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On December 12, 2019, the Department of Justice (DOJ) announced that a former civilian employee of the U.S. Army is being prosecuted by the DOJ’s Criminal Division’s Fraud Section. The former employee, Ephraim Garcia, worked in the Army’s Directorate of Public Works, where his job duties related to the solicitation, award and management of government contracts for certain projects at Camp Arifjan, an Army base in Kuwait.

The charges against Mr. Garcia stem from his alleged part in steering Army work to a certain subcontractor in a way that lined his pockets. Allegedly, around September of 2015, Mr. Garcia offered to pay an employee of a prime contractor to award contracts to a particular subcontractor, Gulf Link Venture Company (Gulf Link). That subcontractor would in turn artificially inflate the price of its bids such that Mr. Garcia, the subcontractor, and the prime contractor’s employee could split the proceeds.

Mr. Garcia is being charged with one count of offering a bribe, one count of receiving illegal gratuities and one count of offering kickbacks related to his actions and the over $170,000 in wire transfers to him or members of his immediate family from Gulf Link’s owner and other individuals associated with Gulf Link, as well as from another subcontractor that was bidding on work under the prime contract.

On December 10, 2019, Mr. Garcia was arrested in the Philippines, where he had been living for the past few years. Three charges are being brought against the former Army employee: offering a bribe, receiving illegal gratuities, and offering kickbacks.

 

We are excited to welcome Partner Habib Ilahi to our Washington, DC office—and Stinson’s Government Contracts and Investigations Group. A former Healthcare Prosecutor in the Department of Justice, Civil Division, Fraud Section, Habib assists clients on government contracting matters and special investigations, as well as healthcare litigation.

https://www.stinson.com/people-HabibIlahi

It’s not always clear where the applicability of one law or rule should stop and the applicability of another should begin. Recently, the Government Accountability Office (GAO) decision in Becton, Dickinson and Company, B-417854 (November 15, 2019) helped clarify the interplay between the Buy American Act (BAA) and the Trade Agreements Act (TAA) when it comes to small business set-aside procurements.

Becton, Dickinson and Company (BD) protested the request for quotations (RFQ) issued by the Department of Veteran Affairs (VA) to establish blanket purchase agreements (BPAs) to provide patient exam room instruments and supplies for VA health centers nationwide under the VA’s Medical Surgical/Prime Vendor 2.0 Program. The solicitation anticipated a total set-aside award establishing multiple BPAs with a performance period less than or equal to five years.

Of note, the solicitation stated that the VA would evaluate offers using a tiered evaluation approach. The tiers were (1) service-disabled veteran-owned small business (SDVOSB) concerns; (2) veteran-owned small business (VOSB) concerns; (3) small business concerns, with historically under-utilized business (HUB) zone small business concerns and 8(a) participants having priority; and (4) large business concerns.

A tiered evaluation requires the contracting officer to evaluate quotations from the first tier first, here, SBVOSBs. If no quotations are received from SDVOSBs or if none could result in an award, the contracting officer must amend the solicitation to remove the SDVOSB set-aside and evaluate quotations from the next tier, here, VOSBs. The contracting officer proceeds in this way until an award can be made to the offeror whose quotation represents the best value to the Government. Ultimately, this means that the contracting officer will not consider quotations from lower tiers where an offeror from a higher tier can receive the award. Tiered evaluations make sense for the VA to the extent that, if an SDVOSB or VOSB concern cannot be selected, the VA does not have to resolicit the requirement.

The tiered evaluation method results in some clauses of a solicitation applying to certain offerors, e.g. small business concerns, and other clauses of a solicitation applying to other offerors, e.g. large business concerns. In this VA procurement, the RFQ incorporated FAR clause 52.225-1, Buy American—Supplies, and the related Buy American Certificate, as applicable to small business concerns, and FAR clause 52.225-5, Trade Agreements, and the related Trade Agreements Certificate, as applicable to large business concerns. Both the BAA and TAA are concerned with the source of end products supplied to the Government. However, they apply different tests for determining whether an end product will be considered a manufactured domestic end product. Unless the end product qualifies as a domestic end product that has been manufactured in the United States or a qualifying country under the applicable test, there are restrictions on when and to what extent the manufactured end product may be procured.

