Global Regulatory Enforcement Law Blog : Global Regulatory Enforcement Lawyers & Attorneys: Reed Smith Law Firm: Government Contracts & Compliance

This post was written by Christopher Rissetto, Larry Demase, Jennifer Smokelin, Bob Helland, and David Wagner.

In the weeks that have passed since our previous article on climate change activity in Congress and the Environmental Protection Agency, it has become evident that Washington is more likely to see a snowstorm this summer than congressional passage of a cap-and-trade measure for greenhouse gas emissions. Passage was never considered to be easy - something we noted in our previous alert. For example, the House of Representatives passed climate legislation in 2009 (H.R. 2454, sponsored by Congressmen Waxman (D-CA-30) and Markey (D-MA-7), but by only a six-vote margin. Still, the 2009 legislation, combined with the impact of the Gulf of Mexico Oil Spill, indicated to some that there was some momentum for a bill passing the Senate and reaching the President this year. But that momentum ran smack into the 60-vote requirement in the Senate, which all measures must clear before receiving a final vote. And the 60 votes were just not there - not for the Waxman-Markey measure or for the industry-specific compromise floated by Senators Kerry (D-MA) and Lieberman (I-CT) during the end of negotiations. It remains possible that the Senate could still take up a cap-and-trade measure, either when it meets from September 13 through October 8 or during its "lame-duck" session, set to begin November 15. But we would not recommend anyone holding their breath.

While action on cap-and-trade in the 111th Congress fizzled in the Senate, EPA has continued on its course of regulating greenhouse gas (GHG) emissions.  As reported in Reed Smith’s Environmental Law Resource blog, in response to EPA’s “Endangerment Finding,” a number of petitions for reconsideration were filed by various industry and special interest groups. These petitions challenge the validity of EPA conclusions that global warming is currently at an all-time high and assert that other geologic periods - e.g., the Medieval Warm Period and the Holocene period - were in fact warmer than present.  Specifically, the groups challenge data supporting reconstruction of historical earth temperatures and assert that certain e-mails involving scientists at the Climate Research Unit of the University of East Anglia in the United Kingdom demonstrate a deliberate and inappropriate manipulation of the data.  The petitioners also challenge the process by which EPA developed the scientific support for the Endangerment Finding; that is, they are claiming that EPA did not independently judge the underlying science and thus did not convene a truly independent external peer review.  Petitioners also claim EPA violated the Information Quality Act by failing to post the underlying data and scientific studies in the docket.  Finally, the petitioners assert that new scientific studies refute evidence supporting the Endangerment Finding.

On July 29, 2010, EPA denied all of the petitions for reconsideration and found, inter alia, that there were no significant errors in the Intergovernmental Panel on Climate Change’s (IPCC) Fourth Assessment Report, and that there was no conspiracy to manipulate the data. EPA also rejected the claim by petitioners that new scientific studies refuted evidence supporting the Endangerment Finding. The court challenges to the Endangerment Finding can now proceed. These challenges, however, are not as likely to be successful as the challenges to the Tailoring Rule, discussed next.

There are significant challenges to the Tailoring Rule, EPA's rule that "tailors" permitting programs to limit the number of facilities that would be required to obtain New Source Review and Title V operating permits based on their greenhouse gas emissions. If there is a chink in EPA’s armor, it rests in these challenges. The crux of these challenges focus on the threshold and timing determination in the final Tailoring Rule, in which EPA sets a threshold of regulation at 75,000 tons GHGs. This effectively leaves major industrial sources under that threshold unregulated until at least 2016, and perhaps beyond. In the draft regulation, EPA had proposed a 25,000-ton GHG threshold. Challengers to the Tailoring Rule argue that this switch from 25,000 to 75,000 tons is arbitrary and capricious with no scientific basis in the record to support it. And they may be right. Last week, 20 of the lawsuits against EPA's tailoring rule were consolidated by the U.S. Court of Appeals for the District of Columbia Circuit. The case's court date has not yet been set. For more discussion, see here.

On the regulatory front, EPA continues to press its authority under the Endangerment Finding. Following up on its Tailoring Rule, on August 12, 2010, EPA proposed two rules regarding GHG emission permitting under the Clean Air Act . In the first rule, EPA proposed to require permitting authorities in 13 states to make changes in their implementation plans to ensure that GHG emissions will be covered. Other states are to inform EPA if their existing permitting authority does not allow them to address GHG emissions. In the second rule, EPA is proposing a federal implementation plan that would allow EPA to issue permits for covered GHG sources located in states not able to develop and submit revisions to their implementation plans before the Tailoring Rule becomes effective. Neither of the rules has been published in the Federal Register yet. Once they are published, EPA will schedule a public hearing on the federal implementation plan rule likely in Arlington, Va., in September.

