like the prior guidance, the new OT Guide is a non-binding policy document that includes instructions for agreements officers in the areas of planning, awarding and administering OTs. For more information, read Dentons’ alert, “DoD Issues New Other Transactions Guide with More Flexible Terms.”

DoD Issues Class Deviation Regarding Limitations on Subcontracting for Small Business

On December 3, 2018, DoD issued comprehensive Class Deviation 2019-O0003 (“Deviation”) adopting the Small Business Administration’s current approach to limitations on subcontracting. The Deviations instructs DoD contracting officers to use procedures (alternate clauses) provided in the Deviation when issuing solicitations and awarding contracts or task or delivery orders under FAR part 19 to small business concerns, 8(a) program participants, HUBZones, SDVOSBs, EDWOSBs, and WOSBs. The alternate FAR clauses track the revisions made by the Small Business Administration to its regulation calculating compliance with the limitations on subcontracting. These revisions changed and standardized the limitations on subcontracting and manufacturer rule with which small businesses must comply under Government contracts awarded pursuant to the set-aside or sole source authorities of the Small Business Act. The clauses within the Deviation allow small prime contractors to count work performed by “similarly situated entities” toward the primes’ own performance thresholds. The Deviation was issued in connection with a proposed rule-making issued by the FAR Council to amend the FAR’s Limitations on Subcontracting clause (52.219-14) in order to conform with the statutory requirement and SBA’s previously announced final rule. The Class Deviation is effective immediately and applies to all DoD solicitations and contract awards. (DoD Class Deviation 2019-O0003).

Regulations

FAR Council Final Rules

FAR Council Issues Final Rule Regarding Combating Trafficking in Persons--Definition of “Recruitment Fees” (FAR Case 2015-017)

On December 20, 2018, DoD, GSA, and NASA, issued a final rule, effective January 22, 2019, amending the Federal Acquisition Regulations (“FAR”) to provide a definition of “recruitment fees” to further implement the FAR policy on combating trafficking in persons. The definition is one element in combating the trafficking of persons by prohibiting contractors from charging employees recruitment fees. The final rule clarifies the prohibition on the charging of recruitment fees set forth in FAR subpart 22.17 Combating Trafficking in Persons, and the associated clause at FAR 52.222-50, Combating Trafficking in Persons. The rule is set in connection to a final rule issued by DoD, GSA, and NASA on January 29, 2015 (FAR Case 2013-001, 80 FR 4967) to implement Executive Order (E.O.) 13627, “Strengthening Protections Against Trafficking in Persons in Federal Contracts,” and title XVII of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2013, “Ending Trafficking in Government Contracting.” Pursuant to this final rule at FAR 22.1703(a) and 52.222-50(b), contractors, contractor employees, subcontractors, subcontractor employees, and their agents are prohibited from charging employees recruitment fees. DoD, GSA, and NASA originally published a proposed rule in the Federal Register at 81 FR 29244 on May 11, 2016, to provide a definition of “recruitment fees” in FAR subpart 22.17 and FAR 52.222-50. The objective of the then proposed rule, and this final rule, is to identify the types of charges and fees that contractors, subcontractors, and their employees or agents are prohibited from charging to employees or potential employees, under the Government policy on combating trafficking in persons. This new final rule now clarifies the prohibition in the 2015 rule by defining “recruitment fees” for purposes of the prohibition (e.g., fees for processing applications, fees for acquiring visas). Additionally, the rule enables clarity and consistency in the application and enforcement of the prohibition. (83 Fed. Reg. 65466, Dec. 20, 2018).

FAR Council Proposed Rules

FAR Council Issues Proposed Rule Regarding Limitations on Subcontracting (FAR Case 2016-011)

