At the end of last year, the Eleventh Circuit issued a disturbing decision involving the prolonged suspensions of two companies that had been suspended based solely on the indictment of an affiliated company.  In Agility Defense & Government Services v. U.S. Department of Defense, 739 F.3d 586, the court held that the plaintiffs could be suspended for longer than the 18 months specified by FAR 9.407-4(b) because legal proceedings had been initiated against a parent company – but not against the plaintiffs themselves. For at least four reasons, this holding causes concern for Government contractors.

Under FAR 9.407, an agency official may suspend a Government contractor for various reasons. The official may extend the suspension to include any affiliate of the contractor if they are (1) specifically named and (2) given written notice of the suspension and an opportunity to respond. In no event may a suspension extend beyond 18 months, unless legal proceedings have been initiated within that period.

On November 16, 2009, the Defense Logistics Agency (“DLA”) suspended Public Warehousing Company (“PWC”) based on an indictment of PWC for alleged Government contracting fraud. On the same day, DLA suspended plaintiff Agility Defense because it was an affiliate of PWC; one week later, DLA suspended plaintiff Agility International on the same basis. The affiliates submitted written responses in opposition to the suspensions, which DLA rejected. Agility International proposed a management buyout in which PWC would indirectly retain only 40 percent ownership. DLA stated that the buyout would not affect the suspension, so Agility International did not complete the buyout. DLA did, however, lift the suspensions of other PWC affiliates based on similar management buyout plans. The plaintiffs filed suit in the Northern District of Alabama seeking injunctive and declaratory relief. The district court granted summary judgment in favor of the affiliates, holding that because the Government had not initiated legal proceedings against the affiliates within 18 months of their suspension notices, the suspension were contrary to law. []

The central issue on appeal was whether the Government must initiate legal proceedings against an affiliate of an indicted Government contractor to toll the 18-month time limit on the suspension of the affiliate even though the affiliate was suspended solely on account of its affiliate status. The Government argued that “legal proceedings” must be interpreted as legal proceedings against the indicted Government contractor, while the affiliates argued that the phrase must be interpreted as proceedings against the suspended affiliates of the indicted contractor. The appeals court reasoned that because the FAR establishes that an agency can suspend an affiliate without any showing of wrongdoing by the affiliate, “legal proceedings” includes proceedings against the indicted Government contractor. The court effectively treated the separate suspensions of the parent company and the affiliates as one suspension:

Together, the suspensions of an indicated government contractor and its affiliate constitute one ‘suspension decision’ because an affiliate is ‘include[d] in the suspension of the indicated government contractor.

The appeals court also rejected the affiliates’ argument that they must be treated as an independent entity when an agency evaluates the duration of a suspension because an agency treats an affiliate as an independent entity when evaluating whether the affiliate is eligible to be a Government contractor. The court also indicated that the agency action at issue was not a finding of present responsibility for the purpose of awarding a Government contract; instead, the court was reviewing the suspensions of two affiliates. The Court stated that the “present responsibility of an affiliate is irrelevant.”

For at least four reasons, the court’s decision rests on questionable grounds.

First, the court’s decision to lump the suspension of the parent company in with the suspensions of the affiliates – effectively treating them as one suspension – is undermined by the facts in the case and procedures afforded by FAR Subpart 9.4. DLA did not treat the suspension of the parent and the suspensions of various affiliates as a single suspension. Instead, DLA suspended one of the affiliates one week after suspending the parent (and the other affiliate). Also, the two plaintiff affiliates submitted oppositions to their suspensions, and DLA actually lifted the suspensions of other affiliates. Moreover, as the court recognized, individual affiliates have the opportunity under the FAR to provide individual responses to suspensions:  “An agency must immediately notify a suspended affiliate of its suspension by certified mail. That notification includes the basis of the suspension and advises the affiliate of its opportunity to respond in writing.” Accordingly, an affiliate not only receives separate notice of its suspension, but also is afforded the right to submit a response that is separate from any response submitted by its parent company.

Second, any effort to treat suspensions of separate affiliates as a single suspension cannot be reconciled with the discretionary nature of suspension. Affiliates of an indicted Government contractor are not automatically suspended; instead, FAR 9.407-1(c) states that “[t]he suspending official may extend the suspension decision to include any affiliates of the contractor.”

Third, the court’s statement that it was not dealing with a finding of present responsibility for the purpose of awarding a Government contract but instead was reviewing the suspensions of two affiliates, artificially bifurcates the single concept of “present responsibility” that is the foundation of FAR Subpart 9.4. FAR 9.402(a) illustrates that “responsibility” for purposes of contracting underlies suspension and debarment:  “Agencies shall solicit offers from, award contracts to, and consent to subcontracts with responsible contractors only. Debarment and suspension are discretionary actions that, taken in accordance with this subpart, are appropriate means to effectuate this policy.”

Fourth, as the trial court explained, there is only one FAR provision regarding expiration of suspension, and it must be applied to suspected wrongdoers and suspended affiliates in a consistent manner. The lower court noted that a plausible reason for allowing suspension of affiliates is to allow the Government adequate time to investigate the affiliates for wrongdoing on their own part. That court explained the problem with Government’s interpretation, which

would allow the government to issue a blanket suspension against numerous contractors and, so long as proceedings were initiated against one of them, allow the government to sit on its hands, rather than taking steps to investigate and determine within a reasonable period of time whether the affiliates were guilty of misconduct, all while those affiliates suffered the loss of business.

As the district also court noted, the plaintiffs had been suspended for thirty-one months – nearly twice the regulatory limit of eighteen months. No company should have to endure a suspension beyond eighteen months unless legal proceedings have been initiated against that company within the eighteen-month period.