This summer, EPA also issued its proposed “Transport Rule” to provide for the attainment and maintenance of the 1997 and 2006 fine particulate matter National Ambient Air Quality Standards and the 1997 ozone NAAQS. While targeting only reductions in emissions of NOx and SO2 transported between the states, many believe this rule will have a dramatic impact on the viability of coal-fired electric generating capacity in the eastern United States.  The Transport Rule is discussed in more detail at the Environmental Law Resource.

Finally, the Obama Administration is also considering a variety of actions it can take without Congress. In a report entitled, “Plan B: Near Term Presidential Actions for Energy and Environmental Leadership,” the Presidential Climate Action Project concluded that President Obama could implement the following ideas prior to the United Nations 16th Conference of the Parties in Cancun:

• Work with states and local governments to create a national roadmap to the clean energy economy
• Declare war on energy waste
• Begin reinventing national transportation policy
• Eliminate fossil energy subsidies under the Administration’s control
• Establish ecosystem restoration as a climate action strategy

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This post was written by Leigh Hansson and Chris Monahan.

The U.S. State Department spent a little ink in the Federal Register earlier this month in an attempt to get green in the 21st century. On August 4, 2010, the State Department, Directorate of Defense Trade Controls, or DDTC, announced a final rule requiring the electronic submission of requests for Commodity Jurisdiction Determinations, or CJs.  Companies submit a CJ if they have doubts as to whether an article or service is covered by the U.S. Munitions List, or if they want to request consideration of a redesignation of an article or service currently covered by the U.S. Munitions List.

In a stunning departure for the federal government, the State Department developed and issued a new form for CJs.  All kidding aside, this new wrinkle in State Department bureaucracy should be a welcome change for most companies interacting with the agency for a few reasons.

The new CJ form is a more environmentally responsible alternative to the old method that required companies to submit seven collated sets of their request and the supporting documentation. In addition to removing the need for all those copies, the new CJ request form must be submitted electronically as of September 2, 2010.

Applicants will not be required to use the DTRADE system and will also not be required to register with DDTC, as some had feared prior to the new rule. Instead, DDTC has created what appears to be a simple and less-burdensome alternative to the old CJ process. Applicants now download the form, scan and attach necessary supporting documents, and submit everything using an open net, web-based application system. DDTC has posted instructions as well as links here.

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This post was writen by Chris Rissetto and Joelle Laszlo.

While most people probably do not associate actions of Congress with the 1970s American pop band The Carpenters, there is a nice reminder in the duo’s music that the passage of a bill on the Hill is often only the first step in an extensive process to draw up the actual rules that will govern how American businesses are to behave. According to an analysis by the U.S. Chamber of Commerce, for example, implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank” or “the Act”) will require 520 rulemakings, 81 studies, and 93 reports. Ten Federal entities, including the Federal Reserve (“Fed”), the Treasury Department (“Treasury”), the Securities and Exchange Commission (“SEC”), and two agencies created by the Act – the Consumer Financial Protection Bureau and the Financial Stability Oversight Council – will be responsible for solely or jointly issuing new rules under the Act. The SEC (both on its own and with the Commodities and Futures Trading Commission), the Fed, and Treasury’s Office of the Comptroller of the Currency have already issued a variety of requests for comments and notices of proposed rulemaking pursuant to the Act.

The Administrative Procedure Act sets forth the specific steps and timeline that Federal agencies must follow when proposing regulations pursuant to Congressional action, but the proverbial devil always lurks in the details. Furthermore, citing the extensive rulemaking that will take place under Dodd-Frank, the SEC has implemented a ‘pre-rulemaking’ process for accepting public comments on a number of issues within the Act’s purview, and other agencies are undertaking similar actions to enhance public participation in the rulemaking process, beyond what is required by law. All of this means that a company with even a passing interest in how the regulations shake out will be best served by developing a comprehensive rulemaking agenda. Such an agenda should take into consideration not only the rulemaking agencies (and their three-pronged goal to promulgate practically-, legally-, and politically- sustainable regulations) but also the Congressional Committees and Members who will be responsible for overseeing agency activities under and compliance with Dodd-Frank. Companies that take this kind of proactive approach will have the best opportunity for ensuring a regulatory future that isn’t all rainy days and Mondays.

