On 26 April, the Federal Acquisition Regulation (FAR) Councils issued a long-awaited proposed rule that, if adopted, would substantially revise the FAR's organizational conflict of interest (OCI) regulations.1 The Councils have framed the rule as an alternative to the extensive proposed OCI rule issued by the Department of Defense (DOD) in April of last year.2 There are many similarities between the two proposals. Both would overhaul the existing OCI regulations and move the rules to a separate part of the regulations related to "improper business practices" (FAR Part 3 and DoD FAR Supplement Part 203, respectively). The proposed FAR rule, however, deviates from the proposed DOD rule in several fundamental respects, as discussed below. The Councils have requested public comments (due 27 June) concerning which approach is preferable.

Defining organizational conflicts of interest

The proposed FAR rule, like the DOD rule, seeks to clarify key terms and provide more detailed guidance regarding how contracting officers should identify and address OCIs. However, while DOD proposed to adopt the Government Accountability Office's (GAO) case law defining three types of OCIs (impaired objectivity, biased ground rules, and unequal access to information), the FAR Councils have concluded that following GAO precedent may not be the most advantageous approach and indicated that issues related to access to nonpublic information should be taken "out of the domain of OCI" and treated separately.3

The proposed rule would revise the definition of "organizational conflict of interest" to identify two situations that pose an OCI. One is similar to the "impaired objectivity" OCI identified under GAO's case law and arises where a contractor's exercise of judgment may be "improperly influenced" by its own interests or those of an affiliate rather than the best interests of the government. Unlike DOD's proposal, the FAR rule would not dictate that agencies attribute the interests of affiliated entities to the offeror or contractor. Instead, the rule would require the contracting officer to analyze the particular relationship between the offeror or contractor and its affiliates on a case-by-case basis to assess the risks of potential conflicts.4 If adopted as proposed, this approach has the potential to create more flexibility for companies seeking to expand their business operations. The second situation encompassed by the proposed OCI definition appears to overlap with the "biased ground rules" OCI identified by GAO and arises where a contractor could have an unfair advantage because it was in a position to influence an acquisition.

Methods endorsed to address organizational conflicts of interest

The proposed rule identifies four methods that agencies can use to address OCIs:

1. Avoidance is an action that prevents an OCI from arising in a current or future acquisition. It can be accomplished by modifying the government's requirements (e.g., by ensuring that the statement of work does not require the contractor to provide objective analysis or evaluations), by requiring the contractor to implement structural barriers or internal corporate controls, or by excluding an offeror from a competition. Excluding offerors, however, is discouraged and before doing so, contracting officers must not explain why a less restrictive method is available.

2. Limitation of future contracting allows the contractor to perform the current contract but precludes it from competing for future contracts (either as a prime contractor or subcontractor) where it would have an unfair advantage. The limitation must be restricted to a fixed term that expires on a specific date or upon the occurrence of an identifiable event.

3. Mitigation is "any action taken to reduce the risk that an organizational conflict of interest will undermine the public's trust in the federal acquisition system."5 The rule identifies several potential mitigation approaches, including using a "clean" subcontractor or team member to perform conflicted work or requiring the contractor to implement structural barriers or internal controls, such as independent directors and non-disclosure agreements (NDAs) between affiliates.

4. Accepting the inherent risk is another means to address certain OCIs. The proposed rule identifies two types of harm associated with OCIs: (a) harm to the integrity of the competitive acquisition process; and (b) harm to the government's business interests. The commentary accompany the rule indicates that the first type of harm should be eliminated "to the maximum extent possible." If the risk to the acquisition process cannot be eliminated and award is necessary to meet the government's needs, a waiver by the head of the contracting activity is required. The Councils suggest these situations should be "extremely rare."6 In contrast, the rule provides that, if the only potential risk is harm to the government's business interests, the contracting officer may decide, in appropriate circumstances, to accept the potential performance risk after exhausting other mitigation approaches. The notion that a contracting officer can decide to accept the risk of certain OCIs (without a formal waiver) is unique to the proposed FAR rule, providing more flexibility than the current FAR rules and DOD's proposal.

Organizational conflict of interest solicitation provisions and contract clauses

The FAR currently does not include any standard FAR OCI clauses. The proposed rule would introduce a series of standard solicitation provisions and contract clauses that contracting officers could tailor as appropriate under the specific circumstances.

