Bid-protest decision impacting mergers and acquisitions

GAO says contracting officers should make a new determination of responsibility if a company is sold while bidding on a contract.

An interesting bid protest decision came down from the Government Accountability Office recently that could have broad repercussions, especially in wake of all the mergers and acquisitions happening in the federal marketplace.

First the basics of what happened:

GAO ruled in favor of FCI Federal in its protest of a $209 million contract award to USIS’ Professional Services Division in July 2014 to support 68 Homeland Security Department Citizenship and Immigration Services field offices and 10 asylum offices throughout the United States.

FCI Federal claimed CIS didn’t reasonably consider and document how it reviewed the allegations of fraud against the awardee’s parent company in determining USIS PSD’s responsibility.

“We sustained the protest, finding that the record showed that the contracting officer failed to obtain and consider the specific allegations of fraud alleged by the Department of Justice (DOJ) against the awardee’s parent, relying instead on general media reports,” GAO wrote in its decision on Aug. 5, which was posted later in the month. “We also found that the contracting officer failed to consider the close relationship between the awardee and its then parent company, USIS LLC, with respect to the contemplated approach to contract performance, mistakenly believed that the two companies were separate, and misunderstood the legal standards related to affirmative responsibility determinations.”

Basically what GAO is saying is when a company is sold from one parent to another or if one company takes over another in a merger or acquisition, the contracting officer needs to reassess the proposal and whether the new company is capable of meeting the solicitation’s requirements. The agency also must document this evaluation as part of its review of the bids.

Bill Shook, a procurement attorney who didn’t represent FCI Federal or USIS, said this decision is one of the few times GAO deals directly with determinations of responsibility.

“The facts are very unusual — a parent company in trouble that spins off a subsidiary with the subsidiary having relied upon the parent to perform a significant portion of the contract. Although government contractors are bought and sold on a regular basis so that an award may be made to a ‘new’ company, generally the contractor being bought or sold remains responsible for performance or the seller would still be capable of performing as needed because it was not under a fraud investigation,” he said. “So the case applies to the narrow circumstance where the offeror is sold during the course of a procurement and its parent is not able to participate as a subcontractor in the subsequent performance because of fraud concerns. It does happen but rarely. A far more common factual pattern would be an offeror is sold and is still responsible because all of the assets necessary for performance go with it.”

This is especially important as the Justice Department continues its aggressive pursuit of False Claims Act violations. DoJ reported in 2014 a record in terms of the number of fines levied on firms, and 2015 is shaping up to be no different based on what we’ve seen so far. USIS’ new parent company Altegrity was part of a settlement recently where it gave up $30 million in fees that it said the government owed.

A FCI Federal spokesman said the company was pleased with GAO’s decision.

Its attorney, Claude Goddard of the Polsinelli law firm, said the bid protest judgment clarifies the linking of responsibility determinations and awards.

“A responsibility determination, by law, must be made before an award decision, but the award decision should be made as soon as possible after the responsibility determination,” Goodard said. “The agency failed to follow those rules here. It tried to take a short cut by using a responsibility determination to justify an award decision made nearly 10 months earlier. In doing so, the agency ignored important developments — the sale of the business entity that submitted the offer — that rendered the original award decision outdated and obsolete. The awardee in its proposal had relied extensively on the past performance, corporate experience and corporate resources of its parent corporation, and the agency had relied on those same factors in assigning the awardee’s proposal high technical ratings. None of those factors applied, however, once the awardee was sold to another contractor. The agency erred by trying to use the later responsibility determination to justify an award that no longer was rationally based given the changed circumstances.”

GAO recommended CIS reopen discussions with all offerors remaining in the competition, request revised proposals, undertake a new evaluation of those revised proposals and make a new selection decision.

This post is part of Jason Miller’s Inside the Reporter’s Notebook feature. Read more from this edition of Jason’s Notebook.

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