The critical litigation and enforcement risks financial institutions will face as a result of Dodd-Frank were the subject of a teleseminar presented this week by Tom Allen, Roy Arnold, Amy Greer, and Chris Rissetto. The seminar was the third in a month-long Reed Smith series on Financial Re-Regulation. The final teleseminar in the series, addressing Dodd-Frank’s expected impact on securitization and related aspects of capital markets, will take place on Tuesday, August 31 beginning at noon EDT.

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This post was written by Stephanie Giese.

The passage of the Weapon Systems Acquisition Reform Act of 2009 (“WSARA”) signed into Public Law 111-23 on May 22, 2009, and most notably the Organizational Conflict of Interest (“OCI”) provisions of the WSARA, arguably marks the start of the Congress' tear to reform Department of Defense (“DoD”) contracting.  The reforms required by the WSARA OCI provisions alone have kicked off a restructuring of the defense industry, beginning with major weapon system developers like Northrop Grumman and Lockheed Martin selling their Systems Engineering and Technical Assistance business units – even before DoD promulgates the new OCI regulations implementing the WSARA, which are expected in the fourth quarter of 2010.

Congress’ reform theme is now being carried over to other aspects of DoD contracting in the 2011 National Defense Authorization Act (“2011 NDAA”).  Given the potential dramatic effect of past reforms mandated by the WSARA, defense contractors should understand the impacts of both the House (H.R. 5136) and Senate (S. 3454) versions of the 2011 NDAA, as well as plan to participate in the DoD rulemaking process that will ultimately implement many of the 2011 NDAA reforms.
Here are some of Congress’ latest proposed reforms for defense contractors to watch in the House and Senate versions of the 2011 NDAA:

• Contractor’s beware—the government may obtain “unlimited rights” to certain contractor technical data developed a private expense.  Among other changes related to technical data, the Senate proposes granting the government unlimited rights in technical data developed “without significant contribution by a contractor or subcontractor”.  “Without significant contribution” is not defined in the bill, but this proposed change would certainly expand the government’s unlimited rights to certain data funded, in part, at the contractor’s expense.
• Reform regarding government review of contractor business systems may increase compliance costs and delay payments to contractors.  For contractors subject to the Cost Accounting Standards, the Senate proposes that a “significant defect” in a contractor’s business system, which is one that undermines the reliability of the data produced by that system, is grounds for the DoD to withhold up to 10% of payments due to a contractor.  Business systems that may be reviewed by DoD include accounting systems, estimating systems, purchasing systems, earned value management systems, material management and accounting systems, and property management systems.
• DoD evaluation of contractor proposals may be limited to “best cost” to the government rather than “best value” to the government in the future.  The House proposes modifying current law to require DoD to weight cost or price at least equal to or greater than all other evaluation criteria in a government competitive source selection.  This would severely limit the DoD’s ability to conduct a best value evaluation of contractor proposals, including for procurements where contractor innovation is required such as in research and development contracts, and would essentially require the DoD to award to the lowest priced offeror for all its procurements.
• Due process lacking for defense contractors and subcontractors that supply cybersecurity products and services, information technology, and national security systems to the DoD.  Such DoD contractors should be aware that, in the name of reducing supply chain risk, the Senate intends to grant the head of a procuring agency, on the basis of a joint recommendation by the Director of the Defense Intelligence Agency and the Assistant Secretary of Defense for Networks and Information Integration, the authority to exclude a particular source from competing for a DoD contract on grounds that the supplier presents an unacceptable supply chain risk.  The bill does not require the DoD to allow the supplier to mitigate the risk before excluding the supplier.  For additional discussion of current cybersecurity issues facing DoD, please see the Reed Smith article, “Cloud Computing—The Key Risks and Rewards for Federal Government Contractors.”
• The U.S. space industrial base may get a boost from additional federal government investment.  The Senate proposes requiring the Secretary of Defense, in consultation with the National Aeronautics and Space Administration (“NASA”), to take steps to preserve the industrial base for liquid rocket propulsion systems and solid rocket motors. I n addition, the House proposes directing the Secretary of Defense and the Director of National Intelligence to jointly establish a national security space architecture to guide and coordinate each agency’s long-term investment in the space industrial base.
• Reminder that defense contractors, with the exception of weapon system developers, may soon be required to go “green” to compete for DoD contracts.  As currently drafted, the Senate bill requires DoD to report its progress to Congress in complying with Executive Order 13514 of October 5, 2009 which requires the head of a procuring agency to “advance sustainable acquisition to ensure that 95 percent of new contract actions including task and delivery orders, for products and services with the exception of acquisition of weapon systems, are energy-efficient (Energy Star or Federal Energy Management Program (FEMP) designated), water-efficient, biobased, environmentally preferable (e.g., Electronic Product Environmental Assessment Tool (EPEAT) certified), non-ozone depleting, contain recycled content, or are non-toxic or less toxic alternatives, where such products and services meet agency performance requirements.”

