Offshore Subcontracting Under Federal Government Contracts

Offshore Subcontracting Under Federal Government Contracts January 27, 2004

Mr. John Palatiello
Executive Director
Management Association for
Photogrammetric Surveyors
1760 Reston Parkway, Suite 515
Reston, VA 20190

Re: Offshore Subcontracting Under Federal Government Contracts

Dear Mr. Palatiello:

At your request, Crowell & Moring LLP has examined the risks that member companies of the Management Association for Photogrammetric Surveyors (“MAPPS”) might face in the context of contracts with the federal government for mapping and related geographic information services if, without the government’s knowledge and consent, they were to utilize offshore labor to perform such contracts. It is our conclusion that the risks could be substantial.

We have reviewed a sampling of federal government contract solicitations and agreements for mapping and related services that you provided to us, as well as applicable statutes, regulatory provisions, and court decisions. While the circumstances of individual contractors will vary depending upon the terms of their agreements and the processes by which they obtained those contracts, contractors who use offshore labor without the knowledge and, in some cases, the consent of the federal government could have several potential sources of liability, any one of which could result in serious legal and financial consequences. These could include, for example, breach of contract, termination for default, liability under the Truth in Negotiations Act, liability under the False Claims Act, and even suspension and debarment.

This letter summarizes the areas that our review suggests are the most likely sources of liability for members who might choose, without the government’s knowledge, to use offshore labor in the performance of their federal contracts. The analysis and conclusions are necessarily of a general nature, but while every member contractor might not encounter all of the issues described, the issues are sufficiently common and the liabilities sufficiently substantial that they should be considered by any of your members who might be considering whether to use, or continue the use of, offshore labor under a government contract.

MAPPS members who perform mapping and related geographic information services under contracts with the federal government could risk substantial legal and financial consequences if they were to use offshore labor without the knowledge and, depending on the contract terms, the consent of the contracting federal agency. Specifically, if a contractor’s use of offshore labor were in any way inconsistent with either (1) disclosures or representations made to the government in the course of obtaining the federal contract, or (2) the final terms of the government contract itself, then a contractor could be liable.

Of particular concern are the provisions of the Truth in Negotiations Act (“TINA”) (10 U.S.C. § 2306a; 41 U.S.C. § 254b). Under that Act, contractors are often required to provide the government with detailed information about the way in which contracts will be performed and the costs of that performance. If, after award of a contract, it is determined that the information provided to the government during negotiations was inaccurate, incomplete, or noncurrent, then the Act provides that the government can recover damages from the contractor. Thus, for example, if a contractor were to submit information during negotiations with the government indicating that it would use domestic labor, but in fact used lower-cost foreign labor, then it could be liable to the government.

Regardless of whether or not TINA applies, contractors also are often asked during a procurement to provide information about who will perform their contracts and where that performance will take place. In addition, a contract could include express provisions that restrict the personnel and subcontractors a contractor may use in performing the contract. A contractor who chooses to perform in a manner or location that is inconsistent with what it disclosed to the government during the procurement or inconsistent with the terms of its agreement could risk liability for breach of contract, termination of its contract, or, as discussed below, allegations of fraud.

Finally, and most significantly, the False Claims Act, 31 U.S.C. § 3729 et seq., allows the federal government to recover substantial (i.e., treble) damages and penalties from a contractor who knowingly submits a claim to the government that is false. This can occur in circumstances where a contractor, without informing the government, does not adhere to representations it made prior to contract award or does not observe contractual requirements during performance. Thus, for example, a contractor who does not disclose accurate and complete information to the government during negotiations as required by TINA could find itself subject not only to liability under that act (as described above), but also to liability under the False Claims Act. The use of offshore labor contrary to representations made to the government during negotiations or contrary to the terms of a contract could therefore expose the contractor to liability under the False Claims Act in addition to contractual liability.

Thus, before your members determine whether to make use of offshore labor in the performance of their government contracts, they should consider all of the disclosures or representations made to the government prior to contract award, as well as the terms of their agreements with the federal government.1 Inconsistent action by the contractor could result in substantial liability.

The federal government typically procures mapping and related geographic information services under the Brooks Act (40 U.S.C. §§ 1101 et seq.). That Act, and applicable provisions of the Federal Acquisition Regulation (“FAR”), set forth the procedures that a government agency will follow to evaluate potential contractors’ qualifications, conduct discussions, select the most highly qualified offerors, and ultimately negotiate a final contract agreement.

