Agencies May Not Conduct Prejudicially Misleading Discussions

By Dick Lieberman, Consultant and Retired Attorney

The Government Accountability Office (“GAO”) has frequently stated that agencies may not prejudicially mislead offerors when they conduct discussions (negotiations) in negotiated procurements. This requirement was again clearly restated in CFS-KBR Marianas Support Services, LLC, Fluor Fed Solutions LLC et al., B-410486, Jan. 2, 2015.

The Federal Acquisition Regulation states that when an agency conducts discussions in a negotiated procurement, “the contracting officer must...[tell offerors about their proposals’] deficiencies, significant weaknesses and adverse past performance information to which the offer or has not yet had an opportunity to respond.” FAR 15.307(d)(3).

The GAO has interpreted this section to mean that:

It is a fundamental precept of negotiated procurement that discussions, when conducted, must be meaningful and must not prejudicially mislead offerors. Specifically, an agency may not mislead an offeror--through the framing of a discussion question or a response to a question--into responding in a manner that does not address the agency's concerns; misinform the offeror concerning a problem with its proposal; or misinform the offeror about the government's requirements.

Metro Mach. Corp., B-281872 (Apr. 22, 1999), 99-1 CPD ¶ 101 (internal citations omitted).

In CFS-KBR, the Navy sought base operations support services for a location in Guam under a cost reimbursement contract. This meant that the Navy was required to perform a “cost realism” analysis to determine the probable cost of performance for each offeror, as required by FAR 15.404-1(d)(1) & (2). For service contracts cost realism analyses always consider whether the offeror’s proposed staffing level is sufficient, and the Navy did that on this procurement. However, the Navy mechanically evaluated all proposals against an undisclosed government estimate of the number of staff required, without considering the offerors’ different technical approaches. The GAO found this methodology unreasonable.

In conducting discussions the Navy advised each offeror of the precise number of staff it considered the proposal to be “deficient,” i.e., too low. Fluor, one of the protesters, increased its staffing to add precisely the number of staff identified by the Navy in the discussions, and the increase was so much that its revised staffing proposal (and high cost) was noncompetitive. GAO held that the Navy’s discussions were misleading, and this resulted in competitive prejudice to Fluor, a necessary aspect for sustaining the protest.

CFS, the other protester, was also told of its staffing deficiencies in the discussions.

However, it did not allege that it was misled by the discussions. In fact, CFS proposed fewer staff than the agency had told it were necessary, adding a smaller number than the Navy had identified in the discussions. The GAO concluded that CFS was not misled to its competitive prejudice by the discussion, and its protest was denied. TIPS: (1) Cost realism analyses are a required part of cost reimbursement contracting. Contractors should be certain that their proposals are realistic, fully comply with the solicitation, and provide adequate staffing to meet any requirement for services. (2) Agencies must use reasonable and realistic methods of conducting cost realism analyses—in particular, requirements for staffing. Mechanical methodology, without considering what is in a proposal, is usually not reasonable. (3) If you submit a proposal, and the agency engages in discussions but you lose the award, be sure to request and obtain a debriefing. At the debriefing, you should be able to determine if the discussions were reasonable, or if they were misleading. If misleading, and you were competitive prejudiced (i.e., you lost because of those discussions), consider filing a GAO protest.

Copyright 2015 Dick Lieberman, Permission Granted to the Maryland PTAC. This article does not provide legal advice as to any particular transaction

The Importance of Quality Control: Two Big Law Firms and One Big Bank Make a $1.5 Billion Mistake

By Dick Lieberman, Consultant and Retired Attorney

Although this blog deals with government contracting, the author couldn’t resist writing about a huge quality control problem, where a huge bank and two big law firms all made a $1.5 billion mistake. This incident demonstrates how crucial a quality control process can be—especially at a bank or a law firm. Government contractors should never short-change their quality program. The incredible story is recounted in In Re Motors Liquidation Co., et al v. Official Committee of Unsecured Creditors v. JP Morgan Chase Bank, No. 13-2187 (2d Cir., Jan. 21, 2015).

In 2001, General Motors (“GM”) obtained a $300 million loan from a group of lenders headed by JPMorgan Chase Bank. The loan was known as the “Synthetic Lease” and JPMorgan was identified in the Uniform Commercial Code (“UCC”) UCC-1 financing statements as the secured party of record. In 2006, GM entered into an unrelated loan for $1.5 billion, known as the “Term Loan,” from a different group of lenders led by JPMorgan Chase. The loan was secured by security interests including all of GM’s equipment at 42 locations throughout the U.S., and JPMorgan perfected the lenders’ security interests in that collateral through the filing of UCC-1 forms.

In September 2008, as the Synthetic Lease was nearing maturity, GM contacted Mayer Brown, LLP, its counsel, and explained that it planned to repay the amount. GM asked Mayer Brown to prepare the documents necessary for JP Morgan and the lenders to be repaid and to release the Synthetic Lease security interests held in GM property. A Mayer Brown partner assigned the work to an associate to prepare the documents to terminate the Synthetic Lease. In order to do so, the associate asked a paralegal who was unfamiliar with the transaction or its purposes to perform a search for UCC-1 financing statements that had been recorded against GM in Delaware. The paralegal found three such UCC-1s. Neither the paralegal nor the associate realized that only the first two UCC-1s related to the Synthetic Lease. The third UCC-1 related to the $1.5B Term Loan.

Mayer Brown prepared the papers to terminate the security interests, but included all three filings, which terminated the Term Loan as well as those in the Synthetic Lease. No one at Mayer Brown, JPMorgan, or its counsel, Simpson Thacher & Bartlett, noticed the error, even though copies of the closing checklist and draft UCC-3 termination statements were sent to individuals at each of these organizations for review. The documents were approved and then filed in Delaware—including the Main Term UCC-3 extinguishing the $1.5 billion security interest.