Industry’s Acquisition Reform Working Group provided its recommendations and concerns regarding the 2011 NDAA to the House and Senate Armed Services Committees on July 28, 2010.

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This alert was written by Edward Miller, Eugene Tillman, Cynthia O’Donoghue, and Leon Stephenson.

The arrival of the new UK Coalition Government has brought with it proposals to reform the health care system in the UK over the next four years, detailed in its much publicized White Paper “Equity and excellence: Liberating the NHS”.

The stated objectives are ambitious and if instituted will have a far reaching effect on both the way the British public access the health system and the role of the private sector in UK health care. Although the White Paper does not go so far as to indicate that privatization of the NHS as such is being considered, the Government’s tone is bold in as much as it advocates public choice and recognizes that resultant competition must include third party private providers.

The key themes of the White Paper are based on choice for the patient, flexibility for the commissioning consortia, encouraging competition and social enterprise. This, within an ambitious four year timetable, indicates that there will be room for unprecedented private, for profit and non-profit and third sector involvement in the reform of the UK health care system.

To view the entire alert, please click here.

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This post was written by Cynthia O'Donoghue and Katalina Chin.

The European Commission DG Justice, Freedom and Security commissioned London Economics, one of Europe's leading specialist economics and policy consultancies, to undertake a study and report on the economic benefits of Privacy Enhancing Technologies ("PETs") for organisations and institutions using and holding personal data in selected European member states.

But what are PETs?  It is a term used for a set of computer tools, applications and mechanisms, including procedures and management systems, which aim to protect the privacy of personal data by eliminating, anonymising or minimising personal data in order to prevent unnecessary or unwanted processing of personal data.  Features can include, for example, allowing an individual to choose the degree of anonymity, to inspect, correct and delete any of their personal data, to track the use of their personal data and may also include a consent mechanism prior to providing personal data to online service providers.  The report emphasises that, "data minimisation and consent mechanisms are an important part of PETs, and PETs often combine these elements with data protection tools into an integrated privacy system".

The report highlights that "the rights [set out in Article 8 of the Charter of Fundamental Rights of the European Union which deals with an individual’s rights to the protection of personal data] form the basis of the legal framework in which PETs are deployed" and should have at their core the objective of transparency, proportionality and data minimisation.

The report explains how it is difficult to quantify the wider economic benefits of a data controller using PETs to protect an individual’s personal data, and how the evidence has shown that the benefits can only be assessed on a case-by-case basis.  If anything, the study found little evidence to show that the demand by individuals for greater privacy is driving PETs deployment, and suggests that this is in part due to “the uncertainties surrounding the risk of disclosure of personal data, a lack of knowledge about PETs, and behavioural biases that prevent individuals from acting in accordance with their stated preference for greater privacy”.

The fact of the matter is, as the report makes very clear, that data controllers can derive a variety of benefits from holding and using personal data (including the personalisation of goods and services, data mining, etc.) and to the extent that PETs limit the ability of data controllers to use personal data, this will clearly act as a disincentive in the exploitation of PETs. The report highlights that, “data controllers often favour mere data protection to protect themselves against the adverse consequences of data loss over data minimisation or consent mechanisms which can impede the use of personal data”.  Evidence considered in the study suggests that there is a role for the public sector in helping data controllers realise the benefits of PETs, such as “official endorsements of PETs, including through pioneering deployment and official certification schemes, and direct support for the development of PETs, through subsidies to researchers (e.g. the European Framework Programmes)".

As the heat in data privacy issues continues to rise, with increased powers of regulatory authorities, tougher sanctions being imposed and a greater emphasis in Europe’s legislation on security management, it is clear that privacy by design will be the most effective method of compliance.

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Articles in This Issue:

• A Summer of Sanctions: World Leaders Respond to Iranian Obstinacy
• New Department of Justice Guidance Seeks to Bolster Confidence in the Use of Independent Monitors
• Round 2: Encryption Controls Streamlining
• The British Are Coming! The British Are Coming! - Preparing for the Launch of the Bribery Act of 2010
• Government Procurement in China
• Enforcement Highlights

Click here to download the full newsletter.

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This post was written by Chris Cwalina, Judy Harris and Amy Mushahwar.

