Government Contractors and Environmental Liability - Debarment and Suspension

Jeff Eckland, William Roberts, Mark Blando, and Matthew Kolling

Any government contractor facing potential environmental liability must consider the effect of debarment or suspension sanctions. More specifically, a contractor must know what debarment and suspension are and how to avoid them, even in the face of a criminal investigation.

Debarment, Generally
Debarment is a sanction used by the federal government to prohibit certain contractors from bidding on or receiving government contracts. 48 C.F.R. § 9.405(a). Pursuant to federal regulations, the General Services Administration (GSA) generates a list of all companies debarred, suspended, proposed for debarment, or otherwise ineligible for government contracts. 48 C.F.R. § 9.404(a)(1). This list is available through the GSA or on the Internet at http://epls.arnet.gov. 48 C.F.R. § 9.404(d)(2). Companies on the list are also ineligible to act as subcontractors or individual sureties on agreements requiring the government's consent. 48 C.F.R. § 9.405(c); 48 C.F.R. § 9.405-2(a). An agency may still contract with a listed company, but only if the agency determines that there is a compelling reason to do so. 48 C.F.R. § 9.405(a). Contracts already in existence at the time of the debarment are presumed to continue to completion notwithstanding the debarment. But again, the agency may determine that a presently existing contract must be terminated immediately to protect the government's interests. 48 C.F.R. § 9.405-1. The government's power to debar contractors is "inherent and necessarily incidental to the effective administration" of government contracts. Gonzalez v. Freeman, 334 F.2d 570, 577 (D.C. Cir. 1964).

A debarment action is entirely discretionary. The government agency may not be arbitrary in its decisions, but otherwise the courts will uphold debarment decisions that have any rational basis. See Lion Raisins, Inc. v. United States, 51 Fed. Cl. 238, 247 (Fed. Cl. 2001). While federal regulations list circumstances under which an agency may debar a company, there are no circumstances where debarment is mandatory. In other words, the mere existence of a cause for debarment does not require that the contractor be debarred. 48 C.F.R. § 9.406-1(a); 40 C.F.R. § 32.300.

Debarment is presumptively effective throughout the executive branch of the federal government. 40 C.F.R. § 32.200(a) (suspension); 48 C.F.R. § 9.406-1(c) (debarment). It is also effective company-wide, including all "divisions or other organizational elements" of the company. 40 C.F.R. § 32.420; 48 C.F.R. § 9.407-5 (suspension); 40 C.F.R. § 32.325(a); 48 C.F.R. § 9.406-1(b) (debarment). The debarment decision may be limited by its terms to only certain individuals, divisions or transactions, but any limitation is up to the discretion of the agency.

Suspension, Generally
The government may also temporarily suspend a government contractor prior to debarment. The effect of the suspension is the same as debarment; the contractor is excluded from bidding on or receiving government contracts. As with debarment, the decision to suspend is entirely discretionary, and the mere existence of a cause for suspension does not require that the contractor be suspended. 48 C.F.R. § 9.407-1(b)(1).

An agency may suspend a contractor upon any "adequate evidence" of a cause for debarment. 48 C.F.R. § 9.407-2. Indictment for any of the offenses listed as causes for debarment is adequate evidence for suspension. 48 C.F.R. § 9.407-2(b). As a result, suspension can be imposed automatically if a company is indicted. In most instances, the contractor will not have an opportunity to argue the merits of its case prior to the agency's suspension decision. In some cases, contractors have been successful in approaching the government prior to receipt of any notice of action in order to discuss mitigating factors before the government reaches a final decision.

Suspension is always a temporary sanction, typically pending the completion of an investigation or debarment proceeding. Once the investigation or debarment process is concluded, the suspension terminates. A suspension will also terminate if the government fails to bring a debarment action within one year.

Causes for Suspension and Debarment
A contractor may be suspended in three general circumstances: 1) upon indictment for a listed offense (such as fraud, false statements, embezzlement or tax evasion) or any other offense indicating a lack of "business integrity" or "business honesty" that affects the "present responsibility" of the company; 2) willful failure, or a history of failure, to perform the terms of a government contract; or 3) "any other cause of so serious or compelling a nature that it affects the present responsibility" of the contractor. 40 C.F.R. § 32.305; 48 C.F.R. § 9.407-2.

A contractor also may be debarred in three general circumstances: 1) upon conviction or civil judgment for a listed offense (such as fraud, false statements, embezzlement or tax evasion) or any other offense indicating a lack of "business integrity" or "business honesty" that affects the "present responsibility" of the company; 2) willful failure, or a history of failure, to perform the terms of a government contract; or 3) "any other cause of so serious or compelling a nature that it affects the present responsibility" of the contractor. 48 C.F.R. § 9.406-2; 40 C.F.R. § 32.305.

