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As discussed above, the CO determined that the
[Global Tires Program] GTP Integrator solicitation’s
“principal purpose” was for the acquisition of warehousing services and not for the
supply of tires, and therefore assigned NAICS code 493190. Subsequently, OHA
affirmed the CO’s NAICS code selection. SupplyCore argues before this court that the
CO’s decision and OHA’s affirmance of the CO’s decision are arbitrary and capricious
and not in accordance with law on two grounds. First, SupplyCore contends that in
determining the “principal purpose” of a solicitation that is for both the acquisition of
supplies and services, the CO should have designated the portion of the contract that had
the greatest monetary value as the “principal purpose.” Second, SupplyCore argues that
NAICS code 493190 is inapplicable to the GTP Integrator solicitation because it was
issued under FAR Part 12, Commercial Items, and because NAICS code subcategory 493
states that entities under this group of NAICS codes “do not sell the goods they handle.”
NAICS Manual at 405. Each of these arguments is examined in turn.
a. The CO’s Decision that the GTP Integrator Solicitation’s Principal
Purpose was for Warehousing Services was Rational and in
Accordance with Law
SupplyCore argues that because seventy percent of the monetary value of the GTP
Integrator solicitation is for the acquisition of tires, under FAR § 19.303(a)(2) and 13 C. C.F.R. § 121.402(b),7
the CO was obligated to find that the solicitation’s “principal
purpose” was for the acquisition of tires. SupplyCore further argues that its position is
confirmed by FAR § 19.102(d), which requires the CO to select “the size standard for the
industry accounting for the greatest percentage of the contract price” when two or more
industries are applicable. Finally, SupplyCore argues that OHA’s affirmance of the
NAICS code decision was improper because it was not in accordance with OHA
precedent. Specifically, SupplyCore argues that NAICS Appeal of SBA, as discussed
above, dictates that a manufacturing code for the acquisition of tires be selected.
In response, the government and SAIC argue that the CO’s decision that the
“principal purpose” of the GTP Integrator solicitation was for services and not supplies
was rational. They argue that the CO correctly recognized that the value of individual
components of a contract is not dispositive where the majority of the work to be
performed is not reflected in the price, and the supplies to be acquired are not part of the
selection evaluation. In this instance, they argue that the CO’s decision regarding the
solicitation’s “principal purpose” is well supported by the terms of the solicitation,
including the fact that eleven of the thirteen CLINs involve chain supply management
services and the PWS focuses on supply chain management functions to be performed by
the GTP Integrator. Additionally, the government and SAIC argue that the GTP
Integrator acts only as a pass-through agent with regard to the tires. In this connection,
they note that under the terms of the solicitation the price of the tires will not be
considered when evaluating the offers.
The government and SAIC also argue that OHA’s decision affirming the CO’s
designation is correct and in line with OHA precedent, contrary to SupplyCore’s
contention. Specifically, they rely on NAICS Appeal of Ferris Optical, where OHA
determined that a procurement that involved the supply of eyeglasses, as well as related
services including fitting, adjusting, and repairing of eyeglasses, was properly classified
under a non-manufacturing NAICS code because the solicitation was for “much more . . .
than merely the delivery of manufactured eyeglasses.” NAICS Appeal of Ferris Optical,
SBA No. NAICS-5285, at 6 (2011).
The court agrees with the government and SAIC. The CO’s decision that the GTP
Integrator solicitation’s “principal purpose” is for the acquisition of services and not
supplies is rational and in accordance with law. First, contrary to SupplyCore’s
contention, FAR § 19.303(a)(2) and 13 C.F.R. § 121.402(b) do not mandate that the CO
determine the “principal purpose” of the solicitation based solely on the monetary value
of the different solicitation components. Rather, 13 C.F.R. § 121.402(b)(2) states that
procurements are “usually classified according to the component which accounts for the
greatest percentage of contract value.” The rule uses the word “usually” and does not
state that the CO is required to classify according to the component which has the
greatest contract value. Thus, the CO did not violate any regulation when he failed to
automatically conclude that the “principal purpose” of the solicitation is for the
acquisition of tires because that is the portion of the solicitation that has the greatest
monetary value. This conclusion is supported by the terms of the GTP Integrator
solicitation. As discussed above, 11 of the 13 CLINs of the solicitation are for services, the PWS focuses on the services required, and the price of the tires is not to be considered
in evaluating offers. In these circumstances, the CO rationally concluded that the
solicitation’s “principal purpose” is for the acquisition of services.
Second, the court agrees that OHA’s affirmation of the CO’s decision is rational
and supported. In this regard, this court has recognized that “because of the SBA’s
‘quasi-technical administrative expertise and [its] familiarity with the situation acquired
by long experience with the intricacies inherent in a comprehensive regulatory
scheme[,]’” OHA is given special deference. LB & B Assocs. Inc. v. United States, 68
Fed. Cl. 765, 771 (2005) (internal citations omitted) (alteration in original). OHA
determined that the CO acted within his discretion and reasonably concluded that the
“principal purpose” of the solicitation is for the acquisition of services not supplies.
Contrary to SupplyCore’s arguments, the court finds that OHA’s decision is consistent
with OHA precedent. In its decision, OHA cited NAICS Appeal of Global Solutions
Network. In NAICS Appeal of Global Solutions Network, OHA evaluated the designation
of a facilities management NAICS code for a solicitation that involved both the
management of a facility and the provision of various academic and vocational training.
NAICS Appeal of Global Solutions Network, Inc., SBA No. NAICS-4478, at 1 (2002).
Despite only 30 percent of the cost being dedicated to the training components, OHA
determined that “[e]ven a most cursory reading of the Statement of Work . . .
demonstrates that the thrust of the procurement is not for facilities maintenance-base
maintenance, but for training, education, and outplacement services.” Id. at 3. Thus,
OHA concluded that the procurement should be assigned a NAICS code that reflects the “principal purpose” of providing academic training and not facilities management. Id.
Additionally, while not cited by OHA when affirming the CO’s decision in the instant
case, the court also agrees with the government and SAIC that OHA’s decision in NAICS
Appeal of Ferris Optical also confirms the reasonableness of the CO’s decision.
Having concluded that the CO rationally and lawfully determined that this
solicitation’s “principal purpose” is for the acquisition of services, the court finds that SupplyCore’s contention that the CO violated FAR § 19.102(d) by not selecting a NAICS
code based on the portion of the procurement with the highest dollar value is without
merit. As noted, FAR § 19.102(d) provides “[w]hen acquiring a product or service that
could be classified in two or more industries with different size standards, contracting
officers shall apply the size standard for the industry accounting for the greatest
percentage of the contract price.” The court agrees with the government that FAR §
19.102(d) comes into play only when two NAICS codes could equally apply to the
procurement. Here, the CO did not have to choose between two equally applicable
NAICS codes because the CO rationally and lawfully determined that only one NAICS
code was applicable. Hence, the CO had no occasion to apply FAR § 19.102(d).
(SupplyCore Inc. v. U. S. and Science
Applications International Corporation, No. 17-1933c, May 1,
2018)
ACG’s Qualification
Plaintiff argues that the Contracting Officer’s decision to award the contract to ACG
lacked a rational basis or involved a violation of regulation or procedure because ACG was not
qualified to perform the work required under the Solicitation. MJAR at 11. In making this
argument, plaintiff asserts that ACG should not have been deemed qualified because the proper
NAICS code was not included in its System for Award Management (“SAM”) registry or
anywhere within its proposal. Id. The Solicitation includes NAICS code 238210 and specifies
that offerors should have a size standard of $15 million. AR 4. NAICS code 238210 is not
included in ACG’s SAM registry. AR 273. However, lacking a specific NAICS code will not
preclude a potential offeror from receiving a procurement award. The Small Business
Administration’s (“SBA”) website says the following:
Your business may have a myriad of capabilities, and the NAICS
code for a given procurement opportunity may not be the same as
your primary NAICS code. That will not keep you from bidding
or making an offer, so long as you meet the size standard for the A. NAVFAC did not Update the Size Standard in the Solicitation for
Phase Two of the Procurement. procurement and have the capacity to provide the
goods or services.
AR 246; see also http://www.sba.gov/contracting/getting-started-contractor/determine-yournaics-code
(accessed October 14, 2016). The NAICS code provided by ACG is 541310, which
has a $7.5 million size standard. AR 136; see also 13 C.F.R. § 121.201. As such, this Court
must agree with defendant’s assertion that “the agency had a reasonable basis to conclude that
the awardee met the size standards required by the Solicitation.” CMJAR at 15. Furthermore,
the GAO has routinely ruled that there is “no statutory or regulatory requirement for the NAICS
code in a solicitation to be listed in an offeror’s [SAM predecessor database].” High Plains
Computing, Inc. d/b/a HPC Solutions, B-409736.2, Dec. 22, 2014, 2014 CPD ¶ 379 at 6-7 (citing
S4, Inc., B-299817, Aug. 23, 2007, CPD ¶ 164 at 8). While this Court is not bound by the
decision of the GAO, that logic is persuasive. The decision to award the procurement to an
offeror without the exact NAICS code listed in the Solicitation was neither arbitrary nor
capricious and was not a violation of law or procedure. (Veterans
Electric, LLC v. U. S. No. 16-1113C, November 23, 2016)
The parties agree that the primary issue in this case is whether the agency revised
the solicitation to use the new, $36.5 million size standard for phase two of the
procurement. Orion claims that the agency’s and the SBA’s decisions were arbitrary,
capricious, or not in accordance with law because those decisions were based on the
application of the “outdated” $33.5 million size standard. Pl.’s MJAR 26; Pl.’s Reply 10.
The operative regulation cited by both parties, 13 C.F.R. § 121.402(a), provides in
relevant part that “[i]f SBA amends the size standard and it becomes effective before the
date initial offers (including price) are due, the contracting officer may amend the
solicitation and use the new size standard.” Orion recognizes that if the agency did not
incorporate the updated size standard into the solicitation, then the original, $33.5 million
size standard remained applicable. Pl.’s MJAR 19. Orion argues that by requiring
offerors to certify their size status “at time of Phase Two proposal submittal,” the agency
expressly or implicitly incorporated the revised, $36.5 million size standard for NAICS code 236220. Pl.’s MJAR 20; Pl.’s Reply 4.
The court agrees with the government that the agency did not expressly amend the
solicitation to use the new size standard by beginning phase two of the procurement after
the new size standard became effective. Amendment 6 required each offeror to certify that it was “a small business at time of Phase Two proposal submittal.” AR 202.
However, Amendment 6 does not mention any change to the size standard in its purpose
statement, AR 200, the description of changes being made to the solicitation, AR 201-02,
or anywhere else in the amendment. In contrast, the agency expressly identified updates
to other parts of the solicitation. See, e.g., AR 201 (extending the time offerors needed to
provide for agency acceptance), 207 (updating liquidated damages and Buy American
Act provisions). The statement in Amendment 6 to provide a size status certification was
one element of a cover letter that the agency directed offerors to submit along with their
phase two proposal. AR 202.10 The plain language indicates that the certification was
required to ensure that the offerors who were selected for phase two in fact met the size
standard identified in the RFP. The court finds no evidence in the record that the
government expressly revised the size standard.
