Welcome to Jenner & Block’s Government Contracts Legal Round‑Up, a biweekly update on important government contracts developments. This update offers brief summaries of key developments for government contracts legal, compliance, contracting, and business executives. 

Legislative Update

The Biden Administration’s Fall 2022 Regulatory Agenda was issued earlier this month. These items provide advanced warning of impending regulatory changes as well as an opportunity to become involved in the rulemaking process, when relevant. Among the changes of note:

• Assessing Contractor Implementation of Cybersecurity Requirements (DFARS Case 2019-D041): DoD is amending an interim rule to implement the CMMC framework 2.0 in order to protect against the theft of intellectual property and sensitive information from the Defense Industrial Base (DIB) sector.
• Prohibition on Procurement of Foreign-Made Unmanned Aircraft Systems: DoD is proposing to amend the Defense Federal Acquisition Regulation Supplement (DFARS) to implement section 848 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2020 to prohibit the procurement of foreign-made unmanned aircraft systems by the Department of Defense.
• Limitations on Communications Systems Lacking Certain Resiliency Features (DFARS Case 2020-D023): DoD is proposing to amend the DFARS to implement section 168 of the NDAA for FY 2020. Section 168 limits availability of funds for the procurement of a current or future DoD communications program of record, unless certain conditions are met.
• Undefinitized Contract Actions (DFARS Case 2021-D003): DoD is proposing to amend the DFARS to implement recommendations from DoD IG Report 2020-084, dated May 11, 2020, regarding undefinitized contract actions. The rule would specify that failure to meet the qualifying proposal date in the definitization schedule could result in the government withholding a percentage of all subsequent financing requests.
• Restriction on Certain Metal Products (DFARS Case 2021-D015): DoD is proposing to amend the DFARS to implement section 844 of the NDAA for FY2021. Section 844 revises the 10 U.S.C. 2533c prohibition on procuring covered material melted or produced in any covered nation to procuring covered material mined, refined, separated, melted in any covered nation. It also amends the exceptions to the prohibition by removing the term tungsten and substituting covered material.
• Modifications to Printed Circuit Board Acquisition Restrictions (DFARS Case 2022-D011): DoD is proposing to amend the Defense Federal Acquisition Regulation Supplement to implement section 851 of the NDAA for FY2022 (Pub. L. 117-81) which amends 10 U.S.C. 2533d, including the effective date of the statute, and section 841 of the FY2021 NDAA (Pub. L. 116-283), which prohibits acquiring a covered printed circuit board from a covered country, unless a waiver is obtained.
• DFARS Buy American Act Requirements (DFARS Case 2022-D019): DoD is proposing to amend the DFARS to implement the requirements of Executive Order 14005, Ensuring the Future Is Made in All of America by All of America’s Workers. Changes to the Federal Acquisition Regulation (FAR) are being made via RIN 9000-AO22 (FAR Case 2021-008, Amendments to the FAR Buy American Act Requirements). This rule proposes conforming changes to the DFARS.
• Employment Transparency Regarding Individuals Who Perform Work in the People's Republic of China (DFARS Case 2022-D010): DoD is finalizing an interim rule that amended the DFARS to implement section 855 of the NDAA for FY2022 (Pub. L. 117-81). Section 855 prohibits the award of a covered contract to, or renewal of a covered contract with, a covered entity unless such covered entity has submitted each required disclosure such covered entity is required to submit. For FY2023 and FY2024, it requires each covered entity that is a party to one or more covered contracts in the fiscal year to disclose if the entity employs one or more individuals who perform work in the People’s Republic of China on any such contract.
• NIST SP 800-171 DoD Assessment Requirements (DFARS Case 2022-D017): This rule was split from RIN 0750-AK81. DoD is finalizing an interim rule (see RIN 0750-AK81, interim rule for DFARS Case 2019-D041) to implement the National Institute of Standards and Technology (NIST) Special Publication (SP) 800-171 DoD Assessment Methodology in order to protect against the theft of intellectual property and sensitive information from the DIB sector. This methodology enables DoD to assess contractor implementation of the cybersecurity requirements in NIST SP 800-171, Protecting Controlled Unclassified Information (CUI) In Nonfederal Systems and Organizations.
• Transactions Other Than Contracts, Grants, or Cooperative Agreements for Prototype Projects: DoD proposes to revise its rule on Transactions Other Than Contracts, Grants, or Cooperative Agreements for Prototype Projects in order to reflect changes in 10 U.S.C. 4022 and its predecessor authorities. Other Transactions (OTs) for prototype projects are legally binding agreements that serve as alternatives to traditional government procurement contracts and provide authority for broad flexibility in terms of the award process and the terms and conditions for the project. The proposed changes broaden use and revise procedures including: provide authority for follow-on production OTs and contracts; special circumstances for award of Ots to small businesses, nontraditional defense contractors, nonprofit research institutions, and consortia; add approval requirements for large dollar Ots; provide authority to supply prototypes and production items as Government furnished items; and apply procurement ethics requirements to section 4022.
• Cybersecurity Maturity Model Certification (CMMC) Program: DoD is proposing to implement the Cybersecurity Maturity Model Certification (CMMC) Framework, to help assess a DIB contractor’s compliance with and implementation of cybersecurity requirements to safeguard Federal Contract Information (FCI) and CUI transiting non-federal systems and mitigate the threats posed by Advanced Persistent Threats—adversaries with sophisticated levels of expertise and significant resources.
• National Industrial Security Program Operating Manual (NISPOM); Second Amendment: Based on public comments, DoD is proposing additional amendments to a rule last published on December 21, 2020. This amendment addresses comments received on requests for guidance and the cost to implement Security Executive Agent Directive (SEAD) 3, as well as to provide clarification on safeguarding procedures for the protection and reproduction of classified information. It also includes DoD’s response to public comments received regarding controlled unclassified information, National Interest Determination requirements for cleared contractors operating under a Special Security Agreement for Foreign Ownership, Control or Influence, and eligibility determinations for personnel security clearance processes and requirements, among others.

