A Terrible Trap

So imagine that you, as outside counsel or corporate counsel, have just successfully negotiated with the Department of Justice (DOJ) a very positive Deferred Prosecution Agreement (DPA). The subject of the DPA was a scheme to bribe local officials in the country where your company makes its best-selling and most sophisticated medical device. While the duration and scope of the scheme was distressing, the DPA allowed the company to avoid a plea or trial, avoid a crushing fine and to improve a Compliance and Ethics program that had grown seriously outdated.'

Time for a cigar, right? Not if the United States buys some of those devices.

The Mandatory Disclosure Rule

The FAR trap that is buried deep and covered with leaves is found at 3.1003 and 52.203-13 and is known as the “mandatory disclosure rule.” If you or your client are engaged in government contracting that is valued at $5 million or more and the performance period is 120 days or longer, then the company “shall timely disclose ' whenever, in connection with the award, performance, or closeout of this contract ' the Contractor has credible evidence that a principal, employee, agent, or subcontractor ' has committed ' [a] violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 ' ; or, [a] violation of the civil False Claims Act.” Other provisions also bring “significant overpayment[s]” under the rule.

The company must make disclosure to the inspector general of the agency that let the contract (some agencies, such as the Department of Defense, have online forms) and to the contracting officer. Violation of the mandatory disclosure rule is now cause for suspension and debarment (9.407-2(a)(8) and 9.406-2(b)(1)(vi)) and must become a part of a government contractor's “Code of Business and Conduct”
as well.

Some Limitations

Likely you noticed the limiting language in the disclosure rule to the effect that the violation or overcharging has to be “in connection with” some facet of the contract. There is, therefore, no need to report an FCPA violation in a distant country that had nothing to do with a contract to provide services to the government in the United States. But “in connection with” is very broad text that is open to wide interpretation. Courts construing the phrase as written in contracts and insurance policies, for example, understand it to be synonymous with “related to.”

If we return to the DPA you just negotiated, then bribery of local officials near your production plant may well be an event that is “related to” or “in connection with” the ultimate sale of the same legally tainted product to the government. Strong arguments might be made that such bribery is not “in connection with” the contract for purchase itself. The problem, however, is that you are not the ultimate arbiter of whether or not the violation was “in connection with” the contract. The contracting agency is. And it is folly to believe that the agency might not notice that your company has entered into a DPA. Such resolutions are quite public, followed closely by both mainstream and trade press, and happily reported to contracting officers by your competitors.

You have more latitude when it comes to the requirement that the disclosure be made in a “timely” fashion. As the Preamble to the Rule explains, the timeliness requirement is meant to work in tandem with the “credible evidence” standard. Unsubstantiated whistleblower reports, for example, do not constitute “credible evidence,” and thus would not start the clock running on what might be considered a “timely” report. Both in theory and in practice, you and the company have ample time to conduct an investigation to determine whether the reports are in fact credible or not.

The peculiar reason that DPAs and similar resolutions often trigger suspensions is that they contain both an admission of a criminal violation and a promise that the company, its employees and agents will not publicly say anything to the contrary. The execution of the DPA necessarily means that the “credible evidence” standard has been met and exceeded. At this point, absent truly extenuating circumstances, it would be difficult to justify a delay of any significance in notifying the contracting agency and the contracting office.

Practical Tips

First, it does not pay to wait until the company enters into the DPA in any event. That may be counter-intuitive given the possibility of a parallel investigation by the agency, but the reality is that busy Inspectors General (IGs) and contracting officers often will await the outcome of the DOJ's investigation. You and the company are at greater risk of a “seriatum” investigation rather than a parallel one if you disclose only after you are done with the DOJ. The term that government contracting attorneys hear most often is “ partnering” in the endeavor that is the subject of the contract. The government not only expects, but demands, to be informed about some trouble you have gotten into that might have some logical bearing upon the contract.

Second, the argument that the company's government contracting business is de minimus in comparison with its overall business is often made, and always rejected. If you want to be the government's partner in contracting, then you are expected to adhere to all of the rules and satisfy all of the expectations. Otherwise, so the government says, you don't have to accept the contracting business.

Third, expect that when you do disclose, you will be asked for information about the course of the investigation. Where there is a close connection between the violation at hand and the contract, the agency may ask probing questions that bear directly on the facts of the DOJ or other enforcement agency investigation. The company can choose to disclose that information, but it should keep the investigative agency informed.

Typically, the contracting agency does not request a waiver of privilege (such as the production of an internal investigation report), but it may view an assertion of privilege as something less than the full cooperation expected of a partner. The best technique is to prepare as complete a statement of facts as possible without resorting to attorney-client privileged information.

All of these niceties, however, are well within the capability of our readers. The important fact is to know that the mandatory disclosure rule exists so that you can avoid the pitfall ' and enjoy your well-deserved cigar.

'

Jeffrey T. Green, a member of this newsletter's Board of Editors, is a partner practicing out of Sidley Austin LLP's Washington, DC, office.

'

Buried deep inside the Federal Acquisition Regulations (“FAR,” 48 C.F.R. (2013)) is a relatively new mandatory disclosure rule that continues to trip up the white-collar defense bar and result in embarrassing legal injury. Since its promulgation in late 2008, the rule has been the subject of much discussion and hand-wringing among the government contracting bar, but precious little discussion, much less cautionary warning, among the white-collar bar.

