How a Frankenstein version of equipment landed a Defense contractor in court

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If your product doesn’t meet the government’s specifications, it can be dangerous, in more ways than one, to try and rig something up. But that’s what a manufacturer of food processing equipment did, with predictable results. Federal procurement attorney Joseph Petrillo joined Federal Drive with Tom Temin with more on the case.

Interview transcript:

Tom Temin: And this is the Hollymatic company. Tell us what happened when they tried to sell a jury-rigged product to the Defense Department.

Joe Petrillo: Well, good morning. Hollymatic was a long standing, apparently almost 90 year old manufacturer of equipment for the food manufacturing and service industries. So it’s a well established company and it’s been making and selling these things commercially into the government for a long time. The Defense Commissary Agency was seeking a replacement for its meat grinders slash mixers for its various commissary stores, It needed to buy replacements for their aging supplies and equipment. So they issued a solicitation for commercial grinders slash mixer. And the specifications had numerous requirements, including that the item be approved by the Underwriters Laboratory and the National Sanitation Foundation. So it needed both UL and NSF certifications,

Tom Temin: Which are pretty standard certifications. I mean, for anything electrical that’s handling food, I imagine you would need that.

Joe Petrillo: Absolutely, absolutely. So, this is a characteristic of what you’d expect to find in the commercial marketplace too. So Hollymatic competed, but the product get offered, one of its standard pieces of equipment, was technically unacceptable. The problem was that the specifications also required that there be separate motors for the grinder and the mixer, and it had a unit that has single motor. So Hollymatic had proposed that several times, was continually found unacceptable. Finally, they described a machine, same model, with separate motors, which they described as a mix assist motor option at no cost. They were the low offeror, and acceptable so they got the contract. They delivered 38 units and they were paid close to half a million dollars. These are apparently not cheap items. Almost immediately, however, the store started reporting electrical problems, and that the units needed new electric cords and plugs. Government did some investigation. They had some questions about the UL and NSF certifications. So they sent Hollymatic notice saying what’s going on here. Hollymatic did not provide an adequate answer. So the contract was terminated for default. And the contracting officers final decision said that the Hollymatic had to refund the amounts that had been paid.

Tom Temin: Wow, they wanted to turn back the equipment altogether. Sounds like Hollymatic kind of rigged up something to put another motor on some stage of this piece of equipment. And I’m looking at the Hollymatic website. And that’s what they do. They take large quantities of beef and turn it into large quantities of hamburger from the looks of it.

Joe Petrillo: That’s apparently what this thing was supposed to do. And I guess the units they sell commercially were doing that.

Tom Temin: So Hollymatic appealed the termination.

Joe Petrillo: Exactly, to the Armed Services Board of Contract Appeals. And the government defended the appeal and it argued actually that Hollymatic had obtained the contract fraudulently. So the board looked at the record, and they noted that Hollymatic did not specifically say that the two motor version of the product had been UL and NSF certified. But they put enough in the proposal to create that impression. Previous statements in the earlier versions of the proposal had said if a single engine version was in fact UL and NSF certified. They were silent about the dual motor version not yet having that certification. And the record showed very clearly that they didn’t even bother applying for UL and NSF certification until after they got award. So the board also noted that the dual motor version had never been sold or offered for sale and wasn’t in that regard a commercial item. So they decided that both of those things were misrepresentations.

Tom Temin: Alright. We’re speaking with Joseph Petrillo, a procurement attorney with Smith Pachter McWhorter. And when you raise the cause for terminating a contract to fraud above just simply the machines didn’t work very well or something, that’s that’s worse, isn’t it?

Joe Petrillo: That is worse. And it has certain implications that I’ll talk about in a second. The misrepresentation was also considered material, because it went to required specifications. And the board also had to find for each fraud the government had reasonably relied upon the misrepresentation. In that instance, because there was a finding of essentially fraud, that voided the contract ab initio, which is a fancy way of saying no contract ever came into existence. The ASBCA then dismissed the appeal, but they didn’t dismiss it because they had ruled against the contractor on the merits necessarily, whether the termination was proper, they ruled that no contract did ever come into existence at all. They didn’t have jurisdiction. And they couldn’t even order the contractor to repay the money to the government because they had no jurisdiction. So that’s an interesting kind of legal result, but it leaves things where they are exactly for Hollymatic

Tom Temin: Well, did the board of contract appeals say that there was no contract in place because the contract had been terminated?

Joe Petrillo: No, it ruled that the fraudulent misrepresentation that resulted in the contract meant no actual deal had occurred. And there are a few things to note about this decision that I think are interesting. One is I’m not entirely sure that this wasn’t a commercial item, there are aspects of the definition of commercial item that allow an item that hasn’t yet been sold to be offered as a commercial item. But I don’t think that was critical here, because the board also found the failure to get the certifications was fatal. So that would have resulted in the same I think holding. What Hollymatic here should have done, I think, was to have objected to the requirement for dual motors. It’s selling this item commercially, it’s being used commercially for the same exact purposes, and it’s working properly. The requirement for dual motors was probably inappropriate, because it was more than the government actually needed and Hollymatic could have tried to get it changed, and if necessary, could have protested it. What Hollymatic shouldn’t have done is what it did, which is to misrepresent what it was doing to meet the specifications. And in essence, that led to its losing the contract.

Tom Temin: Interestingly, they offer a item called a bulker, which is attached to the grinder that further grinds the meat and puts it in packages. This is for supermarkets and so forth, I guess you can see where that could be helpful aboard a ship. But that clearly has a separate motor because it’s a separate thing that attaches when the meat comes out of the grinder. So it seems like they wanted to try to do this with no additional cost. Whereas normally the second stage piece does come with, you have to buy it separately. So they were trying to straddle something here that they just couldn’t quite do.

Joe Petrillo: Right, exactly. That was the problem. And it’s really a good example of how not to go about getting the contract and the need to be careful about details like certifications.

Tom Temin: Or maybe it’s a good idea to set up a fly off of meat grinders in this case to see which one burns up you when you turn the second motor.

Joe Petrillo: That would have been an interesting competition.

Tom Temin: And we all bring out the grill and try them afterwards and decide which we want to feed to the soldiers, sailors, airmen and marines. The way this ends up now is they’re still in dispute over whether they get the money back the government.

Joe Petrillo: I have a feeling the government will be getting the money back. I mean, finding of fraud is bad. It could even result in a debarment or suspension. So this has gotten to be a serious matter for the company.

Tom Temin: Alright. Joseph Petrillo is a procurement attorney with Smith Pachter McWhorter. Thanks so much.

Joe Petrillo: Thank you Tom.

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