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Treasury Implementation of CARES Act $17 Billion Loan Program for Businesses Critical to Maintaining National Security

On April 23, 2020, pursuant to Section 4003(b)(3) of the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. 116-136 (“CARES Act”), the U.S. Department of Treasury (“Treasury”) released a loan application form for “businesses critical to maintaining national security.” While the application form is “for informational purposes only” to allow prospective borrowers to begin to prepare their respective submissions, Treasury announced on April 25, 2020 that applications may be submitted online beginning on April 27, 2020.

Interested companies are advised to prepare and submit their applications promptly as applications are due at 3:00 P.M. EDT on May 1, 2020. Applications received after that time may not be considered. However, Treasury maintains discretion to consider late applications for approval subject to the availability of funds. Prospective borrowers are reminded that, unlike under the Paycheck Protection Program available to small businesses, loan forgiveness is not available under this loan program.

Specifically, the CARES Act authorizes the Treasury to make available up to $17 billion in loans and loan guarantees for “businesses critical to maintaining national security.” Section 4003(a), (b)(3). During an interview on April 23, 2020, Treasury Secretary Steven Mnuchin, in describing the intended beneficiaries of this loan program, stated that, “[t]his pot of money was designed to consider the needs of defense contractors, key suppliers to [the Department of Defense], and other companies that carry classified information.”

The purpose of the loan program is to provide liquidity to offset covered losses, which include losses incurred directly or indirectly as a result of the coronavirus (COVID-19) pandemic. Importantly, an applicant is eligible only if it has “not otherwise received adequate economic relief in the form of loans or loan guarantees” provided under the CARES Act. Section 4002(4)(B).

Treasury has defined a “business critical to maintaining national security” as one that, at the time of the loan application, is either:

  • Performing under a DX-priority rated contract or order under the Defense Priorities and Allocations System regulations (15 CFR Part 700); or
  • Operating under a valid Top Secret facility security clearance under the National Industrial Security Program regulations (32 CFR Part 2004).

Dep’t of Treasury, Q&A: Loans to Air Carriers and Eligible Businesses and National Security Businesses (updated as of Apr. 10, 2020).

The application requires applicants to submit detailed information supporting either of the above. If an applicant does not satisfy either threshold requirement, it may nevertheless be considered for a loan if the Secretary of Treasury, based on a recommendation and certification by the Secretary of Defense or the Director of National Intelligence, determines that the applicant is critical to maintaining national security.

In addition to requiring information supporting either of the above criterion, the loan application requires applicants to provide information regarding their:

  • Corporate structure;
  • Debt, asset, and equity positions;
  • Operations in the United States;
  • Covered losses;
  • Most recently completed IRS Form 941 (“Employers Quarterly Federal Tax Return”);
  • Various consolidated financial statements; and
  • Any outstanding liens with the U.S. Government.

Applicants must also submit a financial plan. Two company officials must certify that the information and certifications provided in the application are true and correct.

Importantly, prior to submitting an application for a loan under this program, potential borrowers should be aware that such loans will be subject to certain conditions and restrictions, including:

  • If the borrower is a public company, then the borrower “must provide a warrant or equity interest in the [b]orrower” to the U.S. Government, unless the Secretary of Treasury determines, in his discretion, that issuance of such warrant or equity interest would not be feasible;
  • If the borrower is a private company, then the borrower may, at the discretion of the Secretary of Treasury, issue a senior debt instrument to the U.S. Government instead of a warrant or equity interest;
  • The borrower must maintain employment levels as of March 24, 2020 to the extent practicable, and in any case not reduce its employment levels by more than 10 percent from the levels on such date, at least until September 30, 2020;
  • Neither the borrower nor any affiliate of the borrower may purchase an equity security of the borrower or any parent company that is listed on a national securities exchange (this restriction does not apply if the borrower or affiliate is required to purchase such a security under a contractual obligation in effect as of March 27, 2020);
  • Effective until 12 months after the borrower has repaid the loan, the borrower must not pay dividends or make other capital distributions with respect to the borrower’s common stock;
  • Effective until 12 months after the borrower has repaid the loan, officers and employees whose total compensation (i.e., salary, bonuses, awards of stock, and other financial benefits) exceeded $425,000 but was less than $3 million in 2019 must not receive: (1) total compensation during any consecutive 12-month period that exceeds the total compensation received in 2019; and (2) severance pay or other benefits upon termination of employment that exceeds twice the compensation received in 2019; and
  • Effective until 12 months after the borrower has repaid the loan, officers and employees whose total compensation exceeded $3 million in 2019 must not receive total compensation during any consecutive 12-month period that exceeds the sum of $3 million and 50 percent of the excess over $3 million of the total compensation received in 2019.