The court also agrees with the government that there is no basis for finding that
the size standard was implicitly revised in Amendment 6. First, as the SBA’s OHA
noted, the size standard in a solicitation cannot be changed without an express
amendment to that effect. AR 2357. For example, the SBA has rejected claims that a procuring agency implicitly amended a solicitation to use a new size standard where the
agency included the new size standard in instructions and questions and answers but did
not formally amend the solicitation. See Dawson Tech., LLC, SBA No. SIZ-5476, at 5 (June 12, 2013) (citing Civitas Group, LLC, SBA No. SIZ-5424, at 2 n.1 (2012). The
SBA’s interpretation of 13 C.F.R. § 121.402(a) is controlling on this court; Orion does
not argue it is plainly erroneous or inconsistent with the regulation. See IEI-Cityside JV
v. United States, 122 Fed. Cl. 750, 758 (2015) (quoting Auer v. Robbins, 519 U.S. 452,
461 (1997)). Moreover, in this case, as the OHA also noted, the agency in its e-mail to
the SBA area office and in its “fax-back memo” to the SBA’s OHA stated that the agency
did not intend to incorporate the new size standard into the solicitation. AR 998, 2322.
In this context, the court cannot read the claimed revision into the solicitation.
Cf. Alabama Aircraft Indus., Inc.-Birmingham v. United States, 586 F.3d 1372, 1376
(Fed. Cir. 2009) (finding that this court cannot “introduce new requirements outside the
scope of the [solicitation]”).
For all of these reasons, the court rejects Orion’s contention that the government
expressly or implicitly amended the NAICS code size standard.
B. The Agency’s Failure to Amend the Solicitation to Use the New Size
Standard was not Arbitrary, Capricious, or Not in Accordance with
Law.
In the alternative, Orion argues that the agency’s failure to amend the solicitation
to update the size standard was arbitrary, capricious, or not in accordance with law.
Pl.’s MJAR 20; Pl.’s Reply 7, 9. Orion acknowledges that 13 C.F.R. § 121.402(a) grants
discretion to the agency in deciding whether to amend a solicitation to incorporate an
updated size standard. Pl.’s MJAR 19. However, Orion argues that NAVFAC’s
“purported decision to enforce the obsolete size standard still must be set aside” on the
grounds that the agency lacked a rational basis for not incorporating the new size standard. Pl.’s MJAR 14-15; Pl.’s Reply 2-3, 7-10. Orion describes the “common sense
practicality” of using current size standards and analogizes to the required use of
prevailing wages under the Davis-Bacon Act, 40 U.S.C. § 3141. Pl.’s MJAR 16 (citing
29 C.F.R. 4.5(c), 4.101(b); FAR 22.1015). Orion also cites public policy considerations,
such as the importance of maximizing small business participation in federal contracting.
Pl.’s MJAR 17; Pl.’s Reply 7-10.
However, the court finds that because the agency had no legal obligation to amend
the solicitation to update the size standard, the agency did not need to document a
rationale for not amending the solicitation. Orion’s policy arguments do not explain how
the agency abused its discretion by limiting the competition to entities that met the
original solicitation’s small business size standard. Orion’s citations to regulations
implementing the Davis-Bacon Act only reinforce the agency’s discretion in this matter.
Moreover, the record shows that Orion could
have raised this issue during the solicitation process and
required the agency to make a formal decision. The solicitation
provided contact information for requests for information, AR
126, 129, 202, and the agency responded to hundreds of requests
for information and clarified provisions in the solicitation.
See, e.g., AR 247-48 (responding to question and clarifying a
solicitation provision about a site visit). Yet, Orion never
asked whether the size standard had been changed. To the
contrary, Orion’s submissions to the agency state that the size
standard was $33.5 million. AR 711, 757. Nonetheless, to the
extent Orion believed that Amendment 6 created ambiguity
regarding the size standard, because the standard had changed,
Orion needed to ask the agency for clarification or request an
amendment to the solicitation prior to the close of the bidding
process. See Blue & Gold Fleet, L.P. v. United States, 492 F.3d
1308, 1313 (Fed. Cir. 2007). Having failed to do so, Orion
cannot now complain that it was uncertain as to the size
standard applicable to the solicitation. Id. (Orion
Construction Corporation v. U. S., No. 15-1505C, April 1,
2016) (pdf)
III. Neither USDA’s Nor SBA’s
Decisions Were Reasonable
The size standard decisions by
both agencies were flawed because the record does not show that
they gave proper consideration to whether dredging constitutes
the primary activity involved, which the regulations instruct is
best determined by the relative value of the items of work
involved.
A. The Contracting Officer’s
Determination Was Irrational
The CO’s statement of facts to the SBA is the best indicator of what
was in front of the agency when it made its initial size standard determination.
That statement makes clear that the agency relied primarily on the overall
purpose the project, “marsh creation and preservation,” in its classification of
this project as best fitting under the general description of construction
services found in NAICS code 237990. We note at the outset that marsh
creation and preservation is the ultimate end of the project, but that phrase
leaves ambiguous the presumptive means to achieve that end, which we view
as the more relevant concern for this exercise in taxonomy. I.e., the work
performed rather than the final outcome should be the focus of the inquiry
because the contractor is concerned with what its capabilities are.
The CO contrasted the work required by the solicitation to what she
considered to be more typical dredging projects. Dredging contracts, in her
words, involve “pump and dump,” but the solicitation requires the contractor
to manage the discharge from the dredge in such a way as to “achieve a
‘uniform’ elevation as established by the plans and specifications” within the
marsh creation cells. AR 349. That, in conjunction with the other elements
not found in more routine clean up dredging operations led to the conclusion
that this project was something more than dredging, and thus it would be better
to classify it as a general construction project. The only quantitative
consideration was with regard to labor hours. The CO stated that item 7 would
make up less than 40 percent of man-hours while general construction would
take up the rest. That calculation assumes that the only dredging involved is
embraced by item 7.
We are not in a position to second guess the agency’s determination that
dredging was not strictly required for work components other than item 7.
Plaintiff may be correct that nearly all the work actually will have to be done
with dredging machinery, but the record does not give us access to that
determination. We assume, therefore, that the agency was reasonable in
concluding that the only work item which had to be presumed to constitute
dredging was item 7. The fact that there were eleven other work items,
however, says nothing about the relative importance of those items.
The regulations require an analysis of the relative weight of the
components of the contract, and absent compelling reasons, the contract should
be classified according to “the component which accounts for the greatest
percentage of contract value.” 13 C.F.R. § 121.402(b)(2); see Red River Serv.
Corp. v. United States, 60 Fed. Cl. 532, 548-49 (2004) (holding that a protestor
was entitled judgment on the administrative record because the CO failed to
give “primary consideration to the relative value and importance of the
components of the procurement.”)
The closest the CO came to this analysis was a look at the anticipated labor
hours per work item. She attributed 40 percent to dredging from item 7, and,
because this was less than the 60 percent of labor items attributed to the other
work items, she was satisfied that dredging was not the primary purpose. That
conclusion, taken at face value, is insufficient, however.
The percentage of labor hours involved in a component of work is not
necessarily synonymous with its contribution to overall cost. Item 7 is priced
by the cubic yard of material dredged, not the man hours expended, if for no
other reason, we assume, because it involves the use of heavy equipment.
Items 5, 6, and 8, as further example, will be paid by linear foot of the material
placed. But nowhere in the record is there any analysis of the total price of
item 7 in comparison to the other work items. The agency’s failure to quantify
in any meaningful way its ultimate conclusion violates the requirement of the
regulation. The regulations are clear, primary consideration is to be given to
the relative value of the components, i.e., what the agency will pay for each
item of work. No such calculation was made.
Plaintiff presented us with two documents at oral argument generated
by the agency but not included in the administrative record. One is a letter
sent to RLB after the award of the contract to another awardee prior to the
GAO protest. That letter presents the cost break down of the successful
awardee’s proposal. In it, item 7 constitutes nearly 75 percent of the total
price. The second document is a spreadsheet, given to plaintiff at its
debriefing following that initial award, which reflects the government’s
internal cost estimate compared with those of RLB and the awardee. The
agency estimates $13,942,600 for Marsh Creation Dredging, item 7, out of a
total estimated price of $24,280,506. Item 7 thus represented 57 percent of the
government’s anticipated cost.
The record is not entirely clear when the government’s internal cost
estimate was generated and whether the CO had it in front of her at the time
of her initial determination. It is important to remember, however, that the
initial contract award was cancelled after a protest at GAO. The agency issued
a new solicitation after correcting defects presented at GAO. Thus, at the time
of the re-solicitation, the agency knew it anticipated 57 percent of cost would
be attributable to item 7, and it knew that a prior awardee for the same work
had priced the dredging component at nearly 75 percent of the total cost.
These materials were thus part of the contract record in front of the agency and
should have been included in the administrative record. We deem them
included.
In light of this knowledge, it was irrational and not consistent with the
regulations for the CO to have not reconsidered the applicable size standard
and to not have done a more meaningful quantitative analysis. Although we
cannot make this determination for the agency, as we instructed in our order
of September 23, 2014, if item 7 is the most valuable item, primary
consideration must be given to it in determining if the exception applies. See
Red River Serv. Corp., 60 Fed. Cl. at 548-49.
B. The SBA Decision on Appeal Failed to Consider the Relative Value
of the Components of Work
Like the USDA before it, OHA’s decision on appeal is devoid of any
quantitative analysis of the relevant cost or importance of the work items.
Rather than confront the appellants’ arguments squarely regarding the value
of the dredging work, the OHA judge rested his conclusion on his reading of
the various tasks required and the overall purpose of the project. He did not
consider whether the CO properly determined the relative value of the
components nor did he even consider the admittedly incorrect labor hour break
down presented to him by the agency. Instead, he simply concluded, “Thus,
I hold that in order for this exception to apply, the services procured have to
be Dredging or Surface Cleanup Activities in nature. Merely because a
solicitation involves dredging work does not justify the use of the exception.”
AR 449. The first sentence is confusing because it leaves no room for a
comparative analysis. The second sentence is correct but begs the question,
“how much of the work is dredging?”.
For aught that appears, OHA seems to have treated as controlling the
fact that there are a number of work items, and arguably only one of them was
dredging. The judge recognized that dredging “activities account for a large
portion of the services sought” but found that unconvincing because “the
Project requires a substantial amount of other types of work in addition to
dredging.” AR 450. That simplistic and imprecise reasoning is too flabby to
meet the regulatory requirements. No consideration of the relative value of the
work items or which was the most representative component was undertaken.
We must therefore set the SBA OHA decision aside as irrational and contrary
to the applicable law. (RLB Contracting
Inc. v. U. S., No. 14-651C, October 3, 2014) (pdf)
The Plaintiff’s complaint contains four separate counts. The
first count is that the VA failed to issue the Solicitation in
compliance with two LOS rules regarding the source of supplies
and the use of subcontractors. The second count is that the VA
failed to issue the Solicitation in compliance with the
statutory nonmanufacturer rule, which requires that a business
concern “represent that it will supply the product of a domestic
small business manufacturer” unless a waiver is granted. Compl.
at 101-102. The third count is that the VA failed to require
sufficient information to support a small-business set-aside.
