Subcontractors often play important roles in government contracting.  A subcontractor may, for example, take the lead in drafting what becomes a winning proposal.  A subcontractor may work on a day-to-day basis with government personnel or directly provide products and services to the government customer.  A subcontractor's reputation and success may, in fact, be the real reason a certain prime contractor wins a government contract. 

Yet, despite their value in the process, subcontractors lack the power to bring a claim against the government.  Under the Contract Disputes Act (CDA), only a "contractor" can pursue a claim.  A "contractor" is "a party to a Federal Government contract other than the Federal Government."[1]  Because a subcontractor is not in privity with the government, it falls outside of this definition and thus has no right to pursue a claim.  There are exceptions to this rule, but they are rarely applied.[2]  As a result, an aggrieved subcontractor is wholly dependent upon its prime contractor's willingness to "sponsor" a claim.

The Binghamton Simulator Decision

The strict sponsorship requirement was highlighted in a recent Armed Services Board of Contract Appeals decision, Binghamton Simulator Co, ASBCA No. 59117, 14-1 BCA ¶ 35,715, 2014 WL 4355174.  In that case, a subcontractor asserted that the government had Small Business Innovative Research Program (SBIR) rights in computer software, while the government claimed it had broader government purpose rights.

The subcontractor appealed to the board without the sponsorship of the prime.  The subcontractor argued that the board had jurisdiction, despite the lack of prime contractor sponsorship, because the terms of the parties' subcontract agreement clearly obligated the prime to sponsor the appeal.  Rejecting this argument, the board found it irrelevant that the prime was contractually obligated to sponsor the claim.  "All that is relevant to our consideration," wrote the board, "is that Leidos does not sponsor this appeal."

Protective Measures for Subcontractors

The Binghamton Simulator case underscores the fact that subcontract terms will not establish jurisdiction under the CDA, no matter how well drafted and no matter how concrete the prime's obligation to sponsor a claim.[3]  The prime's actual conduct is what matters.  This can be especially problematic for subcontractors with valuable intellectual property.

Given this state of affairs, a subcontractor should focus on securing relationships with reputable, fair-dealing primes, taking, to the extent practicable, the following steps:

1.  Before entering into a subcontract agreement, the subcontractor should conduct due diligence to determine whether the prime has a history of fair treatment of subcontractors and a willingness to sponsor claims.  

2.  The subcontractor should try to establish subcontract terms providing that if the prime fails to sponsor a claim brought in good faith, the prime will be in breach and the subcontractor will be entitled to damages or injunctive relief.  Ideally, terms will include the following language and provisions:

• The prime will cooperate fully in the subcontractor's pursuit of a claim.
• The prime will protect the subcontractor's proprietary information with the same degree of care that it would exercise if the proprietary information were its own.
• The prime's refusal to sponsor a subcontractor’s claim to protect the proprietary information will cause irreparable harm.
• The prime may not unilaterally execute a government release of liability.    
• In sponsoring an appeal, the prime will follow all relevant appeals procedures, such as giving timely notice of appeal.

3.  In the event the government attempts to overreach in its pursuit of data rights, the subcontractor should assert the proper level of rights under relevant Defense Federal Acquisition Regulation Supplement (DFARS) or Federal Acquisition Regulation (FAR) procedures.  

4.  If the subcontractor fails to obtain a favorable final decision from the contracting officer, it should appeal the claim to one of the boards or the U.S. Court of Federal Claims after obtaining written evidence of the prime contractor's sponsorship. 

If the prime refuses to sponsor the claim, the subcontractor will have to pursue a breach of contract claim in state court or U.S. district court. [4]  Because it is hard to imagine a court ordering a prime contractor to affirmatively sponsor a claim, the subcontractor's most likely recourse is to seek damages.  To recover damages, a court may require the subcontractor to prove both that it likely would have prevailed on the sponsored claim and the amount it likely would have recovered.  

Conclusion: Subcontractors and Good Faith Government Claims

It is unfortunate, and somewhat counterintuitive, that subcontractors are subject to the whims of prime contractors in enforcing rights against the government.  This is especially true in the area of intellectual property.  Trade secrets are often the lifeblood of smaller companies, the very companies that tend to enter the federal marketplace through subcontracting and bring unique innovation to government.

Fortunately, prime contractors are typically willing to sponsor good faith claims.  To further increase the odds, subcontractors can take protective measures.  First, they can conduct due diligence and strive to do business with primes that have track records of fairness and willingness to sponsor subcontractor claims.  Second, subcontractors can attempt to negotiate subcontract terms that obligate their primes to sponsor claims.  Third, as a last resort, they can pursue breach of contract claims in state or U.S. district courts.

[1] 41 U.S.C. § 7101(7). 

[2] These exceptions include the following: prime contractor as purchasing agent, direct right of appeal established by contract, third party beneficiary, and implied-in-fact contract.  Alpine Computers, Inc., ASBCA No. 54659, 05-2 BCA ¶ 32,997, 2005 WL 1529952.

[3] This was not always the case.  See, e.g., Westinghouse Elec. Corp., ASBCA No. 25685, 82-2 BCA ¶ 15,960, 1982 WL 7802 (subcontractor had the right to appeal contracting officer's decision, despite the prime's refusal to sponsor, because the prime had entered into a sponsorship agreement).

[4] Generally, it is in the prime contractor's interest to sponsor a subcontractor's claim.  Doing so keeps the prime out of the litigation, and the certification standard is not especially high.  See United States v. Turner Constr. Co., 827 F.2d 1554, 1561 (Fed. Cir. 1987).