Phillips v. Mabus
894 F. Supp. 2d 71, 2012 WL 4476539, 2012 U.S. Dist. LEXIS 141042 (2012)
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Rule of Law:
A government contractor states a plausible claim for de facto debarment in violation of the Fifth Amendment's Due Process Clause when alleging a broad preclusion from future government contracts based on charges implicating the contractor's integrity, even if the contractor has not lost 100% of its government work.
Facts:
- Marine Design Dynamics, Inc. (MDD), a naval architecture firm owned by Sebastian Phillips, derived all its revenue from government contracting, primarily with the U.S. Navy.
- From 2006 to 2011, MDD performed work for the Navy's Operational Logistics Integration Program (OPLOG) as a subcontractor to Computer Sciences Corporation (CSC), and also held a separate prime contract with the Military Sealift Command (MSC).
- Between March and July of 2011, four key MDD employees left the company, allegedly after arranging with OPLOG management to take their work with them.
- A former MDD employee, Michael Mazzocco, allegedly spread false rumors that MDD was double or triple billing the government for its work.
- In April 2011, OPLOG manager Charles Traugh pulled back $700,000 of work previously budgeted for MDD under the CSC contract.
- In a May 2011 meeting, Navy officials Michael Bosworth and Traugh, along with former MDD employees, allegedly decided to eliminate MDD entirely from the OPLOG budget for Fiscal Year 2012, which had previously allocated a minimum of $2.7 million for MDD.
- On July 13, 2011, Bosworth instructed Traugh to cease giving any OPLOG work to MDD, a decision Traugh communicated to Phillips on July 28, 2011.
- When MDD attempted to secure other Navy work, a Navy director stated he had been 'directed by [his] leadership not to be involved with any contract that includes MDD' due to problems 'tracking the money' on its OPLOG work.
Procedural Posture:
- Sebastian Phillips and his company, Marine Design Dynamics, Inc. (MDD), filed suit against several Navy officials and former MDD employees in the U.S. District Court for the District of Columbia.
- Plaintiffs moved for a temporary restraining order and a preliminary injunction against the federal defendants, alleging a de facto debarment from government contracting in violation of their Fifth Amendment due process rights.
- Following a hearing on December 7, 2011, the plaintiffs and federal defendants agreed to a consent preliminary injunction.
- Plaintiffs subsequently filed an Amended Complaint.
- The federal defendants filed a motion to dismiss for lack of jurisdiction and failure to state a claim, or in the alternative, for summary judgment.
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Issue:
Does a government contractor state a plausible claim for de facto debarment in violation of the Fifth Amendment's Due Process Clause by alleging that a government agency systematically precluded it from future work based on rumors of fraudulent billing, even if the contractor retained one pre-existing contract with the agency?
Opinions:
Majority - Emmet G. Sullivan
Yes. A government contractor states a plausible claim for de facto debarment where it alleges a systematic preclusion from future work based on charges of dishonesty, even if it retains a single, pre-existing contract. De facto debarment can be demonstrated either by an agency's statements that it will not award future contracts or by a course of conduct showing the same. Here, MDD alleged both: Navy officials stated MDD would get no future OPLOG work, and a broader directive circulated preventing MDD from obtaining work with other Navy components. The court rejected the government's argument that the renewal of one MSC contract defeated the claim, citing precedent that a contractor need not lose 100% of its work. The key is that the government's actions were aimed at broadly precluding MDD from receiving new contracts. Finally, because the preclusion was based on rumors of fraudulent billing and a 'lack of transparency,' it implicated MDD's liberty interest in its reputation and integrity, triggering due process protections.
Analysis:
This opinion clarifies the pleading standard for de facto debarment, affirming that the claim does not require a complete and total cessation of all government work. It emphasizes that a 'broad preclusion' from future opportunities is sufficient to state a claim, preventing agencies from using the existence of a single, minor, or pre-existing contract as a shield against due process challenges. The decision reinforces that the reputational harm or 'stigma' resulting from accusations of dishonesty is a key component for establishing a protected liberty interest. This provides a clear path for contractors at the motion-to-dismiss stage to survive dismissal by alleging specific instances of lost opportunities and agency statements indicating a widespread, reputation-based blacklisting.
