With Congress quickly approaching a September 30 funding deadline with no adequate spending measures in place, and the Office of Management and Budget now directing agencies to prepare contingency plans, the possibility of a government shutdown is becoming increasingly likely. Unfortunately, government contractors faced these challenges just two short years ago during a 16-day shutdown. Among other challenges, contractors may face a lack of incremental funding; the inability to enter into new contracts or contract modifications; closed government facilities; furloughed government employees; delayed payments; increased indirect costs; and unexercised and deferred contract options. This alert highlights steps government contractors can take to protect their business interests in the event of a shutdown.

Review Your Contracts 

Communicate With Your Contracting Officers 

It is important for contractors to seek written guidance from their contracting officers before a shutdown about contract performance during a shutdown. Among other things, contractors should seek guidance on whether facilities will remain open, whether employees should continue working, and whether contract performance should continue. If the contracting officer informs contractors that contract performance should not continue during the shutdown, contractors should insist on a written stop-work order to protect their interests. Further, contractors should request a stop-work order for contracts that remain funded, but cannot be continued during the shutdown due to furloughed employees or closed government facilities. Finally, contractors should contemporaneously inform contracting officers in writing of any expected delays or added expenses to mitigate the potential for future disagreements regarding these expenses or delays.

Prepare Employees and Subcontractors 

Contractors should take steps to prepare employees and subcontractors if they determine there is a need to furlough employees or suspend subcontracts during a shutdown. These actions should be coordinated with appropriate legal and HR support. Once an action plan is in place, the contractor should take steps to diminish the effects of a shutdown. To mitigate risk to employees, contractors should consider reassigning idle employees to exempt or unaffected programs or requiring employees to use their accrued paid leave during the shutdown if there is no state law or agreement to the contrary.

Prepare for Lengthy Payment Delays 

Contractors should prepare to go without payment from the government for an extended period on their non-exempt contracts. To mitigate the possible effects of the shutdown, contractors should collect any possible government receivables before the shutdown occurs and contact and advise creditors about their situation. Further, contractors should consider methods of stretching cash flow by evaluating cash reserves, considering additional lines of credit, and reallocating non-essential budgetary resources, such as business development or advertising funds.

Make a Record 

A shutdown will likely lead to additional expenses or delays. These can occur through extra material and vendor costs, costs associated with ramping up or winding down contracts, unabsorbed overhead, delays from furloughed employees, or intervening contractual actions. Contractors should document these expenses as they occur and memorialize all correspondence with agencies, contracting officers, employees, and subcontractors in writing. Contractors should also record any unavoidable costs or actions taken to mitigate costs during the shutdown in order to validate subsequent requests for equitable adjustment that contractors may submit once the shutdown ends.

Comply With All Normal Deadlines 

Unless contractors are explicitly notified in writing otherwise, they should continue to comply with all government-related deadlines. This includes deadlines for solicitations, bid protests, claims, appeals of contracting officers’ final decisions, and any litigation deadlines. Although some deadlines may be tolled during a shutdown, these rules can vary among agencies. The safest way to avoid any missed deadlines is to assume they are not moving. On the flip side of this coin, contractors should also be aware that a shutdown may cause proposals to be awarded far later than expected due to shutdown-related delays.

For Additional Information

To learn more about how we can work with you to address the issues summarized above, please contact GTSC Strategic Partner Justin A. Chiarodo at chiarodoj@dicksteinshapiro.com or (202) 420-2706, Heather L. Petrovich at petrovichh@dicksteinshapiro.com or (202) 420-2693.

