New Developments in the Mandatory Disclosure Rule that In-House Counsel Must Know: A Brief Note
David Newsome, Jr.[i]
Of the many and diverse duties and responsibilities of in-house counsel for government contractors, one of the more important roles is advising and overseeing internal investigations into employee or company misconduct. Indeed, missteps in internal investigation processes, procedures, or implementation can have devastating consequences for the company, employees, and even counsel. For government contractors, aspects of certain internal investigations may, in some circumstances, have to be disclosed to their client, the US government, under the Mandatory Disclosure Rule (MDR). A recent decision by the US District Court for the Eastern District of Virginia, Anderson v. Flour[ii], has challenged both the industry and government’s understanding of the MDR requirements. For in-house counsel in particular, an understanding of this decision and its impact on company policies, procedures, and investigations is pivotal to properly advise their clients. This brief note will explore the MDRand the court’s decision, and will offer recommendations therefrom.
The MDR, although not exactly titled as such, is found in FAR 52.203-13, Contractor Code of Business Ethics and Conduct[iii]. The clause itself generally addresses contractor business ethics and compliance programs. There is a MDR in both the code of business ethics and conduct section at FAR 52.203-13 (b)(3)(i) and the internal control section at FAR 52.203-13 (c)(2)(F). They are identical and require contractors to timely disclose credible evidence of certain procurement related federal criminal violations and violations of the civil False Claims Act to agencies’ Office of Inspector General (OIG). Contractors who fail to comply with the MDR face suspension and or debarment under FAR 9.4, remedies that could be the death knell of a government contractor.
Based upon information and belief, contractors, in efforts to comply with the MDR, have been submitting disclosures to the pertinent OIG offices that satisfy the “full cooperation” definition of FAR 52.203-13; that is, the disclosures provide sufficient information for law enforcement to identify the nature and extent of the offense and the individuals responsible for the conduct. Indeed, that the Government expects such robust disclosure from contractors, presumably, is evidenced by the information requested in the various agency disclosure forms, many of which require more than just factual information.[iv] Thus, in practice, counsel, either in-house or retained, have led or overseen internal investigations to ensure that any disclosures to the government were protected by the attorney-client privilege or the work-product doctrine. Anderson v. Flour[v] will likely create a wrinkle in this practice, to a certain extent.
There, Flour terminated the employment of Brigadier General Anderson following an internal investigation into whether Anderson had a conflict of interest with a subcontractor bidding on a subcontract. Anderson sued for wrongful termination.
During the discovery phase of the litigation, Anderson became aware of, and requested, Flour’s internal investigation into the matter. Flour refused to provide the report and Anderson moved to compel discovery of the report. The magistrate judge denied the motion, finding that the investigation was by and at the direction of counsel and thus protected by both the attorney-client privilege and work product doctrine.[vi]
Anderson appealed the ruling to the District Court. In reversing the lower court, the Court held that Flour had waived both the attorney-client privilege and the work-product doctrine when it submitted the internal investigation into Anderson’s conduct to a third party, here the agency DOD IG. “Any voluntary disclosure by the client to a third party waives the privilege not only as to the specific communication disclosed, but often as to all other communications relating to the same subject matter.” Id. at 7, citing United States v. Jones, 696 F.2d 1069, 1072 (4th Cir. 1982).
The Court found that Flour failed to establish that it had not waived the privilege regarding four statements in the disclosure:
- “Plaintiff “appears to have inappropriately assisted….”
- “Flour considers [that] a violation…,”
- Plaintiff “used his position…to pursue [improper opportunities] and …to obtain and improperly disclose nonpublic information…”, and
- “Flour estimates there may have been a financial impact…[due to] improper conduct.”
The Court found that these four statements, which are legal conclusions that would typically be privileged, were waived by Flour when it voluntary disclosed the investigation to the DOD IG. Buttressing its finding that Flour had voluntarily waived its privileges, the Court noted that Flour had admitted on eight separate times in the pleadings that the disclosure to the government was, in fact, voluntary. Moreover, the Court deemed Flour’s use of the term “voluntary” as judicial admissions.
Flour, in an obvious attempt to counter and diffuse the eight uses of the word “voluntary,” argued that the disclosure was under the auspices of the MDR. Addressed in a footnote, the Court, in reviewing FAR 52.203-13, held that the MDR does not require disclosure of investigative findings, the credible evidence, any summary, or any detail. Rather, according to the Court, all the MDR requires is a “mere notice disclosing the fact that the contractor has credible evidence.” Anderson at 12. Moreover, the Court found that the “full cooperation” requirement in the definition of FAR 52.203-13 is separate from the mandatory disclosure provision and is not a part of it. According to the Court, “full cooperation occurs when contractors act in response to a government request. 52.203-13(a)(2)(i).” Id.
Flour moved for reconsideration,[vii] arguing, among other things, that “the plain language of governing regulations, the regulatory history, and official government guidance make clear that the entirety of the report was submitted to the government pursuant to the mandatory regulatory requirements.”
