Proposed Legislation Would Allow Foreign Contractors to Be Sued in U.S. Courts

December 21, 2009

Pending legislation could significantly increase the legal risks faced by foreign contractors doing business with the U.S. Government.  On March 4, 2009, Senator Claire McCaskill (D-MO) introduced S. 526, entitled, "Lieutenant Colonel Dominic ‘Rocky’ Baragona Justice for American Heroes Harmed by Contractors Act."[1]  On November 17, the bill was revised and reintroduced as S. 2782.[2]  The Committee on Homeland Security and Governmental Affairs Subcommittee on Contracting Oversight held hearings on the proposed legislation on November 18, 2009.[3]  On May 12, 2009, Representative Timothy Ryan (D-OH) introduced similar legislation in the House, H.R. 2349, which was referred to the Subcommittee on Government Management, Organization, and Procurement on June 26, 2009.

Under the proposed legislation, as a condition of doing business with the U.S. Government, foreign contractors would be required to consent to personal jurisdiction of the U.S. courts in civil or criminal actions brought by the Government stemming from "wrongdoing associated with the performance of the covered contract," and in certain civil actions alleging rape, sexual assault, or serious bodily injury to U.S. military personnel and certain civilians abroad.  The proposed legislation would also amend the Federal Acquisition Regulation (FAR) to provide that a foreign contractor may be debarred or suspended from contracting with the United States for evasion of service of process or failure to appear in U.S. court. 

Potential Application:  Imagine for example an Iraqi food service company with a contract to supply food to U.S. troops in the Middle East.  It subcontracts with an Iraqi trucking company to deliver certain supplies.  On his way to deliver a truckload of potatoes one day, an Iraqi citizen driver, employed by the Iraqi trucking subcontractor, speeds through an intersection and negligently injures a U.S. civilian employed by a private company performing work for the United States Government in Iraq.  If the legislation passes, the Iraqi company could be hailed into U.S. court in the District of Columbia and subject to the substantive law of the jurisdiction.  And if it evades service of process or fails to appear in court, the subcontractor risks suspension or debarment.

Although the impetus for the legislation is understandable, the potential ramifications are sweeping.  Among other things, foreign contractors would be exposed to personal injury and wrongful death lawsuits in courts located throughout the United States, supported by a plaintiffs’ bar that is typically compensated (and motivated) by contingency fees, and would face the prospect of American juries apt to award excessive compensatory and punitive damages, particularly against those perceived as foreign "bad" actors.

S. 2782:  The Proposed Legislation:[4]  In its current form, Section 2 would require amendment to the FAR to provide that a government contractor may be debarred or suspended from contracting with the United States for evasion of service of process or failure to appear in any civil or criminal action brought by the United States government associated with the contract, or in actions filed in U.S. court by a citizen or national of the United States in connection with the performance of the contract.  The amendments to the FAR under this section would apply to any action of a contractor that occurs on or after the effective date of the FAR amendments.

Section 3 would require amendment to the FAR to require that a contractor consent to personal jurisdiction by the U.S. federal courts with respect to any "covered civil action," including a covered action against an employee of the contractor for which the contractor may be liable under theories of vicarious liability.  A "covered civil action" is defined in Section 6 as "a civil action alleging a rape or sexual assault of or serious bodily injury to a member of the Armed Forces of the United States, civilian employee of the United States, or employee of a company performing work for the United States who is a citizen or national of the United States." 

The contractor must consent to jurisdiction in the U.S. District Court for the District of Columbia for a covered civil action in which the events giving rise to the cause of action occurred outside the United States and personal jurisdiction cannot be established in another federal court.  In addition, if the contract is valued at $5 million or more, and the contractor does not maintain an office in the U.S., the contractor must designate an agent in the U.S. to accept service of process.  Finally, the contractor must consent to the application of the substantive law of the State in which the covered civil action is brought. 

The amendments to the FAR under this section would apply to any action of a contractor that occurs on or after the effective date of the FAR amendments.  In addition, if a covered contract is an indefinite delivery, indefinite quantity, or blanket purchase agreement, the amendments would apply to any task order under the covered contract, including any subcontract of the covered contract, which is made on or after the effective date of the amendments.