A government contractor facing environmental liability will be most concerned with 1) an indictment, conviction or civil judgments and 2) "any other cause" serious enough to potentially implicate debarment.

Indictment, Conviction or Civil Judgment

The regulations list several criminal and civil offenses as specific grounds for suspension and debarment. Indictment for any of the offenses will give the government sufficient cause to suspend a contractor. Conviction or civil judgment for any of the offenses will give the government sufficient cause to debar. Armed with an indictment or conviction, the government never has to decide whether the contractor is a "presently responsible" company. The indictment or conviction alone provides sufficient cause to suspend or debar. The contractor may argue that other factors may mitigate its culpability, but the issues of present responsibility and business honesty and integrity are never reached. Sanctions may be mitigated or eliminated at the agency's discretion, but the contractor cannot argue that the government has no cause.

The good news for government contractors facing environmental liability is that environmental crimes are not among those specifically listed as causes for suspension and debarment. Rather, the environmental statutes fall under the "any other offense" language of the regulations. Therefore, to debar for an environmental violation, the government is required to show that the violation indicates a "lack of business honesty or business integrity that seriously and directly affects the present responsibility of the company."

The courts have reported few decisions regarding debarment for environmental crimes. But from the few that are available, it is clear that violation of environmental statutes may give rise to debarment. The principal case on debarment for environmental crimes is Burke v. United States, 127 F.Supp.2d 235 (D.D.C. 2001). In Burke, the EPA found that Burke's criminal conviction under the Clean Water Act established sufficient cause for debarment, and accordingly the agency proceeded to debar him. Burke appealed, alleging that the agency's decision was arbitrary and capricious under the Administrative Procedure Act (APA). He argued that his conviction under the Clean Water Act was not one of the specifically named offenses in the regulations nor within the "nature and character" of those offenses. Id. at 239. The court disagreed. It held that the agency's interpretation of its own regulations was entitled to considerable deference. The agency determined that Burke's environmental crimes "raise[] serious questions about his business integrity." Id. Therefore, the court could not conclude that the agency was wrong in its application of the regulations. A criminal conviction under the Clean Water Act, even by plea bargain as in Burke, was sufficient cause to debar a government contractor.

Given the difficulties of proceeding under the APA and the courts' general deference to agency decisions, most debarment cases are fought at the agency level, and it appears that few are ever appealed to the district courts. The EPA, however, has had substantial opportunity to decide debarment cases involving environmental crimes. By administrative decision, the EPA has determined that violations of the Clean Air Act (in re Blizzard, 2000 WL 1717706 (EPA GD) (unpublished disposition)), Clean Water Act (in re Burnett, 1997 WL 1248806 (EPA GD) (unpublished disposition)), CERCLA (in re Fields, 1995 WL 1212892 (EPA GD) (unpublished disposition)), and RCRA (in re Cimarron Aircraft Corp., 1995 WL 1212901 (EPA GD) (unpublished disposition)) constitute sufficient cause to suspend or debar a government contractor. The agency has held that an environmental crime provides cause to debar "where there is a reasonable connection between the misconduct and performance or business integrity" of the contractor. In re Blizzard, supra, n.17. The agency has further stated that "[e]nvironmental compliance is an important component of the modern business ethic." In re Marine Shale Processors, Inc., 1991 WL 866840 (EPA GD) (unpublished disposition). A company's criminal conduct and evidence of its irresponsibility "constitutes a threat to the Government's interests." Id.

Accordingly, it is highly likely that in any criminal environmental litigation, the EPA will seek suspension and debarment sanctions. The agency considers environmental compliance a part of ethical business behavior. Non-compliance puts into doubt a company's responsibility as a government contractor. Thus, a company facing indictment or conviction for environmental crimes must be prepared to address suspension and debarment sanctions.

Suspension or Debarment upon Any Other Cause

A government agency may also suspend or debar a government contractor even if no indictment or conviction is ever made. The regulations allow an agency to suspend or debar if it has "any other cause," other than an indictment or conviction, that seriously and directly affects the present responsibility of the contractor. 40 C.F.R. § 32.405; 48 C.F.R. § 9.407-2(c) (suspension); 40 C.F.R. § 32.305(d); 48 C.F.R. § 9.406-2(c) (debarment). In practice, however, the government almost always relies on the criminal matter to establish a cause for suspension or debarment. Although debarment for "any other cause" remains a possibility, principal concern should be directed towards a successful resolution of the criminal proceeding.

