The Small Entity Compliance Guide; A Sheep in Sheep’s Clothing

September 13, 2015

So I’m rummaging through emails and come across a notice of a FAR update and see something called a “Small Entity Compliance Guide.”  “Great,” I thought, “finally someone is trying to get information to small businesses about what they need to do to comply with the various government contracting regulations that get dumped on them from time to time.”  Then I kept looking and, much to my dismay, what should appear but the Federal Acquisition Circular that has been published yea these many years with a new title.  What a disappointment.  Of course, it is entirely understandable. Congress comes along with the ‘‘Small Business and Work Opportunity Act of 2007’’ (buried in the ‘‘U.S. Troop Readiness, Veterans’ Care, Katrina Recovery, and Iraq Accountability Appropriations Act, 2007’’), without of course increasing any manpower or funding to do any of this.  So what can one expect of an already overstretched agency but to morph something already being done into something that meets the letter of the congressional mandate without actually doing any additional work (other than pasting a new title on the Federal Register notice).  Still, I was disappointed.  A Small Entity Compliance Guide is a great idea.  I hope one day soon we will see one that actually helps a small business.  Until then we’ll just keep searching the internet.

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Governmental Squareness

June 20, 2011

While working on the section on the limited authority of government agents for my soon-to-be published Solo Attorney’s Emergency Guide to Government Contracts, I had reason to wonder about the genesis of the oft quoted phrase “those who contract with the Government must turn square corners.” United States v. Wunderlich, 342 U.S. 98, 101 (1951). My understanding of this phrase relates to the inapplicability of doctrines such as apparent authority to government contracts, although it has also been applied in a compliance context. That said, it turns out that the phrase and variations thereof have quite an interesting history.

The turn of phrase can be attributed to Justice Holmes in Rock Island, Arkansas & Louisiana RR. Co. v. United States, 254 U.S. 141, 143 (1920). In Rock Island, the plaintiff failed to follow the statutory procedures for appealing a tax assessment. Justice Holmes’ opinion states: “Men must turn square corners when they deal with the Government. If [the Government] attaches even purely formal conditions to its consent to be sued those conditions must be complied with.” Obviously, the context is a question of sovereign immunity and the government’s consent to be sued. That is an issue that remains very relevant with respect to remedies such as the Federal Tort Claims Act.

The first use of this maxim in a government contracts case that I could find came in 1925, in David A. Wright v. United States, 60 Ct. Cl. 519 (1925). In that case, the U.S. Court of Claims (predecessor twice removed of today’s U.S. Court of Federal Claims) quoted Justice Holmes’ maxim in concluding that the plaintiff could not recover for a so-called informal agreement, i.e., a contract not in writing. The plaintiff was induced by government agents (military officers) to rehabilitate a manufacturing facility in reliance on the promise of orders for special lathes. The officer with whom plaintiff dealt had no authority to enter into contracts on behalf of the government. Even though there was authority to give relief for the “informal agreements,” the government official did not have authority to enter into any contract. Notwithstanding the officer’s inducement to incur the costs and plaintiff’s reliance on the officer’s statements, the officer was an agent without authority and the government was not liable. This is the application of Holmes’ “square corners” maxim with which I was familiar.

United States v. Bethlehem Steel Corp., 315 U.S. 289, 337 (1942), concerned shipbuilding contracts from World War I. The contractor in this case was in a very strong negotiating position and insisted on a contract that resulted in a 22% profit. The majority upheld the contract. Justice Frankfurter thought the contracts should be reformed to reduce the profit the contractor received. In his dissent, he quoted Justice Holmes’ maxim in arguing that contractors should not take advantage of the government in an emergency situation. Two years later Justice Frankfurter had occasion to argue the maxim’s antithesis in his dissent in United States v. Blair, 321 U.S. 730, 736-738 (1944). The majority held that a construction contractor could not pursue a claim for damages in the Court of Claims because he had failed to follow the prescribed administrative disputes procedures. “If it were shown that the appeal procedure provided in the contract was in fact inadequate for the correction of the alleged unreasonable attitude of the subordinate Government officials, we would have quite a different case. But here we must insist, not that respondent turn square corners, but that he exhaust the ample remedies agreed upon.” Justice Frankfurter, while acknowledging that those dealing with the government must “turn square corners” and that government contract provisions could not be waived or modified even where circumstances rendered their effect harsh, argued that “there is neither law nor policy that requires that courts in construing the terms of a government contract should turn squarer corners than if the same terms were contained in a contract between private parties.”

