The Risks and Implications of Failing to Comply with U.S. Government Cyber and IT Requirements

by Pepper Hamilton LLP

Pepper Hamilton LLP

This article originally appeared in the Sera Brynn blog on January 30, 2017. It is reprinted here with permission.

This article summarizes some of the many risks and implications that are associated with failing to comply with U.S. government-unique cyber and information technology requirements. We are often asked by small and medium-sized companies whether these types of clauses apply to them, and, if they do, what happens if they cannot comply.

Although the applicability and risk varies with the type of contract and program, the short answer is that some, many or perhaps all cyber and IT clauses will likely apply if they are in your contract and that the risk is significant for companies that fail to comply with the applicable requirements. Companies should view cyber and IT requirements as they do any other contractual requirement imposed by the government.

In most cases, it does not matter if your company:

  • Is small or medium-sized

  • Only generates a small amount of revenue from the government

  • Is focused on commercial customers and sales

  • Is a “commercial item” (FAR Part 12) contractor

  • Is not an IT or cyber-focused company

  • Is not performing under a Statement of Work for IT or cyber services

  • Is “only” a subcontractor or supplier.

If the government or a prime contractor includes cyber and IT clauses in your contract, you should review them and determine their applicability — preferably before you sign. It goes without saying that post-execution is not the ideal time to determine if your contract includes government-unique cyber and IT requirements, whether those requirements apply, whether you complied, and whether you have (or missed) a reporting requirement. If performance is already underway and there is a security incident, the first place your contracting officer will look will be your contract.

The following is a summary of the risks and implications associated with the failure to comply with cyber and IT requirements that may be applicable to your contract.

Breach of Contract: Just like any other contractual requirement, standard breach of contract theories and damages may result from failing to comply with cyber and IT requirements. If the subcontractor is the responsible party, the government will hold the prime contractor liable, and the prime contractor in turn will look to the subcontractor to make it whole.

Liquidated Damages: Government agencies may include liquidated damages provisions in their contracts, especially if there is sensitive personal information, such as personally identifiable information or protected health information. We have seen liquidated damages provisions ranging from $37.50 to $5,000 per affected individual in one agency’s contracts. Prime contractors often flow down liquidated damages provisions to their subcontractors.

Termination for Default: Cyberattacks, data breaches and losses of confidential data are inherently serious in nature, and arguably even more so when the government is a contracting party. Given the seriousness of noncompliance, a government agency may well be in its rights to terminate a contract for default for failure to comply with cyber and IT requirements. Some agencies may even include specific termination provisions relating to cyber and IT noncompliance. For example, one agency provision states that the contractor may be terminated if it has violated any of the information confidentiality, privacy or security provisions of the contract. In addition to the loss of the contract, a default termination exposes the contractor, and if applicable the subcontractor, to money damages as well as damage to its reputation.

Termination for Convenience: Although a convenience termination is a preferable alternative to a default termination, the contractor will nonetheless lose contract revenue and will likely not be made whole through the termination process. If the prime contract is terminated for convenience, the subcontract will likely be terminated as well.

Poor Past Performance: Given the importance of past performance, contractors and subcontractors must take all appropriate steps to ensure that their past performance ratings are as high as possible. Breach of contract, the imposition of liquidated damages and default terminations will unfavorably impact past performance ratings for years.

False Claims Act: A contractor or subcontractor can be liable under the False Claims Act (FCA) for submitting false claims, e.g., invoices. “False certification” cases involve allegations that the contractor has made a false express or implied certification with respect to compliance with a statute, regulation or contract term. Express certification cases are more straightforward — they involve claims for payment that include a false certification regarding a material requirement, i.e., the contractor knows the requirement is material to the government’s payment decision.

In contrast, under the “implied certification” theory, a contractor or subcontractor may be liable for impliedly certifying by submitting its invoice that it has complied with all material statutory, regulatory and contractual requirements. Over the years, implied certification cases have been based on failing to meet requirements such as those relating to domestic preferences, minority ownership, small business subcontracting, prohibited costs and other contract-specific requirements. Although the FCA case law continues to evolve, including the Supreme Court’s recent Escobar decision (Universal Health Services v. United States ex rel. Escobar), given prior precedent, it is not a far leap of logic to anticipate that FCA actions can and will be brought based on the failure to comply with material cyber and IT requirements.

Qui Tam / Whistleblower Action: Qui tam actions are private lawsuits brought by individuals on behalf of the government based on the FCA. These whistleblower lawsuits are often filed by current employees or former employees or competitors. A common theme for whistleblowers is to allege that a contractor is not complying with the terms of its contract (or subcontract). A significant number of FCA actions each year are initiated by these types of whistleblowers.

Mandatory Disclosure: Government contractors and subcontractors are generally required to make timely disclosures in connection with the award, performance or closeout of a contract or subcontract where the contractor has “credible evidence” of a violation of the FCA or various criminal laws. Given the potential FCA liability discussed above, contractors and subcontractors must also consider whether they are obligated to make disclosures to the government in the event of noncompliance with material cyber and IT requirements.

Suspension / Debarment: In addition to allowing the government to suspend or debar a government contractor or subcontractor for failing to make a mandatory disclosure, other broad grounds allowing the government to suspend or debar a contractor or subcontractor include the “willful failure to perform in accordance with the terms of one or more contracts” or “any other cause of so serious or compelling a nature that it affects the present responsibility of the contractor or subcontractor.”

Contractors and subcontractors struggling with cyber and IT requirements should be mindful of the government’s broad suspension and debarment powers. The suspension or debarment of a government contractor or subcontractor is a nightmare scenario for companies doing business in the public sector. Even companies focusing on commercial sales, with only limited government revenue, will feel the impact of a suspension or debarment as many commercial customers require their subcontractors, suppliers and vendors to certify that they are not suspended, debarred or excluded from public contracting.

The above discussion summarizes some of the many risks and implications that are associated with failing to comply with government-unique cyber and IT requirements. Before entering into any government contract or subcontract, companies should be acutely aware of any applicable cyber or IT requirements and assess whether they have any compliance gaps. To the extent that a contractor becomes aware of such gaps, it should address them promptly to avoid potentially serious ramifications to their business.



Written by:

Pepper Hamilton LLP

Pepper Hamilton LLP on:

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