The fourth and final count is that the VA failed to issue the
Solicitation under the proper NAICS code. Compl. at 115.
(sections deleted)
III. Discussion
a. The Statutory Nonmanufacturer Rule applies to the
Solicitation regardless of the NAICS code because it calls for
the provision of supplies.
Central to this case is whether
the NMR applies to the instant Solicitation. Rotech believes
that the current Solicitation will lead to a situation where the
winning bidder or bidders are in violation of the NMR because
they will be unable to provide the product of a domestic small
business. The Government argues that the NMR is inapplicable in
this case because the NMR only applies to contracts for supplies
and that the instant Solicitation, by virtue of its chosen NAICS
code 532291, is a contract for services. Def.’s Mot. J. Admin.
R. at 29. The statutory nonmanufacturer rule, 15 U.S.C. §
637(a)(17), is part of the Small Business Act, and the provision
that is pertinent to this dispute allows a small business to bid
on a contract even though it will not itself supply the product
to be procured as long as it “represent[s] that it will supply
the product of a domestic small business manufacturer or
processor, unless a waiver of such requirement is granted.” 15
U.S.C. § 637(a)(17). “The clear purpose of the non-manufacturer
rule is ‘to prevent brokerage-type arrangements whereby small
“front” organizations are set up to bid [on] government
contracts but furnish the supplies of a large concern.’ The
rules serves, in other words, ‘to prevent dealers from acting as
mere conduits for the products of large manufacturers on small
business set-aside procurements.’” Rotech v. United States, 71
Fed. Cl. 393, 412 (Fed. Cl. 2006) [see below].
Although NAICS code 532291 is
titled “Home Health Equipment Rental,” the parties are in
agreement that the structure of the NAICS code system places
this code under the category of services. Status Conference
September 4, 2014. Rotech, however, believes that because the
procurement calls for the provision of health equipment, it is
also a contract for the supply of products (regardless of the
NAICS code), making the contract subject to the NMR.
Whether the NMR applies to a
contract that includes both services and the provision of
supplies, despite the NAICS code classification of the contract
as one for services, has previously been considered by the Court
of Federal Claims in a nearly identical controversy to the one
now before this Court. In Rotech v. United States, 71 Fed. Cl.
393 (Fed. Cl. 2006), the court considered the applicability of
the NMR to a service contract that also involved the procurement
of home oxygen supplies. At the onset, it is important to
acknowledge that the Government is correct in stating that “the
court’s decision in Rotech is not precedential . . . .” Def.’s
Mot. J. Admin. R. at 33. Nevertheless, the Rotech decision may
be cited as persuasive authority by this Court, as conceded by
the Government (“the Rotech decision is at best persuasive.”)
Def.’s Reply at 12. Indeed, for the reasons discussed infra,
this Court finds the 2006 Rotech decision to be articulate,
thoughtful, and well-reasoned such that there is no reason for
this Court to reach a different conclusion on such a similar set
of facts.
Rotech concerned a pre-award bid
protest by the plaintiff Rotech challenging the award of home
oxygen equipment contracts to two competitor companies by the
VA. Rotech, 71 Fed. Cl. at 395. At issue were two separate
Request for Proposals (“RFP”): RFP 583, which concerned the
provision of home oxygen equipment for Veterans Integrated
Service Network 11 and issued under the same NAICS code as in
this case, namely, 532291 (“Home Health Equipment Rental”), id.,
and RFP 247, a similar but smaller contract for the supply of
home oxygen equipment to beneficiaries in and around Augusta,
Georgia and issued under NAICS code 621610, a service code
titled “Home Health Care Services,” id. at 399. As is the case
in the instant case, both RFPs were issued as small business
set-asides, although the two RFPs in Rotech each featured a
cascading tier system which allowed for the possibility of full
and open competition should certain criteria not be met during
the bidding process. The plaintiff argued that the VA’s decision
to award the RFPs as small business set-asides was arbitrary and
capricious because although the winning bidders were both small
businesses, they intended to fulfill their contracts by
supplying the product of a large business, in violation of the
NMR. Id. at 395. The VA contended that the NMR was inapplicable
to those RFP’s because the rule “applies only to contracts for
the supply of manufactured products alone, and not to contracts
like these, which call for the supply of both manufactured
products and services.” Id. at 411.
In holding that the NMR applies to
service-coded contracts that also involved the provision of
supplies, the Rotech court looked at the plain statutory
language of the statutory nonmanufacturer rule, focusing on the
word “any.” (“An otherwise responsible business concern that is
in compliance with the requirements of subparagraph (B) shall
not be denied the opportunity to submit and have considered its
offer for any procurement contract for the supply of a product .
. . .”). 15 U.S.C. § 637(a)(17)(A) (emphasis added). The Rotech
Court noted that its “first task is to determine whether
Congress has spoken on the precise issue contested by the
parties, by examining the text of the statutory nonmanufacturer
rule.” 71 Fed. Cl. at 418. In interpreting the text of the NMR,
the court held that:
The court cannot, however, ignore
Congress' clear choice of the word "any" as the only adjective
describing the phrase "procurement contract for the supply of a
product." 15 U.S.C. § 637(a)(17)(A) (emphasis added). By opting
not to use further modifying terms, such as "primarily,"
"principally," or "entirely," Congress declined to limit, in any
way, the specific types of "procurement contract[s] for the
supply of a product" to which the restriction should apply.
Indeed, the broad scope of the language used in § 637(a)(17) is
even clearer when it is compared with the terms used in another
federal procurement statute, the Service Contract Act of 1965
(the Service Contract Act), 41 U.S.C. §§ 351-58 (2000). That
statute applies to "every contract . . . the principal purpose
of which is to furnish services . . . ." Id. § 351 (emphasis
added). Its counterpart, the Walsh-Healy Public Contracts Act,
41 U.S.C. § 35 et seq. (2000), applies to contracts for which
the principal purpose is not the furnishing of services, but
instead, "the manufacture or furnishing of materials, supplies,
articles, or equipment . . . ." Id. § 35. As the language of the
Service Contract Act makes clear, Congress can, and does,
sometimes include in its language limiting terms which carefully
define a statute's scope. See and compare Murakami, 398 F.3d at
1352 (stating that if Congress intended a statute to be more
narrow than its plain language suggested, it "could have used
stricter language in crafting the Act") (citing Doyon, Ltd. v.
United States, 214 F.3d 1309, 1316 (Fed. Cir. 2000)). Congress'
refusal to do so here is clear and unambiguous, and must be
respected.
Rotech, 71 Fed. Cl. at 420.
Succinctly put, “that language clearly and unambiguously
provides that the nonmanufacturer rule applies to all supply
contracts, whether they implicate some level of services or not.
No legislative intent sufficient to overcome that plain reading
of the statute exists here.” Id. at 421. The court then analyzed
the contents of both RFPs to determine whether they were for
services or supplies and concluded that while each RFP included
both supply and service elements, “the value of the contracts is
mostly, if not entirely, attributable to the portion which calls
for the supply of manufactured products.” Id. at 430. Thus, it
was found that, regardless of the assigned NAICS code, the
contracts were for supplies and thus the NMR was applicable. Id.
However, after the 2006 Rotech
holding, in 2011, the Small Business Administration (“SBA”)
promulgated 13 C.F.R. § 121.406, addressing the problem of mixed
service and supply contracts. In sum, the regulation states that
the NMR does not apply to contracts that have been assigned a
service NAICS code (as in this case). Indeed, the regulation
states that if a contract classified as a service contract has a
supply component, the NMR does not apply to the supply
component.8 Thus, the Government argues that despite any holding
in Rotech concerning the applicability of the NMR to mixed
contracts issued under NAICS service codes, the SBA’s subsequent
promulgation of 13 C.F.R. § 121.406(b)(3) overrules such a
holding. Def.’s Mot. J. Admin. R. at 35-36. In opposition,
Rotech believes that the new regulations promulgated by the SBA
are irrelevant because the Rotech court has already concluded
the statutory language of the NMR is plain and unambiguous in
its meaning. Pl.’s Mot. J. Admin. R. at 16. The Court is in
agreement with Rotech on this issue. Since the Court of Federal
Claims has already held that it is a plain and unambiguous
statutory requirement that the NMR be applied to all contracts
involving the provision of supplies, regardless of the NAICS
code, this Court is not required to defer to subsequent agency
regulation that is contrary to the statute.
In Chevron, U.S.A. Inc. v. NRDC,
467 U.S. 837 (1984), the United States Supreme Court held that
“ambiguities in statutes within an agency's jurisdiction to
administer are delegations of authority to the agency to fill
the statutory gap in reasonable fashion.” Nat’l Cable &
Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 981
(2005) (citing Chevron, 467 U.S. at 865-866). This delegation of
authority is commonly referred to as Chevron deference,
referring to the deference that courts should pay to an agency’s
determination in resolving ambiguities in a statute. However, as
the Supreme Court later noted in Brand X Internet, “A court's
prior judicial construction of a statute trumps an agency
construction otherwise entitled to Chevron deference only if the
prior court decision holds that its construction follows from
the unambiguous terms of the statute and thus leaves no room for
agency discretion. This principle follows from Chevron itself.”
Brand X Internet, 545 U.S. at 982. Thus, in order for a prior
judicial opinion to trump a regulation promulgated by an agency
regarding statutory construction, that judicial opinion must
have held that the language of the statute was unambiguous. Such
is the case here.
Nevertheless, to further bolster
this point, Judge Bush examined the history of the statutory NMR,
noting that “nothing in the legislative history of the Small
Business Act indicates that Congress intended to create an
exception to the nonmanufacturer rule like the one suggested by
the government. In fact, the unique history of the rule, in its
statutory and regulatory forms, indicates just the opposite.”
Rotech, 71 Fed. Cl. at 420. As the court notes, at the time the
statutory NMR was passed by Congress, its regulatory counterpart
had existed for a number of years and had been interpreted by
SBA-OHA decisions to apply only to contracts solely for the
supply of manufactured goods. Id. at 421. By enacting the
statutory NMR with language indicating that it should apply to
any contract for supplies, Congress clearly evinced its intent
to have the statute apply to all contracts involving the
procurement of supplies and not just those contracts for
supplies alone.
As the Rotech opinion clearly
states, Judge Bush found the statutory NMR to be unambiguous in
its application to contracts for the procurement of any
supplies. Following the Brand X Internet standard set out by the
Supreme Court, Rotech found that the unambiguous terms of the
statutory NMR left no room for agency discretion on the matter.
Thus, it is irrelevant to the controversy at hand that in 2011,
five years after the Rotech decision, the SBA promulgated 13
C.F.R. § 121.406 in an attempt to narrow the scope of the
statutory NMR. By its unambiguous language and clear use of the
word “any” instead of more narrow language, Congress left no
room for the SBA to change the scope of the statutory NMR.
b. The Solicitation is for a
contract that includes supplies.
Because the statutory NMR applies,
unambiguously, to all supply contracts, the next step of the
Court’s inquiry is to determine whether the instant Solicitation
is for a contract that includes supplies, in spite of its
assigned NAICS service code. In Rotech, the court stated the
standard thusly:
[T]he court rejects the contention
that the NAICS codes chosen for these procurements are
dispositive of whether they are ones for supplies or services.
