Category: Government Contracts

What We Know And Don’t About The Federal Court Order Enjoining EO 14042

In news that will be of interest to every federal contractor, including large and small businesses, universities, banks, and the health care industry, Executive Order 14042 (along with the related Task Force Guidance and contract clauses) has been ENJOINED in the states of Kentucky, Ohio, and Tennessee. U.S. District Court Judge Gregory F. Van Tatenhove of the Eastern District of Kentucky issued an order on November 30, 2021 granting Plaintiffs’ (a group including the states of Tennessee, Kentucky, and Ohio) motion for a preliminary injunction.

The decision most certainly will be appealed. In the meantime, contractors with employees performing in Kentucky, Ohio, or Tennessee are not required to comply with the Executive Order or FAR/DFARS clauses. Obviously, this creates a conundrum for federal contractors and subcontractors looking for a uniform way to implement the EO rules.

Background

Plaintiffs Kentucky, Ohio, and Tennessee filed suit in the U.S. District Court for the Eastern District of Kentucky on November 4, 2021, and four days later filed for a Temporary Restraining Order and Preliminary Injunction (“TRO/PI”). The TRO/PI motion asked the Court to enjoin the Government’s enforcement of EO 14042. Plaintiffs challenged the EO on 10 separate grounds, including that it violated the Federal Property and Administrative Services Act (“FPASA”), the Competition in Contracting Act (“CICA”), the Administrative Procedures Act (“APA”), and the U.S. Constitution. The Court held a conference among the parties on November 9 and a hearing on November 18.

The District Court Decision

Regardless of whether one likes the outcome or not, Judge Van Tatenhove’s decision is thoughtfully reasoned and well written. It is methodical and well cited. In sum, Judge Van Tatenhove enjoined the EO not because of the process by which the Administration implemented the mandate (i.e. not due to the lack of a meaningful notice-and-comment period or the unprecedented dynamic nature of the FAR clause), but rather because he found the Administration never had the authority to implement a vaccine mandate in the first place. In other words, the Court issued the injunction because the President of the United States purportedly lacks the statutory or constitutional authority to regulate public health via a contract clause issued pursuant to a procurement statute.

The decision, however, readily concedes that the Court’s view is the beginning, not the end, of the story. “Once again,” the Judge explained, “the Court is asked to wrestle with important constitutional values implicated in the midst of a pandemic that lingers. These questions will not be finally resolved in the shadows. Instead, the consideration will continue with the benefit of full briefing and appellate review. But right now, the enforcement of the contract provisions in this case must be paused.”

The Practical Impact (and Scope) of Kentucky v. Biden

While the Court’s decision is significant, it does NOT apply to all federal contractors. It enjoins the Government “from enforcing the vaccine mandate for federal contractors and subcontractors in all covered contracts in Kentucky, Ohio, and Tennessee.” Sadly, Judge Van Tatenhove does not explain this sentence. Does he mean to enjoin all federal contracts performed in those states, all federal contracts held by contractors operating in those states, or maybe even all federal contracts issued by agencies based in those states? It’s unclear. Adding to the confusion is his statement that the injunction “is properly limited to the parties before the Court” (i.e., the states of Kentucky, Tennessee, Ohio). Here again, we are left to guess what he means.

Subsequent to the Court’s decision, GSA took prompt steps to notify its contractors of the late breaking news. Here is GSA’s take on the scope of the injunction:

Update: On November 30, 2021, in response to a lawsuit filed in the United States District Court, Eastern District of Kentucky, a preliminary injunction was issued halting the Federal Government from enforcing the vaccine mandate for Federal contractors and subcontractors in all covered contracts in Kentucky, Ohio, and Tennessee.

GSA implemented the vaccine mandate stemming from Executive Order 14042 through Class Deviation CD-2021-13. Pursuant to the preliminary injunction, GSA will not take any action to enforce FAR clause 52.223-99 Ensuring Adequate COVID-19 Safety Protocols for Federal Contractors in all covered contracts or contract-like instruments being performed, in whole or in part, in Kentucky, Ohio and Tennessee.

While GSA’s formulation is a bit more useful than the Court’s in that it focuses on contracts “being performed . . . in” the three states, it still does not answer the key question regarding scope.

We think the most common sense interpretation of the scope of the injunction is that it applies to covered employees performing work in Kentucky, Tennessee, and Ohio. That being said, GSA’s interpretation seems to indicate the analysis should be performed at the contract level, rather than the employee level (i.e., if you have even one employee performing on a contract in one of those three states, then the entire contract is exempt from enforcement).

We hope to receive updated Guidance from the Task Force providing a definitive answer to this question in the near future. Until then, Federal contractors and subcontractors are stuck between the proverbial rock and a hard place – having to decide whether to continue marching ahead pursuant to the EO or navigate different rules in different states.

In reaching their own interpretive decision, contractors should keep in mind that the Court order does not prohibit compliance with the EO, it simply enjoins the Government from enforcing the EO. Before a contractor decides to continue rolling out its existing compliance approach as planned, however, it would be well advised to consider this: Now that the EO has been enjoined in Kentucky, Ohio, and Tennessee, one can make a credible (and likely correct) argument the EO requirements are no longer mandatory in those states (both vaccination and making/distancing). This transition from a mandatory to a voluntary rule creates at least two new hurdles for contractors.

  • First, continuing to comply with the FAR/DFARS clauses could create state liability where a state has a law against a vaccine mandate. For example, on November 12, 2021 Tennessee passed TN HB 9077/SB 9014, which prohibits private businesses, governmental entities, schools, and local education agencies from compelling an individual, or from taking adverse action against the individual to compel them, to provide proof of vaccination. Previously, the Executive Order, as a federal law, would have trumped the conflicting state law. Now, however, the unenforceable EO no longer reigns supreme. Accordingly, continuing to impose the EO on a Tennessee workforce creates state risk.
  • Second, continuing to comply with the FAR/DFARS clauses in Tennessee, Kentucky, or Ohio could create problems with a company’s collective bargaining obligations. When the vaccine requirement was a legal obligation, it probably was not required to be collectively bargained. Now that the requirement is no longer a legal obligation (at least in the three states covered by the Court order), imposing a vaccine mandate on union employees may have to be collectively bargained.

Accordingly, while marching ahead with an existing EO 14042 company-wide compliance plan may make great sense from an efficiency and consistency standpoint, it could create unintended risks in at least three states (and certainly in Tennessee).

What Should Contractors Do Now?

The EO 14042 COVID safety contracting landscape (like COVID itself) is changing every day. We are hopeful the Task Force will issue new Guidance soon to help contractors navigate the new hurdles created by the Kentucky decision. Until then, here are a few thoughts for consideration:

  • If you have no employees performing in Kentucky, Ohio, or Tennessee, the Order has no impact on you. The EO still applies to your contracts in other states just as it did prior to the Court’s decision.
  • If you have employees performing in Tennessee, take a close look at TN HB 9077/SB 9014 before making any decision regarding implementation of the EO.
  • If you have employees performing in Kentucky or Ohio and do not have collective bargaining agreements, you may want to continue enforcing the EO to avoid having different rules in different locations. But if you have collective bargaining agreements, make sure you connect with your L&E lawyer before charting a path forward.
  • Consider putting together a communication to your employees who no doubt soon will read a headline and have questions about the Order.
  • For contractors with employees performing in Kentucky, Tennessee, or Ohio, update your current compliance plan.
  • In the absence of further Task Force Guidance, consider staying in close communication with your contracting officer regarding your implementation approach, especially in the three states implicated by the Order.

