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Federal Court Overturns 15-Year Debarment Arising from Affiliate’s Alleged Misconduct  

The United States District Court for the District of Columbia recently overturned the Defense Logistics Agency’s (the “Agency’s”) 15-year debarment from federal contracting of a Houston-based food exporter and its affiliates.  Int’l Exports, Inc. v. Mattis, No. 14-2064, 2017 WL 3025837 (D.D.C. Jul. 17, 2017).  Although the length of the debarments at issue was unusual, debarring companies and their affiliates is a growing trend among federal agencies.  This case highlights several key issues for federal contractors, including the risks that debarment could: 1) arise from settled cases; 2) extend to individuals and affiliates of a company; and 3) last longer than the typical three year period outlined in 48 C.F.R. § 9.406-4.

International Exports, Inc. involved an exporter supplying food to U.S. troops in the Middle East.  Several individuals managing the food exporter were accused of violating the False Claims Act (FCA) by fraudulently labeling products to alter expiration dates and halal certifications.  One of the accused founded International Exports after the food exporter settled the FCA claims. The Agency subsequently proposed International Exports and several individuals with interest in the food exporter for debarment, based on their affiliation with the food exporter’s alleged misconduct.  The Agency imputed the food exporter’s misconduct to International Exports and the individuals and imposed a 15-year debarment from all federal contracting.  International Exports and the debarred individuals sought judicial review of the Agency’s decision.  The Court found that the Agency’s 15-year debarment decision was arbitrary and capricious, but also held that debarring individuals with an ownership or management position in a company is within the scope of federal regulations governing debarment. 

The Agency decision demonstrates the broad discretion agencies have in ordering debarment of individuals and companies alike.  Not only does an agency have authority to propose debarment for any business suspected of an FCA violation, but also for individuals with power to control the primary violator.  The Court held that an agency is not required to demonstrate independent involvement in the violation, so long as an individual had ownership or management interest in the company.  The Court noted that agencies have only three requirements to debar affiliates or individuals based on a company’s misconduct: 1) identifying specific names; 2) giving notice; and 3) providing the opportunity to respond.

Although debarment may extend to individual affiliates, ordering a debarment period beyond the typical three years requires proof of aggravating circumstances.  In International Exports, the Court rejected the 15-year debarment because there was no written finding of fact to establish aggravating circumstances, only the government’s allegations presented in the FCA case.  Although the Court overturned the 15-year debarment in this case, the company could still face a lengthy debarment by other federal agencies based on the FCA case, so long as the agency provides written justification.  

In light of the International Exports decision, companies should remain cognizant of possible debarment arising from FCA settlements.  Businesses should also understand that debarment actions may extend to multiple levels of employees.  Working with debarment officials before agencies issue notices of proposed debarment is crucial to limit a potential debarment period when a company faces alleged misconduct.

By: Lidiya Kurin