Piliero Mazza &
Pargament, PLLC

Vol. IV, Issue 2
February 1999

An Update for Federal Contractors and Commercial Businesses


SBA Issues
Proposed Rule
on Contract Bundling

Employees with
Is Reassignment

Recent Developments
Concerning the
Restriction of
Competition by
Former Employees



SBA Issues Proposed Rule
on Contract Bundling

On January 13, 1999, the Small Business Administration ("SBA") published a proposed regulation to protect small businesses against contract bundling. The proposed rule is designed to require procuring agencies to carefully evaluate whether contract bundling is appropriate. The proposed rule establishes: (1) definitions for "contract bundling," (2) guidelines for documenting contract bundling decisions; and (3) procedures for the SBA to appeal unnecessary or unjustified bundling actions. The proposed rule also relaxes the affiliation rules for bundled contracts by allowing small businesses to joint venture to compete for bundled contracts. It also requires that procuring agencies issue solicitations for bundled contracts with evaluation factors that are designed to increase the likelihood that subcontract opportunities will be provided to small businesses. Given the threat contract bundling poses to small businesses, the proposed regulation may offer some measure of relief to small businesses which may be adversely impacted by contract bundling actions in the future.

To summarize, the proposed regulation defines a bundled contract as the combination of two or more contracts that previously had been performed by one or more small businesses. The proposed regulation would require that federal officials submit for the SBA’s review any procurement identified as a "bundled contract." If the SBA determines that there was no need or justification for bundling the contracts, the SBA may appeal the decision to the head of the procuring agency.

The proposed regulation also provides that, if the procurement is described in the statement of work as involving the "substantial bundling" of contract requirements, the procuring agency must have a written, more comprehensive justification than if the action simply involved a bundled contract. The SBA must then evaluate the justification and determine whether it truly benefits the government in terms of cost savings, faster acquisition cycles, or better overall terms and conditions. If the procurement does not meet this criteria, the SBA may challenge the contract bundling by filing an appeal with the head of the procuring agency.

The proposed regulation also requires that, before the contract bundling decision is undertaken, the procuring agency conduct market research to determine whether bundling of the requirement is necessary and justified. During the market research phase, the acquisition team should consult with the applicable SBA Procurement Center Representative ("PCR") about its intentions. In addition, procuring agencies would be required to notify small businesses which are performing a contract that is going to be bundled of the agency’s plans at least thirty days prior to the issuance of the solicitation for the bundled or substantially bundled requirement. The notice must also provide the small business with the name, phone number and address of the applicable SBA PCR.

Throughout this process, the procuring agency must document the acquisition strategy that led to the determination that bundling is necessary and justified compared to the benefits that could be derived from awarding separate smaller contracts. According to the proposed regulation, reductions in administrative or personnel costs alone should not be a justification for bundling contract requirements unless the cost savings are expected to be substantial.

The proposed rule also seeks to make it easier for small businesses to compete for bundled contracts. Specifically, the proposed regulation would amend the SBA’s affiliation regulations to exempt from the affiliation rules joint ventures between small business to perform bundled contracts. Under the proposed rule, if firms are small before they enter into a teaming arrangement to perform a bundled procurement, the joint venture relationship will not result in the team being disqualified if each of the businesses is small under the SIC Code assigned to the contract. The exemption from the affiliation rules for bundled contracts would be in addition to the exemption which currently exists for small businesses to joint venture on other small business set-asides which have not been bundled. Additionally, the proposed regulation provides that, for bundled or substantially bundled requirements, procuring agencies must identify as significant evaluation factors: (1) the amount of small business participation contemplated by the offerors; and (2) the offerors’ past performance record attaining small business participation goals.
The proposed regulation does not define what constitutes "substantial bundling." Rather, the SBA has requested comments from the public to address the issue. The SBA has indicated that the definition could reflect a threshold dollar value or a combination of factors such as geographical locations and industrial classifications. The public has until March 15, 1999 to comment on the proposed rule before the agency begins finalizing the regulation. The proposed regulation can be found in the January 13, 1999 Federal Register.

We would be pleased to assist any business that is interested in commenting on the proposed rule.


Accommodating Employees with Disabilities:
Is Reassignment Necessary?

The scope of an employer’s obligation to accommodate an employee’s disability under the American’s With Disabilities Act ("ADA") is often unclear. The ADA was deliberately drafted in vague terms, and courts have been left to fashion guidelines governing the rights and obligations of employers and employees. While the EEOC has issued some guidance on various ADA issues, such as pre-employment inquiries, the issue of "reasonable accommodation" of disabilities remains unsettled.

One issue which is particularly troubling to employers is whether there is some further duty to accommodate employees who clearly cannot perform the functions of their positions with any reasonable accommodation. The text of the ADA specifically states that employers must consider "reassignment to a vacant position" when accommodating a disabled employee. The meaning of this provision remains open to debate. However, a number of federal courts have held that there is an affirmative duty to attempt to reassign such employees to different, even dissimilar positions. These holdings impose considerable burdens on employers.

The federal courts remain split as to the extent to which an employer must consider reassignment as a reasonable accommodation. The Federal Court of Appeals for the Seventh Circuit has broadly defined the duty to reassign. That court has held that an employer must examine the possibility of assigning disabled employees to vacant positions for which they may be qualified when accommodation cannot be made with respect to the employee’s original position. This duty applies even if the vacant position is entirely dissimilar to the position the employee originally held. Moreover, the court has held that it may not suffice merely to leave it to the employee to identify and apply for suitable vacant positions. Rather, the employer may need to make some affirmative effort to match employees with vacant positions.

