Piliero Mazza & Pargament, PLLC      Vol. 6, Issue 1     First Quarter 2004

An Update for Federal Contractors and Commercial Businesses



EMPLOYMENTIndustrial Security Clearance Policies and Procedures

GOVERNMENT CONTRACTING - Supreme Court Upholds Rulings Protecting Contracting Preferences for Minorities

SMALL BUSINESS - SBA Releases Proposed Rule on Small Business Subcontracting


Industrial Security Clearance Policies and Procedures

Assume, for a moment, that your company has just completed its first month of work on a new, multimillion dollar government contract and suddenly, one of your key employees calls in sick. He is out for two weeks. While he is on leave, rumors fly around the office that he is in the hospital for a drug overdose. When he returns, you discover that he has received notice that his government security clearance may be revoked. As his employer, what can you expect to happen over the next few months? What are the chances that he will be able to resume his prior work?

Since the 1960s, procedural safeguards have existed to ensure fairness and provide an opportunity for a hearing in the event that a security clearance of a private sector employee has been denied or revoked. In Executive Order 10865, President Eisenhower mandated that regulations address the security of classified information within industry and define the process required for the adjudication of security clearances.

Accordingly, when an employee receives notice that his clearance status is in jeopardy, it comes in the form of a Statement of Reasons that explains why his access to classified information may be denied or revoked. Department of Defense Directive 5220.6 implements Executive Order 10865 and requires that the employee must be given an opportunity to respond in writing. He has the option to attend a hearing and present evidence and witnesses to defend his security clearance. The hearing is conducted by an Administrative Judge within the Defense Office of Hearings and Appeals (DOHA). If the employee chooses, he may be represented by legal counsel and he may cross-examine witnesses or submit interrogatories. After the hearing, he will receive a written notice of the determination. His clearance will be granted or upheld only if it is clearly consistent with the national interest to do so.

In deciding whether a security clearance should be granted or maintained, the Administrative Judge makes a common sense determination based upon a host of factors found in the Adjudicative Guidelines for Determining Eligibility for Access to Classified Information. Some of those factors include:

•   Allegiance to the United States;
•   Foreign influence;
•   Foreign preference;
•   Sexual behavior;
•   Personal conduct;
•   Financial considerations;
•   Alcohol consumption;
•   Drug involvement;
•   Emotional, mental and personality disorders;
•   Criminal conduct;
•   Security violations;
•   Outside activities; and
•   Misuse of information technology systems.

The judge’s discretion is limited, however, by Defense Department guidance and a federal statute, as discussed below.

On August 16, 2000, former Assistant Secretary of Defense, Arthur L. Money, clarified one of the above factors in the Adjudicative Guidelines. In a memorandum to the Secretaries of the Military Departments, among others, he interpreted the guideline on foreign preference to require that an applicant for a security clearance who holds a foreign passport must surrender the foreign passport or obtain official approval for its use. He reasoned that a preference for a foreign passport raises questions about a person’s allegiance.

Congress has set forth four additional factors that would serve to disqualify a person from obtaining or renewing a security clearance, now codified in 10 U.S.C. § 986. A security clearance may not be issued to a person who:

•  Has been convicted of a crime in the United States and sentenced to imprisonment for a term exceeding one year;
•  Unlawfully uses, or is addicted to, a controlled substance;
•  Is mentally incompetent according to an approved mental health professional; or
•  Has been dishonorably discharged or dismissed from the Armed Forces.

The law currently allows the Secretary of Defense or the Secretary of the applicable military department to make an exception for a person convicted and sentenced for a year or for one dishonorably discharged, provided that a meritorious case can be made for that person.

Returning to your hypothetical employee, because hospitalization for a drug overdose is strong evidence of unlawful use of a controlled substance, there is a considerable likelihood that the employee’s clearance will be revoked. However, the employee will likely have a better chance of retaining his clearance if he requests a formal hearing than if he does not. According to a DOHA Chief Administrative Judge, of those who do not request a formal hearing, only 12 percent successfully defend their security clearances. Those who request a formal hearing have a 40 percent win rate at the trial level.