Businesses interested in applying for a loan under this program should carefully evaluate the applicable conditions and restrictions. Prospective borrowers are also advised that recipients of Treasury funds may be subject to increased government oversight and investigations, especially with respect to the certifications required in the application.

Further, any companies interested in applying should prepare their materials promptly to ensure submission in advance of the 3:00 P.M. EDT on May 1, 2020 deadline.

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Treasury Implementation of CARES Act $17 Billion Loan Program for Businesses Critical to Maintaining National Security

DOD Implementation of CARES Act Section 3610

On April 8, 2020, the Department of Defense issued a class deviation implementing CARES Act Section 3610, Federal Contractor Authority. Specifically, the Class Deviation, which is effectively immediately, authorizes contractors to use a new Department of Defense Federal Acquisition Regulation Supplement (DFARS) Part 231 clause—DFARS 231.205-79, CARES Act Section 3610 Implementation—”as a framework for implementation of section 3610″ of the CARES Act. The Class Deviation identifies that Section 3610 can provide “reimbursement on any contract type.”

Most notably in DFARS 231.205-79, provided below, is that:

  • It only applies to contractors for which the “cognizant contracting officer has established in writing to be an affected contractor.”  This is an important distinction and contractors should ensure to obtain, and maintain in its contract files, this affirmation from the contracting officer; 
  • It clarifies both that it applies to “work on a site that has been approved for work by the Federal Government, including on a government-owned, government-leased, contractor-owned, or contractor-leased facility approved by the federal government for contract performance,” which provided needed clarity to the language in the CARES Act, and that the performance location can be deemed inaccessible because of local shelter in place orders; and
  • In order for costs to be allowable, they must be “segregated and identifiable in the contractor’s records so that compliance with all terms of this section can be reasonably ascertained.”

