Contractor Wins Bid Protest by Arguing that “Class Waiver” of Customary Commercial Practices was Irrationally Applied

Two large food distributors interested in competing for a $9.3 million contract to supply food to military and civilian customers in Texas and New Mexico win their pre-award bid protest against the Army’s Defense Logistics Agency Troop Support.  They successfully argued that the DLA’s waiver of the general requirement that government contracts conform with customary commercial practices in the industry was applied irrationally.  The case is U.S. Foodservice, Inc. and Labatt Food Service, L.P. v.United States, 2011 U.S.Claims LEXIS 2009 (October 12, 2011).

The DLA was concerned about fraud connected to the procurement of food supplies.  The lack of transparency in the prices offered to the government makes it difficult to determine if the government is overpaying.  In an effort to standardize pricing in a manner that the government could monitor, the DLA sought and obtained a “class waiver.”  This is a special procedure under FAR 12.302 that permit a government agency to obtain an exception to the general rule under FAR 12.301 that government acquisitions of commercial items be consistent with customary commercial practices.  After obtaining its waiver, it sought to alter the pricing formula generally used by food distributors.

U.S. Foodservice and Labatt Food Service complained that the waiver was irrationally obtained and applied.  Their best argument was that, as distributors, they didn’t have control over the prices manufacturers charged its customers.  They were simply middlemen.

The Court of Federal Claims held that DLA properly obtained the class waiver.  It found that the Agency’s goal of increasing transparency of the procurement process to cut down incidences of fraud was a legitimate procurement objective.  (Expect to see more and more such waivers.  USF argued that an agency could always argue that the possibility of fraud justifies a departure from customary commercial practices, eviscerating the requirement that such practices be followed by the government.  They are probably right.  However, this Court followed the recent precedents of two decisions from the Court of Appeals for the Federal Circuit that blessed such waivers.  These decisions are CHE Consulting, Inc. v.United States, 552 F.3d 1351 (Fed. Cir. 2008) and Weeks Marine, Inc. v. United States, 575 F.3d 1352 (Fed. Cir. 2009)).

However, even though the Court held that the class waiver was proper, it also held that the waiver had to be applied rationally.  It was this latter point the resulted in the successful bid protest.  The solicitation with the waiver required offerors to provide the agency with “most favored customer” (“MFC”) pricing.  Common in GSA contracts, a MFC clause requires that the contractor sell to the government at a price equal to or less than it sells to its lowest paying commercial customer.  USF and Labatt successfully argued that this was impossible.  In the foodservice industry manufacturers fix prices with the customer, not the distributor.  Thus, the DLA was forcing distributors to guarantee prices over which they had no control.  The Court held that this was not a rational application of the Agency’s class waiver to combat fraud.  The Court sustained the bid protest and ordered the DLA to cancel its solicitation containing the MFC clause.

————————————

Dave Albo – Attorney are bid protest attorneys and government contracts lawyers.