2014_BUSINESS_LAW_ANTHOLOGY

2014

BUSINESS LAW

ANTHOLOGY

METROPOLITAN RANKING

SPRINGFIELD, MASSACHUSETTS

TIER 2 - Commercial Litigation

TIER 2 - Labor & Employment Litigation

Nicolai Law Group, P.C.
BUSINESS LAW & LITIGATION
MONARCH PLACE
1 Monarch Pl Ste 1230

Springfield, Massachusetts 01144-4006

NICLAWGRP.COM

Telephone: 413.272.2000 • Facsimile: 413.272.2010

Compliments of Caroline E. Nicolai • 413.272.2000, Ext 224 • caroline.nicolai@niclawgrp.com

2014 BUSINESS LAW ANTHOLOGY
TABLE OF CONTENTS
Attorney Fees, Interest Punitive Damages In Arbitration ....................................1

Assignment, Delegation & Choice of Law Provisions in

Commercial Contracts ............................................................................................4

Commercial Losses......................................................................................................13

EC Privacy Law Update..............................................................................................15

Federal Contracting Overview .................................................................................20

Indemnification Clauses ............................................................................................31

Getting Out of an LLC ...............................................................................................41

Damages in Delaware M&A Deals ..........................................................................46

Robocalling & Wireless ..............................................................................................48

New Massachusetts Sick Time Law ........................................................................51

Social Media Background Screening .......................................................................57

Harassment Claims Limited .....................................................................................60

Wellness Programs ......................................................................................................63

Nicolai Law Group, P.C. • Business Law & Litigation • 413-272-2000
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2014 Business Law Anthology • Page 1
Attorney Fees, Interest Punitive Damages In Arbi
tration
Courts encourage arbitration, a quicker alternative to traditional litigation. To advance this, court review
of arbitration awards is severely limited. Despite this, challenges to arbitration awards are not uncom
mon. In particular, arbitration awards that shift attorney’s fees to the winner or award interest and puni
tive damages are often challenged. This memo discusses an arbitration panel’s authority to award these
damages.
FEE SHIFTING IN ARBITRATION
Under the “American Rule,” attorney fees for court litigation are not recoverable without statutory au
thority or a contract. The American Rule does not necessarily control in arbitration. Arbitration panels
often award attorney fees and those awards are usually upheld on appeal. Attorney fees are most fre
quently awarded when the losing party’s claims or defenses are regarded as frivolous, or where the losing
party’s conduct has been fraudulent or in bad faith. A party’s liability for attorney’s fees in arbitration also
can flow from the same sources as in court - statutory authority, or a contract. In other cases, parties may
consent to mutual liability for attorney fees.
EQUITABLE AUTHORITY
The law on the power of arbitrators to award attorney’s fees is not entirely settled because of the sub
stantial discretionary powers arbitrators hold. Generally, while an arbitrator may not go beyond the lim
its of the contract the agreement to arbitrate is part of, if there is room for doubt or interpretation, the
issue is within the broad authority given to arbitrators of civil disputes. Some courts have recognized that
an arbitrator has the inherent authority to award attorney fees. An arbitrator is not strictly bound by the
law meaning they may invoke equitable remedies including attorney’s fees awards and other sanctions.
In addition, many arbitration clauses relieve arbitrators from adhering to strict rules of law. That has
been held to allow award fees. Arbitration panels frequently impose liability for attorney fees when there
is a particular reason, like bad faith or improper conduct.
While arbitrators may have the power to award fees, enforceability of the award contemplates a rational
basis for imposing that liability. One court noted that an arbitrator may award attorney’s fees through his
equity powers where bad faith or malicious behavior is involved. Bad faith may be improper behavior,
like unwarranted delay before arbitration. It also may include improper conduct during the arbitration
that results in the unwarranted delay of the proceeding. Bad faith may also be found where one party’s
claims or defenses are entirely baseless.
An arbitrator’s equitable authority to award attorney’s fees may be restricted or precluded by the parties’
contract. If the agreement to arbitrate requires that each party bear its own attorneys’ fees, the arbitrators
have no authority to award them to the prevailing party.
This material is provided for information
and education
purposes to clients and others who may be interested in
the sub-‐
ject matter. I is not
legal
advice or a legal
opinion that
can only be given on specific facts.