If the employee loses in the initial hearing, he may submit an appeal brief to the Appeal Board within 45 days after the date of the written decision. On appeal, no new evidence may be considered. Therefore, it is in the employee’s best interest to establish a solid record of facts during the initial hearing phase.

Ultimately, the security clearance adjudication process takes place between the employee and DOHA. Understanding the process, however, may help the employer anticipate the outcome.



Supreme Court Upholds Rulings Protecting Contracting Preferences for Minorities

The Supreme Court recently denied certiorari on two cases in which challenges were made to government contracting programs that provided preferences to contractors based on a racial classification. By rejecting to hear these arguments, the Court implicitly reaffirmed that the government is justified in carving out contracting preferences based on race and that governmental entities have a degree of discretion when creating such opportunities, as long as the government can make the requisite finding that racial discrimination exists and that the programs are narrowly tailored to remedy the problem.

In Concrete Works of Colorado, Inc. v. City and County of Denver, 321 F.3d 950 (10th Cir. 2003), the appeals court held that the city of Denver had a compelling interest in eliminating racial and gender discrimination in the city’s construction industry and that the city ordinance seeking to remedy the past discrimination was narrowly tailored to meet its goal. The Supreme Court denied Concrete Works’ petition on November 17, 2003. However, in a lengthy dissent to the denial, Justices Rehnquist and Scalia offered a glimpse of their continued opposition to how certain courts are applying the law in regard to contracting preferences. Justice Scalia noted that Denver failed to demonstrate that the city’s program properly attempts to remedy an identified practice of discrimination. Further, he asserted that without proof of discrimination, a race-based ordinance to achieve parity in the construction business is unconstitutional.

Justice Scalia based much of his dissent on the Court’s holding in Richmond v. J.A. Croson Co., 488 U.S. 469 (1989). In Croson, the Court invalidated the city of Richmond’s set-aside program for public contracting because the city had failed to demonstrate a compelling interest for giving such preferences on the basis of race. Similarly, in the Denver case, the city set annual goals for the participation of minority business enterprises (MBEs) and women-owed businesses in city contracting. Under the ordinance, if a firm could not certify that it was a victim of past discrimination, there would be a presumption that the firm was a victim of discrimination if it participated in the city’s construction industry before a certain date. Justice Scalia criticized Denver’s presumption of past discrimination because the city produced little statistical evidence to actually back-up its assertion. He said that evidence of some racial discrimination is not enough to justify the program; rather, the city must demonstrate through evidence that racial discrimination was so pervasive that it is reasonable to presume that it affected minority-owned construction companies. Justice Scalia contended that without such a showing of pervasive discrimination, the city’s program is a "sham."

The dissent also discussed Adarand Constructors, Inc. v. Pena, 515 U.S. 200 (1995), referring to the Court’s equal protection analysis in the context of racial classifications in government contracting. Justice Scalia said that the appeals court was in error because the burden of proving the discrimination is on the government. In his criticism of the Tenth Circuit’s ruling, Justice Scalia said that they sustained a lower threshold for proving discrimination, only requiring the city to demonstrate that there may have been racial discrimination.

The dissent asserts the government must show with some specificity that discrimination existed before they can offer race conscious relief. Further, the dissent says that the Tenth Circuit put an almost impossible burden on the plaintiff to challenge such an ordinance. Essentially, Justice Scalia argued that to have a presumption of past discrimination, the city must offer more convincing statistical evidence and without such evidence the presumption is nothing more than an unfounded racial classification.

The dissent in the Denver case demonstrates that there is an identifiable division on the Court when it comes to race-based contracting preferences, and a change in the Court’s composition could impact future rulings on similar matters. However, the Supreme Court’s refusal to hear this case confirms that the government can make such classifications within the boundaries set byAdarand.

On December 15, 2003, the Supreme Court also denied a petition to hear an appeal from the D.C. Court of Appeal’s ruling in American Federation of Government Employees v. U.S., 330 F.3d 513 (2003), holding that rational basis review, not strict scrutiny, was the proper standard to determine whether a contracting provision granting preferences to Native American-owned firms violated equal protection under the law. In holding Section 8014 of the Defense Appropriations Act for fiscal year 2000 valid, the Court noted that Congress has broad authority to regulate commerce with Indian tribes. The Court reasoned that when Congress seeks to regulate commerce with the tribes, it necessarily must engage in racial classifications.



