As important as the topic of suspension and debarment is, it’s not often that courts rule on its nuances. On June 26, 2012, though, the United States District Court for the Northern District of Alabama, in Agility Defense and Government Services, Inc. v. U.S. Dept. of Defense, 2012 WL 2480484 (N.D. Ala. 2012), did just that. The ramifications of this ruling are at once depressing, comforting, and foreboding, and impact any government contractor, regardless of their size or chosen industry. As the Eleventh Circuit Court of Appeals weighs whether to affirm or reverse the District Court’s ruling, we review those ramifications.
Back in 2009, Agility Defense and Government Services, Inc. (DGS) and Agility International, Inc. (Agility) were suspended by the Defense Logistics Agency (DLA) when their Kuwaiti parent corporation, Public Warehousing Company, K.S.C. (PWC) was indicted for allegedly defrauding the U.S. Government of over $6 Billion dollars. Both DGS and Agility are indirect subsidiaries of PWC and, as such, were suspended under Federal Acquisition Regulations Subpart 9.407-1(c) as PWC affiliates. Essential here is that neither DGS nor Agility was charged with any wrongdoing, and DLA did not assert that either company was culpable for PWC’s misconduct in its Notice of Suspension. In short, their suspension was based entirely on their affiliation with PWC.
In response, DGS and Agility submitted written responses to the suspension and debarment official (SDO) at the DLA opposing their suspension. At the same time, DGS and Agility filed a motion for a temporary restraining order in the United States District Court for the District of Columbia in an attempt to block the impending suspension. The District Court held for the Government, the DLA SDO rejected DGS and Agility’s arguments in opposition to their suspension, and both parties were blacklisted from contracting with the U.S. Government pending the conclusion of PWC’s legal proceedings.
Thirty-one months after the District Court’s ruling, DGS and Agility were still suspended. FAR Subpart 9.407-4(b) generally limits suspensions to eighteen months, but contains an exception for suspensions tied to legal proceedings the duration of which exceeds such a limit. Given that the Government’s case against PWC was ongoing, there was no telling how long DGS and Agility would be suspended. Thus, in 2012 both parties again filed suit against the Government to lift the suspension that had been imposed on them by the DLA, except this time they submitted their claims to the United States District Court for the Northern District of Alabama (the “Court”).
DGS and Agility claimed that the Government had violated the Administrative Procedures Act (APA), and sought relief from their suspension, on the grounds that their suspension was, as an initial matter, without basis, and that the duration of their suspension was excessive.
In reviewing DGS and Agility’s first claim, the Court looked to the plain language of the FAR, Subpart 9.407-1(c) of which clearly stipulates that “[t]he suspending official may extend the suspension decision to include any affiliates of the contractor if they are– (1) Specifically named; and (2) Given written notice of the suspension and an opportunity to respond.” On that basis, the Court held that “[t]he regulatory language clearly allows for the suspension of affiliates without any allegations of wrongdoing against them.” According to the Court, if affiliates were afforded the same procedural rights as the principal party, which do require proof of culpability, then there would have been no need to carve out different procedural requirements for extending suspensions to affiliated individuals/entities.
We apologize if you were hoping to hear that a U.S. court finally went rogue and required that there must be some evidence of wrongdoing by an affiliated entity in order for it to be suspended with the principal party. Unfortunately, that day has not yet arrived. Until then, when a contractor is suspended, its affiliated entities must endeavor to show that they do not fit within the definition of “Affiliates” under FAR Subpart 9.407-3, which requires (a) control by, or control of, the principal party; OR (B) control by a third party over both the principal party and the potential affiliate.
There was, however, a silver lining to the Court’s ruling. Despite its first holding that the initial suspension was lawful, the Court held that its duration was excessive and ordered that DGS and Agility’s suspension be terminated. It did so on the basis that the FAR provides only one procedure for terminating the suspension of a principal party and its affiliates and, as such, Subpart 9.407-4(b) “must be applied to suspected wrongdoers and suspended affiliates in a consistent manner.” Accordingly, it was the Court’s interpretation that when Subpart 9.407-4(b) requires that suspensions terminate after eighteen months absent ongoing legal proceedings, the suspension of affiliates must terminate unless the affiliates, and not just the principal party, are embroiled in criminal proceedings. This synced with the Court’s perception that the purpose of suspending affiliates is to prevent the continuation of any potential wrongdoing while it determines whether such affiliates are in fact culpable.
