Fastest 5 Minutes: GSA & AI, Anthropic, Bid Protests

Peter Eyre (0:05)

Welcome to the Fastest 5 Minutes, presented by Crowell & Moring. We are your co-hosts for this edition, Peter Eyre and Yuan Zhou, bringing you a bi-weekly summary of significant government contracts' legal and regulatory developments that no government contracts' lawyer or executive should be without.

Welcome to the Fastest 5 Minutes. Thanks for joining us. We have a lot to cover today. We are going to focus on GSA's final clause on large language model procurements, a Hill letter signaling potential investigations into government contractors, the DC Circuit's ruling denying Anthropic's challenge to the supply chain risk determination, the Deputy Secretary of War's new memo proposing changes to government contracts' accounting, and a Federal Circuit decision holding that IDIQ awardees lack standing to protest co-awardees. So let's get into it. Yuan's going to get us started by talking about this new GSA rule on large language models.

Yuan Zhou (1:03)

Thanks so much, Peter. On September 28th, GSA issued the final version of its AI Clause via a class deviation titled Basic Safeguarding of Data Within Large Language Model AI Systems, which becomes effective on October 19th. The clause governs contractor handling of government information that's processed by LLMs and reflects significant changes from the June 2026 proposed version. A few key developments we want to flag here. First, the final clause really narrows the applicability threshold. It now requires that LLM functionality be a material feature of the procurement and that government data be submitted directly to or produced by the LLM with self-deleting permissions for incidental or back office use. The clause also includes expanded IP protections, expressly acknowledging that the government does not acquire ownership in a contractor's pre-existing commercial products or their proprietary technology. And the clause introduces a restructured flowdown framework that's tied to the NIST AI risk management framework and replaces the prior role-based supply chain definitions. And the Crowell team has published a really detailed analysis on our website if you'd like to read more. Peter, back to you.

Peter Eyre (2:19)

Thank you, Yuan. On September 28, the ranking member of the House Permanent Select Committee on Intelligence sent a letter to the president and CEO of the National Defense Industrial Association, requesting that NDIA remind its member companies of their obligation to be responsive to congressional oversight. In that letter, the ranking member expressed concern that the current administration has departed from decades of precedent in its dealing with private sector players, including, for example, by inappropriately fusing government contracting with the extraction of political or private favor. The letter states that the committee may seek documents, communications and transcribed testimony from companies and their executives to understand how contributions may have been solicited and whether there are conflicts of interests or national security implications. So certainly something we've talked about before and just another piece in that puzzle as we watch what happens with the midterms. Back to you, Yuan.

Yuan Zhou (3:19)

So listeners will recall that we previously discussed the Northern District of California's decision permanently enjoining the Pentagon's Supply Chain Risk Designation of Anthropic under 10 USC. Section 3252 We noted at that time that a companion case challenging a separate designation under the Federal Acquisition Supply Chain Security Act, or FASCSA, remains pending in the DC. Circuit. Well, on September 25th, the DC. Circuit ruled, and this time, Anthropic lost. In a 2-to-1 decision, the court adopted a broad reading of the statutory definition of supply chain risk, holding that Anthropic's model training, which embeds restrictions preventing Claude from performing certain tasks, constituted manipulation of cover technology that's sufficient to trigger the statute, even absent hostile or malicious intent. The majority also rejected Anthropic's procedural challenges, finding that the Department of War reasonably concluded that no less intrusive alternative was available, and found that there was no causal link between Anthropic's AI safety advocacy and the determination. While the California injunction continues to block the broader designation under Section 3252, the Department of War may now move forward with actions to exclude or remove Anthropic from defense contracts under the FAFSA determination. So certainly something we will continue to monitor closely here. Peter, back to you.

Peter Eyre (4:46)

Next up, a new memo out of the Pentagon. On September 14th, Deputy Secretary of War Steve Feinberg released a memo titled Fostering One Strong Industrial Base, and it outlined initiatives to reform federal procurement accounting, things like CAFSA and others like that. The memo is widely viewed as an effort to soften the department's earlier August 18 memo titled Supplier, Cost and Price and Transparency. We talked about that during the last episode. So this September 14 memo has essentially four elements. First, it directs the department to streamline CAFSA applicability, including developing a new CAFSA waiver policy for new entrants and growing businesses, prohibiting so-called shadow CAFSA requirements in non-CAFSA covered contracts such as OTAs, and requiring undersecretary level approval before pursuing acquisition strategies that would bring a business unit newly under full CAFSA coverage. Second, it proposes long-term CAFSA reform by recommending that the CAFSA board replace CAFSA with GAP as the baseline for contract accounting. Third, it calls for simplified business systems reviews and audits. And fourth, it directs a DFAR's rulemaking to revise profit policy so that negotiated margins reflect value delivered, risk carried and private capital invested. There's also an October 1 memo that's just out, issued by the Defense Pricing Contracting Acquisition Policy Office, that essentially supplements the September 14 and August 18 memos by indicating that any of these changes are likely to take place through formal notice and comment rulemaking. So it seems like there has been a bit of a shift in terms of implementation and we'll be watching that. Yuan, back to you for our last item.