For the BAA, a manufactured domestic end product is “[a]n … end product … produced in the United States … if [t]he cost of its components mined, produced, or manufactured in the United States exceeds 50 percent of the cost of all its components …or …[t]he end product is a [commercial off-the-shelf] item.” For the TAA, the test is whether the manufactured end product is “an article that is mined, produced, or manufactured in the United States or that is substantially transformed in the United States or a qualifying country into a new and different article of commerce with a name, character, or use distinct from that of the article or articles from which it was transformed.” To determine whether and to what extent a proffered manufactured product complies with the BAA or TAA and can be acquired, the solicitation contained a Buy American Certificate and the Trade Agreements Certificate for the competitors to certify whether they offered a domestic or qualifying country end product.

Further, the VA obtained a nonmanufacturer rule waiver from the Small Business Administration, where the waiver allows nonmanufacturer small businesses to supply products from businesses of any size regardless of the place the goods were manufactured.

Six days before the deadline for submitting quotations, BD filed a protest with GAO. BD protested the terms of the solicitation alleging that the RFQ improperly advantaged small business by applying different standards to small and large business competitors. BD argued that the TAA should be applied to both large and small businesses and the nonmanufacturer exception should not be applied only to the small business because to have different standards would prevent a level playing field for the competition.

GAO disagreed with the protester’s various arguments holding that the agency could apply different standards to small and large business competitors in accordance with the express terms of the BAA and TAA. GAO recognized that the nonmanufacturer rule waiver properly allows small businesses to source foreign end products, and that the FAR expressly states “that the BAA applies to small business set-asides and that the TAA does not apply to acquisitions set aside for small businesses.” Furthermore, the BAA accounts for foreign-sourced supplies, including those acquired pursuant to the nonmanufacturer rule waiver, by adding a premium to the evaluation of foreign end products if there is an offer that includes an analogous domestic end product that would otherwise be higher-priced. Thus, GAO found that BD’s protest failed to “allege facts that, if uncontradicted, establish the likelihood that the VA violated applicable procurement laws or regulations.”

This decision highlights that there are a number of twists and turns in how the BAA and TAA may be applied. And, while different laws may apply to different classes of competitors and result in different standards, that does not mean that the GAO will find that they violate competition in contracting rules. Rather, where there is reasonable support for an agency’s actions under applicable laws and regulations, GAO, at least, will not disturb the procurement. Whether such distinction is fundamentally fair or promotes an appropriate socio-economic goal may be a question to raise elsewhere.

You might think that this could go without saying, but apparently it can’t: If you want to succeed in your dealings with the federal government, you need to timely provide information required by law, particularly when government personnel specifically ask you for it. The recent decision of the SBA’s Office of Hearings and Appeals in CVE Appeal of: David Han d/b/a Coresivity, SBA No. CVE-140, 2019 (S.B.A.), 2019 WL 5681310 provides a stark reminder that this guidance is especially true in the context of maintaining eligibility as a service-disabled, veteran-owned small business (SDVOSB) under the Veterans Small Business Regulations after changes to company’s ownership and structure.

On September 19, 2018, the U.S. Department of Veterans Affairs (VA) Center for Verification and Evaluation (CVE) verified Appellant, David Han d/b/a Coresivity, as an SDVOSB and included it in the Vendor Information Pages (VIP) database. At the time, Appellant was a sole proprietorship 100% owned by Mr. David R. Han, a service-disabled veteran. Nine months later, on June 18, 2019, Appellant notified CVE of changes in its legal structure, ownership structure, and business name. Appellant had been reorganized as an LLC and changed its name to “Coresivity LLC.” In addition, two non-veterans, Ms. Yoon K. Chung and Mr. Ryan T. Kim, had acquired ownership interests in—and become members of–the LLC. When CVE requested additional information and documentation pertaining to these changes, Appellant withdrew its change request from review.

But the proverbial cat was already out of the bag.

