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Bad spot to be in... OCI

IG OCI Conflict of Interest 209.5 FAR 9.5

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#1 CON46

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Posted 10 May 2012 - 10:23 AM

This was ran by my legal dept. (last year) and 3 issues were recognized, (all 3 required legal investigation)... An IG investigation was launched but IG will not provide status or even status on which issues they are looking into. It is now a year later and IG has given no instruction (pretty much does not respond to emails until I escalate) and due to criticality of the software we must move forward with a new acquisition/award.

I am conducting a DOD acquisition which is Brand Name only and award will be made using other than full and open competition procedures to licensed product resellers of company ABC. Only licensed ABC software resellers can fulfill the requirements of the acquisition. However, based on ABC’s licensing agreement with those resellers, all resellers who supply the Federal Government must purchase their products and upgrade services from company XYZ, who in turn subcontracts with company ABC. All licensed ABC software resellers in affect obtain their quotes from company XYZ. Since company XYZ also submits their own quote, the nature of this relationship between company ABC and XYZ allows company XYZ a competitive advantage.

(Also of note, the products being delivered are upgrades for current software, as such, 100% of deliverables come from company ABC. Company XYZ only adds on a pass through charge and provides no additional support or service. The same goes for every licensed reseller of ABC's products. (Resellers are both Large and Small buinesses). So XYZ essentially sets the resellers prices with exception to the resellers own pass through charge. I have received written confirmation from company ABC that it will not compete against company XYZ or provide support sole source).

At this point, given an ongoing IG investigation, should I address the situation as a DFARS 209.571-3 Organizational Conflict of Interest issue? This means contacing with company ABC or XYZ or both to resolve the situation. IG has not instructed me as to what I can say or reveal so can I tell the contractor that IG is reviewing the current situation in order to facilitate change and promote competition?

#2 Cajuncharlie

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Posted 10 May 2012 - 11:59 AM

Sounds like time to talk to Legal again, to get specific advice as to how to proceed from here, including answers to your questions.

#3 Bailers

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Posted 17 May 2012 - 10:21 AM

Are you consistently seeing better pricing from XYZ than any of the competitors? I don't think this is a OCI issue. It sounds more like a defective pricing or collusion issue. But if you need the software update, what's your choice?

#4 CON46

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Posted 17 May 2012 - 10:38 AM

Yes XYZ always submits better pricing. This issue went the IG at GSA for collusion and a pricing issue but I beleive that was a mistake as the GSA IG has seemingly not done anything yet. (Like I said in my original post it has been a while).

Alternate issues here:
***Company XYZ pays company ABC for being the sole provider of guranteed federal business (this is actually printed in ABC company literature)

***Market prices are about 4% or 5% of the prices listed on GSA. For this award in particular GSA prices had the total at around $64 million whereas market pricing is well below $1 million. I understand GSA's MOT 500K but the unit prices are absurdly inflated. The GSA CO seemed very disinterested in correcting the pricing situation so our office had to escalate it to the CO's director. Only then did it go to the GSA IG. The GSA's prices are still grossly out of sync with market to this day.

I have completely lost faith in the FED Gov's ability to police anything to ensure enthical practices are followed. Both GSA and IG seem to be complete failures.

#5 Vern Edwards

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Posted 17 May 2012 - 11:00 AM

[S]hould I address the situation as a DFARS 209.571-3 Organizational Conflict of Interest issue?


In what way would this be an organizational conflict of interest? Why wouldn't this be a suspected anti-trust violation? See FAR Subpart 3.3, specifically, 3.303( c). (There is currently no DFARS coverage.) It most certainly is not a defective pricing issue.

By the way, there is no reason to lose faith. Anti-trust issues are complex and there are only so many DoJ attorneys. DoJ must focus on companies like Apple, Google, and Motorola. You are probably talking about relatively small potatoes.

#6 CON46

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Posted 17 May 2012 - 11:09 AM

My logic was that an actual organizational conflict of interest is created when all licensed ABC software resellers obtain their quotes from company XYZ and XYZ then turns around and bids. It creates an unfair competitive advantage. It may be an acceptable commercial practice but when dealing with the gov we have our own rules. I had doubts about 3.303 anti-trust beacuse this practice is inline with the natural (commercial) operation of market forces.

#7 CON46

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Posted 17 May 2012 - 11:20 AM

Then again, this was my first contract that I worked on so it is possible that I just did not recognize an anti-trust issue when I saw one. Legal believed ABC granted XYZ a monopply on gov business.

