Government Contracts Monitor

Suspension of Affiliates: It’s Worse Than You Think. A Lot Worse, Actually.

December 20, 2011

In the Old Testament, a jealous God threatens on various occasions to visit the sins of the father to the third or fourth generations.  See, e.g., Exodus 20:5.  Think this has no application to the suspension and debarment context?  Think again.  In the updated version of the narrative, however, the aggrieved blameless contractors are appealing to another higher authority – the United States District Court for the Northern District of Alabama - and the complete story has yet to be written.

The saga began in November 2009, when a federal grand jury in Georgia indicted The Public Warehousing Company K.S.C. (“PWC”), a Kuwaiti company - now The Agility Public Warehousing Company K.S.C. - for overbilling the Government under a series of prime-vendor subsistence contracts performed in the Middle East.  Based on the indictment, the Defense Logistics Agency (“DLA”) suspended PWC and 128 other entities deemed to be “affiliates” of PWC.  Two of the downstream companies caught in the PWC vortex – and they were way downstream on the PWC organizational chart - were Agility Defense & Government Services, Inc. (“DGS”), and Agility International, Inc. (“Agility”).  The DLA conceded that there were no allegations that DGS or Agility had engaged in any wrongdoing.  Nonetheless, the DLA extended the suspensions to them, noting that “the [Federal Acquisition Regulation (“FAR”)] recognizes that suspensions may be extended to affiliates regardless of culpability.”  But cf. FAR § 9.407-1(c) (stating merely that the suspending official may suspend affiliates if they are specifically named and given written notice of the suspension and an opportunity to respond).

Almost instantaneously, DGS and Agility implored the DLA to lift their suspensions.  Besides being “innocent,” several other facts were in their favor: (1) DGS had performed services for the Department of Defense (“DoD”) under several large DoD contracts, subcontracts, and joint ventures, (2) DGS was cleared to perform classified work and had entered into a Special Security Agreement with the Defense Security Service, effectively negating PWC’s foreign control, and (3) DGS’s leadership included several retired senior military officers, and its chief executive officer was a retired Army three-star general.  In addition, neither DGS nor Agility had performed any work on the prime-vendor contracts that were the subject of the indictment.

The subsidiaries’ entreaties fell on deaf ears, however, and the DLA affirmed their suspensions.  In response, DGS, Agility, and various other PWC subsidiaries filed suit in the United States District Court for the District of Columbia, arguing, inter alia, that their mere affiliation with PWC was an insufficient cause for their suspensions.  In December 2009, the court denied the subsidiaries’ motion for injunctive relief, reasoning that they might be able to effect the lifting of the suspensions by “restructuring so as to extinguish their relationships  with PWC”.  (In lawyers’ terms, the subsidiaries had failed to prove irreparable injury.)

After further unsuccessful efforts to convince the DLA to lift their suspensions, DGS and Agility crafted a restructuring plan that would sever Agility’s affiliation with PWC.  In July 2011, the companies presented a sophisticated seven-page term sheet to the DLA whereby DGS would divest its 60-percent controlling interest in Agility and retain only a nonvoting minority interest so long as DGS remained suspended.  In essence, DGS proposed to sacrifice its government business for Agility by breaking the organizational chain between PWC and Agility, thereby permitting Agility to return to the DLA’s good graces.  DGS and Agility even noted that the DLA had previously accepted just such a control-stripping solution with another contractor.

Ah, but to no avail this time either: once again, the DLA rejected DGS’s and Agility’s proffer, concluding that it would not be in the Government’s interest “to do business with any PWC or Agility affiliate or subsidiary, regardless of the equity interest, until the criminal case has been concluded.”  Emphasis added.  To add insult to injury, the DLA added that the information before it was insufficient to reestablish Agility’s present responsibility, which had never been at issue.

In the face of the DLA’s intractability, DGS and Agility sued the DLA in the United States District Court for the Northern District of Alabama on December 6, 2011.  By this point, DGS and Agility had already been suspended for over two years without ever being implicated in any wrongdoing.  DGS and Agility noted that the Government had never initiated any criminal or civil proceedings against them and correctly observed that the FAR provides for an eighteen-month limit on suspensions unless legal proceedings have been initiated within that period.  FAR § 9.407-4(b).  DGS and Agility alleged that the DLA’s “indefinite suspension of blameless contractors” was a violation of due process as well as the FAR.  DGS noted that - after being suspended for over two years – its business had shrunk from $450 to $79 million in annual contract revenue, and its employee count had shrunk from over 1,200 to under 50.

DGS’s and Agility’s four-count complaint against the DLA consists of three counts under the Administrative Procedure Act (“APA”) and one count alleging a violation of constitutional due process.  The APA counts allege that (1) the DLA’s “shifting, inconsistent, and unsubstantiated rationales for suspension render its continued suspension of DGS and Agility International arbitrary and capricious, an abuse of discretion, and contrary to law,” (2) the DLA has applied the suspensions punitively against DGS and its subsidiaries “as a means to exert leverage in litigation against the ultimate corporate parent PWC, imposing a form of economic sanctions to deprive PWC subsidiaries of a chief source of business”, and (3) “[t]he excessive and continuing suspension of DGS and its subsidiaries is contrary to law and an abuse of discretion.”  DGS and Agility have asked the court to declare the suspensions void and to enter an order compelling the DLA to remove them from the Excluded Parties List System.

The DLA’s suspension of DGS and Agility is a worst-case scenario illustrating the potential punitive aspects of the Government’s suspension and debarment process.  As such, contractors would do well to follow the progress of the Alabama lawsuit.  We’ll report back . . . .

John Howell is the attorney responsible for the content of this article.