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Stretching the Limits of FAR OCI Rules

By Alan Chvotkin on June 6, 2022.

The Federal Acquisition Regulation (FAR) has included coverage on organizational conflicts of interest (OCI) since its inception. Today, an OCI is defined in FAR 2.101 by three prongs: a situation where (1) “because of other activities or relationships with other persons, a person is unable or potentially unable to render impartial assistance or advice to the Government,” or (2) “the person’s objectivity in performing the contract work is or might be otherwise impaired,” or (3) “a person has an unfair competitive advantage.” The first prong of this definition requires that the agency define the nature of the activities or relationship that will impinge on the performance required by the instant (or group of) contract(s). It is only this first prong of the definition that is the subject of this commentary.

FAR coverage

Several pages of coverage in FAR Subpart 9.5 outline the general rules and procedures for agencies to identify, evaluate and resolve an OCI. However, while FAR 9.5 addresses creating solicitation provisions and contract clauses to highlight and address potential issues appropriate to the nature of the actual or perceived OCI, the FAR has never, appropriately in my view, had a standard (FAR Part 52) solicitation provision or contract clause because the nature of the OCI is dependent on the facts and circumstances of each agency procurement. When a buying agency is concerned about a potential conflict of interest, it is required to tailor a specific solicitation and contract clause appropriate to the work at hand.

Thus, FAR 9.507-1 (relating to solicitation provisions) and FAR 9.507-2 (relating to contract clauses) put the responsibility on the buying agency to identify what work called for under the current solicitation (and resulting contract) would give rise to a current or future (but never a past) conflict of interest. It is only after the agency has made that identification can the solicitation then require a bidding contractor to identify whether their “other activities or relationships” preclude the bidder from rendering impartial assistance or advice and, if desired by the agency, to propose a mitigation/avoidance plan for such potential conflict of interest. If the contractor does have an OCI that cannot be mitigated or avoided, the government may choose to waive the identified conflict.

FAR 9.508 provides eight non-exclusive examples of situations in which questions concerning OCI may arise “to help the contracting officer apply the general rules to individual contract situations.” There is an extensive litany of Government Accountability Office (GAO) decisions interpreting and applying the FAR OCI provisions. Many of the early GAO decisions addressed the contours of the three prongs in the definition. More recently, many of these GAO OCI cases properly focused on the buying agency’s behavior. If the agency had a concern about a potential OCI, did the agency follow the dictate of FAR 9-507-1 and “invite offerors’ attention to this concern?” Did the agency state the nature of the potential conflict as seen by the contracting officer? Did the agency state the nature of the proposed restraint on future contractor activities? If presented with a mitigation plan from an offeror, did the agency evaluate that plan? If the agency evaluated the plan, and the offeror was the successful offeror, did the agency incorporate the mitigation plan into the resultant contract and monitor compliance with it?

There have been very few regulatory initiatives to further address these matters in the FAR. The most significant was a FAR proposed rule, published on April 26, 2011 (eleven years ago!); in it, DoD, GSA, and NASA proposed to amend the FAR to revise regulatory coverage on organizational conflicts of interest (OCI) and provide additional coverage regarding contractor access to nonpublic information. But on March 19, 2022, the FAR Council withdrew the proposed rule without further action.[1]

Pending Legislation

The application of the OCI rules is also highlighted in pending legislation. On March 23, 2022, four United States Senators – two Democrats and two Republicans – introduced S. 3905, the “Preventing Organizational Conflicts of Interest in Federal Acquisition Act.”[2] The legislation was introduced “to help identify and mitigate potential conflicts of interest between taxpayer-funded projects and government contractors’ other business opportunities,” the sponsors said in a March 28, 2022 press release.[3]  One of the concerns behind the legislation was the “danger that conflicts of interest can pose in government contracting, such as when the consulting firm McKinsey worked for opioid manufacturers at the same time it was working for the FDA (Food and Drug Administration) on opioid-related projects,” according to Senator Charles Grassley (R-IA), a cosponsor of the bill. On May 27, 2022, an identical bill was introduced in the U.S. House of Representatives by Congresswoman Carolyn Maloney (D-NY), chair of the House Oversight Committee;[4] there has been no further action on this House legislation.