DFARS 231.205-79 CARES Act Section 3610 – Implementation

  1. Applicability.
    1. This cost principle applies only to a contractor:
      1. that the cognizant contracting officer has established in writing to be an affected contractor;
      2. whose employees or subcontractor employees:
        1. Cannot perform work on a government-owned, government-leased, contractor-owned, or contractor-leased facility or site approved by the federal government for contract performance due to closures or other restrictions, and
        2. Are unable to telework because their job duties cannot be performed remotely during the public health emergency declared on January 31, 2020, for Coronavirus (COVID–19).
    2. The maximum reimbursement authorized by section 3610 shall be reduced by the amount of credit a contractor is allowed pursuant to division G of the Families First Coronavirus Response Act (Pub. L. 116– 127) and any applicable credits a contractor is allowed under the CARES Act (Pub. L. 116-136) or other credit allowed by law that is specifically identifiable with the public health emergency declared on January 31, 2020 for COVID–19.
  2. Allowability.
    1. Notwithstanding any contrary provisions of FAR subparts 31.2, 31.3, 31.6, 31.7 and DFARS 231.2, 231.3, 231.6, and 231.7, costs of paid leave (including sick leave), are allowable at the appropriate rates under the contract for up to an average of 40 hours per week, and may be charged as direct charges, if appropriate, if incurred for the purpose of:
      1. Keeping contractor employees and subcontractor employees in a ready state, including to protect the life and safety of Government and contractor personnel, notwithstanding the risks of the public health emergency declared on January 31, 2020, for COVID-19, or
      2. Protecting the life and safety of Government and contractor personnel against risks arising from the COVID-19 public health emergency.
    2. Costs covered by this section are limited to those that are incurred as a consequence of granting paid leave as a result of the COVID-19 national emergency and that would not be incurred in the normal course of the contractor’s business. Costs of paid leave that would be incurred without regard to the existence of the COVID-19 national emergency remain subject to all other applicable provisions of FAR subparts 31.2, 31.3, 31.6, 31.7 and DFARS 231.2, 231.3, 231.6, and 231.7. In order to be allowable under this section, costs must be segregated and identifiable in the contractor’s records so that compliance with all terms of this section can be reasonably ascertained. Segregation and identification of costs can be performed by any reasonable method as long as the results provide a sufficient audit trail.
    3. Covered paid leave is limited to leave taken by employees who otherwise would be performing work on a site that has been approved for work by the Federal Government, including on a government-owned, government-leased, contractor-owned, or contractor-leased facility approved by the federal government for contract performance; but
      1. The work cannot be performed because such facilities have been closed or made practically inaccessible or inoperable, or other restrictions prevent performance of work at the facility or site as a result of the COVID-19 national emergency; and
      2. Paid leave is granted because the employee is unable to telework because their job duties cannot be performed remotely during public health emergency declared on January 31, 2020, for COVID-19.
    4. The facility at which work would otherwise be performed is deemed inaccessible for purposes of paragraph (b)(3) of this subpart to the extent that travel to the facility is prohibited or made impracticable by applicable Federal, State, or local law, including temporary orders having the effect of law.
    5. The paid leave made allowable by this section must be taken during the period of the public health emergency declared on January 31, 2020, for COVID–19, up to and including September 30, 2020.
    6. Costs made allowable by this section are reduced by the amount the contractor is eligible to receive under any other Federal payment, allowance, or tax or other credit allowed by law that is specifically identifiable with the public health emergency declared on January 31, 2020, for COVID–19, such as the tax credit allowed by division G of Public Law 116–127.

The Class Deviation can be found here and remains in effect until rescinded.

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DOD Implementation of CARES Act Section 3610

Guarding The Privilege: Fourth Circuit Reverses District Court Decision Finding Disclosure Pursuant to the Mandatory Disclosure Rule Waived Attorney-Client Privilege

The United States Court of Appeals for the Fourth Circuit recently, and importantly, reestablished the status quo for government contractor disclosures made pursuant to the Mandatory Disclosure Rule (MDR), while also providing further insight into when a disclosure could waive privilege. Specifically, the Fourth Circuit, in a non-precedential decision, overturned an unsettling decision from the U.S. District Court for the Eastern District of Virginia that certain disclosures a government contractor made pursuant to the MDR constituted a waiver of the attorney-client privilege.

In reaching the conclusion that the contractor’s disclosure pursuant to the MDR did not waive the attorney-client privilege, the Fourth Circuit distinguished between disclosures based on the advice of an attorney (not a waiver of privilege) and disclosures that divulge the underlying attorney-client communication itself (a waiver of privilege). The Fourth Circuit also identified using strong dicta that its decision is consistent with the purpose of the MDR. In specifically focusing on the MDR, the Fourth Circuit stated that:

  • “requiring [the contractor] to produce privileged materials is particularly injurious here, where [the contractor] acted pursuant to a regulatory scheme mandating disclosure of potential wrongdoing. Government contractors should not fear waiving attorney-client privilege in these circumstances”; and
  • “the district court’s decision has potentially far-reaching consequences for companies subject to [the MDR] and other similar disclosure requirements. We struggle to envision how any company could disclose credible evidence of unlawful activity without also disclosing its conclusion, often based on the advice of its counsel, that such activity has occurred. More likely, companies would err on the side of making vague or incomplete disclosures, a result patently at odds with the policy objectives of the regulatory disclosure regime at issue in this case.”

While contractors must remain vigilant about the level of information disclosed pursuant to MDR and ensure the disclosure do not divulge the underlying attorney-client communication, this decision should provide comfort to the government contract community. Contractors, pursuant to the MDR, should be able to inform their government customers in sufficient detail of the contractor’s general conclusions as to whether conduct satisfies the credible evidence standard under the MDR. This, in turn, should enable contractors and the government to preserve resources and enable cost-savings to the extent additional investigations are unnecessary. 

