Government Contracts Monitor

Update: Government Cannot Suspend Affiliate More than 18 Months without Legal Proceeding

July 18, 2012

As previously reported here, United States District Court for the Northern District of Alabama heard an important case of first impression regarding the suspension of a subsidiary based on its relationship with a suspended parent company.  The court held that the subsidiary could not be suspended for longer than eighteen months unless the government initiated legal proceedings against the subsidiary.  Agility Defense and Government Services, Inc. v. United States, No. 5:11-cv-04111-CLS, 2012 WL 2480484 (N.D. Ala. Jun. 26, 2012).

At issue was the interpretation of FAR 9.407-4(b), which states, in part, that “[i]n no event may a suspension extend beyond 18 months, unless legal proceedings have been initiated within that period.”  The government argued that the continued suspension of the subsidiaries was appropriate because proceedings had been initiated against the parent company, even though the subsidiaries in question were not parties to those proceedings.  The court, however, rejected this interpretation because it:

would allow the government to issue a blanket suspension against numerous contractors and, so long as proceedings were initiated against one of them, allow the government to sit on its hands, rather than taking steps to investigate and determine within a reasonable period of time whether the affiliates were guilty of misconduct, all while those affiliates suffered the loss of business.

Id. at 22.  According to the court, the purpose of the government’s power to suspend affiliates in FAR 9.407 is to give the “government adequate time to investigate affiliates for wrongdoing on their own part.”  Id. at 21-22 (emphasis added).  Thus, the suspension power allows the government to “put an immediate stop to potential wrongdoing that it may not have been able to investigate fully, but it does not give the government the power to suspend an affiliate indefinitely without even suspicion of wrong doing.”  Id. at 22 (emphasis in original). 

Finally, the court noted that the government retained a number of options to protect itself from companies attempting to circumvent suspension and debarment, including the catchall suspension powers enumerated in FAR 9.407-2(c) and the present responsibility determination made in connection with awarding contracts as required by FAR 9.103.

The decision should have repercussions far beyond Alabama as the court’s decision acknowledges a critical limitation on the government’s ability to suspend subsidiaries and affiliates based solely on guilt by association.   

Click here to find the court’s opinion.

Jeffry Cook is the attorney responsible for the content of this article.