BETH FLESHMAN, ALION AND GUY TORRES, SALIENT, ASSUME LEADERSHIP OF THE GTSC LION’S DEN

Industry leaders will continue to focus on growth for midtier government contractors

While the DOJ continues to vigorously pursue FCA cases against companies in the health care and other sectors, cash-strapped states are now following suit. State Attorneys General (AGs) have increasingly pursued novel and creative FCA actions, as have private plaintiffs, who are authorized by qui tam provisions to stand in the shoes of states to sue and receive part of any recovery. A driver of this action was the Deficit Reduction Act (DRA) of 2005, which authorized states to receive, in addition to their own recoveries, 10 percent of the federal government’s share of recovered Medicaid funds if their FCAs are at least as robust as the federal FCA. As a result, since 2005 nearly a dozen states have either enacted false claims statutes or have amended existing statutes to make them equally or more robust than the federal FCA, including incorporating qui tam provisions and broadening the circumstances under which companies can be found liable for violations.

For example, late last year, in response to the DRA, New York state amended its FCA (New York State Finance Law § 187, et seq. (NY FCA)), to bring its false claims law more in line with the federal FCA. The New York statute now includes a “reverse false claims” provision that imposes liability as broadly as the federal FCA, providing that a person may be held liable for violating the NY FCA if that person “[k]nowingly conceals or knowingly and improperly avoids or decreases an obligation to pay or transmit money or property to the state or a local government, or conspires to do the same….” (NY FCA § 189(1)(h)). The New York amendments also allow the state, as intervenor in a qui tam case, to relate back to the qui tam plaintiff’s filing date for statute of limitations purposes, expanding the period for which the state can seek recoveries. In addition, the law provides attorneys’ fees for successful qui tam plaintiffs, incentivizing the plaintiff’s bar to partner with the state or pursue their own cases under the NY FCA.

Recent developments in California also have made California False Claims Act (CFCA) cases more likely. In October of last year, California Governor (and former AG) Jerry Brown signed into law amendments to California’s general whistleblower statute (Cal. Labor Code § 1102.5) extending already existing whistleblower protections to employees who report illegal behavior internally to supervisors or those responsible for compliance. The amendments also imposed liability on any person working on an employer’s behalf who retaliates against an employee who engages in protected whistleblowing activity. In addition, a California appellate court, in San Francisco United School District ex. rel. Contreras v. First Student, Inc., No. A136986, Cal. Court App. (1st Dist. Mar. 11, 2014), recently expanded liability under the CFCA by approving the “implied certification” theory, holding that “a vendor impliedly certifies compliance with express contractual requirements when it bills a public agency for providing goods or services.” As a result, government contractors that do business with the state of California are now exposed to CFCA liability if they knowingly submit an invoice while in breach of a material contract term, whether or not they expressly certified compliance with material contract terms.

California and New York are just two high-profile examples of a national trend. Florida AG Pam Bondi worked with the legislature to significantly amend the Florida FCA last year to expand its scope and provide new subpoena powers and penalties. In Vermont, AG Bill Sorrell worked with several state senators to introduce a new FCA patterned on the federal act, after the state collected more than $23.5 million since 2010 through cooperative work with the DOJ on Medicaid fraud cases.

Because many states are facing substantial budget pressure, FCA activity, in particular Medicaid fraud cases, are likely to substantially increase in 2014 and beyond. In January Texas AG Greg Abbott announced that Hi-Tech Pharmacal Co. will pay $25 million to settle claims that it submitted inflated pricing information for certain prescription drugs from 1995 to 2013. In April Texas settled a state FCA lawsuit against HEB Grocery Co. for $12 million, settling claims that HEB overcharged the Texas Medicaid program for prescription drugs. Florida also reached a $7 million agreement recently with All Children’s Health System to settle allegations that the hospital violated the federal and Florida’s FCA by submitting illegal Medicaid claims.

FCA cases are not limited to health care. New York AG Eric Schneiderman, who as a state legislator sponsored a substantial 2010 expansion of the NY FCA, has pursued a ground-breaking FCA reverse false claims case against Sprint Nextel Corporation for allegedly under-collecting and underpaying more than $100 million in New York state and local sales taxes. In late February a New York appellate court upheld a lower court’s decision denying Sprint’s motion to dismiss the case. FCA cases have also recently been brought against or settled with technology providers and construction firms for providing allegedly defective products and services or inflating their billing, energy companies for underpaying royalties, and mortgage lenders for alleged false applications for HUD-sponsored insurance and federal loan financing.

