Infotech and the Law: Contingent fees pose ethics challenge

John Jensen

The ethics scandals that have rumbled through the federal procurement world of late have brought increased attention to numerous statutory restrictions, such as the Procurement Integrity Act, bribery and gratuity statutes, and the Anti-Kickback Act.

One aspect of government contracts ethics that has not yet made the news concerns the statute known as the Covenant Against Contingent Fees. Unlike the activities prohibited by other statutes, the activity central to the covenant, the payment of contingent compensation, is not always intuitively unethical, is not per se illegal, and is not uncommon.

But violations of the statute, whether intentional or innocent, can bring severe adverse consequences.

In 1941, Congress enacted the Covenant Against Contingent Fees to reduce corruption in government contracting and to avoid exorbitant fees from being included in contract prices. The statute provides that all negotiated contracts, except those not greater than $100,000 and those for commercial items, must contain a warranty "that the contractor has employed or retained no person or selling agency to solicit or obtain the contract under an understanding or agreement for a commission, percentage, brokerage, or contingent fee, except a bona fide employee or established commercial or selling agency maintained by him to obtain business."

The murky part of this law is the "bona fide agency" exception. The Federal Acquisition Regulation allows contingent fees to be paid an "established commercial or selling agency" that is "maintained by the contractor for the purpose of securing business" and that neither "exerts nor proposes to exert improper influence to solicit or obtain government contracts nor holds itself out as being able to obtain any government contract or contracts through improper influence."

In determining whether the bona fide agency exception is satisfied, the courts in the past considered six factors, which, although no longer part of the FAR, probably remain relevant. These factors, with some questions to ask yourself, are:

The fee should not be an exorbitant amount. Ask: Is the fee off the charts?

The agency should have adequate knowledge of the contractor's products and business, as well as other qualifications necessary to sell the products or services. Ask: Does the agent only offer access, or does the agent know your products or services?

The contractor and the agency should have a continuing relationship. Ask: Is the agent making only a single sales effort? If so, why?

The agency should be an established selling concern that has existed for a considerable period, or a newly established going concern likely to continue in the future. Ask: What will the agent be doing six months from now?

The agency's business should be conducted in its name and characterized by the customary indicia of the conduct of regular business. Ask: Does your agent have a trade name, an address and a business card?

The fact that an agency represents the contractor in government and commercial sales should receive favorable consideration. Ask: If the agent isn't representing you in the commercial market, too, is there a good reason?

You can hire selling agents of all types, from large consulting operations to former government personnel. All can be perfectly legitimate. But the Covenant Against Contingent Fees requires the contractor to determine whether the agent qualifies as bona fide.

Before entering a contingent fee arrangement, ask: Do we need to structure this on contingent basis? Have I done sufficient due diligence on this selling agent? Does my written contract contain the protections that I need?

John Jensen chairs the government contracts practice at Pillsbury Winthrop Shaw Pittman LLP, McLean, Va. He can be reached at john.jensen@pillsburylaw.com.

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