New Federal Circuit Precedent on Commercial Contracting and Agency Corrective Action

Government Contracts Update

Date: October 22, 2018

Key Notes:

  • The Federal Circuit has issued numerous decisions this year involving bid protests.
  • Two recent decisions set new precedent on the preference for commercial item contracting and the standard of review for agency corrective action.
  • The decision in Palantir USG should cause agencies to improve their consideration of commercial solutions, while Dell Federal Systems, L.P. will give agencies greater discretion to undertake corrective action.

In two recent decisions involving U.S. Army procurements, the U.S. Court of Appeals for the Federal Circuit has issued significant new precedent affecting the preference for commercial item contracting and the standard of review for agency corrective action.

In Palantir USG v. United States, the Federal Circuit affirmed the U.S. Court of Federal Claims (CoFC), finding the Army, in a significant procurement for technology to be used for intelligence sharing, violated the Federal Acquisition Streamlining Act of 1994 (FASA) by failing to properly determine whether its requirements could be met by commercial items. Under Palantir, all agencies must reassess their commitment to comply with FASA’s preference for commercial item procurement, especially in light of more recent actions by Congress consistent with FASA’s mandate.

In Dell Federal Systems, L.P. v. United States, the Federal Circuit reversed the CoFC, clarifying the standard that must be applied to that court’s review of agency corrective action, in this case involving an Army procurement of commercial IT hardware. Under Dell Federal Systems, the CoFC must take a more deferential approach to agency discretion; agencies may be more willing to take corrective action; and protesters will face higher hurdles challenging agency corrective action at the CoFC. Both cases illustrate the importance of the CoFC and the Federal Circuit to the federal procurement and bid protest systems.

Palantir: Consideration of Commercial Solutions

In Palantir, issued September 7, 2018, the Federal Circuit set new precedent that will increase and improve the opportunities available for commercial item contractors under existing law. Palantir alleged that the Army violated FASA primarily by failing to properly determine whether its requirements could be met by commercial items. The Federal Circuit affirmed the CoFC’s decision to issue a permanent injunction on the Army’s solicitation of bids. While both courts’ decisions are based on a law (FASA) that is almost 25 years old, these decisions are consistent with the preference for commercial item contracting expressed repeatedly by Congress over the past few years.

The Army solicitation was for the Distributed Common Ground System – Army Increment 2 (DCGS-A2), which will update and replace its primary system for processing and disseminating multisensory intelligence and weather information. The Army sought a single contractor to be the system data architect, developer and integrator, using a cost reimbursement task order. As stated in the Federal Circuit decision, the “overarching purpose” of the DCGS-A system “is to combine all of the Army’s intelligence software/ hardware capabilities into one program with the ability to access and be accessed by Army intelligence and command components, as well as other military and intelligence systems.” The current DCGS-A Increment 1 is operational and deployed, but its technology is over 10 years old.

The CoFC concluded the Army failed to comply with FASA’s requirements codified at 10 U.S.C. § 2377, and the Federal Circuit agreed. In its decision, the appellate court explained the extensive statutory and regulatory preference for the acquisition of commercial items. FASA requires federal agencies, “to the maximum extent practicable,” to procure commercially available technology to meet their requirements. The Federal Circuit noted legislative history that reflected Congress’ recognition that “the purchase of proven products such as commercial and nondevelopmental items can eliminate the need for research and development, minimize acquisition leadtime, and reduce the need for detailed design specifications or expensive product testing.” The decision also focused on FASA’s requirements for preliminary market research as part of the statute’s preference for commercial items.

Prior to its protest at the CoFC, Palantir filed a pre-award bid protest at the Government Accountability Office (GAO), which was denied in May 2016. Palantir protested again at the CoFC, which found in its favor. Based on the record, the appeals court agreed with the trial court “that the Army failed in its obligation under § 2377 to determine whether a commercial item could meet or be modified to meet the Army’s procurement requirements.” The appeals court found that the trial court did not, as argued by the government, add requirements beyond those established in FASA.

The Federal Circuit also noted that it gives deference to the Army’s procurement decisions, but that even considering that deference, the Army’s procurement actions violated FASA. The Federal Circuit thus affirmed the CoFC’s decision and injunction, concluding that the Army must fully satisfy the requirements of 10 U.S.C. § 2377 before awarding a contract for the DCGS-A2 requirements. The significance of this precedential decision is far greater than its impact on this particular procurement. In light of this decision, all government agencies must rethink their compliance with FASA, its preference for commercial items and their obligation to procure commercially available technology “to the maximum extent practicable.”