During the process of such a procurement, potential contractors are typically asked to provide significant and detailed information not only about their qualifications and how they propose to provide the services that the government requires, but also about their costs to provide those services. That information may then become a part of the rationale for the agency’s determination to award the contract, and often is incorporated into the final agreement.2

A contractor who provides such information, but then proceeds in a manner inconsistent with what was disclosed to the agency, could face significant legal and financial risks. These could include liability for defective pricing under the Truth in Negotiations Act, as well as potential liability for breach of contract or termination for default (including liability for the government’s reprocurement costs), which, in turn, could result in civil or even criminal False Claims Act liability.

A. Liability for Defective Pricing Under the Truth in Negotiations Act
To begin with, under the Brooks Act, government agencies are obligated to negotiate contracts at levels of pricing that are determined to be “fair and reasonable.” 40 U.S.C. § 1104(a). In order to determine whether a contractor’s proposed pricing is fair and reasonable, agencies often require contractors to submit “cost or pricing data” during negotiations. Such submissions are governed by the Truth in Negotiations Act (10 U.S.C. § 2306a; 41 U.S.C. § 254b) and implementing regulations. These require contractors to disclose “all facts that, as of the date of price agreement . . . prudent buyers and sellers would reasonably expect to affect price negotiations significantly . . .” and include, among other things, “[d]ata supporting projections of business prospects and objectives and related operations costs . . .” and “[i]nformation on management decisions that could have a significant bearing on costs.” FAR § 2.101. More importantly, contractors are required to certify that the disclosed data are “accurate, complete, and current . . . .” FAR 15.406-2.

If, after award of a contract, it were determined that cost or pricing data that a contractor provided to the government during negotiations were inaccurate, incomplete, or noncurrent, the contractor could have significant liability. FAR § 15.407-1(b)(1) provides that, in such circumstances, the government is “entitled to a price adjustment, including profit or fee, of any significant amount by which the price was increased because of the defective data.” The government’s right to recovery of such amounts is further protected by including in the contract a clause such as FAR § 52.215-10, “Price Reduction for Defective Cost or Pricing Data” and an audit clause such as FAR § 52.215-2, which secures the government’s right to “examine and audit all of the Contractor’s records, including computations and projections” relating to contract proposals, negotiations, contract pricing, and contract performance. FAR § 52.215-2(c).

A contractor submitting cost or pricing data in support of higher cost domestic labor, but in fact planning to utilize lower-cost foreign labor, would run afoul of these provisions. This point is illustrated by United States ex rel. Campbell v. Lockheed Martin Corp., 282 F. Supp.2d 1324 (M.D. Fla. 2003), in which the court addressed a circumstance where the contractor was alleged to have withheld cost or pricing data from the government relating to the contractor’s improved efficiency (and reduced labor costs) associated with the transfer of its manufacturing operations to a new location. The court held that the contractor was required to provide such data under the Truth in Negotiations Act and that, if it had failed to do so, the contractor could be liable for damages for defective pricing as well as under the False Claims Act. Id.

B. Disclosures of Information Other than Cost or Pricing Data
Regardless of whether an agency requests “cost or pricing data” in the course of negotiations, agencies could and, in the case of mapping and related services, often do ask contractors to provide relevant information about the manner and locations in which the required services will be provided. In various ways, that information might ultimately become a part of the agency’s award determination and might be incorporated into the final contractual agreement.

Contractors should be cautious of the risks associated with performing in a manner or location inconsistent with what it disclosed to the government during negotiations. A contractor who proposes to perform work at a location in the United States (on its own or through a particular subcontractor) could be deemed in breach of contract if it were then to use a different location or a different subcontractor, without notifying the agency. A contractor in breach of contract risks termination for default (including potential liability for the government’s reprocurement costs) and other liability for damages to the government. Contractors may also be subject to liability under the False Claims Act if they provide false information to the government during negotiations.

These examples demonstrate that there are serious risks for contractors who may inform the government that they (or their subcontractors) have performed or intend to perform services at United States locations, but actually use offshore resources.

D. “Knowingly” Submitting a False Claim
The False Claims Act standard for liability, which requires that a contractor “knowingly” submit a false claim, provides for broader liability than it might at first appear. To begin with, liability under the False Claims Act does not require that the contractor intentionally set out to deceive the government. The Act plainly states that “no proof of specific intent to defraud is required.” 31 U.S.C. § 3729(b). Instead, a contractor “knowingly” submits a false claim when it does so with “actual knowledge,” in “deliberate ignorance of the truth or falsity of the information,” or “in reckless disregard of the truth or falsity of the information.” 31 U.S.C. § 3729(b). The “reckless disregard” standard has been explained by some courts to be a little more than gross negligence. See, e.g., United States v. Krizek, 111 F.3d 934 (D.C. Cir. 1997).

