Understanding and Mitigating Risks of Prospective Suspensions for Affiliates of Suspended or Debarred Entities

Federal contractor suspensions are discretionary administrative agency actions that exclude firms with unsatisfactory honesty, integrity, or business ethics records from participating in federal contracts or programs. Government officials may suspend contractors, along with their affiliates, for a variety of reasons, including the commission of fraud, criminal offenses, unfair trade practices, or other offenses. The Federal Acquisition Regulations (FAR) 9.407-1(b)(1) describe suspensions as serious actions implemented when a completion of investigation or legal proceedings is pending. In that sense, suspensions may be seen as precursors to more permanent debarment actions. Suspension actions are thus imposed based on adequate evidence when the Government determines that immediate action is necessary to protect its interests. Federal contractors are required to demonstrate responsibility before receiving contracts. Therefore, prospective contractors are only eligible for an award if they are deemed responsible. In fact, unsuccessful offerors may challenge responsibility of awardees through post-award bid protests. Meanwhile, if existing contractors are deemed non-responsible, the Government may initiate suspension and debarment proceedings against the non-responsible contractor.

Since suspension and debarment actions are administered on a government-wide basis, companies excluded by a federal agency are excluded from doing business with all federal agencies for the length of their suspensions. The General Services Administration (GSA) maintains a list of these excluded companies, which is made available to the public through the System of Award Management (SAM). Federal contractors must also certify their exclusion status and those of all lower-tier subcontractors. As temporary disqualifications from government contracting, suspensions generally last up to a year. In fact, under FAR 9-407-4, suspensions may not last longer than 18 months unless legal proceedings have been initiated against the suspended contractor within that period. When the Government suspends a contractor, it may also suspend affiliates of that contractor. To suspend an affiliate of a suspended or debarred contractor, the Government is required to name the affiliated entity specifically in the suspension. Additionally, the suspending Government agency must provide the affiliated entity with a written notice of the suspension and an opportunity to respond to the suspension.

In interpreting the interplay of these regulations, the United States Court of Appeals for the Eleventh Circuit has previously held that the Government may suspend an affiliate of a suspended contractor for longer than 18 months when legal proceedings have been initiated against the contractor during that period. In the relevant case from 2013, a large federal contracting firm was indicted by a grand jury for committing a multibillion-dollar fraud against the United States in performing a government contract to supply food to American military personnel in the Middle East region. Based on the indictment, the Defense Logistics Agency (DLA) suspended two affiliate companies of the large federal contractor. In challenging the suspensions, the affiliate companies argued that they were not implicated in the parent company’s indictment and submitted evidence of compliance procedures to prevent fraud. However, DLA was unconvinced and continued their suspensions. The affiliates later presented a management buyout plan where they proposed that a new holding company would attain a majority 60 percent stake in the affiliate companies, with the indicted parent company retaining only 40 percent ownership. However, DLA rejected these buyout proposals despite having lifted suspensions of other affiliates of the indicted parent company based on similar management buyouts.

The affiliates brought the matter to a Federal District Court that granted summary judgment in favor of the affiliates, ruling that the Agency did not have the authority to suspend the affiliates beyond 18 months. However, the U.S. Court of Appeals for the Eleventh Circuit reversed the District Court’s summary judgment ruling. During the appeal, the affiliate companies argued that since no legal proceedings had been initiated against them in the 18 months since the beginning of their suspension, DLA had to lift their suspensions. Meanwhile, DLA took the position that it could suspend the two affiliates beyond the 18-month period since legal proceedings had already commenced against the parent company during that period and because the companies could not demonstrate that they were no longer affiliates of the parent company. In conducting regulatory interpretation utilizing the plain meaning analysis in the context of two additional related provisions, the Court concluded that the Government may suspend the affiliate companies based on their affiliation status with the suspended parent company alone. That is, the Agency need not present a showing of wrongdoing on the part of the affiliate companies themselves to suspend them. In such a scenario, a suspending agency must only meet the following three requirements to suspend an affiliate company.

  • The agency must establish that the indicted Government Contractor can control or be controlled by the affiliate.
  • The agency must specifically name the affiliate when suspending it.
  • The agency must provide the affiliate with a notice of the suspension and a notice of an opportunity for it to respond.

The Court further clarified that the suspension of an already suspended Government contractor and its affiliate together constitute only one suspension decision as affiliates are considered included in the suspension of the indicted Government contractor under FAR 9.407-1(c). Therefore, such a suspension decision does not require a showing of wrongdoing by the affiliate company itself.

While Government agencies may extend the suspension to affiliates of suspended contractors, they are not required to do so. Affiliates who have been suspended are allowed to respond and provide mitigating evidence. Affiliate companies of suspended or indicted contractors should look to present evidence demonstrating a lack of control dynamic between the suspended company and the affiliate to support their argument against the suspension reaching them. Such evidence may include differences in management structure and personnel, sufficiently detailed compliance procedures, and adequate firewalls. The Government will generally review such evidence on a case-by-case basis to determine whether to extend the suspension to the affiliate or whether the affiliate’s responsibility remains unaffected, rendering their suspension unnecessary.

This Federal Procurement Insight is provided as a general summary of the applicable law in the practice area and does not constitute legal advice. Contractors wishing to learn more are encouraged to consult the TILLIT LAW PLLC Client Portal or Contact Us to determine how the law would apply in a specific situation.