Within a month, CVE issued a Notice of Proposed Cancellation (NOPC), informing Appellant that CVE proposed to cancel Appellant’s verified status as an SDVOSB and allowing Appellant 30 days to respond with evidence that might cause CVE to retract the proposed cancellation. The NOPC explained that CVE needed specific information to ascertain whether Appellant remained an eligible SDVOSB, including (i) a detailed letter of explanation identifying all changes to Appellant since September 19, 2018; (ii) current resumes identifying the roles and responsibilities for each of Appellant’s apparent owners; (iii) a letter of explanation identifying the extent of the involvement of the non-veteran owners; (iv) a current signature card authenticated by the Appellant’s financial institution, identifying all authorized signatories on the Appellant’s business bank account; and (v) all applicable technical licenses and certifications for Appellant or a signed and dated detailed letter of explanation specifying that the Appellant currently has no certifications and the applicable reasons.

CVE went on to make clear that, without such information, it could not determine whether Appellant was still eligible as a SDVOSB, whether the veteran owner, Mr. Han, had maintained the required ownership, management, and control of Appellant, or whether business relationships exist with non-veterans that might prevent Mr. Han from exercising independent business judgment without great economic risk. In its communication with Appellant, CVE also noted that Appellant apparently had not registered under its new name and structure in the System for Award Management (SAM) and, therefore, was not compliant with 38 C.F.R. § 74.2(f).

Despite this, Appellant responded to the NOPC by simply submitting a letter asserting that Mr. Han had changed Appellant’s legal structure from a sole proprietorship to an LLC and later to a corporation. The response stated that Mr. Han owns 51% of Appellant and “make[s] the majority of all decisions,” Ms. Chung is Appellant’s Chief Operations Officer and owns 39% of Appellant and Mr. Kim owns 10% of Appellant and is “not involved in the day-to-day operations or management” of the company. Appellant’s response also provided a copy of its July 10, 2019 articles of incorporation for “Coresivity Inc.”, as well as an updated resume for Mr. Han and a resume for Ms. Chung. Appellant did not, however, submit a resume for Mr. Kim. Nor did it address the issue of Appellant’s SAM registration.

On September 5, 2019, CVE issued a Notice of Verified Status Cancellation (NOVSC) finding that Appellant’s response to the NOPC was “not adequate to justify overturning all of the findings listed in the NOPC” and formally cancelling Appellant’s status as a verified SDVOSB. In addition to detailing the reasons that prevented CVE from being able to determine whether Appellant still met the SDVOSB requirements, the NOVSC also noted that the SAM still did not contain any record for Coresivity, LLC or Coresivity, Inc.—so Appellant was still not compliant with 38 C.F.R. § 74.2(f).

Appellant immediately appealed the decision to the U.S. Small Business Administration Office of Hearings and Appeals (OHA), arguing that the cancellation was clearly erroneous and requesting that the OHA reverse the CVE’s decision. Appellant acknowledged that it did not previously provide CVE the resume of Mr. Kim, but offered that resume as an attachment to its appeal. Appellant did not allege any specific errors in CVE’s decision.

Not surprisingly, the OHA denied the appeal.

OHA’s decision first notes that VA regulations make clear that CVE may remove a concern from the VIP database if the concern “[f]ail[s] to make required submissions or responses to CVE or its agents, including a failure to make available … information requested by CVE … within 30 days of the date of request.” 38 C.F.R. § 74.21(d)(5). After explaining that Appellant bears the burden of proving, by a preponderance of the evidence, that the cancellation was based upon clear error of fact or law, 13 C.F.R. § 134.1111, the OHA found no basis to conclude that CVE improperly removed Appellant from the VIP database because Appellant clearly did not comply with CVE’s request for information. CVE’s removal of Appellant from the VIP database was undisturbed.

It’s difficult to know for sure whether Mr. Han and his partners could have structured their changed entity in a way that would maintain its SDVOSB eligibility. But there is no doubt that considering the requirements and how to meet them before making changes to the entity’s organization or operations–and taking the proper steps to document and record any changes made –would have been helpful. At the very least, it could have helped prepare the Appellant for providing effective answers to the CVE’s questions. And (it should also go without saying) developing effective answers is a prerequisite to being able to timely respond to government inquiries.