Regulations Affect Sales Agents, Fees

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Ethics corner

May 2006

By John Stafford and Hannah Brody

Many firms hire employees or engage sales agents to help secure federal government business. Doing this properly requires compliance with ethics rules that bar “improper influence.”

Generally, the government views contingent fee arrangements in sales or marketing contracts contrary to public policy, because of the potential for improper influence. With limited exceptions, contingent fee arrangements not only are barred by statute, but contractors also must affirmatively warrant the absence of any contingent fee arrangement to receive a government contract.

The Federal Acquisition Regulation defines a contingent fee as “any commission, percentage, brokerage or other fee that is contingent upon the success that a person or concern has in securing a government contract.” Case law emphasizes, however, that it is not contingent fees that are precluded per se. Rather, it is the threat of improper influence that may be encouraged by a contingent fee that precludes certain arrangements.

Improper influence is defined as “any influence that induces or tends to induce a government employee or officer to give consideration or to act regarding a government contract on any basis other than the merits of the matter.” Improper influence would include any inducement for a government employee to award a contract for reasons other than merit. Improper influence also has been interpreted to include lobbying activity as defined in the Byrd Amendment and the FAR, which limit use of appropriated funds to sway federal transactions.

The covenant against contingent fees applies to all government solicitations and contracts over the simplified acquisition threshold (now $100,000), except for commercial items. This prohibition does not apply if the contractor maintains a “bona fide” employee or agency for the purpose of securing business. Yet, employees or sales agents otherwise meeting the relevant criteria, lose their “bona fide” status by exerting or proposing to exert improper influence to solicit or obtain a government contract. Another exception is that contingent fee restrictions do not specifically apply to consultants hired by “bona fide” selling agents. Contractors should be careful and not attempt to circumvent the bar by asking consultants to hire third parties to do what “bona fide” agents and employees cannot do.

In evaluating whether the covenant against contingent fees applies to a specific sales agreement, two major considerations arise.

First, is the agreement’s purpose to secure business? Other agreements are not prohibited, and agreements that do not contemplate direct contact with procurement or agency officials should be permissible.

Second, is the agent qualified as “bona fide?” Five factors are considered in making this determination.

• Are fees commensurate with the nature and extent of the services?

• Does the agent have adequate knowledge of the contractor’s operations?

• Has the business relationship been continuous? (An agent hired to obtain a specific government contract is less likely to be considered to be “bona fide.”)

• Is the agent is an established business?

• Is the arrangement limited to obtaining government business?

There is no requirement that the agent be registered as a “sales agent” in states where it does business to qualify as “bona fide” under applicable federal rules.

A determination of “bona fide” employee or agent status is not based on the application of a strict formula, but instead requires careful evaluation of the contract and surrounding facts. For example, does the agent stand to obtain an exorbitant bonus? Is he hired on a part-time or one-time basis? Did the company hire the agent because of claims he or she made regarding relationships with government officials?

In addition, contractors who enter into an otherwise prohibited agreement, but are nevertheless awarded a contract award without the services of an agent — or without benefit of the relationship created by the sales agreement — still may have a problem. Sales based solely on the basis of a product’s merits are not cured if the contract contemplated exertion of improper influence.

Breach of the covenant against contingent fees empowers the procuring agency to annul the contract without liability to the government and to recover any contingent fees paid. The conservative approach advocates against entering into contingent fee arrangements altogether, which may be difficult for small businesses and start-up companies for whom financial considerations often make success fees attractive.

If a contingent fee arrangement is optimal to the business strategy, the consultant, at a minimum, should be required to comply with some code of ethics acceptable to the contractor — with compensation clearly spelled out. Recasting what in fact is a contingent fee as a “bonus” or “success fee” does not legitimize an otherwise illegal fee.

Periodic reports from sales agents and employees should be required, and appropriate executives should be aware of consultant agreement terms and be held personally responsible to oversee these relationships.

Finally, consultants and employee prospects who say they can achieve certain results based on relationships with government officials and the ability to influence their actions should be avoided.

John Stafford and Hannah Brody are attorneys at the international law firm of Greenberg Traurig. The opinions expressed here are solely those of the authors and are not intended to provide legal advice or represent the view of NDIA or the NDIA Ethics Committee.