United States: GAO Decision Highlights Agency Discretion to Require Manufacturer Commercial Sales Data in FSS Contracting Even When Using Resellers

Earlier this month, the Government Accountability Office (GAO) issued an important decision relating to the use of resellers to sell medical devices on the Federal Supply Schedule (FSS) (Affirmative Solutions, LLC, B-402996, Sept. 8, 2010). In many cases medical device and other supply companies sell through resellers in order to avoid the disclosure and compliance burdens associated with contracting directly with the federal government. One such FSS disclosure requirement is central to this recent protest —specifically the requirement for a manufacturer to provide commercial sales practices (CSP) data along with a reseller's FSS offer. The Affirmative Solutions case delves into the level of commercial sales a reseller must demonstrate to insulate a manufacturer from having to supply its CSP data in connection with the reseller's FSS offer.

This case involved a protest filed by a distributor (Affirmative) for a major medical device manufacturer challenging the Department of Veterans Affairs' (VA's) request for the manufacturer's CSP data in the evaluation of Affirmative's FSS proposal. In denying the protest, GAO recognized that:

1. The government retains broad discretion in determining what it considers to be "significant" commercial sales by a reseller;
2. An agency's decision to require manufacturer CSP data for a reseller's offer will stand unless it was clearly unreasonable or there is a showing of bad faith or fraud; and
3. The government has a right to reject a reseller's offer if it determines that manufacturer CSP data is necessary, but was not provided.

In this case, Affirmative, a Service-Disabled Veteran Owned Small Business (SDVOSB), had submitted an FSS proposal to act as the exclusive distributor to the VA and Department of Defense (DoD) for some 32,000 of the manufacturer's spinal and surgical products. The solicitation contained the standard FSS contract terms relating to the submission of CSP data required to determine whether offered prices are "fair and reasonable," including the provision stating that if an offeror is a dealer or reseller "without significant sales to the general public," CSP information from the manufacturer is required "if the manufacturer's sales under any resulting contract are expected to exceed $500,000."

In response to Affirmative's offer, the contracting officer (CO) had determined that Affirmative's commercial sales were "insignificant" as follows:

Upon determining that Affirmative's CSP data was "insignificant," the CO "determined that in view of the significant purchases that could be made under this contract, 'documented evidence' of the manufacturer's commercial sales practices was needed to ensure a 'solid basis for award and a sound determination of price reasonableness.'" Affirmative informed the CO that the manufacturer would not provide this "proprietary information"; in response the VA informed Affirmative that it would reject its proposal.

Affirmative's protest challenged the agency's determination that it lacked "significant sales to the general public."

Consideration of Federal Sales

Affirmative first argued that when determining whether a reseller's sales to the general public are significant, the VA is required to consider sales "to both Government and non-Government customers." GAO rejected this argument, noting that the CSP Format "expressly provide[s] that sales to the Federal Government are not counted in determining commercial sales to the general public" and, according to a statement by the General Services Administration (GSA), whose views were solicited by GAO in this protest as GSA administers the FSS program, the CSP Format "specifically prohibits" the provision of Federal sales information.

What Amount of Commercial Sales is "Significant?"

Affirmative further argued that $3.6 million in sales to its two commercial hospital customers amounted to "significant" sales. The CO had determined that this level of sales—while perhaps significant to Affirmative, an SDVOSB "who provides no value added services"—was "vastly insignificant" in relation to the Government's annual open market purchases ($29.6 million) and the manufacturer's FY 2009 sales for the offered spinal product line ($3.4 billion).

In analyzing this issue, GAO looked to a statement by GSA that it "has provided no specific guidance to contracting officers about whether disclosed public sales are significant." Instead, CO "determinations are discretionary, taking into account information available through contractor disclosures and market research." GAO noted that price reasonableness determinations are "matter[s] of administrative discretion involving the exercise of business judgment by the contracting officer; therefore, we will question such a determination only where it is clearly unreasonable or there is a showing of bad faith or fraud." GAO also indicated that an agency reasonably may determine that prices offered for an FSS contract are unreasonable where a "vendor provides insufficient data to support the allowance of such costs."

GAO ultimately determined that the VA acted reasonably in concluding that Affirmative's sales to two hospital customers did not constitute "significant" commercial sales. In so doing, GAO found reasonable the VA's view that "volume sales to entities such as national accounts would be far more relevant than Affirmative's limited commercial sales to two hospitals in assessing whether prices are fair and reasonable." In addition, GAO accepted the CO's statement that in view of the level of Affirmative's sales, the CO was "unable to determine if the prices offered are based on the manufacturer's commercial list price, a manufacturer's suggested retail price, or some other discounted starting point established by Affirmative as a dealer/reseller." Given these factors, GAO found that "VA could reasonably determine that manufacturer information was required to determine whether the offered prices were fair and reasonable because the public sales were not considered significant under the circumstances."

Conclusion

This case provides important insight into the current thinking of GSA and VA regarding what level of sales will not be considered "significant sales" to commercial customers for purposes of a reseller. Equally significant, this case also demonstrates not only the extent to which these agencies have the discretion to determine what "significant" is, but also the extent to which GAO will defer to such determinations.

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