Binding Arbitration in Employment Contracts? Not in Some Federal Government Work

Asking new employees to sign arbitration agreements is common in the commercial business world. But it can be a big no-no in government contracting.

In a recent bid protest decision, GAO sustained a protest where a Reston, Virginia company required its proposed key personnel to sign binding arbitration agreements.  In other words, requiring key personnel to arbitrate employment disputes cost the original awardee a $41 million contract.

The problem with doing so, according to the decision in L3 Unidyne, Inc., B-414902 (Oct. 16, 2017), is that it seems to have been contrary to the Fiscal Year 2010 Defense Appropriations Act.

Defense appropriations bills, which are passed by Congress annually, serve the primary purpose of funding the Department of Defense for the upcoming fiscal year. But it is common practice for lawmakers to use the opportunity to introduce a number of policy concerns, or occasionally bizarre pet projects, into a bill that they know will pass.

According to L3 Unidyne, the 2010 Act precludes the expenditure of funds on any federal contract in excess of $1 million, unless the contractor agrees not to enter into a binding arbitration agreement for certain types of employment claims, including discrimination claims under title VII of the Civil Rights Act of 1964. The 2010 requirement has been incorporated into the DFARS, where contracts will contain the clause at DFARS 252.222-7006 (Restrictions on the Use of Mandatory Arbitration Agreements).

The procurement in question sought various services in connection with the Navy’s towed sonar array. The Navy issued the solicitation to holders of the Seaport-e IDIQ contract. The work was to last a maximum of two years. Importantly, the solicitation required offerors to provide letters of intent from proposed key employees.

The Navy received several proposals, only one of which was found technically acceptable, that of Leidos, Inc. of Reston, Virginia. The Navy announced that Leidos had won the award at an evaluated cost of $41.4 million.

One of the unsuccessful offerors, L3 Unidyne, Inc., of Norfolk, Virginia, filed a protest. It argued that Leidos had required key employees to sign arbitration agreements contrary to the 2010 Defense Appropriations Act, and that the Navy failed to evaluate Leidos’ proposal for compliance.

The evidence showed that Leidos had required four proposed key employees to sign arbitration agreements as a condition of employment. Leidos’s submitted letters of intent for the employees included the following language: “All new hires and rehires of Leidos must execute an Arbitration Agreement prior to commencement of employment.”

GAO sustained the protest, holding:

As noted, the record shows that four of Leidos’s key employees were proposed as contingent hires. Each of them executed a letter of intent agreeing to accept employment with Leidos, and each of those letters of intent expressly conditioned the individual’s employment on execution of an arbitration agreement. As the protester correctly notes, there is no evidence in the record to show that the agency ever meaningfully considered whether or not the Leidos proposal complied with the statutory requirements described above in light of the terms of the letters of intent.

GAO added that the Navy “could not properly have considered the Leidos proposal awardable without resolving whether or not the arbitration agreements here violate the statutory prohibition.”

What is unclear from the case is why L3 relied solely on the 2010 appropriations bill, rather than DFARS 252.222-7016 or more recent statutory authority. There are no dates in the opinion, but it is fair to assume that the solicitation came out in 2017, maybe 2016 at the earliest. It is hard to imagine it reaching all the way back to 2010. It is possible, but again unclear from the case, that L3 cited the 2010 bill because that was in effect when the parties received the underlying Seaport-e contract. Regardless, GAO noted that “Although the provision to which the protester refers related to fiscal year 2010 funds, Congress repeatedly has reenacted identical provisions, most recently in the Consolidated Appropriations Act, 2017 . . . .”

Thus, GAO recommended that the Navy go back and “determine as an initial matter whether the Leidos proposal violates the statutory prohibition against requiring individuals to enter into arbitration agreements as a condition of employment.” GAO also recommended that the Navy pay L3 its costs, including attorneys’ fees—which, if this result is any indication, were probably very well-earned.

The L3 Unidyne case is an important reminder to defense contractors that they may be prohibited from requiring employees or independent contractors to sign mandatory arbitration agreements covering certain claims. Contractors would be wise to review their practices, and adjust them if necessary, before the issue comes to light in a bid protest with a contract hanging in the balance.