The code chosen by an agency's contracting officer is certainly
one item of evidence which may be examined by the court in
determining the nature of a particular procurement, and thus,
whether it is subject to the nonmanufacturer rule. There is no
support, however, for the contention that the label assigned to
a procurement in fact determines the nature of the contract to
be awarded thereunder.
71 Fed. Cl. at 429-430. In that
case, as in the case before this Court, the court was presented
with a solicitation for home oxygen supplies and services issued
under NAICS code 532291. After examining the two RFP’s and
comparing the value of the services and supplies required, the
court concluded that the majority of the value of the contract
was driven by the supply component, and thus the RFPs offered
contracts for supplies, placing them squarely within the ambit
of the statutory nonmanufacturer rule. Id. at 430. Thus, not
only did the contract include supplies but the supply component
also predominated.
Although the RFPs at issue in Rotech are not identical to the
instant Solicitation, the Court finds them to be sufficiently
similar such that the instant Solicitation can fairly be
considered a contract for supplies. In Rotech, the court noted
that “the majority of the line items listed in RFPs 583 and 247
are for manufactured products to be provided to VA patients.
Only a handful relate to the provision of services. And, while
it may be true that some costs are associated with the provision
of those services, but simply are not billed separately, there
is no evidence on this record to establish the relative size of
those costs, or to show that they are anything more than
‘incidental.’” Rotech, 71 Fed. Cl. at 428.
Specifically, of the fifteen line
items listed in RFP 583, fourteen identified manufactured goods.
In the instant VISN 19 solicitation, the base year for the Fort
Harrison VA Medical Center contains 23 line items, 14 of which
are fairly described as calling for the procurement of
supplies.10 Pl.’s Mot. J. Admin. R. at 6-7. While the
supply-to-service line item ratio of the instant VISN 19
solicitation may not be as overwhelming at first glance as that
of RFP 583, an examination of the line items show that, as in
Rotech, the majority of the value of the contract will be
derived from the supply of manufactured goods. Among the many
service line items are:
• CLIN 0001 (Rental of
Concentrator System, to have an estimated monthly quantity of
2100)
• CLIN 0006 (Rental of Portable Gaseous System, to have an
estimated monthly quantity of 1200)
• CLIN 0019 (Portable Gaseous Contents, to have an estimated
monthly quantity of 7800)
• CLIN 0020 (Portable Liquid Contents, to have an estimated
monthly quantity of 6600).
AR at 422-425.
Conversely, the nine line items
identified as services (CLINs 0001A, 0005A, 0010A, 0011A, 0013,
0014, 0015, 0016, and 0017) have a combined estimated monthly
quantity of 223, with several line items having an estimated
quantity of 0. Id. Looking at the comparison between supplies
and services, it is fair to say that the majority of the value
of the VISN 19 Solicitation is derived from the supplies to be
provided rather than the services. Although the Government tries
to differentiate the structure of the solicitation in Rotech (14
of 15 CLINs for supplies) from the instant solicitation (14 of
23 CLINs for supplies), this structure is heavily influenced by
the Government’s decision to provide some patients with
equipment already owned by the VA (CLINs 0014, 0015, 0016, and
0017). In those instances, a contractor is simply required to
deliver and set up equipment already owned by the VA rather than
procure a brand new device. However, looking at the actual
numbers reveals that, for the base year in Fort Harrison, only
12 total devices owned by the VA will be provided for those four
CLINs.
Even more telling is a comparison
between CLIN 0001 and CLIN 0001A. Line item 0001 is for the
rental of new concentrator systems procured by the contractor
along with the delivery, set-up, and maintenance of such devices
and calls for an estimated monthly quantity of 2100. Line item
0001A calls for the set-up and maintenance of VA owned
concentrator systems in a monthly quantity of only 100. Although
the Court has not been provided with any evidence of total
estimated costs for each of these line items, the large and
obvious difference in supplies to services leads this Court to
believe that the vast majority of the value for the VISN 19
solicitation is tied to supplies rather than services. Thus,
even though only 14 of the 23 CLINs call for supplies, the Court
has no doubt that those 14 CLINs account for the large majority
of the value of the contract compared to the 9 CLINs that call
for a relatively small amount of services. The Government
contends that although the majority of the line items contain a
supply element, Rotech overlooks the significant service
component attached to them. Def.’s Mot J. Admin. R. at 23. The
significance of the service component is, however, irrelevant to
the application of the NMR under the holding in Rotech as long
as there is a supply component.
The Government’s argument that the
VISN 19 solicitation is one for services rather than supplies
because unlike the RFPs in Rotech, the instant solicitation
calls for the contractor to rent out the home oxygen equipment
rather than sell it to the VA is on firmer ground because a
contract without a supply component would not fall under the NMR.
Def.’s Mot. J. Admin. R. at 29 (“The principal purpose of this
solicitation is not to obtain manufactured oxygen tanks because
the government is not taking ownership of a manufactured
product. The tanks belong to the offeror, not the Government.
Instead, the solicitation involves the rental of such items and
the services required to operate them.”) However, as Rotech
correctly notes, “the NAICS rules make no distinctions regarding
whether rental versus ownership determines the applicable NAICS
code or even the principle purpose” and that “the NMR applies to
‘any procurement contract for the supply of a product . . . .’”
Pl.’s Reply at 24. This position is sensible, because regardless
of whether the VA is taking ownership of a product, home oxygen
systems are still being provided to VA recipients, and a
contractor must still find a way to acquire the necessary
supplies in order to provide them. As Rotech correctly notes,
multiple CLINs in the Rotech contract called for the provision
of rented equipment and those were treated identically to CLINs
calling for the purchase of new supplies. Pl.’s Mot. J. Admin.
R. at 18. The entire purpose of the NMR is to ensure that when a
small business contractor needs to acquire supplies it does not
itself produce, it gets them from another small business
concern. Whether renting the supplies or selling them, the small
business contractor must still acquire them from another entity,
and the NMR governs that transaction.
c. The NAICS code of Rotech’s
current contract is not dispositive.
The Government is at pains to
prove that the proper NAICS code was used in order to have the
Court conclude that the contracts were service contracts.
However, as this Court has already stated (in agreement with the
Rotech court), the NAICS code does not determine whether a
contract is one for supplies or for services for purposes of the
application of the NMR, although it is certainly relevant
evidence.
For example, the Government argues
that since this court decided Rotech, the SBA-OHA and the GAO
have issued several decisions regarding the selection of NAICS
codes which help distinguish Rotech and explain why it is
inapplicable to the instant case. Def.’s Mot. J. Admin. R. at
17-22. Furthermore, the Government contends that the proper
NAICS code was used because Rotech, the incumbent contractor for
VISN 19 since 2003, was awarded the VISN 19 contract, among many
other contracts, under NAICS code 532291. Def.’s Mot. J. Admin
R. at 27. The Government argues that it “stands to reason Rotech
believes that the contract they have been performing for the
last 6 years was properly constituted under the correct NAICS
code” and that “[t]he only difference is that the current
procurement is a small business set aside whereas the previous
contract was unrestricted.” Id.
Although the issue of the proper
NAICS code does not affect the Court’s decision regarding the
application of the NMR, suffice it to say that code 532291 (Home
Health Equipment Rental) seems more in line with the contracts
in the solicitation than Rotech’s proffer, which is code 339112
(Surgical and Medical Instrument Manufacturing). Thus, the Court
is not persuaded by Rotech’s fourth count that the VA used the
wrong NAICS code. That said, the NAICS code is non-determinative
as to whether a contract truly is one for supplies or services –
that question must be answered by looking to the terms of the
contract.
d. The issues raised in counts
1 and 3 are moot based on the Court’s finding that the NMR
governs.
Regarding the issues raised in
Count 1 (concerning various LOS rules) and Count 3 (concerning
48 C.F.R. § 19.502-2(b)(1)) the Court finds that those issues
are presently moot. The VA acted in a manner that was contrary
to law when it issued the VISN 19 solicitation without including
the requirements of the NMR. Because the Solicitation fails for
that reason, it is unnecessary for the Court to go into other
potential shortcomings at this juncture. (Rotech
Healthcare Inc. v. U. S., No. 14-502C, September 19, 2014)
(pdf)
The primary issue in this case is whether (SBA’s Office of
Hearings and Appeals) OHA’s decision that the CO’s designation
of NAICS Code 541712 was improper and that NAICS Code 541513 was
the appropriate designation, was arbitrary, capricious, or
contrary to law.
Selection of the applicable NAICS code is
governed by 13 C.F.R. § 121.402(b), which provides in pertinent
part:
The procuring agency contracting
officer, or authorized representative, designates the proper
NAICS code and size standard in a solicitation, selecting the
NAICS code which best describes the principal purpose of the
product or service being acquired. Primary consideration is
given to the industry descriptions in the NAICS United States
Manual, the product or service description in the solicitation
and any attachments to it, the relative value and importance
of the components of the procurement making up the end item
being procured, and the function of the goods or services
being purchased. A procurement is usually classified according
to the component which accounts for the greatest percentage of
contract value.
13 C.F.R. § 121.402(b).
The NAICS Manual description of NAICS
Code 541712 provides that this industry comprises
“establishments primarily engaged in conducting research and
experimental development (except biotechnology research and
experimental development) in the physical, engineering, and life
sciences, such as agriculture, electronics, environmental,
biology, botany, computers, chemistry, food, fisheries, forests,
geology, health, mathematics, medicine, oceanography, pharmacy,
physics, veterinary and other allied subjects.” NAICS Manual; AR
Tab 83 at 3249. The reference in the SBA’s regulations
concerning NAICS Code 541712, however, provides that: “‘Research
and Development’ means laboratory or other physical research and
development. It does not include economic, educational,
engineering, operations, systems, or other nonphysical research;
or computer programming, data processing, commercial and/or
medical laboratory testing.” 13 C.F.R. § 121.201 n.11(a).
The standard of review the OHA must
apply in an NAICS code appeal is whether the CO’s NAICS code
designation was based on “clear error of fact or law,” a showing
for which the “appellant has the burden of proof, by a
preponderance of the evidence.” 13 C.F.R. § 134.314. The OHA
judge applied this standard, and came to the conclusion that the
CO erred in assigning NAICS Code 541712 to the Solicitation. AR
Tab 83 at 3249-3251. In Arcata’s January 4, 2013 Motion For
Judgment On The Administrative Record and January 25, 2013
Response, however, it offered several arguments that OHA’s
finding was arbitrary and capricious.
In reviewing whether the OHA’s decision
was arbitrary and capricious, the court must determine whether
OHA’s decision “examine[d] the relevant data and articulate[d] a
satisfactory explanation for its action including a ‘rational
connection between the facts found and the choice made.’” Motor
Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins.
Co., 463 U.S. 29, 43 (1983) (quoting Burlington Truck Lines v.
United States, 371 U.S. 156, 168 (1962)).