EXPRESS AUTHORITY
The clearest case for authorizing attorney fee awards is where the contract allows for them. Where the
arbitration clause provides for an award of attorney fees and costs, an award including them almost cer
tainly will be upheld. The wording of the arbitration clause must be carefully analyzed. Some contain
ambiguous language like the "expense of the arbitrators and the arbitration shall be equally divided.”
This could mean either attorney fees may not be awarded, as an “expense” of the arbitration, or attorney
fees may be awarded, if they are regarded as a cost like copying or hearing facility costs. A clause that ex
pressly refers only to “expenses” or “costs” could be narrowly interpreted.
Contracts that authorize an award of fees to the “prevailing party” can create a dispute as to who pre
vailed. This can be a problem in arbitration where compromise awards happen. A panel may conclude
the claims are not conclusively supported, yet award a percentage of the damages requested. Courts gen
erally will not examine an arbitrator’s conclusion that one party has prevailed.
POST-CONTRACT CONSENT
Authorization for arbitrators to award fees can come from mutual claims by opposing parties for attor
ney’s fees against the other. Such submissions may give rise to an operative consent by the parties to at
torney fee awards. A party to an arbitration can acquiesce to the award of attorney’s fees by either
making its own demand for attorney’s fees or not objecting to the other party’s demand for fees. Such
consent can provide arbitrators with the authority to award fees even where the contract does not ex
pressly do so. This is frequently an unanticipated problem because lawyers always demand an award of
attorney fees in their court papers where it has no legal effect. In the arbitration setting, however, such a
demand can put attorney fees on the table.
AUTHORIZED BY STATUTE
If the law that governs the dispute allows attorney fees for the prevailing party, the arbitrator likely will
be authorized to award fees even if the contract is silent. The party ordered to pay the award may say the
arbitrator exceeded the scope of his authority as granted by the contract. In one case, the arbitration
panel awarded the winner attorney fees. They reasoned that although the contract was silent, the winner
was statutorily entitled to such a recovery where state law allowed it and AAA rules permitted such an
award where all parties requested fees in the papers they filed. The award was upheld on appeal.
In another case, the substantive law governing the claims, which provided for an attorney fee award, was
held to trump the state’s general arbitration statute, which prohibited an attorney’s fee award in the ab
sence of an express agreement.
PUNITIVE DAMAGES AND INTEREST
While many state laws bar punitive damages awards in pure contract cases, arbitrators may not be strictly
prohibited from awarding them. One reason is because whose law is controlling is often murky. Also,
arbitrators usually have broad discretion to fashion equitable relief. While punitive damages are the ex
ception in arbitration, the risk is difficult to quantify. State law permitting, arbitrators may award puni
tive damages unless prohibited by contract. The mere circumstance that an arbitration clause is broadly
worded has been held sufficient to permit an award of punitive damages. The contract need not mention
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punitive damages for them to be available. On the other hand, when the contract contains a choice of law
clause providing for application of the law of a state prohibiting punitive damages in contract actions, the
arbitrators are barred from awarding them. It also has been held that punitive damages may be awarded
if the governing rules authorize them.
Unless the contract provides otherwise, arbitrators are authorized to impose pre-award and post-award
interest.
EXTRA-CONTRACTUAL DAMAGES SHOULD BE REASONABLE
Even when extra-contractual damages are authorized, arbitration awards may be challenged on the
ground of unreasonableness. Awards are seldom disturbed for being excessive but an arbitrator's con
scious disregard of controlling law has been held a sufficient ground for overturning an award. It has
been held that an award may be found grossly excessive if the panel has shown manifest disregard of ap
plicable legal guidelines of reasonableness. In a case where the panel awarded punitive damages of $27
million, the reviewing court regarded this as grossly excessive, arbitrary and irrational. An agreement to
arbitrate does not waive all constitutional protection.
VACATING AN AWARD OF EXTRA-CONTRACTUAL DAMAGES
Judicial review of an arbitration award is very limited. The standard of review gives deference to the
award. Federal courts are not authorized to reconsider the merits of an award even if the parties say the
award rests on errors of fact or on misinterpretation of the contract.
To vacate an award based on a manifest disregard of the law, the court must find that the arbitrators un
derstood but chose to disregard a clearly defined law or legal principle applicable to the case before
them. The error must be so palpably evident as to be readily perceived as such by the average person
qualified to serve as an arbitrator.
Although challenges based on the manifest disregard of the law standard are common, courts very rarely
vacate an award for this. The reason for the reluctance to find manifest disregard of the law is that arbi
trators are hired by parties to reach a result that conforms to industry norms and to the arbitrator’s no
tions of fairness, not necessarily a particular rule of law. Interfering with this process frustrates the intent
of the parties, and thwarts the usefulness of arbitration. Arbitration becomes the start, not the end, of
litigation.
Because of U.S. Supreme Court decisions, some federal circuits have taken the position that manifest
disregard is no longer a ground for vacating an arbitration award under Federal law.
CONCLUSION
Arbitration awards that shift attorney fees to a prevailing party, or award punitive damages are frequently
contested. They may be overturned when they are contrary to the contract, or when they contradict
clear controlling substantive law brought to the arbitrator's attention. Parties that wish to limit exposure
to fee shifting or extra-contractual damages should expressly preclude them in their arbitration clauses
with precise and comprehensive terms. Even then, fee shifting may occur if, during the process, a party
claims it has a right to recover fees and is deemed to have waived its right to claim that fee shifting is con
tractually precluded.
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Assignment, Delegation & Choice of Law Provisions in
CommercialContracts
INTRODUCTION
Commercial contracts give rights and duties to each party. Almost every commercial contract has a pro
vision on assigning rights, delegating duties, or both. Negotiating and drafting these provisions creates
an opportunity for parties to address competing business interests: the desire to freely assign and dele
gate one’s contracting rights and duties to a third party, while limiting the other party’s freedom to do
the same.
Assignment provisions tend to be in the boilerplate provisions of commercial contracts, except in com
mercial leases. There is no standard form assignment provision appropriate for every deal. It could be a
mistake to assume an assignment provision suitable in one place is suitable in another. Every commercial
contract should have an assignment provision tailored to address the needs of the situation, parties and
the law of the jurisdiction.
Choice of law provisions are also usually considered boilerplate. The law on choice of law provisions is
confusing and a moving target.
This memo looks at topics on the law of assignment, delegation, and choice of law. Unless otherwise
noted “assignment provision” here means a contract provision on both assignment and delegation.
ASSIGNMENT
If a contract right is transferable, its value is higher. One contracting parties may seek to realize this add
ed value is to negotiate a favorable assignment provision. So, its important to have a working knowledge
of the laws that facilitate, and sometimes prohibit, assignment.
DEFINITION & REQUIREMENTS
When a party to a contract transfers its rights under the contract to a third party, it has made an assign
ment. The word “assign” is not required for a valid assignment. Any act or words that show an intention
of transferring a right to the assignee, if the assignor is divested of all interest in that right, will do it.
The general rule is that absent an express provision to the contrary, contract rights are freely assignable.
A writing is usually not required to have an effective assignment; an oral assignment is generally effec
tive. A few assignments require a writing like assignments of interests in land and assignments intended
as security interests under the Uniform Commercial Code.
Generally, a party may choose to assign less than all of its rights under a contract. If so, it will maintain its
interest in the retained rights. An assignment of a part of a right, whether the part is specified as a frac
tion, an amount, or otherwise, is operative as to that part to the same extent and in the same manner as if
the part had been a separate right.
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Upon assignment of a right, the assignor’s interest in that right is extinguished. An assignment operates
to transfer to the assignee all of the assignor’s right, title, and interest in whatever right is assigned.
Most contract rights may be assigned. There are some exceptions including assignments:
• Prohibited by law, whether embodied in a statute or case law (like claims subject to the Federal
Anti-Assignment Act and wages, in some jurisdictions);
• That would materially change the duty of the non-assigning party;
• That would materially decrease the likelihood that the non-assigning party would receive the in
tended return performance from the assignee;
• That would materially reduce the value of the return performance of the non-assigning party;
• That would materially increase the burden or risk of the non-assigning party; and
• Of non-exclusive software, copyright, and patent licenses.
With the exception of assignments prohibited by law or public policy, parties can agree to the assign
ment of any rights, including most of those otherwise considered non-assignable.
CONTRACT PROVISIONS PROHIBITING ASSIGNMENT
Parties frequently agree to limit the ability to assign contract rights. There are many reasons why a party
may want to limit the other party’s ability to assign rights. The most basic is wanting to control who you
are doing business with.
Although enforceable, anti-assignment provisions are strictly construed by the courts because they pro
hibit the alienation of property rights, depriving the owner of their full enjoyment and control.
An anti- assignment provision that generally prohibits an assignment of the contract should be avoided.
Courts have expressed difficulty in interpreting them as opposed to the assignment of rights. Unless a
contrary intent is shown, a contract prohibition against assignment of the contract with nothing further
is likely to be presumed to prohibit only the delegation of duties, not to prohibit an assignment of rights.
If parties intend to restrict the assignment of rights, the provision should be drafted to expressly prohibit
the assignment of rights.
Courts have distinguished the power to assign from the right to assign. A party’s power to assign is only
limited when the parties have shown they intend to limit it. To show that intent, the clause must have