The Senate bill was amended and approved by the Senate Homeland Security and Governmental Affairs at its business meeting on May 25, 2022;[5] the amended version is an improvement over the introduced version although it is still vague on the outcomes to be achieved. It is awaiting future action by the United States Senate and additional amendments to the committee-reported are likely to be offered; one such amendment may be offered by Senator Hassan (D-NH) relating to company compliance actions and penalties for non-compliance, as she previewed during the committee markup.

In addition, on April 13, 2022, the House Oversight Committee released a 52-page interim majority staff report titled “The Firm and the FDA: McKinsey & Company’s Conflicts of Interest at the Heart of the Opioid Epidemic.”[6] The report asserts that “McKinsey had significant and long-running conflicts of interest due to its overlapping and conflicting work for FDA and opioid manufacturers,”[7] and that McKinsey’s conduct raises significant questions about the lack of regulation over consulting companies that advise both the federal government and private sector clients.”[8]  The report addresses the FAR provisions on OCI, and acknowledges that the FDA included a generic OCI clause in many of the McKinsey contracts,[9] but faulted McKinsey for failing to make disclosures to the FDA regarding these “conflicting activities.”

So What?

Appropriately, the FAR has placed the initial responsibility on the buying activity and its purchasing contracting officer to identify what areas of contractor activity would give rise to the agency’s concern about an organizational conflict of interest. Once the contractor responds to that concern, it is incumbent on the agency to evaluate the risk and offered mitigation factors before making a source selection decision. Suggestions that agencies skip that first step – or shift the responsibility to future offerors or to current contractors to speculate on whether its actions do, or should, raise a concern with an agency – create untenable positions for both agencies and contractors.

Improvements can certainly be made in the current FAR coverage. For example, the acquisition community would benefit from updated FAR OCI examples based on what the government now buys (e.g. solutions, not simply products or services) and how the government now buys (e.g. through multiple-award IDIQ contracts). But before launching into unchartered territory, it is worth Congress and the FAR principals, including the Office of Federal Procurement Policy, engage contracting agencies, contractor representatives, and the legal community in a robust discussion of the FAR’s current and future OCI policy and practice.

 

***** an “excerpt” was published by Executive Mosaic*****

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[1]Federal Acquisition Regulation Case 2011-001, “Withdrawal of Organizational Conflicts of Interest,” March 19, 2022, available at https://www.govinfo.gov/content/pkg/FR-2021-03-19/pdf/2021-05658.pdf (concluding that “given the amount of time that has passed since publication of the proposed rule, and potential changed circumstances, a decision has been made not to proceed with finalization of the FAR rule”).

[2] S. 3905, introduced March 23, 2022, available at https://www.congress.gov/117/bills/s3905/BILLS-117s3905is.pdf.

[3] See press release from the Senate Homeland Security and Governmental Affairs Committee, March 28, 2022, available at https://www.hsgac.senate.gov/media/majority-media/peters-grassley-hassan-and-ernst-introduce-bipartisan-legislation-to-prevent-conflicts-of-interest-in-federal-contracting.

[4] HR 7602, introduced April 27, 2022, available at https://www.congress.gov/117/bills/hr7602/BILLS-117hr7602ih.pdf.

[5] See press release from the Senate Homeland Security and Governmental Affairs Committee, May 25, 2022, available at  https://www.hsgac.senate.gov/media/majority-media/peters-grassley-hassan-and-ernst-bipartisan-legislation-to-prevent-conflicts-of-interest-in-federal-contracting-advances-in-senate.

[6] See Majority Interim Staff Report by House Committee on Oversight and Reform  (“Majority Interim Staff Report”), available at  https://oversight.house.gov/sites/democrats.oversight.house.gov/files/2022-04-13.McKinsey%20Opioid%20Conflicts%20Majority%20Staff%20Report%20FINAL.pdf.

[7] Majority Interim Staff Report at 52

[8] Majority Interim Staff Report at 53

[9] Majority Interim Staff Report at 34-36

As Desperation Sets In, Biden Invokes Defense Production Act to Address Baby Formula Crisis

By Andrew Victor, Haaleh Katouzian, Madison Plummer

On May 18, 2022, President Biden invoked the Defense Production Act of 1950 (the DPA) to alleviate the baby formula shortage.

