United States: New Federal Law Aims To Identify And Prevent Or Mitigate Organizational Conflicts Of Interest In Federal Contracting

In the midst of the year-end legislative push, Congress last week passed S. 3905, the "Preventing Organizational Conflicts of Interest in Federal Acquisition Act." This "good government" law requires the Federal Acquisition Regulatory Council (FAR Council) to revise the Federal Acquisition Regulation (FAR) to provide government contractors with clearer definitions and guidance-including in FAR clauses incorporated into contracts-regarding their obligations to avoid, mitigate, and disclose specific types of organizational conflicts of interest (OCIs). In short, Congress aims to ensure that contractors' public, private, domestic, and foreign business relationships do not unduly influence their federal government contracts.

Whether the law proves to be a bane or a boon will be in the eye of the beholder. Sophisticated government contractors and nonprofit organizations may already have robust controls to identify, avoid, and report OCIs. Nonetheless, all organizations that contract with the federal government should recognize both the risks and opportunities presented by the new law, and they may be wise to comment during the public rulemaking process to help shape the final contours of the policy.

Background and Congressional Interest

Conflict of interest rules are not new in the federal acquisition arena. For decades, the FAR has compelled contractors (and contracting officers) to proactively identify, evaluate, and resolve OCIs when they compete for and perform on contracts and task orders.¹

Under the FAR, an OCI:

means that because of other activities or relationships with other persons, a person is unable or potentially unable to render impartial assistance or advice to the Government, or the person's objectivity in performing the contract work is or might be otherwise impaired, or a person has an unfair competitive advantage.²

FAR Subpart 9.5 and, in particular, FAR 9.505 provide the general rules that govern OCIs. Case law in the federal court and the U.S. Government Accountability Office have classified OCIs into three categories: (1) biased ground rules, under which the contractor was unfairly able to set the competition rules for the procurement, such as preparing specifications or work statements (FAR 9.505-2); (2) impaired objectivity, where a firm's ability to render impartial advice would be undermined by the firm's competing interests, which is addressed in part by FAR 9.505-1, Providing systems engineering and technical direction, and FAR 9.505-3, Providing evaluation services; and (3) unequal access to information (see FAR 9.505-4).

The general FAR guidance, including FAR 9.505, prioritizes preventing the existence of an OCI and unfair competitive advantage. If an OCI exists, or cannot be mitigated, the consequences can be severe-up to and including the disqualification of an otherwise successful contract awardee, or the inability to challenge a competitor's award.³

Yet, notably, there is no singular FAR clause⁴ that affirmatively imposes obligations on contractors to avoid, mitigate, or report OCIs. In the absence of centralized FAR guidance, some agencies, such as the Department of Defense (DoD),⁵ the Department of the Navy,⁶ the Food and Drug Administration (FDA), and Department of Education⁷ have included clauses in solicitations and contracts that impose affirmative obligations related to OCIs.

The utility of clearer, more uniform FAR guidance, including in FAR clauses, became evident during the investigation of and legal challenges directed against McKinsey & Company, a management consulting firm, for its failure to disclose OCIs related to its work with opioid manufacturers. Specifically, in April of this year, the House Committee on Oversight and Reform released an Interim Majority Staff Report uncovering "significant, years-long conflicts of interest at McKinsey, resulting from its work for the [FDA] at the same time that it was advising opioid manufacturers."⁸ Among other findings, McKinsey allegedly "failed to disclose its serious, longstanding conflicts of interests to FDA, potentially violating contract requirements and federal law[.]"⁹

In the wake of these investigations and media coverage, a bipartisan group of lawmakers introduced and successfully advanced the "Preventing Organizational Conflicts of Interest in Federal Acquisition Act" to revise and strengthen OCI regulations.