The Supreme Court will (again) weigh in on the False Claims Act after granting cert to address whether the False Claims Act can be knowingly violated if the underlying conduct is “objectively reasonable.” The two consolidated Seventh Circuit cases are United States ex rel. Schutte v. SuperValu Inc., and United States ex rel. Proctor v. Safeway, Inc.

SLS Federal Services, LLC v. United States, No. 22-1215 (Fed. Cl. January 10, 2023)

• In a case before the Court of Federal Claims (COFC), Judge Bruggink found an agency abused its discretion by refusing to engage in discussions in a DoD procurement valued above $100 million, subject to DFARS 215.306.
• Judge Bruggink concluded that DFARS 215.306 creates a presumption in favor of opening discussions for DoD procurements valued above $100 million; discussions are not mandatory under the regulation, but where the regulation applies, the agency must provide a rational basis for not engaging in discussions.
• Judge Solomson previously reached the same conclusion in Oak Grove v. United States, 155 Fed. Cl. 84 (2021) and IAP Worldwide Services, Inc. v. United States, 159 Fed. Cl. 265 (2022).

In most circumstances, agencies enjoy broad discretion when deciding whether to engage in discussion or make award based on initial proposals. GAO is particularly deferential to agency decisions to make award without discussions. DFARS 215.306, however, changes the analysis for DoD procurements valued above $100 million. Judge Solomson’s decisions in Oak Grove and IAP, and now Judge Bruggink’s decision in SLS, confirm that at least some COFC judges will scrutinize DoD’s decision to make award without discussions where the DFARS 215.306 applies. This is yet another area where protest practice before the Court of Federal Claims differs from practice at the GAO.

Arcticom, LLC, B-421256; B-421256.2 (December 28, 2022) (Published January 18, 2023)

• GAO denied a bid protest arguing, in part, that the agency should have evaluated past performance references from its affiliated entities.
• The protester submitted three past performance references, two of which were from affiliated entities. The agency concluded these references were not relevant both because the RFP did not contemplate the evaluation of affiliated companies’ past performance and because the proposal did not explain precisely how these firms would be involved in contract performance. The protester challenged this conclusion, arguing that its proposal made clear that these affiliated companies would provide technical and administrative support and thus were required to be considered.
• GAO agreed with the agency, explaining that while agencies may consider such experience where the proposal demonstrates that the resources of the parent or affiliated company will affect contract performance, an agency is under no general obligation to do so when the solicitation is silent on the issue.

When submitting past performance references, offerors must carefully adhere to the solicitation guidelines for what references will be considered by the agency. In cases where a contractor wants to submit a proposal but cannot satisfy the stated relevancy requirements, any dispute over the terms of the solicitation (including filing a protest) must occur prior to proposal submission.

Secretary of Defense v. Raytheon Co. et al., No. 2021-2304 (January 3, 2023)

• In this long-running saga related to 2007/2008 incurred costs, the US Court of Appeals for the Federal Circuit reversed the ASBCA’s decision in favor of Raytheon.
• The ASBCA had found Raytheon’s policies for tracking unallowable lobbying and corporate organization costs to be reasonable and had denied the government’s claim. But the Federal Circuit disagreed.
• First, the Federal Circuit held that Raytheon’s established policy where employees in its government relations department tracked the amount of time spent on unallowable activities only during the “scheduled working day” (i.e., 8 a.m. to 5 p.m.) did not accurately reflect the proportion of time spent on unallowable lobbying, much of which was before- and after-hours. The court concluded the salary paid these employees was for all efforts regardless of the time of day performed. Thus, these hours should have been tracked and excluded as unallowable costs under FAR 31.205-22.
• Second, the Federal Circuit determined that Raytheon’s bright-line corporate-development policies were inconsistent with the FAR and resulted in Raytheon charging the government for unallowable costs. The FAR disallows costs associated with “planning . . . mergers and acquisitions.” FAR 31.205-27(a)(1). Because Raytheon only reported time after the submission of an indicative offer or the decision to go to market with offering materials—Raytheon’s bright-line rules—the court held Raytheon charged the government for time spent planning these corporate transactions. The Federal Circuit’s rationale was that a decision on submitting an offer or to go to market cannot be made unless at least some planning for that offer or the offering materials has occurred, and that planning time should have been unallowable. Furthermore, the court was unpersuaded that these costs were economic planning costs allowable under FAR 31.205-12.
• The matter was remanded back to the ASBCA for a determination of the quantum Raytheon owes to the government.

The Federal Circuit’s decision dramatically alters prevailing interpretations of FAR 31.205-22, 31.205-12, and 31.205-27, and companies relying upon the ASBCA’s prior guidance may find themselves with policies that no longer accurately reflect the line between allowable and unallowable costs. Contractors should carefully scrutinize their policies pertaining to lobbying and corporate organizations to ensure they are consistent with the Federal Circuit’s ruling.

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