3 Key Contractor Suspension Cases To Watch

By Dietrich Knauth

Law360, New York (November 6, 2013, 9:22 PM EST) — Agency decisions to suspend a company from federal contracting are rarely litigated in court, but three cases from 2013 have the chance to shape policy in areas like the treatment of contractor affiliates, the timing of a suspension and the due process rights of suspended contractors.

Suspension and debarment — suspension’s longer-term counterpart — are intended to protect the government from dealing with risky or unscrupulous businesses. But attorneys say that some recent government decisions have blurred the line between protection and punishment and raised questions about how far the government can legally go in cutting ties with disfavored companies.

“I know all the players on the government side personally, and I know their intentions are good,” David Robbins said, who heads the government contracts group at Shulman Rogers Gandal Pordy & Ecker PA and was a top U.S. Air Force suspension and debarment attorney until Nov. 1. “The challenge, however, is knowing where the edges are in what is appropriate. At least in some cases, judicial guidance could help the system.”

Here are three cases that could impact contractors in future suspension and debarment disputes:

BP Exploration & Production Co. Inc. et al. v. McCarthy et al., U.S. District Court for the Southern District of Texas.

BP PLC, along with a host of its affiliates, was suspended from government contracts in November 2012, after pleading guilty to felony misconduct and reaching a $4.5 billion settlement related to the Deepwater Horizon oil spill. BP sued the U.S. Environmental Protection Agency over the suspension in August, arguing that the EPA’s action ignored “the overwhelming evidence and record of BP’s present responsibility as a government contractor” and that the timing of the suspension was both arbitrary and punitive.

The decision to suspend BP more than two years after the spill shows some of the difficulties the government faces when balancing the need to protect itself from unethical contractors, with the need to give accused companies time to explain and address deficiencies.

Suspension is intended to protect the government from unscrupulous contractors, not to punish companies — so the timing of BP’s suspension seemed strange to some, even within the government’s suspension and debarment community, according to Robbins.

“Frankly, its probably very good for the community to have this discussion about when should these actions be kicked off, to ensure that they’re not used to punish,” Robbins said. “The EPA case, I understand there’s some tension about the timing of this, and I think it’s healthy to have the courts take a look at this.”

Agility Defense & Government Services Inc. et al. v. U.S. Department of Defense et al., U.S. Court of Appeals for the 11th Circuit.

The 11th Circuit is poised to rule on ambiguous regulations for suspending contractors that are affiliated with indicted companies, in a case that challenges the government’s effort to keep a suspension alive beyond an 18-month limit written into the Federal Acquisition Regulation.

An Alabama federal judge had lifted the suspensions of two U.S.-based affiliates of Kuwait-based Agility Public Warehousing Co. KSC, which is accused of providing false invoices defrauding the U.S. military on food supply contracts worth $8.5 billion. The U.S. could suspend the companies from receiving contracts as a protective measure, the judge found, but couldn’t keep them suspended for nearly three years without attempting to prove any wrongdoing beyond their affiliation with Agility.

The appeal could clear up an ambiguity in the FAR’s language on suspending affiliates of a company suspected of wrongdoing. The FAR rule clearly allows agencies to suspend affiliates of a suspect contractor for up to 18 months before legal proceedings are initiated, but it is less clear about whether affiliates can remain suspended once legal proceedings have been brought only against the parent company.

“The DLA case is a fascinating question about how long you can continue to have a suspension in effect,” Robbins said. “There’s some room for clarification in the regulatory language.”

In its appeal, the government argues that it needs to maintain the suspensions to prevent prime contractors from shifting business to their affiliates to avoid the consequences of suspension from government contracting. Contracting experts are divided on the lower court ruling, with some supporting the government’s position and others saying it raises serious questions about contractors’ due process rights.

The attorney overseeing Agility’s defenses, Richard Marmaro of Skadden Arps Slate Meagher & Flom LLP, said that Agility’s 128 affiliates have been suspended for too long — even longer than the three-year debarment period typical for companies that have been convicted of wrongdoing.

The affiliates in this case, and other affiliates that aren’t actively litigating their suspensions, have never even been accused of complicity with their parent company’s alleged misconduct, Marmaro said. The DLA and outside critics who say Agility could shift business to its affiliates to get around its suspension have no evidence to back up their allegations, he added.

“The affiliates are not alleged to have done anything wrong. Nor is there any allegations that the affiliates were involved in any way in the charges in the indictment against [Agility],” Marmaro said.

The 11th Circuit has a chance to set an important precedent that will protect innocent affiliates of indicted companies from being suspended for more than 18 months without any evidence being presented against them, Marmaro said.

“The purpose of the 18-month period is to give the government time to determine whether a contractor is responsible,” Marmaro said. “If, during that time period, the government’s investigation shows that the affiliate is complicit with the parent’s alleged misconduct, then the government must initiate legal proceedings against the affiliate in order to maintain the suspension.”

The DLA has lifted the suspensions of two affiliates, but those companies were forced to essentially sever all ties to the company, Marmaro said. And another affiliate, Gulf Catering Company for General Trade and Contracting WLL, has launched a separate lawsuit in Georgia federal court to challenge its suspension.

MG Altus Apache Co. v. U.S., U.S. Court of Federal Claims.

A case decided in May could impact contractors that believe suspensions or debarments violate their rights to due process.

In MG Altus Apache Co. v. U.S., the U.S. Court of Federal Claims rejected a contractor’s challenge to a secret vendor vetting blacklist that effectively debarred a trucking contractor in Afghanistan without its knowledge. The contractor, unaware it had been placed on a vendor vetting blacklist, wasted time and money submitting contract bids that had no chance of success, and eventually sued, arguing that the U.S. Army had violated its due process rights by secretly debarring it.

Agencies are not generally allowed to use de facto debarments, like the secret vendor blacklist, to get around the rules regarding notice and due process, according to Todd Canni, an attorney at McKenna Long & Aldridge LLP and a former Air Force suspension and debarment attorney.

The court found the Army had used a de facto debarment against MG Altus Apache but had been justified in doing so because of national security concerns. According to Canni, this finding risks encouraging other contracting personnel to use similar “blacklists,” rather than formally referring matters to their agency suspension and debarment official.

Steven Shaw, a senior of counsel at Covington & Burling LLP and a former debarment official for the Air Force, says secret blacklists not only are unfair to contractors, but also raise the risk that the government will continue to do business with unethical companies. A formal debarment or suspension excludes the company from contracting with any federal agency, but secret lists create a risk that the company will continue to get contracts if the blacklisting agency doesn’t share its information within the government.

“This concept of secret lists is something that always bothered me at the Air Force,” Shaw said. “If you keep it quiet, you are protecting one agency on one program, and meanwhile you’re allowing the entire federal government to be at risk of contracting with this particular company. It’s a huge disservice to the government and the taxpayers.”

The Army said it couldn’t tell MG Altus Apache about the blacklisting because its evidence was classified, but that doesn’t mean the debarment decision must be classified too, Shaw says.

“The evidence itself can be classified, but you can design the administrative record in such as way as to support a suspension or debarment on a classified program. … It’s cumbersome, but you can do it,” he said.

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