Government Contracts Monitor

Beware: The DoD Prohibition against Binding Arbitration for Employees Has Teeth

October 26, 2017

By: Lindsay Simmons

For the past seven years or so, procuring agencies within the Department of Defense (DoD) have been precluded from expending funds on contracts in excess of $1 million unless the contractor agrees not to require its employees to agree to binding arbitration as a condition of employment. To the extent that anyone is still clinging to the notion that the prohibition was toothless and essentially had no meaningful impact on contractors’ ability to win awards, they should jettison that belief. The recent Government Accountability Office (GAO) decision in L3 Unidyne, Inc., B-414902; B-414902.2; B-414902.3 (October 16, 2017) makes very clear that offerors who fail to comply with the prohibition against binding arbitration in employee agreements run a very real risk of not winning covered DoD contracts—or of losing awarded contracts that are protested on this ground.

L3 Unidyne involved a challenge to the Department of Navy’s issuance of a task order to Leidos, Inc. During evaluation, the Navy found that L3 had failed to submit a technically acceptable proposal and ultimately found that Leidos was the only firm to have submitted a technically acceptable proposal. After the agency issued the task order to Leidos, L3 protested. In addition to challenging the Navy’s evaluation of its own proposal, L3 also argued (apparently in a supplemental protest) that the agency acted improperly when it failed to find the Leidos proposal ineligible for award because Leidos required certain of its proposed new (not yet hired) key employees to enter into binding arbitration agreements as a condition of employment.

Given the relevant facts and law, L3 had a very strong argument on this point. The protest record revealed that Leidos had provided with its proposal letters of intent relating to a number of prospective new key employees that included the following provision:

All new hires and rehires of Leidos must execute an Arbitration Agreement prior to commencement of employment. Enclosed is a copy of the Arbitration Agreement you are required to execute as a condition of employment.

L3 also relied primarily on a provision of the Fiscal Year 2010 Defense Appropriations Act—which Congress has repeatedly reenacted, most recently in the Consolidated Appropriations Act of 2017 and the Continuing Appropriations Act of 2018. That provision prohibits the expenditure of funds on any contract in excess of $1 million unless the contractor agrees not to enter into an agreement with any of its employees that conditions that an individual’s employment on his or her agreement to resolve through arbitration certain types of employment claims (e.g. a claim under title VII of the Civil Rights Act of 1964). As noted by the GAO, the Appropriations Acts also allow the Secretary or Deputy Secretary of Defense to waive the prohibition so long as the Secretary of Defense transmits the waiver determination to Congress and, simultaneously makes it public, not less than 15 business days before the contract or subcontract addressed in the determination may be awarded.

L3 argued that the Navy failed to evaluate the Leidos proposal for compliance with the prohibition—and that there has been no showing that the agency sought and obtained a waiver of the requirement, as contemplated by the statutes. In response, the agency argued that its consideration of whether Leidos’s arbitration agreements violate these statutory provisions is a matter of contract administration and, therefore, not subject to review by the GAO.

The GAO made short work of the Navy’s argument and easily sustained this aspect of the protest.

With respect to the notion that the issue is one of contract administration, the GAO concluded that the requirement relates to the propriety of the agency’s award decision because the statute requires any waiver decision to be made and transmitted to Congress 15 days before a contract may be awarded. Thus, the agency’s consideration of the issue must occur before contract award and is, therefore, subject to GAO review.

The GAO sustained the protest based in part on what the record revealed about the Leidos letters of intent to prospective employees that expressly conditioned employment on execution of an arbitration agreement. In addition, the GAO pointed to the lack of any evidence showing that the Navy ever meaningfully considered whether or not the Leidos proposal complied with the statutory requirements described above in light of the terms of the letters of intent. Nor was there, according to the GAO, any evidence that the agency even had a copy of the actual Leidos arbitration agreement (as opposed to the letters of intent referencing such an agreement) before making award to the firm. Finally, as alleged by L3, there was no evidence to show that the agency sought or obtained a waiver of this statutory requirement prior to making award to Leidos. Given these circumstances, the GAO concluded that the Navy could not properly have considered the Leidos proposal awardable without resolving whether or not the arbitration agreements here violate the statutory prohibition.

The takeaway here? Follow the rules and don’t impose prohibited arbitration provisions on your employees. And if you’re involved in a protest, be on the lookout for any evidence that your competitor has ignored the rule. Their lack of compliance can lead to a protest win for you.

© 2017 Jackson Kelly PLLC