Breakout Session # 905 Jonathan S. Aronie, Esq. Sheppard Mullin Richter & Hampton LLP April 24, 2007 1:40 – 2:40 p

2. Advanced Issues In Multiple Award Schedule Contracting Breakout Session # 905 Jonathan S. Aronie, Esq.Sheppard Mullin Richter & Hampton LLP April 24, 2007 1:40 – 2:40 pm

3. The Audit Alphabet Soup • GSA • GSA OIG (auditors) • GSA OIG (agents) • SBA • IOA • DOL OFCCP • GAO • DCAA • Agency inspections • And whistleblowers

4. Parade of Horribles . . . • Breach of contract • Price adjustments (retroactive) • Price reductions (prospective) • Cancellation/Termination • Civil False Claims Act • DOJ initiated • Relator initiated • Suspension/Debarment • Collateral suspension/debarment • Criminal prosecution

5. Civil False Claims Act • Civil War era anti-fraud statute • Currently Government’s primary civil fraud statute • “Qui Tam” provisions permit suits to be brought by “relators” on behalf of Government • Relators can be part of the alleged fraud • Significant damages / penalties

6. Elements Of An FCA Action • A false claim • Submitted to the U.S. Government • “Knowingly” • Actual knowledge • With deliberate indifference • Recklessly • Slightly different for a “Reverse False Claim”

7. Damages / Penalties • Treble damages • $1M actual damages costs you $3M in damages • Up to $11,000 Penalties per violation • $1 overcharge on 100 invoices costs $300 in damages, plus $1,100,000 in penalties • Plus Plaintiff’s attorneys fees in some cases • Plus your own attorneys fees • Plus collateral damages

8. Illustrative MAS FCA Settlements $98M

9. “Every indication we have, including hotline calls and qui tam actions filed under the civil False Claims Act, is that defective pricing is currently alive and well at GSA, although the contractual right to audit for it is not.” -Kathleen S. Tighe

10. High Risk Areas

11. Contractor Team Arrangements

12. Contractor Team Arrangements • MAS contractors can team • Facilitates award of large, complex tasks • Facilitates small business participation • CTAs vs. subcontracts • Key compliance considerations • All members must be MAS contractors • Each member must sell at its own Schedule price • Each member must pay its own IFF • GSA now permits single POC for invoicing/billing

13. GSA’s Suggested Elements Of A Quality CTA • Identify participants, responsibilities, schedules, items • Define key terms • Identify scope, performance period, termination provisions • Identify fees, etc. • Identify administration functions and process • Establish license and other proprietary rights • Establish representations and warranties • Identify confidentiality provisions • Identify indemnification provisions • Identify governing law • Establish how disputes will be resolved

14. Price Reductions Clause

15. Overview • Contractor provides data to GSA prior to negotiations (“CSPF”) • Discloses standard commercial practices • Data reveal customers that receive company’s best discounts (“MFC”) • Company negotiates “Basis of Award” category of customers and BOA/GSA relationship

16. The Price Reductions Clause • The Price Reductions Clause serves to maintain the relationship between three prices: • The GSA price • The BOA price • The commercial list price • Changes to the relationship subsequent to award trigger the Clause

17. Computing a Price Reduction

18. Computing a Price Reduction

19. Computing a Price Reduction

20. What Does NOT Trigger the Clause? • Sales to Federal agencies/Authorized Purchasers • Sales outside the basis of award (if within disclosed commercial practices) • Sales of products/services not on Schedule • Certain fixed price, high dollar value orders • Certain “spot discounts” provided equally to the Government • Quotation or billing errors, properly reported to GSA • Other disclosed and pre-approved sales

21. Scope of Contract Issues

22. Scope Of Contract Issues • Two key questions • Is the product/service within the scope of your Schedule? • Is the product/service on your Schedule? • Terminology • “On Schedule” or “Schedule Item” • “Non-Schedule” or “Non-FSS” • “ODC” • “Ancillary Item” or “Incidental Item” • “Open Market” • GSA’s ongoing investigative focus in this area • Bid protests

23. Trade Agreements Act

24. TAA Overview • All Schedule products and services must comply with the Trade Agreements Act (TAA) • Products must be “substantially transformed” in an eligible country • Services must be performed by a company “established” in an eligible country • Schedule contractors must take TAA compliance seriously

25. Summary of Eligible Countries • United States • Caribbean Basin Countries • Free Trade Agreement Countries • Least Developed Countries • WTO Government Procurement Agreement Countries See FAR Part 25 for a current list of eligible countries.

26. Partial List of Ineligible Countries • Taiwan • Malaysia • China • South Africa • General rule: If it’s not expressly eligible, it’s ineligible.

27. Substantial Transformation Guidelines • Origin of components is generally (but not always) irrelevant where there has been a substantial transformation. • Assembly operations that are minimal or simple generally will not result in a substantial transformation. • Components packed together as a set are not necessarily substantially transformed by virtue of being so packed. • Products sold as “optional” configurations still may meet TAA requirements • “Substantial transformation” requires something more than mere assembly. • The TAA substantial transformation test is somewhat different from the NAFTA test.

