United States: April 2018 Bid Protest Roundup

This month's roundup summarizes decisions from each of the bid protest venues: the Government Accountability Office (GAO), the Court of Federal Claims (COFC or the Court), and the Small Business Administration (SBA) Office of Hearings and Appeal (OHA). These cases are noteworthy for practitioners that encounter issues with: (1) prolonged, multi-phased procurements; (2) solicitation ambiguities; (3) affiliation issues with shareholders of small businesses; and (4) evaluation records that evidence disagreement among evaluation authorities. Please check back with us in early June for the next roundup.

DZSP 21, LLC v. United States and Fluor Federal Solutions, LLC, COFC No. 18-86C.

DZSP 21, LLC (DZSP) and Fluor Federal Solutions, LLC (Fluor) have been fighting for years over this contract with the Navy for base operations services in Guam. The Navy's initial attempts to award the contract to DZSP were unsuccessful as the GAO sustained Fluor's protests and caused the Navy to take multiple rounds of corrective action. Eventually, the Navy selected Fluor and DZSP protested to the GAO and, after that was unsuccessful, went to the Court of Federal Claims. Judge Lettow sustained DZSP's protest and required the Navy, once again, to reevaluate proposals or amend the solicitation.

The decision is noteworthy because it highlights the problems and complexities that can arise in prolonged bid protest disputes. Specifically, in such circumstances, it can become difficult to distinguish among the record of the agency's evaluation, the position the agency takes in defending its awards, and the GAO's position on the agency's evaluation. This can leave the agency—and the awardee's contract—especially vulnerable to post-award protests.

The Court in DZSP took issue with two aspects of the agency's evaluation, both of which derived from inconsistencies introduced or exacerbated by the protest process. First, Fluor was assessed a strength for its retention of incumbent personnel, but the Court determined that the basis for that strength was not addressed in Fluor's proposal. Rather, according to the Court, the GAO had misinterpreted Fluor's proposal in an earlier decision, and the Navy had relied on that misinterpretation—and not on Fluor's proposal—in assigning Fluor a strength. This is a reminder for protest counsel and evaluation officials that strengths (and weaknesses)—no matter how obvious—must be grounded in the offeror's proposal. It is also a reminder that, although the GAO's ability to adjudicate protests is well established, factual and legal determinations at the GAO have no formal precedential value at the Court of Federal Claims.

Second, the Navy had accepted DZSP's proposed costs in the initial evaluation in 2016, but the evaluators upwardly adjusted DZSP's proposed costs in the most recent evaluation. The adjustment was based on the Navy's conclusion that DZSP's proposed costs were unrealistically low because DZSP's exempt labor rates had increased during the performance of the bridge contracts required to sustain base operations during the pendency of the protests and the Navy's corrective actions. The Court determined that the Navy's reliance on the bridge contracts—which were necessary because of the earlier protests—was unreasonable. Judge Lettow noted that agencies may change their position from evaluation to evaluation, but the Court emphasized that a departure from a prior position had to be accompanied by a rational explanation. The Navy had failed to articulate a reasoned and equitable rationale for this aspect of the evaluation.

Takeaway: Logic might suggest that, given a second or third chance at making a source selection, a procuring agency might mitigate protest risk by eliminating errors in the initial decision. Procurements that go through multiple iterations as a result of protests and resulting corrective actions, however, present pitfalls for agencies and awardees. The evaluation record becomes more complex and the risk increases for inconsistencies and contradictory findings that present compelling grounds of protest.

DCR Services & Construction, Inc., B-415565.2; B-415565.3 (2018)

It is well established that ambiguities that are patent on the face of a solicitation must be addressed prior to the submission of proposals. Disappointed offerors cannot challenge patent ambiguities after award; those arguments are untimely. Latent ambiguities—those that cannot be discerned from the face of the proposal—may be protested after award. Drawing the line between patent and latent ambiguities can, in some cases, be difficult and reasonable minds might differ in distinguishing between the two. The GAO's decision in DCR, however, demonstrates the importance of thinking carefully about how to address ambiguities before submission of proposals.

In this case, DCR construed the Army's solicitation as requiring offerors to propose a prescribed list of staff positions and to include capped labor rates for certain positions. The Army interpreted the solicitation such that offerors were not required to staff all positions. As a result of DCR's interpretation, its proposed price was the highest of the 11 accepted proposals. In its post-award protest, DCR contended that the agency's interpretation of the pricing instructions presented a latent ambiguity. The problem with DCR's position, however, was that, prior to submission of proposals, DCR had requested clarification from the Army on this precise question, and had received no response from the Army. The GAO concluded that DCR's pre-proposal request for clarification demonstrated that DCR was aware of the ambiguity and was required to challenge the ambiguity prior to submission of proposals. Because DCR had not protested pre-award, its protest was dismissed as untimely.

Takeaway: Offerors frequently struggle with how to interpret potentially ambiguous solicitation terms. If the potential ambiguity affects a key component of the offeror's staffing approach, price, or compliance with a solicitation requirement, the offeror should carefully consider challenging the solicitation term with the agency. Often, such ambiguities can be resolved through questions and answers with the agency, but, if an offeror raises an ambiguity and the agency either does not address it or does not address it sufficiently, the offeror must then consider a formal pre-award protest. The offeror will not have a chance to the challenge the term post-award.

Size Appeal of Melton Sales & Service, Inc., SBA No. SIZ-5893 (2018)

OHA recently held that two entities were affiliated with one another where one of the entities owned less than 1% of the other entity's outstanding ownership interests. According to OHA, the owner of less than 1% of a company has the power to control the owned entity when there are multiple minority owners with roughly the same amount of stock or shares.