The risk that dealing with government agents take was perhaps most brutally demonstrated in Federal Crop Insurance Corp. v. Merrill, 332 U.S. 380, 384-388 (1947). Local government agents had approved insurance contract that was not permitted by the regulations. The majority held that government did not have to make good on the insurance contract. “Whatever the form in which the Government functions, anyone entering into an arrangement with the Government takes the risk of having accurately ascertained that he who purports to act for the Government stays within the bounds of his authority. . . . And this is so even though, as here, the agent himself may have been unaware of the limitations upon his authority.” The majority opinion went on to say that Justice Holmes’ maxim “does not reflect a callous outlook. It merely expresses the duty of all courts to observe the conditions defined by Congress for charging the public treasury.” The dissent by Justice Jackson included a nice turn of phrase on the Holmes maxim: “It is very well to say that those who deal with the Government should turn square corners. But there is no reason why the square corners should constitute a one-way street.”

That brings us to the case that first captured my interest in the Holmes maxim, United States v. Wunderlich, 342 U.S. 98, 101 (1951). This case involved a standard government contract disputes clause which appeal from a contracting officer’s decision could only be appealed to the head of the department. Here the contractor appealed the adverse decision of the agency head to the Court of Claims, which found in the contractor’s favor. In the Supreme Court, the majority basically said the contract prohibited any sort of judicial relief except in the case of the government agency’s engaging in fraud. The reference to the Holmes maxim actually comes in Justice Douglas’ dissent in which he offers the maxim as a concept of government contract law upon which the majority relied sub silentio, ignoring (in Justice Douglas’ mind) the broader implications of the majority position.

This decision, as might be expected, caused an uproar in the business community and Congress enacted the “Wunderlich Act” which authorized judicial review on fact decisions if the decisions were (1) fraudulent, (2) arbitrary, (3) capricious, (4) so grossly erroneous as necessarily to imply bad faith, or (5) not supported by substantial evidence. (41 U.S. Code §§321- 322) The act also prohibited use of a government contract clause making the decision of any administrative official, representative, or board final on a question of law. Although still on the books, the Wunderlich Act has for most government contract purposes been preempted by the Contract Disputes Act. (41 U.S. Code §§601-613)

Justice Black’s dissent in St. Regis Paper Co. v. United States, 368 U.S. 208, 229 (1961), provided another nice turn of phrase based on the Holmes maxim. For purposes of an investigation, FTC had demanded copies of corporate reports submitted to the Census Bureau. The census statute granted the Secretary of Commerce the discretion to furnish to named authorities data taken from information obtained by the Census Bureau on censuses of population, agriculture and housing. The statute also provided that when the Secretary furnishes such data it shall “in no case” be used by the recipient “to the detriment of the persons to whom such information relates.” The majority said that didn’t matter because the information didn’t come from the Secretary but from a direct request from the FTC to the company. In dissent, Justice Black responded: “Our Government should not, by picayunish haggling over the scope of its promise, permit one of its arms to do that which, by any fair construction, the Government has given its word that no arm will do. It is no less good morals and good law that the Government should turn square corners in dealing with the people than that the people should turn square corners in dealing with their Government.”

