As part of a team formed to do business with the federal government, you may have divvied up your work responsibilities as prime contractor and subcontractor. But there is more sharing to do, starting with how many, and which, obligations of the prime in its contract with the federal government should “flow down” into the subcontract between the prime the sub to become obligations of the sub as well.

The prime will want the sub to join the prime in being liable for as much as possible, while the sub will want to limit such exposure. Under federal law, some clauses of the prime contract must flow down to the subcontract.

These include: the contractor code of business ethics and conduct; small business qualifications, where applicable; various socio-economic and equal opportunity policies of the government; anti-kickback provisions and provisions against human trafficking.

Other prime contract clauses must flow down by necessity to enable the prime to fulfill its contract obligations to the government. Examples of these would be: change-order provisions; technical data rights; the government’s right to audit the business; inspection rights and dispute-resolution.

Certain mandatory flow-down clauses, such as the government’s rights in the contract data, must be stated in the subcontract without alteration. Other necessary flow-downs, such as termination procedures, should be tailored to the prime-sub relationship because they may not be quite the same as those between the prime and the government.

For that reason, it is best to recite the applicable provisions, rather than incorporating the applicable Federal Acquisition Rule number, so as to ensure a proper fit into the particulars of the business relationship between the prime and the sub.

Certain flow-down provisions also create exceptions to what is otherwise a lack of “privity” between the sub and the government. That is, the contract with the government is between the government and the sub; the sub is not a party to it. Flow-downs and other exceptions to the lack of privity actually create direct dealings between the government and the sub – for example, the government’s to right intellectual property in the subcontract. (Exceptions to privity will be discussed in more detail in the next blog.)

For more information please contact Jay Merwin at 410-583-2400 or merwin@bowie-jensen.com.

The “teaming” of businesses to achieve certain advantages for bidding on government contracts has picked up especially in the area of set-asides under the 2010 Small Business Jobs and Credit Act, encouraging the award of government work to legally defined small businesses. When a large business teams up with a small business to qualify for the bid requirements of certain government work, the parties must be vigilant to ensure the continued separation and independence of their respective entities, lest the government deem them “affiliated,” thereby jeopardizing the small business qualification and possibly resulting in other penalties.

The federal Small Business Administration (SBA) applies this affiliation analysis generally to qualified small businesses teaming with larger ones as joint ventures to bid on government work. Under the regulations, the SBA may also determine that small and large companies teaming as prime and subcontractor may be deemed joint ventures that are affiliated and therefore disqualified. In deciding whether the teammates are affiliated, the SBA looks at the big picture, but with particular attention to:

(i)             common ownership or management;

(ii)           identical business interests, such as family members, common investments or other economically dependent contractual relationships;

(iii)          past dealings between the parties, possibly including previous teaming relationships;

(iv)          extensive reliance by the small business on the large business; and

(v)           the existence of other joint ventures between them.

Each of these factors involves the larger business dominating the small business in some way, thereby rendering the small business as a mere “front” for the large business to win the government contract, and defeating the purpose of the set-aside for small business.

A finding of affiliation of the members of a teaming agreement bidding for government business can lead to a further determination of false certification under the federal False Claims Act. This is because companies submitting proposals for small-business set-aside work are deemed to have certified that one of them is a qualified small business. If this deemed certification proves untrue on account of a finding of affiliation between the parties to the team bidder, the penalties may be severe, including treble damages for the government’s “presumed loss” of the value of the contract, default, and suspension and debarment from government work. 

For more information please contact Jay Merwin at 410-583-2400 or merwin@bowie-jensen.com.

The U.S. Supreme Court just handed a big win to all landowners who receive a “compliance order” pursuant to the federal Clean Water Act, issued by the Environmental Protection Agency (“EPA”).  The nation’s highest court held that the landowner has the right to seek immediate, emergency relief in federal court to attempt to stop the EPA’s enforcement of the order.

A compliance order is the EPA’s way of notifying a landowner that the owner has done something to discharge a pollutant in any waters in the United States, in violation of the Clean Water Act.  Compliance orders usually require the owner to cease the cited activity immediately and restore the land to its original condition.  Failing to comply with the EPA’s command subjects the owner to a civil penalty of up to $37,500 per day, which can be increased to as much as $75,000 per day if the EPA prevails in any lawsuit it files against the non-compliant landowner. 

