Online marketplaces: Making federal procurement simple

Congress has recognized the value of commercial online marketplaces. In the 2018 National Defense Authorization Act (NDAA), Congress gave the General Services Administration (GSA) a mandate to experiment with procuring through online marketplaces to promote competition, expedite procurement, and ensure reasonable pricing. An online marketplace hosts diverse suppliers, and competition exists by virtue of having multiple offers for a given product.

For government buyers in particular, an online marketplace can provide cost-effective features such as workflow approvals, tax exemptions from state taxes, and tools to document adequate competition.

Under Section 846 of the 2018 NDAA, online marketplaces would be available for all commercial-off-the-shelf (COTS) products under the simplified acquisition threshold. The original version of the law required GSA to consider market models already in use in the private sector and to use commercial terms and conditions.

However, the final version of Section 846 and later amendments risk departing from customary commercial practices. Instead of adopting commercial terms and conditions, the legislation defaulted to the standard set by procurement laws for purchases below the simplified acquisition threshold, unless waived by GSA. Moreover, instead of relying on real-time competition among commercial suppliers, Congress authorized GSA to develop additional ordering requirements for such online marketplace purchases.

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More specifically, the law broadly restricts the use of third-party supplier data by online marketplaces. Such a restriction conflicts with the commercial arrangements between the online marketplace platforms and their third-party suppliers. This is yet another example of history repeating itself in federal acquisition. Since the enactment of the Federal Acquisition Streamlining Act (FASA) in 1994, the policy governing commercial item procurements has been to simplify acquisition. However, as identified by the Section 809 Panel, the number of government contract clauses applicable to commercial item acquisitions has grown from 57 in 1995 to 165 today. Such regulatory burden has complicated commercial item acquisitions. The recent legislation on online marketplaces is going down the same slippery slope. The solution is not more regulation, but less.

As the government proceeds to implement Section 846, the following should be considered:

  1. Beware of reinventing the wheel.  Commercial online marketplaces have a mature business model and fully-developed terms and conditions. The government has no need to impose new procedures or additional government-specific terms. This would be an inefficient investment of regulatory capital and would conflict with the congressional mandate of using commercial terms and conditions to the maximum extent practicable. More importantly, the government may fall into the trap of subjecting micro-purchases, currently an area with minimal regulations, to burdensome and unnecessary requirements. Increased regulations and procedures will complicate micro-purchases through online marketplaces and raise the transaction costs for both sellers and buyers. Additionally, government-specific terms will discourage otherwise innovative companies from entering the federal marketplace.
  2. Let the marketplace do its work. The government should recognize that competition is inherent to an online marketplace, and ensure that there is no requirement to compare products among different online platforms. Why should government buyers check out multiple websites when they already have a dynamic market in one place? In the brick-and-mortar setting, it would make no sense for a buyer to drive to multiple stores to compare prices for a hammer under various brands. Similarly, most buyers go to just one website, particularly if it is a marketplace with multiple sellers, to buy a product. This is the market at work. Suppliers have a great incentive to earn customer trust and offer competitive prices. The government should capitalize on market incentives, and not try to control the process.
  3.  Respect the commercial arrangements between marketplaces and suppliers. Suppliers contract to sell their products on online marketplaces voluntarily and form commercial contractual relationships. The government should not interfere with those relationships. For example, Section 846 restricts the use of third-party supplier data by online marketplaces. Specifically, Section 846(h)(3) prohibits the use of third-party data for “pricing, marketing, competitive or other purposes.” This broad prohibition ignores the economic reality that many online marketplaces rely on third-party data analytics to improve user experience, conduct due diligence on suppliers, maintain safety and anti-counterfeiting programs, and optimize sales and transactional data for buyers and sellers. Restricting the use of third-party supplier data would most likely necessitate revising the contractual arrangements between online marketplaces and suppliers, which should be outside of the government’s purview.

Congress passed Section 846 to simplify, not complicate, procurements. Unfortunately, the law, as written, creates a potential for new requirements and procedures, which will burden online marketplaces, suppliers and government buyers. As the government implements this law, it should ensure that online marketplace procurements, especially micro-purchases, continue to rely on commercial terms and conditions. In a nutshell, keep it simple.

Robert A. Burton is a partner at Crowell & Moring LLP.  He is a nationally-recognized leader in federal procurement and served in the Executive Office of the President as the deputy administrator of the Office of Federal Procurement Policy.

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