The Holmes maxim was used to reinforce the principle that unauthorized representations of government agents cannot be relied on in Heckler v. Community Health Services, 467 U.S. 51, 63 (1984). The majority concluded that the government was not estopped from recovering Medicare overpayments even though recipient relied on express authorization of government agent in making expenditures. The majority opinion explained that the Holmes maxim “is consistent with the general rule that those who deal with the Government are expected to know the law and may not rely on the conduct of Government agents contrary to law.”

Perhaps the most recent and notorious invocation of the Holmes maxim was in the Winstar Supreme Court decision. (United States v. Winstar Corp., 518 U.S. 839 (1996)) Because the FSLIC lacked the funds to liquidate all of the failing thrifts during the savings and loan crisis of the 1980’s, the Federal Home Loan Bank Board encouraged healthy thrifts and outside investors to take over ailing thrifts. As inducement, the Bank Board agreed to permit buyers to designate the excess of the purchase price over the fair value of identifiable assets as an intangible asset referred to as supervisory goodwill, and to count this goodwill toward the capital reserve requirements imposed by federal regulations. Congress’s subsequent passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 prohibited thrifts from counting this goodwill in computing the required reserves. A number of thrifts put out of business by the change in the rules sued on the theory that the promise to be able to use goodwill as an asset counting toward the capital reserve requirements was a contractual obligation that was breached by the government. The majority confirmed the judgment of the courts below that the thrifts were entitled to recover against the government for breach of contract.

Between the various opinions in Winstar, almost all of the cases referenced above were invoked. Chief Justice Rehnquist dissenting, invoked the Holmes maxim with this explanation: “The wisdom of this principle arises, not from any ancient privileges of the sovereign, but from the necessity of protecting the federal fisc — and the taxpayers who foot the bills — from possible improvidence on the part of the countless Government officials who must be authorized to enter into contracts for the Government.” In his concurring opinion, Justice Scalia said in response to the government’s argument that the promise to recognize the supervisory goodwill was not “unmistakable:”

It was found below that the Government had plainly made promises to regulate in a certain fashion, into the future; I agree with those findings, and I would conclude, for the reasons set forth above, that the promises were unmistakable. Indeed, it is hard to imagine what additional assurance that the course of regulation would not change could have been demanded — other than, perhaps, the Government’s promise to keep its promise. That is not what the doctrine of unmistakability requires. While it is true enough, as the dissent points out, that one who deals with the Government may need to “turn square corners,” . . . he need not turn them twice.

While it is of literary and historical interest to see how Holmes’ maxim has been invoked over the decades since 1920, it certainly remains a key concept for all dealing with the government. Government agents can only act within the scope of their authority. Commitments made by government agents without authority cannot be relied upon. Government agents’ representations of the law are worth nothing if in error. We all must turn square corners when we deal with the Government.


Finessing CICA Redux: Another Attempt by Government IT Offices to Avoid Competition

January 11, 2011

A bit over a year ago, I wrote about an interesting government agency strategy to avoid having to deal with the messiness of “full and open competition.” (See https://vanhornelaw.wordpress.com/2008/09/05/finessing-cica-the-open-ended-support-contract-ploy/) Now it is time to discuss another ploy to avoid the annoyance of competition, the purported standardization determination.

On January 3, 2011, the Court of Federal Claims issued a preliminary injunction against the Department of the Interior’s attempt to standardize on Microsoft’s email system without conducting a competition. After attempting unsuccessfully to interest the Department in its ability to provide an email system for the Department, Google protested various actions of the Department to implement its sole source decision to use the Microsoft product. You can see a copy of the opinion at http://tinyurl.com/4956j5g.

From the opinion, it is pretty clear that Interior had made the decision to standardize on Microsoft some time ago, perhaps as early as 2007. For months, in 2009 and 2010, Google corresponded with and met with Interior officials to pitch its competing product. Up until late 2010, Interior essentially led Google on, claiming that a competition would be held for the Department’s email system. When solicitation documents became public in late 2010, it was finally clear that there was to be no competition and that Interior had made a final, internal decision to go with Microsoft. The actual solicitation was issued only to selected Microsoft resellers to implement the standardization decision.