It has been ignored at great peril, given that failure to disclose can result in suspension and debarment from government contracting. And no fewer than 78 of the Fortune 100 companies engage in government contracting at some level.

What It's About

So imagine that you, as outside counsel or corporate counsel, have just successfully negotiated with the Department of Justice (DOJ) a very positive Deferred Prosecution Agreement (DPA). The subject of the DPA was a scheme to bribe local officials in the country where your company makes its best-selling and most sophisticated medical device. While the duration and scope of the scheme was distressing, the DPA allowed the company to avoid a plea or trial, avoid a crushing fine and to improve a Compliance and Ethics program that had grown seriously outdated.'

Time for a cigar, right? Not if the United States buys some of those devices.

The Mandatory Disclosure Rule

The FAR trap that is buried deep and covered with leaves is found at 3.1003 and 52.203-13 and is known as the “mandatory disclosure rule.” If you or your client are engaged in government contracting that is valued at $5 million or more and the performance period is 120 days or longer, then the company “shall timely disclose ' whenever, in connection with the award, performance, or closeout of this contract ' the Contractor has credible evidence that a principal, employee, agent, or subcontractor ' has committed ' [a] violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 ' ; or, [a] violation of the civil False Claims Act.” Other provisions also bring “significant overpayment[s]” under the rule.

The company must make disclosure to the inspector general of the agency that let the contract (some agencies, such as the Department of Defense, have online forms) and to the contracting officer. Violation of the mandatory disclosure rule is now cause for suspension and debarment (9.407-2(a)(8) and 9.406-2(b)(1)(vi)) and must become a part of a government contractor's “Code of Business and Conduct”
as well.

Some Limitations

Likely you noticed the limiting language in the disclosure rule to the effect that the violation or overcharging has to be “in connection with” some facet of the contract. There is, therefore, no need to report an FCPA violation in a distant country that had nothing to do with a contract to provide services to the government in the United States. But “in connection with” is very broad text that is open to wide interpretation. Courts construing the phrase as written in contracts and insurance policies, for example, understand it to be synonymous with “related to.”

If we return to the DPA you just negotiated, then bribery of local officials near your production plant may well be an event that is “related to” or “in connection with” the ultimate sale of the same legally tainted product to the government. Strong arguments might be made that such bribery is not “in connection with” the contract for purchase itself. The problem, however, is that you are not the ultimate arbiter of whether or not the violation was “in connection with” the contract. The contracting agency is. And it is folly to believe that the agency might not notice that your company has entered into a DPA. Such resolutions are quite public, followed closely by both mainstream and trade press, and happily reported to contracting officers by your competitors.

You have more latitude when it comes to the requirement that the disclosure be made in a “timely” fashion. As the Preamble to the Rule explains, the timeliness requirement is meant to work in tandem with the “credible evidence” standard. Unsubstantiated whistleblower reports, for example, do not constitute “credible evidence,” and thus would not start the clock running on what might be considered a “timely” report. Both in theory and in practice, you and the company have ample time to conduct an investigation to determine whether the reports are in fact credible or not.

The peculiar reason that DPAs and similar resolutions often trigger suspensions is that they contain both an admission of a criminal violation and a promise that the company, its employees and agents will not publicly say anything to the contrary. The execution of the DPA necessarily means that the “credible evidence” standard has been met and exceeded. At this point, absent truly extenuating circumstances, it would be difficult to justify a delay of any significance in notifying the contracting agency and the contracting office.

Practical Tips

First, it does not pay to wait until the company enters into the DPA in any event. That may be counter-intuitive given the possibility of a parallel investigation by the agency, but the reality is that busy Inspectors General (IGs) and contracting officers often will await the outcome of the DOJ's investigation. You and the company are at greater risk of a “seriatum” investigation rather than a parallel one if you disclose only after you are done with the DOJ. The term that government contracting attorneys hear most often is “ partnering” in the endeavor that is the subject of the contract. The government not only expects, but demands, to be informed about some trouble you have gotten into that might have some logical bearing upon the contract.

Second, the argument that the company's government contracting business is de minimus in comparison with its overall business is often made, and always rejected. If you want to be the government's partner in contracting, then you are expected to adhere to all of the rules and satisfy all of the expectations. Otherwise, so the government says, you don't have to accept the contracting business.

Third, expect that when you do disclose, you will be asked for information about the course of the investigation. Where there is a close connection between the violation at hand and the contract, the agency may ask probing questions that bear directly on the facts of the DOJ or other enforcement agency investigation. The company can choose to disclose that information, but it should keep the investigative agency informed.

Typically, the contracting agency does not request a waiver of privilege (such as the production of an internal investigation report), but it may view an assertion of privilege as something less than the full cooperation expected of a partner. The best technique is to prepare as complete a statement of facts as possible without resorting to attorney-client privileged information.

All of these niceties, however, are well within the capability of our readers. The important fact is to know that the mandatory disclosure rule exists so that you can avoid the pitfall ' and enjoy your well-deserved cigar.

'

Jeffrey T. Green, a member of this newsletter's Board of Editors, is a partner practicing out of Sidley Austin LLP's Washington, DC, office.

'