According to Senator Chuck Grassley (R-IA), one of the law's Senate co-authors,

[f]ederal contractors are entrusted to provide critical goods and services to the federal government as it serves the American people. If we don't know whether they are serving other, potentially conflicting interests, we can't be confident that Americans are getting exactly what they pay for. We've put together a good government bill that takes steps to eliminate these potential conflicts of interest to rebuild public trust in our contracting process[.]¹⁰

Anticipated Reforms to OCI Regulations

Passed by Congress on December 14, 2022, the law requires the FAR Council within 18 months to "revise" the FAR to provide and update "definitions related to specific types of organizational conflicts of interest," "definitions, guidance, and illustrative examples related to relationships of contractors.that may cause contract support to be subject to potential organizational conflicts of interest," and other illustrative examples, such as when "employees of the contractor.are permitted by the contractor to simultaneously perform work under a contract for a private sector client under the regulatory purview" of the contracting agency.¹¹

The anticipated FAR revisions must also "provide executive agencies with solicitation provisions and contract clauses.that require contractors to disclose information relevant to potential organizational conflicts of interest and limit future contracting with respect to potential conflicts of interest with the work to be performed under awarded contracts[.]"¹²

Agencies are also required to establish or update their own conflict of interest procedures, consistent with the FAR revisions. Finally, the FAR Council must "update the procedures set forth in [FAR] 9.506.to permit contracting officers to take into consideration professional standards and procedures to prevent organizational conflicts of interest to which an offeror or contractor is subject."¹³

While the bill advanced in the Senate with relative ease and bipartisan support-passing by unanimous consent in both the committee of jurisdiction and the full Senate-it only narrowly overcame potential hurdles in the House of Representatives, with a final (and largely party line) vote of 219 to 205.

There, some Republican members described the legislation as "unnecessary" and "duplicative," given that the FAR "already contains provisions targeting conflicts of interest" and "includes guidance for agencies to add contract clauses addressing conflicts that might arise."¹⁴ According to the bill's critique, "it will become even more difficult for companies to do business with the Federal Government, and it is complicated enough as it is."¹⁵

The bill now being law, the contractor community must adapt to the anticipated changes. Importantly, however, President Biden's signature does not end the policymaking process. Rather, any proposed revisions to the FAR spurred by this legislation will likely first proceed through public notice-and-comment rulemaking. This means the contractor community will have the opportunity to weigh in on proposed revisions and can thereby help shape the final policy.

Contractors concerned about the rules-fearing they may go too far, or not far enough-should not miss the chance to have their perspectives heard and considered. Those interested in tracking the latest updates on proposed FAR revisions should visit the U.S. government's official acquisition page here.

Footnotes

1 FAR 9.500.

2 FAR 2.101.

3 See CACI, Inc.-Fed. v. United States, 158 Fed. Cl. 1, 5 (2021) (denying protest of a $774 million Army encryption device contract where protestor failed to rebut allegations of its own OCI).

4 On April 26, 2011, at 76 FR 23236, the FAR Council had proposed a rule that included FAR OCI clauses, which it withdrew on March 19, 2021. 2021 FR 05658.

5 48 C.F.R. § 252.209-7008, Notice of Prohibition Relating to Organizational Conflict of Interest - Major Defense Acquisition Program (Dec. 2010).

6 See, e.g., NAV 5252.209-9513, Organizational Conflict of Interest instructions (Services) (NAVAIR) (Jun. 1993).

7 48 C.F.R. §3452.209-70, Conflict of Interest Certification (Mar. 2011).

8 "The Firm and the FDA: McKinsey & Company's Conflicts of Interest at the Heart of the Opioid Epidemic," U.S. House Committee on Oversight and Reform, Interim Majority Staff Report at 3 (April 13, 2022), available at https://oversight.house.gov/sites/democrats.oversight.house.gov/files/2022-04-13.McKinsey%20Opioid%20Conflicts%20Majority%20Staff%20Report%20FINAL.pdf.

9 Id. at 5.

10 Press Release, Sen. Chuck Grassley (R-IA), "Grassley, Peters, Hassan, Ernst Bipartisan Legislation to Prevent Conflicts of Interest in Federal Contracting Advances in Senate" (May 25, 2022), available at https://www.grassley.senate.gov/news/news-releases/grassley-peters-hassan-ernst-bipartisan-legislation-to-prevent-conflicts-of-interest-in-federal-contracting-advances-in-senate.

11 S.3905, Sec. 2(a)(1), available at https://www.congress.gov/bill/117th-congress/senate-bill/3905/text.

12 Id. Sec. 2(a)(2).

13 Id., Sec. 2(a)(5).

14 168 Cong. Rec., No. 194 H9837, H9838 (Daily Ed., Dec. 14, 2022) (statement of Rep. Keller), available at https://www.congress.gov/117/crec/2022/12/14/168/194/CREC-2022-12-14-pt1-PgH9837.pdf.

15 Id.

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