SBA Releases Proposed Rule on Small Business Subcontracting

The Small Business Administration recently released a proposed rule that would amend SBA’s regulations governing small business subcontracting. The subcontracting proposed rule was prompted by public comments received by SBA in response to its proposed rule on contract bundling which has since been finalized. The proposed rule on subcontracting lists numerous factors to be considered in evaluating a prime contractor’s performance and good-faith efforts to achieve its small business requirements under asubcontracting plan. The proposed rule also seeks to authorize the use of goals as a factor in source selection when placing orders pursuant to the Federal Supply Schedule (FSS) and other government-wide acquisition (GWACs) and multi-agency (MACs) contracts.

Under the Small Business Act, large businesses awarded federal prime contracts in excess of $500,000 ($1,000,000 for the construction of a public facility) are required to submit a subcontracting plan to the agency. The plan includes information and goals regarding the maximum practicable use of small businesses as subcontractors. Contractors are supposed to make a "good faith" effort to meet their goals. Evaluations of a prime contractor’s "good faith" efforts are important because contracting officers may refer to them when making a past performance evaluation. The proposed rule sets forth some examples of conduct that contracting officers can use to assess a prime’s effort to comply with its subcontracting plan. In addition, the proposed rule specifies the various categories of small businesses, such as women and veteran-owned business and HUBZone firms, that should be provided with subcontracting opportunities to the greatest practicable extent and consistent with the efficient performance of the contract.The proposed rule would require that evidence of "good-faith" efforts by a prime contractor include documentation that the contractor attempted to achieve its subcontracting plan pursuant to certain proposed regulatory provisions. Such efforts may include:

•   Breaking out contract work items into economically feasible units to facilitate the use of small businesses;
•   Conducting market research to identify small business subcontractors;
•   Soliciting small business concerns as early as possible;
•   Negotiating with small businesses;
•   Directing small businesses that need assistance; and
•   Assisting in the development of small business concerns.

Also, firms may submit evidence that on contracts of similar size and scope, other contractors did not achieve or exceed the goals stated in their subcontracting plan.

The SBA’s Office of Advocacy (Advocacy) filed a noteworthy comment on the proposed rule. In its comment, Advocacy pointed out that the proposed rule may have unintended adverse consequences on small business prime contractors. Advocacy expressed this concern because the proposed rule does not differentiate between large and small business prime contractors, it simply refers to all businesses performing prime contracts.

Advocacy believes that the rule, if implemented, would impose administrative costs and compliance burdens on small businesses, a residual effect of the rule not likely to be realized by larger prime contractors. Also, the comment points out that the factors included in the regulatory amendments proposed by SBA for judging a prime contractor’s "good-faithed" efforts appear to be more than just recommendations. Advocacy suggests they constitute new requirements. Advocacy contends that it does not make sense to make small business prime contractors demonstrate such efforts because the award itself represents an effort to utilize small businesses to the greatest practicable extent.

The proposed rule also seeks to increase the pre-award notification threshold for when prime contractors must provide written notification to unsuccessful small business offerors from $10,000 to $100,000. This increase conforms to the simplified acquisition threshold. SBA would also establish procedures for conducting more comprehensive compliance reviews. Under the proposed rule, an ordering agency that anticipates placing an order or entering into a blanket purchase agreement against a FSS, GWAC or multi-agency contract can evaluate subcontracting as an important factor in its source selection process. Specifically, the agency can consider the subcontracting to be performed on the requirement, the goals negotiated in the commercial plan, or the contractor’s past performance in meeting subcontracting goals in previous contracts.

Comments on the proposed rule were due on December 19, 2003. In its comments, Advocacy urged SBA to re-examine the economic impact and paperwork burdens that would be imposed on small business prime contractors. We will report further on this matter as it moves through SBA’s regulatory process.


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