#8 Vern Edwards

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Posted 17 May 2012 - 11:52 AM

Here is the definition of OCI from FAR 2.101:


“Organizational conflict of interest” means that because of other activities or relationships with other persons, a person is unable or potentially unable to render impartial assistance or advice to the Government, or the person’s objectivity in performing the contract work is or might be otherwise impaired, or a person has an unfair competitive advantage.


Here is what FAR 9.505 says about "unfair competitive advantage":

(b) Preventing unfair competitive advantage. In addition to the other situations described in this subpart, an unfair competitive advantage exists where a contractor competing for award of any Federal contract possesses—
(1) Proprietary information that was obtained from a Government official without proper authorization; or
(2) Source selection information (as defined in 2.101) that is relevant to the contract but is not available to all competitors, and such information would assist that contractor in obtaining the contract.


In such cases, the advantage and the conflict arise from the contractor's ties to the government.

That is not your case. Your case is one of a relationship between two private parties that gives one of them an unfair advantage over third parties. You have an anti-trust issue, not an OCI issue.

#9 CON46

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Posted 18 May 2012 - 07:30 AM

Vern, thank you for your assistance. Following FAR 3.303 I will draft a memo, run it by my legal office for clearity and send it to the Attorney General and the agency office responsible for contractor debarment and suspension under Subpart 9.4.

#10 Vern Edwards

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Posted 18 May 2012 - 07:54 AM

Good. Don't expect immediate action, everyone must prioritize. But you're doing the right thing. Write a fact-filled, carefully drafted memo. Don't make accusations or legal assertions.

You can really have fun with this and learn something. Don't rush.

#11 CON46

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Posted 27 June 2012 - 02:41 PM

UPDATE:

So the Antitrust issue was escalated up to the Air Force Legal Operations Agency (AFLOA). Turns out this business practice is acceptable and there is not an issue as we seem to be boxed in by our own rules. Company ABC can restrict competition so that company XYZ is the sole provider for the entire Federal Government. This seems wrong to me as XYZ can mark up the products without reason, currently what is happening, however their is no alternative and no way to stop it. (Both ABC and XYZ are very very large businesses so i assume that their attorney's have earned their keep).

As for the IG, they never returned my emails or any emails from my legal office. Legal's take was that since they were being ignored there must not be an issue.

#12 wifcon1

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Posted 05 July 2012 - 04:01 PM

If ABC wants to have all their sales to the government go through a single reseller (or if they choose to sell directly to the government and not through resellers), that doesn't mean they have a monopoly. Just because ABC makes the only software that meets your customer's requirement, that doesn't mean ABC has a monopoly. Unless there's more to this, I don't see the anti-trust issue.

While the situation where other resellers have to go through XYZ to get quotes does seem a bit odd (you wonder why they would even bother quoting if XYZ always underbids them), I'm not really sure why that aspect of the situation has you so concerned. The requirement is brand name only. Competition amongst resellers is not competition. Also, though not to this degree, many resellers hold competitive advantages over other resellers based on their agreements with the OEM. If you take XYZ and the other resellers out of the equation, your situation isn't much different. Say ABC sold directly to you and they added the "mark-up" w/o reason but still came in below commercial market pricing. Are your concerns here any different than any other sole source requirement? At least in this case GSA has apparently established fair and reasonable pricing.

#13 fizzy

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Posted 21 July 2012 - 04:18 PM

UPDATE:

So the Antitrust issue was escalated up to the Air Force Legal Operations Agency (AFLOA). Turns out this business practice is acceptable and there is not an issue as we seem to be boxed in by our own rules. Company ABC can restrict competition so that company XYZ is the sole provider for the entire Federal Government. This seems wrong to me as XYZ can mark up the products without reason, currently what is happening, however their is no alternative and no way to stop it. (Both ABC and XYZ are very very large businesses so i assume that their attorney's have earned their keep).

As for the IG, they never returned my emails or any emails from my legal office. Legal's take was that since they were being ignored there must not be an issue.


That's not a surprise. I deal with complex supply chains on MAS, and the business practice of a producer/manufacturer of a product restricting sale to dealers or preventing dealers from competing with the producer or manufacturer in a competition is very common. Limitation of competition is an objective of commercial business.

You could issue the RFQ to all of the providers on the Schedule SIN, and if you do, then you are not limiting competition, though you know who will have the lowest quote. Does the award have to go to the lowest-price quote? Do licensed dealers who obtain their product upgrades from XYZ offer any other advantages to the government that could justify a higher priced award?

