Why Did the IRS Give Equifax a $7.25 million contract?

October 10, 2017

Politico  and The Hill on October 5 reported that the IRS had awarded Equifax a sole source $j7.25 million contract “to verify taxpayer identity and to assist in ongoing identity verification and validations needs of the Service.”   Naturally, this raised question from all quarters in the wake of the massive data breach suffered by Equifax.  It may seem odd when the basic principle of federal procurement is “full and open competition” [48 CFR 6.101] for the IRS to give a sole source contract to Equifax when there are obviously other companies that could also perform the service.

To unravel this situation, we must understand the Government Accountability Office (GAO) bid protest process and the laws and regulations involved.   The federal procurement process has a long history of mechanisms to allow disappointed bidders to challenge the government’s procurement actions.  Federal procurement regulations (known as the FAR and found at 48 CFR Chapter 1) provide for what is called an agency level protest (48 CFR 33.103) that requires the agency to consider protests presented to the agency.  A more formal protest option is to file a protest with GAO. [31 US Code 3552]  The other option for protestors is to file an action at the US Court of Federal Claims.  [28 US Code 1491(b)(1)]

If the agency receives notice of the protest from GAO in a short, prescribed time, the agency must direct the awarded contractor to not proceed with the performance of the new contract.  When this stay of performance is in place, it is common practice for the agency to award a “bridge contract” (essentially an extension of the existing contract) to the incumbent contractor, which is often also the protestor.  This is a good way for the losing incumbent contractor to get a few more months of work from the agency.  But it also makes it easier for the agency to deal with a successful protest.

In this case, on July 7, 2017, Equifax Information Services, LLC filed a bid protest with GAO against an award by the IRS to an as yet unidentified contractor. [Solicitation TIRNO-17-Q-00047; File Number: B-414907.1]  Apparently, the protest was filed within the time limit that required suspension of performance of the new contract.  Equifax must have been the incumbent contractor.  So the IRS basically extended Equifax as the contractor during the pending protest.  This was the $7.25 million contract the news reports are referring to.  The IRS justified this sole source award as follows:  “A sole source order is required to cover the timeframe needed to resolve the protest on contract TIRNO-17-Z-00024. This is considered a critical service that cannot lapse.”

The IRS Commissioner claimed that “the only alternative” to doing business with Equifax was “to shut down all online access to taxpayer accounts.”  This got the attention of GAO, which pointed out that the IRS could have proceeded with the newly awarded contract if the Commissioner had determined in writing “that urgent and compelling circumstances which significantly affect interests of the United States will not permit waiting for the decision of the Comptroller General.”  [31 US Code 3553(c)(2)]  While this provision and the GAO statement did nothing to make the IRS look good, this statutory authority was probably not useful in this case.

Switching contractors for any major program usually takes weeks if not months to turn over the program to the new contractor, a process which requires the participation of the prior contractor.  In this case, it is likely that the agency has no certainty that the protest will be rejected which might require redoing the procurement.  Even if the protest is rejected by GAO, Equifax would still have the option of a protest at the US Court of Federal Claims.  Even if the Court of Federal Claims rejected the protest, that could be appealed to the US Court of Appeal for the Federal Circuit and even to the Supreme Court.  This “bridge contract” that was awarded to Equifax was probably for three to six months.  If that contract for that period was worth over $7 million, it should be obvious that Equifax has a financial interest in extending the contract as long as possible.

If Equifax takes that route, at some point after completion of the GAO protest process, IRS would most likely obtain court approval to move forward with the awarded contract even in the midst of appeals.  In any event, it appears that the IRS suffered from a common and long standing federal agency problem, trying to successfully explain a complicated situation to Congress.

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Bid Protests for Government Property Sales? Maybe . . . Sort of

January 31, 2016

When a bidder in a government real estate property auction feels in some way the victim of unfair or improper treatment by the government is there a remedy available? And by remedy, I mean some formal process that will subject the government agency’s action to an independent review. If you ask the General Services Administration (the seller of most surplus federal property), they will say there is no remedy.   But in my view, that is not quite the case. Read the rest of this entry »


Governmental Squareness

June 20, 2011

While working on the section on the limited authority of government agents for my soon-to-be published Solo Attorney’s Emergency Guide to Government Contracts, I had reason to wonder about the genesis of the oft quoted phrase “those who contract with the Government must turn square corners.” United States v. Wunderlich, 342 U.S. 98, 101 (1951). My understanding of this phrase relates to the inapplicability of doctrines such as apparent authority to government contracts, although it has also been applied in a compliance context. That said, it turns out that the phrase and variations thereof have quite an interesting history.