express language that any assignment will be void or invalid if not made in the way specified. The provi
sion must generally say that any non-conforming assignment will be void or invalid, or that the assignee
will get no rights and the non-assigning party will not recognize any such assignment. Without that lan
guage, the provision will likely be read only as a covenant not to assign or an agreement to follow specific
procedures before assigning. Breach of a covenant may render the assigning party liable in damages to
the non-assigning party, but the assignment would likely be valid. As a practical matter, damages could
be minimal or difficult to prove.
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DELEGATION
DEFINITION & REQUIREMENTS
A delegation is the act of giving another person the responsibility of carrying out the performance agreed
to in a contract. If a party to the contract appoints a third party to perform under the contract, it has
made a delegation. There is no requirement that the word “delegate” be used. Any generally accepted
words of transfer may be used. A delegation of duties may be written or oral.
Generally speaking, upon delegating a contract duty, the delegating party remains secondarily liable un
der the contract, unless the contract provides otherwise or there is a novation. A novation is the act of
replacing one party to an agreement with a new party. A novation is only valid with the consent of all
parties to the original agreement. The other side must consent to the replacement of the party with the
new party for the novation to be effective. A contract transferred by novation transfers all duties and ob
ligations from the original party to the new party, and releases the original party of the duties subject to
the novation
With a few exceptions, most duties may be delegated. Purely personal service contracts are generally not
assignable. Personal service contracts tend to involve a relationship of personal confidence between the
parties. It is a relationship in which a party would have a substantial interest in having a particular person
perform or control the acts promised. Rare genius and extraordinary skill are not delegable, and con
tracts for their employment are personal and cannot be delegated. Generally, if the performance of an
agreement is by unidentified agents, servants, or employees of an impersonal corporation to provide ser
vices to another, it may be delegated.
Duties may also be non-delegable if performance is based on the integrity, credit, or responsibility of a
party. Sometimes a party depends on the integrity and reputation of a particular entity in connection
with an obligation under a contract. To secure the benefit of that bargain, a party may seek to add a non-
delegation provision to the contract. Generally, the law allows a party to delegate its duties unless con
trary to the terms of the contract.
ASSUMPTION OF DUTIES
The majority rule is that an assignee must expressly assume duties to be obligated to perform the as
signed duties. In a minority of states an assignee can be deemed to have impliedly assumed the duties
under an agreement, even without an express assumption of an assignor’s duties. Among them are Texas,
Washington and Alabama. To avoid an implied assumption, language in the assignment provision ex
pressly negating any implied assumption of duties should be added.
CONSENT
There may be a conflict between parties who each want the power to assign while preventing the other
from assigning. This is often resolved with a compromise requiring each party to obtain the other’s con
sent before making an assignment. A popular middle ground is to require that the non-assigning party’s
consent is not to be unreasonably withheld. The standard of reasonableness by itself is narrow and vague
and may ultimately leave the determination to a judge or jury. To regain a measure of certainty, a party
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may seek to include certain reasonableness factors in the provision. Sometimes, this is achieved with a
list of factors that the assignment has to satisfy, like the net worth or reputation of the assignee.
If the assignment provision does not require a non-assigning party to act reasonably in withholding con
sent, the non-assigning party may be subject to an implied covenant of good faith and fair dealing to re
spond reasonably to requests for consent. Depending on the applicable law, the implied covenants may
apply even if the assignment provision allows the non-assigning party to withhold consent in its sole and
absolute discretion. In states that do not recognize implied covenants of good faith and fair dealing, a
party would be at liberty to act unreasonably when deciding to withhold consent if not otherwise limited
by the assignment provision.
When a party knows in advance that it may want to assign its rights or delegate its duties to a certain enti
ty, like an affiliate or subsidiary, you should obtain the pre-approval of the non- assigning party within
the text of the assignment provision itself.
MERGER & SALE OF STOCK
Parties to should consider whether they intend for a merger, sale of stock, or involuntary transfer by one
of the parties to violate a prohibition on assignment. The parties may have different views on how the
provision should address this issue. One party might desire a broad anti-assignment provision that
would be violated with any number of corporate transactions, while the other might seek to preserve the
ability (without the other’s consent) to restructure its business and sell or otherwise transfer assets or the
business itself as needed over the term of the agreement.
Courts use a range of analyses to decide whether an event is an assignment. One approach courts take is
to consider the relevant merger statute. Another approach focuses on the facts and circumstances of the
transaction.
The merger statute approach focuses on the language of the state merger law. The language usually pro
vides that the surviving corporation in a merger is vested with the rights, franchises, and obligations of
the disappearing corporation. Emphasizing the vesting process occurs “automatically,” these courts tend
to conclude that an assignment by operation of law is not an assignment within the meaning of an anti-
assignment provision.
Other courts take an all-inclusive view of whether a merger is an assignment. These courts tend to focus
on whether the merger creates any quantifiable risk of loss or increased hazard to the non-assigning par
ty. An application of Georgia law addressed this issue in the context of a transfer of an insurance policy
from a disappearing corporation to a surviving corporation. A parent corporation, which survived a mer
ger, attempted to recover on a loss under the disappearing corporation’s insurance policy.
After the merger, a fire occurred. The surviving corporation filed a claim and was denied coverage be
cause the merger was a prohibited assignment in violation of the policy. The lower court ruled for the
insurer. The appellate court reversed and ruled the merger statute rendered the policy language at least
ambiguous because the anti-assignment provision failed to include or exclude an assignment by opera
tion of law. The court chose to look to the facts of the transaction and policy as a whole and determine
whether the assignment by merger increased the risks or hazards to the insurer.
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A Connecticut court held that whether a change in the form of a lessee’s business from a partnership to a
corporation violates a covenant against assignment is a fact question, to be resolved by reference to
whether there was an essential change in personnel, whether the change was substantial or merely one of
form, and whether the interests of the landlord are affected by the change.
The general rule is that a change in ownership effected through the sale of stock is not treated as an as
signment. Parties can contractually agree that the sale of a majority interest will be an assignment. Pub
licly traded companies frequently insist that transfers of shares will not be treated as an assignment. The
owners of privately held companies may desire the flexibility to transfer shares to certain specific groups
of people without being deemed to have made an assignment.
To be enforceable, anti-assignment provisions intended to encompass mergers, sales of stock, and
changes in control should be clear, definite and unambiguous.
SPECIAL ISSUES: INTELLECTUAL PROPERTY LICENSES & UNIFORM COMMERCIAL CODE
INTELLECTUAL PROPERTY LICENSES
The licensee absent express language in the license specifically permitting it may not assign non
exclusive patent and copyright licenses. This principle is based on the rationale that a non-exclusive pa
tent or copyright license is a contract promise by the licensor not to sue the licensee for infringement.
The promise is personal to the licensee and nontransferable absent consent of the licensor. The non
assignable nature of non-exclusive patent and software licenses is partially attributable to the rationale
behind patent and copyright laws. They are intended to protect authors and inventors and promote au
thorship and new inventions by reserving to the patent or copyright owner the exclusive right to deter
mine to when and to whom license rights are granted.
Software is uniquely situated as eligible for either patent or copyright protection. Courts have found
non-exclusive software license agreements are non-assignable by the licensee unless assignment is ex
pressly permitted by agreement.
There is a split of authority on whether or not an exclusive patent or copyright license (including soft
ware licenses) may be assigned without consent of the licensor. Some courts have found as a matter of
law that exclusive copyright licenses are assignable only with the consent of the copyright (or patent)
owner. Other courts have found exclusive licenses to be assignable by the exclusive licensee absent a
prohibition of assignment in the contract. However, if a license only grants exclusive rights to a portion
of the rights owned by the licensor in and to the intellectual property (e.g., such as a grant of the exclu
sive right to distribute software, with the owner of the software retaining other rights such as the rights to
make copies and derivative works), then it is possible that such a “limited” exclusive license would be
treated more like a non-exclusive license and be found non-assignable without licensor consent.
There is legal authority supporting the position that trademark licenses cannot be assigned by the licen
see without consent.
As the owner of the rights granted, the licensor of intellectual property rights retains the right of assign
ment, absent restriction in the agreement.
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SOFTWARE LICENSES & ANCILLARY CONTRACTS
An intellectual property rights licensee should be careful to ensure the license agreement contains an
assignment provision and license grant that will meet the its future needs. Software licensees should in
clude assignment language to allow the licensee to meet its future business needs, which could include
the sale or acquisition of business units that may need to use the licensed software. The licensee should
consider whether it intends to use any third parties (like outsourcing companies) to manage, run, oper
ate or otherwise use the software. Third party use could be in violation of the agreement and construed
as an unauthorized assignment of rights without licensor consent. The licensee should seek appropriate
restrictions on the licensor’s ability to assign its rights and obligations under the agreement to ensure
