Franken Amendment

Background

The “Franken Amendment” refers to the provision that Sen. Al Franken of Minnesota originally added to Section 8116 of the Defense Appropriations Act for Fiscal Year (FY) 2010 (Pub. L. No. 111-118). Generally speaking, this provision prohibits certain Department of Defense ("DOD") contractors and subcontractors from requiring or enforcing employees or independent contractors to arbitrate claims arising under Title VII of the Civil Rights Act of 1964 and any tort related to or arising out of sexual assault or harassment. This prohibition was continued in Section 8102 of the DoD and Full-Year Continuing Appropriations Act, 2011 (Pub. L. 112-10) and is expected to be continued in subsequent appropriations acts for the DoD. As a result, the DoD has issued two rules to implement the prohibitions in these Acts.

The Prohibition

The Franken Amendment, as implemented, prohibits departments and agencies of the DoD from using funds appropriated or otherwise made available by the FY 2010 and 2011 defense Appropriations Acts or subsequent DoD appropriations, for any contract (including task or delivery orders and bilateral modifications adding new work) in excess of $1 million, if the contractor requires its employees to arbitrate (1) claims under Title VII of the Civil Rights Act of 1964 (e.g., race, sex, national origin and religious discrimination); or (2) tort claims related to or arising out of sexual assault or harassment, including assault and battery, intentional infliction of emotional distress, false imprisonment, or negligent hiring, supervision or retention (collectively, “covered claims”).

Implementation

To implement the Franken Amendment and similar sections in subsequent appropriation acts, the DoD adopted a new Subpart in the Defense Federal Acquisition Regulation Supplement (“DFARS”), Subpart 222.74 (“Restrictions on the Use of Mandatory Arbitration Agreements (Revised June 29, 2011)”), which sets forth the scope and application of the Franken Amendment restriction and describes the limited basis on which the Secretary of Defense can waive application of that restriction to a particular contract or subcontract. The restriction on the use of mandatory arbitration agreements is incorporated into specific DoD contracts or task or delivery orders through the use of a new contract clause, DFARS 252.222-7006, Restrictions on the Use of Mandatory Arbitration Agreements (DEC 2010).

Restriction Scope

Under the DFARS clause, a contractor’s ability to use mandatory arbitration provisions in employment agreements is restricted in two ways. First, the contractor must agree to not enter into any agreement with an employee or independent contractor that requires, as a condition of employment, that the employee or independent contractor arbitrate a covered claim. Second, the contractor must agree to not enforce any arbitration provision in existing agreements that require the employee or independent contractor to arbitrate covered claims. Note that when this clause is incorporated into a prime contract the restriction applies to all employees or independent contractors of a contractor to whom this rules applies, not just those employees or independent contractors performing work related to the contract containing the DFARS contract clause. However, when this clause is incorporated into a subcontract the restriction applies only to employees or independent contractors of a contractor performing work related to the prime contract containing the DFARS contract clause. This restriction also does not apply to a contractor’s or subcontractor’s agreements with employees or independent contractors that may not be enforced in a court of the U.S.. These restrictions also do not affect the enforcement of other aspects of an agreement that are not related to arbitration of these covered claims. For example, these restrictions, do not prohibit the arbitration of common law claims unrelated to sexual harassment or sexual assault, non-Title VII federal employment law claims, e.g., age or disability claims, most wage claims, contract claims, or employment claims under state statutes. Therefore, contractors can still use agreements that have mandatory arbitration provisions, provided those provisions are carefully tailored to exclude coverage of covered claims.

Covered Contracts

The restriction applies to:

1. any contract (including task or delivery orders and bilateral modifications adding new work) executed after Feb. 17, 2010 (the effective date of the Franken Amendment) and for which in excess of $1 million has been appropriated or otherwise made available by 2010, 2011 and future appropriation acts;

1. any delivery or task order exceeding $1 million regardless of whether the basic indefinite-delivery/indefinite-quantity contract was covered; and

1. a bilateral contract modification adding new work that uses more than $1 million in appropriations.

