Palantir USG v. United States1 may prove to be one of the most significant procurement precedents of the decade. Affirming the Court of Federal Claims, the Federal Circuit breathed new life into the government's obligations under the Federal Acquisition Streamlining Act (FASA) to prioritize, to the maximum extent practicable, the acquisition of commercial and nondevelopmental solutions. Weaning agencies off their historic preference for developmental solutions is critical now more than ever, as it is readily apparent that maintaining the United States' technological and battlefield superiority depends on its ability to harness technologies from the commercial sector and become a more commercial-friendly business partner. The decision will have the practical impact of requiring agencies to more carefully document their market research. Palantir will also provide useful leverage for companies seeking to eliminate (whether by negotiation or protest) solicitation provisions that are not accommodating to commercial vendors.
Background
Palantir concerns the US Army's Distributed Common Ground System (DCGS-A)—pronounced "dee-sigs." DCGS-A is the Army's primary system for processing and disseminating multi-sensor intelligence and weather information.2 The Army intends to procure a system that combines all intelligence software and hardware capabilities into one program with the ability to access and be accessed by, not only Army intelligence and command components, but also other members of the broader distributed common ground and surface system.3
A principal element of DCGS-A is its data management architecture. Palantir sells a commercial data management architecture called Gotham, which is successfully used in commercial and DoD markets.
There are, thus far, two increments of DCGS-A. The Army has already attempted to procure and field the first increment, referred to as DCGS-A1. In doing so, the Army adopted a developmental approach, which lasted nearly two decades, cost over $6 billion, and generated significant stakeholder complaints. Congressional scrutiny and criticism were plentiful, particularly regarding the Army's insistence on continued use of a developmental approach, despite cost overruns, performance problems, schedule delays, and strong end-user support for commercial options such as Palantir's Gotham platform.4
When the Army began to conduct market research and gather industry input to support its acquisition of the second increment of DCGS-A, referred to as DCGS-A2, Palantir encouraged the Army to procure its Gotham platform on a firm fixed-price, commercial item basis, with additional modifications as needed to meet the full DCGS-A2 requirements. However, the Army's Requests for Information and other industry outreach suggested that the Army was once again only interested in a developmental approach to DCGS-A2, procured on a cost-plus basis. Despite Palantir's repeated assertions that a commercial-item approach would be preferable, the Army issued a DCGS-A2 solicitation that called for developmental solutions on a cost-plus basis. Palantir filed a pre-award bid protest at the Government Accountability Office (GAO) challenging the terms of the DCGS-A2 solicitation.
At GAO, Palantir's primary argument was that the Army failed to comply with its obligations under 10 USC § 2377, enacted as part of FASA, to conduct market research into and maximize use of commercial item and nondevelopmental solutions. Specifically, § 2377(b) requires an agency, "to the maximum extent practicable" . . . [to] acquire commercial items . . . to meet the needs of the agency."5 To that end, § 2377(c)(1) requires an agency to "conduct market research appropriate to the circumstances" into the availability of commercial items. Then, § 2377(c)(2) requires the agency to "determine whether there are commercial items" that can (A) meet the agency's requirements; (B) be modified to meet the agency's requirements; or (C) meet the agency's requirements if those requirements were modified to a reasonable extent.
