ContractsProf Blog

Congress May Close Loophole for Defense Contractors

According to the Associated Press, as reported in the Orlando Sentinel, Congress is moving to close a loophole that until now has permitted military contractors to avoid paying taxes and evade the strictures of U.S. employment law by setting up off-shore shell corporations. 

According to the report, U.S.-based military contractors have been setting up subsidiaries in places like the Cayman Islands.  These subsidiaries then employ U.S. citizens who provide support services for the U.S. military abroad.  As foreign corporations doing work abroad, these subsidiaries do not pay social security or medicare taxes for their workers and need not abide by federal labor and anti-discrimination laws.  The A.P.'s investigation suggests that the off-shore subsidiaries exist only on paper, without an address or phone number. 

The House passed tax legislation two weeks ago that would treat  foreign subsidiaries of U.S. government contractors as U.S. corporations.  The Senate is now considering the measure.  Today's New York Times features an editorial urging passage of the legislation. 

[Jeremy Telman]

The Army Lawyer: Special Contracts Issue

The Army Lawyer's January 2008 issue is a special issue devoted to "Contracts and Fiscal Law Developments of 2007 -- The Year in Review.  As the Table of Contents indicates, much of the issue is taken up with developments in contracts law.

[Jeremy Telman]

The General Services Administration: A Victim of "Terrorism"

According to the Wall Street Journal (see story "The Ousting of Lurita Doan"), Lurita Doan (pictured), as chief of the General Services Administration, oversaw "tens of billions of dollars in government contracts"  with the help of inspectors general.  In her two-year tenure as GSA chief, Doan generated a lot of controversy. 

In 2006, frustrated with oversight by those inspectors general, Doan proposed to cut the budget of the inspector general's office by $5 million.  Doan claimed that she was going after wasteful government spending, despite the fact that the office reported that its oversight had saved the government $1 billion over the previous two years through its watchdog efforts with respect to government contracts.  The Washington Post obtained a copy of notes from a GSA staff meeting in which she chided the inspectors general as terrorists: "There are two kinds of terrorism in the US: the external kind; and, internally, the IGs have terrorized the Regional Administrators,"

In January 2007, Doan admitted she made a "mistake" in awarding a no-bid contract to a friend.

In March, 2007, the House Committee on Oversight and Government Reform initiated investigations into Ms. Doan's conduct that may have violated the Hatch Act, which prohibits partisan campaign activities on federal property, when she allegedly directed GSA administrators to "help our [Republican] candidates" in a teleconference with one of Karl Rove's deputies on the line.

A full catalog of Washington Post stories covering Doan's career in public service is available here.

This week, Doan finally resigned from the GSA at the request of the White House.  Heckuva job, Doanie.

[Jeremy Telman]

Two Reasons Not to Contract with the Government

Although I teach contracts and contribute to this blog, I am not a contracts scholar.  My main research interests lie at the intersection of U.S. constitutional law and international law.  But in that context, I have been thinking a lot of late about how current trends in the law create substantial disincentives for entities to enter into contracts with the U.S. government.  I'm sure that readers who deal with government contracts regularly can think of many more, but I want to focus on two developments that would give me pause if I were considering entering into a contract with the U.S.

For more bloviation, click on the link . . .

The first development has to do with international agreements.  For simplicity's sake, let's say there are two approaches to understanding why states enter into and abide by international agreements.  I'll call the first approach normative.  It is associated with people like Tom Franck and Harold Koh who argue that states are compelled by notions like legitimacy and fairness to enter into international agreements that implement international norms or norms that have been internalized by states parties.  From the perspective of the normative approach, something like waterboarding simply cannot be justified.  Call it torture, call it cruel, inhuman or degrading treatment, it clearly violates international norms and is categorically prohibited. 