This issue came up when GM went into bankruptcy, and JPMorgan informed the Unsecured Creditors Committee that the UCC-3 termination statement relating to the Main Term Loan had been “inadvertently filed.” The Committee began an action to state that the loan was no longer secured, and JPMorgan was now an unsecured creditor for the $1.5 billion loan, because the termination statement had been filed. JPMorgan asserted that the filing was inadvertently wrong (they didn’t mean to do it), or was unauthorized, and therefore ineffective.

The Bankruptcy Court held that the termination statement was unauthorized and therefore ineffective because no one at JPMorgan, GM or their law firms had intended that the Term Loan security interest be terminated. On appeal, however, the Second Circuit Court of Appeals reversed, concluding that “although the termination statement mistakenly identified for termination a security interest that the lender did not intend to terminate, the secured lender authorized the filing of the document, and the termination statement was effective to terminate the security interest.” The Court noted that even though there was a mistake in the documents, JPMorgan authorized them to be filed after it and its counsel had reviewed them—so JPMorgan and its counsel knew that the documents were going to be filed, and JPMorgan “reviewed and assented to the filing of the [$1.5 billion UCC-3 termination] statement.”

COMMENT: What a “mistake.” All of this could have been avoided by careful review of the documents by all the high-powered lawyers who were involved as well as by the bank involved. (The market capitalization of JPMorgan Chase is more than $200 billion.) And, as government contractors we must ask, where were the quality control reviews/internal reviews at the two law firms? Expect considerable litigation to follow this decision.

Copyright 2015 Dick Lieberman, Permission Granted to the Maryland PTAC. This article does not provide legal advice as to any particular transaction.

Agencies Cannot Refuse to Pay Reasonable and Valid Fees on Sustained Protests

By Dick Lieberman, Consultant and Retired Attorney

The Competition in Contracting Act provides that the Government Accountability Office (“GAO”) may recommend that an agency pay legal fees and certain other costs where the GAO has determined that a solicitation for a contract or a proposed award or the award of a contract does not comply with a statute or regulation. 31 U.S.C. §3554(c). The GAO recommends that these costs be paid where a protest is either (1) sustained; or (2) where a procuring agency takes corrective action in response to a protest, but the GAO determines that the agency unduly delayed taking corrective action in the face of a clearly meritorious protest. Generally, if an agency takes corrective action on or before the due date for its protest report to the, the GAO regards such action as prompt and declines to grant cost reimbursement. Palmetto Isotopes, B- 410268.2, Jan. 5, 2015, 2015 WL 65017.

CICA further states that GAO may recommend payment to the protester (interested party), the costs of: filing and pursuing the protest, including reasonable attorneys’ fees and consultant and expert witness fees; and bid and proposal preparation. However, except for small business concerns within the meaning of the Small Business Act, Sec. 3(a), no interested party may be paid attorneys fees that exceed $150 per hour unless there is a special justification for paying more (usually a cost of living factor). 31 U.S.C. § 3554(c)(2).

A recent GAO protest demonstrates the significant mistakes that an agency can make when the GAO recommends the payment of legal fees. 6K Systems, Inc., Costs, B-408124.6, Dec. 16, 2014. In 6K, GAO recommended that the Office of Personnel Management (“OPM”) pay 6K’s legal fees after it sustained 6K’s protest of an unreasonable agency price evaluation and an agency failure to engage in meaningful discussions. 6K, which OPM acknowledged was a small business under the Small Business Act, submitted a request for 120.5 hours of attorney work at $225 per hour, for a total of $27,112.50. OPM refused to agree to that amount, and 6K filed its claim for costs with GAO.

First, OPM challenged the number of hours, but GAO noted that OPM had provided “no substantive support for its position,” instead filing a one page statement that recounted the negotiations between the agency and the protester. GAO therefore examined the reasonableness of the attorney hours, and concluded that, except for three requests totaling 5.75 hours, all the hours were reasonable. GAO disallowed 2.25 hours related to attending the debriefing, 1.75 for researching remedies the Court of Federal Claims, and 3.5 hours to discuss post-protest decision steps with 6K. GAO concluded that 6K was entitled to reimbursement for 114.75 attorney hours (120.5 minus 5.75 hours).

Second, OPM refused to pay at the requested hourly rate of $225. OPM simply stated that it “calculates the hourly attorney fee at $150” without providing any basis for this position. The GAO noted that CICA’s cap of $150 applied only to large businesses, and small businesses are specifically excluded from this limitation. OPM had acknowledged that 6K was a small business, and never argued that a $225 rate was unreasonable for legal services in Washington, DC. The GAO cited the CICA statement above that “[n]o party (other than a small business concern...) may be paid costs for attorneys’ fees that exceed $150 per hour.” Since 6K was small, and GAO deemed the $225 rate reasonable, it was allowed by GAO.

6K got all of its protest costs back, except for 5.75 hours worth of attorney time that didn’t relate to the protest. GAO recommended reimbursement of $25,818.75, or 114.75 attorney hours at $225 per hour.

TIPS:

(1) Agencies must comply with the law and the FAR, just as contractors must. An agency may not disregard the plain language of the law, which in this case, excluded small businesses from the hourly cap, basing their reimbursement only on “reasonableness.”

(2) If an agency denies a cost claim, it must provide a reasonable basis for that denial. Merely stating that the agency “calculates the hourly attorney fee at $150”” is not sufficient. Failure to read the statute and provide logical support for an agency’s position will be overruled by GAO.

Copyright 2015 Dick Lieberman, Permission Granted to the Maryland PTAC. This article does not provide legal advice as to any particular transaction.