Eleventh Circuit Allows Suspension of Affiliates To Exceed 18 Months

DLAlogoIn November 2009, the Defense Logistics Agency (“DLA”) suspended Public Warehousing Company, K.S.C. (“Public Warehousing”) after it was indicted for allegedly defrauding the government on a food supply contract.   Public Warehousing was the parent company of Agility Defense and Agility International.  Pursuant to FAR 9.407-1(c), which provides that the government may suspend an affiliate of a suspended contractor based solely on its affiliate status if the affiliate is specifically named and given written notice of the suspension and an opportunity to respond, DLA also suspended Agility Defense and Agility International solely because they were affiliates of Public Warehousing.

Both affiliates submitted written responses to DLA opposing their suspensions.  They and argued that neither affiliate was implicated in the indictment of their parent and that both companies had sufficient compliance procedures in place.  DLA rejected their requests, and later rejected a second request to end the suspensions.

In Agility Def. & Gov’t Servs. v. Dep’t of Def., the Eleventh Circuit reversed an Alabama district court ruling and held that under the Federal Acquisition Regulation (FAR), when the government suspends a contractor, it may suspend affiliates of that contractor for more than 18 months based solely on its affiliation with the contractor as long as legal proceedings have been initiated against the contractor, even if no legal proceedings are initiated against the affiliate.  Both affiliates filed suit in federal court, arguing that, pursuant to FAR 9.407-4(b), which states that “in no event may a suspension extend beyond 18 months, unless legal proceedings have been initiated within that period,” their suspension should be lifted.

Based on this language, the district court concluded that the suspensions against the affiliates should have been lifted after 18 months because the government had only initiated legal proceedings against Public Warehousing, but had not initiated legal proceedings against the affiliates.  The Eleventh Circuit disagreed, however, and reasoned that because the FAR allows the government to suspend an affiliate solely based on its affiliate status without any showing of wrongdoing by the affiliate, legal proceedings initiated against the parent tolled the 18-month limit for suspension of the affiliates as well.  The Eleventh Circuit concluded that “[s]o long as they are affiliates of Public Warehousing, they can be suspended.”

The Eleventh Circuit also determined that because the FAR allows the government to debar an affiliate based on its relationship to a contractor that is convicted of an offense—even if the affiliate has done nothing wrong—“it would be nonsensical to require the agency either to terminate the suspensions of the affiliates or to initiate separate legal proceedings against the affiliates, only to debar them if the legal proceedings against Public Warehousing end in a conviction.”  In addition, the Eleventh Circuit also rejected the affiliates’ claim that a suspension that exceeds 18 months violated due process, concluding that the FAR provided adequate due process where the regulations require immediate notification and give an opportunity to respond.

The Eleventh Circuit’s opinion provides further authority for the government to suspend and debar affiliates of companies that are suspended or debarred.  That additional authority, when combined with the  increased activity in suspension and debarment, simply increases risks facing affiliates and means that