Overview
A new final Federal Acquisition Regulation (FAR) rule issued on January 13, 2017, implements a section of the Consolidated and Further Continuing Appropriations Act of 2015 (Act) that prohibits the use of federal funds for a contract with an entity that requires employees or subcontractors to sign an internal confidentiality agreement restricting the lawful reporting of waste, fraud, or abuse to a designated government representative authorized to receive such a report. To be eligible for award, a contractor must represent that it does not require employees or subcontractors to sign or comply with such internal confidentiality agreements.
Applicability
This final rule became effective as of January 19, 2017 and is applicable to all solicitations and contracts using fiscal year 2015 or subsequent fiscal year funds that do not already contain a comparable provision or clause.
DoD, GSA, NASA, and the Administrator for Federal Procurement Policy determined that this final rule applies to all solicitations and resultant contracts, including contracts and subcontracts for acquisitions at or below the simplified acquisition threshold (SAT) and for commercial items, including commercially available off-the-shelf (COTS) items. The application to contracts and subcontracts below the SAT threshold and for commercial and COTS items reflects a determination that it is not in the best interest of the government to waive the applicability of section 743 to those contracts and subcontracts. The final rule commentary notes that in fiscal year 2015, about 90% of all awards were below the SAT, and commercial item procedures were used in more than 50% of all awards, so excluding these awards from application of the law would weaken the impact of the law.
In addition, the FAR Council maintains that this rule imposes a minimal burden on offerors and contractors, requiring only that offerors represent by submission of the offer that they will not require certain internal confidentiality agreements and that contractors only need to notify employees that the prohibition and restrictions of any preexisting internal confidentiality agreements covered by the clause are no longer in effect to the extent that the restrictions are inconsistent with the prohibitions of the clause (although, as noted below, contractors should consider doing more than this).
Key Background
The final rule was issued almost one year after the FAR Council published a proposed rule to implement section 743 of the Act. Steptoe’s advisory on that proposed rule addresses the reason for the rule, similar requirements existing outside the FAR, and the relationship of this rule to contractor compliance programs.
Also, in November 2016, the DoD issued a class deviation to the FAR to prohibit the award of DoD contracts to companies – including companies selling commercial items under FAR Part 12 – that fail to represent that they do not require employees or subcontractors to sign or comply with confidentiality provisions in agreements that prevent the reporting of fraud to federal authorities. Steptoe’s advisory on that DoD class deviation is available here. However, with the issuance of the final FAR rule, that deviation will now be withdrawn.
Noteworthy Changes from the Proposed Rule
The final rule changes the proposed rule in several important ways:
- It includes definitions of ‘‘internal confidentiality agreement or statement,’’ ‘‘subcontract,’’ and ‘‘subcontractor.’’
- An “internal confidentiality agreement” is a “confidentiality agreement or any other written statement that the contractor requires any of its employees or subcontractors to sign regarding non-disclosure of contractor information;” with exceptions for confidentiality agreements arising out of civil litigation or agreements signed “at the behest of a federal agency.”
- ‘‘Subcontractor’’ means any supplier, distributor, vendor, or firm (including a consultant) that furnishes supplies or services to or for a prime contractor or another subcontractor; while a “subcontract” is any contract as defined in FAR 2.101 entered into by a subcontractor.
- It explains and clarifies that the representation required by the new FAR clause applies to future internal confidentiality agreements or statements that restrict reporting of waste, fraud, or abuse related to the performance of a government contract.
- It specifically states that the procuring agency’s Office of the Inspector General is authorized to receive such information as a designated investigative or law enforcement representative of a federal department or agency.
- It clarifies that contractors are required to give notice to current employees and subcontractors that prohibitions and restrictions in any preexisting confidentiality agreements or statements covered by the clause are no longer in effect to the extent that such prohibitions and restrictions conflict with the requirements of the new FAR clause.
Other Points
- Contractors should note the supply chain impact. Specifically, the final rule states that the new FAR “clause does flow down to subcontracts, but it also prohibits the prime contractor from requiring subcontractors to sign internal confidentiality agreements or statements.”
- Although there is an employee and subcontractor notice requirement, this rule does not specify how the notification is to be made. In discussing comments to the proposed rule on this issue of notification, the final rule notes that the preamble to the proposed rule only mentioned email as an example: ‘‘This notice could be accomplished through normal business communication channels, such as email.’’ Contractors can use other means to notify employees and subcontractors.
- Notwithstanding the final rule’s statement that this rule imposes a minimal burden on offerors and contractors, prudent contractors should consider examining their internal confidentiality agreements and related procedures, and if necessary, modifying those agreements and procedures to ensure compliance with this final rule.