Biden’s Memorandum, addressed to the Secretary of Health and Human Services (HHS), stated that the “disruption threatens the continued functioning of the national infant formula supply chain, undermining critical infrastructure that is essential to the national defense, including to national public health or safety.”  Thus, to ensure a continued supply of formula, the HHS Secretary, in consultation with other cabinet and agency heads, may prioritize and allocate “all ingredients necessary to manufacture infant formula, including controlling the distribution of such materials . . . in the civilian market[.]”

The DPA, as amended, gives the President broad authority to influence domestic industries in the interest of national security.  Importantly, the President can mandate that persons and corporations (1) accept prioritized contracts; and (2) follow the President’s allocation of materials, services, and facilities.  50 U.S.C. § 4511(a); Defense Production Act of 1950, Section 101(a) (emphasis added).  Stated differently, the President can invoke the DPA to “prioritize government contracts for goods and services over competing customers, and offer incentives within the domestic market to enhance the production and supply of critical materials and technologies when necessary for national defense.”[i]

Most recently, the President invoked the DPA to address medical supply chain issues related to COVID-19.  Agencies used DPA authorities to 1) prioritize contracts for critical materials, such as COVID-19 vaccines, 2) fund projects for the expansion of domestic supply production, and 3) promote public-private partnerships.[ii]  In response, private companies found DPA awards provided “timely access to raw materials and supplies and helped them expand production faster than they could have on their own.”

With the DPA being utilized for more than the traditional defense context, government contractors should become familiar with this law as its use expands to different industries.  When working with federal agency partners, contractors should understand policies and procedures related to the DPA.  Additionally, contractors should consider how they can compete for DPA awards as these contracts offer not only monetary allocations, but also business development and growth opportunities.

If you have any questions or need any additional information, please do not hesitate to contact the authors.

Authors:  Andrew Victor, Haaleh Katouzian, Madison Plummer

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Reference

[i] Heidi M. Peters & Michael H. Cecire, Cong. Research Serv., R43767, The Defense Production Act of 1950: History, Authorities, and Considerations for Congress 1 (2022), https://sgp.fas.org/crs/natsec/R43767.pdf.

[ii] U.S. Gov’t Accountability Off., GAO-22-105380, COVID-19: Agencies Are Taking Steps to Improve Future Use of Defense Production Act Authorities (2021), https://www.gao.gov/assets/gao-22-105380.pdf.

Fourth Circuit Grants Rehearing En Banc in $680 Million Allergan FCA Case Dismissed Under Safeco’s Scienter (Knowledge) Standard

By Robert Rhoad, Andy Liu, and Haaleh Katouzian

On May 10, 2022, the Fourth Circuit granted a rehearing en banc for a case decided earlier this year, United States ex rel. Sheldon v. Allergan Sales, LLC.

In 2014, a relator brought a qui tam action against his employer, Forest Laboratories, LLC (Forest), alleging that Forest “engaged in a fraudulent price reporting scheme under the Medicaid Drug Rebate Statute[.]”  The Medicaid Drug Rebate Statute (Rebate Statute) requires a drug manufacturer to report its “Best Price” to the Centers for Medicare & Medicaid Services (CMS) so that CMS can calculate rebates it is owed based on that price.  The relator argued that Forest gave different discounts to different customers on the distribution chain but failed to aggregate those discounts when calculating its Best Price, resulting in the government paying $680 million more than if the discounts were aggregated.

The majority, in a 2-1 decision, included the following as an example of the allegation: “on one covered drug, [the relator] alleged that in FY2013 Forest gave a 20% discount to a patient’s insurance company and a 10% discount to the same patient’s pharmacy—two different entities on the distribution chain . . . [The relator] alleged that Forest was required to aggregate these discounts, report a Best Price of 70%, and give Medicaid a 30% rebate. Instead, Forest did not aggregate these discounts because they were given to different entities, reported a Best Price of 80% (based on the highest discount given to a single entity), and gave Medicaid a 23.1% rebate . . . [The relator] allege[d] that this led to the federal government paying 6.9% more for this drug than it would have if Forest had accurately reported Best Price.”