The applicable affiliation regulation states that "[i]f two or more persons (including any individual, concern or other entity) each owns, controls, or has the power to control less than 50 percent of a concern's voting stock, and such minority holdings are equal or approximately equal in size, and the aggregate of these minority holdings is large as compared with any other stock holding, SBA presumes that each such person controls or has the power to control the concern whose size is at issue." 13 C.F.R. § 121.103(c)(2). This regulation is referred to as the "multiple minority shareholder rule." The presumption in the rule can be rebutted by showing that the relevant minority shareholder neither controls, nor has the power to control, the company.

The solicitation in Melton was a small business set-aside under manufacturing NAICS code 333618 with a corresponding size standard of 1,500 employees. The Army awarded a contract to MTP Drivetrain Service, LLC (MTP), and Melton Sales & Service protested the award, arguing that MTP was not a small business due to its affiliation with other businesses that shared management and had common owners.

Upon review, the SBA Area Office determined that two individuals, Joe and Rudy Niswanger, controlled MTP because Joe owned 70% of the company, and Rudy was the general manager. The Area Office also concluded that 24 other companies were affiliated with MTP and the Niswangers because they were controlled by MTP and/or the Niswangers. One of the identified affiliates was Joe Gear Holdings, LLC ("Joe Gear").

When analyzing whether there were additional affiliates not directly owned or controlled by Joe and Rudy Niswanger, the Area Office found that Joe Gear owned one ownership share in a company called VIPAR, which had 120 outstanding ownership shares, all held by different individuals or entities. Each owner was entitled to one vote. The Area Office concluded that Joe Gear was not affiliated with VIPAR because the one ownership interest out of 120 shares "does not provide Joe Gear with the power to control VIPAR."

Melton appealed the Area Office's decision to OHA, which overturned the Area Office's finding. In its decision, OHA held that the Area Office erred when it concluded that MTP was not affiliated with VIPAR under the multiple minority shareholder rule. In other words, Joe Gear's ownership of 1/120th of VIPAR's shares gave Joe Gear the ability to control VIPAR.

OHA stated that "individual control is immaterial, as multiple minority shareholders may control a subject concern even if they individually cannot." OHA further held that "in the absence of clear evidence demonstrating control or the power to control by another party, it is presumed that each minority shareholder has equal control over the subject concern, regardless of the size of the shareholder's interests." OHA found that MTP and Joe Gear failed to rebut the presumption that Joe Gear had the ability to control VIPAR and "[t]herefore, Joe Gear must be presumed to control or have the power to control VIPAR under the multiple minority shareholder rule," and Joe Gear and MTP are both affiliated with VIPAR.

Although the finding did not change MTP's status as a small business under the 1,500-employee size standard, the case sends another warning shot to small businesses with multiple owners that each hold a minority ownership interest. The holding in the case confirms that the holding in Size Appeal of Government Contracting Resources, Inc., SBA No. SIZ-5706 (2016), may not have been the anomaly that many thought it was. In Government Contracting Resources, OHA held that a minority shareholder that owned only 4.16% of a company's outstanding ownership interests has the power to control the company when each owner holds a similar size minority interest.

The conclusion in Melton takes the finding one step further: even if you own less than 1% of a company, you might be deemed to control the company in certain circumstances. OHA is establishing precedent indicating that, under the multiple minority shareholder rule, no ownership interest is too small to be deemed "controlling" if each minority owner holds the same, or a similar, ownership stake.

Takeaway: Contractors, and their owners and investors need to be cautious when determining the best ownership structure, and companies that rely on their small business size status should revisit their ownership structure if they have potential issues under the multiple minority shareholder rule.

PiperCoughlin LLC, B-414352.2, April 17, 2018.

The issue in Piper was whether the source selection authority's (SSA) disagreements with the agency's evaluators were reasonable, and whether the disagreement was sufficiently documented. Here, the agency's evaluation team consisted of a source selection evaluation board (SSEB) and a source selection advisory council (SSAC).

The members of the SSEB had assigned Piper certain strengths and rated Piper "outstanding" in the technical and management factors. The SSAC disagreed with the SSEB's assigned strengths and concluded that Piper's proposal only warranted an "acceptable" technical rating and a "good" management rating.

The GAO reviewed the reasonableness of the SSA's decision to agree with the SSAC and found that the SSAC's approach was both reasonable and sufficiently documented. The GAO found that the SSA documented consideration of specific aspects of Piper's proposal and the difference in evaluation ratings. For example, the SSA noted his agreement with the SSAC's conclusion that the technical proposal lacked sufficient detail in certain respects. The SSA also agreed with the SSAC's assignment of a weakness for failing to match the staffing structure and proposed labor hours in a sample task order included in the request for proposals.

The GAO also found it significant that the SSA (and the SSAC) had revised other offerors' evaluation ratings, and had adjusted Piper's past performance rating upward.

In reaching the conclusion that the SSA acted reasonably, the GAO cited a line of cases standing for the proposition that SSAs are not bound by the findings of lower-level evaluators, and may come to their own reasonable evaluation conclusions if such considerations are well documented.

Takeaway: Clients sometimes misunderstand the import of a disagreement within the evaluation team. A disagreement, standing alone, does not render the evaluation flawed. Rather, the GAO will generally defer to the SSA as long as the record contains contemporaneous support, and an articulated rationale, for the SSA's decision to disagree with the assigned evaluators.

Nevertheless, disagreements do sometimes reveal a flawed preference for one offeror over another and, therefore, must be scrutinized closely. Prism Maritime, LLC, B-409267.2; B-409267.3, April 7, 2014, presents a good example of a disagreement that revealed a flawed and unreasonable evaluation. The GAO found that the SSA in Prism acted without justification in the decision to overrule the SSEB's evaluators and failed to document any contemporaneous rationale for the decision to award a contract to an offeror that submitted a non-compliant proposal.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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