Flour further asserted that the Court erred in its MDR ruling, and that, in practice, the federal government encourages and expects government contractors to submit “full cooperation” disclosures, and not just a document containing the mere existence of “credible evidence.” Flour supported its argument by referencing various government Inspector Generals’ disclosure forms and industry MDR guidelines that, according to Flour, clearly show that the government expects “full cooperation” disclosures from contractors. These disclosures, Flour added, have significant legal implications, requiring more than the mere existence of credible evidence, and Flour noted that contractors have long provided counsel-directed internal investigations, which are protected by the attorney-client privilege.
Finding Flour’s arguments unpersuasive, the Court essentially reiterated its initial ruling that the MDR requires only a timely, written disclosure, upon credible evidence and that such disclosure need not be comprehensive, which is the case with “full cooperation” disclosures. The Court reviewed the legislative history of the clause and found it consistent with its interpretation that the “full cooperation” privilege protections do not extend to the MDR provisions of FAR 52.203-13. Moreover, the Court maintained its earlier ruling that Flour’s uses of the word “voluntary” were judicial admissions, thus negating Flour’s contention that the disclosures were actually made under the auspices of the MDR.
Future gyrations of Anderson v. Flour will certainly be closely monitored by the government contracting community. As for now, until this matter is finally resolved, in-house counsel should review their internal investigation and disclosure policies to determine what changes, if any, are necessitated by the decision. For those contractors whose practice is to make minimal disclosures, there may be no need to change or modify their behavior. Others, however, may need to evaluate their policies to determine whether disclosures should provide only broad facts with no legal conclusions, and that only inform the government of the existence of a credible violation, and no more. Whichever disclosures are provided, counsel should ensure that disclosures specifically state that they are made pursuant to the MDR, are not voluntary, and are protected by the attorney-client privilege and work-product doctrine. Doing such, however, carries risk. That is, providing bare-boned disclosures could bring into question a contractor’s present fitness to contract or enhance the risk that the government may miscomprehend the disclosure. Switching to the government’s perspective, agencies should anticipate receiving disclosures that fall short of the customary robust practice. Agencies may have to modify their disclosure forms and, in some respects, determine whether additional resources are required, and available, to investigate matters left short by bare-boned MDR disclosures.
[i] David Newsome, Jr., is a Senior Legal Counsel at KBR. This article and any opinions therein are his alone, and in no way, form, or fashion represent the opinions, positions, or interpretations of KBR.
[ii]Anderson v. Flour Intercontinental, Inc. et al, 1:19-cv-00289-LO-TCB, Nov 15, 2019.
[iii]In pertinent part:
(a) Definitions. As used in this clause– ….
(1) Means disclosure to the Government of the information sufficient for law enforcement to identify the nature and extent of the offense and the individuals responsible for the conduct. It includes providing timely and complete response to Government auditors’ and investigators’ request for documents and access to employees with information;
(2) Does not foreclose any Contractor rights arising in law, the FAR, or the terms of the contract. It does not require-
(i) A Contractor to waive its attorney-client privilege or the protections afforded by the attorney work product doctrine; or
(ii) Any officer, director, owner, or employee of the Contractor, including a sole proprietor, to waive his or her attorney client privilege or Fifth Amendment rights; and ….
(b) Code of business ethics and conduct. ….
(2) The Contractor shall–
(i) Exercise due diligence to prevent and detect criminal conduct; and
(ii) Otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.
(i) The Contractor shall timely disclose, in writing, to the agency Office of the Inspector General (OIG), with a copy to the Contracting Officer, whenever, in connection with the award, performance, or closeout of this contract or any subcontract thereunder, the Contractor has credible evidence that a principal, employee, agent, or subcontractor of the Contractor has committed-
(A)A violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code; or
(B)A violation of the civil False Claims Act ( 31 U.S.C. 3729-3733). ….
(2)An internal control system.
(i) The Contractor’s internal control system shall- ….
(F) Timely disclosure, in writing, to the agency OIG, with a copy to the Contracting Officer, whenever, in connection with the award, performance, or closeout of any Government contract performed by the Contractor or a subcontract thereunder, the Contractor has credible evidence that a principal, employee, agent, or subcontractor of the Contractor has committed a violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 U.S.C. or a violation of the civil False Claims Act (31 U.S .C. 3729-3733).
[iv]See, for example, the Department of Commerce’s form at https://www.oig.doc.gov/Documents/FAR-disclosure.pdf; DOD https://www.dodig.mil/Portals/48/Documents/Contractor-Disclosure/Contractor-Disclosure-Program-Guide-1-Jun-17.pdf?ver=2017-06-19-093259-387;
[vi] Apparently, the parties did not address, nor did the trial Judge raise, the issue of whether the investigation was under the auspices of the MDR.
[vii] Anderson v. Flour Intercontinental, Inc. et al, 1:19-cv-00289-LO-TCB, Dec. 20, 2019.