The turn of phrase can be attributed to Justice Holmes in Rock Island, Arkansas & Louisiana RR. Co. v. United States, 254 U.S. 141, 143 (1920). In Rock Island, the plaintiff failed to follow the statutory procedures for appealing a tax assessment. Justice Holmes’ opinion states: “Men must turn square corners when they deal with the Government. If [the Government] attaches even purely formal conditions to its consent to be sued those conditions must be complied with.” Obviously, the context is a question of sovereign immunity and the government’s consent to be sued. That is an issue that remains very relevant with respect to remedies such as the Federal Tort Claims Act.

The first use of this maxim in a government contracts case that I could find came in 1925, in David A. Wright v. United States, 60 Ct. Cl. 519 (1925). In that case, the U.S. Court of Claims (predecessor twice removed of today’s U.S. Court of Federal Claims) quoted Justice Holmes’ maxim in concluding that the plaintiff could not recover for a so-called informal agreement, i.e., a contract not in writing. The plaintiff was induced by government agents (military officers) to rehabilitate a manufacturing facility in reliance on the promise of orders for special lathes. The officer with whom plaintiff dealt had no authority to enter into contracts on behalf of the government. Even though there was authority to give relief for the “informal agreements,” the government official did not have authority to enter into any contract. Notwithstanding the officer’s inducement to incur the costs and plaintiff’s reliance on the officer’s statements, the officer was an agent without authority and the government was not liable. This is the application of Holmes’ “square corners” maxim with which I was familiar.

United States v. Bethlehem Steel Corp., 315 U.S. 289, 337 (1942), concerned shipbuilding contracts from World War I. The contractor in this case was in a very strong negotiating position and insisted on a contract that resulted in a 22% profit. The majority upheld the contract. Justice Frankfurter thought the contracts should be reformed to reduce the profit the contractor received. In his dissent, he quoted Justice Holmes’ maxim in arguing that contractors should not take advantage of the government in an emergency situation. Two years later Justice Frankfurter had occasion to argue the maxim’s antithesis in his dissent in United States v. Blair, 321 U.S. 730, 736-738 (1944). The majority held that a construction contractor could not pursue a claim for damages in the Court of Claims because he had failed to follow the prescribed administrative disputes procedures. “If it were shown that the appeal procedure provided in the contract was in fact inadequate for the correction of the alleged unreasonable attitude of the subordinate Government officials, we would have quite a different case. But here we must insist, not that respondent turn square corners, but that he exhaust the ample remedies agreed upon.” Justice Frankfurter, while acknowledging that those dealing with the government must “turn square corners” and that government contract provisions could not be waived or modified even where circumstances rendered their effect harsh, argued that “there is neither law nor policy that requires that courts in construing the terms of a government contract should turn squarer corners than if the same terms were contained in a contract between private parties.”

The risk that dealing with government agents take was perhaps most brutally demonstrated in Federal Crop Insurance Corp. v. Merrill, 332 U.S. 380, 384-388 (1947). Local government agents had approved insurance contract that was not permitted by the regulations. The majority held that government did not have to make good on the insurance contract. “Whatever the form in which the Government functions, anyone entering into an arrangement with the Government takes the risk of having accurately ascertained that he who purports to act for the Government stays within the bounds of his authority. . . . And this is so even though, as here, the agent himself may have been unaware of the limitations upon his authority.” The majority opinion went on to say that Justice Holmes’ maxim “does not reflect a callous outlook. It merely expresses the duty of all courts to observe the conditions defined by Congress for charging the public treasury.” The dissent by Justice Jackson included a nice turn of phrase on the Holmes maxim: “It is very well to say that those who deal with the Government should turn square corners. But there is no reason why the square corners should constitute a one-way street.”