The case that the Supreme Court just decided concerned a couple who purchased two-thirds of an acre near a lake in Idaho.  They had filled in part of their land with dirt and rock for a foundation to a house they were building when the EPA issued a Compliance Order. The EPA said the couple had violated the Clean Water Act, and ordered them to restore their property immediately.  The couple disputed the EPA’s determination, but their request for a hearing before the EPA was denied.  The EPA also refused to reconsider the Compliance Order, which it said was not subject to further review.   The EPA informed the couple that their only choice was to comply with the order or pay a fine of $37,500 a day.

The couple sued in federal court to prohibit enforcement of the order and declare that the order was incorrectly issued.  At trial, the court threw out their case, basing its decision on law that it believed prohibited landowners from challenging an EPA compliance order.

The Supreme Court disagreed, holding that the couple’s lawsuit was not prohibited and could move forward.  The decision opens the door to for landowners to bring a swift and effective challenge to an EPA Compliance Order rather than wait, sometimes for months and years on end, for the EPA to voluntarily review its order, during which time landowners risk massive fines for non-compliance.

The Maryland Court of Special Appeals added further reinforcement to the protections provided when conducting business as a limited liability company (LLC).  In Serio v. Baystate Properties, the Maryland Court of Special Appeals reversed the Circuit Court’s finding that Serio’s activities as the sole member of an LLC warranted piercing the corporate veil to impose individual liability.  Prior to Serio, under Maryland law, a court could disregard a corporate form and impose individual liability only in instances of fraud or to enforce “paramount equity.”  This disregard of the corporate form to impose liability on a member or shareholder is called “veil piercing.”

In Serio, Baystate entered into a contract with Serio Investments, LLC, a single member LLC owned by Serio, to develop and build residential homes.  According to Baystate, Serio represented that the sale of two other lots would provide his LLC with the necessary capital to perform under the contract and that Serio Investments LLC would set up an escrow account to pay subcontractors.  Ultimately, the proceeds from these sales never made it to the LLC and an escrow account was never established.  The LLC, which was woefully undercapitalized, went into bankruptcy and thus Baystate sued Serio individually, attempting to pierce the corporate veil.

The trial court imposed personal liability on Serio, concluding that paramount equity (i.e., fundamental fairness) warranted piercing the corporate veil.  The Court of Special Appeals reversed, effectively eliminating the paramount equity exception to the protections offered by a corporate formation. The Court reiterated that Maryland has taken a dim view of veil piercing and will only do so where there is evidence of fraud.    In this case, the court concluded that at its core, this case involved a contract dispute between two businesses and that a business loss is often just the result of a bad business deal; therefore foreclosing the possibility or recouping such losses from the business owners absent some sort of personal guaranty.    

This case highlights two important business lessons:  (1) make sure you conduct your business under a recognized business form, e.g., LLC, incorporated entity; and (2) perform some due diligence on your business partners.

For further information, contact Matt Hjortsberg at 410-583-2400 or at Hjortsberg@bowie-jensen.com

BitTorrent is a peer to peer file sharing protocol that allows its members to share pieces of a file simultaneously such that each user can access and view the entire file without downloading it completely.  It was designed to facilitate the sharing of large files and minimize the demand on an individual server.   A seed user uploads the file and then peer users join the network, each simultaneously sending and receiving pieces of the file within the swarm of users.

BitTorrent file sharing has the capacity to be used for software and content updates as well as the authorized distribution of media content and comprises a significant amount of total web traffic and bandwidth consumption.  Several BitTorrent sites index and catalog publicly-available media files, including movies, television shows, music, video games, and applications, while some files are shared only within a closed group.

When copyright protected material is shared using a BitTorrent protocol without the holder’s permission, each transmission among the users constitutes a copyright infringement.  Media distributors, including movie studios, have begun targeting BitTorrent peers through their IP addresses and filing mass lawsuits against up to several thousand downloaders at time.  Statutory penalties can be as high as $150,000 but are often much lower. 

For the purposes of naming defendants in these sweeping lawsuits, internet service subscribers are identified by their IP addresses.  For business owners, that means that any infringing downloads that occur over your connection by your employees, customers, and neighbors can be traced back to your business, in much the same way that a red-light ticket comes to the registered owner of a car regardless of who was driving it.  While you may not be able to monitor all internet activity over your home or business network, especially if you have a large number of employees, network security and clear policies and training on internet use limitations can help to prevent unwanted copyright infringement in your business’ name.  BitTorrent files and client software often carry viruses and malware as well and should be avoided unless needed for a designated purpose. 

For more information on BitTorrent copyright enforcement, look for a complete article in the upcoming edition of Bowie & Jensen’s LegalEase newsletter or contact Lisa D. Sparks at sparks@bowie-jensen.com.