In this case, OHA reviewed the
Solicitation and the PWS, the CO’s April 19, 2012 Memorandum
defending his choice of NAICS Code 541712, the arguments of
Delphi, the CO, and another prospective offeror, applicable OHA
case law, and SBA regulations, in arriving at a reasoned
explanation for his decision that the CO’s designation of NAICS
Code 541712 was a “clear error of fact or law.” AR Tab 83 at
3251. OHA determined that the Solicitation did not anticipate
the creation of new processes or products, which OHA precedent
has considered an essential element of research and development.
AR Tab 83 at 3250 (citing NAICS Appeal of Dayton T. Brown, Inc.,
SBA No. NAICS-5164, at 5-6 (“[P]rocurements classified under
NAICS code 541712 must be for research and development, and thus
must look to creating new processes or products.”); NAICS Appeal
of Dynamac Corp., SBA No. NAICS-5025, at 8 (“While many of [the]
tasks [identified in the solicitation] require scientific
experience/expertise, they do not require the development of a
new or improved product, which is the predicate of a research
and development contract.”)). Nor did it anticipate that the
contractor would perform “work that is an integral part of
[NASA’s] research and development,” or “directly or
independently perform research and development tasks.” AR Tab 83
at 3250-51. In addition, OHA found that the principal services
required by the Solicitation were “engineering, operations, and
computer support services,” activities that largely are excluded
from the definition of “research and development” set forth in
13 C.F.R. § 121.201 n.11(a). AR Tab 83 at 3250 (citing NAICS
Appeal of Advanced Sys. Tech., Inc., SBA No. NAICS-4774, at 20
(2006) (“[The] exclusion of operations research, systems
research, and other nonphysical research, as well as computer
programming and data processing, excludes the work required
under this solicitation from being classified as research and
development.”)).
For these reasons, the court has
determined that OHA’s decision, concluding that the CO “clearly
erred in classifying the acquisition under NAICS code 541712”
(AR Tab 83 at 3249), was rational and not arbitrary and
capricious. Moreover, “[e]ven if the court would have reached a
different conclusion, the court may not reverse. The court may
not substitute its judgment for that of the OHA judge.” Eagle
Design, 57 Fed. Cl. at 274 (citing Citizens to Preserve Overton
Park v. Volpe, 401 U.S. 402, 416 (1971)).
(sections deleted)
Arcata’s primary argument is that OHA’s
decision to substitute NAICS Code 541513 as the NAICS
designation for the Solicitation lacked a rational basis. First,
Arcata asserts that OHA’s decision was unsupported by the
record, as it summarily discounted the CO’s conclusion that
research and development was the primary work contemplated by
the Solicitation. In doing so, Arcata asserts, OHA failed to
give deference to the CO’s justifications for selecting NAICS
Code 541712. As discussed above, the court has determined that
OHA’s decision that NAICS Code 541712 was improper was not
arbitrary and capricious. Moreover, OHA, having rationally
determined that the CO “erred in assigning NAICS code 541712,”
then properly considered the appropriateness of the NAICS code
advanced by Delphi’s appeal. AR Tab 83 at 3251; see also Ceres,
52 Fed. Cl. at 35 (“The [OHA], in deciding an NAICS appeal,
considers not only those NAICS codes advocated by the CO and the
protestor, but also considers ‘any other . . . [NAICS] code it
deems, sua sponte, arguably is appropriate for the
solicitation.’” (quoting Information Ventures, Inc., SBA No.
4294, 1998 WL 128528 (1998)).
As previously discussed, selection of
NAICS codes is governed by 13 C.F.R. § 121.402(b). This
regulation provides that, in selecting a code, primary
consideration is given to
the industry descriptions in the NAICS
United States Manual, the product or service description in
the solicitation and any attachments to it, the relative value
and importance of the components of the procurement making up
the end item being procured and the function of the goods or
services being purchased.
13 C.F.R. § 121.402(b). NAICS Code
541513, titled “Computer Facilities Management Services,”
provides:
This U.S. industry comprises
establishments primarily engaged in providing on-site
management and operation of clients’ computer systems and/or
data processing facilities. Establishments providing computer
systems or data processing facilities support services are
included in this industry.
NAICS Manual.
Having found that the PWS divided the
tasks required by the Solicitation into “three major categories:
mission support services, operations and maintenance, and
systems engineering” and reviewed the tasks falling into these
categories, OHA then concluded that the services described by
NAICS Code 541513 fit “a large portion” of the services required
by the Solicitation, “particularly the ‘mission support
services’ and ‘operations and maintenance’ portions of the PWS.”
AR Tab 83 at 3243, 3251. OHA clearly recognized that, “[w]hile
there is no single NAICS code that applies to the full range of
services being acquired under this contract, applicable
regulations instruct that the CO should select the code ‘which
accounts for the greatest percentage of contract value.’” AR Tab
83 at 3251. The CO, in his response to Delphi’s NAICS code
appeal, had determined that NAICS Code 541712 comprised the
single largest percentage of contract value for the predecessor
contract, but his analysis also determined that NAICS Code
541513 “is attributed to approximately 15% of the overall
proposed effort.” AR Tab 48 at 1667; see also AR Tab 83 at 3245.
Having determined that NAICS Code 541712 was not an appropriate
designation for the Solicitation, OHA then determined that NAICS
Code 541513 and other related information technology work, could
reasonably be grouped together, to “constitute[] the bulk of the
anticipated work.” AR Tab 83 at 3251.
The court has reviewed the Solicitation,
the PWS, and OHA’s decision rejecting the designation of NAICS
Code 541712, and has determined that OHA’s decision regarding
NAICS Code 541513 was well reasoned and rational. The court also
has determined that OHA’s decision was not arbitrary and
capricious. Several major portions of the PWS, as OHA noted,
anticipate tasks involving operating, implementing, and
maintaining various systems at NASA that reasonably can be
described as “management and operation of . . . computer systems
and/or data processing facilities” under NAICS Code 541513. See,
e.g., AR Tab 69 at 2652-66 (including, inter alia, PWS § 3.2
“Operations, Maintenance, and Repair Requirements,” § 3.2.4
“Systems Operations and Maintenance Plan,” § 3.2.5 “Facility
Management,” § 4.1 “Mission Support Services” (including tasks
described as operations and “system maintenance” for various
NASA Dryden systems, as well as “computer systems operations”),
and § 4.2 “Operations and Maintenance” (including tasks
described as IT support services, “system administration and
related system management services” for NASA Dryden’s data
center, security control centers, and various other labs,
centers and systems at NASA)). Although it is true that NAICS
Code 541513 does not cover every aspect of the Solicitation,
such as the design and training requirements of the PWS, the
selected NAICS code “need not be a perfect fit to every facet of
the performance work statement.” InGenesis, 104 Fed. Cl. at 52.
Moreover, the fact that NAICS Code 541513 constituted the second
highest percentage of contract value under the CO’s analysis (AR
Tab 48 at 1667), supports the conclusion that OHA’s decision in
rejecting the applicability of NAICS Code 541712, was not
contrary to law, arbitrary, nor capricious.
Arcata also argues that NAICS Code
541513 is not appropriate because the Solicitation envisions
off-site work. Arcata’s examples of off-site work, however, with
one exception,2 show only a possibility of such work with
respect to limited tasks defined in the Solicitation. AR Tab 69
at 2648 (“[S]ome WBS elements may require work at other sites.
In such cases, the contractor shall arrange and coordinate all
travel required to accomplish the requirements.”) (emphasis
added); AR Tab 69 at 2649 (section 2.6 of the PWS, entitled
“ON-SITE/OFF SITE CONTRACTOR EFFORT,” providing that “travel may
be required to support off-site operations,” and that “the
contractor shall also perform one-time-only requirements, such
as a study or system development, where it may be appropriate to
use off-site resources and other than Government-furnished
equipment.”). Otherwise, the Solicitation contemplated a broad
range of operations, engineering, systems, and computer support
services to be performed on-site, as discussed above.
For these reasons, the court has
determined that Arcata failed to establish that OHA’s decision
that the applicable NAICS Code was 541513 was unlawful,
irrational, or arbitrary and capricious. (Arcata
Associates Inc. v U. S., No. 12-846C, April 3, 2013) (pdf)
Plaintiff advances three arguments in its
motion for judgment on the
administrative record: (1) selection of NAICS code 621111
rendered the
solicitation unduly restrictive of competition, (2) the Army’s
selection of code
621111 instead of code 622110 was arbitrary, capricious, and
lacked a rational
basis, and (3) the SBA OHA’s decision to affirm the contracting
officer was
likewise arbitrary, capricious, or otherwise contrary to law. In
response,
defendant argues that the contracting officer’s code designation
was rational
because NAICS code 621111 best describes the services being
solicited. For
the same reasons, defendant argues that SBA OHA’s decision to
affirm the
contracting officer’s NAICS code designation was reasonable.
Plaintiff’s motion for judgment on the
administrative record relies heavily on [protester's corporate
president] Ms. Edwards’s declaration and its supporting
documentation. Before we can examine the merits of plaintiff’s
substantive arguments, therefore, we must first decide whether
we may consider the information contained within her declaration
and its attached exhibits.
I. Ms. Edwards’s declaration is not needed
to allow effective judicial review.
Because of the level of deference accorded
to agency action, we
typically review the administrative record already in existence,
“not some new
record made initially by the reviewing court.” Camp v. Pitts,
411 U.S. 138,
142 (1973). As the Federal Circuit has noted, we must consider
the propriety
of “‘the agency decision based on the record the agency presents
to the
reviewing court.’” Axiom Res. Mgmt., Inc. v. United States, 564
F.3d 1374,
1380 (Fed. Cir. 2009) (quoting Fla. Power & Light Co. v. Lorion,
470 U.S.
729, 743-44 (1985)). While this rule is not absolute, the
administrative record
should be supplemented only in limited cases in which “the
omission of extrarecord
evidence precludes effective judicial review.” Id.
Ms. Edwards is experienced in providing
medical staffing, and she
makes the following points. The instant solicitation is a
“follow-on” contract
to a prior solicitation for physician services,
W81K04-08-R-0022. Decl. ¶ 4.
The prior solicitation was classified with NAICS Code 621111
giving it a
small business revenue limit, as amended, of $10 million. Decl.
¶ 5. Ingenesis
Arora Staffing, LLC, a joint venture in which plaintiff is a
partner, no longer
qualifies under the 621111 small business set aside limit, but
it does qualify
under the set aside allowed by 622110. Decl. ¶¶ 7-8, 13-14. With
regard to
the prior solicitation, Ms. Edwards asserts that the “task
orders issued by
defendant have been primarily for the services of
Psychiatrists.” Decl. ¶ 15.
Specifically, she notes that “[o]ut of a total full time
employees (FTE) of
thirty-five, twenty [approximately 57%] have been
Psychiatrists.” Decl. ¶ 15.
In terms of dollar value provided, she notes that mental health
services account
for sixty-four percent of the total. Decl. ¶ 15.
She also states that, “It has been my
experience that federal agencies
commonly use NAICS Code 622110 when soliciting for medical
staffing.”
Decl. ¶ 17. According to Ms. Edwards, based on reviewing the
FedBizOpps
website, since the prior solicitation was issued, federal
agencies have issued
at least forty-seven solicitations under NAICS code 622110 for
medical staff
to augment existing medical centers. Decl. ¶ 18. She asserts
that, based on
her review of federal agency staffing, most positions to be
furnished are ones
that provide inpatient or mental health services. Decl. ¶ 20.