Additionally, stay on the lookout for additional updates (including from us) on the other pending litigation challenging the EO.

What’s Next?

Speaking of the “other pending litigation,” the docket still is full of challenges to the EO. By our count, there are motions for preliminary injunction pending in cases with 24 additional states as plaintiffs:

 

 

 

 

 

 

 

The judges in these cases are not bound by the Kentucky decision – either on the merits or the scope of any resulting injunction. Meaning, should a judge in one of the remaining cases also strike the EO as contrary to law or the Constitution, that judge could choose to issue a nationwide injunction covering all contractors in all states (or, as the Kentucky judge chose, limit the application to the specific state(s) involved). Only time will tell. As of the publication of this Alert, three of those cases have hearings scheduled for December 3, 6, and 7. We expect decisions shortly thereafter.

Importantly, as the Kentucky decision explicitly recognizes, it’s unlikely any of these district courts will be the final arbiter of the legality of EO 14042. We think it’s only a matter of time until we get the rarely seen, yet always celebrated Supreme Court government contracts decision. Stay tuned.

For Those Wanting A Bit More Detail . . .

For those interested in the details of the Kentucky decision, here is a brief summary:

After analyzing and concluding that the plaintiffs had standing to pursue this matter on behalf of their agencies and businesses operating in their states (a contrary outcome to the U.S. District Court’s recent decision in Mississippi), Judge Van Tatenhove jumped right in to analyzing the myriad arguments raised by Plaintiff. Briefly, here is what he found:

  • FPASA. Plaintiffs argued that the President exceeded his authority under FPASA in issuing the EO. The Court agreed, reasoning that FPASA was intended to give the President procurement powers, not unlimited powers. “FPASA does not provide authority to ‘write a blank check for the President to fill in at his will. . . .” The Court found an insufficiently close nexus between the EO and the need for economy and efficiency in the procurement of goods and services, reasoning that similar logic could authorize a president to outlaw overweight contractor employees since the CDC has concluded that obesity worsens the outcomes of COVID-19. While recognizing the breadth of FPASA and how it historically has been used to promote far-reaching social labor policies (e.g., EO 11246), for this judge at least, the COVID-19 mandate was just a bridge too far.
  • CICA. CICA requires agencies to provide “full and open competition through the use of competitive procedures” in federal procurements. The Court found that the EO violates CICA. According to Judge Van Tatenhove, “contractors who ‘represent the best value to the government’ but choose not to follow the vaccine mandate would be precluded from effectively competing for government contracts.” It seems to us this reasoning does not hold up under close scrutiny. Couldn’t one say the same thing about contractors precluded from contracts where they “choose not to follow” the Trade Agreements Act, Section 889, Executive Order 11246, or any other number of gating procurement rules? In any event, the Court found the argument compelling at least “at this early stage in the litigation.”
  • Non-Delegation Doctrine. The non-delegation doctrine precludes Congress from transferring its legislative power to another branch. Plaintiffs argued that “mandating vaccination for millions of federal contractors and subcontractors is a decision that should be left to Congress (or, more appropriately, the States) and is a public health regulation as opposed to a measure aimed at providing an economical and efficient procurement system.” In evaluating Plaintiffs’ argument, the Court looked to the OSHA rule recently struck down by the Fifth Circuit. “It would be reasonable to assume that a vaccine mandate would be more appropriate in the context of an emergency standard promulgated by OSHA,” Judge Van Tatenhove noted, and then went on to note that even the OSHA ETS was struck down as a violation of the non-delegation doctrine. If the ETS couldn’t withstand a non-delegation challenge, “the Court has serious concerns about the FPASA, which is a procurement statute, being used to promulgate a vaccine mandate for all federal contractors and subcontractors.” The Court acknowledged “that only twice in American history, both in 1935, has the Supreme Court found Congressional delegation excessive.” Nonetheless, Judge Van Tatenhove seems to believe he has found the third. He mused, however, that “it may be useful for appellate courts to further develop the contours of the non-delegation doctrine, particularly in light of the pandemic.”
  • Tenth Amendment. As we all will remember from high school civics (if not from law school), the Tenth Amendment states that “powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” The Court expressed a “serious concern that Defendants have stepped into an area traditionally reserved to the States,” and held the Tenth Amendment provides an additional reason to enjoin the EO.

In short, Judge Van Tatenhove clearly believes the Plaintiffs, in this case, are likely to prevail on multiple statutory and constitutional bases.

The decision then goes on to discuss whether the President (through his delegated officials) failed to follow applicable administrative procedures in issuing the EO and the subsequent FAR clause. Here, the President fared better than he did with Plaintiffs’ constitutional arguments. The Court concluded that the Administration, while perhaps “inartful and a bit clumsy” at times, “likely followed the procedures required by statute.” The Court also concluded that the Administration did not act arbitrarily or capriciously (as defined by the APA). “The Court finds, based on the limited record at this stage in the litigation, that Defendants have followed the appropriate procedural requirements in promulgating the vaccine mandate.” But this all is little solace to the Administration as it would have been much easier to overcome a procedural error than a constitutional one — let alone the “serious Constitutional concerns” identified by Judge Van Tatenhove.

*Sheppard Mullin partners Jonathan Aronie, Ryan Roberts, Anne Perry, and associates Nikki Snyder, Emily Theriault, and Dany Alvarado participated in drafting this Alert.

Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.

Article by the Government Contracts Practice Group with Sheppard, Mullin, Richter & Hampton LLP.

For more about federal court orders and federal contractors visit the NLR Government Contracts Maritime & Military Law type of law page.

DOL Publishes Final Rule Implementing President Biden’s $15 Federal Contractor Minimum Wage Executive Order 14026

The Department of Labor (DOL) has published its Final Rule implementing President Biden’s April 27, 2021, Executive Order 14026 raising the minimum wage from $10.95 an hour to $15 an hour (with increases to be published annually). The new wage rate will take effect January 30, 2022, though as discussed below, the rate increases will not be applied to contracts automatically on that date.

The Final Rule is substantially similar to the DOL’s proposed Notice of Rulemaking issued in July 2021 and is more expansive in coverage than the current federal contractor minimum wage requirements in effect under former President Obama’s Executive Order 13658.