28. Illustrative Questions • Does the name of the end product differ from the names of its components? (e.g., computer vs. display, disk drive, keyboard, etc.) • Do the physical characteristics and qualities of the end product differ from those of its components (e.g. size, weight, shape, strength, hardness, etc.)? • Is the end product used for a different purpose than its components? • What level of complexity is involved in assembly? • How many components are there? • What technologies are involved? • How many operations are required? • What machinery or tooling is used? • How long does the process take? • What types of technical skills must employees possess? • What is the expense and value added of assembly?

29. Audits

30. The Inspector General Act • Per the Inspector General Act of 1978, as amended, the Inspector General's mission is to: • Conduct independent audits and investigations • Prevent and identify waste, fraud, and abuse • Promote economy, effectiveness, and efficiency • Review pending legislation and regulation

31. The Origins Of An OIG Audit • Renewal (Pre-Award Attestation Review) • Contracting Officer referral • IOA referral • Whistleblower allegation • Competitor complaint • Targeted OIG enforcement effort (e.g., TAA) • DOJ investigation • Voluntary disclosure • Significant Schedule revenue growth • Historic risk factors • It’s just your time

32. GSA OIG • Statistics: Oct. - March ‘06 • 48 pre-award audits on contracts worth $3.8 billion • Made more than $240 million in financial recommendations • 991 Hotline calls • 372 referrals for criminal prosecution, civil litigation, and administrative action • 61 criminal cases; 9 civil cases; 66 administrative cases • 7 of the 9 civil cases were accepted for litigation by DOJ • More than $46 million in recoveries

33. VA OIG • Statistics: Oct. - March ‘06 • 13 pre-award reviews identified $69.8M in potential cost savings from Schedule vendors based upon “most favored” pricing concept • 515 investigations; 835 arrests • $176 million in monetary recoveries • Office of contract review recovered more than $17.5 million)

34. Current Audit Issues • “Commercial pricelist” • “Commercial sales” • Resumes • Mapping • Commercial to federal • Subcontractor to prime • Profit

36. Basic Rules For An OIG Audit • Call and involve your lawyer • Review document request carefully • Identify exclusive point of contact • Establish exclusive line of communication with auditor • Negotiate reasonable scope of document request • Don’t obstruct audit • Conduct privileged parallel review • Request and plan for entrance conference • Provide support to auditors throughout audit • Review all documents to be produced for privilege • Request and plan for exit conference

37. The Entrance Conference • Introduce key points of contact and selected key personnel • Discuss origin, scope, & duration of audit • Discuss logistics • Hours of operation • Designated auditor work area • Badge and escort requirements • Discuss production/interview rules • Document production/copying • Employee interaction (maybe/maybe not) • Request review of draft report and exit conference

38. The Exit Conference • Ensure company cooperated • Discuss substantive audit findings • Ensure auditors have all requested documents • If not, agree upon time line to provide documents, if appropriate • Agree upon any outstanding action items and time line to complete • Discuss auditors’ next steps and timing • Renew request to review draft report • Incorporate any new information into ongoing parallel privileged review

39. Why Do Bad Things Happen To Good People?

40. A few recurring scenarios… • Failure to understand Government Contracts environment • Sales growth outpaces infrastructure growth • Management focuses on revenue, without focusing on compliance • Individuals “on the ground” not incentivized to “do the right thing” • Decentralized operations without centralized control • Lack of training

41. How Can “Bad Things” Be Prevented? The Importance of a Comprehensive Internal Compliance Program

42. Ten Simply Ways to Reduce Risk • Submit only current, accurate, and complete information to Government • Memorialize all Government advice and direction in writing, and log all communications with the Government • Use email judiciously • Don’t give gifts to or engage in employment discussions with Government employees • Review solicitations, contracts, and subcontracts carefully, and take exceptions where necessary • Limit who can interact with the Government • Provide avenue for internal reporting of problems • Ensure Sales has a financial incentive to “get it right” • Maintain complete, up-to-date records of all proposals, contracts, and modifications • Develop a tailored internal compliance program

43. A Tailored Compliance Program • Senior officer must be assigned overall responsibility • Program must be tailored to organization • Program must incorporate Code of Conduct • Personnel must have access to hotline • Personnel must receive training • Compliance must be key to advancement • Program must be monitored and audited • Breach of program must result in discipline • Program must be reviewed and updated regularly

44. Questions?

45. A brief, shameless plug for the Second Edition of Multiple Award Schedule Contracting, by John Chierichella and Jonathan Aronie • Only comprehensive guide to the MAS program • Useful Vendor Resource Guide • Nationally recognized contributors • Ernst & Young • Coalition for Government Procurement • Government Officials • Hardcover or paperback • Available at www.schedulecontracts.comand

46. Jonathan S. Aronie, Esq. Sheppard Mullin Richter & Hampton LLP Washington, DC 202.218.0039 phone 202.302.4855 cell 202.312.9416 fax jaronie@sheppardmullin.com Jonathan’s professional experience includes litigating under the qui tam provisions of the False Claims Act, drafting corporate compliance plans, conducting internal investigations (proactive and defensive), and counseling corporate clients in an array of federal regulatory and statutory matters. He frequently meets with, negotiates against, and represents clients before the Department of Justice, the Government Accountability Office, the General Services Administration, and the various agencies of the Department of Defense. Jonathan writes a monthly procurement column for Federal Computer Week and is the co-author of the leading book on the Multiple Award Schedule Program. He is cleared at the highest levels and frequently counsels clients in classified matters relating to national security.