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Guarding The Privilege: Fourth Circuit Reverses District Court Decision Finding Disclosure Pursuant to the Mandatory Disclosure Rule Waived Attorney-Client Privilege

Federal Contracting Implications of President Trump’s National Emergency Declaration In Response to the Coronavirus (COVID-19) Pandemic

March 16, 2020

Dentons has formed a COVID-19 Client Special Situations Team and Client Resources Hub that stands ready to assist contractors in addressing the full range of issues, both in the US and globally, that may arise in connection with the COVID-19 outbreak. This advisory is the latest update in a series of alerts that address various aspects in which the contracting community may be affected. This advisory focuses on the implications of President Trump’s emergency declaration under the Stafford Act and the government’s use of the Defense Production Act and similar authorities to acquire goods and services that may be necessary to combat COVID-19.

On Friday, March 13, 2020, President Trump declared a national emergency relating to the coronavirus (COVID-19) pandemic. This emergency declaration makes available billions of dollars in federal disaster relief funds to state and local governments pursuant to the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act), 42 U.S.C. ch. 68. Federal Emergency Management Agency (FEMA) administers the funds, pursuant to specific federal regulations, and generally makes them available to state and local governments in the form of grants. The state and local governments will further administer the funds for specific programs through subgrants and procurement contracts to support the COVID-19 response and relief effort.

In addition to the funds made available under the Stafford Act, contractors also should be cognizant of the fact that the federal government might exercise its authority under the Defense Production Act of 1950, 50 U.S.C. §§ 4501 et seq., which is implemented by the Defense Priorities and Allocations System (DPAS), 15 C.F.R. § Pt. 700, to rapidly respond to the COVID-19 pandemic. Under DPAS, the government has the authority to prioritize government contracts for goods and services over competing customers, to allocate or control the general distribution of materials, and to offer incentives within the domestic market to enhance the production and supply of critical materials and technologies when necessary to respond to a national emergency. Contractors that have prime contracts, subcontracts or purchase orders subject to DPAS generally must quickly accept DPAS-rated orders within a short timeframe (10 to 15 days), and may only reject a rated-order in very limited circumstances. Additionally, prime contractors and subcontractors are required to flowdown these rating requirements to suppliers, as necessary to meet delivery requirements.  It is therefore important for contractors to be aware of which of their prime contracts, subcontracts and purchase orders are rated.

While it is unlikely that the government would exercise the more extreme authority granted under DPAS and effectively commandeer manufacturing and other types of facilities in order to produce critical medical supplies or to support other emergency relief efforts, contractors should further be mindful that the government could also authorize companies to use certain goods and technology that is patented by other companies without the consent of the patent holder. Specifically, pursuant to the Bayh-Dole Act, 35 U.S.C. ch. 18, or 28 U.S.C. § 1498, the federal government may authorize a company to produce, for example, critical pharmaceutical products, testing equipment or other essential items that are patented by another company to combat CoVID-19. Together, these authorities essentially authorize the US government to license and authorize the practice of patented inventions by industry competitors without regard to whether the patented technology was developed with government funding or exclusively at private expense. While patent holders are not without recourse, a patent holder’s recourse is typically limited to relief from the federal government in the form of royalty payments or damages—not from the companies who have received appropriate authorization and consent to use the patented items. Notably, however, in cases involving subject inventions funded by it, the government, pursuant to the Bayh-Dole Act, may exercise its “march-in” rights that permit the government to require the patent holder to license the invention to third parties. If the patent holder fails to do so, the Bayh-Dole Act permits the government to directly license the patented technology to non-patent holders upon terms that are reasonable under the circumstances. This may presumably include the payment of reasonable royalties to the patent holder, but the relevant provision of the Bayh-Dole Act (35 U.S.C. § 203) does not specifically require the payment of such royalties, creating risk that the patent holder may not receive the compensation that might normally be due. While the Bayh-Dole Act and its implementing regulations in the Federal Acquisition Regulation (FAR) apply to small businesses and non-profit organizations, the Act authorizes the government to extend the Act’s requirements to all contractors. See 35 U.S.C. § 210(c); FAR Subpart 27.3. In this regard, the Department of Defense has extended these requirements, among others, to large contractors through a specific clause, Defense Federal Acquisition Regulation Supplement (DFARS) 252.227-7038, which includes the government’s march-in rights. See DFARS 252.227-7038(h). Therefore, contractors of all sizes should be aware of the government’s ability to exercise these rights.

