Helping individuals, companies, and organizations understand key legal and practical considerations for promoting compliance and making better business decisions in these types of federal, state, and local government contracting matters MORE

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.

Supply chain risks are on the rise. Protecting the supply chain is a critical aspect of our national security, health and public safety. Whether parts are electronic or not, if they aren’t what they are represented to be, don’t do what they are supposed to do, or do things that they’re not supposed to do, then they pose real, tangible risks to our national security, health and safety. Unfortunately, it may be difficult to determine whether a part or supply is counterfeit or simply nonconforming. Even if it is nonconforming, if it is a critical or major nonconformance, it may raise the risk of catastrophic failure when used.

Contractors and the Department of Defense (DoD) struggle with how to best address counterfeit and nonconforming parts – to ferret them out of the supply chain and to obtain timely notice when such a part is identified in the supply chain by others. Numerous laws and regulations have been issued to try to address the situation. For example, DoD rules provide authority to eliminate contractors and their suppliers from contracts if they are determined to pose a risk to the supply chain. Other government-wide Federal Acquisition Regulation (FAR) rules prohibit specific equipment and services from being used or delivered under government contracts because they have been deemed to pose a national security risk. And still other DoD or government-wide rules require contractors to certify the conformity of their supplies, report actual or suspected counterfeits and nonconformities when found, require procurement of electronic items from the original equipment manufacturer or authorized reseller, or use a counterfeit electronic part detection and avoidance systems.

On November 22, 2019, the FAR Council issued a government-wide final rule on the Reporting of Nonconforming Items to the Government-Industry Data Exchange Program (GIDEP) to try to address some of these concerns. In the past, GIDEP has provided the Government and DoD contractors the opportunity to report on, and to find out about, identified actual or potential supply chain risks. This final rule expands the scope of GIDEP screening and reporting to contractors and subcontractors involved in contracts at DoD and other agencies across the Federal Government.

The final rule requires contractors to screen GIDEP as part of their inspection system or program to control quality, and to avoid the use and delivery of actual or suspect counterfeit items or major or critical nonconforming items to the Government. The final rule also requires contractors to report on actual or suspect counterfeit parts or parts with critical or major nonconformances to their Contracting Officer, as well as the GIDEP. Contractors must now submit a report within 60 days “of becoming aware or having reason to suspect, such as through inspection, testing, record review, or notification from another source (e.g., seller, customer, third party) that an item purchased by the contractor for delivery to, or for, the Government is ‘counterfeit or suspect counterfeit item’ or ‘a common item that has a major or critical nonconformance’.”

The definitions of those now reportable matters under the final rule include:

  • “Counterfeit item” is defined as “an unlawful or unauthorized reproduction, substitution, or alteration that has been knowingly mismarked, misidentified, or otherwise misrepresented to be an authentic, unmodified item from the original manufacturer, or a source with the express written authority of the original manufacturer or current design activity, including an authorized aftermarket manufacturer. Unlawful or unauthorized substitution includes used items represented as new, or the false identification of grade, serial number, lot number, date code, or performance characteristics.”
  • “Suspect counterfeit item” is defined as “an item for which credible evidence (including but not limited to, visual inspection or testing) provides reasonable doubt that the item is authentic.”
  • “Nonconforming item” for purposes of the final rule includes (i) “[a]ny items that are subject to higher-level quality standards in accordance with the clause at 52.246-11, Higher-Level Contract Quality Requirement”; (ii) “[a]ny items that the contracting officer, in consultation with the requiring activity determines to be critical items for which use of the clause is appropriate”; or (iii) “electronic parts or end items, components, parts, or materials containing electronic parts, whether or not covered [by (i) or (ii)] …” under a DoD prime or subcontract, where the acquisition is above the simplified acquisition threshold (SAT).
  • “Critical item” is defined as “an item, the failure of which is likely to result in hazardous or unsafe conditions for individuals using, maintaining, or depending upon the item; or is likely to prevent performance of a vital agency mission.”
  • “Critical nonconformance” is defined as “a nonconformance that is likely to result in hazardous or unsafe conditions for individuals using, maintaining, or depending upon the supplies or services; or is likely to prevent performance of a vital agency mission.”
  • “Major nonconformance” is defined as “a nonconformance, other than critical, that is likely to result in failure of the supplies or services, or to materially reduce the usability of the supplies or services for their intended purpose.”

The rule carves out exemptions from reporting for the following types of situations: 1) acquisition of medical devices that are subject to U.S. Food and Drug Administration reporting requirements; 2) where disclosure would impact an ongoing criminal investigation, 2) where the incident arises under a FAR part 12 commercial item contract or subcontract for commercial items, 3) where the contract or subcontract is valued below the Simplified Acquisition Threshold (SAT). What is potentially confusing about the final rule is that it still requires DoD contractors and their supply chain to report on counterfeit or suspect counterfeit electronic parts for DoD contracts and subcontracts, including commercial items, while for non-DoD agencies it “focuses on supplies that require higher-level quality standards or are determined to be critical items.”

The rulemaking on the final rule confirms that there is a limited safe harbor available for DoD contractors and subcontractors that report to GIDEP where they have “made a reasonable effort” to determine that they have an actual or suspect counterfeit part. However, the final rule does not expand that safe harbor to non-DoD contracts or reporting on major or critical nonconforming parts.

Note too that the regulatory history of the final rule indicates that a contractor’s report to GIDEP on an actual or suspected counterfeit also may be considered “credible evidence” of fraud under the FAR Mandatory Disclosure Rule and trigger a duty on the contractor to report to the Inspector General as well as the Contracting Officer under the Mandatory Disclosure Rule.

In addition to the above, the final GIDEP reporting rule does not address a number of issues that continue to plague both the Government and contractors, including such important issues as:

  • The rule does not require reporting of foreign corporations or entities that do not have an office, place of business, or paying agent in the United States. As counterfeits may come through a variety of ways into the supply chain – notably through foreign acquisitions – this carve out omits a key component of the supply chain community.
  • The rule requires the contractor to retain the part in question until provided disposition instructions by the Contracting Officer. This may raise issues of chain of custody, costs of retention, and protection of the integrity of the part. It also raises questions of what the contractor is to do under the contract to perform its obligations in the wake of its reporting.
  • The reporting obligations may provide a road map to critical or key government contractors and suppliers of covered parts for bad actors to track and trace. How to secure the supply chain and provide notice is a key issue for contractors and the Government.

This final rule is another step in securing the Government-Industry supply chain. Contractors should be taking steps to assess their requirements and to institute procedures to address these reporting requirements in a timely and secure fashion. Further, in addition to reporting on such items, contractors should be considering whether and to what extent their contract’s costs, schedule or method of performance are being impacted, and whether these increased costs and changes can be compensated.