On December 4, 2018, DoD, GSA, and NASA issued a proposed rule to amend the FAR to implement the final rule published by the Small Business Administration in the Federal Register at 81 FR 34243 on May 31, 2016 implementing section 1651 of FY 2013 NDAA, which revised and standardized the limitations on subcontracting, including the non-manufacturer rule, that apply to small business concerns under FAR part 19 procurements. This proposed rule amends FAR parts 19 and 52, revising and standardizing limitations on subcontracting through a single FAR clause applicable to every small business program. The proposed rule also creates a new FAR clause implementing the revised and standardized nonmanufacturer rule across all the small business programs. Prior to passage of section 1651 of the NDAA for FY 2013, the limitations on subcontracting and the nonmanufacturer rule were inconsistent across the small business programs. Section 1651 of the NDAA for FY 2013 changed the focus of the limitations on subcontracting rules. Instead of requiring a percentage of work to be performed by a prime contractor, the limitations on subcontracting rules now limit subcontracting to a percentage of the overall award amount to be spent by the prime on subcontractors. As a result, the prime contractor no longer has to track the percentage of costs incurred that it spends performing work itself; it only has to track the percentage of the overall award amount (i.e., contract price) that it spends on subcontractors. Additionally, the percentage of the award amount that the prime contractor spends on subcontractors who are similarly situated entities is not considered subcontracted for purposes of compliance with the limitations on subcontracting. Work performed by similarly situated entities is counted as if it were performed by the prime contractor in determining compliance with the limitations on subcontracting. Under the current FAR clauses, there is only one way for a small business to comply with the limitations: It must spend the required amount on work performed in-house. As proposed in this rule, there will be more than one way to comply with the limitations, and the small business will be able to choose how to comply. The rule tracks SBA regulations providing that the limitations on subcontracting and the nonmanufacturer rule clauses are prescribed for small business set-asides that are expected to exceed $150,000, and for requirements set aside for or awarded on a sole-source basis to 8(a) participants, HUBZones, SDVOSBs, EDWOSBs, or WOSBs eligible under the WOSB program. Comments on the proposed rules must be submitted on or before February 4, 2019. (83 Fed. Reg. 62540, Dec. 4, 2018).

FAR Council Issues Proposed Rule Regarding Whistleblower Protection for Contractor Employees (FAR Case 2017-005)

On December 26, 2018, DoD, GSA, and NASA issued a proposed rule to amend the FAR to implement Public Law 114-261, enacted December 14, 2016, which enhances whistleblower protection for contractor employees. The statute amends 41 U.S.C. § 4712 to make permanent the pilot program for enhancement of contractor protection from reprisal for sharing certain information. The proposed rule would make permanent the protection for disclosure of certain information. It also would clarify that the prohibition on reimbursement for certain legal costs applies to subcontractors, as well as contractors. Comments on the proposed rule must be submitted on or before February 25, 2019. (83. Fed. Reg. 66223, Dec. 26, 2018).

DoD Final and Interim Rules

DoD Issues Final Rule Regarding Modification of DFARS Clause “Surge Option” (DFARS Case 2018-D02)

On December 4, 2018, DoD issued a final rule, without change, effective immediately, amending the Defense Federal Acquisition Regulation Supplement (“DFARS”) to revise a clause to reflect current terminology and industry practices, pursuant to action taken by the DoD Regulatory Reform Task Force. The original proposed rule published in the Federal Register at 83 FR 30659 on June 29, 2018, modified DFARS clause 252.217-7001, Surge Option, to replace the term “Production Surge Plan (DI-MGMT-80969)” with “Capabilities Analysis Plan (CAP)” and add text to permit the increase of supplies or services called for under the clause to be expressed as a specific number. Additionally, the associated clause at DFARS 217.208-70(b) was amended to reflect that the increase of supplies or services may also be expressed as a specific number. The proposed changes are now final without change. The final rule is minimal and reflects updates required to mirror current industry terminology and practice for support that may be required for industrial planning for selected essential military items in the event of an emergency. The rule continues to apply to contracts below the simplified acquisition threshold (“SAT”); however, the rule does not apply to commercial items, including commercially available off-the-shelf items. (83 Fed. Reg. 62502, Dec. 4, 2018).

DoD Issues Final Rule Regarding Documentation of Interagency Contracts

On December 4, 2018, DoD issued a final rule, effective immediately, amending the DFARS to implement section 875 of the NDAA for FY 2019 that removes the requirement to make a best procurement approach determination to use an interagency acquisition. Section 875 amends section 865 of the NDAA for FY 2009 by removing the requirement for agencies, prior to requesting another agency to conduct an acquisition on its behalf, to make a determination that the use of an interagency acquisition represents the best procurement approach implemented at FAR 17.502-1(a). Removal of the requirement from the FAR, in accordance with section 875, is being accomplished under FAR case 2018-015. The final rule also removes supplemental text from DFARS 217.502-1 that advises contracting officers, when providing acquisition assistance to deployed DoD units or personnel from another DoD Component, to obtain the determination from the requiring DoD unit or personnel. (83 Fed. Reg. 62501, Dec. 4, 2018).

DoD Issues Final Rule Regarding Sunset Provision Relating to the Procurement of Certain Goods (DFARS Case 2018-D007)

On December 4, 2018, DoD issued a final rule amending the DFARS to implement section 813(b) the NDAA for FY 2018 that repeals the FY 2015 restrictions on the source of photovoltaic devices in contracts awarded by DoD that result in DoD ownership of photovoltaic devices by means other than DoD purchase of the photovoltaic devices as end products. Section 813(b) repeals section 858 of the NDAA for FY 2015, effective October 1, 2018, but does not repeal section 846 of the NDAA for FY 2011 regarding sources of photovoltaic devises purchased by contractors that become property of DoD. The FY 2018 NDAA repealed Section 858 of the FY 2015 NDAA because that section did not specifically reference the Buy American statute. Consequently, the exceptions available under the Buy American statute did not automatically apply to photovoltaic devices provided under covered contracts. Effective December 5, 2018, the final rule is implemented without change from the proposed rule DoD published in the Federal Register at 83 FR 42822 on August 24, 2018. (83 Fed. Reg. 62498, Dec. 4, 2018).

