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August 16, 2022 - Federal Procurement

Another Piece to the Puzzle: Court of Federal Claims Has Jurisdiction Over Bid Protest Where the Disputed Other Transaction Could Lead to a Follow-On Production Contract

GAO Finds CIO-SP4 Solicitation Is Unduly Restrictive of Competition

There has been significant uncertainty as to where a company can protest an Other Transaction (“OT”) award. As we previously reported, cases such as SpaceX, MD Helicopter, and Kinemetrics have provided useful data points. The most recent decision of the U.S. Court of Federal Claims (“COFC”) in Hydraulics International, Inc. v. United States[1] is consistent with this line of cases, finding that the COFC has jurisdiction when the U.S. Department of Defense (“DoD”) expressly contemplates issuing a follow-on production contract to one or more of the OT recipients upon successful completion of the OT.

The OT Prototype Project

The Army needed upgraded Aviation Ground Power Units (“AGPUs”) to service military helicopters. To accomplish the AGPU upgrade, the Army selected an OT agreement as the purchasing vehicle. The Army awarded an OT to a consortium,[2] which issued a Request for Enhanced White papers for the AGPU upgrade prototype project. The project was for a base effort of one prototype AGPU, with an option for a second phase of ten prototypes, and contemplated awarding the base effort to up to two contractors. Once the base effort was completed, the Army would run tests and decide whether to down-select to one of the base effort vendors for the second phase. Specifically, the Request for Enhanced Whitepapers stated, pursuant to the Army’s OT authority, “[u]pon a determination that this competitively awarded prototype project has been successfully completed, this project may result in the award of a follow-on production contract for over 150 AGPUs without the use of competitive procedures.”

Five bidders, including Hydraulics International, submitted whitepapers in response to the request.  The Army reviewed the whitepapers and selected two other offerors for award of the base effort using a best-value determination.

Hydraulics International’s Protest

Hydraulics International filed a bid protest at the COFC, contending that the Army misevaluated its schedule and price information in its whitepaper submission and waived a key requirement when evaluating the proposals from the two successful offerors.

The Government argued that the COFC lacked subject matter jurisdiction over the protest because the dispute was not “in connection with a procurement or a proposed procurement” as required under 28 U.S.C. § 1491(b)(1) (the “Tucker Act”). Specifically, the Government contended that the Army was acquiring AGPU prototypes using its OT authority, and an OT agreement is not a “procurement.” Furthermore, the Government asserted that the OT awards were not “in connection with” a proposed procurement because any “follow-on production” from the OT awards was conditional and may never occur.

 In contrast, Hydraulics International argued that the COFC had jurisdiction to hear the case under the Tucker Act because the possibility of a follow-on production contract for 150 AGPUs without competition placed these OT awards “in connection with a procurement.”

Court’s Decision

The Court found that it had jurisdiction under the Tucker Act. The Tucker Act grants the COFC “jurisdiction to render judgment on an action by an interested party objecting to a solicitation by a Federal agency for bids or proposals for a proposed contract or to a proposed award or the award of a contract or any alleged violation of statute or regulation in connection with a procurement or a proposed procurement.” 28 U.S.C. § 1491(b)(1). The term “procurement” includes all stages of the process of acquiring property or services, beginning with the process for determining a need for property or services. In a previous decision concerning an OT award, the Court noted, “the Federal Circuit has held that ‘[t]he operative phrase “in connection with” is very sweeping in scope.’”[3]

The Court noted that the DoD’s OT authority allows it to enter into OT agreements to “carry out prototype projects.”  10 U.S.C. § 4022(a)(1). When pursuing OT prototype projects, the DoD is required to use competitive procedures “[t]o the maximum extent practicable.” 10 U.S.C. § 4022(b)(2). If the initial prototype phase uses competitive procedures, a “follow-on production contract or transaction” may be awarded “without the use of competitive procedures.” 10 U.S.C. § 4022(f)(2). However, the statutes granting the DoD OT authority are silent on the Tucker Act, bid protests, judicial review, and the COFC.

The Court reasoned that, for it to have jurisdiction over the OTs at issue, the OTs must be “in connection with a procurement or a proposed procurement.” The Court stated that OTs themselves are not “procurement contracts”;[4] thus, the Court focused its analysis on the OT’s connection to a “proposed procurement.” The Court concluded that the upgraded AGPU OT awards were “in connection with a procurement or a proposed procurement” because they are part of the Army’s process for determining a need for acquisition.

The Government stressed that although the Request for Enhanced Whitepapers contemplated a follow-on production contract for 150 AGPUs without the use of competitive procedures, it did not guarantee that a follow-on production contract would be awarded. However, the Court found it immaterial whether the potential procurement of 150 AGPUs ever occurs, so long as the Government has initiated the process for determining a need for acquisition and that acquisition might occur via procurement. The Court reasoned that the OT awards in this case initiated the process for determining a need for acquisition, and they are “in connection with” that process because they may result in the exclusion of Hydraulics International from consideration for a follow-on production contract. Therefore, the Court found that it has subject matter jurisdiction over Hydraulics International’s protest.