Based on
plaintiff’s current contracts with defendant, she asserts that
“eighty-four
percent of the physicians we have furnished are providing
inpatient and/or
mental health services.” Decl. ¶ 23. Finally, she notes that,
concurrent with the instant solicitation, defendant also issued
the solicitation for ancillary
services using NAICS code 622110. Plaintiff argues that the
above
information is needed to demonstrate the extent to which
psychiatric care will
be required and that the services being procured are primarily
inpatient in
nature.
(sections deleted)
The gist of plaintiff’s submission is that
Ms. Edwards would have
picked a different code, based on her own experience in
contracting with the
government for medical services. There are a number of
difficulties with
entertaining this collateral attack on the solicitation. The
most basic is that it
presumes we conduct a de novo review of the contracting
officer’s work. No
doubt every bidder would like to kibitz the contracting
officer’s handling of
the procurement, offering additional information to consider,
challenging the
government’s assessment of how much work of certain types could
be
anticipated, or suggesting what the government really needs. But
the question
is not whether more information might have been available, or
what someone
else might have done, but whether the “additional evidence [is]
necessary,”
Axiom, F.3d at 1380, for the court to conduct its very limited
review. The
court in Axiom cautioned in particular against unnecessarily
expanding review
beyond the administrative record in existence and thereby “using
new evidence
to convert the arbitrary and capricious standard into
effectively de novo
review.” Id. (internal quotations omitted).
A bid protest is not an opportunity to
second-guess the agency’s
determinations of what it needs. And we specifically have been
reluctant to
consult prior solicitations in determining whether the decisions
in a disputed
solicitation were arbitrary or capricious. See NEQ, LLC v.
United States, 86
Fed. Cl. 592, 594 (2009). Moreover, neither the extent of
inpatient versus
outpatient treatment nor the extent of psychiatric services is
ultimately
dispositive. We are prepared to assume that the Army wants
psychiatrists and
anticipates the furnishing of significant inpatient treatment.
That much
appears of record and is sufficient to frame plaintiff’s claims.
Anything
further would convert this into a de novo review.
II. The selection of NAICS Code 621111 was
not arbitrary, capricious, or
otherwise not in accord with the law
Plaintiff argues that the contracting officer erred in selecting NAICS
code 621111 and that SBA OHA erred in affirming that code
selection. The
arguments are similar on both fronts and have the following
common
denominator: NAICS code 621111 does not capture the principal
purpose of
the solicitation because the Army is seeking psychiatric
services and inpatient
care providers. We disagree.
A. Soliciting psychiatric services does not
preclude using code 621111
The parties agree that the contracting
officer must select only one
NAICS code for this contract. The fact that there does not exist
one code that
perfectly captures all elements of the work statement is
unfortunate but simply
a fact of life in small business contracting. It is understood
that the role of the
contracting officer is simply to “select the NAICS code which
best describes
the principal purpose of the product or service being acquired.”
Ceres, 52 Fed.
Cl. at 25 (citing 13 C.F.R. § 121.402(b)); see also 48 C.F.R. §
19.303(a)
(2011). Primary consideration is given to:
The industry descriptions in the NAICS United States Manual,
the product or service description in the solicitation and any
attachments to it, the relative value and importance of the
components of the procurement making up the end item being
procured, and the function of the goods or services being
purchased.
13 C.F.R. § 121.402(b).
The beginning point in code selection, therefore, is the
principal
purpose of the work being contracted. Defendant argues and
plaintiff has to
concede that the Army is looking for physicians in a wide range
of specialties
(including psychiatry) to work in government facilities. It may
also be useful
to highlight what the Army is not looking for: physical
facilities, hospitals,
phlebotomists, cafeterias, janitorial services, emergency rooms,
etc. In this
solicitation, it is looking for doctors, and nothing else.
It is understandable, therefore, that the following code
appeared to be
a good fit:
This U.S. industry comprises establishments of health
practitioners having the degree of M.D. (Doctor of medicine) or D.O. (Doctor of osteopathy) primarily engaged in the
independent practice of general or specialized medicine (except
psychiatry or psychoanalysis) or surgery. These practitioners
operate private or group practices in their own offices (e.g.,
centers, clinics) or in the facilities of others, such as
hospitals or
HMO medical centers.
This is, of course, NAICS code 621111, the
code under which plaintiff currently provides these services and
the code selected by the contracting officer and affirmed by SBA
OHA.
Plaintiff’s first argument against this
code is that it specifically does not
include psychiatric services, which are classified separately
under code
621112, “Offices of Physicians, Mental Health Specialists.” The
contracting
officer noted that under the instant solicitation, approximately
[ ]% to [ ]% of
the total physician labor required would constitute psychiatric
services. AR
514. Plaintiff suggests that volume could be higher, but it has
to concede that
Code 621112 cannot be appropriate because, by including only
psychiatric
services, it excludes all non-psychiatric services. The
contracting officer
could pick only one code, so he understandably picked the most
generalized
physician-specific code, 621111. Plaintiff has not argued that
the NAICS code
selected would preclude the Army from seeking psychiatric
services. If it did,
then plaintiff could not supply psychiatrists under the current
contract–a
position that plaintiff clearly does not take.
The purpose of the NAICS code determination
is not to find a perfect
fit, only a fit that describes the principal purpose of the
services being
acquired. The principal purpose of this solicitation was to
procure physicians
across various specialties and to have them work in existing
government
facilities; code 621111 fully aligns with that purpose.
B. Any inpatient versus outpatient
distinction is not sufficient to render the selection of code
621111 arbitrary or capricious.
The second argument plaintiff offers with
the use of code 621111 is that
in the NAICS taxonomy scheme, code 621111 falls underneath the
umbrella
of subsector 621, “Ambulatory Health Care Services,” which
states that
providers in this subsector, “do not usually provide inpatient
services.”
NAICS 621, 2007 WL 6902771 (NAICS). We could question the logic
of
characterizing physicians such as neurosurgeons, practitioners
of emergency
medicine, radiologists, anesthesiologists, gastroenterologists,
general surgeons,
and plastic surgeons as not “usually provid[ing] inpatient
services,” but that
anomaly is inherent in the NAICS code structure itself and not
created by the
contracting officer. Indeed, in its briefing and in reliance on
Ms. Edwards’s
declaration, plaintiff states that “[a]s part of the incumbent
contract, 79% of
the physicians provided to the Army by plaintiff perform
inpatient services,”
and that “less than one-third of the value of the [incumbent
contract] consists
of services that fit within the ambulatory sector 621.” Pl.’s
Mot. J. 23.
We decline to permit this generalized and
not directly controlling
introductory language to trump the more particularized and
directly controlling
language of NAICS code 621111 itself. The chosen code contains
no
limitations on whether the physicians do primarily inpatient or
outpatient work.
This no doubt suited the Army well, given the fact that all of
the work would
be done in its own hospitals and clinics. The distinction would
therefore be
immaterial.
In any event, while subsector 621 provides
that ambulatory health care
providers do not usually provide inpatient services, this does
not mean that
such providers are precluded from providing inpatient services.
We agree with
SBA OHA’s observation that in some solicitations, potentially
“‘no one
designation can be a perfect fit.’” AR 537 (quoting NAICS Appeal
of
AllSource Global Mgmt. LLC, SBA No. NAICS-5292, at 7 (2011)).
C. The failure to use NAICS code 621110 was
not arbitrary or capricious
Plaintiff contends that the contracting officer overlooked a
more logical
NAICS code, 621110, which was used in the companion “Ancillary
Services”
solicitation. This code has two virtues, at least from
plaintiff’s perspective.
The most salient is that it has a much higher small business
threshold,
$34,500,000, under which plaintiff fits. The second is that, as
the government
concedes, 621110 is written so broadly that it could
theoretically cover all the
physician services the government wants, including
psychiatrists. We repeat
the description:
This industry comprises establishments known and licensed as
general medical and surgical hospitals primarily engaged in
providing diagnostic and medical treatment (both surgical and nonsurgical) to inpatients with any of a wide variety of medical
conditions. These establishments maintain inpatient beds and
provide patients with food services that meet their nutritional
requirements. These hospitals have an organized staff of
physicians and other medical staff to provide patient care
services. These establishments usually provide other services,
such as outpatient services, anatomical pathology services,
diagnostic X-ray services, clinical laboratory services,
operating
room services for a variety of procedures, and pharmacy
services.
NAICS 622110, 2007 WL 6902817 (NAICS). The
code thus includes physicians generally, along with a wide array
of associated facilities and services, including the furnishing
of hospitals themselves.
The agency rejected this code as
insufficiently focused on the primary purpose of this particular
solicitation, however, which was physicians. The question that
the contracting officer faced was this: should I pick a code
that is much more narrowly tailored to what the Army wants,
namely a broad array of physicians, despite the fact that it
excludes psychiatrists, or should I use a much broader code that
includes physicians, but includes virtually everything else
associated with general purpose hospitals?
The contracting officer chose the former,
and thus the question before us is not what the court would have
chosen, but whether the contracting officer’s choice was
arbitrary or capricious. We think it plainly was not.
Casting a net wide enough to include bidders capable of
furnishing fully
operational hospitals with all allied services seems far in
excess of the only
thing the agency wanted: portable doctors. This is particularly
true in view of
our prior conclusions that the nominal exclusion of
psychiatrists and the
general characterizations of the ambulatory care subsector were
not
problematic.
D. The contracting officer’s NAICS code
designation did not otherwise violate applicable statutes or
regulations.
Plaintiff also advances generalized
arguments based on the requirement
for full and open competition requirements under the Competition
in
Contracting Act (“CICA”), 10 U.S.C. § 2305 (2006). Under CICA,
the
government must procure goods and services in such a way as to
“achieve full
and open competition.” Id. § 2305(a)(1)(A)(I). Specifically,
plaintiff argues
that, due to the size limitations, competition is unduly
restricted because
plaintiff cannot submit a proposal. These arguments are
unconvincing. CICA
expressly allows the government to favor small businesses to
further the
policies of the Small Business Act, 15 U.S.C. §§ 638, 644. 10
U.S.C. §
2304(b)(2). Moreover, Federal Acquisition Regulation 6.203
specifically
allows “contracting officers [to] set aside solicitations to
allow only such
[small] business concerns to compete.” 48 C.F.R. § 6.203(a).
Indeed, “[n]o
separate justification or determination and findings is required
under this part
to set aside a contract action for small business concerns.” Id.
§ 6.203(b). It
is not up to the court to decide how small is too small.
In sum, the selected code captures the
principal purpose of the contract.
It need not be a perfect fit to every facet of the performance
work statement.
