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Monday
Mar202017

U.S. law prohibits contingent fees in government contracts, except to ‘bona fide’ agents

There is a long-standing debate over the benefits and drawbacks of using intermediaries to generate and retain business.

Numerous FCPA Blog posts have explained how agents and intermediaries can provide vital support to companies looking to break into foreign markets

At the same time, intermediaries may expose companies using them to significant risk by engaging in fraud or corrupt practices, with or without the principal’s knowledge.

In researching the use of agents and intermediaries, we found a long-standing, but lesser-known, provision in the U.S. public procurement system that directly confronts this issue. 

Federal Acquisition Regulation (“FAR”) 52.203-5. Known as the covenant against contingent fees, this contract clause prohibits contractors from engaging an agent to solicit or obtain a government contract in exchange for a contingent fee.

The historical basis for the covenant extends back more than 150 years to the U.S. Supreme Court case of Providence Tool Co. v. Norris. Decided in 1864, the Supreme Court held that contingent-fee agreements with agents, by their very nature, “suggest the use of sinister and corrupt means” and should be “uniformly declared invalid.” 

When the covenant was first implemented in 1918, President Woodrow Wilson acknowledged that a blanket ban on the use of agents would substantially interfere in ordinary trade practices. Hence, an exception for “bona fide” agents was added to the covenant.  In theory, “bona fide” agents provide legitimate services and do not propose to exert improper influence, even when hired on a contingent basis. 

But what does “bona fide” really mean? 

The case law and regulatory history surrounding the covenant describe five key factors that should be examined when evaluating whether an arrangement is with a “bona fide” agent:

1.   The agent’s fee should be proportional to the services performed.

2.   The agent should have adequate knowledge of the contractor’s business.

3.   The agent and the contractor should have, or contemplate, a continuing relationship.

4.   The agent is an established or ongoing concern.

5.   An agent that represents the contractor in both government and commercial sales is likely to be considered bona fide (although an agent that works in just government sales is not automatically disqualified).

As we noted in a recent article on this subject, the covenant’s exception for bona fide agents reflects a long-held understanding that an outright ban on the use of agents -- at least in the U.S. procurement market -- would not be in anyone’s best interest:

In essence, the prohibition restricts “how the contract between the parties may be structured in an effort to prevent corrupt practices.” Capital- Keys, LLC v. Ciber, Inc., 875 F. Supp. 2d 59 (D.D.C. 2012). At the same time, the covenant has long attempted to distinguish the influence peddler from genuine intermediaries who can, and often do, provide legitimate services and benefits to potential contractors. Accordingly, the covenant contains an exception that allows contractors to engage “bona fide employee[s] or agenc[ies]” on a contingent basis. FAR 52.203-5(b).  This exception reflects a policy judgment that an outright ban on contingent arrangements would encroach too heavily on common commercial trade practices.

Our main takeaway from researching the covenant against contingent fees is that using agents and intermediaries is not a new phenomenon. The covenant’s history and purpose also demonstrate that certain types of arrangements used to engage agents (specifically, hiring on a contingent basis) may merit greater scrutiny.  As with most things, the devil is in the details. 

______

Collin Swan is Counsel in the World Bank’s Office of Suspension and Debarment and a professorial lecturer in law at The George Washington University Law School. 

Sati Harutyunyan is a government contracts associate at Jenner & Block LLP and a former consultant for the World Bank’s Office of Suspension and Debarment.

The findings, interpretations and conclusions expressed here are those of the authors and do not necessarily reflect the views of Jenner & Block LLP, the World Bank Group, its board of directors or the governments they represent.

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