That brings us to the case that first captured my interest in the Holmes maxim, United States v. Wunderlich, 342 U.S. 98, 101 (1951). This case involved a standard government contract disputes clause which appeal from a contracting officer’s decision could only be appealed to the head of the department. Here the contractor appealed the adverse decision of the agency head to the Court of Claims, which found in the contractor’s favor. In the Supreme Court, the majority basically said the contract prohibited any sort of judicial relief except in the case of the government agency’s engaging in fraud. The reference to the Holmes maxim actually comes in Justice Douglas’ dissent in which he offers the maxim as a concept of government contract law upon which the majority relied sub silentio, ignoring (in Justice Douglas’ mind) the broader implications of the majority position.

This decision, as might be expected, caused an uproar in the business community and Congress enacted the “Wunderlich Act” which authorized judicial review on fact decisions if the decisions were (1) fraudulent, (2) arbitrary, (3) capricious, (4) so grossly erroneous as necessarily to imply bad faith, or (5) not supported by substantial evidence. (41 U.S. Code §§321- 322) The act also prohibited use of a government contract clause making the decision of any administrative official, representative, or board final on a question of law. Although still on the books, the Wunderlich Act has for most government contract purposes been preempted by the Contract Disputes Act. (41 U.S. Code §§601-613)

Justice Black’s dissent in St. Regis Paper Co. v. United States, 368 U.S. 208, 229 (1961), provided another nice turn of phrase based on the Holmes maxim. For purposes of an investigation, FTC had demanded copies of corporate reports submitted to the Census Bureau. The census statute granted the Secretary of Commerce the discretion to furnish to named authorities data taken from information obtained by the Census Bureau on censuses of population, agriculture and housing. The statute also provided that when the Secretary furnishes such data it shall “in no case” be used by the recipient “to the detriment of the persons to whom such information relates.” The majority said that didn’t matter because the information didn’t come from the Secretary but from a direct request from the FTC to the company. In dissent, Justice Black responded: “Our Government should not, by picayunish haggling over the scope of its promise, permit one of its arms to do that which, by any fair construction, the Government has given its word that no arm will do. It is no less good morals and good law that the Government should turn square corners in dealing with the people than that the people should turn square corners in dealing with their Government.”

The Holmes maxim was used to reinforce the principle that unauthorized representations of government agents cannot be relied on in Heckler v. Community Health Services, 467 U.S. 51, 63 (1984). The majority concluded that the government was not estopped from recovering Medicare overpayments even though recipient relied on express authorization of government agent in making expenditures. The majority opinion explained that the Holmes maxim “is consistent with the general rule that those who deal with the Government are expected to know the law and may not rely on the conduct of Government agents contrary to law.”

Perhaps the most recent and notorious invocation of the Holmes maxim was in the Winstar Supreme Court decision. (United States v. Winstar Corp., 518 U.S. 839 (1996)) Because the FSLIC lacked the funds to liquidate all of the failing thrifts during the savings and loan crisis of the 1980’s, the Federal Home Loan Bank Board encouraged healthy thrifts and outside investors to take over ailing thrifts. As inducement, the Bank Board agreed to permit buyers to designate the excess of the purchase price over the fair value of identifiable assets as an intangible asset referred to as supervisory goodwill, and to count this goodwill toward the capital reserve requirements imposed by federal regulations. Congress’s subsequent passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 prohibited thrifts from counting this goodwill in computing the required reserves. A number of thrifts put out of business by the change in the rules sued on the theory that the promise to be able to use goodwill as an asset counting toward the capital reserve requirements was a contractual obligation that was breached by the government. The majority confirmed the judgment of the courts below that the thrifts were entitled to recover against the government for breach of contract.

Between the various opinions in Winstar, almost all of the cases referenced above were invoked. Chief Justice Rehnquist dissenting, invoked the Holmes maxim with this explanation: “The wisdom of this principle arises, not from any ancient privileges of the sovereign, but from the necessity of protecting the federal fisc — and the taxpayers who foot the bills — from possible improvidence on the part of the countless Government officials who must be authorized to enter into contracts for the Government.” In his concurring opinion, Justice Scalia said in response to the government’s argument that the promise to recognize the supervisory goodwill was not “unmistakable:”

It was found below that the Government had plainly made promises to regulate in a certain fashion, into the future; I agree with those findings, and I would conclude, for the reasons set forth above, that the promises were unmistakable. Indeed, it is hard to imagine what additional assurance that the course of regulation would not change could have been demanded — other than, perhaps, the Government’s promise to keep its promise. That is not what the doctrine of unmistakability requires. While it is true enough, as the dissent points out, that one who deals with the Government may need to “turn square corners,” . . . he need not turn them twice.