Forest moved to dismiss the action, arguing, among other things, that there could be no “knowing violation” of the False Claims Act (FCA) because its interpretation of the Rebate Statute was plausible and objectively reasonable.  The Fourth Circuit agreed.  Because “[t]he FCA defines ‘knowingly’ as including actual knowledge, deliberate ignorance, and reckless disregard” and “Safeco interpreted ‘willfully’ to include both knowledge and recklessness[,]” the Fourth Circuit, reasoned that the Supreme Court’s scienter standard set forth in Safeco Insurance Co. of America v. Burr, 551 U.S. 47 (2007) (“Safeco”) (addressing willfulness/scienter under Fair Credit Reporting Act), applied to the FCA.[1]

The Court concluded that the relator “failed to plead scienter as required by the FCA” because “Forest’s reading of the Rebate Statute was not only objectively reasonable but also the most natural. And Forest was not warned away from its reading by authoritative guidance from CMS.”[2]  The Court held that the defendant’s reading of the statutory text was “the best reading of that text” and that “CMS knew as early as 2006 that manufacturers were not aggregating discounts given to different entities along supply chains” but “never clearly stated that discount aggregation to different entities was required, [so] it did not act with the specificity necessary to warn Forest away from its interpretation.”

The majority made clear that Safeco only applied to legally false claims, such as those in the case before it.  Additionally, the majority stated that Safeco does not “write defendants a blank check.”  The Safeco test still “requires an objectively reasonable reading of the statute”—“and not every objectively reasonable reading will suffice.”  The test also “allows the government to issue authoritative guidance that clarifies its interpretation of the law and so warns defendants away from otherwise reasonable interpretations.”  Thus, “Safeco’s standard duly ensures that defendants must be put on notice before facing liability for allegedly failing to comply with complex legal requirements.”

“If the government wants to hold people liable for violating labyrinthine reporting requirements, it at least needs to indicate a way through the maze.”  The relator’s position, the majority stated, “instead makes sinister actors out of parties who have followed the law in every respect and sought administrative guidance where none was ever provided” and ultimately “takes the FCA a very long step toward a strict liability statute.”  It went on to hold that “[t]he False Claims Act does not assess liability through ambush. Companies must instead knowingly submit a false claim to be liable. And Forest simply did not do so here.”

The dissent strongly disagreed.  The Safeco decision, the dissent reasoned, instead “concerned a narrow issue: the proper interpretation of the Fair Credit Reporting Act’s scienter requirement.”  The dissent stated that the majority’s opinion “effectively neuter[ed] the False Claims Act—the Government’s primary tool for fighting fraud—by eliminating two of its three scienter standards (actual knowledge and deliberate ignorance) and replacing the remaining standard with a test (objective recklessness) that only the dimmest of fraudsters could fail to take advantage of.”

The rehearing of Allergan en banc will be closely watched given the importance of the applicability of Safeco to FCA claims, especially with similar cases moving up toward the Supreme Court.[3]

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[1] The Fourth Circuit, “[i]n adopting this standard, . . . join[ed] each and every circuit that has considered Safeco’s applicability to the FCA.”

[2] This reasoning follows the “two-step analysis as to reckless disregard” identified by Safeco.

[3] See e.g., United States ex rel. Schutte v. SuperValu Inc., 9 F.4th 455 (7th Cir. 2021).  A petition for a writ of certiorari was filed on April 1, 2022.  The question presented is “[w]hether and when a defendant’s contemporaneous subjective understanding or beliefs about the lawfulness of its conduct are relevant to whether it ‘knowingly’ violated the False Claims Act.”  For the petition, see here.

When “Late is Late” and When It Isn’t: GAO and the Court of Federal Claims Issue Decisions Addressing the Contours of Late Proposal Submissions

By Andrew Victor, Haaleh Katouzian, and Madison Plummer

Two recent decisions, one from the Government Accountability Office and another from the Court of Federal Claims demonstrate the deference afforded to agencies in accepting late proposals.