State FCAs have also become fertile ground for creative plaintiff’s attorneys. Prominent plaintiff’s firms have long cultivated relationships with AGs as they sought to represent the states in civil lawsuits such as the tobacco litigations of the 1990s and more recent consumer protection and public nuisance suits against the pharmaceutical and other industries. Plaintiff’s lawyers have also taken notice of the potential for large automatic recoveries in qui tam suits. 647 federal qui tam suits were filed by private plaintiffs in 2012 alone, compared to only 30 in 1987. This upward trend is likely to continue as plaintiffs increasingly assert multiple state FCA claims alongside federal claims and attempt to work alongside AGs in pursuing such cases.

There are steps companies can take to reduce their potential exposure to FCA actions brought by the federal government, AGs, and/or qui tam plaintiffs. Any company that provides goods or services to the government, or even subcontracts to do so, should do the following:

(1) Create and update its compliance program to ensure current compliance with all applicable legal requirements and to flag potential problems early before they give rise to an FCA claim.

(2) Establish appropriate and continuous training programs that inform employees of key legal obligations, and encourage employees to bring problems to the attention of supervisors and compliance officers.

(3) Periodically audit business activities to ensure those activities conform to the company’s compliance program by conducting interviews, surveying employees, and providing employees with opportunities to provide feedback regarding potential wrongdoing.

(4) Fully and seriously investigate all allegations of impropriety, no matter how unlikely, and regardless of the whistleblower’s credibility or motivations.

(5) Carefully consider the ramifications of strategies that impact taxes or royalties remitted to the government and whether such plans might become the basis for reverse FCA claims.

More broadly, companies involved in supplying goods or services paid for by the government should familiarize themselves with, and even develop relationships with the DOJ authorities and AGs who are authorized to bring FCA cases or oversee qui tam litigations. Given the increasingly innovative ways FCA claims are asserted, companies cannot risk hiding their heads in the sand regarding their potential exposure. Knowing the government authorities responsible for such cases can provide critical insight to understanding their priorities, their complex relationships with qui tam plaintiffs, and the future directions and likely developments in this increasingly important area of the law.

Contributing Authors:

Merle DeLancey primarily represents healthcare clients involved in a broad spectrum of government contracting issues and litigation. He also formulates strategies for expanding contracting opportunities using the General Services Administration (GSA) and Department of Veterans Affairs (DVA), Federal Supply Schedules (FSS), and other government-wide acquisition and indefinite delivery, indefinite quantity contract vehicles. Merle also has substantial experience in complex, multidistrict litigation in federal district courts throughout the United States.

Bernard Nash joined Dickstein Shapiro in 1988 and leads the firm’s State Attorneys General Practice, where he represents clients in complex state and federal legal and legislative matters. Bernie’s work typically involves cases of first impression, matters having public policy implications and/or a governmental interest, and complex litigation. He routinely counsels major private sector clients on a wide range of matters involving State Attorneys General and also has represented states in significant policy disputes.  According to Chambers USA: America’s Leading Lawyers for Business, Bernie is “the leading practitioner in the country” who has “cornered the market” in representing clients before State Attorneys General and is known as “the godfather of State Attorney General work.”

Andrew Smith is an associate in Dickstein Shapiro’s Government Contracts Practice. Andrew focuses on complex civil litigation matters relating to antitrust, unfair trade, mass torts, product liability, and general commercial law. He also has represented and counseled clients in government investigations and government contract matters, including False Claims Act investigations and litigation, and claims and bid protests before the U.S. Government Accountability Office. Additionally, Andrew has been actively involved in providing pro bono legal research assistance to the American Antitrust Institute.

Christopher Allen joined Dickstein Shapiro in 2007. Chris is an associate in the State Attorneys General Practice. He represents clients primarily in connection with state government investigations and complex public policy issues, including outreach, negotiations, and litigations involving consumer protection, pharmaceutical products, data breach, information security compliance, antitrust, and environmental issues.