While it is of literary and historical interest to see how Holmes’ maxim has been invoked over the decades since 1920, it certainly remains a key concept for all dealing with the government. Government agents can only act within the scope of their authority. Commitments made by government agents without authority cannot be relied upon. Government agents’ representations of the law are worth nothing if in error. We all must turn square corners when we deal with the Government.


Finessing CICA Redux: Another Attempt by Government IT Offices to Avoid Competition

January 11, 2011

A bit over a year ago, I wrote about an interesting government agency strategy to avoid having to deal with the messiness of “full and open competition.” (See https://vanhornelaw.wordpress.com/2008/09/05/finessing-cica-the-open-ended-support-contract-ploy/) Now it is time to discuss another ploy to avoid the annoyance of competition, the purported standardization determination.

On January 3, 2011, the Court of Federal Claims issued a preliminary injunction against the Department of the Interior’s attempt to standardize on Microsoft’s email system without conducting a competition. After attempting unsuccessfully to interest the Department in its ability to provide an email system for the Department, Google protested various actions of the Department to implement its sole source decision to use the Microsoft product. You can see a copy of the opinion at http://tinyurl.com/4956j5g.

From the opinion, it is pretty clear that Interior had made the decision to standardize on Microsoft some time ago, perhaps as early as 2007. For months, in 2009 and 2010, Google corresponded with and met with Interior officials to pitch its competing product. Up until late 2010, Interior essentially led Google on, claiming that a competition would be held for the Department’s email system. When solicitation documents became public in late 2010, it was finally clear that there was to be no competition and that Interior had made a final, internal decision to go with Microsoft. The actual solicitation was issued only to selected Microsoft resellers to implement the standardization decision.

This is not a new tactic among government IT offices. In 2007, the Department of Homeland Security tried to do the same thing with the acquisition of financial systems software. (See Savantage v. US, http://tinyurl.com/24vj2rg.) Both DHS and Interior set up the actual solicitation so that the real party in interest, the software developer, could not bid on the procurement by making the procured services only for implementation of a sole source designation of the software to be used. This appears to be an effort to simply avoid having to have a competition for the software since IT personal have developed their own preferences for a particular company’s software and choose not to subject that preference to the competitive market place. Obviously, the strategy becomes problematic when the sole source determination fails to meet statutory and regulatory requirements. Secondarily, the strategy also makes it more difficult for the software developer to challenge the procurement.

It would appear that GAO simply will not address this type of procurement law violation because the protester is not, and cannot be, a bidder. The Court of Federal Claims, on the other hand, has repeatedly shown a willingness to address CICA finessing ploys of various types. I assume this is because the two bid protest forums work under quite different jurisdictional mandates. The statutory mandate to GAO in ruling on bid protests is to “determine whether the solicitation, proposed award, or award complies with statute and regulation.” 31 U.S. Code 3554(b)(1). The Court, however, is under a mandate “to render judgment on an action by an interested party objecting to a solicitation by a Federal agency for bids or proposals for a proposed contract or to a proposed award or the award of a contract or any alleged violation of statute or regulation in connection with a procurement or a proposed procurement.” 28 U.S. Code 1491(b)(1). What the Court has that GAO does not is jurisdiction over “any alleged violation of statute or regulation in connection with a procurement or a proposed procurement.” The Court interprets this third leg of its jurisdictional statute quite broadly, relying on the very broad definition of “procurement” from the Office of Federal Procurement Policy Act, 41 U.S. Code 403(2)(which is mirrored in the FAR at 2.101). See Ramcor Services Group, Inc. v. United States, 185 F.3d 1286, 1289 (Fed. Cir. 1999).