Securing information technology infrastructure has become a prominent focus of the Obama administration and the subject of several bills percolating on Capitol Hill. In step with these efforts, on Monday, August 9, 2010, the Federal Communications Commission ("FCC") requested public comment on its proposal to expand its role in protecting private networks from cybersecurity attacks through creation of a cybersecurity roadmap.

The concept of establishing a cybersecurity roadmap was initially laid out in the National Broadband Plan, which the FCC presented to Congress in March of this year. The proposed roadmap would identify the five most critical cybersecurity threats to the communications infrastructure and to end users. It would also establish a two-year plan (with milestones) for the FCC to address these threats. 

By means of this roadmap, the FCC would like to demonstrate leadership and provide a clear vision on cybersecurity priorities.  Presently, various parts of the federal government -- from the Justice Department to the Defense Department -- share responsibility for thwarting private cyberattacks.  The Government Accountability Office ("GAO") has intimated that the present structure of federal cybersecurity coordination leaves much to be desired.  In a recent report, the GAO stated, “[f]ederal agencies have not demonstrated an ability to coordinate their activities and project clear policies on a consistent basis[.]”

The FCC is using its Section 706 deployment authority as a basis for acting to fill the perceived leadership void, stating that if cyberattacks create a lack of consumer confidence on the Internet, there may be a decreased demand for broadband services. The FCC's concern is buttressed by the fact that online hackers are showing increasing sophistication. For example, in Malware (a program containing sequences of steps to carry out attacks) alone, there have been three generations of common hacks, each upping the ante in terms of network damages.

• Generation 1: consisted of viruses that were spread across the network through e-mail and file sharing methods that required human "touch" to trigger replication (examples of this generation include LoveLetter, Fizzer, and Melissa).
• Generation 2: consisted of worms that exploited operating systems or application vulnerabilities using an automated script (an example of this generation includes the now infamous Anna Kournikova virus).
• Generation 3: has been the most detrimental to networks and has consisted of a combination of elements (for example, viruses, Trojan horses, and automation) to uniquely exploit networks (examples of this generation include Blaster, SQL Slammer, Slapper, Sasser, and Witty worms).

Comments are encouraged from all relevant stakeholders (applications developers, ISPs, e-commerce site owners, device manufacturers). Because this is a newer foray of the FCC, comments are encouraged even by those who are not usual suspects before the Commission. Those companies interested in this proceeding should act quickly as comments are due to the FCC on September 23, 2010.

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This post was written by Lorraine Campos and Steve Tibbets.

“Major systems” are the lifeblood of large defense contractors.  The long-term development and implementation of big and expensive programs – think fighter jets – are the foundation of many contractors’ business plans.  Generally, contractors that design systems, buildings, or vehicles for the Government are not supposed to compete for follow-on contracts to build those items because they could skew specifications to favor themselves.  Current regulations permit OCI “mitigation” plans where the building or implementing parts of the company are isolated from the design parts.

On July 20, 2010, the American Bar Association (“ABA”) Section of Public Contract Law (“Section”) submitted its comments on a major proposed rule on Organizational Conflicts of Interest (“OCIs”) published by the U.S. Department of Defense (“DOD”) in April 2010.  The proposed rule would significantly curtail the ability of large defense contractors to handle procurements of major defense systems in a “cradle to grave” manner.  The proposed rule would, if finalized, place stricter limits on contractors’ ability to work on both the design or development phases of a large procurements and the implementation or manufacturing phases of the same procurement.

The proposed rule would reduce the extent to which contractors can rely on mitigation plans.  The Section argues that this will reduce competition because contractors will avoid certain portions of procurements so they are not “conflicted out of” other parts of those procurements.  As a practical matter, contractors for the DOD will have to plan their business strategies with greater care and make difficult decisions regarding which contracts to chase, considering when to trade off the prospect of current work for future contracts on which they may be dependent and cannot risk a conflict.

Ultimately, the reason OCIs strike policy-makers as worthy of further regulation is the conventional wisdom in the defense contracting space that any successful contractor will be bought by the “big boys” with deleterious effects on competition.  The Section seems to indicate that certain larger defense contractors are averse to “tough choices” regarding which parts of major procurements to pursue and prefer the existing rules, which permit them to pursue entire procurements as long as OCI mitigation is in place.  Whether this aversion will lead to any large-scale balkanization of the design and implementation parts of major contractors remains to be seen.  What is clear from the comments is that the community has “sat up and taken notice” that the proposed rule is a departure from business as usual on OCIs.
 

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