GAO denied the protest, but not before holding an evidentiary hearing and receiving testimony from Army procurement officials. GAO ultimately deferred to the Army's decision to adopt a developmental approach, particularly in light of findings that the Army determined: (A) no commercial item could meet all of the DCGS-A2 requirements, and (B) the best acquisition approach was selecting a single contractor to perform the noncommercial Lead Systems Integrator (LSI) services of acquiring and integrating all components necessary to meet the DCGS-A2 requirements—i.e., shifting integration risk to the LSI.6
Undeterred, Palantir filed a protest at the United States Court of Federal Claims. Notably, one day after Palantir filed at the court, the Army issued a formal determination that DCGS-A2 is not a commercial item. This post-hoc documentation ultimately proved ineffective—if not detrimental.7 In a 100-plus page decision, Judge Horn held that the Army failed to meet its obligations under § 2377 and permanently enjoined any award under the solicitation.8 Recognizing that it was presented with an issue of first impression,9 the court carefully explored the statutory text, emphasizing the phrase "maximum extent practicable."10
After a detailed review of the administrative record, supplemented by expert testimony from both parties, the court determined that, even though there is no formal documentation requirement associated with § 2377, the Army's documented market research was insufficient. The decision carefully stated that it was not requiring the Army to procure a commercial item,11 but only holding that the Army "failed in its obligation under 10 USC § 2377 to fully investigate if Palantir, or any other potential offeror, could meet the requirements of the Army's procurement needs on a commercial basis, in part or in full."12
The court emphasized that the Army was repeatedly notified by Palantir that commercial items could meet its needs, yet the Army's market research appeared to be limited to developmental approaches, as if the Army had already decided that the DCGS-A2 solicitation would require a developmental solution. The court also found that there was no indication the Army considered how commercial items could be modified to meet the DCGS-A2 requirements, or how those requirements could be reasonably modified to allow a commercial solution.13
The government appealed the Court of Federal Claims' decision to the United States Court of Appeals for the Federal Circuit, framing this as a case of first impression.14
Arguments on Appeal
The government's argument on appeal was two-pronged. First, the government argued that the Court of Federal Claims erred as a matter of law by adding to FASA a requirement that the government "fully investigate" availability of commercial items. Specifically, the government argued: "If the court's holding is left intact, it creates market research obligations beyond the statutory and regulatory language, and undermines the discretion afforded to agencies in conducting market research and deciding the most appropriate acquisition approach."15
The government's second argument was that the Army's market research and determinations were sufficient in this case.16 Specifically, the government argued that the Court of Federal Claims "plainly erred in jettisoning the presumption of regularity, and substituting the unsubstantiated inference that market research was premised on the Army's predetermination that the DCGS-A2 solicitation would be for a developmental/cost-reimbursement contract, and not a commercial item contract under FAR Part 12."17 The government contended the Army knew from the outset, based on its experience with DCGS-A1, that it wanted to use an LSI approach instead of assuming responsibility for integration of various commercial and government-unique software. According to the government—regardless of what any single document may demonstrate—the Army's market research was reasonable under the circumstances and satisfied FASA because the Army knew that no single commercial item could meet all of its needs, decided to take an LSI approach, and did not consider those LSI functions to be commercial.18 The government further emphasized that its decision to use a non-commercial LSI approach for the prime DCGS-A2 contract does not mean that the LSI chosen will not be required to conduct market research to maximize use of commercial item components, satisfying the spirit of FASA.19
The overarching theme of Palantir's response was that government's legal position "makes a mockery of the statute's requirement that agencies 'acquire commercial items' to 'the maximum extent practicable.'"20 As a factual matter, Palantir asserted that the government cannot "escape the fact that the market research the Army did conduct was entirely focused on a developmental approach."21
Palantir argued that the government's market research failed to meet two, independent obligations of § 2377. First, Palantir argued that the government failed to conduct adequate market research into the availability of commercial item solutions. Second, Palantir argued that the government failed to determine whether commercial items could (A) meet the Army's requirements; (B) be modified to meet the Army's requirements; or (C) meet the Army's requirements if those requirements were modified to a reasonable extent.22
Technology Network (TechNet), an association of chief executive officers and senior executives of leading technology companies from across the nation, submitted an amicus curiae brief in support of Palantir.23 TechNet argued that the Army's approach to DCGS is product of a DoD culture predisposed to favor full development of government-unique solutions instead of relying on the commercial and nondevelopmental solutions that FASA directs agencies to favor.24
The Federal Circuit's Decision