I'll call the second approach Realism and reduce Realism to the belief that states are rational, self-interested actors that enter into and abide by international agreements to the extent that doing so furthers national self interest.  Variations on Realism dominated political science departments for decades before it was discovered by international legal scholars.  Now, through the writings of people like Jack Goldsmith, Eric Posner, and Adrian Vermeule, international legal scholarship is taken up with the Realist model as never before.  In the context of the War on Terror, these neo-Realists, or neo-Nationalists, or New Sovereigntists (whatever you want to call them) have argued for extensive executive authority to do whatever is necessary to national defense.  By the way, for a brilliant, short critique of this approach as it relates to torture, see Alice Ristroph's Professors Strangelove.  A more extended but also very intelligent critique can be found in Thomas Crocker's, Torture, with Apologies. 

My point here is a simple one.  Let's assume that the U.S. signed the Geneva Conventions banning cruel, inhuman and degrading treatment based on the simple Realist principle of reciprocity.  We promised not to, for example, waterboard detainees because we don't want our soldiers waterboarded.  JAG officers testifying before Congress cited this concern in voicing their opposition to proposed legislation (subsequently enacted) that would insulate the government from lawsuits brought by Guantanamo detainees alleging that their rights protected under the Geneva Conventions were violated.  So, in addition to normative arguments, there are solid Realists arguments for abiding by our international obligations.  But reigning theories of the unilateral executive embodied in both the scholarly and political efforts of Robert Delahunty, Jack Goldsmith and John Yoo suggest that those obligations can be set aside whenever the executive branch finds it expedient to do so.  If I were a international entity considering entering into an agreement with the United States, this doctrine would give me pause, especially as there is no limit on what the executive branch can do in the name of national security.  Today, it may set aside the Geneva Conventions, tomorrow it may decide that the U.S. cannot abide by its environmental agreements, the Law of the Sea, trade agreements, etc. because doing so would undermine national security.

Fine, you're saying.  But I'm not an international entity, so I don't have to worry.  Well, the problem you have as an individual contracting with the United States is secrecy.  Let's say you enter into some sort of commercial contract with the U.S. government.  You may be a defense contractor; you may be a government employee; you may be involved in something related to U.S. surveillance operations.  I'm not saying you're a spy; you may just be a software designer facilitating surveillance.  Now, let's say the government breaches its agreement with you, or maybe it fires you based on your race or gender or because you blew the whistle on some illegal conduct by your immediate superior.  The government can stop your law suit in its tracks by invoking the state secrets privilege and your case will be dismissed before you even get to discovery.  I have an article on this topic coming out in the Temple Law Review.  For those of you who just can't wait, you can have a look at a draft version here.

My point is pretty basic.  Current policies, largely informed by a bizarre infatuation with executive power, create disincentives for rational actors to contract with the United States.  The predictable result of this is higher transactions costs as the U.S. seeks to overcome the obstacles it has needlessly placed between itself and individuals and entities otherwise willing to assist the U.S. in achieving its legitimate goals.

[Jeremy Telman]

Government Contracts and the Revolving Door

You may know John Ashcroft (left) as the author of "Let the Eagle Soar" or you may know him as a former U.S. Attorney General.  In any case, he testified before Congress yesterday, defending a contract that could pay him as much as $52 million (over an 18-month period) to monitor Zimmer Holdings Inc. of Warsaw, Ind., a company that manufacturers replacement hips and knees.  According to STLToday.com (the Internet home of the St. Louis Post-Dispatch), Zimmer Holdings was one of four companies that agreed to pay $300 million to settle cases arising from a federal investigation.

Ashcroft's Washington, D.C. based company (presumably The Ashcroft Group, LLC) was selected on a no-bid basis by New Jersey's U.S. Attorney Christopher Christie, who used to work for Mr. Ashcroft at the Department of Justice,  In his defense, Mr. Ashcroft pointed out that no taxpayer dollars were spent on the contract as the money paid to him is provided by the company being monitored.  So, it's supposed to make us more comfortable with the quality of the monitoring that the monitor is paid millions of dollars by the party he's supposed to monitor?  But then again, Mr. Ashcroft is a man of integrity, just like this guy.

