United States: Government Contracts Client Alert - May 2005

The Government Accountability Office issued a final rule effective April 14, 2005, allowing agency tender officials ("ATO") to protest certain A-76 procurement decisions on behalf of the agency. In the final rule, the GAO amended its Bid Protest Regulations to revise the definition of an interested party to permit a protest to be filed by an ATO in public-private competitions under Office of Management and Budget (OMB) Circular A-76. GAO also revised the definition of an intervenor to permit an ATO and an employee representative to intervene in these protests. See 70 Fed. Reg. 19679 (2005).

The competitions affected by this rule are public-private competitions conducted under OMB Circular A-76 regarding an activity or function of a Federal agency performed by more than 65 full-time equivalent employees of the Federal agency.

If you are involved in an A-76 protest, you should be aware of the effective dates of the new rule. Protests filed after the effective date of the rule, April 14, 2005, that relate to studies initiated on or after January 26, 2005, will be considered under the new rule. However, protests filed after the effective date of the rule that relate to studies initiated before January 26, 2005, will be considered under the GAO regulations as they existed prior to the issuance of the new rule. Similarly, protests filed after the effective date of the new rule that supplement or amend protests filed before the effective date of the rule, and requests for reconsideration filed after the effective date of the new rule that concern a protest that was not subject to the new rule, will be considered under the GAO regulations as they existed prior to the issuance of the new rule.

GAO declined at this time to provide definitive guidance regarding access to protected information by the ATO, employee representative, or their attorneys, suggesting that it believes it is premature to do so. It plans to develop and publish uniform procedures after experience is gained by all sides. In the interim, GAO plans to proceed as follows: (1) where the attorney for the ATO or employee representative is not a government employee, GAO intends to require the attorney to apply for admission under the protective order under the existing standards established for admission to a protective order; (2) the ATO and the employee representative will not be provided access to protected information under the protective order, just as non-attorneys in other protests cannot obtain such access; and (3) where the attorney for the ATO or the employee representative is a government employee, GAO will proceed on a case-by-case basis. It intends to give weight to the agency’s views and to the access that the agency has given the attorney to proprietary or source selection sensitive documents before the protest was filed.

A recent decision by the Comptroller General has further clarified when a bidder has actual or constructive knowledge of an adverse agency action, thereby triggering the ten (10) day time period under which the bidder has to file a protest with the General Accounting Office ("GAO") under 4 C.F.R. § 21.2 (a)(3), GAO Bid Protest Regulations.

In Supreme Edgelight Devices, Inc., B-295574, March 4, 2005, 2005 CPD ¶ 58, Supreme Edgelight Devices, Inc. ("Supreme"), protested the cancellation of a Requests For Quotations (RFQ) for aircraft light plates issued by the Defense Supply Center Richmond, Defense Logistics Agency ("DSCR").

Supreme received a copy of DSCR’s decision to cancel the RFQ on a Saturday, a non-business day at Supreme, when a mailroom employee received mail. Supreme filed its protest twelve (12) days after physical receipt of the envelope containing the adverse agency decision. Although Supreme admitted that its mailroom clerk received the envelope containing the agency decision, Supreme argued that its protest was timely filed because the envelope containing the decision was not opened by anyone at Supreme until the following Monday, thus making Supreme filing within ten (10) days of learning of the agency decision. DSCR argued that GAO should deny Supreme’s protest as untimely. DSCR equated Supreme’s receipt of the envelope with constructive notice of DSCR’s decision to cancel the RFQ.

GAO found, however, that, like the after-hours e-mail notification found not to constitute constructive notice in International Res. Group, a bidder’s receipt of an adverse agency action outside of normal business hours does not constitute actual or constructive notice when the clerical or security employees receiving the notice do not open the envelope or otherwise examine its contents. See B-286663, Jan. 31, 2001, 2001 CPD ¶ 35 at 5.