In a unanimous decision authored by Judge Stoll, and joined by Judges Newman and Mayer, the Federal Circuit affirmed the Court of Federal Claims' judgment. The Circuit declined to read the Court of Federal Claims' decision as unduly expanding FASA's mandate, and confirmed, after de novo review, that the Circuit reached the same conclusion that the government failed to satisfy FASA:
The government first argues that the trial court erroneously added requirements to § 2377, including that the Army was required to "fully investigate," "fully explore," "examine," and "evaluate" whether all or part of its re¬quirements could be satisfied by commercially available items, such as Palantir's product. We are not persuaded that the Court of Federal Claims imposed additional requirements beyond those required by the statute. FASA requires an agency to use the results of market research to "determine" whether there are commercial items that "meet the agency's requirements; could be modified to meet the agency's requirements; or could meet the agency's requirements if those requirements were modified to a reasonable extent." § 2377(c)(2). While the trial court's thorough opinion sometimes uses words other than "determine," we conclude that, read in context, those words were intended to be synonymous with "determine." In any event, we need not devote significant discussion to this argument, as we "sit to review judgments, not opinions," and our de novo review leads us to the same conclusion as the one reached by the Court of Federal Claims.25
Following thorough analysis of the record evidence regarding the Army's market research, the Federal Circuit concluded that the record could not support a determination that the Army satisfied its obligations under FASA:
On this record, we agree 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. We acknowledge that there is no statutory or regulatory requirement for agencies to document their determinations pertaining to § 2377 and FAR Part 10. Nevertheless, the record must be sufficient to permit meaningful judicial review consistent with the Administrative Procedure Act, 5 USC § 706. . . . Here, the administrative record plainly shows that the Army was on notice that Palantir's product might be a commercial item that would satisfy its requirements, whether as-is or with modifications. Despite that notice, the Army's ultimate determination regarding its market research excluded commercial items from consideration in a conclusory fashion. On this record, we conclude that the Army did not rationally use its market research results to determine whether there are available commercial items that: "(A) meet the agency's requirements; (B) could be modified to meet the agency's requirements; or (C) could meet the agency's requirements if those requirements were modified to a reasonable extent." § 2377(c); FAR 10.001(a)(3)(ii).26
The Circuit rejected the government's argument that the Court of Federal Claims failed to apply the presumption of regularity, holding that the extensive record evidence cited by the Court of Federal Claims in support of its decision was sufficient to rebut the presumption of regularity:
Under the Administrative Procedures Act, even where an explanation or reason is not required for an agency's determination, a reviewing court has the power to require an explanation. In determining whether to require an explanation, the agency decision is entitled to a presumption of regularity. Because of that presumption of regularity, the agency should not be required to provide an explanation unless that presumption has been rebutted by record evidence suggesting that the agency decision is arbitrary and capricious.
Here, the court extensively cited record evidence showing that the Army's decision was arbitrary and capricious and in violation of 10 USC § 2377. In particular, the court performed a searching review and analysis of [the market research submissions and agency analyses thereof]. Based on this review, it concluded that the Army neglected to determine whether possible commercially available alternatives meet or could be modified to meet the requirements of the Army's acquisition. Accordingly, the court properly determined that the record evidence rebutted the presumption of regularity.27
In conclusion, like the Court of Federal Claims, the Federal Circuit confirmed that it was not directing any particular outcome in this acquisition, other than that the Army must do more to satisfy its obligations under FASA.28
Implications
One of the most striking aspects of the Palantir case as a whole is that it provided the first instance for the Court of Federal Claims and Federal Circuit to meaningfully address agencies' obligations under FASA's mandate. The Federal Circuit's affirmance of Judge Horn's holding may breathe life into the expectation that agencies must tailor acquisitions to accommodate and foster competition from commercial firms.
In the past 24 years since Congress passed FASA, agencies have continued to package acquisitions of standard commercial technology and services into complex solicitations under FAR Part 15, often imposing burdensome accounting and other compliance obligations that many commercial firms cannot and will not accept. It is no secret that the speed of technological innovation has outpaced government acquisition cycles, and a significant amount of modern innovation is occurring in commercial markets by companies that are not dependent on the federal government for revenue. Indeed, it is no longer novel to suggest that the United States' technological and battlefield superiority depend on the government's ability to attract commercial suppliers and harness their innovation. From that perspective, the Federal Circuit's affirmation of FASA's mandate in Palantir is a welcome development.
Regardless of whether Palantir ultimately improves the government's ability to do business with commercial firms, three implications are likely.