Dell Federal Systems: Judicial Review of Corrective Action

In Dell Federal Systems, issued in public version on October 5, 2018, the Federal Circuit clarified the standard of review for agency corrective action that should be applied by the CoFC, reversing the CoFC’s decision while mandating a more deferential approach to agency discretion.

Dell Federal Systems concerns a U.S. Army solicitation for indefinite delivery, indefinite quantity contracts for commercial computer hardware, with a 10-year performance period and an estimated value of $5 billion. After making multiple awards to several companies, the Army, in response to unsuccessful offerors’ protests to GAO, proposed to undertake corrective action by reopening the procurement to conduct additional discussions with offerors. Several awardees challenged this decision before the CoFC, which granted a permanent injunction preventing the Army from proceeding with its proposed corrective action. The Federal Circuit found the CoFC did not apply the correct standard of review, and that the Army’s corrective action was reasonable under that standard.

In the original competition, the Army received 58 proposals, 52 of which were from small businesses. Three were found nonresponsive, and of the 55 evaluated, only nine were deemed acceptable. The Army did not open discussions and made nine awards. Twenty-one unsuccessful offerors filed protests at GAO, arguing their proposal deficiencies were minor and could have been resolved through clarifications, or that the Army should have engaged in discussions. The Army issued a Notice of Corrective Action to resolve all protests, which would include opening discussions with all of the remaining offerors, including the protesters, and requesting revised proposals. GAO dismissed the protests as moot.

Several of the initial awardees then sued in the CoFC, seeking an injunction against the Army’s corrective action. The CoFC summarized the issue as “whether holding post-award discussions is a rational remedy for failing to hold pre-award discussions.” The CoFC found that clarifications and reevaluation would be a more “narrowly targeted” post-award solution, following CoFC precedent Amazon Web Servs., Inc. v. United States, 113 Fed. Cl. 102 (2013). The CoFC granted a permanent injunction against the Army’s corrective action, finding that it was “overbroad” and not “narrowly targeted.”

On appeal, the government argued that under Federal Circuit precedent, the Army’s proposed corrective action was “rationally related to the procurement defect.” The Federal Circuit’s standard of review for agency procurement decisions is under the Administrative Procedure Act (APA), and the government argued that the CoFC applied a more exacting standard than the APA’s “rational basis” review and impermissibly restricted the deference that the CoFC must afford to agency procurement officials under the Tucker Act.

The Federal Circuit agreed, finding that an agency’s corrective action “only requires a rational basis for its implementation” and that the CoFC decision did not adhere to the standards set out in Federal Circuit precedent. The Federal Circuit noted it has “consistently reviewed agencies’ corrective actions under the APA’s ‘highly deferential’ ‘rational basis’ standard.” The Federal Circuit separately found that in this case, the Army’s corrective action had a rational basis, and thus satisfied the appropriate standard.

The government argued that the Army’s corrective action was reasonably related to the relevant procurement defects, including a “likely violation” of DFARS 215.306(c)(1) by its failure to conduct pre-award discussions, and because clarifications could not be used to correct material proposal mistakes. The Federal Circuit agreed with these points, finding that opening discussions at this post-award stage is “rationally related to the undisputed procurement defect of originally failing to conduct pre-award discussions, as reasonably interpreted by the agency to be required by the applicable regulations.”

The Federal Circuit also noted arguments concerning the alleged anticompetitive nature of the release of all offerors’ pricing as part of the Army’s corrective action, but that did not alter the appellate court’s conclusion. The court found no binding authority preventing, on the facts of this case, the release of this pricing information to all offerors, and that the agency provided a reasonable explanation for this aspect of its corrective action.

The Federal Circuit further found that the Army rationally chose discussions, rather than clarifications, for all offerors as the appropriate corrective action. The appellate court stated that the Army was “not legally required to address every option, but rather to provide a reasonable corrective action and adequately explain its reasoning for doing so,” and that even if there were other options available, the court would not substitute its judgment for the Army’s. The Federal Circuit reversed the CoFC’s grant of an injunction and reinstated the Army’s proposed corrective action.

Under Dell Federal Systems, the CoFC must take a more deferential approach to agency discretion when reviewing challenges to corrective action. As a result, agencies may be more willing to take corrective action and may do so more frequently, and protesters will face higher hurdles challenging that corrective action at the CoFC. But the CoFC remains a forum that will review such challenges, and it remains to be seen how future case law will develop under the latest Federal Circuit precedent.

FOR MORE INFORMATION

For more information, please contact:

Joseph R. Berger
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Joseph.Berger@ThompsonHine.com

Tom Mason
202.263.4168
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Ray McCann
202.263.4152
Ray.McCann@ThompsonHine.com

Francis E. Purcell, Jr.
202.263.4118
Chip.Purcell@ThompsonHine.com

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