that any assignee has the resources and capability to meet the licensor’s rights under the license, like ob
ligations to support and maintain software in a software license context.
Software licensors should be careful to protect their ownership rights by limiting assignment by the li
censee. The licensor should use assignment restrictions to prevent a licensee from assigning its rights to
a competitor of licensor. If the software license agreement makes performance commitments that could
be impacted by the number of users or quantity of data processed, it would be advisable to retain the
ability to prohibit assignment of the license to a company significantly larger than the original licensee,
subject to performance commitments and licensee fee being adjusted accordingly.
Parties to software license agreements with ancillary agreements not the subject of federal copyright or
patent law (like support and maintenance or development agreements related to the license) should be
careful to consider a uniform assignment provision across all related contracts. The absence of a specific
assignment provision may mean that different law may govern different contracts, potentially resulting
in different outcomes on the issue.
UNIFORM COMMERCIAL CODE
Commercial sales and security interest agreements governed by the UCC follow these general rules:
• The UCC security agreement provisions contain rules favoring the free assignability of accounts,
leases, and other contract rights. These provisions are designed to increase the availability of
credit, primarily by enlarging the pool of assets readily available for use as collateral. Toward that
goal the law generally overrides contract or statutory prohibitions on assignment on certain cat
egories of collateral and say that an assignment of rights in that collateral will not cause a default,
breach, right to terminate, or similar adverse event under the commercial agreement containing
the anti-assignment provision. The sections prohibiting anti-assignment provisions are not all
identical and care is needed to understand the nuances.
• While the sales agreement section of the UCC expressly provides that parties to a commercial
agreement can agree to prohibit assignment, there is some uncertainty about the remedies avail
able if an assignor breaches an anti-assignment provision. Some have suggested the prohibited
assignment may remain effective and that the assignor will be liable for damages.
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ADDITIONAL ISSUES
Miscellaneous Considerations: A party may want to ensure that its right to assign passes to its assign
ee. This right to assign may have particular relevance to a party that intends to assign its rights to an affil
iate or subsidiary, who in turn may desire to make a subsequent assignment.
Rights Non-Divisible: A party may want to prevent another party from dividing its rights and making
multiple assignments. This may be significant in agreements on intellectual property, where the owner of
the intellectual property rights desires to avoid transfer of rights granted apart from the other rights and
obligations.
Ancillary Agreements: A commercial transaction may involve the execution of related ancillary agree
ments, as is commonly the case in asset purchase transactions. The documents should contain matching
assignment provisions to ensure that the entire closing package is similarly assignable.
Who Is The Party After Assignment? Commercial agreements generally use “labels” to define parties
(e.g., “Landlord,” “Company,” “Contractor,” “Supplier,” etc.). Following an assignment, there could be a
question on the identity of the party identified, and whether the label now refers to the assignor, assign
ee, or both. For example, an agreement may say that the insolvency of the “Supplier” is a default under
the agreement. After an assignment by the assignor-supplier to the assignee-supplier, would the insol
vency of the assignor still trigger default under the agreement?
No Waiver: The parties might want to clarify that the non-assigning party’s consent to one assignment
does not waive the consent requirement for subsequent assignments.
CHOICE OF LAW
The general rule that parties are free to choose the law governing their contract does not eliminate the
complexity of applying that provision.
In the absence of clear agreement as to which jurisdiction’s law applies in interpreting a contract, the tra
ditional rule is that the substantive law of the place of the contract governs. This standard encompasses
both: (i) the place where the contract was entered into; and (ii) the place where it is to be performed.
The main reason for including of a choice of law provision is to ensure certainty or uniformity on the
interpretation of the contract. The laws of prominent commercial jurisdictions like Delaware, New York,
and California are often used in commercial transactions due to the large well-settled body of commer
cial law there. The parties can be relatively certain in relying on such laws that the agreement will be in
terpreted by courts according to their understanding.
For parties with operations in several states, the ability to focus on the law of one particular state, like the
state of their primary operating base, is appealing both for drafting form customer contracts and efficient
resolution of subsequent disputes. Concentration in jurisdictions where there is clear, favorable, and fa
miliar law can mean significant cost savings on litigation expense and claims settlement.
There is an interaction between the choice of law provision in a contract and the choice of forum provi
sion, if any. Parties may frequently specify the forum where claims relating to or arising out of the agree
ment may be brought. While this choice of forum may be aligned with the jurisdiction whose law
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governs under the choice of law provision, this is not always the case. When different jurisdictions are
chosen for the governing law and forum, it is critical to understand the forum court will apply the laws of
its own jurisdiction for procedural matters including whether or not the choice of law provision is en
forceable. For substantive matters generally the law cited in the choice of law provision governs. The law
of the forum is used to decide whether an issue is itself procedural or substantive.
A typical “bare bones” choice of law provision says the contract is governed by the law of…. While this is
enough to identify the governing law, it is flawed because it fails to address a number of issues that ham
per effective interpretation of choice of law provisions.
Renvoi: The bare bones provision ignores the potential circularity called “renvoi,” i.e., the application of
the designated governing law’s own choice of law statutes. If suit was brought in State A on a contract
that chose State B’s law to control, the State A court might, applying State B’s choice of law rules, decide
that State B law requires the law of State A to apply under the State B conflict of law statutes. State A’s
conflict of law rules might then point back to State B. The court effectively faces a “hall of mirrors” de
termining the applicable governing law. To avoid this, many drafters expressly exclude the governing
state’s choice of law provisions, or refer to the state’s “internal” or “substantive” laws.
Depaçage: In line with the general principle that the parties are free to choose the law governing the
agreement, parties may choose to have different bodies of law govern different issues or sections of the
agreement as they see fit. This practice of issue-by-issue determination is known as “depeçage.” This
“pick and choose” approach may invite more litigation than it wards off.
Contract v. Tort Claims: Courts often hold that, absent an agreement to the contrary, the choice of law
provisions of a contract will govern disputes arising from the construction of the contract but not tort
claims which ostensibly arise out of or are related to the contract. A broader provision pertaining all
rights and duties “arising from or relating in any way to” the contract would have a better chance of in
corporating tort claims into the choice of law provision. Because courts apply choice of law provisions
unevenly to tort claims in the absence of express inclusion, an explicit clause contemplating any and all
non-contract claims arising out of or relating to the making, performance, and construction of the con
tract would be more useful.
Visibility Of Provision: Some states require that the choice of law provision be conspicuously set out
from the remainder of the document. This can be done using bold or underlined text.
LIMITATIONS
Depending on the state, there are theories that limit choice of law provisions. In some states, the chosen
law must have a substantial relationship to either the transaction or the parties; or have some other rea
sonable basis as the parties’ choice of law. A second limitation requires that the chosen law not be con
trary to a fundamental policy of a state which has a materially greater interest than the chosen state in the
determination of the particular issue and which would otherwise be the state of applicable law in the ab
sence of the choice of law provision.
The UCC says that a foreign jurisdiction’s law may be applied to a transaction by a choice of law provi
sion when the transaction bears a reasonable relationship to that jurisdiction. This means the law chosen
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must be that of a jurisdiction where a significant enough portion of the making or performance of the
contract is to occur or occurs. The UCC limitation does not contemplate a relationship with the Parties;
just a relationship between the governing law jurisdiction and the transaction.
In addition to the general rules outlined above, some states have their own unique requirements or
thresholds that pertain to the application of the jurisdiction’s law to contracts that bear some (or no)
relationship to it. For example, both Delaware and New York have laws that allow parties to choose their
respective state laws as governing, even if the underlying contractor parties bear no relationship to the
state, provided that the transaction embodied in the contract meets a certain dollar amount threshold.
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Commercial Losses
The line between tort and contract law is sometimes unclear, especially in product liability and construc
tion law. To keep the line distinguishable, most states have adopted some form of the commercial-loss
doctrine, also called the economic-loss doctrine.
Originally applied in product liability cases, the traditional commercial-loss doctrine says that when a
product is defective, a party may not recover in tort unless the defect causes personal injury or damages
property other than the product itself. The basic argument for this is that tort law is an inappropriate tool
for purely commercial disputes. The law for those disputes is contract law.
The commercial-loss doctrine is applied widely including product liability, misrepresentation, and con
struction claims. It is applied to cases in most industries. To understand why the commercial-loss doc
trine should stop a tort claim, you need to understand the basic difference between tort and contract law.
When a claim is subject to contract law, the commercial-loss doctrine should bar the tort claim.
Contract law is based on the theory that the parties to a contract can allocate certain risks of a transac
tion between them as they choose. General public policy plays a small role.
Tort law is based on the theory that society requires people to exercise due care in their interactions with