In rejecting DSCR’s untimeliness argument , the GAO found "no practical difference between e-mail or by the protester’s clerical or security personnel for purposes of determining whether a protester has received constructive or actual notice of initial adverse agency action," under 4 C.F.R. § 21.2 (a)(3) (2004). Although GAO did not specifically define "ordinary business hours" or "employee," in its findings, GAO provided guidance on its understanding of "ordinary business hours" and how receipt of an adverse agency decision after ordinary business hours may affect a protest filing. Specifically, GAO concluded that a Saturday receipt of an agency decision did not constitute actual or constructive knowledge of the initial adverse agency action on that date "where Saturday was not an ordinary business day for the protester and where the decision was not in fact opened or reviewed" by Supreme’s employee.

While a decision on whether to file a protest with the GAO still remains an extremely time-sensitive decision, the Supreme decision should allow nervous management a chance to rest a little easier on the weekend. If Saturday is not an ordinary working day, and mailroom or other clerical or security employees do not open mail, receipt of an adverse agency decision in electronic or postal form does not start the clock running. The extra one or two days the Supreme decision allows now can be used by management, and management’s counsel, to discuss and, if necessary, prepare the protest documents.

Despite surviving DSCR’s challenge to the timeliness of the protest, Supreme ultimately lost its protest on other grounds.

In an extensive brief filed in a qui tam case in Alexandria, Virginia, the U.S. Department of Justice argues that contracts awarded by the Coalition Provisional Authority (CPA) for the reconstruction of Iraq are subject to the False Claims Act, notwithstanding that no U.S. appropriated funds were involved. Thus, according to the Justice Department, knowingly false claims presented to the CPA would violate the False Claims Act, notwithstanding that there are no typical U.S. Government-origin funds.

When the case was filed by the relator, the Government declined to intervene in the dispute. The defendant contractor, Custer Battles, LLC, moved to dismiss the action arguing that: the CPA is not an agency of the United States, and thus, claims under the contract were not presented to the government; and the contracts were not funded with U.S. funds. U.S. District Judge T. S. Elliss III invited the Government to file a brief setting forth the Government’s position with respect to whether the False Claims Act applies to claims presented to the CPA.

Funds used to pay the Custer Battles contracts included: Vested Funds that were Iraqi Government funds confiscated by the United States pursuant to two Executive Orders; Seized Funds consisting of Iraqi- or regime-owned cash, funds and securities in Iraq that were found and seized by CPA forces in Iraq in accordance with the laws and usages of war; and Development Funds for Iraq (DFI), funds held by the Federal Reserve Bank of New York (FRBNY) on the books of the Central Bank of Iraq. The Justice Department noted that the funding authority for both Vested Funds and Seized Funds originated and came through the U.S. Government. The CPA, as the entity temporarily governing Iraq, controlled the FRBNY account during the period the CPA existed.

Payments methods were determined through individual contracts and were made by electronic fund transfer (EFT), check or cash. Vested Funds were paid via all three methods; Seized Funds were paid by check or cash only. Checks were U.S. Treasury checks. DFI funds were disbursed at the direction of CPA designees either by physically shipping currency or electronically wiring transfers. The CPA entered into two contracts with Custer Battles. The Baghdad International Airport (BIAP) contract was initiated as a letter contract and later definitized as a firm fixed price contract in the amount of $16.48 million, to be paid from Vested Funds and Seized Funds. The Iraqi Currency Exchange (ICE) contract was competitively awarded for $6.8 million but later increased to $12.63 million, all to be paid from DFI funds. The ICE contract was later modified to include $3.0 million for additional time and materials, to be paid out of Seized Funds.

The Justice Department noted that the FCA is the government’s major tool for combating fraud against the government. Given the major role that United States officials played in the CPA and the importance of rooting out fraud that may have occurred during the occupation of Iraq, the Justice Department sees the FCA as an important tool that should be available for any false claims presented to the CPA. The brief notes that the FCA requires two elements: presentment to a government officer or employee and a knowingly false claim.