Having found that it had jurisdiction to hear Hydraulics International’s protest, the Court granted the Government’s motion for judgment on the administrative record, concluding that the Army acted rationally when it evaluated proposals. In reaching this conclusion, the Court applied the arbitrary and capricious standard of review, stating, “[w]hen this Court evaluates a bid protest, ‘the inquiry is whether the agency’s action was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law and, if so, whether the error is prejudicial.’”[5]

Takeaways

When added to the existing pieces of the puzzle, Hydraulics International shows that disappointed OT competitors can bring bid protests to the COFC if successful performance of the Prototype OT agreement could transition into a potential follow-on production contract without the use of competitive procedures. Then the COFC can review the protest just like it would any other bid protest. Although the Court’s finding of jurisdiction is not surprising, the applied standard of review is significant. Many of the common bid protest arguments are rooted in CICA and other statutes that specifically apply to procurement contracts and not OT awards. Therefore, at least some standards should apply differently.

The Court applied its arbitrary and capricious standard of review, and general bid protest precedent, even generally reviewing the best value trade off, without any examination of whether there has actually been a “violation of law or regulation” in connection with a procurement or proposed procurement. The Court seems to be saying that the Tucker Act’s protest jurisdiction extends to any objection to “a proposed award or the award of a [non-procurement] contract . . . in connection with a procurement or a proposed procurement.” 28 U.S.C. § 1491(b)(1).

This not the only route the Court’s analysis could have taken. Because the Court determined an OT itself is not a procurement contract, the Court could have focused on the Tucker Act’s third prong, which applies to “any alleged violation of statute or regulation in connection with a procurement or a proposed procurement.” 28 U.S.C. § 1491(b)(1) (emphasis added). The difference in approach affects the standard of review that should be applied. Under the Court’s analysis, it could apply the Administrative Procedure Act’s arbitrary and capricious standard of review to the award decision (which it did) without having to show a violation of a statute or regulation. The alternative approach would require a showing that the DOD, by, for instance, straying from its RFP, violated its statutory charge to use competitive procedures to the maximum extent practicable. However, this second approach would likely give the DoD more leeway than the arbitrary and capricious standard applied to the award decision.

The Court’s decision is another piece of the puzzle and provides some clarity regarding the Court’s jurisdiction over OT awards. The takeaway is this: If a disputed OT award contemplates issuing a follow-on production contract to one or more of the OT recipients without the use of competitive procedures, then the award is sufficiently made “in connection with” a procurement to establish jurisdiction.

[1] Hydraulics International, Inc. v. United States, Docket No. 1:22-cv-00364 (Fed. Cl. Aug. 8, 2022).

[2] Although this OT was awarded through a consortium, the Court still had jurisdiction despite the consortium creating a layer of separation between the Government and the consortium members. This was the logical decision, as the Government, at the end of the day, was making all of the evaluation and source selection decisions.

[3] Hydraulics International, Inc. v. United States, Docket No. 1:22-cv-00364 (Fed. Cl. Aug. 8, 2022) (quoting Space Expl. Techs. Corp. v. United States, 144 Fed. Cl. 433, 439–40 (2019)).

[4] The Court stated categorically that OTs are not “procurement contracts.” Generally, this is accurate, in the sense that OTs are, by design, not subject to laws or regulations that apply specifically to “procurement contracts,” like the Competition in Contracting Act (“CICA”) or the Federal Acquisition Regulation (“FAR”). But OTs are indisputably contracts and, at least for purposes of DoD’s Prototype OT authority, may be used to procure certain goods and services. DoD’s Prototype OTs are unique in this latter respect; agencies with only general OT authority, like NASA and TSA, are (likely) still bound by the limitations in the Federal Grant and Cooperative Agreement Act (“FGCAA”), which prohibits federal agencies from using anything other than a procurement contract when acquiring goods or services for the Government’s direct benefit. Rocketplane Kistler, B-310741, Jan. 28, 2008, 2008 CPD ¶ 22; but see MorphoTrust USA, LLC, B-412711, May 16, 2016, 2016 CPD ¶ 133. Congress has granted DoD express, specific authority to award OTs for prototyping projects, which supersedes the general requirements in the FGCAA. But, in doing so, Congress was silent on whether a Prototype OT may itself be considered a “contract” or a “procurement” for purposes of the Tucker Act. A straightforward reading of the plain language of the statute suggests it might, notwithstanding common assumptions to the contrary. 

[5] Id. (quoting Glenn Def. Marine (ASIA), PTE Ltd. v. United States, 720 F.3d 901, 907 (Fed. Cir. 2013)).ed