others, whether those interactions are by contract or not. Breaching that duty should leave parties liable
to the injured ones. This social policy disperses the cost of civil injuries. It has nothing to do with people
contracting.
The commercial-loss doctrine came from the law on sales of goods. Sales of goods come under contract
law. To make a claim against a seller, a person has to prove there was a contract. In the twentieth centu
ry, strict and negligent product liability law was established for defective products that harmed other
property and persons, whether there was a contract or not.
When that change happened, a plaintiff ’s attorney would try to pursue a tort claim every time a product
was defective, even if the only damage was to a product itself. This is because under contract law, most
claims do not allow the open-ended recovery tort law permits. In addition, most contract claims have
bargained-for limitations on what a party can recover and when. To avoid these limits, the plaintiffs’ bar
tried to take the narrow tort rule carved out for defective products that caused injuries to persons or oth
er property and broaden it so that it would include damage to a product itself. Defendants argued that
when the only damage was to a faulty product itself, no rational policy justified allowing a tort claim. The
commercial-loss doctrine was born from this argument.
The policy behind the commercial-loss doctrine is to prevent contract law from drowning in a sea of tort.
The Supreme Court said that when a product injures only itself, society has decided a consumer does
not need the extra protection of tort law because the consumer can bargain for contract warranty protec
tion. The doctrine protects the freedom of parties to split up the economic risk between themselves by
contract.
Some tend to think that tort claims are normal and appropriate whenever the commercial-loss doctrine
does not stop them. This is not true. This would effectively switch the burden of proving that the com-
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mercial-loss doctrine applies to defendants. If traditional contract law has governed an industry histori
cally, proponents of tort claims should have the burden of showing why policy should allow tort claims.
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EC Privacy Law Update
Ed. Note: Last year we issued an update on privacy law developments in the US.
As Internet use has become ubiquitous, companies are gathering more and more information regarding
their customers and visitors to their websites. Databases of this information are a powerful business and
marketing tool, but also raise a serious threat to the privacy of personal information. Governments
around the world are addressing that threat through laws regulating the collection, disclosure and use of
personal data. This memo addresses recent developments in this area, focusing on Europe.
Use of personal data, like medical information, credit card records, purchasing patterns and the like, by
businesses that gather it, whether by Internet or other means, has been more restricted in Europe than
the US. In the US, except for medical data, most regulation has centered on data security and notifica
tion of breaches.
In the EC, the 1998 Directive on Transborder Flows of Personal Data prohibits companies from trans
mitting data to countries that do not adequately protect it.
It applies to non-European companies with European customers, employees or others from whom per
sonal data is collected. Collecting personal data by a US company over its website could violate Europe
an law, given the lack of formal US protection of that information, particularly if the data is collected
through facilities or equipment located in Europe, including the use of cookies placed on European us
ers’ computers.
The EC enacted a new Directive on Privacy in the Electronic Communications Sector (E-Privacy Di
rective) in 2002 that requires consumers be given clear and precise information about the purposes of
cookies and an opportunity to refuse them before they may be used. As amended in 2009, the E-Privacy
Directive requires consumers to actively give consent to such cookies. In response to this, the United
Kingdom enacted new laws on cookies and e-commerce effective in May 2012 that applies to all data
collected electronically whether personal information or not. Cookies and similar methods of gathering
data may not be used without user consent after having received clear and comprehensive information
about what the means of data gathering are doing and what information is being stored. Regulatory
guidance indicates consent requires active communication by which the user knowingly indicates ac
ceptance, like clicking an icon, sending an email or subscribing to a service. The key is that the user must
be shown to understand that by taking the action, she is providing consent. This is a problem for sites
that require a cookie to be set before the web page is displayed; the guidance recommends minimizing
such situations and to seek the consent as soon as possible, while being prepared to show the site is do
ing all it can to provide the information and seek consent as promptly as possible.
Canadian law is even stricter. While the European E-Privacy Directive allows websites to condition ac
cess on acceptance of cookies as long as their purpose is legitimate and the acceptance is well informed,
the Canadian Privacy Commission found that an airline’s denial of access to users who refused cookies
was a violation of Canadian Law. Their law became applicable in 2004 to ALL companies that collect,
use or disclose personal information about Canadian citizens in the course of commercial activities.
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India recently enacted strong privacy laws as well. In 2011 India adopted rules implementing parts of a
2008 law. These rules are more restrictive than those contained in US and the EU law and purport to
extend to any person so long as a computer or computer network located in India is affected.
The EU Data Protection Directive affects US companies that wish to receive information about its Eu
ropean employees or customers, or respond to government demands for information about Europeans.
This concern was the subject of negotiations between the United States and the European Community.
In 2000, the Department of Commerce issued the final version of an intergovernmental agreement cre
ating a “safe harbor” for US companies that voluntarily and publicly agree to adhere to specified princi
ples, including:
(a) Notice: Notice to individuals of the purposes for which personal information is collected, the
types of third parties to whom it is disclosed, and how individuals may limit such use and disclo
sure where it is for a purpose other than that for which the information was originally collected
or later authorized.
(b) Choice: An opportunity for individuals to choose (“opt out”) whether and how their per
sonal information is used or disclosed to third parties, where such use is incompatible with the
original purpose of collection; for sensitive information (e.g. medical information or information
on racial or ethnic origin, political opinions, religious beliefs and the like, or information desig
nated as sensitive by the source) individuals must be given an explicit choice (“opt in”) before
the information is disclosed to a third party or used for a purpose other than that for which it was
originally collected.
(c) Onward Transfer: A requirement that third parties, who are acting as agents of a business, to
whom personal information may be transferred by that business without Notice and Choice,
must provide at least the same level of protection.
(d) Security: Use of reasonable measures to protect personal information from loss, misuse, un
authorized access or disclosure, alteration or destruction.
(e) Data Integrity: A prohibition on processing personal information in a way that is incompati
ble with the purposes for which it is collected or subsequently authorized.
(f) Access: Giving individuals reasonable access to information about them and the opportunity
to correct or delete inaccurate information.
(g) Enforcement: A mechanism for enforcing compliance with these principles.
The EC has recognized the Federal Trade Commission and the Department of Transportation as gov
ernment bodies empowered to investigate complaints and get relief against unfair or deceptive practices
or noncompliance with the safe harbor principles. Businesses not subject to FTC or DOT jurisdiction
like telecommunications, banking, insurance and nonprofit companies, cannot use the safe harbor pro
gram. The FTC has sued and entered into consent orders with several US companies that have falsely
claimed to comply with the safe harbor framework.
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Outside the boundary of the safe harbor, businesses that collect or receive personal data from EU per
sons risk violation of EC law, although other ways to comply may be elected. One option is getting the
informed consent of every person whose information is to be transferred. Another option for such busi
nesses is to choose to use binding contracts that conform to EC Directive requirements with those who
provide them with personal data and anyone to whom they transfer such data. To facilitate this, the EC
has adopted standard contract forms, under which the data transferred is treated in compliance with EU
data protection standards.
US companies should consider bringing themselves within the safe harbor if they collect personal data
from individuals in the EC. This means certifying to the Department of Commerce their adherence to
the safe harbor principles and implementing privacy policies that comply with those principles.
European actions indicate enforcement of privacy rules can be expected. The European Court of Justice
found that a website published by a Swedish woman that included names of her colleagues, job descrip
tions and some telephone numbers and other personal information, constituted the processing of per
sonal data under the Directive.
In another example of European privacy enforcement, a German state Interior Ministry found that HP
printer driver software violated German data protection law by transmitting technical information, in
cluding IP addresses and printer model numbers, to an HP server outside Germany without appropriate
user consent. In Spain, authorities charged Google for collecting personal information via Wi-Fi inter
ceptions by Google street view trucks and conveying that information to the United States in violation of
Spanish law.
The United Kingdom’s Information Commissioner’s Office (“ICO”) announced that where laptops
containing unencrypted personal information are lost or stolen, enforcement action may be filed against
even private individuals under their law which applies to any person who controls and loses personal
data.
French authorities have warned that sharing credit and payment histories must conform to French pri
vacy law. While such information may be used for internal and intra-industry purposes, it may not be
shared with other industries, and must comply with privacy practices, like offering a right of redress to
the subject of the information. Norway has recently enacted security rules requiring all Norwegian em
ployers subject to Norwegian tax laws to encrypt paycheck stubs sent via e-mail.
The US Sarbanes-Oxley Act’s requirement of anonymous corporate whistleblower hotlines has been
held to conflict with European data protection laws. Under Sarbanes-Oxley, public companies must pro
vide at least one confidential, anonymous method for employees to submit complaints about questiona