In VERSA Integated Solutions, Inc., the protester submitted a proposal, but the proposal got stuck in the agency’s email quarantine, never reached the contracting officer, and, thus, the protester was never considered for award.  The protester argued that the agency shouldn’t have rejected its proposal because it submitted the proposal before the deadline and the agency had control over it, albeit in quarantine.  GAO denied the protest, stating that it would not relax the late is late rule because doing so would undermine FAR clause 52.212-1, which governed the submission of proposals.

When “Late is Late” and When It Isn’t

This decision comes on the heels of Savantage Financial Services, Inc. v. United States, a bid protest at the Court of Federal Claims.  Like the solicitation in VERSA, the solicitation in Savantage also included FAR 52.212-1.  Here, however, while offerors submitted initial proposals on time, two offerors were late in submitting proposal revisions.  Despite being late, the agency made award to these two late offerors.  The protester argued that the agency should have rejected the revisions, pointing to the late is late rule.  The court rejected this argument, holding that, although the late is late rule is strict, the contracting officer had discretion to waive the deadline for the late proposal revisions, and under that discretion the determination that the revisions were minor, was reasonable.

Ultimately, agency discretion is paramount.  The juxtaposition of these two cases emphasizes, once again, the importance of proper and timely submission of offers, while also underscoring that even the “late is late” rule may bend to the discretion of a contracting officer.

Update: Chvotkin’s Second Interview on Government Contractor Confidence Index Study With ExecutiveBiz

Alan Chvotkin, partner at Nichols Liu LLP and a key member of Executive Mosaic’s GovCon Expert program, recently spoke with ExecutiveBiz regarding the results of the Government Contractor Confidence Index study he recently co-wrote and the current set of growth initiatives for Nichols Liu to drive value for its customers.

“Overall, I thought the results of the survey were extremely positive and useful. My sincere compliments to my co-writer Russell Smith and to OCI Proposal Consultants for conceiving and executing the ‘Government Contractor Confidence Index’ study. I think it shows the continued strength of the federal marketplace and that the confidence by the contractors makes this a good marketplace for business.”

Alan discussed following questions in the interview with ExecutiveBiz:

  1. What can you tell us about Nichols Liu’s recent growth initiatives and how you’re driving value for your customers?

  2. What are your strategic goals for the coming year and any new markets that you’re keeping an eye on in the federal sector?

  3. What can you tell us about the results on the confidence in the federal market and the top priorities for government contractors in cyber, infrastructure and emerging technologies?

  4. How will the pace of policy changes in acquisition regulations continue to accelerate for the rest of 2022 and beyond? What improvements do we need to make?

You can read the full Executive Spotlight interview with Alan Chvotkin here

 

Photo: EPStudio20/Shutterstock

Chvotkin Comments on Appropriations Enactment and Future Proposal Activity

On March 22, 2022., Nichols Liu partner Alan Chvotkin wrote a guest column for the blog published by Organizational Communications, Inc. The article addressed the March 15, 2022 enactment of the full-year appropriations act for the Federal government for Fiscal Year 2022 and the impact of that legislation on future government contracting proposal activity. This article on full year federal appropriations enactment covers:

  • A Few High Points
  • When does the Funding Flow?
  • Programs Awaiting Funding
  • Appropriations for FY 2023
  • Path Forward

This $1.5 trillion, 2,741-page Federal Appropriations enactment provides a 6.7 percent increase over the President’s budget request for non-defense agencies and a 5.6 percent increase for defense activities.

This enactment of the full-year appropriations is a welcome development – and beats the alternatives of a shutdown or a full-year CR. But agencies have a lot of work to do to take advantage of the funding Congress has made available. Contractors also have to be ready to respond rapidly to the flood of expected opportunities to come.

Read full article here

About the Author: Alan Chvotkin is a partner in a leading federal contracts law firm Nichols Liu LLP.  He is the former executive vice president and counsel for the Professional Services Council (PSC) and a recognized subject-matter expert (SME) in federal procurement.

 

Photo: Tunisia Colors | E+B Education

Chvotkin Co-Authors Government Contractor Confidence Index Study ; Discusses Results on FedNewsRadio

Chvotkin Co-Authors Government Contractor Confidence Index Study

Alan Chvotkin coauthored with Russell Smith, president of proposal support company OCI, a new study that quantifiably measures the overall confidence of federal contractors in the Federal market and the road ahead. The survey also assessed the impact of COVID-19 and the Biden Administration on their business.

