Piliero Mazza & Pargament, PLLC   Vol. 5, Issue 3
Third Quarter 2003

An Update for Federal Contractors and Commercial Businesses

 

    A R T I C L E S

CORPORATE - Trademark Owners Must Act Quickly in Asserting Their Rights


GOVERNMENT CONTRACTING - OMB Issues New Outsourcing Rules

OMB Increases Benchmark Compensation


SMALL BUSINESS - SBA Proposes Annual Recertification for Small Businesses

SBA’s Barreto Seeks Funding for FY 2004


CORPORATE

Trademark Owners Must Act Quickly In Asserting Their Rights

With companies conducting more and more of their advertising on-line, there is a heightened risk that trademarks and service marks will be misused by competitors attempting to capitalize on the goodwill inherent in such marks. For example, one common misuse occurs where a company uses the mark of another in a fashion that suggests that the owner of the mark is affiliated with that company, or is sponsoring that company’s activities. Another common problem occurs where a company uses the mark of another as a “metatag” in order to unfairly attract website visitors through search engine “hits.”

To protect against these and other infringing activities, an increasing number of companies have begun to implement procedures to regularly monitor the use of their trademark over the Internet. It is important that trademark owners recognize, however, that once wrongful conduct is discovered, prompt remedial action must be taken. Otherwise, the owner may leave itself vulnerable to a defense to an infringement claim known as “laches.” 

Laches is an equitable defense that is similar in purpose to the statute of limitations for various legal claims. The defense is based on the premise that “equity aids the vigilant, not those that slumber on their rights.” The impact of a valid defense of laches is to prohibit a plaintiff (i.e., the owner of a mark) from enjoining or complaining about the alleged misuse of its mark by a defendant.

To prove the defense of laches, a defendant must show that a plaintiff had knowledge of the defendant’s use of its mark; that the plaintiff inexcusably delayed in taking action in respect to such use; and that the defendant will be prejudiced if the plaintiff is permitted inequitably to assert its rights. The equitable defense of laches requires a balancing of the equities of the parties and the public, and therefore, the circumstances of each particular case must be reviewed in order to determine whether or not a claim of laches is sufficient to bar relief sought by the trademark owner.

An issue that frequently arises when the defense of laches is raised is the length of the delay that is required in order for the claim to be valid. Unfortunately, there is no definitive guidance on the length of delay that must occur in order to support a valid claim of laches. Rather, courts will evaluate the connection between the length of the delay and the resulting of prejudice to the defendant. In one case, a delay of only thirteen weeks was held by a federal district court to be sufficient to bar the issuance of injunctive relief where, during those thirteen weeks, the defendant spent over $1 million in connection with the use of the mark. Thus, in that instance, the prejudice to the defendant resulting from the delay was great. 

Although there is no established rule on the length of delay that will support a claim of laches, courts have identified a variety of factors that will be considered in examining whether or not a valid defense of laches may be made. These factors include the following: (i) the strength and value of the trademark rights asserted; (ii) the plaintiff’s diligence, or lack thereof, in seeking to enforce its legal rights in the mark; (iii) the harm that will result to the owner if relief is denied; (iv) the extent or harm of prejudice suffered by the alleged infringer as a result of the owner’s delay; and (v) the extent to which the respective uses of the mark are directly competitive or merely related.

In determining whether or not to uphold a defense of laches, a court will also look very closely at the intent of the defendant. Courts are more reluctant to deny injunctive relief to a plaintiff because of delay when it appears that a defendant knowingly and deliberately adopted the mark at issue. Only in exceptional circumstances will injunctive relief be denied under a claim of laches where there is deliberate infringement by a defendant. Therefore, in order for a defendant to raise a valid defensive of laches, it must be able to demonstrate that it acted in good faith and with “unclean hands.” A trademark owner, however, is well-advised not to delay initiation of an infringement action based on this general rule. Whether or not a defendant acted intentionally, deliberately or in bad faith can be difficult to prove. Indeed, trademark infringers do not always act with a conscious intent to confuse and/or deceive the public.