ble accounting matters. French and German decisions have held that such methods may violate
European Law.
A German Labor Court held that an anonymous hotline could not be implemented by Wal-Mart with
out first consulting with the works council, which had a right to participate in matters relating to the
rules of operation of the establishment and conduct of employees. In 2005, the French data protection
agency found that anonymous hotlines would reinforce the risk of slanderous denunciations and was
disproportionate to the objectives sought. In addition, a French court ordered the French subsidiary of a
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US company to discontinue a whistleblower hotline on similar grounds. In 2009, the French Supreme
Court considered the validity of a corporate code of conduct implemented by a company to comply with
Sarbanes-Oxley. The Court found that the scope of the company’s code of conduct was too broad be
cause it extended intellectual property rights, confidentiality, discrimination, conflicts of interest and
harassment.
European data protection laws require individuals have notice of what data is collected about them and
that it be processed fairly. Anonymous tips raise significant data protection and privacy issues under Eu
ropean law. Recognizing the conflict with US law, CNIL, the French privacy administrative body issued
guidelines which, among other things, require that whistle-blowing systems be limited in scope. Em
ployees should not be required, but merely encouraged to use them. Anonymous reports should be dis
couraged, and, when received, must be handled with precautions. Critically, the individual who is the
subject of the report must be notified promptly.
The EU has stressed that whistleblowing schemes must be implemented in compliance with EU data
protection rules and that the individual accused by a whistleblower is entitled to the rights guaranteed by
European data protection law. It observed that whistleblowing schemes entail a very serious risk of stig
matization within the organization and that the person will be exposed to such risks even before the per
son is aware that she has been incriminated and the alleged facts have been investigated. The report does
recognize Sarbanes-Oxley whistleblowing rules as a legitimate initiative to protect the interests of share
holders, so long as adequate safeguards are in place. The report suggests a number of steps that may be
taken in this vein:
• Possible limits on the number of persons who may report alleged misconduct.
• Possible limits on the categories of persons who may be incriminated.
• Promotion of identified and confidential reports rather than anonymous reports:
The report indicates that anonymous reports are particularly problematic and only identified reports
should be used. Whistleblowers should be informed that their identity will be kept confidential and not
disclosed to third parties, including the accused. Only if despite this step, the person making the report
wants to remain anonymous should the report be accepted. Anonymous reports should be treated with
special caution and perhaps investigated more quickly because of the risk of misuse.
• Clear definition of the limited types of information to be communicated.
• Compliance with strict data retention periods. Generally data should be deleted promptly, usu
ally within two months of completion of the investigation, unless legal or disciplinary proceed
ings are taken.
• Provision of clear and complete information about the whistleblowing scheme.
• Respecting the rights of the accused to be informed of the charges against him as soon as possi
ble, and how to exercise his rights of access and rectification.
The EU’s Data Protection Directive has led to a conflict between US discovery obligations and Europe
an privacy obligations. Both EU data protection laws and US discovery laws provide severe sanctions for
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noncompliance. Accordingly, companies subject to US discovery demands for personal data located in
the EU may find themselves between a rock and a hard place.
A party’s US discovery obligations are in Federal Rules and state court rules that allow a party to request
non-privileged information germane to a claim or defense. The Directive places severe restrictions in the
processing of personal data. Specifically, for documents within the scope of the EU Directive, compli
ance with EU law will typically require a basis under EU law for (1) collection; (2) disclosure; and (3)
analysis in the EU; a basis for (4) transfer to the US; and a basis for (5) analysis; (6) disclosure; and (7)
use in the US.
In the Americas, US litigants seeking to acquire information from a Mexican party will face new hurdles
with the recent amendment to the Mexican Constitution concerning privacy protection, which was
modeled after Spanish Law. US litigants will likely face similar complications where discovery requires
the disclosure of the personal information of Mexican citizens.
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Federal Contracting Overview
This memo is an overview of some of the more common legal issues in contracting with the federal gov
ernment.
A government contract is between a private company and a country. The government has a very regulat
ed form of contracting. The regulations are designed to protect tax dollars and ensure they are used ap
propriately and fairly. The Federal Acquisition Regulation (FAR) governs procurement by federal
government executive agencies. FAR has standard contract clauses to provide contract based remedies
for most situations. FAR also authorizes agency-specific regulations to supplement FAR.
FORMING A CONTRACT WITH THE GOVERNMENT
There are two phases to forming a contract with the federal government: formation, or the pre-award
phase, and administration, or contract performance. During formation, the prospective contractor and
the government focus on the steps leading up to a contract award. The solicitation, a document generat
ed and issued by the contracting agency, describes the requirements and the rules governing the pro
curement from beginning through award. It is the starting point for nearly every formation issue.
The rules associated with government contract formation focus on fair competition and making sure the
government gets what it needs at a fair price within the law. The rules in this phase are different from
those covering administration, which focus on whether the terms of the contract have been complied
with.
Formation starts when an agency defines its requirements and submits a purchase request to the agency
contracting department. For the purchase request to move forward, the government needs both money
for the deal and the authority to contract.
Only contracting officers have the authority to bind the government by entering into a contract. They
have been issued a warrant that authorizes them to obligate funds for the government. This is important.
The contracting officer is the only person who can award a government contract or authorize changes to
it. The only exception is where individuals other than contracting officers are given a Government Pur
chase Card (GPC) that permits them to purchase up to the micro-purchase threshold ($3,000 for goods
and services, $2,500 for construction).
FULL AND OPEN COMPETITION.
The government must use procedures that allow qualified companies to compete on a level playing field
for an award. In the private sector, a longtime supplier will often be awarded a contract without much
shopping.
The Competition in Contracting Act (CICA) sets full and open competition as the standard method for
awarding government contracts. This means all offerors have the opportunity to compete against one
another to meet the government's needs. While this is the standard, there are many exceptions to it that
limit competition or sometimes allow for an award with no competition.
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With limited exceptions, information on proposed contracts over $25,000 must be publicized on the
Federal Business Opportunities Web site, the point of entry for contract opportunities.
The government may award a contract without full and open competition if the acquisition meets cer
tain requirements. In these cases, the government must solicit offers from as many potential sources as
practicable under the circumstances. The government is not required to use full and open competition
when its need for goods or services is of such an unusual and compelling urgency that the government
would be seriously injured unless the agency is permitted to limit the number of sources from which it
solicits bids or proposals. This justification cannot be used because of the lack of advance planning or
concerns related to the amount of funds available to the agency for procurement functions.
Full and open competition is also not required when the acquisitions involve certain international
agreements, when it is not authorized or required by statute, or other than full and open competition is
required to protect national security or the public interest. The government must publicize the justifica
tion for not using full and open competition on the website.
Full and open competition is also not necessary when the government orders goods from a contractor
who has already been awarded an existing contract vehicle if the order is in the scope of the contract.
The best example of this is an order placed under a GSA Federal Supply Schedule (FSS). GSA awards
FSS contracts to establish standing sources of supply based on a determination of whether the contrac
tor is offering commercial goods and services at reasonable prices. After the GSA awards an FSS vehicle
to a contractor, federal agencies can limit competition to FSS holders. The government will solicit
quotes from several FSS holders and select the quote that best meets their needs.
The government has discretion to determine the extent of competition required in procurements below
$150,000. Instead of issuing a formal solicitation, the contracting officer may solicit a number of quotes
from companies and then issue a purchase order. A purchase order is an offer by the government to buy
supplies or services, including construction and research and development, upon specified terms and
conditions, using Simplified Acquisition Procedures (SAP).
GOVERNMENT PROCUREMENT METHODS
To fulfill the requirement to use competitive procedures for contract awards, the government uses either
a sealed bid process or a negotiated procurement process for most acquisitions.
Sealed Bidding.
The government uses sealed bidding when it can issue a solicitation that clearly describes its needs and
the solicitation will elicit bids that can be compared solely on price. Sealed bidding begins by issuing an
Invitation For Bid (IFB). The IFB clearly describes the requirements, including detailed specifications.
The solicitation states the date and time for submission of bids. The IFB deadline is strict; missing it by
even a second will likely result in exclusion from the competition.
The government holds a public bid opening after bids are submitted. Following the opening, the gov
ernment will review the bids to make sure the bidder has complied with the IFB specifications. The gov
ernment will award the contract to the lowest priced "responsive" and "responsible" bidder. A
prospective contractor is "responsive" when it complies with all material aspects of an IFB. A prospective
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contractor is "responsible" when it has adequate financial resources, a satisfactory record of performance,