The Justice Department argues that the Vested Funds are funds of the United States and that the President’s Executive Orders assert claims of ownership of certain blocked Iraqi funds. Once the funds were confiscated, all right, title and interest vested in the United States, and no longer belonged to Iraq.

The nature of the Seized Funds differed, according to the Justice Department, since there was no Executive Order vesting ownership of these funds in the United States. Relying on the laws and usages of war, the Justice brief argues that the United States, as the occupying force may take possession and control over cash that is the property of the occupied state. The Seized Funds remain subject to the control of the occupying force, which the United States has authority to administer and manage. In addition, Justice argues that under international law, including customary international law, international conventions, and United Nations Security Council Resolutions, the United States was an occupying force during times relevant to the litigation and could take possession of cash, funds, and realizable securities which are strictly the property of the occupied state.

Justice recognizes that the DFI funds differ from the other funds, since the DFI funds were never accounted for on the books of the U.S. Treasury, and present a closer question as to whether they were covered by FCA. Justice notes that when Ambassador Bremer was appointed as President Bush’s envoy, he was given the authority to oversee use of U.S. appropriated funds, "as well as Iraqi state- or regime-owned property that is properly under U.S. possession and made available for use in Iraq to assist the Iraqi people and support the recovery of Iraq." Justice reasons that this made the DFI funds similar to the Seized Funds since both were controlled, administered, managed, and disbursed by the United States. Thus, by operation of international law, the United States had certain rights, interests and responsibilities over the DFI funds, and should make no difference that these DFI funds were maintained outside the U.S. Treasury at the FRBNY.

The Justice Department brief concludes that for all the funds, it is clear that Custer Battle’s claims were ultimately presented to " an officer or employee of the United States Government or to a member of the Armed Forces of the United States" satisfying the "presentment" test under the FCA. Defendants’ claims for any of the funds under the two contracts would violate the FCA if the claims are show to have been knowingly false because those claims were for money or property to be paid out of or provided by the United States. For these reasons, the Justice Department concludes that the Custer Battles’ claims presented to the CPA under the two contracts are subject to False Claims Act.

Judge Elliss converted the defendants’ motion to dismiss to a motion for summary judgment. His ruling on the motion and the application of the False Claims Act to Custer Battles’ claims is expected shortly.

DOD’s final rule requiring machine readable UIDs (unique item identification) for items valued at or above $5,000 was published and became effective April 22, 2005. 70 Fed. Reg. 20831-20838. An interim rule was published by DOD on December 30, 2003, containing very similar requirements.

The UID requirement will be implemented through a new clause, FAR 252.211.7003 – Item Identification and Valuation. DOD advises in its final rule that the requirements will apply only a contract includes the clause and that the Christian Doctrine will not impose the requirements if a contract fails to include the clause.

DOD is developing a separate policy for RFID (Radio Frequency Identification) technology for shipping and packaging and advises that it will be closely coordinated with the new UID rule. RFID requirements will not replace or supersede UID requirements.

A number of small business contractors questioned the cost of implementing the UID requirements. DOD states that it anticipates that most small vendors will be able to comply using labels and data plates readily available in the commercial market. It believes that the necessary labels and will be available at a cost of $0.10 to $3.00 per item. The final rule also permits exclusions to marking requirements for items acquired from small business concerns when it is more cost effective for the government agency to assign, mark and register the UID after delivery.

DOD may impose the requirements for items with an acquisition cost of less than $5,000 when identified in individual contracts. Identifying information will include such data as supplying entity, original part number, lot or batch number, parent item in the assembly, manufacturer serial number and UID type.

The Comptroller General recently affirmed the Government Accountability Office’s ("GAO") position that an agency’s failure to formally amend a solicitation may not be sufficient grounds for a bid protest under its Bid Protest Regulations.