DoD Issues Final Rule Regarding Modification of the Limitations on Single-Source Task or Delivery Order Contracts

On December 21, 2018, DoD issued a final rule, effective immediately, amending the DFARS to implement section 816 of the FY 2019 NDAA. Section 816 amends 10 U.S.C. § 2304a(d)(3)(A) by modifying the limitations on single-source task or delivery order contracts. Currently, FAR subpart 16.504(c)(1)(ii)(D)(1)(i) prohibits the award of a task or delivery order contract in an amount exceeding $112 million to a single source unless the head of the agency determines that the orders expected under the contract are so integrally related that only a single source can reasonably perform the work. Section 816 amends this limitation in 10 U.S.C. § 2304a to require the head of the agency to determine that only a single source can “efficiently perform the work,” instead of “reasonably perform the work” as required by 41 U.S.C. § 4103. The final rule also adds text to DFARS 216.504 to require agency heads to make the determination required by section 816, in lieu of the FAR determination. (83 Fed. Reg. 65559, Dec. 21, 2018).

DoD Issues Final Rule Regarding Restrictions on Acquisitions From Foreign Sources (DFARS Case 2017-D011)

On December 21, 2018, DoD issued a final rule, effective immediately, amending the DFARS to implement sections 817 and 881(b) of FY 2017 NDAA to apply domestic source requirements to acquisitions at or below the SAT when acquiring athletic footwear to be furnished to enlisted members of the Armed Forces upon their initial entry into the Armed Forces, and adds Australia and the United Kingdom to the definition of the “National Technology and Industrial Base.” 10 U.S.C. § 2534, Miscellaneous Limitations on the Procurement of Goods Other Than United States Goods, requires that DoD only procure certain items if the manufacturer of the items is part of the national technology and industrial base. (83 Fed. Reg. 65560, Dec. 21, 2018).

DoD Implements Interim Rule Regarding Foreign Commercial Satellite Services and Certain Items on the Commerce Control List (DFARS Case 2018-D020)

On December 21, 2018, DoD implemented an interim rule, effective immediately, amending the DFARS to implement section 1603 of FY 2018 NDAA and section 1296 of FY 2017 NDAA. Section 1603 amends 10 U.S.C. § 2279 to impose additional prohibitions with regard to acquisition of certain foreign commercial satellite services. It addresses cybersecurity risks and the source of satellites and launch vehicles used to provide the foreign satellite services. Under the interim rule the definition of “covered foreign country” is expanded to include Russia, as specified in the statute, and adds the statutory definitions of “cybersecurity risk” and “launch vehicle” at DFARS 225.772-1 and in the associated provision at DFARS 252.224-7049, Prohibition on Acquisition of Certain Foreign Commercial Satellite Services—Representations, and the clause at DFARS 252.225-7051, Prohibition on Acquisition of Certain Foreign Commercial Satellite Services, as appropriate. This interim rule creates a new clause to require compliance during contract performance with the representations in their offer with regard to the origin of the satellite services, satellites, and launch vehicles. Section 1296 of the NDAA for FY 2017 amends section 1211 of FY 2006 NDAA to prohibit purchase from any Communist Chinese military company, through a contract or subcontract (at any tier), of goods and services controlled as munitions items on the 600 series of the Commerce Control List (CCL) of the Export Administration Regulations of the Department of Commerce. This rule provides a definition of “600 series of the Commerce Control List” and amends DFARS 225.770 and the clause at DFARS 252.225-7007 to extend the prohibition on acquisition of United States Munitions List items from Communist Chinese military companies to apply to items in the 600 series of the CCL. Comments on the interim rule must be submitted on or before February 19, 2019. (83 Fed. Reg. 66066, Dec. 21, 2018).