$15 Wage Rate Does Not Apply to All Federal Contractors, All Federal Contracts, or All Workers

Covered Contracts

The $15 wage rate will apply to workers on four specific types of federal contracts that are performed in the U.S. (including the District of Columbia, Puerto Rico, and certain U.S. territories):

  • Procurement contracts for construction covered by the Davis-Bacon Act (DBA), but not the Davis-Bacon Related Acts
  • Service Contract Act (SCA) covered contracts
  • Concessions contracts – meaning a contract under which the federal government grants a right to use federal property, including land or facilities, for furnishing services. The term “concessions contract” includes, but is not limited to, a contract the principal purpose of which is to furnish food, lodging, automobile fuel, souvenirs, newspaper stands, or recreational equipment, regardless of whether the services are of direct benefit to the government, its personnel, or the general public
  • Contracts related to federal property and the offering of services to the general public, federal employees, and their dependents

The Executive Order does not apply to contracts or other funding instruments, including:

  • Contracts for the manufacturing or furnishing of materials, supplies, articles, or equipment to the federal government
  • Grants
  • Contracts or agreements with Indian Tribes under the Indian Self-Determination and Education Assistance Act
  • Contracts excluded from coverage under the SCA or DBA and specifically excluded in the implementing regulations and
  • Other contracts specifically excluded (See NPRM Section 23.40)

Effective Date; Definition of “New” Contracts Expanded

The Final Rule specifies that the wage requirement will apply to new contracts and contract solicitations as of January 30, 2022. Despite the “new contract” limitation, the regulations, consistent with the language of the Biden Executive Order, strongly encourage federal agencies to require the $15 wage for all existing contracts and solicitations issued between the date of the Executive Order and the effective date of January 30, 2022.

Similarly, agencies are “strongly encouraged” to require the new wage where they have issued a solicitation before the effective date and entered into a new contract resulting from the solicitation within 60 days of such effective date.

Pursuant to the Final Rule, the new minimum wage will apply to new contracts; new contract-like instruments; new solicitations; extensions or renewals of existing contracts or contract-like instruments; and exercises of options on existing contracts or contract-like instruments on or after January 30, 2022.

Geographic Limitations Expanded

The Final Rule applies coverage to workers outside the 50 states and expands the definition of “United States” to include the 50 states, the District of Columbia, Puerto Rico, the Virgin Islands, Outer Continental Shelf lands as defined in the Outer Continental Shelf Lands Act, American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, Wake Island, and Johnston Island.

Workers Performing Work “On or In Connection With” a Covered Contract

Only workers who are non-exempt under the Fair Labor Standards Act and performing work on or in connection with a covered contract must be paid $15 per hour. The wage requirement applies only to hours worked on or in connection with a covered contract.

A worker performs “on” a contract if the worker directly performs the specific services called for by the contract. A worker performs “in connection with” a contract if the worker’s work activities are necessary to the performance of a contract but are not the specific services called for by the contract.

The Final Rule includes a “less-than-20% exception” for those workers who only perform work “in connection with” a covered contract, but do not perform any direct work on the contract. For workers who spend less than 20% of their hours in a workweek working indirectly in connection with a covered contract, the contractor need not pay the $15 wage for any hours for that workweek.

Tipped Employees

Under the Final Rule, DOL is phasing out lower wages and tip credits for tipped employees on covered contracts. Employers must pay tipped employees $10.50 per hour in 2022 and increase those wages incrementally, under a proposed formula in the NPRM. Beginning in 2024, tipped employees must receive the full federal contractor wage rate.

$15 Wage Contract Clause Requirements, Enforcement Obligations

The Final Rule provides that a Minimum Wage contract clause will appear in covered prime contracts, except that procurement contracts subject to the Federal Acquisition Regulation (FAR) will include an applicable FAR Clause (to be issued by the Federal Acquisition Regulation Council) providing notice of the wage requirement.

In addition, covered prime contractors and subcontractors must include the Contract Clause in covered subcontracts and, as will be in the applicable FAR Clause, procurement prime contractors and subcontractors will be required to include the FAR clause in covered subcontracts.

In addition, the Final Rule provides that contractors and subcontractors:

“… shall require, as a condition of payment, that the subcontractor include the minimum wage contract clause in any lower-tier subcontracts … [and] shall be responsible for the compliance by any subcontractor or lower-tier subcontractor with the Executive Order minimum wage requirements, whether or not the contract clause was included in the subcontract.”

The DOL will investigate complaints and enforce the requirements but under the Final Rule, contracting agencies may also enforce the minimum wage requirements and take actions including contract termination, suspension and debarment for violations.

Preparation for the $15 wage

To prepare, contractors and subcontractors of covered contracts should consider taking the following steps:

  • Review existing multi-year contracts with options or extensions that may be exercised on or after January 30, 2022, to plan for wage increases at the exercise of the option or extension, but also review any contract modifications to see if an agency is including the requirement early than required, as is allowed under the Final Rule
  • Identify job titles that typically perform work directly on covered contracts and those that perform indirect work above 20% in a workweek
  • Plan for wage increases for covered workers who are not already making $15 per hour
  • Determine impact on existing collective bargaining agreements particularly on SCA-covered contracts
  • Prepare for submission of price/equitable adjustments based on wage increases if allowed under the contract terms

Article By Leslie A. Stout-Tabackman of Jackson Lewis P.C.

For more labor and employment legal news, read more at the National Law Review.

Jackson Lewis P.C. © 2021

GovCon Fraud Grounded: Whistleblower Receives Reward for Reporting Aviation Equipment Government Contracting Fraud

The United States Department of Justice settled a case against aviation equipment defense contractor Airbus Defense and Space Inc. (ADSI) for charging improper fees on government contracts. Under the terms of the settlement, the defense contractor paid $1,043,475 to resolve False Claims Act allegations. A former employee of the government contractor reported these improper fees and will receive $157,220 of the government’s recovery.

According to the allegations, the contractor included an unapproved cost rate on contracts, did not accurately disclose fees, and worked out a storage overbilling scheme with a third-party contractor, causing the government to pay more for storage than necessary. To disguise an additional and sometimes undisclosed indirect cost rate, the contractor added what they called an “Orlando Factor” to various price proposals for 62 contracts. Indirect cost rates are a complex portion of government contracting arrangements whereby a contractor attempts to obtain reimbursement for their company’s operational costs. From 2016-2017, this aviation equipment contractor’s “Orlando Factor” was applied in addition to their indirect cost rate approved by the federal agencies with which they were contracting.

The allegations further describe additional fees the contractor tacked onto equipment acquisitions in violation of federal acquisition regulations. Moreover, the contractor listed an unverified affiliate fee on its proposals. Finally, the contractor inflated storage costs by a factor of 10, resulting in General Dynamics passing on $80,000 in storage fees to the U.S. Navy instead of $8,000 in fees.

Defense contracting fraud harms taxpayers; inflating the cost of obtaining equipment can make defense budgets spiral out of control. This particular contractor seems to have found multiple ways to hide costs and pad proposals so as to turn a profit above and beyond their cost of doing business.

A former employee of ASDI reported these fraudulent practices and is being rewarded for speaking up, including receiving funds to pay for their expenses, attorneys’ fees, and costs. The Department of Justice needs whistleblowers to report government contracts fraud. Last year, only 35 defense fraud cases were filed by whistleblowers. With $720 billion spent, more fraud is out there.