Facility Ineligibility

A company may also face the prospect of "facility ineligibility" for convictions under the Clean Air Act or Clean Water Act. Federal government agencies may not contract for the use of facilities at which a criminal violation of the Clean Air Act or Clean Water Act occurred, assuming the facility is owned, leased or supervised by the person or company convicted. See Clean Water Act § 508; Clean Air Act § 306; Southern Dredging Co., Inc. v. United States, 833 F.Supp. 555 (D.S.C. 1993) (addressing statutory debarment under the Clean Water Act).

The provisions governing facility ineligibility apply only to criminal convictions. There is no provision here analogous to suspension upon indictment. This process of declaring facilities ineligible is often referred to as "statutory" debarment. See Jon D. Silberman, Does Environmental Deterrence Work? Evidence and Experience Say Yes, But We Need to Understand How and Why, 30 ENVTL. L. REP. 10523, n.38 (July 2000). There is no agency discretion in declaring facilities ineligible. The statutory language is mandatory. When a facility is declared ineligible, the facility is "automatically" placed on the agency's list of debarred companies. Joseph G. Block, Environmental Criminal Enforcement on the 1990's, 3 VILL. ENVTL. L.J. 33, 38 (1992). Although the statutory debarment only applies to the facility at which the violation occurred, the agency has the discretion to extend the debarment company-wide. Id.

Practical Tips
Submit Any Mitigating Factors in an Argument in Opposition

A suspended or debarred company may submit an argument in opposition within 30 days of receiving notice of the action. If the argument raises a disputed question of material fact, the contractor will be permitted an evidentiary hearing before the agency. The debarring official is required to consider the company's submission in reaching a final decision.

The company is entitled to have the agency consider any relevant factors that mitigate its culpability. The regulations require the debarring officer to take into account mitigating factors as to the contractor's present responsibility. Where debarring officers have failed to take mitigating factors into account, courts may review the debarment decision under an "arbitrary and capricious" standard. See Burke, 127 F.Supp.2d at 235; Roemer v. Hoffman, 419 F.Supp. 130 (D.D.C. 1976) (setting aside debarment where agency decision-maker had failed to give a "hard-look" to all mitigating factors bearing on contractor's present responsibility).

Among the mitigating factors the agency must consider are whether the contractor:
1) had effective control standards in place at the time of the incident or has since adopted such standards;
2) brought the incident to the government's attention in a timely manner;
3) fully investigated the incident and made the results of the investigation available to the government;
4) cooperated in the government's investigation;
5) paid or agreed to pay civil or criminal liability for the incident, including the costs of the government investigation, and has made full restitution for the injuries caused;
6) took appropriate disciplinary action against the persons responsible for the incident;
7) implemented or agreed to implement remedial measures, including those identified by the government;
8) instituted control processes and ethics training programs;
9) eliminated the circumstances within the contractors' organization that led to the incident;
10) recognizes and understands the seriousness of the incident; or
11) implemented programs to prevent a recurrence.

48 C.F.R. § 9.406-1. The factual basis for any mitigating factors should be developed and included in any argument in opposition submitted to the agency. If the agency fails to consider these mitigating factors, the company may argue that the agency's decision was arbitrary and capricious in an action under the Administrative Procedure Act. See 5 U.S.C. § 706(2)(A); Robinson v. Cheney, 876 F.2d 152 (D.C. Cir. 1989); Gonzalez, 334 F.2d at 570 (holding that debarment decisions are reviewable under the APA).

Begin Thinking about Suspension and Debarment Early

Suspension sanctions can be imposed very quickly. Since the government needs only "adequate evidence" to impose a suspension, contractors must be able to respond to a suspension investigation promptly. Contractors also must not neglect suspension and debarment considerations when facing a criminal investigation. Although potential criminal liability may be more immediately pressing, a prohibition from government contracts can, for many companies, be an equally serious penalty. Many contractors depend on government work, and a debarment sanction could potentially put them out of business. Moreover, it is often possible to wrap up a debarment investigation with a successful resolution of the criminal matter. A plea bargain in the criminal case may include an agreement by the government not to impose debarment sanctions.

Make Every Effort to Cooperate in the Government's Investigation

Suspension and debarment are not intended to be punitive sanctions. They are meant to protect the government's interests in dealing only with responsible companies. The sanctions are "going forward" sanctions; the government looks to whether the company will be responsible in the future, not to what it has done in the past. Thus, anything a contractor can do show its present responsibility will tend to decrease the likelihood of debarment sanctions being imposed. Cooperating in the government's investigation will go a long way toward showing the contractor's present responsibility.

This article was prepared by the Government Contract Law Practice Group at the Law Firm of Faegre & Benson LLP, headquartered in Minneapolis, Minn. Contributors to this article include group head Jeff Eckland, William Roberts, Mark Blando, and Matthew Kolling.