Huntsville NCMA Chapter Mandatory Subcontractor FlowDowns and Mandatory

Huntsville NCMA Chapter Mandatory Subcontractor Flow-Downs and Mandatory Disclosures: What is Actually Required? Why is it Important? Presented by: Kim Bessiere Martin Sarah Osborne August 16, 2018 ©Bradley Arant Boult Cummings LLP

Agenda § Subcontractor Flow-Downs – Mandatory vs. Necessary – Contract Risk – Compliance Risk § § False Claims Act Mandatory Disclosure Rule Practical Advice for Proactive Compliance Questions?

Subcontractor Flow-Downs § Flow-down provisions are prime contract clauses inserted into a subcontract § Includes clauses from the FAR and agency supplements – DFARs § Can significantly impact the subcontractors’ obligations and risks

Subcontractor Flow-Downs § Mandatory – Contract Requirement – No one size fits all approach • Often dependent on contract type, size, or subject matter • 52. 244 -6 Subcontract for Commercial Items – Contains eighteen mandatory flow-downs for subcontracts for commercial items – Note that each contains separate flow-down criteria

Subcontractor Flow-Downs § Mandatory – Language of clause will specify whether it must be floweddown to a subcontract and how: • Verbatim; e. g. , Equal Opportunity, FAR 52. 222 -26: – “The Contractor shall include the terms and conditions of this clause in every subcontract. . ” • “Substance” of the clause 5

Subcontractor Flow-Downs § Necessary – Clauses that need to be flowed-down to meet requirements – May include agency-specific clauses or terms 6

Subcontractor Flow-Downs § Tailor flow-downs – Blanket incorporation of all prime contract terms presents potential issues • Cost • Compliance • Unintended interpretations – Cover risks not addressed in prime terms • Changes • Disputes • Termination for Convenience

Subcontractor Flow-Downs – Understand what is contained in each clause • Updates to regulations or wage determinations – Minimum Wages Under Executive Order 13658, FAR 52. 222 -55: » Minimum hourly wage for contracts performed for U. S. Government $10. 35 per hour as of Jan. 1, 2018. Mandatory flow-down • Executive orders – Equal Opportunity, FAR 52. 222 -26: » Mandatory flow-down above $10, 000

Subcontractor Flow-downs – Understand what is contained in each clause (cont’d) • Versions – “Most current version” may not be what is required under prime – Monitor for modifications for changes to FAR clauses requiring flow-down 9

Why is Flow-Down Important? § Failure to flow-down mandatory clauses is a breach of contract by the prime – Liability for performance issues – Termination – False Claims Act implications § Important for the subcontractor – Under the “Christian Doctrine, ” subcontractor can be subject to these requirements even though not in the subcontract • UPMCBraddock, et al. v. Harris, 934 F. Supp. 2 d 238 (D. D. C. 2013) 10

False Claims Act § FCA penalizes anyone who: – Knowingly submits a false claim to the government for payment – Knowingly makes a false record or statement to get a false claim paid by the government § Treble damages and civil penalties – Record recoveries by DOJ in recent years • $3. 7 billion in FY 2017 • $3. 4 billion from suits filed by whistleblowers

False Claims Act § Knowingly submits a false claim to the government for payment – Knowing • Actual knowledge • Deliberate indifference • Reckless disregard for the truth – Claim is a request or demand for payment – Falsity • Factual: incorrect description of goods or services • Legal: false representation of compliance with contract terms or federal statute

False Claims Act: Express and Implied § Express Certifications – Seeking payment for services not actually performed § Implied Certification – Theory of liability adopted by U. S. Supreme Court in Escobar in 2016 – Requires • Some representation about goods/services provided – Work complies with all contract requirements • Nonconformance that is material to the Government’s decision to pay claim – Invoice for hours worked by security guards who did not pass marksmanship test required by contract constituted false claims

False Claims Act: Subcontractors § Subcontractors are liable for “knowing” false claims submitted to the prime contractor for payment under a government contract § Unclear how implied certification theory will address prime contractor liability for material noncompliance by subcontractors – Deliberate indifference or reckless disregard for truth • Failure to flow-down material requirements • Failure to confirm applicable minimum wages

False Claims Act: Subcontract Administration in FCA Claims § U. S. ex rel. Wall v. Circle C Constr. , LLC, 813 F. 3 d 616 (6 th Cir. 2016). – Subcontractor employee brought qui tam FCA action against subcontractor and prime contractor failure to pay applicable wage rates – Invoices for work certified compliance with Davis-Bacon Act – Difference in payments was $9, 900 – Government brought action seeking damages up to value of prime contract, $555 k. Trial court awarded trebled damages of $763 k – Appellate court affirmed liability, but lowered trebled damages to $15, 000

False Claims Act: Subcontract Administration in FCA Claims § U. S. ex rel. Howard v. Lockheed Martin Corp. , 14 F. Supp. 3 d 982, 1007 (S. D. Ohio 2014) – In FCA action, Court found Lockheed Martin’s failure to flow down material specifications to subcontractors probative of whether Lockheed knowingly submitted false claim for goods that failed to meet quality standards

Mandatory Disclosure Rule § FAR 52. 203 -13 – Contractor required to timely disclose credible evidence of: • Violation of federal criminal law, • An FCA violation; or • Significant overpayments – Credible evidence known to “principal, ” which includes an officer, director, owner, partner, or person having primary management or supervisory responsibilities within a business entitles – Applies to contractor and subcontractor conduct through contract closeout – Failure to comply can result in suspension or debarment of the contractor

Mandatory Disclosure Rule § Other Requirements: – Written Code of Ethics – Internal procedures to detect, process, investigate, and assess potential violations – Within 90 days of contract award: • Business Ethics Awareness and Compliance Program • Internal Control System 18

Proactive Strategies For Compliance § Have a clear understanding of: – Contract terms – Subcontract terms – Rules or specifications applicable to goods or services being billed – Advice of counsel/compliance experts – Pay close attention to clauses incorporated by reference § Develop charts to help identify and track mandatory flow-down requirements based on subcontract value and type

Proactive Strategies For Compliance § Supervisor training is imperative – Potential “Principal” § Internal audits to monitor compliance with contract terms § Monitor contract modifications for new clauses required for flow-down

Questions? Kim Bessiere Martin Sarah Osborne Bradley Arant Boult Cummings LLP 200 Clinton Avenue Huntsville, AL 35801 256. 517. 5155 kmartin@bradley. com Bradley Arant Boult Cummings LLP 200 Clinton Avenue Huntsville, AL 35801 334. 956. 7609 sosborne@bradley. com