© 2021 by Tycko & Zavareei LLP
For more articles on Government Contracts, visit the NLR

Government Contracts, Maritime & Military Law type of law section.

How Government Contractors Can Prepare for a Government Shutdown

The federal government’s funding is slated to deplete on September 30th, 2021. Congress is currently debating the legislation that will allow operations to continue beyond this date, but it remains to be seen whether or not the government will experience a temporary shutdown. Regardless, the Office of Management and Budget signaled for agencies to prepare for a gap in funding, and President Joe Biden’s White House is preparing for this outcome.

“Government shutdowns impact government contractors in significant ways. Work and payments suddenly stop, and contractors have to decide what to do with their skilled and knowledgeable workers, who suddenly have nothing to do for a company whose cash flow has taken a sudden hit,” said Guy Brenner, a partner in the labor and employment law department and head of the Government Contractor Compliance Group at Proskauer Rose LLP. “This is particularly difficult given that the length of the shutdown is difficult to predict.”

A government shutdown presents unique challenges, not only for federal agencies, but for government contractors and subcontractors as well. These challenges include (but are certainly not limited to) employee pay and overtime, unemployment benefits, the furloughing of employees and more. As a result, it’s important government contractors remain informed and prepare themselves for next steps, should the shutdown indeed take place.

What Do Government Contractors Need to Know About the Shutdown?

In years past, government shutdowns complicated pay and backordered work, and the ongoing COVID-19 pandemic adds another layer to the impending decision on September 30, 2021. With a possible shutdown approaching, government contractors should consider their options under their existing contracts. The looming possibility of a government shutdown creates an air of uncertainty, but workers can mitigate the effects with proper preparation. This includes provisions of the Worker Adjustment and Retraining Notification Act of 1988 (WARN Act) which impacts larger employers.

Typically under the WARN Act, employers must notify employees within 60 days of an upcoming large-scale layoff. The WARN Act applies if there is an “employment loss,” which includes a layoff exceeding six months, an employment termination or a 50 percent reduction in hours in each month over six months.

Another consideration for government contractors during a shutdown is furloughing employees. Often contract workers who are furloughed are not paid their owed wages until after the shutdown has ended and a spending agreement is made, sometimes taking many months before issuing the payments. In some instances, such as during the shutdown of 2018/2019, lawmakers may vote against paying contractors for their furloughed time.

Another complication begins when government contractors take a hit during the shutdown and require workers to use their paid time off (PTO) as compensation rather than back pay. And those with PTO still fare better than contractors who are considered non-essential and cannot rely on PTO. What are the options for those workers?

In addition to furlough and PTO, another potential option for government contractors and their employees during the shutdown is unemployment benefits. However, some furloughed employees may not be eligible for unemployment benefits. Government contractors should check state laws to determine eligibility. Government contractors can find additional resources from the U.S. Department of Labor, including fringe benefits, paid sick leave and pay requirements.

How Can Government Contractors Prepare for a Shutdown?

Despite the uncertainty, government contractors can prepare in advance for a government shutdown. E-Verify, the online system used by employers to check the employment eligibility of new hires, is run by the Department of Homeland Security and may be unavailable during a shutdown. To prepare for this, government contractors should complete I-9 paperwork as soon as possible if E-Verify is unavailable.

Another consideration for government contractors during a shutdown is employee benefits. Furloughed employees may have their benefits affected if a government shutdown happens for a long period of time. The longest government shutdown on record was for 34 days in 2018-2019, which was a partial shutdown, whereas the government is facing a full shutdown this time since the government hasn’t passed any funding bills.

If the government shuts down and employees’ hours are reduced, they may lose COBRA health plan coverage. If this happens, government contractors must send qualifying event notices to affected employees, and employees must be given the option to continue coverage under the plan for the duration of the furlough at the employee’s expense for the maximum COBRA continuation period.

If the government is shut down and employees are furloughed, government contractors should tell employees not to do any work. If employees work while furloughed, they must be paid a salary for the entire week. Aside from furlough, government contractors may also decide to allow employees to work a reduced number of hours, but the process needs to be analyzed carefully and managed tightly, due to requirements for exempt employees, salary requirements, local regulations for a reduction in compensation, as well as contractual obligations, overtime exemptions and any foreign work authorizations.

Government contractors should consider incorporating the cost impacts of a shutdown into their planning and allow for it in their contracts. Contractors should plan to establish a line of communication with contracting officers ahead of time to discuss what work might be halted just in case they are unavailable if the government shuts down. Additionally, small businesses that rely on government funding can also prepare by speaking with their bank before any upcoming funding deadlines to ensure they have the cash flow to stay afloat during the shutdown.

What are the Next Steps for Government Contractors?

Government contractors can start preparing now for a government shutdown by completing necessary I-9 paperwork, determining furlough and unemployment benefit eligibility, determining WARN Act eligibility as well as planning for COBRA coverage interruptions.

“When the government shuts down, contractors can feel sudden and serious economic and workflow impacts, and naturally want to react quickly. But doing so without careful thought and planning may only solve one problem while creating an even bigger and potentially more costly one,” Mr. Brenner said. “Wage and hour, immigration, benefits, unemployment insurance, and lay off laws are all issues contractors need to consider before taking action.”

Copyright ©2021 National Law Forum, LLC
For more articles on the government shutdown, visit the NLRGovernment Contracts, Maritime & Military Law section.

Hurricanes and Act of God Defenses

Following a major hurricane or other extreme weather event, vessel owners and operators may face liability for failure to perform their agreed contracts or for liability arising from an allision or collision. When such major hurricanes strike, to escape liability, vessel owners and operators may take advantage of two doctrines: (1) force majeure; and (2) the inevitable accident/ Act of God defense. Below we explain those doctrines and the burden of proof for each.

A.        Contractual Defenses – Force Majeure Clauses

Maritime contracts for services generally include clauses for performance, demurrage, deviation, termination and suspension.  In addition, most contracts include a force majeure clause designed to excuse one or all of the parties from liabilities or obligations under a contract when there has been an occurrence of an extraordinary and unforeseeable event beyond the control of the parties. These are known as force majeure clauses—which roughly translates to a “superior force.” A typical force majeure clause reads as follows:

Except for the duty to make payments hereunder when due, and the indemnification provisions under this Agreement, neither Company nor Contractor shall be responsible to the other for any delay, damage or failure caused by or occasioned by a Force Majeure Event as used in this Agreement.  “Force Majeure Event” includes: acts of God, action of the elements, warlike action, insurrection, revolution or civil strife, piracy, civil war or hostile action, strikes, differences with workers, acts of public enemies, federal or state laws, rules and regulations of any governmental authorities having jurisdiction in the premises or of any other group, organization or informal association (whether or not formally recognized as a government); inability to procure material, equipment or necessary labor in the open market acute and unusual labor or material or equipment shortages, or any other causes (except financial) beyond the control of either Party. Delays due to the above causes, or any of them, shall not be deemed to be a breach of or failure to perform under this Agreement.