[Jeremy Telman]

Contracts, Politics, and National Security

  On February 29th, the U.S. Air Force announced that it was awarding a $35-40 billion contract to build aerial refueling planes to a team formally led by Northrop Grumman.  I challenge anyone to click on the image at left and resist the temptation to stand up and shout U.S.A!!  U.S.A.!!  Aerial refueling is cool!!

Anyhow, the contract award to Northrop Grumman and its partner, the European Aeronautic Defense and Space Co. (EADS),was widely reported as a "stunning setback" for Boeing, since EADS is the parent corporation of Boeing's rival, Airbus.  What was the Air Force thinking?  This is about refueling, not about supplying pilots with beaujolais nouveau.  In any case, like an earlier proposal to place a Dubai-controlled company in charge of managing six U.S. port terminals, this government contract raises issues of patriotism, national security and economic outsourcing.

Today, the Associated Press reports that Boeing will file a challenge to the Air Force's decision with the Government Accountability Office.  According to the AP, pressure to review the decision is coming from politicians representing states that would have benefitted had the contract been awarded to Boeing. Meanwhile, Alabma Senator, Richard Shelby, defended the Air Force's decision.  Northrup Grumman reports that the contract will lead to the creation of 2000 new jobs in Mobile.

UPDATE: For those interested in learning more about the Government Accountability Office bid-protest mechanism, there is a new article out:  Robert S. Metzger & Daniel A. Lyons, A Critical Reassessment of the GAO Bid-Protest Mechanism, 2007 Wisc. L. Rev. 1225.

[Jeremy Telman]

Contracting for Force in Iraq

The use of government contractors to provide security services in Iraq (read, "carry guns in a war zone") has raised a lot of interesting questions for the contract law community.  Historically, use of private force under vaguely government authority was common; much of the colonization of America was done by private entrepreneurs using force under Royal charters that often allowed them to kill as many natives as necessary.  The Constitution specifically authorizes Congress to grant letters of marque (left) to private shipowners to wage war on enemies.  As late as 1856, the British East India Company operated its own empire with its own army.  Even today there are private armies in many countries.

But over the past century, the U.S. and other developed countries have elected to entrust the use of force in war zones to their own employees rather than private contractors.  That means that the war in Iraq has raised significant issues about who should be using force, who should be watching those who apply force, and exactly what contract law has to do with all this.

George Washington's Steve Schooner is quoted in an interesting piece that goes over the issues in a story today from the Associated Press.

[Frank Snyder]

Consolidating the Boards of Contract Appeals

New legislation will consolidate all of the federal government's various civilian Boards of Contract Appeals, the entities responsible for hearing and resolving disputes under federal contracts, into a single organization.  Last Friday the folks at George Washington's law school hosted a panel discussion (left), led by Stephen Schooner and Christopher Yukins, on what that's going to mean for those who practice before the Boards.  If you missed it, don't worry -- a podcast of the program is available.

[Frank Snyder]

Lack of Privity Dooms Sub

One area where privity of contract is alive and well is the field of government contracts.  The long-standing rule in government contract claims is that only a “contractor” -- one who is a “party” to the contract -- can sue the government under a contract.  This means that if the government’s actions cause extra costs for the sub, the sub has no direct action against the government.  In such cases, the prime contractor usually sponsors the claim, which avoids the problem.  But what happens when the prime has “absconded with all the moneys” and has no intention of sponsoring a claim?

Well, the subcontractor loses.  Attorney Gregory S. Jacobs of Pittsburgh’s Reed Smith runs down the lessons to be learned from recent decision of the Armed Services Board of Contract Appeals in Alpine Computers Inc., ASBCA No. 54659, 05-02 BCA ¶ 32,997, in When Can a Subcontractor Sue? Less Often Than You Would Think.
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ABA on terminations for convenience

One of the most important rules of government contract law is also one of the oddest from the point of view of the nonspecialist:  the "termination for convenience."  Under the rule, the government has the unilateral power to terminate a contract at any time for any reason, subject only to payment of certain expenses and profits.  The ABA is offering a CLE on issues surround the TFC tomorrow, September 20, 2005.  Registration is here.