In AVL Books.Com, Inc., B-295780, March 28, 2005, 2005 CPD¶__, AVL Books.Com, Inc. ("AVL Books") protested the evaluation of its proposal in response to a Request For Quotations ("RFQ") for medical journal subscriptions issued by the Naval Supply Systems Command ("NSSC").

After receipt of six responses to its RFQ, and conversations with its medical librarian, NSSC determined that, even though it was not listed as a requirement in the original solicitation, the ability to process and track subscription claims online should be considered in evaluating each bidder, Because the subscriptions were to begin within weeks and a prompt decision was necessary, NSSC then telephoned responsive bidders, including AVL, and asked whether each could provide those types of online services.

Two bidders verbally informed the contracting officer that their respective companies did provide such services. These two bidders also forwarded written confirmations to the contracting officer and medical librarian.

During its telephone call, AVL Books stated it provided claims processing via e-mail, telephone and facsimile. AVL Books, however, did not follow-up with a written confirmation as two other bidders did. NSSC ultimately issued an order to the bidder with the lowest price, who also had confirmed in writing that it was capable of supplying online claims processing services.

In its protest, AVL Books contended that the order should be overturned because the procurement was not conducted on an equal basis. Specifically, AVL Books argued that the telephone inquiry from the contracting officer did not qualify as adequate notice that NSSC was amending the solicitation to require online claims processing services.

GAO was not persuaded by AVL Book’s argument, and, citing to its decision in Ram Enters., Inc., B-221924, June 24, 1986, 86-1 CPD 581 ¶ at 3, found that where time is of the essence and "where the agency has adequately advised the offerors of its changed requirements, the failure to formally amend the solicitation is not significant." Because "both of the other firms understood the question to mean that online claims processing capability was now an evaluation factor" and both, on their own initiative, provided written confirmations to the contracting officer of their ability to provide such services, GAO found the NSSC’s telephone inquiry provided adequate notice.

With the AVL Books decision, government contractors bidding to do business with the government should consider several issues when conducting what they might believe are informal inquiries from or conversations with contracting officers. Bidders at all times must have a thorough understanding of the evaluation factors and requirements listed in the solicitation. Issues that are not specifically required in the solicitation, but are later addressed in discussions with the contracting officer, should be noted. To avoid miscommunication, as in AVL Books, once discussions are completed, bidders should request that the contracting officer confirm, preferably in writing, whether the issues addressed in the discussions are now considered evaluation factors under the solicitation. Finally, even if the contracting officer confirms the modification in writing, the best practice is for each bidder to provide the contracting officers with written confirmation that it meets the new contract requirements.

The Georgia Court of Appeals recently decided a case that may signal the end of "insured contract" coverage. Scottsdale Insurance Co. v. Great American Assurance Co., 2005 WL 288837 (Ga. App. February 4, 2005). An "insured contract" is any other contract pertaining to a business where the indemnitor assumes tort liability for bodily injury or property damage to a third party. Most Commercial General Liability ("CGL") policies contain coverage for insured contracts. Thus, if a lessee agrees to indemnify the lessor for bodily injury or property damage under the lease agreement, the lessee’s CGL policy will insure that risk under the insured contract portion of the CGL policy.

In Scottsdale, Moresi leased office space from Pearle Vision. Moresi then subleased the space to Dr. Mullins. Both the lease and sublease agreements contained provisions indemnifying Pearl Vision for personal injuries suffered on the premises. Melissa Neil sued Dr. Mullins and Pearle Vision alleging negligence in misdiagnosing a medical condition. Moresi’s insurance carrier, Great American, refused to indemnify Pearle Vision. Pearle Vision’s insurance carrier, Scottsdale, settled with Ms. Neil. Scottsdale then sued Moresi for failure to indemnify Pearle and won a $3.0 million judgment. Scottsdale sued Great American, arguing that the lease agreement containing the indemnification provision was an "insured contract" under Moresi’s CGL policy and that Great American was liable to Scottsdale for the $3.0 million judgment it won against Moresi. The court noted that even though the underlying claim was for personal injury, Great American did not insure against Moresi’s failure to adhere to the contract by not indemnifying Pearle Vision. The court even went a step further. After acknowledging there was an insured contract exception in the insurance contract, the court declared that since the policy did not cover the claim (for breach of contract), there is no need to address whether the (insured contract) exception was covered.

