October 6, 2022

Volume XII, Number 279

Advertisement

October 06, 2022

Subscribe to Latest Legal News and Analysis

October 05, 2022

Subscribe to Latest Legal News and Analysis

October 04, 2022

Subscribe to Latest Legal News and Analysis

Organizational Conflicts of Interest – Part 1: A Refresher on OCIs

You might be wondering, “What’s so important about Organizational Conflicts of Interest (“OCIs”)?” The answer is fairly simple: understanding both what causes OCIs and how to mitigate them are critical because unmitigated OCIs can preclude a contractor from (1) competing for future contract work, (2) performing certain tasks under existing contracts, (3) transferring personnel between company organizations, (4) hiring personnel, (5) teaming with certain vendors, and/or (6) entering into certain corporate transactions. Moreover, undisclosed or unmitigated OCIs can create risk of liability under the False Claims Act. In this Part 1 of a three part series, we offer a summary of what creates OCIs and general mitigation strategies. In Part 2, we will detail how OCIs arise in protests, and in Part 3, we will address the risks of False Claims Act liability arising from undisclosed OCIs.

What is an Organization Conflict of Interest?

An OCI arises when, because of other activities or business relationships, a company, its employees, consultants, or subcontractors:

  1. Is unable or potentially unable to render impartial assistance or advice to the Government;

  2. Potentially lacks necessary objectivity in performing the contract work; or

  3. Possesses an unfair competitive advantage.

These break down into three general categories of OCIs: (1) Unequal Access to Information, (2) Impaired Objectivity, and (3) Biased Ground Rules. Each category raises different concerns and requires different mitigation or avoidance strategies. As explained further below, impaired objectivity and biased ground rules OCIs present a higher level of risk for contractors because they are more difficult to mitigate.

An unequal access to information OCI arises when performance under one contract provides a contractor with information that is not publicly available, and such information provides an unfair competitive advantage in a competition for another contract. Examples of this type of information include proprietary information about a competitor received from the government, and nonpublic source selection sensitive information, such as internal government estimates and evaluation strategies. Information provided voluntarily without limitation on use or publicly available information are excluded from this category.

An impaired objectivity OCI arises where a contractor’s work under one government contract entails evaluating itself or a related entity (e.g., through the assessment of performance under another contract, or an evaluation of proposals) such that the contractor’s ability to render impartial advice to the government could appear to be undermined by the contractor’s relationship to the party being evaluated. This category of OCI encompasses evaluating, e.g., (1) a contractor’s own offers, products, or services; (2) a competitor’s offers, products, or services; or (3) a contractor’s own regulatory compliance. As a result, a contractor cannot be awarded a contract (or subcontract) to evaluate its own or a competitor’s products, services, or offers without proper safeguards in place to ensure objectivity.

Finally, biased ground rules OCIs involve situations where a contractor, in some manner, has set the ground rules for a competition for a particular contract, which could result in the contractor skewing the competition in its own favor. This includes, e.g., preparing specifications, drafting statements of work, and performing systems engineering and technical assistance (“SETA”) services. Generally, it is irrelevant whether the bias is intentional. In these circumstances, a contractor cannot be awarded a contract (or subcontract) to supply the system or any of its major components.

How Can OCIs be Mitigated or Avoided?

Based on the nature of the conflict, a potential OCI is resolved by imposing some type of restriction on the contractor’s eligibility for future contracts, or its ability to provide particular services under an existing contract. Procuring agencies frequently will preemptively address OCIs by requiring offerors to agree to a preclusion on future work. Additionally, the following are specific ways in which contractors can mitigate or avoid each of the three categories of OCIs.

An unequal access to information OCI can be mitigated by imposing restrictions upon personnel with access to the third party proprietary or source selection sensitive information. First, a contractor should require its employees to sign non-disclosure agreements (“NDAs”) to prohibit the unauthorized use and disclosure of any nonpublic information. This prevents employees from disseminating the information and also restricts access to the information to employees with a “need to know.” Second, a contractor should establish and document a firewall arrangement to prohibit the transfer of this information from one unit to another. This can be accomplished by establishing and maintaining a log that identifies the particular types of nonpublic information to which each employee has access, physical and electronic control measures, implementation of separate reporting structures, and precluding sharing of personnel across units. It is critical to have the firewall in place before obtaining access to the nonpublic information that could create an OCI.

Although a firewall is an effective method of mitigating or avoiding an unequal access to information OCI, it is an inadequate mitigation strategy for biased ground rules or impaired objectivity OCIs. This is because a firewall does not eliminate the relevant financial incentives at the core of these two OCI categories. However, there are still a few mitigation strategies that can be employed, such as recusal from the procurement, reassignment of the potentially OCI causing work to a subcontractor or the Government, divestiture of the conflicting business, or the use of an independent third-party to perform the work or to review the work impacted by the potential OCI. These techniques are not a guarantee that the company will be permitted to compete, but without any such mitigation efforts, the company absolutely will be precluded.

OCIs continue to be an issue in federal procurements and remain a successful challenge in bid protest forums. Thus, contractors should be mindful of these potential issues, especially if there is a potential OCI issue for you or a competitor that could lead to a bid protest.

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XII, Number 208
Advertisement
Advertisement
Advertisement
Advertisement

About this Author

Anne Bluth Perry, Investigations & International Trade Attorney, Sheppard Mullin
Partner

Anne B. Perry is a partner and former co-chair of the Government Contracts, Investigations & International Trade Practice Group in the firm's Washington, D.C. office. 

Areas of Practice

Ms. Perry concentrates in the areas of Government Contracts law and litigation and is a lecturer and author in the area.  Her broad experience in Government Contracts includes, for example: bid protests before the U.S. General Accounting Office, and the United States Court of Federal Claims; complex litigation in connection with the False Claims Act; claims litigation...

202-218-6875
Daniel J. Alvarado Government Contract & Trade Attorney Sheppard Mullin Law Firm
Associate

Daniel J. Alvarado is an associate in the Government Contracts, Investigations, and International Trade Practice Group in the firm's Washington, D.C. office.

Areas of Practice

Daniel's practice encompasses all areas of government contracting, with a focus on matters of compliance, investigations, disclosure obligations, transactional due diligence, and bid protest litigation. He assists clients of all sizes in manning complex government regulatory requirements in the areas of schedule contracting,...

202.747.2325
Advertisement
Advertisement
Advertisement