However, the restriction does not apply to contracts for the acquisition of commercial items, including commercially available off-the-shelf (“COTS”) items.

Definition of “Contractor.”

As clarified by the DoD in its guidance for the final FAR rule issued in December 2010, the term “contractor” as used in DFARS clause refers only to the specific legal entity that has the contract, and does not encompass a parent or subsidiary corporation unless that parent or subsidiary is a party to the contract. Therefore, the restriction on one corporate legal entity will not require compliance by all of that corporation’s parent, subsidiary, or affiliated corporations.

“Flow down” and Certification Requirements

If the DFARS clause is in any of a contractor’s prime contracts, the contractor must also certify that it requires each “covered subcontractor” to agree not to enter into, and not to take any action to enforce, mandatory arbitration agreements requiring arbitration of covered claims by employees or independent contractors performing work related to that contract. As clarified by the DoD in its guidance for the final FAR rule issued in December 2010, the term “subcontract” as used in the DFARS contract clause is “limited to those contracts placed by the contractor or higher-tier subcontractors that are specifically for the furnishing of supplies or services for the performance of the contract, not supplies or services a contractor or higher-tier subcontractor might purchase for other purposes.” Therefore, a prime contractor to which the restriction applies would only need to flow down these restrictions in subcontracts specifically related to the contract (or higher-tier subcontract) containing the restriction on the use of mandatory arbitration agreements. The DFARS clause defines the term “covered subcontractor” as “any entity that has a subcontract valued in excess of $1 million, except a subcontract for the acquisition of commercial items, including commercially available off-the-shelf items.” Accordingly, the certification requirement at the prime contract level necessitates that a contractor subject to DFARS 252.222-7006 include an appropriate “flow down” provision in any subcontract valued at greater than $1 million. In addition, because the DoD has taken the position in the guidance for the final FAR rule issued in December 2010 that the certification applies to compliance by “covered subcontractors” at all tiers, the contractor will need to take steps to ensure that any “covered subcontractor” flows down the same requirement to any “covered subcontractors” of its own.

Waiver Process

The Secretary of Defense may waive applicability to a particular contract or subcontract, if the Secretary or the Deputy Secretary personally determines that the waiver is necessary to avoid harm to national security. Any such waiver determination must set forth the specific grounds for the waiver, state any alternatives considered, and explain why each of the alternatives would not avoid harm to national security interests. The contracting officer submits any requests for a waiver in accordance with agency procedures.

Practical Considerations and Actions

1. Know whether the legal entity out of which you contract has DFARS 252.222-7006 in any single contract. If it is, then the follow the guidance below.

If the clause is in a prime contract, then the restriction applies to all employees of the legal entity, not merely those employees performing work on a contract with the DFARS clause. However, if the clause is only incorporated into a subcontract, then the restriction only applies to those employees working on the subcontract. Therefore, you need to review your employment agreements and agreements for independent contracts and either remove the mandatory arbitration provisions or tailor such provisions so as to exclude coverage of the covered claims from your employment agreements and agreements with independent contractors. An exclusion could be to exclude from the scope of claims covered by inserting the following: “other than claims (a) under Title VII of the Civil Rights Act of 1964; or (b) tort claims related to or arising out of sexual assault or harassment, including assault and battery, intentional infliction of emotional distress, false imprisonment, or negligent hiring, supervision or retention”.

1. If there are mandatory arbitration provisions in existing agreements with employees and independent contractors, then do not enforce the mandatory arbitration provisions to compel arbitration of covered claims.

Put in place procedures to monitor and enforce compliance by covered subcontractors, such as adopting appropriate “flow down” contract clauses to include in subcontracts, or adding certification of compliance with the Franken Amendment to the list of representations and certifications required of subcontractors.