The solicitation sought the services of physicians in a
wide-range of specialties
who can practice in military treatment facilities. That is the
exact essence of
code 621111. Thus, the contracting officer’s selection of code
621111 and the
SBA OHA’s affirmation of that code were not arbitrary,
capricious, or
otherwise not in accord with the law. (InGenesis,
Inc., v. U. S., No. 11-754, March 23, 2012) (pdf)
B. The Non-Manufacturer Rule
Rotech’s principal contention is that the
VA’s decision to award small business set-aside contracts to
Mitchell and FCC under RFP 583 is arbitrary,
capricious, an abuse of discretion, and contrary to law. Rotech
argues, specifically,
that the VA erred when it decided to award the contracts to
Mitchell and FCC
without determining their compliance with the Small Business
Act’s nonmanufacturer
rule. Rotech argues that because the value of the contracts to
be
awarded is derived principally from the supply of home oxygen
products, any
offeror which seeks to qualify under the terms of the
solicitation must comply with
that provision of the Act, by supplying home oxygen equipment
manufactured by a
small business. Plaintiff asserts that neither Mitchell nor FCC
intends to do so, and
thus, they are ineligible for small business awards in the
context of these
procurements. Rotech asks the court to permanently enjoin any
small business setaside
awards to Mitchell or FCC, and to order the VA to apply the
nonmanufacturer
rule to the contested procurements or to conduct a
resolicitation
which complies with the rule. In response, defendant admits that
the VA made no
findings on whether Mitchell or FCC will comply with the
non-manufacturer rule.
The government contends that such findings are not necessary,
however, because
the rule does not apply to RFPs 583 and 247. The United States
insists that the
non-manufacturer rule applies only to contracts for the supply
of manufactured
products alone, and not to contracts like these, which call for
the supply of both
manufactured products and services. Indeed, the VA took that
position early in
this dispute, as demonstrated by a written statement from the CO
for RFP 583:
The proposed contracts for home oxygen
services are
service contracts. The nonmanufacturer rule is not
applicable to this procurement. It is not solely for
manufactured products (oxygen), but also requires the
contractor to perform a significant number of services.
The Small Business Administration’s Office of Hearings
and Appeals has held that the nonmanufacturer rule
applies to procurements solely for manufactured
products, and not to procurements which include
services.
AR at 478. Based on this interpretation of
the non-manufacturer rule, defendant
argues that its conduct here was proper, and should be allowed
to proceed.
There is no question that Rotech’s protest
is centered on the Small Business
Act of 1958, 15 U.S.C. §§ 631-51 (2000). The United States
Congress first created the Act in 1953 to “aid, counsel, assist,
and protect . . . the interests of smallbusiness
concerns in order to preserve free competitive enterprise [and]
to insure
that a fair proportion of the total purchases and contracts or
subcontracts for
property and services for the Government . . . be placed with
small-business
enterprises.” Flexfab, L.L.C. v. United States, 424 F.3d 1254,
1256 (Fed. Cir.
2005) (citing 15 U.S.C. § 631(a)); see also Contract Mgmt., Inc.
v. Rumsfeld, 434
F.3d 1145, 1147 (9th Cir. 2006); 134 Cong. Rec. E3597-03 (daily
ed. Oct. 12,
1988) (statement of Rep. Aspen). To that end, the Act “directs
federal agencies to
reserve some government contracts for small businesses,”
Columbian Rope Co. v.
Sec’y of Army, 142 F.3d 1313, 1315 (D.C. Cir. 1998), with a
“‘Government-wide
goal for participation by small business concerns . . . [of] not
less than 23 percent
of the total value of all prime contracts for each fiscal
year.’” Contract
Management, 434 F.3d at 1147 (quoting 15 U.S.C. § 644(g)(1)). A
business is
considered a “small business concern” under the Act only if it
is “independently
owned and operated” and “not dominant in its field of
operation.” Columbian
Rope, 142 F.3d at 1315 (quoting 15 U.S.C. § 632(a)(1)). The task
of establishing
criteria to determine whether individual companies qualify as
small businesses, and
applying those criteria in individual cases, has been delegated
by Congress to the
SBA. Id. (citing 15 U.S.C. §§ 632(a)(2)(A), 637(b)(6)). Federal
agencies work
together with the SBA to establish small business set-asides for
contract
solicitations. Contract Management, 434 F.3d at 1147 (citing 15
U.S.C. § 644(a)).
The Small Business Act imposes a number of
requirements which businesses
must satisfy if they wish to claim a small business preference
in government
procurements. Most important to this lawsuit is the Act’s
requirement “that
nonmanufacturer recipients of small business set-aside[] . . .
contracts for
manufactured products . . . provide the product of domestic
small manufacturers or
processors on small business set-asides . . . – the so-called
‘nonmanufacturer
rule.’” 35 No. 37 Gov’t Contractor 598 (Sept. 29, 1993). The
clear purpose of the
non-manufacturer rule is “to prevent brokerage-type arrangements
whereby small
‘front’ organizations are set up to bid [on] government
contracts, but furnish the
supplies of a large concern.” Size Appeal of BNF Mfg. Corp., SBA
No. 633
(1973). The rule serves, in other words, “to prevent dealers
from acting as mere
conduits for the products of large manufacturers on small
business set-aside
procurements.” Size Appeal of Fire-Tec, SBA No. 1262 (1979); see
also Size
Appeal of Nuclear Research Corp., SBA No. 2828 (1988). The
non-manufacturer
rule began as a regulation created by the SBA as a part of its
effort to promote
small business in the United States. See Small Business Size
Standards, 49 Fed. Reg. 27925 (July 9, 1984) (citing 13 C.F.R. §
121.5(b)(2) (1984)). In 1988,
however, during a major overhaul of the terms of the Small
Business Act,
Congress codified the rule as a separate section of the statute
itself. See Business
Opportunity Development Reform Act of 1988, Pub. L. No. 100-656,
102 Stat.
3853 (1988); 15 U.S.C. § 637(a)(17) (1988). In this lawsuit, the
parties disagree
on both the scope of the statutory non-manufacturer rule and the
nature of RFPs
583 and 247. Both of those issues affect whether the awards to
Mitchell and FCC
fall within the statute’s purview. Accordingly, this protest
presents questions of
both statutory and contractual interpretation.
1. Interpretation of the Statute-To What
Does it Apply?
(sections deleted)
Here, the central question presented is
whether the statutory nonmanufacturer
rule applies to the contracts offered by RFPs 583 and 247. The
starting point in answering that question is, of course, the
statutory language.
Barnhart, 534 U.S. at 450. The statutory rule, found at 15 U.S.C.
§ 637(a)(17),
provides, in relevant part, as follows:
(A) An otherwise responsible business
concern that is
in compliance with the requirements of
subparagraph (B) shall not be denied the
opportunity to submit and have considered its offer
for any procurement contract for the supply of a
product to let pursuant to this subsection or
subsection (a) of section 644 of this title solely
because such concern is other than the actual
manufacturer or processor of the product to be
supplied under the contract.
(B) To be in compliance with the requirements referred
to in subparagraph (A), such a business concern
shall –
(i) be primarily engaged in the wholesale or
retail trade;
(ii) be a small business concern under the
numerical size standard for the Standard
Industrial Classification Code assigned to the contract
solicitation on which the offer is
being made;
(iii) be a regular dealer, as defined pursuant to
section 35(a) of Title 41 (popularly referred
to as the Walsh-Healey Public Contracts
Act), in the product to be offered the
Government or be specifically exempted
from such section by section 636(j)(13)(c)
of this title; and
(iv) represent that it will supply the product of a
domestic small business manufacturer or
processor, unless a waiver of such
requirement is granted - -
(I) by the Administrator, after reviewing a
determination by the contracting officer that no
small business manufacturer or processor can
reasonably be expected to offer a product meeting
the specifications (including period for
performance) required of an offeror by the
solicitation; or
(II) by the Administrator for a product (or class of
products), after determining that no small business
manufacturer or processor is available to
participate in the Federal procurement market.
15 U.S.C. § 637(a)(17).
(Pages deleted)
In the court’s view, the regulatory history
underlying SBA’s version of the
non-manufacturer rule supports the interpretation of the statute
which is urged by
Rotech. To show that mixed-purpose contracts are outside the
rule’s purview,
defendant relies on the agency’s statement in 1984 that the rule
applied in cases of
“a contract other than a construction or service contract,” and
on its 1995 statement
that the rule applies to a “procurement of manufactured or
processed products.”
Def.’s Resp. at 3 (citing Small Business Size Standards, 49 Fed.
Reg. 27925 (July
9, 1984); Small Business Size Regulations; Non-Manufacturer
Rule, 60 Fed. Reg.
27924 (May 16, 1995)). Notably absent from either of those
statements, however,
is use of the word “solely” or “principally,” or any other term
which would narrow
the range of supply contracts within the regulation’s scope.
Similarly, the text of
prior versions of the regulation state that the rule does not
apply to “construction or
service contracts,” but none speaks to the issue of
mixed-purpose contracts, or
provides that a manufacturing contract which involves an
incidental amount of
services is to be treated as an exempt service contract. See
id.; compare 48 C.F.R.
§ 52.219-6(c). Further, and most importantly, the current
version of the nonmanufacturer
regulation, which followed the enactment of the non-manufacturer
statute, completely removed the exception for “construction or
service contract[s]”
from its language. See 13 C.F.R. § 121.406.
There is absolutely no question that
contracts for services are not subject to
the non-manufacturer rule. Defendant has presented more than
adequate support
for that proposition, citing legislative and regulatory history
and provisions of the
Code of Federal Regulations to that effect. The next inferential
leap in defendant’s
argument, however, that any service aspect of a contract, no
matter how minute, exempts a contract from that rule, is
unsupported, save a handful of questionable
agency decisions. It is true that the SBA has examined the
non-manufacturer rule
and has interpreted it to apply only to contracts solely for the
supply of a product.
At other times, however, it has arrived at an opposite
conclusion. Compare
Arizona Medical Supply, SBA No. 1295 (1979) with Empire Home
Medical, SBA
No. 4291 (1998). More importantly, the plain language of the
statutory nonmanufacturer
rule, which is yet to be interpreted explicitly by an agency or
court,
utilizes exceptionally broad wording. See 15 U.S.C. §
637(a)(17). By its plain and
ordinary meaning, that statute applies to all manufacturing
contracts, whether
accompanied by an ancillary request for services or not. Id. And
again, nothing in
the scant legislative history behind the Act demonstrates
congressional intent to
attribute a meaning to the statute which is different than the
one espoused by its
clear language.
Finally, there is no question that, if the
VA’s interpretation of the nonmanufacturer
rule is allowed to stand, it will significantly undermine the
Small
Business Act’s primary goal–to promote the participation of
small businesses in
federal government contracting. Again, the non-manufacturer rule
was “designed
to ensure that small businesses actually perform a significant
part of the work
required by government contracts that they win.” Colombian Rope,
142 F.3d at
1315. Here, however, it is impossible to overlook the reality
that, if Mitchell and
FCC receive small business awards under RFPs 583 and 247, they
will “act[] as
mere conduits for the products of large manufacturers on small
business set-aside
procurements.” See Size Appeal of Fire-Tec, SBA No. 1262 (1979);
see also Size
Appeal of Nuclear Research Corp., SBA No. 2828 (1988). This is
exactly the sort
of arrangement which the non-manufacturer rule was created to
prevent. It is true
that Mitchell and FCC will benefit marginally from those awards,
by earning
profits associated with the resale of home oxygen equipment to
the VA. However,
their participation will undercut the intended, and much greater
benefit which
would be enjoyed by a small business chosen to supply that
equipment to the VA
directly.