Moreover, force majeure clauses, especially in contracts performed in the Gulf of Mexico, typically include hurricanes in the exhaustive list of potential force majeure events. If “hurricanes” are not specifically contemplated, such weather events may also qualify under “Act of God,” as discussed below.

When such a force majeure event occurs, the party seeking to invoke the clause bears the burden of proof in showing its application. Generally speaking, the party would need to present evidence proving: (1) that the alleged event constitutes a force majeure event; (2) that the event had adversely affected the party’s ability to perform; (3) that the party’s inability to perform is beyond its control; and (4) there existed no reasonable steps the party could have taken to avoid the event or its consequences. In the aftermath of a major hurricane such as Hurricane Katrina or Hurricane Ida, the parties should face little to no difficulty in proving that the hurricane qualified as a force majeure event and that their performance has been affected.

Even if a maritime contract does not contain a force majeure provision, parties may still look to common law principles to escape liability for nonperformance. For example, under the doctrine of “impossibility of performance,” a party can be relieved of its contractual obligations when the object of performance has become impossible or commercially impracticable. See Transatlantic Financing Corp. v. United States, 363 F.2d 312 (D.C. 1966).

All in all, following a major disaster, parties should first look to the language of the contract to determine the viability of such defenses. The contract will control and will dictate the parties’ next steps. Jones Walker routinely advises clients with respect to such matters.

B.        Defenses to Tort Liability – Act of God

The maritime doctrine of “Act of God” or “inevitable accident” serves as a defense to nonperformance of contractual obligations, as discussed above, and to liability for a maritime accident, such as a collision or allision. The doctrine serves as an affirmative defense to the element of causation. In other words, the loss was caused not by any action of the vessel owner or any human intervention, but was caused by an unpredictable and inevitable Act of God, which could not have been prevented. The U.S. Supreme Court has defined an “Act of God” as “a loss happening in spite of all human effort and sagacity.” The Majestic, 166 U.S. 375 (1897). This defense has also been widely defined as “any accident, due directly and exclusively to natural causes without human intervention, which by no amount of foresight, pains, or care, reasonably to have been expected could have been prevented;” and/or “a disturbance . . . of such unanticipated force and severity as would fairly preclude charging . . . [defendant] with responsibility for damage occasioned by the [defendant’s] failure to guard against it in the protection of property committed to its custody.” See 1A C.J.S. Act of God at 757 (1985); Ompania De Vapores INSCO S.A. v. Missouri Pacific R.R. Co., 232 F.2d 657, 660 (5th Cir. 1956), cert. denied, 352 U.S. 880 (1956). See also Skandia Ins. Co., Ltd. V. Star Shipping, AS, 173 F. Supp. 2d 1228 (S.D. Ala. 2001) (defining “Act of God” as a natural event that is overwhelming and cannot be forestalled nor controlled with respect to a Hurricane Georges cargo claim).  With respect to major weather events such as hurricanes, the doctrine acts as a defense to tort liability for breakaways resulting in collision and allisions. See  Petition of U.S., Heide Shipping & Trading v. S.S. Joseph Lykes, 425 F.2d 991 (5th Cir. 1970) (vessel breakaway in Hurricane Betsy). That said, such hurricanes must be “so extraordinary that the history of climatic variations and other conditions in the particular locality affords no reasonable warning of them.” Warrior & Gulf Navigation Co. v. United States, 864 F.2d 1550, 1553 (11th Cir. 1989) (other internal citations omitted).

Before even considering the “Act of God” defense however, three important maritime presumptions come into play: (1) the Pennsylvania Rule; (2) the Louisiana Rule; and (3) the Oregon Rule —named after the respective cases in which they arose. Under the Pennsylvania Rule, a party who violates a safety regulation, such as the COLREGS, will be presumed at fault for a maritime incident. The Pennsylvania Rule may be overcome but case law notes that: “a party who fails to observe a safety regulation [must meet] the burden of showing not merely that [its] fault might not have been one of the causes [of the loss], or that it probably was not, but that it could not have been.” United States v. Nassau Marine Corp., 778 F.2d 1111, 1116 (5th Cir. 1985). The Louisiana and Oregon Rules together create a presumption of fault against the vessel owner of a vessel striking another vessel or stationary object. The Louisiana and The Oregon Rules “[create] a presumption of fault that shifts the burden of production and persuasion to a moving vessel who, under her own power, allides with a stationary object.” Combo Maritime, Inc. v. U.S. United Bulk Terminal, LLC, 615 F.3d 599, 604 (5th Cir. 2010). The moving vessel may rebut the presumption by showing by a preponderance of the evidence, that (1) the collision was the fault of the stationary object (or other vessel), (2) that the moving ship acted with reasonable care, or (3) that the collision was an unavoidable accident.  Bunge Corp. v. M/V Furness Bridge, 558 F.2d 790, 795 (5th Cir. 1977), cert. denied, 435 U.S. 924, 98 S. Ct. 1488, 55 L. Ed. 2d 518 (1978)).

When one of the aforementioned principles apply, the presumption shifts the burden of proof to the vessel owner — both the burden of producing evidence and the burden of persuasion — who must show that it was without fault or that the collision was the result of an inevitable accident, i.e. an Act of God. Bunge Corp. v. M/V Furness Bridge, 558 F.2d 790, 795 (5th Cir. 1997). Where a party invokes the Act of God defense and alleges that such vis major event caused the accident (ie. no fault of the vessel owner), the vessel owner bears a heavy burden to demonstrate that its “drifting was the result of an inevitable accident, or a vis major, that human skill and precaution and a proper display of nautical skill could not have prevented.” Bunge Corp., 240 F.3d at 926. In addition, a party who invokes Act of God with respect to inclement weather must prove not only that the weather was heavy, “but also that it took reasonable precautions under the circumstances as known or reasonably to be anticipated.” In re Southern Scrap Material Co., 713 F. Supp. 2d 568, 578 (E.D. La. 2010) (internal citations omitted). In other words, the party must show that it took reasonable precautions under the circumstances to prevent the breakaway, collision, or allision. Petition of U.S., 425 F.2d 991, 995 (5th Cir. 1970). If any human negligence was a contributing cause of the incident, the Act of God defense will be defeated. Crescent Towing & Salvage Co., Inc. v. M/V Chios Beauty, No. 05-4207, 2008 U.S. Dist. LEXIS 62247 (E.D. La. Aug. 14, 2008). This is because an Act of God is such a catastrophic event that the exercise of reasonable care or reasonable precautions could not have prevented the loss.

