July 13, 2012

Suspension and "Guilt by Association"

Holland & Knight Government Contracts Blog
Steven D. Gordon

A recent federal court decision highlights two important issues relating to excluding contractors from participation in federal government contracting: (1) suspension, and (2) "affiliation." Agility Defense and Government Services Inc. v. Department of Defense, No. CV-11-S-4111-NE (N.D. Ala. 6/26/12).

Suspensions are temporary exclusions pending the completion of an investigation of a contractor and/or any ensuing legal proceedings (criminal or civil) or administrative proceedings (debarment or Program Fraud Civil Remedies Act actions). The FAR sets a time limit of 12 months for any suspension if no legal or administrative proceedings have been initiated by that point. This time limit may be extended for an additional six months upon the request of a senior Justice Department official. A suspension may not exceed 18 months unless proceedings have meanwhile been initiated against the contractor -- in which event the suspension continues until the proceedings are resolved. FAR 9.407-4.

The principal causes for suspension include committing a fraud or criminal offense in connection with a public contract, violating certain federal or state statutes, or other serious causes that affect the contractor’s "present responsibility." But a suspension (like a debarment) can be extended beyond the wrongdoing contractor to include an "affiliate" of that contractor even if the affiliate is innocent of any wrongdoing. FAR 9.407-1(c). The rationale is to prevent the actual wrongdoer from using the affiliate to circumvent its exclusion. Contractors are considered affiliates of each other if, directly or indirectly, either one controls or has the power to control the other, or a third person controls or has the power to control both. FAR 9.403. "Affiliates" can include parent corporations, subsidiaries and sister corporations. Also, businesses may be deemed affiliates if a suspended (or debarred) contractor holds an ownership interest or a corporate position that enables the contractor to control operations in both businesses.

The Agility decision dealt with a novel issue regarding two innocent affiliates that had been suspended from government contracting for 31 months, well beyond the 18-month time limit set by the FAR, based on the indictment of their parent corporation. The Government argued that this result was permissible because criminal proceedings had been instituted against the parent company within the time limit and were still pending. The court rejected this argument and ruled that the continued suspension of the affiliates was unlawful after the 18-month time limit expired without the institution of proceedings against them.

The court noted that the Government can use alternative procedures, aside from the indefinite suspension of affiliates, to protect itself against an (alleged) wrongdoer circumventing its exclusion. The court cited the affirmative determination of responsibility that a contracting officer must make before any contract award. (See, for example, Bilfinger Berger AG Sede Secondaria Italiana, B-402496 (May 13, 2010), where GAO upheld the agency’s negative responsibility determination of the protester because it proposed to use the resources of its debarred affiliated company (e.g., a contractor’s license) to perform the contract). The court did not, however, explore the full implications of this argument. The existence of such alternative means for protecting the Government against irresponsible contractors also undercuts the need to suspend an innocent affiliate for up to 18 months -- or to debar the affiliate for a period of years -- based simply on an agency official's concern that the affiliate "might" be used by a wrongdoer to circumvent a legitimate suspension or debarment.

Sanctioning an innocent affiliate is fundamentally at odds with American principles of justice and due process. It is not permitted in criminal or civil cases. The fact that the regulations authorize it with respect to suspension and debarment is troubling, especially given that the Government has alternative means of protecting itself. This regulatory authorization does not necessarily establish the legality of the practice. The suspension or debarment of an innocent affiliate may not comport with due process or pass muster under the "arbitrary and capricious" proscription of the Administrative Procedure Act.

The court suggested that the 18-month suspension period was intended as a limited period in which the Government can determine whether affiliates actually participated in wrongdoing and, if so, proceed against them. This is incorrect. The rationale for excluding affiliates, regardless of complicity, is that it "is necessary to prevent a debarred person from participating in covered transactions through or under the guise of other entities that such person controls." 53 Fed. Reg. 19161, 19169 (May 26, 1988). Moreover, apart from affiliates, the entire tenor of the suspension/debarment regulations is to require adequate proof of a contractor's complicity before it can be excluded. See FAR 9.407-5, 9.406-5(b).

From a practical perspective, the best option available to a contractor that finds itself suspended as an affiliate may be to take the requisite steps to cease its affiliation with the alleged wrongdoer. In the Agility case, a number of subsidiaries of the indicted parent company were suspended as affiliates. At least two had their suspensions terminated after taking steps that were deemed sufficient to end the parent's control over them. But the two plaintiffs proposed a "management buyout" that the agency deemed inadequate to remove the influence of the parent company -- for reasons that are not readily apparent. The court does not analyze this issue but it is potentially of greater interest to a suspended affiliate than the question of whether the suspension must be lifted after 18 months.

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