Government Contracts Monitor

FAR Final Rule Bars Contractor Confidentiality Agreements Restricting Employees and Subcontractors from Reporting Fraud, Waste & Abuse

January 23, 2017

The FAR Council has published a Final Rule, effective January 19, 2017, prohibiting the use of appropriated or otherwise available funds for any contract, grant or cooperative agreement with an entity that requires its employees or subcontractors to sign internal confidentiality agreements or statements that prohibit or otherwise restrict the lawful reporting of fraud, waste or abuse to a designated investigative or law enforcement representative of a federal department or agency authorized to receive such information, such as an agency Inspector General. This Final Rule implements Section 743 of the Consolidated and Further Continuing Appropriations Act, 2015 (Pub. L. 113-235), and anticipated similar successor provisions in future appropriations acts and continuing resolutions. The Final Rule largely adopts, with some clarifications and other changes, a Proposed Rule previously discussed here.

The Final Rule adds new FAR Section 3.909, “Prohibition on contracting with entities that require certain internal confidentiality agreements,” and two new clauses (FAR 52.203.18 & 19) that Contracting Officers must include in all solicitations and resultant contracts, and all modifications to any existing contract(s), obligating FY15 or subsequent year funds, other than personal services contracts performed entirely by the contracting individuals. The first of the new clauses sets forth the statutory prohibition, makes clear that the prohibition does not contravene requirements applicable to the non-disclosure of classified information, and addresses the need for and impact of contractor compliance representations. The second clause sets forth contractors' affirmative compliance obligations.

Importantly, these new requirements extend to commercial items and simplified acquisition purchases. Moreover, the substantive requirements in FAR 52.203-19 are explicitly required to be flowed-down into all subcontracts at all levels (FAR 52.203-19(f)). In this regard, “subcontract” is broadly defined as any contract defined in FAR 2.1 entered into by a subcontractor to furnish supplies or services for performance of a prime contract or subcontract, and includes, but is not limited to, purchase orders (FAR 52-203.19(a)). “Subcontractor” is similarly broadly defined to “mean any supplier, distributor, vendor, or firm (including a consultant) that furnishes supplies or services to or for a prime contractor or another subcontractor” (id.).

In addition to not entering into new employee agreements or making statements violating the prohibition, contractors must affirmatively notify their employees, through normal business communication channels, such as e-mail, that any such limitations in any pre-existing confidentiality agreements or policy statements are no longer in effect and will not be enforced (FAR 52.209-19(c)). This language means that contractors are not required to review and revise existing agreements and statements. Instead, they may simply issue what the Final Rule terms “a blanket notice of non[-]enforcement" as to any prior inconsistent agreements or statements. While declining (as inappropriate) to prescribe specific language in the regulations, the FAR Councils “concur[red]” that the following language submitted by a commenter is “appropriate” for inclusion in an internal confidentiality agreement or statement, and could be tailored for use in the notice required by FAR 52.203-19(c):

“Neither the confidentiality provision contained in the _________ [insert title of agreement, statement, policy], nor confidentiality provisions contained in any existing employment [agreement] or contract with _______ [insert name of contractor] shall be construed to prohibit or otherwise restrict you, as an employee of [sub]contractor of _________ [insert name of contractor] from lawfully reporting waste, fraud, or abuse to a designated investigative or law enforcement representative of a federal department or agency authorized to receive such information under the procurement.”

FAR 52.203-19(d) provides that submission of an offer constitutes a representation (i.e., an implied certification) that the offeror is in compliance with the new requirements. An offeror not able to make this representation is ineligible for award (FAR 3.902-2(a)).

In response to comments on the Proposed Rule, the FAR Councils clarified several issues in the Final Rule, including that (1) the prohibition extends to all employees, not just those specifically working on a Government contract, (2) the covered confidentiality agreements exclude confidentiality agreements arising out of civil litigation or entered into at the behest of a Federal agency, (3) the Rule does not require retrospective representation, and applies only to “future” internal confidentiality agreements or statements restricting the reporting of waste, fraud or abuse related to the performance of a Government contract, (4) the required contractor non-enforcement notice need be given only to current employees and subcontractors, and (5) the purpose of the “designated investigative or law enforcement representative … authorized to receive such information” language is to eliminate disclosures to unauthorized persons. The Rule does not address disclosures to Congress.

As discussed at the outset above, this new Rule is effective January 19, 2017. Given the statutory “funds use” bar driving this Rule, as well as general ethical policy considerations, contractors would be well-advised to start complying with these new requirements immediately. Specifically, contractors should (1) issue the required blanket non-enforcement notice to current and future employees and subcontractors, (2) ensure that new employee confidentiality agreements, and company statements and policies, comply with the new requirements, and (3) flow-down the new FAR 52.203-19 clause to all subcontractors at all tiers under covered contracts.