Key Areas of the Government Contractor Confidence Index Study includes:

1. The effect of the Biden Administration on business prospects
2. Core growth areas for 2022
3. The level of challenge in finding new personnel
4. The effect of COVID-19 on their businesses

“In the government contracting arena, there has ever been a study that quantifiably measure the overall confidence of the government contracting community,” said Russell Smith, President of OCI Proposal Consulting.

“We found that overall confidence about future business and growth opportunities is high, especially in cybersecurity and infrastructure, Chvotkin noted.

Click here to download the full report.

On March 31, Chvotkin discussed the survey results and related federal market issues with Tom Temin, host of the “Federal Drive with Tom Temin,” on FedNewsRadio. Listen to the full interview below

Update: April 6, 2022, Chvotkin’s Second Interview on Government Contractor Confidence Index Study With ExecutiveBiz

 

 

Photo: EPStudio20/Shutterstock

Federal Acquisition Regulations: A Tidal Wave of Rules Coming in 2022

[fusion_builder_container hundred_percent=”no” equal_height_columns=”no” menu_anchor=”” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” class=”” id=”” background_color=”” background_image=”” background_position=”center center” background_repeat=”no-repeat” fade=”no” background_parallax=”none” parallax_speed=”0.3″ video_mp4=”” video_webm=”” video_ogv=”” video_url=”” video_aspect_ratio=”16:9″ video_loop=”yes” video_mute=”yes” overlay_color=”” video_preview_image=”” border_size=”” border_color=”” border_style=”solid” padding_top=”” padding_bottom=”” padding_left=”” padding_right=””][fusion_builder_row][fusion_builder_column type=”1_1″ layout=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” border_position=”all” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding_top=”” padding_right=”” padding_bottom=”” padding_left=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”small-visibility,medium-visibility,large-visibility” center_content=”no” last=”no” min_height=”” hover_type=”none” link=””][fusion_text]Alan Chvotkin, a partner at Nichols Liu, has published his most recent article on Federal Acquisition Regulations 2022 as a part of Executive Mosaic’s  GovCon Expert program.

Previously, GovCon Expert Alan Chvotkin provided a review of the federal acquisition regulations issued over the past year. Despite the pandemic, and even with the Inauguration of President Biden and the transition to his new administration, it was still a busy and impactful year for these rules and for the acquisition community.

In his latest piece, Chvotkin offered a preview of the pace and scope of acquisition regulation changes we are likely to see during calendar year 2022. There is a lot on the acquisition regulations plate that could move into proposed and final rules. There is also the parallel process of the use of class deviations that could accelerate the timing of acquisition policy changes affecting contractors.

You can read Alan Chvotkin’s full GovCon Expert article : Here

Please refer : 2021 Federal Acquisition Regs Year-in-Review[/fusion_text][/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]

Will the ransomware surge impact Biden’s cyber EO?

FCW interview featuring Alan Chvotkin

July 09, 2021

As ransomware attacks increase in size and scope, officials say no one is safe: the public and private sector are both vulnerable to — and seen as major targets for — multi-pronged cyber attacks that can snarl an entire agency’s operations or shut down a global corporation until a ransom is paid or systems are restored from secure and uncompromised backups (if such backups exist). Meanwhile, the White House has sought to get ahead of these attacks by issuing a cybersecurity executive order featuring aggressive deadlines and sweeping reforms to current federal cyber policy.

If the federal government, its contractors and American businesses writ-large have a fighting chance against these increasingly sophisticated attacks, success will require collaboration, organization and new investments in technology and staffing, according to Alan Chvotkin, a partner at Nichols Liu LLP and the former executive vice president and counsel of the Professional Services Council.

Chvotkin spoke to FCW in a recent interview about the latest ransomware attack, and what federal officials can do to meet the moment and prevent similar attacks against government agencies. The following conversation has been lightly edited and condensed for clarity.

Read More

Reference : FCW

Disclaimer

The information provided in this blog does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only.  Information on this website may not constitute the most up-to-date legal or other information.  Readers of this website should contact their attorney to obtain advice with respect to any particular legal matter.