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The corporate death penalty, as suspension and debarment is often referred to, can kill more than just a contractor; it has the potential to wipe out an entire corporate family.

At both the federal and state levels, suspension and debarment against a contractor can affect that contractor’s affiliates, regardless of whether they were involved in any wrongdoing. Whether its suspension or a “not responsible” determination of the faultless affiliate, the risk of affiliation with a suspended or debarred contractor is real and it’s expanding.

The far reach of FAR

The Federal Acquisition Regulation (FAR) permits suspension and debarment of government contractors for a variety of reasons, including, but not limited to, commission of fraud, bribery, falsification of business records, and other criminal offenses, indictment for any of the aforesaid, violation of the civil False Claims Act, or the commission of any offense indicating a lack of business integrity or honesty that seriously and directly affects the present responsibility of the contractor. Not only does FAR allow harsh penalties against a contractor that has engaged in such misconduct, but it also permits the suspension or debarment to be applied to any affiliates of the contractor, regardless of whether they have been implicated in or even accused of any wrongdoing.

Late last year, the U.S. Circuit Court of Appeals for the 11th Circuit, in Agility Defense & Government Services v. U.S. Department of Defense, No. 13-10757 (11th Cir. Dec. 31, 2013), expanded the potential reach of these suspension and debarment powers. While FAR contains a provision capping suspensions at 18 months unless legal proceedings have been instituted, the 11th Circuit limited the application of this cap--finding that “legal proceedings” against a contractor tolls the 18-month maximum suspension for all of the contractor’s affiliates. That means an indictment against a parent company can result in an indefinite suspension of its affiliates, even when those affiliates have not been implicated in any wrongdoing.

The 'Not Responsible' Affiliate

Not only can the misconduct of a contractor result in the suspension or debarment of its inculpable affiliates under FAR, but it can also lead to a finding that the affiliates, who have not been alleged to have participated in the misconduct, are nonetheless “not responsible.”

Though not a new case, OSG Product Tankers, LLC v. United States, 82 Fed. Cl. 570 (2008) illustrates this potential far-reaching impact of affiliation with a contractor accused of misconduct. In that case, the parent company of an indirect subsidiary was the subject of debarment proceedings. The subsidiary was not named in the debarment action and was not otherwise charged with any wrongdoing. The parent company ultimately entered into a plea agreement, avoiding debarment.

Despite the fact the parent company was not ultimately debarred, and despite the fact the affiliate was never a part of the debarment proceedings nor accused of any wrongdoing, the affiliate was nonetheless deemed not responsible on a subsequent contract. In arriving at the determination, the contracting officer applied the wrongdoings of the parent, which formed the basis of the debarment proceeding to the affiliate. Notably, in that case, the affiliate had relied on its parent’s financial strength and performance history in responding to the contract.

Expanding Risk of Affiliation

The potential impact of contractor misconduct on affiliates is of concern given the increased number of suspensions and debarments being issued by government agencies.  On March 5, 2014, the Interagency Suspension and Debarment Committee released a report on federal debarments for fiscal years 2012 and 2013 showing that, once again, suspensions and debarments by the federal government are on the rise.

Proposed legislation may further this trend. The Stop Unworthy Spending (SUSPEND) Act, introduced by Rep. Darrell Issa, proposes to strengthen the suspension and debarment system and increase transparency, largely by consolidating civilian agency suspension and debarment offices into one review board. Presently, individual agencies, each with their own procedures, handle suspension and debarment. Issa introduced the legislation as a means to ensure “zero tolerance for fraudsters, criminals, or tax cheats receiving taxpayer money through grants or contracts.”

Beyond a Federal Contractor Concern

Federal contractors are not the only ones subject to the potential far-reaching effects of the corporate death penalty. Many state and local laws regarding suspension and debarments are similarly modeled after FAR, permitting (and in some instances requiring) suspension or debarment based solely on affiliation with a suspended or debarred contractor.

In addition to corporate structure considerations, affiliate status is often critical to contractors in order to establish appropriate performance history, financial strength or bonding capacity. Given the potential far-reaching impact of affiliation with a suspended or debarred contractor, firms should evaluate related entities’ compliance programs and practices to ensure that a contractor receives the benefits of affiliation instead of a death sentence.

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