You must be present to win

Minority- and women-owned businesses interested in getting a piece of the Texas state procurement pie are gathered in Dallas today and tomorrow for the Texas Spot Bid Contract Fair. At the innovative annual forum, the state awards $5 million in contracts to the businesses who show up and demonstrate what they can do.

Polley's IT News Round-Up

The new issue of Vince Polley’s excellent Miscellaneous IT Related News (MIRLN) is out.  It’s available online here.  Some highlights:

• China has decided to allow online signatures to have legal effects.

• Intel will no longer allow open-source licenses on some of its software.

• A British Columbia court upholds the outsourcing of Canadian health records management to a private U.S. firm, rejecting claims of potential privacy lapses.

• A French court says Yahoo is not liable for auctions of Nazi memorabilia on its sites.

• A battle over "fair use" of materials placed on reserve by faculty is brewing at the University of California, San Diego.

• The Australian actors’ union is trying to block a "remixable" film project out of fears that the digitalized images could be used in ways the actors don’t approve.

GAO: Most of government at "high risk" of waste

The U.S. Government Accountability Office has released its 2005 list of 25 government programs that are at "high risk" of vulnerability to waste, fraud, and mismanagement. The good news is that three areas have been removed from the list, including (among others) the Student Financial Aid program.  The bad news is that four areas have been added; the biggest seems to be the government’s practice of using government-wide "supply schedule" contracts.

The GAO considers a total of 25 areas to be "high risk," including such things as Medicare, Medicaid, procurement at NASA, DoD, and DoE, air traffic control modernization, HUD mortgages, tax collection—in other words, pretty much any part of the government where money changes hands.  Many of these programs have been on the list since it started in 1990.  Of 41 different areas that have appeared on the GAO list, six were resolved before 2001, and 10 since.  The GAO document itself is here.

If you want to report waste, fraud, or mismanagement on a federally funded program at your own institution, click here, but don't do it unless you've got tenure.

Feds issue new prison contract

The U.S. government has awarded a new prison contract to Corrections Corporation of America.  The four-year deal may be worth as much as $129 million.   CCA will be responsible for about 1,200 prisoners at its Northeast Ohio Correctional Center in Youngstown.  CCA, with total annual revenues of about $1 billion, is now reported to be the sixth largest correctional system in the U.S.

The contract under which CCA leases the correctional center from its related "CCA Prison Realty Trust" is here.

"Small" will not mean "large" for SBA any more

The Small Business Administration is taking steps to ensure that it counts "small business" contracts more accurately.

Until now, SBA regulations counted a contract as "small business" if it was awarded to a small business, and the contract kept that status for the life of the contract, even if the contractor were later acquired by a large business.  This means that the government has been counting contracts actually held by large businesses as part of the total number of small business contracts it reports.

The new regulations will require the acquiring company to re-certify its status at the time of the acquisition.  The change is the result of heavy lobbying by small business interests; the Wall Street Journal quotes one lobbying group as saying that the new rule will "help open up the market to small businesses."

Companies protest award of $1 billion Treasury contract

A $1 billion government contract to provide telecommunications services to the U.S. Treasury Department is being challenged.  Three big players in the field, Qwest, Northrop Grumman, and Broadwing, are protesting the Treasury’s award to AT&T.

The contract at issue is for the "Treasury Communications Enterprise" (TCE), which provides service and tech support at 850 locations. According to Government Executive magazine's web site, knowledgeable observers suggest there may be problems with the procurement:

Treasury awarded TCE after receiving only one round of offers from the bidders, which included A&T rival Sprint Co. The department had reserved the right to seek only one round, but industry observers have noted that it's rare not to ask for multiple offers on a contract as technically complex and lucrative as TCE. A second round of offers might give the government a better range or service prices, they said.