A powerful but little known weapon in the arsenal of federal regulators is the debarment power, whereby a government prosecutor or regulator from even a single agency can threaten to debar a company under its investigation or prosecution powers from government contracting.   The threat of such banishment from public contracting has been a powerful tool in such cases as the investigation of Tyco International, and pharmaceutical companies regulated by the FDA, to name two examples.

The threat to cut off a company from doing governmental business affects the company far beyond its own dealings with the government.  Even where the company’s own share of government contracting business may be small, a company’s customers may engage in significant government contracting, and they may be under an agreement not to buy from companies who are on the government debarred list.    For pharmaceutical companies, the pervasive presence of the federal government in health care through Medicare, Medicaid, VA, etc. means that debarment is essentially a death sentence.

In practical effect, this gives the company the status of a pariah, with spiraling effects with customers that, out of concern for their own reputations and business opportunities, may choose to cease doing business with any company under such a cloud.

Debarment seems like a sensible enough penalty.  After all, no government should feel it needs to continue to do business with any company that has shown itself guilty of serious unethical or dishonest conduct.   It may well be appropriate for certain companies, particularly those that have breached a public trust by dishonest practices in government contracting.  But who should make such a government-wide decision, and under what process should that decision be made?  The sanction is both imposed and lifted without what we like to call due process of law and can apparently be imposed by regulators looking into business practices outside of government contracting.  The sanction can represent a body blow or even a death knell to a company.    Getting off the debarment list is very difficult, with no procedural safeguards to ensure that a company’s initial listing or retention on the list is merited or deserves to be continued.

This power also grants extraordinary discretion to the executive to affect the fortunes of thousands of employees, shareholders, business partners and prospects of the company under investigation for what may be the misconduct of only a few individuals.   Further, it may be subject to abuse, with the disfavored company being replaced by a company with political or financial ties to the current executive.  Looking at it another way, a company that is a political target with trumped up or exaggerated allegations made against it, can be leveled by the exercise of this power without there ever being an adjudication of guilt or proof of serious misconduct.   Companies under this threat can and do often settle, paying enormous fines to salvage their reputations, keep their stock prices up, and protect their ability to freely trade with others.   Just the threat of such blacklisting can and has led to large wealth transfers to government treasuries and thus raises the specter of unfair abuse of executive powers.