Hurricanes are generally regarded as “Acts of God.” Even though storms are not unusual for the Gulf of Mexico, courts recognize that a hurricane that causes unexpected and unforeseeable devastation with unprecedented wind velocity, storm surges, flooding, etc. is a classic case of an “Act of God.” Terre Aux Boeufs Land Co. v. J. R. Gray Barge Co., 00-2754 (La. App. 4 Cir. 11/14/01); 803 So.2d 86, 92. For example, following Hurricane Katrina, the U.S. District Court for the Eastern District of Louisiana held that a Category 4 or 5 hurricane was an Act of God sufficient to bar a claim by a marina owner against the owner of a vessel that broke away from her berth, drifted and hit another vessel.  The defense of Act of God applied because, 1) the accident was due exclusively to natural events without human negligence, and (2) there was no negligent behavior.  J.W. Stone Oil Dist., LLC v. Bollinger Shipyard, 2007 WL 2710809 (E.D. La. 2007).  The district court held in Stone Oil that hurricanes are considered in law to be an Act of God unless there is an intervening and contributing act of individual negligence. This includes taking reasonable precautions based upon the available information. But see Borries v. Grand Casino of Miss., Inc., 187 So.3d 1042, 1050 (Miss. 2016) (holding that plaintiff presented sufficient evidence to create a factual dispute as to whether a casino vessel was properly moored ahead of Hurricane Katrina so as to preclude a summary judgment on the Act of God defense). The relevant inquiry always revolves around what reasonable precautionary steps the vessel owner took ahead of the storm (or should have taken).

In Simmons v. Lexington Ins. Co., 2010 WL 1254638 (E.D. La. 2010), aff’d., 401 Fed. Appx. 903 (5th Cir. 2010), the district court also considered whether reasonable precautions had been taken by a marina to protect a sailboat in Hurricane Katrina under both Louisiana and maritime law.  The Court reviewed other Katrina cases, including Conagra Trade Group, Inc. v. AEP Memco, LLC, 2009 WL 2023174 (E.D. La. 2009), and Coex Coffee Int’l., Inc. v. Dupuy Storage & Forwarding, LLC, 2008 WL 1884041 (E.D. La. 2008).  (Katrina’s unprecedented flooding and devastation was an Act of God defense.)  In Conagra, supra, the district court was asked to review a contract of affreightment for a cargo of wheat aboard a barge that sunk.  The defendant was found not negligent in delivering its barge of cargo several days before the weather forecast accurately predicted the landfall of Katrina.  In In re S.S. Winged Arrow, 425 F.2d 991 (5th Cir. 1970), the court affirmed that the Act of God defense applied to the loss of a vessel properly moored well before it became apparent that Hurricane Betsy would strike.

Regardless of if such cases are brought in federal court or state court, the Act of God doctrine will apply. For example, following Hurricane Rita, Jones Walker successfully defended its client in a Louisiana state court by invoking the Act of God defense in response to a barge breakaway in Lake Charles that struck and destroyed a bridge. Following a trial, the jury exonerated the defendant vessel owner finding that Hurricane Rita caused the loss, not any alleged act of the barge owner.

C.        Contractual Performance Clauses – Act of God

Clauses for demurrage, detention or laytime usually involve delays in the loading or unloading of cargo or the delivery of goods and materials.  Laytime is the period of time allowed for loading and unloading.  Demurrage and detention are sums paid to compensate for time lost related to the delivery of equipment or cargo.  Demurrage begins to run after the passage of laytime or the agreed time of delivery and performance.  Damages are awarded for failure to perform.  Deviation is an obligation to maintain a proper course in ordinary trade and to timely arrive at the agreed destination.  All deviation clauses are subject to certain liberties.  Any deviation may affect insurance and hire.

Typically a contract for maritime services can be terminated for cause or for convenience.  Similarly, parties may negotiate terms to suspend performance, which would suspend payment of hire and performance of services.  A suspension clause is typically an off-hire clause where the contract terms remain but no hire is paid.  Usually a vessel owner will be compensated and reimbursed for certain additional expenses if a contract is terminated for convenience.  An Act of God clause excuses delays in performance, but in most cases serves to either suspend performance or terminate the contract for cause as between the parties.

D.        Conclusion

In sum, following major hurricanes like Katrina, Laura, and now Ida, vessel owners and operators may invoke the Act of God defense (with respect to both tort liability and contractual obligations). That said, to successfully invoke the defense, the vessel owner faces a high burden in proving that human negligence did not cause the loss. Such a burden requires certain evidence, testimony, and other proof.

© 2021 Jones Walker LLP

Article By Grady S. Hurley, Jefferson R. Tillery and Sara B. Kuebel of Jones Walker LLP

For more articles on government contracts, visit the NLR Government Contracts, Maritime & Military Law section.

Whistleblower Rewarded Over $2 Million for Exposing Contractor of Military Helicopters That Provided Unsafe Helicopters, Risking the Lives of Military Members Deployed to War Zones

An Illinois-based aviation services company and its subsidiary in Florida have agreed to pay the government $11,088,000 to resolve allegations that they violated the False Claims Act by breaching their contract to maintain military aircraft that were “fully mission capable.”

The aviation service companies own and maintain helicopters.  They had contracted with the Department of Defense to supply helicopters for use in transporting cargo and personnel in support of missions in Afghanistan and Africa.  However, according to a whistleblower, the aviation companies schemed to maximize profits by failing to provide the resources needed to maintain the helicopters.  This resulted in the helicopters not being airworthy.  Yet, the companies continued to certify the helicopters as “fully mission capable.”  Thus, it was alleged, the companies knowingly risked the lives of military personal who were using the aircraft while deployed in war zones and committing fraud against U.S. taxpayers.

The same companies also paid an additional amount to resolve a separate matter brought by the Federal Aviation Administration (FAA) against them for deficiencies in helicopter maintenance work.

This lawsuit originated from a former employee of the aviation service companies who brought suit under the qui tam, or whistleblower, provisions of the False Claims Act. Whistleblower lawsuits allow private parties, known as “relators,” to bring suit on behalf of the government and to share in any recovery, usually 15% to 25% of the settlement amount.  In this case, the whistleblower will receive $2,162,160.  The False Claims Act allows the government to intervene and prosecute an action, as it did in this case.  Fraud in government contracting is often exposed by individuals with knowledge that the fraud is occurring, as in this case. Whistleblowers may be employees, clients, or competitors of the wrongdoer.  Such individuals can use their inside knowledge to bring fraud to the attention of the government, saving lives and protecting taxpayer money.

© 2021 by Tycko & Zavareei LLP

Executive Order Increases the Minimum Wage for Federal Contractors to $15

On April 27, 2021, President Biden signed Executive Order 14026, which increases the minimum wage for workers on or in connection with a federal government contract to $15.00 as of January 30, 2022.  This Executive Order increases the minimum wage level set by President Obama’s 2014 Executive Order 13658, which has been set at $10.95 per hour since January 1, 2021.

The new minimum wage applies to most new federal contracts, contract-like instruments, solicitations, extensions or renewals of existing contracts or contract-like instruments, and exercises of options on existing contracts or contract-like instruments that are entered into or exercised on or after January 30, 2022.  However, the Executive Order “strongly encourage[s]” agencies to ensure, to the extent permitted by law, that the wages paid under existing contracts are consistent with the Executive Order’s requirements.  The Executive Order provides that compliance with the increased minimum wage will be a condition of payment on the government contract, raising the potential for False Claims Act liability if a government contractor accepts payment on a federal contract while failing to pay covered workers the required wage.  The Executive Order’s requirements must, in many circumstances, be included in subcontracts.