Although laches originated as an “equitable” defense (i.e., a defense that would bar an injunction to enjoin further use of the mark), it also can bar claims for money damages. In applying this defense to claims for money damages, courts have reasoned that proving damages in infringement cases is notoriously difficult and any delay in bringing the question to court can substantially increase those difficulties. In addition, courts have reasoned that it is inequitable for the owner of a mark to delay initiation of an infringement suit for several years while a defendant builds up his business and profits.

Before any delay in instituting suit can be said to constitute laches, a plaintiff must have actually or constructively been placed on notice of the defendant’s activities. Importantly, actual notice is not always required, and imputed notice may suffice to put a plaintiff on notice that its mark is being infringed. Some courts have used the “reasonably prudent person” standard to impute notice to a plaintiff who claims ignorance of a defendant’s activities.

It is an open issue of whether publication over the Internet by an infringer will place an owner on notice of the infringing activity even though the owner has not actually viewed the infringer’s web site. Indeed, it is conceivable that courts may one day impose an obligation on trademark owners to monitor the use of their marks over the Internet. Therefore, companies are well-advised to conduct periodic searches of their trademarks and servicemarks. Once a company is placed on notice of infringing activity, whether that notice is actual or imputed, the company must act promptly to avoid a valid defense of laches. This includes not only prompt submission of a “cease and desist” letter to the alleged infringer, but also the initiation of a civil action where the alleged infringer refuses to discontinue the improper use of the mark.

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SMALL BUSINESS

SBA Proposes Annual Recertification for Small Businesses

In the last edition of the Legal Advisor, we discussed recent administrative activity to address a perceived problem of larger businesses receiving work intended for “small businesses.” The discussion included the Office of Federal Procurement Policy’s proposal to require annual recertification for small businesses participating in government-wide acquisition contracts (GWACs) across four agencies - Commerce, National Aeronautics and Space Administration, National Institute of Health and General Services Administration. This rule followed a policy announced by the GSA last fall that schedule holders will be required to self-certify at the beginning of each option period of their GSA schedule contracts (i.e., every five years).

On April 25, 2003, the Small Business Administration published its own proposed recertification requirements that would require small businesses performing certain types of government contracts to recertify their size and small business status on an annual basis. The proposal would affect contractors performing under the GSA’s Multiple Award Schedule (MAS) Program, including the Federal Supply Schedule (FSS), as well as other multiple award contracts, including GWACs and multi-agency contracts.

According to SBA, the change is being proposed to address the situation where task orders under such contracts are issued to firms that have outgrown the size standard under which the contracts were originally awarded. The proposed rule would also prohibit agencies from claiming credit for awards to small businesses when task orders are issued to a firm that no longer qualifies as a small business.

Under SBA’s current regulations, a company self-certifies as a small business on the date that it submits an initial offer. If the company wins the contract award, it is considered small for the life of the contract, including all orders issued under that contract.

SBA has expressed concern that contracts issued under some multiple award schedules are being extended for up to 10 to 20 years, during which time, a “small business” often far outgrows the size standard.

Under the proposed rule, a business that is small at the time of its initial offer for a MAS or other multiple award contract would be considered small for one year from the date of certification. Thereafter, the firm would be required to recertify its size each subsequent year for the term of the contract. The procuring agency would then publish a list of the recertifications received on the agency’s website or in the Federal Register. Interested parties would be permitted to file protests challenging the size of concerns who have recertified.

In anticipation of small businesses concerns, as well as agency concerns that annual recertification may affect the efficient procurement of goods and services, SBA considered various alternatives.

One alternative would have required that a concern must be “small” as of the date of each order, in addition to being able to self-certify as “small” at the time of award. SBA believed this method would have required size determinations too frequently, thereby leading to further delay of the procurement process.