integrity, and business ethics, and the necessary organization, technical skills, and facilities to perform
the contract.
Negotiated Procurements.
The government uses a negotiated procurement process when its needs are too complicated for sealed
bidding and require it to use factors other than price to make an award. The negotiated procurement
process usually starts with a Request for Proposals (RFP). The RFP will include a Statement of Work
(SOW) that describes the needs and a list of the factors to be applied when evaluating offers. The RFP
must state the factors and significant subfactors to be used to evaluate the proposal and their relative im
portance. These factors can include technical capability, management capability, personnel qualifica
tions, past performance and price.
The RFP must also state the standard the government will use to make the award decision. The govern
ment may say it will make an award decision by selecting the proposal that represents the "best value"
taking technical and cost factors into consideration, or it may base the award on the lowest-priced tech
nically acceptable offeror with acceptable past performance.
TYPES OF GOVERNMENT CONTRACTS
The solicitation that describes the government's requirement must state whether the contractor will be
paid a fixed price or the government will reimburse the contractor based on the actual cost of performing
the contract, up to a stated maximum contract amount.
FIXED-PRICE CONTRACTS.
The most common form of contract is a fixed-price one. Fixed-price contracts can be for a firm fixed
price or an adjustable price with the price adjustment made using some objective standard, like the Con
sumer Price Index. In a fixed-price contract, the price risk associated with cost overruns is on the con
tractor. Contracting officers are required to use fixed-price contracts when acquiring commercial items.
COST-REIMBURSEMENT CONTRACTS.
Sometimes it is difficult or impossible for the government to accurately estimate a fair and reasonable
fixed price. In those cases, the government may use a solicitation for a cost-reimbursement contract.
Under these contracts, contractors are paid allowable incurred costs to the extent set in the contract plus
an agreed upon calculable amount. This contract shifts the risk of a cost overrun to the government. This
type of contract also reduces performance risk since the contractor is being compensated in accordance
with its costs.
OTHER TYPES OF CONTRACTS.
In certain situations, the government may recognize a need, but may not be able to determine the quan
tity needed, or the dates on which it will need these goods or services. Here, the government may award
what is called an "indefinite" type of a contract. These include indefinite-delivery contracts; definite-
quantity contracts where the location for delivery is not specified; requirement contracts where the ex-
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tent of the requirements is not known at the time of award, but the contractor must stand ready to fulfill
the government's needs as they arise during a specified period; and indefinite-quantity contracts.
The government may also award time-and-material or labor-hour contracts for services when it is not
possible at award to estimate the extent or duration of the work required, or to estimate the costs in
volved. Under a time-and-material contract, labor is paid for on the basis of direct labor hours at speci
fied fixed rates, and materials are paid for at cost. Labor-hour contracts are similar to time-and-material
contracts and are used when the contractor is not expected to supply the materials.
LEGAL ISSUES DURING CONTRACT FORMATION
BID PROTESTS
If a prospective government contractor believes the government made a mistake in contract formation, it
can file a bid protest challenging the action. Only interested parties can protest. An interested party is an
actual or prospective offeror whose direct economic interest would be affected by the award.
There are three possible places where a bid protest can be filed: (1) the government Accountability Of
fice; (2) the federal agency conducting the procurement; and (3) the Court of Federal Claims. An inter
ested party can submit its protest to any of these and is not required to exhaust administrative remedies
at the agency before going to the others. If an interested party files a protest that the agency denies, the
protester can file its protest again at GAO. If a protester files with GAO and GAO denies the protest, the
protester can file its protest at the Court of Federal Claims.
GAO is the primary forum for hearing bid protests. It is charged with reviewing protests of procurement
actions by Executive agencies and makes recommendations on the proper course an agency should take
following disposition of the protest. Although GAO's decisions are advisory, agencies almost always fol
low its recommendations.
GAO protests must include a detailed statement of the legal and factual grounds of protest including
copies of relevant documents; all information establishing that the protester is an interested party; all
information establishing the timeliness of the protest; request for a ruling by the Comptroller General of
the U.S.; and a statement of the form of relief requested.
The deadlines of the particular forum are strictly enforced. Protests over irregularities in a solicitation
must be filed at GAO before the bid opening or closing date for receipt of proposals. Generally, in other
cases, protests must be filed no later than 10 days after the basis of the protest is known or should have
been known. If a timely agency-level protest was filed and was denied, a subsequent protest to the GAO
must be filed within 10 days of knowledge of an initial adverse agency action.
In all other cases, protests must be filed within 10 days of receipt of the notice of award (including post
ing on the website) or within 10 days of the date the agency initially proposes for a debriefing, provided
the protester requested the debriefing within three days of receipt of the notice of award. It is important
to request a debriefing as soon as there is notice you did not win the competition. There is only a three-
day window.
Upon receipt of a protest to GAO, the agency may be required to withhold an award or suspend contract
performance if it has already made the award. This applies when a protest is filed before the submission
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of offers, or in a post-award protest, if the agency received notice of the protest from GAO within 10
days of the actual date of award or within five days of a required debriefing. GAO only guarantees that it
will provide notice to the agency within 24 hours after receipt of a protest. It is best to file the protest the
day before it is due to ensure that timely notice is given to the agency and the procurement is stayed.
GAO must issue a decision on a protest within 100 days after it is filed. Federal regulations provide for
an express option where a decision must be issued within 65 days of filing. If GAO determines that a
contract action does not comply with law or regulation, it may recommend that the agency implement
any combination of: refraining from exercising options under the contract or reimburse the protester for
the costs of filing and pursuing the protest and/or bid and proposal preparation; terminate the contract;
recompete the contract; issue a new solicitation; or award a new contract consistent with law or regula
tion.
Protests to the agency must be addressed to the contracting officer or person designated to receive pro
tests. A protest filed with the agency must contain the solicitation/contract number; detailed statement
of the grounds for protest with a description of prejudice to the protester; copies of relevant documents;
request for a ruling by the agency; statement as to the form of relief requested; all information establish
ing that the protester is an interested party; and all information establishing the timeliness of the protest.
Protests based on alleged improprieties in a solicitation must be filed before the bid opening or closing
date for receipt of proposals. In all other cases, protests must be filed no later than 10 days after the basis
of the protest is known or should have been known. Consistent with agency procedures, interested par
ties may ask for an independent review of the protest at a level above the contracting officer.
Protests filed before submission of offers, or within 10 days of the actual contract award or within five
days after a required debriefing, may automatically suspend procurement until the protest is resolved.
After receipt of a pre-award protest to the agency, a contract may not be awarded until resolution of the
protest, unless the contract award is justified in writing for urgent and compelling reasons or it is deter
mined to be in the best interest of the government. After receipt of a protest to the agency within 10 days
after contract award, or within five days after a timely debriefing date, the contracting officer must sus
pend contract performance pending resolution of the protest, unless continued performance is justified
in writing for urgent and compelling reasons or it is determined to be in the best interest of the govern
ment.
Agencies must make their best efforts to resolve agency protests within 35 days after a protest is filed. If
an agency determines that a contract action does not comply with law or regulation, it may issue any
remedy that would have been recommended by GAO had the protest been filed with the GAO. The
agency may require the awardee to reimburse the government's costs associated with the protest if a
post-award protest is sustained based on an awardee's intentional or negligent misstatement, misrepre
sentation, or miscertification.
Either initially, or after filing at GAO or the agency, an interested party may file a protest at the Court of
Federal Claims (COFC). Protests may be filed at the COFC despite having been the subject of a GAO
protest. They are not "appeals" of a GAO decision. If the protest is filed at COFC while the same issue is
pending at GAO, GAO will dismiss the protest and defer to the COFC. If GAO has issued a decision on
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the protest, the COFC will fully review the protest, although the record of the GAO proceeding may be
admitted into evidence for COFC's consideration. COFC has jurisdiction to hear both pre and post-
award protests, but it will not hear a case alleging that GAO failed to follow its own internal protest rules.
A protest to the COFC must include a complaint and must comply with the Court's rules for the filing of
bid protests. For pre-award protests the protest must be filed before bid opening or the receipt of pro
posals. Unlike GAO or agencies, COFC does not have a specific deadline for post-award protests and
COFC does not provide for an automatic stay of award or performance. A protester must request a pre
liminary injunction to stop the procurement from moving forward.
SMALL BUSINESS SET-ASIDE ISSUES.
The government has policies to ensure that various socioeconomic objectives are met. To meet these
objectives the government has implemented contracting preferences for small businesses, including
small disadvantaged businesses, women-owned small businesses (WOSBs), veteran-owned small busi
nesses, and small businesses located in Historically Underutilized Business Zones (HUBZones). Issues
frequently arise over whether federal procurements should be set aside for small business, whether or
not the procurement should be set aside for a particular sub-category of small business, and whether the
parties competing for a small business set-aside contract are in fact, small.