The national emergency surrounding COVID-19 creates a situation in which the government may utilize its vast national security powers and emergency resources to combat the virus. Contractors must be aware of the unique issues that may arise under these circumstances as the consequences of noncompliance may be drastic.

Please contact any of the authors if you require additional guidance on specific issues.

Federal Contracting Implications of President Trump’s National Emergency Declaration In Response to the Coronavirus (COVID-19) Pandemic

The Most Important Contract Disputes Decisions of 2019

In the attached article, we summarize and discuss the impacts of disputes decisions that are likely to have sustained impacts on contractors and the Government alike into the foreseeable future in connection with our “Feature Comment: The Most Important Contract Disputes Decisions of 2019,” in The Government Contractor (Vol. 62, No. 5).

The Most Important Contract Disputes Decisions of 2019

CBCA further limits the Federal Circuit’s decision in Maropakis

On January 5, 2016, the Civilian Board of Contract Appeals (CBCA) issued a decision that is another in a line of decisions that erodes the Federal Circuit’s holding in M. Maropakis Carpentry, Inc. v. United States, 609 F.3d 1323 (Fed. Cir. 2010). In Maropakis, the Federal Circuit held that certain contractor defenses to government claims are actually contractor claims under the Contract Disputes Act’s (CDA), meaning they must first be submitted to the contracting officer for decision and cannot be raised for the first time in litigation. Since that decision, both the Court of Federal Claims (COFC) and the boards of contract appeals have narrowed the scope of the Federal Circuit’s decision in Maropakis. See, e.g., Total Eng’g, Inc. v. United States, 120 Fed. Cl. 10 (2015) (The CDA does not require the contractor to jump through such an extra hoop and refile its defense to a government claim as a so-called contractor’s ‘claim’ where it is not seeking any separate monetary relief or contract adjustment.). For more information on the Total Engineering case, see our previous post here.

Most recently, in Jane Mobley Assoc., Inc., v. Gen. Serv. Admin., CBCA 2878, 2016 WL 73878, the CBCA explained the difference between an affirmative CDA claim and a defense to a government claim:

An affirmative CDA claim is an attempt to modify or adjust the contract to counter the liquidated damages assessment (e.g., compensable time extensions as a result of government delays). A factual defense to a liquidated damages assessment merely serves to attack the assessment itself (e.g., the government’s assessment was incorrect because the delay was excused as a result of government delays). Plainly stated, a CDA claim seeks affirmative relief under the contract through a contract adjustment; a factual defense only attempts to reduce or eliminate the liquidated damages assessment.
Id. (emphasis original) (citations omitted).

In distinguishing (and limiting) Maropakis, the CBCA stated:

In the CDA context, if we were to apply the rule of Maropakis to any defense raised by a contractor in response to a government claim that is not in the nature of an adjustment of contract terms or not seeking separate monetary relief, the “drastic consequence” could well be that the contractor’s appeal is never able to be heard on the merits. This is contrary to the intent and purpose of the CDA.
Id. (emphasis original).

This holding, and the steady departure from Maropakis, is beneficial for contractors because it promotes efficient adjudication in defending against government claims. Nevertheless, contractors should remain cognizant of the Federal Circuit’s holding in Maropakis and assess, on a case-by-case basis, whether their defense qualifies as a “claim” under the CDA.