Confused? It’s no wonder. On one hand the Court made it quite clear that culpability was not required in order to suspend an affiliate. On the other hand it held that an affiliate’s suspension must be terminated after eighteen months if there is no evidence that the affiliate was culpable.
The ruling is less confusing, though, upon consideration of the true purpose of suspension and debarment: the protection of the United States. The U.S. suspension and debarment system is not intended to punish parties, although it certainly has the effect of doing so. Rather, it is intended to preclude unethical contractors from polluting the U.S. procurement process. Suspensions, specifically, are employed to stop the proverbial bleeding while an investigation takes place. Thereafter, though, there is no need to further suspend a party absent proof that additional damage will occur.
…and the Really Ugly
At first glance, Agility Defense and Government Services, Inc. seems promising, as suspended affiliates can, unless it is reversed by the Eleventh Circuit, use the case to support the proposition that their suspensions should be limited in duration and not tied to the interminable prosecutions of the principal party. The danger in this ruling, though, lies in the manner in which agencies could respond to it.
Imagine for a minute that an SDO wishes to dismantle an entire corporation, along with its affiliates, to ensure that the Government is fully protected. The corporation is going to be indicted, but the Government does not have sufficient evidence to prosecute the affiliates and is unwilling to pursue their indictment. The SDO would suspend the corporation and its affiliates on the basis of the indictment, but he knows that, as a result of Agility Defense and Government Services, Inc., the affiliates’ termination will expire after eighteen months. However, he also knows that there is no requirement that he wait for the conviction required under Subpart 9.406-2(a) to debar the corporation. Instead, he can debar the corporation if he can show, ”based upon a preponderance of the evidence,” that the corporation committed any of the misconduct identified in Subpart 9.406-2(b). Alternatively, he can turn to his favorite ace-in-the hole, Subpart 9.406-2(c), under which he is authorized to debar “[a] contractor or subcontractor based on any other cause of so serious or compelling a nature that it affects the present responsibility of the contractor or subcontractor.” Lastly, he knows that the affiliation requirements of Subpart 9.406 are identical to those of 9.407, and he just finished re-reading in Agility Defense and Government Services, Inc. that there is no requirement for an affiliate to be found culpable. Thus, instead of suspending the corporation he amasses enough evidence to propose it, along with its affiliates, for debarment. Suddenly, the affiliate is not facing eighteen months of suspension, but three years of debarment. Few government contractors can survive such a long moratorium on conducting business.
Hopefully, agencies will not respond to this case in such a manner and, given that the Government has appealed the Court’s ruling, there is no certainty that they will even be tempted to do so. If the case is affirmed, though, there is certainly an argument that under certain circumstances agencies are incentivized to pursue debarments where they would otherwise have selected suspensions, and for any innocent affiliate that is a terrifying proposition.
The takeaway of Agility Defense and Government Services, Inc. for government contractors is that they should be hyper-sensitive to malfeasance by their affiliates, as it is now clear that their innocence will not preclude their suspension. Furthermore, even if the Eleventh Circuit affirms the Court’s ruling and affiliates’ suspensions are limited absent legal proceedings, there is no guarantee that their business can survive eighteen months of suspension. Contractors should work with their compliance officer, corporate counsel, and outside counsel to develop means of detecting misconduct at their parent corporation, subsidiaries, and/or the companies with which they share common control. Additionally, contractors should develop robust response strategies, so that when they do hear of misconduct at an affiliate company they can implement aggressive mitigation measures to distance themselves from the malfeasance. Hopefully, in doing so, they will inspire an SDO to breeze right past the affiliation provisions of Subparts 9.406 and 9.407 and focus entirely on the principal party.
We will publish an update on this important issue as soon as the Eleventh Circuit issues its opinion. Stay tuned!
Adam Munitz is a lawyer at Fluet Huber + Hoang, a full service law firm focused on the needs of growing government contractors. Adam specializes in Government Contracts Law and International Trade. You can reach him by email here.