This case is a departure from previous cases dealing with insured contract coverage. Before Scottsdale, all claims involving insured contracts were based on the indemnity agreement. The understanding was that the underlying liability may be in tort for bodily injury or property damage. But the way the claim is paid is through a breach of contract action based on the indemnity clause. The court in Scottsdale failed to follow the line of previous cases.

In the construction context, it is now even more important to be named as "additional insured." If an indemnitee is listed as an "additional insured" on the indemnitor’s insurance policy, there is no need to look for coverage under the insured contract provision of the indemnitor’s CGL policy. Of course, it is best to have both insured contract coverage and be named as additional insured. But the Scottsdale decision magnifies how important it is to be named as additional insured. Failure to be named as additional insured could result in no coverage at all.

At a time when so-called "outside the scope" ordering problems under GSA schedule contracts have been well publicized (and formally addressed as part of GSA’s "Get It Right" campaign), the Office of Federal Procurement Policy ("OFPP") has issued a policy memorandum on the opposite problem affecting some procurements: agency reliance on overly restrictive, brand-name specifications to describe their procurement needs. Specifically, by Memorandum dated April 11, 2005, OFPP cites a significant increase in recent years of RFQs and RFPs seeking or relying on brand name specifications or equipment, especially in information technology procurements. This includes solicitations where agencies have specified particular brand name microprocessors for computers instead of (1) articulating a neutral benchmark for performance or (2) specifying requirements for applications or interoperability. The Memorandum also cites a recent $81 million RFQ whereby the requested office supplies were identified by a vendor number unique to only one large office supply company. By the Memorandum, OFPP admonishes contracting agencies to instead use "vendor and technology neutral contract specifications" and to "comply with the requirements of the FAR regarding the use of brand name specifications."

The rule on the use of brand name or unduly restrictive specifications is relatively well established. Generally, "[i]n preparing a solicitation for supplies or services, a contracting agency must specify its needs and solicit offers in a manner designed to achieve full and open competition, and include restrictive provisions or conditions only to the extent necessary to satisfy the agency’s needs." Prisoner Transportation Services LLC, et. al., B-292179, June 27, 2003, 2003 CPD 121. The Federal Acquisition Regulation, at §11.105, specifically prohibits agency requirements to be written "so as to require a particular brand name, product, or a feature of a product, peculiar to one manufacturer" which would preclude consideration of a product manufactured by another company, unless-

• The particular brand name, product, or feature is essential to the Government’s requirements, and market research indicates other companies’ similar products, or products lacking the particular feature, do not meet, or cannot be modified to meet, the agency’s minimum needs;

• The authority to contract without providing for full and open competition is supported by the required justifications and approvals (see FAR 6.302-1); and

• The basis for not providing for maximum practicable competition is documented in the file when the acquisition is awarded using simplified acquisition procedures.

Pursuant to the Memorandum, the OFPP has requested that procuring agencies that intend to define their requirements by using brand name specifications now take the unusual step of publicizing the written justification with the solicitation on www.fedbizopps.gov. In the case of national security or trade secret concerns, where publication would not be appropriate, agencies are asked to provide a copy of the justification to the OFPP.

Contractors who believe they are competitively prejudiced because a government solicitation unnecessarily calls for a competitor’s brand name equipment, or otherwise relies on overly restrictive specifications, may be able to challenge the use of such specifications —- but must generally do so before the time set for submission of initial proposals. While Government protest forums such as the Government Accountability Office typically give deference to an agency’s determination of its procurement needs, such forums will overturn the use of descriptions that are overly restrictive or unfair if the use of such descriptions is not necessary to meet the agency’s needs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.