First, agencies will need to take a more careful approach to documenting market research, particularly where an agency is contemplating a developmental approach, or even use of noncommercial solicitation provisions. This is particularly true if market research reveals a commercial solution may meet the agency's needs. If the agency declines to adopt FAR Part 12 commercial item procedures, or insists on requirements that commercial vendors cannot satisfy, the agency may need to carefully document the basis for its decision.
Second, commercial vendors may be more willing to object to agency decisions to utilize FAR Part 15 procedures, or even specific solicitation provisions that are not consistent with commercial practice. The Federal Circuit's opinion in Palantir will provide significant leverage in any such negotiations, which may be conducted informally or by means of an agency-level protest. As always, firms interested in any given procurement opportunity should carefully review the solicitation as soon as possible to determine whether any provisions are improper or objectionable. In some circumstances, agencies may amend a solicitation in response to informal correspondence from an offeror. However, if informal correspondence is not successful, any bid protest challenging a solicitation term must be filed prior to the proposal submission deadline with the agency, GAO, or the Court of Federal Claims.
Third, there will likely be more pre-award protests challenging solicitations on the basis that an agency has not satisfied its obligations under FASA. While sufficient documentation of market research and the reasoning behind any given solicitation provision or acquisition strategy may suffice to ultimately defeat a protest, such evidence may not protect the agency from having to defend itself in protest proceedings. In this regard, Palantir could prove to be a double-edged sword, depending on how GAO and the Court of Federal Claims respond. In a market where many different companies are vying to influence the terms of a solicitation, such litigation could grow complex and unwieldy, particularly with respect to the scope of corrective action. In many cases, there may be multiple commercial suppliers, each contending that they offer the appropriate solution. These potential complications could ultimately limit the effectiveness of commercial item contacting. If the requirements associated with commercial item contracting (supposedly simplified compared to noncommercial contracting) become too onerous, that may fuel recent trends of moving acquisition to non-procurement channels, particularly Other Transactions, for which oversight and judicial review are less readily available.
When considering future cases challenging agencies' compliance with FASA, it is important to recognize that the Palantir decision turns largely on the presence of strong record evidence showing that the Army was on notice of the potential for a commercial solution to meet its requirements, but did not seriously consider a non-developmental approach. A commercial vendor that believes its product or service can meet an agency's needs should provide the agency with documented notice of its capabilities. In response, an agency that receives such notice will need to carefully document its consideration of a commercial approach. It will be important to watch how GAO and the Court of Federal Claims handle cases where the record evidence of an agency's awareness of a commercial solution is not as strong as in Palantir, or cases where the record shows that the agency carefully considered a commercial approach, but made a reasoned and documented determination to acquire a developmental solution.
Finally, the Palantir decision should be considered in context of the 809 Panel's recommendations to streamline defense acquisitions. Many of the Panel's recommendations are directed at reforming the commercial item acquisition process to make it more simple and effective.29 Any changes Congress may make in response to the 809 Panel's recommendations should be made with Palantir in mind.
Footnotes
1 See Palantir USG, Inc. v. United States, No. 2017-1465 (Sept. 13, 2018).
2 See Palantir USG, Inc. v. United States, 129 Fed. Cl. 218, 222-23 (2016).
3 Id.
4 See TechNet Amicus Brief, No. 2017-1465 at 15-22 (detailing relevant congressional hearings).
5 10 U.S.C § 2377(b).
6 Palantir USG, Inc., B-412746, May 18, 2016, 2016 CPD ¶ 138.
7 Palantir USG, Inc. v. United States, 129 Fed. Cl. 218, 232 (2016).
8 Id. at 266-69.
9 Id. at 266.
10 Id. at 266-68.
11 Id. at 282.
12 Id. (emphasis added).
13 Id. at 276-77.
14 United States Opening Br. at 29.
15 Id. at 32-33, 37-38.
16 Id. at 1-2.
17 Id. at 31.
18 Id. 32-33.
19 Id. 30-31.
20 Palantir Response at 3.
21 Id.
22 Id. at 1, 3-4.
23 TechNet Amicus Brief at 2.
24 Id. at 4-5.
25 Palantir USG, Inc. v. United States, 17-1465 at 17 (internal citations omitted).
26 Id. at 23-25 (internal citations omitted).
27 Id. at 26-27.
28 See id. at 27.
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