Another alternative considered by SBA would have required a firm to recertify its status as a small business at the time of any option on the multiple award or schedule contract. SBA expressed concern, however, that this alternative would allow a small business that was purchased by a larger company, to perform the contract until the next option period (i.e., up to five years) without having to change its size status. Accordingly, this recertification requirement was felt by SBA to be too infrequent.

The final option contemplated by SBA, most similar to the proposed rule, would have required annual recertification or notification for a MAS or other multiple award contract only when the firm’s status changed. Instead of requiring all firms to recertify annually, this self-policing option would have limited the number of firms having to recertify with SBA. Ultimately, however, SBA decided that annual recertification for each concern was appropriate.

Ironically, if implemented, the annual recertification requirement could prove to be detrimental to many small businesses. Although the proposed rule is designed to prevent businesses that have grown to be “other than small” from receiving federal contract dollars intended for “small businesses,” it could hinder the natural growth of small businesses by stripping them of contracts during a crucial stage of development. In addition, implementation of the new annual recertification requirements could dissuade agencies concerned with procurement efficiency from including small businesses in multiple award contracts out of fear that their participation in pomtetitions for task orders could be cut short. This perception could be particularly problematic for small businesses given the clear trend toward greater use of multiple award contracts.

Thus far, SBA’s proposal has resulted in considerable debate regarding its fairness. These debates will only increase as SBA considers the comments received on the proposal. At the request of several of our clients, our firm has organized a coalition of small businesses to present their views on the proposed rule. If your business is interested in participating in the coalition, we invite you to contact Pam Mazza or Tony Franco at (202) 857-1000.

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GOVERNMENT CONTRACTING

OMB Issues New Outsourcing Rules

On May 29, 2003, the Office of Management and Budget (OMB) issued the final revisions to OMB Circular A-76, which sets forth the procedure for outsourcing government services. The changes have received general support from federal service contractors. Some of the more significant changes are summarized below.

1. Direct Conversion - OMB has eliminated direct conversions from the Circular, reasoning that the practice conflicts with the goal of increasing competition. Direct conversions do, however, remain available to DOD agencies under Section 8014 of the Department of Defense Appropriation Act.

2. Revisions to the Streamlined Process and Elimination of 10% Price Differential  - Recognizing the flexibility that direct conversions offer government agencies, OMB has streamlined competitive procedures for commercial activities performed by 65 or fewer full time employees. In this regard, OMB eliminated the 10 percent price differential, which required an offer from a non-incumbent provider to be increased by 10 percent for purposes of comparison with the government’s price. Second, to further OMB’s overall goal of creating equality between the private and public sectors, the revised circular requires that separate individuals within an agency calculate the costs for public and private sector performance using a standardized form.

Additional changes to the streamlined competition process include:

• a prohibition against contesting award decisions;
• authority for agencies to use multiple award schedules (as is currently provided under the Federal Acquisition Regulation) to obtain proposals; and
• a requirement that an agency publicly announce, in each solicitation, the prior service provider’s name and the “number of government personnel performing the activity.” 

These changes should assist contractors in developing more informed and competitive bids.

3. Agency Research and Justification - The OMB has clarified the general solicitation process for both standard and streamlined competitions. An agency must clearly define the activities to be performed under a solicitation, research the appropriate classification of the activity, and determine the base cost of performance by the incumbent. Additionally, the Circular provides instructions on conducting the solicitation process from start to finish, including determining the cost of public sector versus private sector performance. Agencies are also required to assign a code to all commercial activities that are performed in-house and provide justification for why the work should not be competed. Additionally, contractors may challenge an agency’s classification of a particular commercial activity, thereby subjecting agency actions in this regard to a greater level of scrutiny.

4. Equal Treatment of Public vs. Private  -  The OMB has attempted to place private contractors on a more level playing field by requiring agencies to respond to solicitations within the same time frame as private sector offerors.

