April 28, 2011
On April 26, 2011, the Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA) proposed to substantially amend the Federal Acquisition Regulation (FAR) to provide more comprehensive guidance concerning organizational conflicts of interest (OCI) and contractor access to nonpublic information. The proposed rule comes more than three years after the FAR Councils issued an advanced notice of proposed rulemaking seeking information regarding the need to revise the FAR’s OCI provisions, and almost four years after a report issued by the Acquisition Advisory Panel (established by the Services Acquisition Reform Act of 2003) concluded that the FAR does not adequately address OCI.
Multiple statutory provisions have also increased the focus on OCI in recent years. Section 841 of the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 mandated a review of the FAR’s OCI provisions. Additionally, the Weapon Systems Acquisition Reform Act of 2009 (WSARA) required DoD to review OCI provisions in the context of major defense acquisition programs (MDAPs). Last year, a Defense Federal Acquisition Regulation Supplement (DFARS) OCI rule was promulgated, but was limited to the context of MDAPs. The earlier proposed version of the DFARS rule, however, would have been applicable to all DoD contracts. The preamble to the proposed FAR OCI rule notes that the two proposed OCI rules differ substantially, and requests "feedback regarding which course of action, or whether some combination of the two, is preferable."
Proposed Changes to the FAR’s OCI Provisions
The FAR’s existing OCI provisions, virtually unchanged since the mid-1980’s, largely track relevant OCI case law. The proposed rule diverges from this approach, and instead divides OCI issues into two categories: (1) those that risk harm to the integrity of the competitive acquisition process, which adversely affects the Government, other vendors, and the taxpayer; and, (2) those that could present harm to the Government’s business interests, but would not impact the integrity of the competitive acquisition system. The proposed rule also revises the definition of OCI, and provides additional definitions and policy statements with the aim of clarifying the management of OCI for both contractors and the Government.
Where a potential OCI would present a risk to the integrity of the competitive acquisition process, the proposed rule requires contracting officers to "substantially reduce or eliminate" the risk. However, where a potential OCI would only threaten the Government’s business interests, the proposed rule grants the contracting officer (CO) "broad discretion to select the appropriate method for addressing the conflict, including the discretion to conclude that the Government can accept some or all of the performance risk."
The proposed rule establishes five methods for addressing potential OCI, and offers relatively detailed descriptions of each method. The five methods include: (1) avoidance; (2) limitation on future contracting; (3) mitigation; (4) assessment that the risk is acceptable; and (5) waiver. However, the proposed rule would not allow COs to determine that the risk is acceptable where the risk threatens the competitive acquisition process. Where a potential OCI would present a risk only to the Government’s business interests, COs may still implement one or a combination of strategies to reduce that risk.
The proposed rule would require COs to address OCI concerns early and often during the procurement process, beginning even before contract requirements are drafted. Proposed FAR subpart 3.1206 contains lengthy directions to COs on how to address potential OCIs at every step of a procurement, offering substantially more guidance than is present in the FAR’s existing OCI provisions.
The proposed rule would relocate the FAR’s OCI provisions from FAR part 9 to FAR part 3, thus placing OCI in the same section as related issues such as personal conflicts of interest. As currently drafted, the proposed OCI rule would apply to prime and subcontracts with both for-profit and not-for-profit organizations, as well as organizations created wholly or partially with Government funds. However, the proposed rule would not supplant agency-specific statutory OCI provisions. No exemptions for commercial items or commercially available off-the-shelf items are included in the proposed rule. The proposed rule also defines contracts to include task or delivery orders and modifications that add to the scope of work, thus requiring COs and contractors to remain cognizant of potential OCI years after contract award.
Proposed Changes to the FAR’s Access to Nonpublic Information Provisions
The proposed rule would remove the FAR’s provisions on unequal access to nonpublic information from the OCI context. The preamble to the proposed rule notes that unequal access to nonpublic information rarely produces a conflict of interest, and thus is better placed in FAR part 4. The proposed rule would create a separate FAR subpart, entitled "safeguarding information within industry," that would govern both contractor access to nonpublic information and unequal access to nonpublic information. The preamble to the proposed rule notes that greater clarity and detailed rules regarding access to nonpublic information are necessary due to the industry’s shift towards service contracting and the often confusing array of non-disclosure agreements currently utilized by various Federal agencies and contractors. The proposed rule also references a recent Government Accountability Office (GAO) report, "Contractor Integrity: Stronger Safeguards Needed for Contractor Access to Sensitive Information," which called for increased regulation of contractor access to nonpublic information.
The proposed rule would impose contractual obligations on contractors and subcontractors to protect all nonpublic information to which they obtain access through contract performance, whether that information belongs to the Government or a third party. The proposed rule would require contractor employees who utilized nonpublic information to sign non-disclosure agreements that would be enforceable both by the Government and third parties. The proposed rule would add an "access clause," aimed at precluding contractors from using nonpublic information for any purpose unrelated to contract performance. It would also add a "release clause," which would require the consent of the original owners of third-party nonpublic information prior to the Government’s release of such information to contractors who require it for contract performance.
Regarding unequal access to nonpublic information, the proposed rule reflects an approach based upon both the source and effect of the nonpublic information. Where a contractor obtains nonpublic information from a source other than the Government, such as through market research or private-sector business contacts, the CO need not take any steps to address the situation. Where a contractor receives access to nonpublic information from the Government, either directly or indirectly, the CO must first evaluate whether the nonpublic information would be competitively useful to the offeror, and whether it was available to all offerors. If the information would be competitively useful to the contractor, and was unavailable to all other offerors, the contracting officer may take steps to resolve the situation through: (1) disseminating the information at issue to all offerors; (2) mitigation through the use of a firewall; or, (3) disqualification, so long as no less restrictive method would achieve the desired result.
This proposed rule represents a substantial change from existing regulations governing OCI and access to nonpublic information. Although this proposed rule certainly provides more detailed guidance to both contractors and the Government, its divergence from the existing GAO case law and relevant regulations means that contractors will need to engage in a thorough evaluation of their policies, procedures, training programs, and compliance infrastructure should the proposed rule be finalized in its current form. Comments on the proposed rule are due no later than June 27, 2011, and the Government also has expressed interest in receiving feedback comparing the merits of this proposed rule with the earlier DFARS OCI proposed rule. Gibson Dunn will continue to closely monitor this issue and provide you with new information as it becomes available.
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