Practical Impact on Government Contractors – Publications

The U.S. Supreme Court on June 28 overturned long-standing precedents and expanded the ability of government contractors to challenge agencies’ interpretation and application of certain laws. Loper Bright Enterprises v. Raimondo AND Relentless vs. Department of Commerce (Loper Bright)The court overturned the 40-year sentence Chevron doctrine and held that courts can no longer rely on an agency’s interpretation of an ambiguous statute. Instead, courts must use their own judgment to evaluate an agency’s interpretation of the statute, employing the usual tools of statutory interpretation, such as considering plain language and congressional intent.

By invalidation ChevronThe Supreme Court has created new opportunities for government contractors to challenge agency regulations. Loper Light provides government contractors with the opportunity to raise new or improved arguments at all stages of the rulemaking process to support or oppose agency interpretations. The decision may also enable new proactive challenges to existing agency regulations, such as FAR clauses or agency supplements to the FAR.

Functional tombstone for Chevron Respect

Agencies routinely promulgate regulations to implement federal statutes. For example, each year the National Defense Authorization Act (NDAA) contains policy and procurement directives that the Department of Defense and other federal agencies implement through rulemaking. Congress also authorizes regulation of government contractors by directing the Federal Acquisition Regulatory Council (FAR Council) to implement or change government procurement regulations. The FAR Council currently has more than 50 open rulemaking actions.

For over 40 years, the Supreme Court’s ruling on the case Chevron generally required courts to defer to agencies’ permissible interpretations of ambiguities in the statute when taking regulatory actions and deciding cases. Chevron ruled that judicial deference was appropriate because the agencies had expertise that the courts lacked. Because Chevron To maintain deference, government contractors had to meet a high bar to challenge agency interpretations—they had to prove that the agency had adopted an unreasonable or impermissible interpretation of the statute or otherwise breached some procedural obligation under the rule.

IN Loper LightThe Supreme Court “placed a tombstone on Chevron “no one can miss.” (Justice Gorsuch concurred.) The court held that under the Administrative Procedure Act, courts must exercise their independent discretion in deciding whether an agency has properly interpreted the statute. Courts may consider the agency’s views in making that determination, but they cannot rely on the agency’s interpretation. We provide additional analysis Loper Light decision in our LawFlash of June 30.

Creation of public procurement regulations

Two recent examples of government contracting regulations show how Loper LightRejection by Chevron can be of great importance to contractors.

TikTok ban

The No TikTok on Government Devices Act (TikTok Ban) requires agencies to ban TikTok from government devices. It directs the executive branch to “develop standards and guidelines for executive branch agencies requiring the removal of any covered applications from information technology.” The Act defines the terms “covered application” and “information technology,” and the FAR Board adopted those definitions in its temporary rule prescribing the Federal Acquisition Regulation (FAR) clause implementing the TikTok ban, FAR 52.204-27 – ByteDance Covered Application Ban.

However, many government contractors believe that these definitions are ambiguous and have requested clarification in the final version of the regulations. Because Loper LightIf the FAR Council develops these definitions, its interpretation will not be final and may depend on court interpretation as to the best meaning of the relevant statutory language.

Semiconductor ban

The Fiscal Year 2023 NDAA directs the Department of Defense to prohibit the purchase of semiconductors from certain Chinese companies, as well as electrical components and products that use electronic components or contain semiconductors when used in certain critical systems. The FAR Council took the first steps to implement this ban by publishing an advance notice of proposed rulemaking.

In our May 20, 2024 LawFlash, we discussed how the implementing regulations and the FAR Board’s actions leave many questions open about how this semiconductor ban will affect the industry. As with the TikTok ban, Loper Light opens the possibility that the FAR Council’s implementation of the semiconductor ban, including what qualifies as “use” of a prohibited semiconductor in a covered part and what qualifies as a “critical system,” could be challenged. The analysis is no longer whether the agency adopted a permissible or reasonable position; rather, the court must determine whether the agency adopted a correct interpretation.

Post-Chevron Landscape

Next Loper Lightagencies will undoubtedly argue that their interpretations reflect the “best meaning” of the statute. Still, agencies can take steps to avoid litigation over their interpretations and may choose NO promulgating regulations interpreting ambiguous statutory language, even if such interpretations might provide clarification to industry. In the context of FAR rulemaking, this approach could mean that ambiguous statutory language could more often find its way into FAR clauses and then into contracts. As a result, contractors could find themselves having to interpret those terms without the potential benefit of formal agency clarification.

The increased prospect of judicial review also increases the likelihood of uncertainty for government contractors. Historically, after the FAR Council issues a final rule, contractors have moved to meet their compliance obligations, sometimes seeking waivers if compliance could not be achieved in the short term. After Loper Lightcontractors will need to track whether the regulations have been challenged and, if so, whether those regulations have been subject to a court order while the litigation is ongoing. If the FAR rulemaking is subject to a court order, contractors will need to consider whether an earlier version of the FAR rulemaking that was enacted before the challenged rulemaking applies to their contract, or whether the applicable FAR rule does not apply at all while the litigation is ongoing.

We continue to monitor ongoing changes as the courts implement them. Loper Light decision. In the meantime, contractors should closely monitor the FAR Council’s rulemaking to assess whether any agency interpretations of the statutes may warrant challenge under the new approach to reviewing agency actions under Loper Light decision. Morgan Lewis attorneys are prepared to help contractors respond to this new landscape by reviewing agency rulemaking activities, assessing the applicability of FAR clauses, and advising on potential rulemaking challenges.