Under the federal regulations, contracting officers are required to automatically set aside a procurement
for small business if it is for less than $100,000. Contracting officers are required to set aside procure
ments over $100,000 for small businesses unless they determine it is not reasonable to expect offers from
at least two responsible small businesses. If procurement is not set aside and an interested small business
believes two interested responsible small businesses exist, it can protest at GAO. The protester must
show why the contracting officer knew, or should have known, that at least two interested and responsi
ble small businesses were planning to submit proposals.
On every procurement, a contracting officer assigns a code to define the goods or services being pro
cured. This is a NAICS (North American Industry Classification System) code. Every NAICS code has a
size standard to guide the contracting officer in defining which businesses are considered small for that
particular requirement. A size standard can be based on the gross revenue of the company or the number
of people employed by the company depending on the type of business.
If procurement has been set aside for small business, but the proposed awardee is a company that you do
not believe qualifies as a small business under solicitation, the company's size status can be challenged at
the Small Business Administration (SBA).
SBA also hears protests challenging the contracting officer's NAICS code determination in set aside pro
curements.
PROCUREMENT INTEGRITY ACT ISSUES.
The Procurement Integrity Act (PIA) influences the contract formation process by prohibiting a pro
spective government contractor (1) who is competing for a contract from knowingly getting a competi
tor's bid or proposal information or agency source selection information before a contract award and (2)
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from employing certain former government employees for a time after they have been involved in the
procurement process.
Contractor bid or proposal information includes any of the following information submitted to a federal
agency in connection with a bid or proposal if it has not previously been publicly disclosed: cost or pric
ing data; indirect costs and direct labor rates; proprietary information on manufacturing processes, op
erations information; techniques marked as confidential or proprietary; and information marked as
contractor bid or proposal information.
Source selection information is any of the following information prepared to evaluate a bid or proposal,
if it has not previously been publicly disclosed; bid prices submitted in response to a solicitation; pro
posed costs or prices submitted in response to a solicitation; source selection plans; technical evaluation
plans; proposal technical evaluations; proposal cost or price evaluations; competitive range determina
tions that identify proposals that have a reasonable chance of being selected for award; rankings of bids,
proposals or competitors; reports and evaluations of source selection panels, boards or advisory coun
cils; and other information marked as source selection information by the government. A competitor's
violation of PIA must be reported to the contracting officer within 14 days of discovery for a protester to
raise the violation in a protest action at GAO.
Beside the restrictions on getting information, PIA prohibits contractors competing in procurement
from hiring former government employees who served in certain positions on that procurement if the
procurement is over $10 million for one year from the last date of the official's involvement with that
procurement.
CONFLICTS OF INTEREST
There are two types of conflicts of interest impacting government procurements: (1) personal conflicts
of interest and (2) organizational conflicts of interest.
PERSONAL CONFLICTS OF INTEREST.
Government employees cannot participate personally and substantially in matters in which they or their
organizations or with which they are negotiating for employment, have a financial interest. Violation of
these rules may subject them to criminal sanctions.
Federal laws also imposes revolving door restrictions on government employees with contracting re
sponsibilities. They prohibit certain former government officials from certain involvement with govern
ment procurements after they leave federal service. Any government official involved with procurement
should get a letter outlining any future employment restrictions from their agency ethics advisor before
starting employment with any government contractor. Companies should request a copy of this letter as
part of the hiring process to avoid any potential conflicts.
ORGANIZATIONAL CONFLICTS OF INTEREST.
Organizational Conflicts of Interest (OC) arise when because of other activities or relationships with
other persons, a person is unable or potentially unable to render impartial assistance or advice to the
government; her objectivity in performing the contract work is or might be otherwise impaired, or she
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has an unfair competitive advantage. Courts have decided that “person” in this regulation means an enti
ty. GAO and the courts have identified three general types of OC: (1) biased ground rules in procure
ments; (2) unequal access to information; and (3) impaired objectivity.
Biased ground rules are where company employees draft specifications that competitors for a contract
must meet or are in a position that would allow the contractor to draft the solicitation to advance the
employees' own ends.
Unequal access to information is where a company has access to nonpublic information that gives the
company an unfair competitive advantage in a later competition.
Impaired objectivity is where the contractor is required to be objective but the contractor has an interest
in the outcome that calls the company's impartiality into question.
An OC discovered before an award must be disclosed to the contracting officer and may require a miti
gation plan to minimize the impact of the OC. An unmitigatable OC can cause the contracting officer to
exclude a company from the competition. An OC discovered post-award may result in termination of
the contract and administrative penalties. Failure to disclose an OC is potential grounds for suspension
and debarment and may be a violation of the False Claims Act.
ADMINISTRATION OF GOVERNMENT CONTRACTS
When the government makes a contract award, the contractor becomes responsible for performing the
contract according to the terms in the solicitation and other regulations that may apply. The contract
includes the solicitation document and may incorporate the entire proposal. The solicitation will not
only include a description of the goods or services required, it will also include typical contract terms like
price, delivery, deliverables, and payment and government-specific clauses that govern contractor action.
These clauses can sometimes be negotiated, but many are based on statutes and may not be waived.
The matrix in FAR §52.30 outlines contract provisions required for each type of contract. They are de
signed to address nearly every issue that might arise during performance and impose many requirements
and obligations on a contractor. Contractors must understand the clauses in their contracts to comply
with them. Failure to comply can result in contract termination, fines, suspension, or debarment from
government contracting as well as other administrative and possible criminal penalties.
LEGAL ISSUES THAT CAN ARISE DURING CONTRACT PERFORMANCE
Standards Of Conduct.
Government contractors must abide by a standard of business conduct to maintain public confidence in
the federal procurement system. Certain business practices acceptable in the private sector are not ac
ceptable in government service.
These standards of conduct make it illegal for a government contractor to try to improperly influence
government officials or unfairly gain an advantage through certain types of behavior in competing for,
winning, and performing a government contract. It is illegal to give bribes or freebies to government offi
cials or provide kickbacks to contractors in connection with a government contract.
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Giving, promising, or offering anything of value to a public official because of an official act is a federal
crime. It is also a federal crime to give anything of value to a public official with the intent to influence an
official act or induce the public official to commit fraud or violate an official duty.
The Anti-Kickback Act prohibits giving anything of value to prime contractors or subcontractors in or
der to improperly get or reward favorable treatment in connection with a government contract. Contrac
tors have a duty to disclose whether they have reasonable grounds to believe that the company, a
subcontractor, or an employee has engaged in this activity.
Contractors performing certain government contracts must have a written code of business ethics. Fed
eral contracts and subcontracts over $5 million, with a performance period of 120 days or more, will like
ly require the contractor to have business ethics policies in place with a training program and internal
controls within 90 days of the contract award. Contractors are also required to report any credible evi
dence that they have violated certain criminal laws or that they have submitted false claims to the gov
ernment.
False Statements Act & False Claims Act.
The government expects companies it does business with to hold themselves to a high standard and re
quires them to deal with the government in good faith. The criminal and civil False Claims Act (FCA)
and the False Statements Act create a very simple rule - it is illegal to submit false claims or to lie to the
government. Implementing this "simple" rule is anything but.
Under the FCA, it is a federal crime to knowingly directly or indirectly submit a false claim for payment
to the federal government. The False Statements Act prohibits knowingly and willfully making a false
statement or certification about a matter within the jurisdiction of any federal agency. The criminal pen
alties associated with these laws are identical.
A contractor can violate FCA without having a specific intent to defraud the government. The
knowledge requirement is satisfied through: (1) actual knowledge of the information; (2) deliberate
ignorance of the truth or falsity of information; or (3) reckless disregard of the truth or falsity of infor
mation. The FCA has become one of the main tools the government uses to prosecute fraud.
Penalties under FCA include the forfeiture of all related claims by the company and penalties that can
include triple damages and an additional fine up to $11,500 per violation. Any lies, misstatements or
untruths made in the course of the competition, award, performance or close out of a government con
tract are related to a "claim" for payment under the contract. The government views every invoice paid
after a misrepresentation to be a separate false claim.
Contract Changes.
The government is entitled to get exactly what it contracts for. This makes the contract the key docu
ment. Contract terms are only subject to change with the contracting officer's written approval. Substitu
tions or changes without the contracting officer's written permission can result in FCA allegations.
A contractor cannot supply products that do not exactly comply with contract specifications. The con
tractor must also comply with the other elements of the contract, like required testing procedures, speci-
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