Although the Executive Order does not elaborate on which employees work “on or in connection” with a federal contract, it is likely that the Department of Labor’s forthcoming regulations implementing the Executive Order will follow the lead of its previous regulations implementing Executive Order 13658.  Under those regulations, workers perform services “on” a contract if they directly perform the services called for by the contract’s terms, and they perform services “in connection with” a contract if they perform work activities that, although not specifically called for by the contract, are necessary to the contract’s performance.

The Executive Order also addresses the cash portion of the tipped minimum wage for covered workers.  The cash wage for covered workers who qualify as tipped employees will increase to $10.50 as of January 30, 2022.  The wage will then increase as of 85% of the general minimum wage as of January 30, 2023, and 100% of the general minimum wage as of January 30, 2024, at which point the tip credit will be eliminated.

The Department of Labor is required to issue regulations implementing the Executive Order by November 24, 2021.  Federal contractors and subcontractors should consider beginning preparations for the increased minimum wage now, in advance of the regulations, by identifying potentially covered workers whose wages may require adjustment.  Polsinelli will continue to update the contractor community when regulations are issued.

© Polsinelli PC, Polsinelli LLP in California

ARTICLE BY Jack Blum of Polsinelli PC
For more articles on federal contractor minimum wage, visit the NLR Government Contracts, Maritime & Military Law section.

How Long Until Biden Nominates the MARAD Administrator?

As President-elect Biden begins assembling his new team, personnel decisions play an important role in what the next four years will look like for the maritime industry. As speculation begins to mount, a question we see regularly is how long it will take for the president to appoint a new head of the U.S. Maritime Administration (MARAD).

The short answer is not any time soon. If past is prologue, it will be many months before a new administrator is confirmed. In the chart below, we detail the nomination and confirmation timelines of the last six MARAD administrators during the first term of an incoming president:

Admiral Mark Buzby had the fastest confirmation in recent history, despite having to wait nearly nine months after the 2016 election to take command at MARAD.

The longest wait for a MARAD Administrator occurred during the first term of the Obama presidency. David Matsuda was formally nominated to the post more than a year after the 2008 election, and in the end wouldn’t be confirmed until nearly 600 days after the election.

It should be noted, that in addition to those listed, several MARAD administrators have navigated the nomination process in the second term of a presidency; including Paul “Chip” Jaenichen (2014), Sean Connaughton (2006), Clyde Hart (1998), and John Gaughan (1985).

The new MARAD administrator will have big shoes to fill in replacing Admiral Buzby, but despite a slow-developing process, the agencies maintain order and continuity at the staff level from top to bottom. But if history holds, don’t expect a rapid transition at MARAD.

Marad Nominee Timeline

Copyright 2020 K & L Gates
ARTICLE BY Mark Ruge and  Brody Garland of K&L Gates
For more articles on maritime law, visit the National Law Review Government Contracts, Maritime & Military Law section.

Breaking News: President Trump Issues Executive Order on Combating Race and Sex Stereotyping

On September 22, 2020 President Trump issued an Executive Order “on Combating Race and Sex Stereotyping” (“September 22 EO”) covering government contractors and certain grant recipients that outlines what those organizations cannot include in employee training. It appears, the September 22 EO covers all federal contractors and subcontractors and will require contracting agencies to insert a contract clause in contracts (presumably, from the language of the EO new contracts only) entered into 60 days from September 22, 2020 addressing race and sex stereotyping.

Stemming from the belief that

[i]nstructors and materials teaching that men and members of certain races, as well as our most venerable institutions, are inherently sexist and racist are appearing in workplace diversity trainings across the country

the Order establishes a requirement that contractors and grant recipients not use any workplace training that

“inculcates in its employees” any form of race or sex stereotyping or any form of race or sex “scapegoating”

This includes prohibition on the following concepts:

  • one race or sex is inherently superior to another race or sex;
  • an individual, by virtue of his or her race or sex, is inherently racist, sexist, or oppressive, whether consciously or unconsciously;
  • an individual should be discriminated against or receive adverse treatment solely or partly because of his or her race or sex;
  • members of one race or sex cannot and should not attempt to treat others without respect to race or sex;
  • an individual’s moral character is necessarily determined by his or her race or sex;
  • an individual, by virtue of his or her race or sex, bears responsibility for actions committed in the past by other members of the same race or sex;
  • any individual should feel discomfort, guilt, anguish, or any other form of psychological distress on account of his or her race or sex; or
  • meritocracy or traits such as a hard work ethic are racist or sexist, or were created by a particular race to oppress another race.

Given this, the Executive Order could severely limit and curtail diversity and inclusion, sexual harassment, and related EEO training contractors and government grant recipients are allowed to provide to their employees.

Interesting, the September 22 EO does not include a provision that regulations be issued to implement its requirements.   However, importantly, the Office of Federal Contract Compliance Programs has been tapped as the Agency to enforce the Executive Order.  Per the Order, the Director of OFCCP is required to publish a request for information within 30 days of September 22 seeking from federal contractors and subcontractors information regarding training, workshops or “similar programming” provided to employees, and interesting, that those materials, as well as information about the expense, frequency, duration of the trainings be provided to OFCCP.  There is no detail or instruction as to what OFCCP is required to do with the submissions. However, the executive order states violators can be subject to contract suspension or termination and the contractor may be subject to suspension or debarment.

In addition, the September 22 EO requires all federal agency heads to review their grant programs, and identify in a report to be provided to the Director of the Office of Management and Budget (“OMB”) within 60 days of issuance of September 22, programs that the agency determines as a condition of receiving grant monies that the recipient certify that it will not use federal funds to “promote the concepts” identified above with respect to federal government contractor prohibitions in training and related materials.

If fully implemented, the requirements of the Executive Order could require significant modifications to the content of trainings on race and sex including, diversity and inclusion and unconscious bias, that have become the mainstay for many employers, including contractors and grant recipients.  Some of these trainings are, or may be, required by other federal or state requirements, which could pose a conflict for contractors.

We anticipate challenges to this Executive Order.  We will be following this closely and will be back with future insights and developments.

Jackson Lewis P.C. © 2020
For more articles on Trump, visit the National Law Review Election Law / Legislative News section.

National Security Meets Teenage Dance Battles: Trump Issues Executive Orders Impacting TikTok and WeChat Business in the U.S.

On August 6, 2020, Trump issued two separate executive orders that will severely restrict TikTok and WeChat’s business in the United States.  For weeks, the media has reported on Trump’s desire to “ban” TikTok with speculation about the legal authority to do so.  We break down the impact of the Orders below.

The White House has been threatening for weeks to ban both apps in the interest of protecting “the national security, foreign policy, and economy of the United States.”  According to the Orders issued Thursday, the data collection practices of both entities purportedly “threaten[] to allow the Chinese Communist Party access to Americans’ personal and proprietary information — potentially allowing China to track the locations of Federal employees and contractors, build dossiers of personal information for blackmail, and conduct corporate espionage.”