DoD Proposed Rules

DoD Issues Proposed Rule Regarding Restrictions on Use of Lowest Priced Technically Acceptable Source Selection Process (DFARS Case 2018-D010)

On December 4, 2018, DoD issued a proposed rule to amend the DFARS to implement sections 813, 814, and 892 of FY 2017 NDAA and sections 822, 832, 882, and 1002 of FY 2018 NDAA that establish limitations and prohibitions on the use of the lowest price technically source selection process. Use of the lowest priced technically acceptable (“LPTA”) source selection process is implemented in FAR subpart 15.101-2. To supplement the FAR, DoD is proposing to add a new DFARS section 215.101-2-70 that addresses the various limitations and prohibitions on the use of the LPTA source selection process. This new section is broken into two paragraphs: Paragraph (a) addresses the limitations provided in section 813 of the NDAA for FY 2017, as amended by section 822 of the NDAA for FY 2018; paragraph (b) addresses the prohibitions provided in sections 814, 832, and 892 of the NDAA for FY 2017, as amended by sections 882 and 1002 of the NDAA for FY 2018. The new statutory limitations and prohibitions on the use of the LPTA source selection process and reverse auctions apply to not only acquisitions conducted using FAR part 15 procedures for negotiation, but also to the following: (1) Orders placed against Federal Supply Schedules using FAR subpart 8.4 procedures; (2) Acquisitions for commercial items using FAR part 12 procedures; (3) Acquisitions conducted using FAR part 13 simplified acquisition procedures; and (4) Orders placed under multiple award indefinite delivery contracts using FAR 16.505 procedures for fair opportunity. In order to notify contracting officers of the new limitations and prohibitions when using these other procedures, DoD is proposing to add cross-references to the new limitations and prohibitions outlined at DFARS 215.101-2-70 in DFARS sections 208.405, 212.203, 213.106-1, and 216.505. These new cross-references make clear that the limitations and prohibitions on the use of LPTA at DFARS 215.101-2-70 apply to the type of procurement being conducted. Comments on the proposed rule must be submitted on or before February 4, 2019. (83 Fed. Reg. 62550, Dec. 4, 2018).

DoD Issues Proposed Rule Regarding Small Business Set-Asides for Architect-Engineer and Construction Design Contracts (DFARS Case 2018-D057)

On December 4, 2018, DoD issued a proposed rule to implement section 2804 of FY 2019 NDAA regarding set-asides for architect-engineer and construction design contracts. Section 2804 amends the thresholds at 10 U.S.C. § 2855 for small business set-asides of acquisitions for architect-engineer services, including construction design, in connection with military construction projects or military family housing projects. Section 2804 requires these acquisitions to be set aside for small business if valued at less than $1,000,000 and removes the prohibition on setting aside these acquisitions. Consequently, these acquisitions may now be set aside for small business, if valued at $1,000,000 or more. The proposed rule would delete paragraph (2) at DFARS 219.502-1, prohibiting small business set-asides of acquisitions for architect-engineer services for military construction or family housing projects valued at $400,000 or more. Further, the proposed rule revises the dollar value at DFARS 219.502-2, paragraph (a)(iii), from $400,000 to $1,000,000, which requires acquisitions for architect-engineer services for military construction or family housing projects to be set aside for small business below a certain dollar value. Comments on the proposed rule must be submitted on or before February 4, 2019. (83 Fed. Reg. 62554, Dec. 4, 2018).

DoD Issues Proposed Rule Regarding Applicability of Inflation Adjustment of Acquisition Related Thresholds (DFARS Case 2018-D023)

On December 21, 2018, DoD issued a proposed rule to implement section 821 of the FY 2018 NDAA. Section 821 amends 41 U.S.C. § 1908(d) to require that the inflation adjustments of statutory acquisition-related thresholds under 41 U.S.C. § 1908 apply to existing contracts and subcontracts in effect on the date of the adjustment. 41 U.S.C. § 1908, Inflation adjustment of acquisition-related dollar thresholds, requires an adjustment every five years of statutory acquisition-related thresholds for inflation using the Consumer Price Index for All Urban Consumers (CPI-U), except for the Construction Wage Rate Requirements statute (formerly known as the Davis-Bacon Act), Service Contract Labor Standards statute (formerly known as the Service Contract Act), and trade agreements thresholds. Currently, the DFARS clauses that contain thresholds subject to inflation adjustment provide the specific dollar amount of the threshold. DoD is proposing to replace the dollar amounts of the thresholds in each clause with a reference to the FAR or DFARS section that provides the overarching policy and the acquisition-related threshold. If the DFARS policy section does not currently include the acquisition-related threshold, this rule proposes amendments to those sections to add the thresholds. Further, within the amended DFARS clauses, the rule proposes additional text to clarify that the threshold with which a contractor or subcontractor must comply is the threshold in effect at the time of contract or subcontract award or issuance of the notice, as appropriate. DoD expects that these changes will not only reduce the number of places to update the thresholds for future inflation changes, but also ensure that future contracts containing these clauses always include a reference to the current threshold. Comments on the proposed rule must be submitted on or before February 19, 2019. (83 Fed. Reg. 65618, Dec. 21, 2018).

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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