So what is going on here? Why the tendency for this type of ploy to show up in the government IT arena? I would suggest that defining requirements, as would be necessary for a competitive procurement, is really not an easy task. By just getting comfortable and familiar with and then specifying one software product, the requiring office can avoid the unpleasant task of actually articulating what the agency needs. It would appear that procurement officials, perhaps because of a lack of technical expertise, can get snowed by inadequate sole source justifications. This is then compounded with use of all of the IDIQ type contracts available to the contracting officer (e.g., GSA schedule contracts, GWACS, various agency BPAs) which also help disguise the real sole source selection. Since the Savantage decision, and now certainly after the Google decision, it hopefully will be obvious that this particular CICA finessing ploy isn’t all that likely to succeed.


Finessing CICA: the Open-Ended Support Contract Ploy

September 5, 2008

CICA, the Competition in Contracting Act (41 USC 253 et seq.), requires the government to obtain supplies and services through “full and open competition through the use of competitive procedures.” There are, of course, a number of exceptions to this requirement and sometimes it seems to me that federal procurement officials put more effort into avoiding competition than they put into running an appropriate competition. Agencies appears to have developed a number of ploys to avoid competition involving task order IDIQ contracts, buzzwords like “standardization,” and (today’s entry) the open-ended support contract.

Here’s how it works. The agency finds an IDIQ or schedule contract, a BPA or some similar contractual ordering vehicle (in this case a Government Wide Acquisition Contract (GWAC)) and issue a task order for “support” to a program. Then, with or without the help of the support contractor, the agency decides what the program needs, say IT services or software tools. The support contractor is then directed to go out and buy whatever is needed. Since the purchase is a subcontract, most federal procurement regulations (specifically the requirement for “full and open competition”) do not apply, making it much easier for agency personnel, who activity participate in the selection process, to get what they want without having to worry about messy things like solicitations, source selection evaluations and bid protests. Or so the theory goes.

This was apparently the plan in a case recently decided the by Court of Appeals for the Federal Circuit. (Distributed Solutions, Inc., and STR, L.L.C., v. United States, No. 2007-5145, August 28, 2008) This case involves a procurement of software for the Joint Acquisition and Assistance Management System program (JAAMS), a joint United States Agency for International Development (USAID) and Department of State (DOS) program to develop a common computer platform between the two agencies. In November 2003, a task order was issued to SRA International, Inc. (SRA), under GSA’s Millennia GWAC to provide “technical services and support for information technology purposes.” In June 2005, the agency, assisted by SRA, issued a Request for Information (the June RFI) soliciting sources for “commercial off-the-shelf (COTS) Acquisition and Assistance (A&A) solutions for JAAMS.” After reviewing the June RFI responses, the agency announced that it had decided “to pursue alternative courses of action.” The agency then decided to task SRA with selecting the software vendors, which SRA did first by issuing an RFI of its own (the August RFI) and then making a selection. Two disappointed software vendors unsuccessfully protested to GAO and subsequently to the Court of Federal Claims. Both GAO and the Court treated the protests as nothing more than subcontractor protests, which neither forum will hear.

The Court found that the contractors had standing (i) because they responded to the June RFI, demonstrating that they were potential offerors, and (ii) because they had a direct economic interest, having been deprived of the opportunity to compete to provide the software solution, a contract that could have been worth $10 million. The Court also found that the contractors had alleged a number of non-frivolous statutory and regulatory violations.

This left the key question, whether the complaint alleged statutory and regulatory violations “in connection with a procurement or a proposed procurement.” The Court of Federal Claims jurisdictional statute for bid protests, 28 USC 1491(b), includes three bases for jurisdiction: (I) objections to a solicitation; (ii) objections to an award; and (iii) “any alleged violation of statute or regulation in connection with a procurement or a proposed procurement.” The contractors relied on the third basis for bid protest jurisdiction.

The Court, citing RAMCOR Services Group, Inc. v. United States, 185 F.3d 1286, 1289 (Fed. Cir. 1999), noted that the operative phrase “in connection with” is very sweeping in scope. Acknowledging that the bid protest jurisdictional statute (28 USC 1491(b)) does not define either “procurement” or “proposed procurement,” the Court adopted the statutory definition of “procurement” found in the OFPP Act at 41 U.S.C. § 403(2). Under this definition, “procurement” includes “all stages of the process of acquiring property or services, beginning with the process for determining a need for property or services.” Although the Court did not comment on this, the statutory definition from the OFPP Act has been adopted by the Federal Acquisition Regulation. See 48 CFR 2.101.