Or, alternatively, if company XYZ is a large business, you could set aside the RFQ for ABC small business dealers.

#14 CON46

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Posted 31 July 2012 - 03:15 PM

Fizzy,
In this case the Manufacturer restricts the sale to a reseller who is also the mandatory distributer.

To answer your questions...
Could you issue the RFQ to all of the providers on the Schedule: An RFQ was posted and seperately emailed to about 20 licensed resellers. However this did no good what-so-ever becasue XYZ supplied much higher prices to all the other resellers. Remember, the manufaturer is limiting competition by making all the other resellers obtain pricing from XYZ... then XYZ submits their lowered bid.

Does the award have to go to the lowest-price quote? Yes, why wouldn't it. You cannot award on a small-business set aside becasue the manufaturer is actually performing the work and a SB cannot do 51%. Treat it like a product and you have the same situation. Set-asides are not allowed inthis situation. To make matters worse XYZ knows that they are working in a loop-hole here and has increased their pricing 9% year after year while the product coming from ABC has stayed the same (without increase).

Do licensed dealers who obtain their product upgrades from XYZ offer any other advantages to the government that could justify a higher priced award? No it is absolutely the same product. If you award to company EFG they have to buy from XYZ who purchases from manufacturer ABC. ABC performs the service or supplies the product directly to the DOD bypassing interaction with both EFG and XYZ (technically this should be a product but creative CO's could argue as a service). Neither EFG or XYZ contribute to the effort at all and are accepting a payment for not doing nothing.

XYZ pays ABC for exclusive rights to supply all Federal Agencies who use their product/service. However since the payment is going from the prime (since we have to contract with XYZ) to the sub (ABC) it is legal.

#15 fizzy

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Posted 05 October 2012 - 04:28 PM

Fizzy,
In this case the Manufacturer restricts the sale to a reseller who is also the mandatory distributer.

To answer your questions...
Could you issue the RFQ to all of the providers on the Schedule: An RFQ was posted and seperately emailed to about 20 licensed resellers. However this did no good what-so-ever becasue XYZ supplied much higher prices to all the other resellers. Remember, the manufaturer is limiting competition by making all the other resellers obtain pricing from XYZ... then XYZ submits their lowered bid.

So, the point here is if you issued the RFQ to 20 SIN holders on Schedule, and the lowest price was offered by XYZ because the market is fixed, then award to XYZ, because the software distribution agreements allow the market to be fixed.


Does the award have to go to the lowest-price quote? Yes, why wouldn't it.

I don't know that they answer to this question is ever "yes, why wouldn't it". There are always non-price factors that may be evaluated in a competition, are there not? Could you not evaluate the past timeliness of delivery as being more important than price? How about software upgrades?

You cannot award on a small-business set aside becasue the manufaturer is actually performing the work and a SB cannot do 51%. Treat it like a product and you have the same situation. Set-asides are not allowed inthis situation. To make matters worse XYZ knows that they are working in a loop-hole here and has increased their pricing 9% year after year while the product coming from ABC has stayed the same (without increase).

Have you checked with SBA to see if there is a non-manufacture rule waiver?

Do licensed dealers who obtain their product upgrades from XYZ offer any other advantages to the government that could justify a higher priced award? No it is absolutely the same product. If you award to company EFG they have to buy from XYZ who purchases from manufacturer ABC. ABC performs the service or supplies the product directly to the DOD bypassing interaction with both EFG and XYZ (technically this should be a product but creative CO's could argue as a service). Neither EFG or XYZ contribute to the effort at all and are accepting a payment for not doing nothing.

XYZ pays ABC for exclusive rights to supply all Federal Agencies who use their product/service. However since the payment is going from the prime (since we have to contract with XYZ) to the sub (ABC) it is legal.



#16 CDBurner

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Posted 06 December 2012 - 09:26 AM

Just curious, what's keeping you from looking into alternatives? I know we have preference for commercial products, but if the only product out there isn't be sold at a reasonable price, it seems like you'd have a fair case to look into paying someone to develop or alter a product that would meet our needs that we would have rights to effect further competition and hopefully drive down price in the long term.

I'm sure you've considered this, but just wanted to put this issue into context
.





Also tagged with one or more of these keywords: IG, OCI, Conflict of Interest, 209.5, FAR 9.5

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