For all of these reasons, the court
concludes that the statutory nonmanufacturer
rule does, in fact, apply to contracts for the supply of
manufactured
items which also require the provision of some services. It
follows, then, that the
rule applies to the contracts offered via RFPs 583 and 247.
Accordingly, the VA’s
decision to award work under those solicitations, without
examining each offeror’s
intent to comply with the rule, was arbitrary and capricious. In
an abundance of caution, however, the court will go on to
consider the second prong of the parties’
dispute. Assuming that contracts which call for a significant
number of services
are exempt from the non-manufacturer rule, Rotech and the United
States also
disagree on whether RFPs 583 and 247 fall within that exception.
2. Interpretation of the Solicitations -
Contracts for Supplies,
Services, or Both?
(sections deleted)
The second issue central to this protest is whether RFPs 583 and
247 offer
contracts for supplies only, or contracts for both supplies and
services. Rotech
argues that, even if the non-manufacturer statute is narrow, and
applies only to
contracts solely for the provision of manufactured goods, RFPs
583 and 247
nevertheless fall within its scope. Plaintiff argues that the
services required under
the proposed contracts are so slight in comparison to the
manufactured goods
required thereunder that they are de minimus. Rotech claims,
therefore, that the
contested RFPs may be characterized as offering contracts solely
for manufactured
goods, to which the rule undoubtedly applies. Defendant
disagrees, arguing that
the procurements require a significant number of services, and
thus fall outside the
statute’s purview. These arguments make it clear that, even
assuming defendant’s
interpretation of the rule to be correct, the United States must
also establish that
these RFPs actually offer mixed-purpose contracts necessarily
classified as service
contracts instead of supply contracts in order to prevail in
this protest.
Accordingly, the government’s contentions regarding the nature
of RFPs 583 and
247 are critical to its claim that the VA’s conduct was proper.
As the briefing summarized above makes
clear, the parties agree that RFPs
583 and 247 include some terms which describe supplies, and
others which describe services. They disagree, however, on the
significance of the “service”
clauses, and whether they are prevalent enough to remove the
RFPs from the scope
of the non-manufacturer rule. A comparison of the terms disputed
here with others
previously examined by SBA and the courts is helpful to assess
their import. Both
parties cite to one of the earliest administrative decisions on
point, John R.
Bermingham, which dealt with this issue in some detail. In John
R. Bermingham,
the challenged solicitation called for “a combination of work
which could be
classified as ‘service’ and ‘supply.’” SBA No. 1889 (1984).
Specifically, it
required “Class ‘B’ Overhaul [which] include[d] restorations,
parts, replacement
and adjustments required to restore the dimensions and
clearances to within the
tolerances specified in the applicable technical manuals, [d]rawings
and plans.” Id.
On review, the SBA noted that several clauses of the
solicitation indicated that the
contract being offered was one for supplies. For example, the
document identified
the manufacturer, the dealer, and the place of performance. On
the other hand, the
solicitation also included language applicable only to service
contracts. The
“General Provisions” section stated “DAR REQUIRED CLAUSES FOR
FIRS
FIXED PRICE SERVICE CONTRACTS.” In addition, the procurement had
been
assigned Standard Industries Classification Code 7699, titled
“Repair Shops and
Related Services not Elsewhere Classified.” After considering
these terms, the
SBA determined that the contract was one for services, because
the awardee would
not provide new supplies to the agency, but instead would only
refurbish existing
ones. Id. (“Bermingham would be providing a service to the
Department of the
Navy by accomplishing the overhaul of Leslie
Regulators/Controllers. Leslie
would be supplying to Bermingham the end item, the overhauled
regulator or
controllers . . . and not a new item. It is therefore, found
that this solicitation is a
‘Service’ contract . . . .”).
Here, as in John R. Bermingham, the terms
of the RFPs appear to conflict
with one another, because they include some terms which apply to
supply
contracts, and others which apply to service contracts. These
RFPs are different,
however, because both undoubtedly call for the provision of new
home oxygen
equipment. Part III of RFP 583, titled “Scope of Contract and
Statement of Work,”
provides that “[a]ll equipment is to be current state-of-art
model and all supplies
are to be new.” AR at 327. Clearly, these are not contracts for
refurbishment
which can be classified as “services” contracts under the
reasoning of John R.
Bermingham. Accordingly, that decision provides little guidance
here.
(sections deleted)
In the court’s view, the situation
presented here most resembles that
reviewed in Arizona Medical Supply, SBA No. 1295 (1979). There,
as here, the
solicitation required the proposed awardee to sell new medical
equipment to the
procuring agency, and to deliver, retrieve, maintain, and store
all such equipment,
old and new. Id. In considering whether the procurement was one
for services or
supplies, the SBA noted carefully that “[t]he only separate
charge identified on the
solicitation other than for sale of the equipment is for pickup
and delivery.” It also
emphasized that, according to the agency’s contracting officer,
“the great
proportion of the value was [to be] for the equipment . . . .”
Id. The SBA
concluded that because most of the value of the procurement
related to the supply
of equipment, and the comparative value of the services was
incidental, the
procurement was “primarily for the sale of prosthetic
equipment.” Id. The same is
true here. As plaintiff has underscored repeatedly, the majority
of the line items
listed in RFPs 583 and 247 are for manufactured products to be
provided to VA
patients. Only a handful relate to the provision of services.
And, while it may be
true that some costs are associated with the provision of those
services, but simply
are not billed separately, there is no evidence on this record
to establish the relative
size of those costs, or to show that they are anything more than
“incidental.” The
court appreciates the United States’ argument that the cost of
servicing each item
of manufactured equipment represents a portion of each item’s
total sale price.
There is no evidence, however, to quantify that claim. On this
record, the
“services” portions of the contracts offered under RFPs 583 and
247 are slight in
comparison to the supply portions. For that reason, the court
cannot conclude that
these solicitations truly offer mixed-purpose contracts which
would disqualify the
disputed procurements from being classified as supply contracts.
At this juncture, it is appropriate to note
that the SBA’s approach in Arizona Medical Supply – a comparison
of the dollar value of the supply versus services
portions of a contract – is echoed in other areas of the law. A
parallel can be
drawn, for example, between this method of analysis and the SBA
regulation
which describes the method for determining the size standard
applicable to a
federal government procurement. Title 13 of the Code of Federal
Regulations,
section 121.402, provides that size standards are typically
assigned to
procurements “according to the component which accounts for the
greatest
percentage of contract value.” Id. § 121.402(b); see and compare
Advanced Sys.
Int’l, Inc., SBA No. 3448 (1991) (concluding that a solicitation
for training
manuals to be used by the military to instruct personnel on use
of equipment was a
supply contract, because 75 to 80 percent of the value of the
contract related to
tangible deliverables, whereas 20 to 25 percent was attributable
to ancillary
services). Similarly, a number of courts have been called on to
determine whether
a contract is subject to the Service Contract Act or the
Walsh-Healy Act, based on
whether its “principal purpose” is the furnishing of services
though the use of
service employees. To do so, the courts undertake a case by case
examination of
the terms of the contract, and of the work required thereunder,
to determine the
source of the majority of the contract’s value. See, e.g., Ober
United Travel
Agency, Inc. v. United States Dep’t of Labor, 135 F.3d 822 (D.C.
Cir. 1998)
(holding that government travel management contracts were
service contracts
subject to the Service Contract Act, rather than supply
contracts, because their
principal purpose was to procure assistance in booking travel,
but they did not
actually obligate the government to purchase any products);
Donovan, 757 F.2d at
345 (deferring to Secretary of Labor’s determination that
contracts for sale of
timber were supply contracts, despite ancillary services which
were to be
performed in order to harvest timber); see also McLucas, 364 F.
Supp. at 771. A
similar approach can even be found in state law jurisprudence
focused on the
application of the Uniform Commercial Code to “non-divisible
mixed (goods and
services) contracts.” Bonebrake v. Cox, 499 F.2d 951, 960 (8th
Cir. 1974) (internal
quotations omitted); Conopco, Inc. v. McCreadie, 826 F. Supp.
855, 867-68
(D.N.J. 1993) (“In considering whether the U.C.C. will apply to
a mixed goods and
services contract, the court must determine whether goods or
services
predominate.”).
Inasmuch as this common sense approach to
classification appears in
relevant SBA decisions, the federal regulations, and elsewhere
in state and federal
law, the court concludes that it should govern this analysis as
well. Applying that
test to the facts of this case, it is clear that RFPs 583 and
247 include only an incidental amount of services. The
VA’s own estimate of proposal costs related
to
RFP 583 indicates that the single service requirement listed in
the schedule, Item
0014, will account for [] of the entire cost of the procurement
in all of the areas in
which small business set-aside awards are planned. See AR at
2020-26. The cost
of supplies is vastly larger. In Area B, for example, the
equipment and supplies
will cost the government approximately []. Id. at 2021. In Area
C, they will cost
approximately []. Id. at 2022. In Area F, they will cost
approximately [], and in
Area G, they will cost approximately []. Id. at 2025-26. Based
on these figures, it
is clear that RFP 583 offers contracts which are almost
entirely, if not exclusively,
for supplies, to which the non-manufacturer rule undoubtedly
applies. There is no
reason to conclude that the outcome regarding RFP 247 will
differ in any
significant way.
In addition, the court rejects the
contention that the NAICS codes chosen for
these procurements are dispositive of whether they are ones for
supplies or
services. The code chosen by an agency’s contracting officer is
certainly one item
of evidence which may be examined by the court in determining
the nature of a
particular procurement, and thus, whether it is subject to the
non-manufacturer
rule. There is no support, however, for the contention that the
label assigned to a
procurement in fact determines the nature of the contract to be
awarded thereunder.
The United States appears to argue that because the NAICS codes
assigned to
RFPs 583 and 247 are ones used to describe service contracts,
and because the
regulations required the VA’s contracting officers to choose
codes which
accurately represented the nature of the proposed contracts, it
follows that the
contracts are undoubtedly ones for services. Unfortunately, that
logic fails to
account for the very real possibility that an NAICS code could
be assigned in error.
That possibility is especially relevant here, where the plain
language of RFPs 583
and 247 appears to contradict the CO’s choice. Again, the
solicitations themselves
show that the value of the contracts is mostly, if not entirely,
attributable to the
portion which calls for the supply of manufactured products.
For these reasons, the court concludes that
RFPs 583 and 247 offer contracts
for supplies. There is no question, then, that the statutory
non-manufacturer rule,
found at 15 U.S.C. § 637(a)(17), applies to them. Accordingly,
the VA’s decision
to award small business set-aside contracts under RFP 583 to
Mitchell and FCC,
without considering whether those offerors would provide items
manufactured by
small businesses, was erroneous. The VA’s stated intent to award
work under RFP
247 without considering compliance with the non-manufacturer
rule is likewise contrary to law. On this record, the court
agrees with plaintiff that Rotech was
prejudiced by this error in the procurement process, and that
but for the error,
Rotech would have had a substantial chance to win these awards.
(Rotech Healthcare Inc. v. U. S.,
No. 06-303C, July 24, 2006) (pdf) |