  • 52.203-XX, Notice of Potential Organizational Conflict of Interest. This provision would notify offerors that the contracting officer has determined that performance of the contract may pose OCI risks. It would require offerors to disclose "all relevant information regarding any organizational conflicts of interest" and represent, "to the best of its knowledge and belief," that it has done so. This has the potential to create False Claims Act liability insofar as representations are later deemed false and material to the award of a contract. The clause further requires offerors to explain how they intend to address any OCIs (e.g., through a formal OCI mitigation plan or by agreeing to a limitation on future contracting).
  • 52.203-ZZ, Disclosure of Organizational Conflict of Interest After Contract Award. This contract clause would require the contractor to promptly and fully disclose OCIs that are discovered after award (including undiscovered conflicts that existed prior to award and conflicts that arose following award).
  • 52.203-YY, Mitigation of Organizational Conflicts of Interest. This clause applies when the contracting officer determines that a conflict can be addressed through a mitigation plan. The clause provides the mechanism for incorporating the mitigation plan into the contract, sets forth the rules to govern post-award changes to the plan, and addresses issues associated with noncompliance.
  • 52.203-YZ, Limitation on Future Contracting. This clause is used when the contracting officer addresses a potential conflict by requiring that the contractor agree to limit its ability to perform future contracts.

Treatment of access to nonpublic information

The proposed rule also includes extensive coverage of issues related to access to "nonpublic information," defined as any information that is exempt from disclosure or has not been disseminated to the public. These access issues and the potential for an associated unfair competitive advantage would not be characterized as OCIs and would be treated separately in an expanded FAR subpart 4.4.

The proposed rule includes two clauses, 52.204-XY, Release of Pre-Award Information and 52.204-YY, Release of Nonpublic Information, that would require all offerors and contractors to agree to release of their nonpublic information to third-party contractors for purposes of performing another government contract. Contractors with such access would be contractually obligated to protect all nonpublic information obtained through contract performance. A new clause, 52.204-XX, Access to Nonpublic Information, would preclude the contractor from using nonpublic information for any purpose unrelated to contract performance, and it would require the contractor to safeguard nonpublic information from unauthorized disclosure, inform employees of their obligations, and obtain NDAs from employees who have access to nonpublic information. The rule also includes alternate versions of the clause that are prescribed for situations in which the contracting officer determines that the contractor should execute a confidentiality agreement with a third party or that the contractor may required access to a third party's facilities or nonpublic information that is not in the government's possession.

Contracting officers would be required to address situations in which an offeror has access to nonpublic information that (a) was provided by the government; (b) is not available to other offerors; (c) is competitively useful; and (d) provides an unfair advantage. To assist agencies in identifying such situations, a new solicitation provision, 52.204-YZ, Unequal Access to Nonpublic Information, would require offerors to identify whether they or any affiliates possess nonpublic information that is "relevant to the current solicitation" and was provided by the government. When resolution is required, the contracting officer has discretion to adopt an appropriate mitigation technique, which could include disclosing information to all offerors, obligating an offeror to implement a firewall, or disqualifying the offeror with access to the information. Disqualification is the least-favored approach and is only appropriate if no other method of resolution will adequately protect the integrity of the competition.

Applicability

Finally, the proposed rule would apply to both for-profit and not-for-profit contractors. It would not exempt commercial-item contracts (including contracts for commercially available off the shelf items), but the commentary accompany the rule indicates that the Councils believe the risk of OCIs and thus the need for certain contract clauses will not be frequent for such acquisitions.7

Footnotes

1. FAR Case 2011-001, Proposed Rule, Organizational Conflicts of Interest, 76 Fed. Reg. 23,236 (Apr. 26, 2011).

2. DFARS Case 2009-D015, Proposed Rule, Organizational Conflicts of Interest in Major Defense Acquisition Programs, 75 Fed. Reg. 20,954 (Apr. 22, 2010). Congress mandated that DOD issue OCI regulations to govern Major Defense Acquisition Programs (MDAPs). DOD's proposed rule extended beyond MDAPs and would have applied broadly to all non-exempt DOD procurements. DOD subsequently issued a final rule that was limited to MDAPs and indicated that it was deferring a decision on the other proposed regulations.

3. 76 Fed. Reg. at 23,238.

4. The proposed rule would direct the contracting officer to consider whether: (1) the offeror and affiliate are controlled by a common corporate headquarters; (2) the overall corporate organization has established internal barriers that limit the flow of information, personnel, and other resources between organizations; (3) the organizations are separate legal entities and are managed by separate boards of directors; (4) the corporate organization has instituted OCI training and other protections; and (5) the affiliate can influence contract performance. See id. at 23,245.

5. Id. at 23,245.

6. Id. at 23,238.

7. Id. at 23,239.

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