Understandably, these decisions could create significant burdens for employers, particularly larger employers with multiple facilities and many different types of positions. The decisions have been criticized as "affirmative action" for the disabled. It should be noted, however, that other courts, including the Federal Court of Appeals for the Tenth Circuit, have reached different decisions. Specifically, it has been held that there is no duty to reassign where the employee is not "qualified" for his or her original position. In addition, even those courts that have held that there is a duty to consider reassignment have held that the employer is under no duty to create new positions for the disabled. Only existing vacancies must be considered. In addition, there is no duty to "bump" other employees from their positions in order to accommodate a disabled employee. Furthermore, employers are entitled to enforce existing policies governing lateral transfers or demotions, and need not modify these policies to favor disabled employees.

Given the complex issues and "grey areas" inherit in the reasonable accommodation process, employers should carefully consider reassignment if accommodating employees in their regular positions would impose an undue hardship.

The EEOC has indicated that it will be issuing guidelines on reasonable accommodation in the near future. We will continue to issue updates on this topic as guidance is issued and as the federal courts issue further decisions addressing reasonable accommodation under the ADA.


Recent Developments Concerning the Restriction of Competition by Former Employees

One of the most frequently litigated issues relating to the employment relationship is the extent to which an employer may limit or restrict entirely a former employee’s ability to work for a competitor.  Employers increasingly require certain classes of employees to execute confidentiality agreements.  Additionally, non-competition and non-solicitation agreements are required as a matter of course for employees with significant responsibilities or access to sensitive information.  The enforceability of non-competition and non-solicitation agreements is often disputed, with employees usually arguing that the agreements are overly broad in terms of geographic scope or duration.

Some recent cour decisions have been highly favorable to employers attempting to restrict competition by former employees. The following is a discussion of a recent decision by a federal district court in Maryland enforcing a non-competition agreement with a nationwide scope, as well as recent decisions applying the so-called "inevitability" doctrine. That doctrine holds that competition by employees may be restricted, even in the absence of a non-competition agreement, if their new employment would "inevitably" lead to the disclosure of confidential information.

In the first case, Intelus Corp. v. Barton, a federal district judge in Maryland recently enjoined a former employee from competing with his former employer for six months without regard to geographic limitation. The Intelus case was the first of its kind in Maryland and was one of few cases to enforce a non-competition agreement with an unlimited geographic scope.

The employee in Intelus was an account manager for a company which develops and sells software. The employee was one of the company's most profitable account managers and had strong relationships with the company's clients. The employee was required to sign a confidentiality agreement, a non-disclosue agreement and a non-competition and non-solicitation agreement. The non-competition clause provided that the former employee was prohibited from working for any company which "directly" competed against Intelus.

In successfully moving for an injunction prohibiting the former employee from competing against it, Intelus was able to show that its success was largely dependent on the personal contacts of its account managers. The court noted that Intelus competed for clients on a national basis and observed that "competition unlimited by geography can be expected where the nature of the business concerns computer software and the ability to process information." The court found that a covenant not to compete limited to a narrow geographic area would render the restriction meaningless. The court also noted that the six-month limit of the agreement woiuld not impose an undue hardship on the former employee.

The decision in the Intelus case was based on the particular facts of the case, and involved a balancing of the equities as they applied to the particular parties. Thus, the holding will not be of universal applicability in future cases. Despite the fact specific nature of the case, however, it may be of great value to employers attempting to restrict the activities of their former employees.

As noted above, it may also be possible to restrict competition by former employees even in the absence of a written non-competition agreement. Specifically, courts appear to be increasingly willing to restrict the activities of former employees who had access to confidential information and who signed written confidentiality agreements. Such employees may be restricted from competing against former employers on the grounds that the disclosure of confidential information would be "inevitable" if they were permitted to work for a competitor.

One of the cases applying the "inevitably" doctrine, PepsiCo. Inc. v. Redmond, decided by the Federal Court of Appeals for the Seventh Circuit, restricted a former employee of Pepsi from working in a similar capacity for the manufacturer of Gatorade. The employee had been responsible for sports drinks while working for Pepsi. The court agreed with Pepsi's arguments tha t the employee had been privy to confidential information and trade secrets and that their disclosure would be "inevitable" were the employee permitted to work for Gatorade. The restriction on competition, however, was limited to five months. The employee also was enjoined from disclosing trade secrets of Pepsi.

Some courts applying the "inevitability" doctrine have only barred employees from performing specific classes of duites for their new employers. For example, for mer employees have been permitted to work for new employers in areas where the new employer did not compete against the former employer. In such cases, employees are barred only from performing duties which would directly lead to the use or disclosure of confidential information or trade secrets.

While courts seem increasingly willing to apply the inevitability doctrine, it is far preferable to enforce a written non-competition agreement. Many judges are reluctant to intrude upon the freedom of parties to contract, and may balk at trestricting competition absent a written non-compete agreement. Thus, employers desirous of restricting competition yb new of current employees, particularly those with access to sensitive information or those with significant client contact, should require them to sign enforceable non-competition agreements. We will continue to issue updates on significant developments in this field.


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