As comments are due on April 28, 2014, federal contractors and other stakeholders should act quickly to submit their views on what will have a significant and lasting impact on federal cybersecurity acquisition practices.

The draft plan proposes a repeatable, scalable, and flexible framework for addressing cyber risk in federal acquisitions, and by design, it will affect nearly all contracting entities. The draft plan proposes a “taxonomy” for categorizing procurements so that the government can effectively prioritize those in need of additional resources, attention, and safeguards. As proposed, the taxonomy is modeled on Federal Information and Communications Technology (ICT) acquisitions—though the Working Group has asked whether this framework is a workable model for the categorization of all acquisitions. The Working Group would use the ICT framework to categorize all acquisitions that present cyber risk, after which it would separately assess the risks within each category. Categories that present greater cybersecurity risk (based on threats, vulnerabilities, and impacts) would receive more and faster attention in acquisitions. The taxonomy is, in our view, the most significant new development in the draft plan, as it will serve as the principal basis for categorizing the extent of cyber regulations for procurements. This aspect of the plan accordingly warrants particularly close attention.

The Working Group seeks comments in many areas, including whether:

(a) the approach is workable;

(b) the process will obtain sufficient stakeholder input;

(c) any additional assumptions, clarifications, or constraints should be expressed;

(d) the approach will satisfy the goals of Recommendation IV of the final report, i.e., whether it creates a repeatable, scalable, and flexible framework for addressing cyber risk in federal acquisitions;

(e) the major tasks and sub-tasks are appropriate and, if implemented, will achieve the identified outputs/completion criteria;

(f) the taxonomy and category definitions can be used to develop overlays (a fully specified set of security requirements and supplemental guidance that allow for the specific tailoring of security requirements;

(g) factors can be developed to assess each measure of cybersecurity risk (i.e., threat, vulnerability and impact);

(h) other aspects (e.g., annual spending) should be considered in category prioritization; and

(i) in addition to information security controls derived from the cybersecurity framework and other relevant NIST guidance and international standards, other procedural or technical safeguards that address business cyber risk should be included (e.g., source selection and pricing methodology, source selection evaluation criteria minimum weighting and evaluation methodology, etc).

Submit comments here or contact GTSC to provide input to the Coalition’s response.

Brian Finch, a partner in Dickstein Shapiro’s Washington, DC office, is head of the firm’s Global Security Practice. Named by Washingtonian magazine in 2011 as one of the top 40 federal lobbyists under the age of 40, Brian is a recognized authority on global security matters who counsels clients on regulatory and government affairs issues involving the Department of Homeland Security, Congress, the Department of Defense, and other federal agencies.  Dickstein Shapiro is a Strategic Partner of the Government Technology & Services Coalition.   You can reach Brian at finch@dicksteinshapiro.com (202)420-4823. 

Justin Chiarodo represents clients in all aspects of federal, state, and local procurement law. Named by Law360 in 2013 as a “Rising Star” in Government Contracts, Justin has extensive experience in government contracts litigation, compliance, and regulatory matters, with particular expertise in the defense, health care, technology, and professional services sectors.

Daniel Broderick is a Washington, DC-based associate in Dickstein Shapiro’s Energy Practice. He focuses on regulatory and project development matters affecting clients in the electricity industry, including electric market design, municipalization, compliance, certification, and power purchase agreements. 

John Morton, former director, U.S. Immigration & Customs Enforcement and John Fantini Porter, Chief of Staff, Management & Administration, were awarded Federal Small Business Champions of the Year; Chad Sweet, co-founder and CEO of the Chertoff Group received the Market Maven award; Robert V. Jones, CEO, PreSafe Technologies for Small Business Member of the Year; Brian Finch, Dickstein Shapiro for Strategic Partner of the Year; Bill Carroll, Managing Partner StrikeForce Consulting, Strategic Advisor of the Year and TASC Inc. for Mentor of the year.  Read the release.