CBCA further limits the Federal Circuit’s decision in Maropakis

DOD signals pivot away from proposed DFARS rule on evaluating price reasonableness for commercial items

The Department of Defense (DOD) published a report on the Open DFARS Cases as of December 7, 2015, which indicates that the controversial proposed rule on evaluating price reasonableness for commercial items (DFARS Case 2013-D034) was closed. As we previously reported, the proposed rule would have made significant substantive changes to what qualified as a commercial item under DOD-funded contracts and would have imposed significant data gathering burdens on prime contractors. In its place the DOD opened a new case, DFARS Case 2016-D006, Procurement of Commercial Items. The purpose of the new DFARS case is to implement the requirements of six sections of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2016, in addition to the requirements of section 831 of the NDAA for FY 2013. See National Defense Authorization Act for Fiscal Year 2016, Pub. L. No. 114-92; National Defense Authorization Act for Fiscal Year 2013, Pub. L. No. 112-239. A brief overview of some key requirements within the applicable sections of the NDAA for FY 2016 is provided below.

The DOD opened DFARS Case 2016-D006 on December 7, 2015, and has proposed a rule within the agency, which its staff is processing. We will continue to monitor the progress and will report back here with updates.

Section 851, “Procurement of Commercial Items.” This section requires the Secretary of Defense to establish a centralized capability to oversee the making of commercial item determinations for DOD procurements and to provide public access to these determinations. The section also permits contracting officers (CO) to rely on prior determinations made by a military department, Defense Agency or other component of the DOD. Notably, the section permits a CO to require a contractor to supply additional information to support the reasonableness of a price, irrespective of whether a contractor was required to provide such information in connection to a prior procurement.

Section 852, “Modification to Information Required to be Submitted by Offeror in Procurement of Major Weapon System as Commercial Item.” Under this section, an offeror must submit: (a) prices paid for the same or similar commercial items under comparable terms and conditions by both the government and commercial customers; and (b), if the information for (a) is not available, (i) prices for the same or similar items sold under different terms and conditions; (ii) prices for similar levels of work or effort on related products or services; (iii) prices for alternative solutions or approaches and (iv) other relevant information. The section also permits the CO to request additional information, such as labor costs, material costs and overhead rates.

Section 853, “Use of Recent Prices Paid by the Government in the Determination of Price Reasonableness.” This section provides that a CO, in determining whether a price is reasonable, must consider prior prices paid by the government for the same or similar commercial item if these prices are provided by an offeror and represent reasonable prices based upon the totality of the circumstances (i.e., the time elapsed, the quantities and the terms and conditions).

Section 855, “Market Research and Preference for Commercial Items.” This section requires the Under Secretary of Defense for Acquisition, Technology, and Logistics to issue guidance that: (a) prohibits an agency from contracting for noncommercial information technology products or services in excess of the simplified acquisition threshold, unless the agency determines in writing that commercial items cannot meet the agency’s needs; and (b) mandates that agencies conduct market research, where appropriate, prior to making a price reasonableness determination.

Section 856, “Limitation on Conversion of Procurements from Commercial Acquisition Procedures.” Under this section, for a CO to convert a procurement of commercial items or services valued over $1,000,000 from commercial acquisition procedures to noncommercial acquisition procedures, the CO must make a written determination that: (a) the commercial acquisition procedures were erroneously utilized or were utilized because of inadequate information; and (b) the conversion will result in cost savings. In making such a determination the CO must consider: (a) estimated research and development costs for improving future products or services; (b) transaction costs for both the DOD and contractor; (c) changes in purchase quantities and (d) potential delay costs resulting from the conversion. If the procurement is valued over $100,000,000, the head of the contracting authority must also approve the determination. The requirements in this section terminate in five years.

Section 857, “Treatment of Goods and Services Provided by Nontraditional Defense Contractors as Commercial Items.” This section permits the head of an agency to treat the items and services provided by nontraditional defense contractors as commercial items.

As previously stated, DFARS Case 2015-D006 will also implement section 831 of NDAA for FY 2013, which directed DOD to, among other things, issue guidance including “standards for determining whether information on the prices at which the same or similar items have previously been sold is adequate for evaluating the reasonableness of prices.” National Defense Authorization Act for Fiscal Year 2013, Pub. L. No. 112-239.

DOD signals pivot away from proposed DFARS rule on evaluating price reasonableness for commercial items