Section 4 would require amendment to the FAR to require that the contractor consent to personal jurisdiction over the contractor by the federal courts with respect to any civil action or criminal prosecution brought by the United States government alleging "wrongdoing associated with the performance of the covered contract."  A "covered contract" is defined in Section 6 as a contract, grant, or cooperative agreement for work to be performed outside the United States that is awarded or entered into by the United States and exceeds $1 million.  Such "wrongdoing" could include criminal or civil False Claims actions, for example. 

As with Section 3 above, Section 4 would require the contractor to consent to personal jurisdiction in the U.S. District Court for the District of Columbia for a civil action or criminal prosecution in which the events giving rise to the cause of action occurred outside the U.S. and personal jurisdiction cannot be established in another Federal court.  Similarly, if the contract is valued at $5 million or more, and the contractor does not maintain an office in the U.S., the contractor must designate an agent in the U.S. to accept service of process.  Again, as with Section 3, the amendments would apply to any action of a contractor that occurs on or after the effective date of the FAR amendments and would have prospective application if the covered contract is an indefinite delivery, indefinite quantity, or blanket purchase agreement.

Section 6 defines "contractor" broadly, to include, "the contractor under the contract, any subcontractor under the contract, any subordinate contractor under the contract, any subsidiary, parent company, or successor entity of the contractor formed to act as a successor in interest of the contractor, and any employee thereof performing work under or in connection with the contract."

Current Status of the Proposed Legislation:  The bills are in the early stages of the legislative process and it is unclear whether the proposed legislation in its current form will ultimately become law.  Baragona’s story is certainly tragic and compelling, as are the facts cited by Senator McCaskill upon introducing the legislation.[5]  In addition, foreign contractors have of late come under increased scrutiny.  Indeed, just two days before the hearing on the Senate bill, the government publicly announced its intervention in a False Claims Act[6] case seeking treble damages and civil penalties against Kuwait-based companies that supplied food to U.S. troops in the Middle East.[7]  Further, the legislation enjoys bi-partisan support (S. 2782 was co-sponsored by four Democrats and three Republicans). 

However, in his November 18, 2009 testimony, Richard Ginman, Deputy Director For Defense Procurement and Acquisition Policy, Office of the Under Secretary of Defense (Acquisition, Technology and Logistics), highlighted several areas of concern for the U.S. Government.  Principally, the Government fears the legislation may impair its ability to enter into necessary contracts with foreign contractors.  For example, foreign contractors may refuse to enter into contracts requiring consent to jurisdiction in the U.S, which may result in decreased competition and increased prices.  Increased costs to foreign contractors (who may obtain insurance to cover U.S. claims) may also lead to demand for increased pay from the Government.  In addition, prospective application of the legislation might impair existing contracts:  it may restrict the Government’s ability to unilaterally exercise valuable option requirements and require bilateral modifications, encouraging contractors to request additional consideration, including an increase in contract price.

Additionally, during the November 18, 2009 hearings, law professors debated whether the assertion of jurisdiction over, and application of U.S. law to, foreign contractors as proposed in the bill would be constitutional and/or enforceable under international law.  Further, Assistant Attorney General Tony West questioned whether the amendment providing for personal jurisdiction over foreign contractors in civil or criminal actions brought by the Government is even necessary. 

First, West noted, the "concept of civil ‘personal jurisdiction’ does not apply to criminal matters," because U.S. courts already have jurisdiction over foreign actors when the United States is the victim of a crime.  As for civil matters, West noted, "the Department has brought cases successfully against foreign contractors and subcontractors, and other nonresident defendants, for violations of the False Claims Act… To date, [the Government] ha[s] not yet faced a personal jurisdiction challenge in connection with a procurement fraud matter arising out of contracts related to the wars and reconstruction efforts in Iraq and Afghanistan."  Nevertheless, West noted that he anticipates personal jurisdiction challenges in the future and, thus, "requiring contractors to consent to personal jurisdiction in U.S. courts as a condition of their contract with the United States should assist us in establishing personal jurisdiction over foreign contractors in procurement fraud cases."

Gibson, Dunn & Crutcher will continue to monitor the proposed legislation and keep you up to date on any major developments. 

Gibson, Dunn & Crutcher’s lawyers are available to assist clients in addressing any questions they may have regarding this issue.  Please contact the Gibson Dunn attorney with whom you work, the Co-Chairs of the firm’s Government and Commercial Contracts Group, Karen L. Manos (202-955-8536, [email protected]) and Joseph D. West (202-955-8658, [email protected]), or Of Counsel Jessica H. Sanderson in the firm’s Denver office (303-298-5928, [email protected]).

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