Government contractors and their counsel must not only be aware of the requirements of the FAR and other applicable statutes and regulations, but also must be attuned to situations in which government contracting intersects with other areas of law. Government contracts lawyers are periodically called upon to provide counseling or represent clients in litigation involving antitrust, tort, intellectual property and even constitutional law issues. In this posting, I will outline some issues that arise in the intersection between government contracts and antitrust. In subsequent postings, I will address other such intersections.
The government contracts market is distinct from commerical markets in a number of dimensions that bear on potential antitrust issues. At least in the context of negotiated procurements, pricing is done by negotiation after submission and certification of the contractor’s cost or pricing data. If the government pays for R&D, it receives unlimited rights in technical data and can use that data to obtain competition for follow-on production contracts. The government also has to power to establish an alternative source for, e.g., weapons systems by insisting on sharing of technology or through “leader-follower” procurements.
Despite these unique aspects of the government contracting market, contractors must be attuned to antitrust issues in a number of areas, most prominently in teaming agreements (.pdf) between competitors. The limited number of cases raising antitrust issues in the context of government contracting have held that, despite the government’s power to control the terms and timing of competition for products that it buys, many of those products are for unique government applications and therefore constitute “single product markets” over which an incumbent contractor can exercies market power. See Northrop Corp. v. McDonnell Douglas Corp., 705 F.2d 1030 (9th Cir. 1983 (teaming for production of F-18 aircraft); American Standard, Inc. v. The Bendix Corp., 487 F.Supp. 265 (WD Mo 1980)(leader-follower for tri-service transponder). Nevertheless, FAR 9.602 recognizes that teaming agreements, even between competitors, “may be desirable from both a Government and industry standpoint” for a number of reasons, including allowing companies to “complement each other’s unique capabilities”–e.g., where one company has developed a particularly useful technology and the other company has robust manufacturing capabilities. Similarly, the DOJ/FTC Antitrust Guidelines (.pdf) for Collaborations Among Competitors recognizes that teaming agreements and joint ventures can provide pro-competitive benefits that outweigh any competitive harm that may result from the collaboration, and generally indicates that a “rule of reason” analysis will be applied to such collaborations. See Northrop, 705 F.2d at 1051-54. However, it is clear that DOD will closely scrutinize competitor collaborations, as it did in breaking up an alliance between two of the leading shipyards in the DD-21 procurement in the late 1990s.
Contractors must also be on their guard for antitrust issues relating to vertical teaming arrangements, such as those between a system integrator and a particular subcontractor or supplier. In 1999, in part in response to the DD-21 problem, Deputy DOD Secretary Jacques Gansler issued a memorandum (.pdf) for secretaries of the Military Departments on “Anticompetitive Teaming.” Focusing on exclusive teaming agreements with subcontractors or suppliers with uniques technologies or capabilities, the Gansler memorandum required heightened scrutiny of such agreements by contracting officers, including use the consent to subcontracting provisions in Subpart 44.2 of the FAR to prevent sole source situations from occurring. The memorandum even proposed adding exclusive teaming agreements with the sole provider of a product or service to the list of antitrust violations in FAR 3.303(c) that must be reported to DOJ for investigation, but DOD backed down on this proposal after receiving industry comment that such a provision would chill legitimate, pro-competitive teaming.