This is not a new tactic among government IT offices. In 2007, the Department of Homeland Security tried to do the same thing with the acquisition of financial systems software. (See Savantage v. US, http://tinyurl.com/24vj2rg.) Both DHS and Interior set up the actual solicitation so that the real party in interest, the software developer, could not bid on the procurement by making the procured services only for implementation of a sole source designation of the software to be used. This appears to be an effort to simply avoid having to have a competition for the software since IT personal have developed their own preferences for a particular company’s software and choose not to subject that preference to the competitive market place. Obviously, the strategy becomes problematic when the sole source determination fails to meet statutory and regulatory requirements. Secondarily, the strategy also makes it more difficult for the software developer to challenge the procurement.

It would appear that GAO simply will not address this type of procurement law violation because the protester is not, and cannot be, a bidder. The Court of Federal Claims, on the other hand, has repeatedly shown a willingness to address CICA finessing ploys of various types. I assume this is because the two bid protest forums work under quite different jurisdictional mandates. The statutory mandate to GAO in ruling on bid protests is to “determine whether the solicitation, proposed award, or award complies with statute and regulation.” 31 U.S. Code 3554(b)(1). The Court, however, is under a mandate “to render judgment on an action by an interested party objecting to a solicitation by a Federal agency for bids or proposals for a proposed contract or to a proposed award or the award of a contract or any alleged violation of statute or regulation in connection with a procurement or a proposed procurement.” 28 U.S. Code 1491(b)(1). What the Court has that GAO does not is jurisdiction over “any alleged violation of statute or regulation in connection with a procurement or a proposed procurement.” The Court interprets this third leg of its jurisdictional statute quite broadly, relying on the very broad definition of “procurement” from the Office of Federal Procurement Policy Act, 41 U.S. Code 403(2)(which is mirrored in the FAR at 2.101). See Ramcor Services Group, Inc. v. United States, 185 F.3d 1286, 1289 (Fed. Cir. 1999).

So what is going on here? Why the tendency for this type of ploy to show up in the government IT arena? I would suggest that defining requirements, as would be necessary for a competitive procurement, is really not an easy task. By just getting comfortable and familiar with and then specifying one software product, the requiring office can avoid the unpleasant task of actually articulating what the agency needs. It would appear that procurement officials, perhaps because of a lack of technical expertise, can get snowed by inadequate sole source justifications. This is then compounded with use of all of the IDIQ type contracts available to the contracting officer (e.g., GSA schedule contracts, GWACS, various agency BPAs) which also help disguise the real sole source selection. Since the Savantage decision, and now certainly after the Google decision, it hopefully will be obvious that this particular CICA finessing ploy isn’t all that likely to succeed.


Non-US Contractors Taxed To Pay For 9/11 Medical Benefits

January 3, 2011

The James Zadroga 9/11 Health and Compensation Act of 2010 was signed by President Obama on January 2, 2011. The Act established the World Trade Center Health Program and, among other things, provides for medical monitoring and treatment benefits to eligible emergency responders and recovery and cleanup workers who responded to the September 11, 2001, terrorist attacks.

To pay for the costs of this program, the Act imposes what amounts to a two percent gross revenue tax on “foreign persons” for amounts received as US government contractors for work performed in certain countries. The US Government contracts covered are those for services performed in, or goods produced or manufactured in, any country which is not a party to an international procurement agreement with the United States.

There are several bilateral trade agreements covering government procurement, but the primary multilateral agreement covering government procurement is the World Trade Organization Agreement on Government Procurement. Although the specific countries covered by this definition will most likely be specified in regulations that will certainly be issued to implement this Act, the countries most likely covered are Iraq, Afghanistan, Pakistan, India, central Asia and the Middle East (excluding Israel but including the Persian Gulf countries), and Turkey.

The Act defines “foreign person” as any person other than a United States person. The tax will apply to contracts awarded on or after January 2, 2011.