In an effort to further eliminate perceived inequities, an agency may also:

• be eliminated from competition for a material deficiency without the entire competition being canceled;
• be subject to recompetition of awarded work under the same time frames as the private sector;
• be re-evaluated before any additional options for work are exercised; and
• undergo an evaluation to ensure that continued performance by the agency is beneficial to the government.

5. Award Timetable  - The OMB has created deadlines by which a contract award determination must be made. For standard competitions, an award decision must be made within 12 months from the time the competition is announced (with the potential for a six-month extension). Also, a 90-day time frame has been implemented for streamlined competitions (with the potential for a 45-day extension). The revisions also require agencies to publicly announce each competition, the award decision and the cancellation of a solicitation.

It is anticipated that the changes in OMB Circular A-76 will enhance competition and help level the playing field for government contractors. The elimination of the 10 percent price differential for cost comparison purposes should make it easier to compete with the incumbent government workforce. The time limitations imposed on the competitive outsourcing process should also decrease the considerable time, expense and uncertainty that have traditionally been associated with A-76 cost comparisons. Also, while it can be a double-edged sword, the inability to challenge cost comparisons under the streamlined procedures should bring finality and greater certainty to the process.

In addition, small businesses may stand a better chance of receiving contracts under the streamlined competition procedure. The limitation on the size of the commercial activities subject to the streamlined competition procedures make more small requirements available to small businesses and 8(a) firms for competition.

Although the new procedures will inevitably lead to new issues and additional questions, there is a general consensus within the federal service contractor industry that the new rules represent a significant step in the right direction.

In a related matter, the General Accounting Office is currently seeking comments about the bid protest procedure as it relates to the public sector. For the private sector, the rules for filing a bid protest are laid out in the Competition in Contracting Act (CICA) of 1984. The Act states that a protest may be filed by an “interested party,” and defines an “interested party” as “an actual or prospective bidder or offeror whose direct economic interest would be affected by the award of the contract.” Because federal employees fail to meet the CICA definition of an “interested party,” they are currently unable to protest A-76 awards. Consequently, GAO is seeking input as to “whether the revisions made to the Circular affect the standing of an in-house entity to file a bid protest … and who would have the representational capacity to file such a protest.” Comments on this GAO proposal are due on or before July 16, 2003. 

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SMALL BUSINESS

SBA’s Barreto Seeks Funding for FY 2004

Administrator Hector V. Barreto addressed the Senate Committee on Small Business and Entrepreneurship Wednesday, June 4, seeking their support for President Bush’s Budget Request and Reauthorization package for the U.S. Small Business Administration (SBA) 2004 Fiscal Year (FY). “President Bush understands the vital role that America’s small businesses play in creating opportunities,” Barreto stated. “He also recognizes that as we look toward economic recovery, small businesses play a leading role.”

The President’s small business agenda, which calls for a broad tax relief, focuses on three strategic goals aimed at creating more jobs: (1) minimizing small businesses’ regulatory burden by providing easily accessible compliance information; (2) working to empower entrepreneurs by providing increased access to capital and information, technical assistance and counseling, as well as procurement opportunities, and (3) continuing to help businesses and families recover from disasters through its disaster assistance program.

The Administration calls for a total FY 2004 appropriation of $797.9 million, a four percent increase from the FY 2002 budget. Barreto assured the committee that these funds will “provide more than $20.8 billion in small business loans, loan guarantees and venture capital.

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GOVERNMENT CONTRACTING

OMB Increases Benchmark Compensation

On May 2, 2003, the Office of Management and Budget (OMB) published a revision to Section 808 of Public Law 105-85, concerning the maximum allowable amount of executive compensation (the benchmark) that can be expensed when performing government contracts. The new amount is $405,273 and is in effect for contracts issued in contractor fiscal year 2003 and for future contracts until revised by OMB.

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