Moreover, under what is sometimes called the “collective knowledge” theory, it is possible that a contractor could be liable under the False Claims Act even where no single employee within the company actually knows that that a false claim is being submitted. The collective knowledge theory suggests that a company knowingly submits a false claim in circumstances where, combining the knowledge of several individual employees, the company as a whole possessed enough information to know that the claim was false. See, e.g., United States v. Bank of New England, 821 F.2d 844 (1st Cir. 1987) (“The aggregate of those components constitutes the corporation’s knowledge of a particular operation”). In circumstances where the employee submitting a claim to the government acts in deliberate ignorance or in reckless disregard of knowledge that other company employees may have, there is no need for the government to apply this theory to prevail in a False Claims Act action; the statutory standard is met by that employee’s conduct alone. However, the collective knowledge theory would impute actual knowledge to the company, and therefore liability for a false claim, even where no employee actually knows that a false claim is being submitted, acts with deliberate ignorance, or act with reckless disregard. The applicability of the collective knowledge theory to False Claims Act cases has not been fully resolved by the Courts. See, e.g., United States v. United Technologies Corp., Sikorsky Aircraft Division, 51 F. Supp.2d 167 (D. Conn. 1999) (declining to apply the doctrine under the facts of that case). However, contractors should be wary of the risks it creates. As companies who have been subject to False Claims Act investigations can attest, the investigative process alone, i.e., without a finding of liability, can have debilitating or even ruinous consequences.

E. The “Qui Tam” Provisions of the False Claims Act
While the government can bring False Claims Act litigation against contractors, federal law also provides significant incentives for private citizens to bring “whistleblower” suits if they believe that a contractor has submitted a false claim to the government. Specific provisions of the False Claims Act referred to as the “qui tam” provisions not only allow private citizens to bring such False Claims Act litigation, but also encourage it by allowing them to keep a part of the recovery. See 31 U.S.C. § 3730(d).

Qui tam suits are typically brought by current or former employees who have obtained relevant information during the course of their employment with the contractor. See, e.g., United States ex rel. Milam v. Univ. of Texas M.D. Anderson Cancer Center, 961 F.2d 46 (4th Cir. 1992); United States ex rel. Truong v. Northrop Corp., 728 F. Supp. 615 (C.D. Cal. 1989). The False Claims Act includes whistleblower protection provisions, protecting such employees from retaliation by their employers (including discharge, demotion, suspension, threats, harassment, or any manner of discrimination) when they bring qui tam suits. 31 U.S.C. § 3730(h). Potential plaintiffs also may be industry competitors or employees of those competitors. See, e.g., United States ex rel. McCoy v. Seaward Marine Servs., 972 F.2d 344 (4th Cir. 1992). Thus, for a contractor whose actions might have the appearance of a false claim, the potential plaintiffs could be numerous, extending well beyond the government agency.

Once a qui tam plaintiff files suit, the government is given the option of taking it over. 31 U.S.C. § 3730 (b). If the government does take over the suit, then it becomes primarily responsible for the conduct of the litigation, but the qui tam plaintiff will still be entitled to as much as 25% of any recovery, plus attorneys fees and costs. 31 U.S.C. § 3730(c)-(d). If the government decides not to take over the qui tam plaintiff’s suit, then the litigation may still go forward, and the qui tam plaintiff would be entitled to keep up to 30% of any recovery, plus attorney fees and costs. Id.

Finally, contractors who may face allegations under the False Claims Act could also face suspension and debarment from obtaining further federal contracts. A contractor who is suspected of, or is the subject of a conviction or civil judgment for fraud in obtaining or performing a government contract, for making false statements, or for “any other offense indicating a lack of business integrity or business honesty . . .” can be suspended or debarred from receiving any more government contracts. See FAR §§ 9.406-2(a), “Causes for debarment,” and 9.407-2(a), “Causes for suspension.” Generally, such suspension or debarment prevents contracts with all agencies (FAR §§ 9.406-1(c), 9.407-1(d)) and is effective against all divisions and organizational elements of the contractor (FAR §§ 9.406-1(b), 9.407-1(c)). Under some circumstances, the suspension or debarment may even be effective against affiliates of the contractor. Id. The period of debarment may vary, depending upon the seriousness of the cause (FAR § 9-406-4(a)(1)); however, the debarment could last years, having a substantial effect upon a contractor that obtains any significant portion of its business from the federal government.

As the analysis and examples above show, there can be substantial risks to a government contractor that acts without the knowledge and consent of the government to use offshore labor on its federal contracts. Depending upon the particular circumstances, a contractor risks liability for defective pricing under TINA, breach of contract, contract termination, suspension and debarment, and even liability for False Claims Act penalties and treble damages. These can amount to substantial liability, possibly affecting the continuing viability of a government contractor, and should be considered by any of your membership who may be considering the use of offshore labor.

We hope the foregoing is responsive to your request. Should you have any questions, please do not hesitate to call.

Kenneth M. Bruntel, Esq.