This is not a new threat.  A variety of government actions in recent years have been aimed at mitigating the national security risks associated with foreign adversaries stealing sensitive data of U.S. persons.  For example, in 2018, the Foreign Investment Risk Review Modernization Act (FIRRMA) was implemented to expand the authority of the Committee on Foreign Investment in the United States (CFIUS) to review and address national security concerns arising from foreign investment in U.S. companies, particularly where foreign parties can access the personal data of U.S. citizens.  And CFIUS has not been hesitant about exercising this authority.  Last year, CFIUS required the divestment of a Chinese investor’s stake in Grindr, the popular gay dating app, because of concerns that the Chinese investor would have access to U.S. citizens’ sensitive information which could be used for blackmail or other nefarious purposes.  That action was in the face of Grindr’s impending IPO.

In May 2019, Trump took one step further, issuing Executive Order 13873 to address a “national emergency with respect to the information and communications technology and services supply chain.”  That Order stated that foreign adversaries were taking advantage of vulnerabilities in American IT and communications services supply chain and described broad measures to address that threat.  According to these new Orders, further action is necessary to address these threats.  EO 13873 and the TikTok and WeChat Orders were all issued under the International Emergency Economic Powers Act  (IEEPA), which provides the President broad authority to regulate transactions which threaten national security during a national emergency.

Order Highlights

Both Executive Orders provide the Secretary of Commerce broad authority to prohibit transactions involving the parent companies of TikTok and WeChat, with limitations on which transactions yet to be defined.

  • The TikTok EO prohibits “any transaction by any person, or with respect to any property, subject to the jurisdiction of the United States,” with ByteDance Ltd., TikTok’s parent company, “or its subsidiaries, in which any such company has any interest, as identified by the Secretary of Commerce”
  • The WeChat EO prohibits “any transaction that is related to WeChat by any person, or with respect to any property, subject to the jurisdiction of the United States, with Tencent Holdings Ltd., WeChat’s parent company “or any subsidiary of that entity, as identified by the Secretary of Commerce.”
  • Both Executive Orders will take effect 45 days after issuance of the order (September 20, 2020), by which time the Secretary of Commerce will have identified the transactions subject to the Orders.

Implications

Until the Secretary of Commerce identifies the scope of transactions prohibited by the Executive Orders, the ultimate ramifications of these Orders remain unclear.  However, given what we do know, we have some initial thoughts on how these new prohibitions may play out.  The following are some preliminary answers to the burning questions at the forefront of every American teenager’s (and business person’s) mind.

Q:  Do these Orders ban the use of TikTok or WeChat in the United States?

A:  While the Orders do not necessarily ban the use of TikTok or WeChat itself, the app (or any future software updates) may no longer be available for download in the Google or Apple app stores in the U.S., and U.S. companies may not be able to purchase advertising on the social media platform – effectively (if not explicitly) banning the apps from the United States.

Q:  Will all transactions with ByteDance Ltd. and Tencent Holdings Ltd. (TikTok and WeChat’s parent companies, respectively) be prohibited?

A:  Given the broad language in the Orders, it does appear that U.S. app stores, carriers, or internet service providers (ISPs) will likely not be able to continue carrying the services while TikTok and WeChat are owned by these Chinese entities.  However, it is unlikely that the goal is to prohibit all transactions with these companies as a deterrent or punishment tool – which would essentially amount to designating them as Specially Designated Nationals (SDNs) – the  Orders clearly contemplate some limitations to be imposed on the types of transactions subject to the Order by the Secretary of Commerce.  Furthermore, the national security policy rationale for such restrictions will not be present in all transactions (i.e. if the concern is the ability of Chinese entities to access personal data of U.S. citizens in a manner that could be used against the interests of the United States, then presumably transactions in which ByteDance Ltd. and Tencent Holdings Ltd. do not have access to such data should be permissible.).  So while we do not know exactly what the scope of prohibited transactions will be, it would appear that the goal is to restrict these entities’ access to U.S. data and any transactions that would facilitate or allow such access.

Q:  What does “any property, subject to the jurisdiction of the United States” mean?

A:  Normally, the idea behind such language is to limit the prohibited transactions to those with a clear nexus to the United States: any U.S. person or person within the United States, or involving property within the United States.  It is unlikely that transactions conducted wholly outside the United States by non-U.S. entities would be impacted.  From a policy perspective, it would make sense that the prohibitions be limited to transactions that would facilitate these Chinese entities getting access to U.S.-person data through the use of TikTok and WeChat.

Q:  What about the reported sale of TikTok?

A: There is a chance the restrictions outlined in the TikTok EO will become moot.  Reportedly, Microsoft is in talks with ByteDance to acquire TikTok’s business in the United States and a few other jurisdictions.  If the scope of prohibited transactions are tailored to those involving access to U.S. person data and if a U.S. company can assure that U.S. user-data will be protected, then the national security concerns of continued use of the app would be mitigated.  Unless and until such acquisition takes place, U.S. companies investing in TikTok or utilizing it for advertising such be prepared for the restrictions to take effect.  At this time, there do not appear to be any U.S. buyers in the mix for WeChat.

Q:  The WeChat EO prohibits any transaction that is “related to” WeChat…what does that mean?

A:  The WeChat prohibition is more ambiguous and could have significantly wider impact on U.S. business interests. WeChat is widely used in the United States, particularly by people of Chinese descent, to carry out business transactions, including communicating with, and making mobile payments to, various service providers.  The WeChat EO prohibits “any transaction that is related to WeChat”  with Tencent Holdings Ltd., or any of its subsidiaries.  Unlike TikTok, WeChat’s services extend beyond social media.  While the language of the ban is vague and the prohibited transactions are yet to be determined, it appears likely that using WeChat for these communications and transactions may no longer be legal. It is also unclear if the WeChat prohibition will extend to other businesses tied to Tencent, WeChat’s parent company, including major gaming companies Epic Games (publisher of the popular “Fortnite”), Riot Games (“League of Legends”), and Activision Blizzard, all in which Tencent has substantial ownership interests.  There has been some reporting that a White House official confirmed Tencent’s gaming interest are excluded from the Order as being unrelated to WeChat, but until the Secretary of Commerce specifies the prohibited transactions, the scope of the Order remains uncertain

Bottom Line

Until the Secretary of Commerce issues its list of transactions prohibited under these Executive Orders, the scope and effect of these Orders is conjectural.  This Administration’s all-in posture towards China would suggest that the prohibitions could be broad and severe.  U.S. companies utilizing WeChat or TikTok for business purposes or conducting business with the apps’ owners, should think carefully about ongoing and future transactions.  Of course, there is an election right around the corner and a new Administration may bring significant change to related foreign, trade and technology policy.  Thoughtful planning for a variety of scenarios will enable companies’ to respond appropriately as the restrictions on TikTok and WeChat are crystallized.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.