Gordon Rees Scully Mansukhani announces the latest update from the firm's Government Contracts practice group, bringing you an overview of recent notable decisions, rule updates, and other critical information related to contracting with federal and state governments. Our team compiled the most pertinent legal developments in the ever-evolving landscape of government contracts to keep you informed. Please contact Patrick Burns or Elizabeth Husebo for further information regarding the cases and administrative actions highlighted below.
Recent Cases/Decisions
GAO Sustains Protest Due to Agency’s Inadequate Market Research
Overview: In this bid protest before the Government Accountability Office (“GAO”), the protester contested the U.S. Navy’s decision to maintain a small business set-aside after amending the solicitation’s terms. The central legal issue was whether the Navy conducted adequate market research to reasonably expect proposals from at least two responsible small businesses capable of meeting the amended requirements at a fair market price. This decision is notable for its discussion of the government’s obligation to perform adequate market research prior to making a set-aside decision.
Decision: The GAO ruled in favor of the protester, finding that the Navy's market research was inadequate to justify its set-aside decision. The Navy’s market research relied on an incorrect assumption—that the nonmanufacturer rule did not apply to the procurement—which proved fatal to its award.
The nonmanufacturer rule, set forth in FAR 52.219-33, allows small business concerns to compete for sole-source supply contracts even if they do not manufacture the goods, provided the goods can be obtained from another small business manufacturer at fair value. When it performed the market research, the Navy erroneously believed the Small Business Administration ("SBA") issued a class waiver of the nonmanufacturer rule as to all products set forth in the procurement. Such a waiver would effectively loosen the procurement requirements as to enable an offeror to source materials and products from businesses, regardless of size. Even after realizing the error, it failed to perform market research regarding small business concerns that could satisfy the nonmanufacturer rule.
As a result, the GAO recommended that the Navy conduct proper market research to ensure that at least two responsible small business concerns could meet the solicitation’s requirements at a fair market price.
Citation: Knudsen Systems, Inc., B-422433.2 (Aug. 9, 2024).
Noncompliance with Trade Agreements Act Causes GAO to Partially Sustain Protest
Overview: In a recent GAO decision, HPI Federal protested the Air Force’s award to Transource Services Corp. (“Transource”) for an IT product procurement involving the purchase of various computer devices through blanket purchase agreements under the General Services Administration’s Federal Supply Schedule contracts.
The protest focused on compliance with the Trade Agreements Act (“TAA”), which mandates that products provided under federal contracts must either originate from the U.S. or designated countries or undergo "substantial transformation" in a designated country. The substantial transformation test evaluates whether a product has been significantly altered in a designated country, resulting in a "new and different article of commerce" with a distinct name, character, or use compared to its original components.
HPI Federal argued that the monitors quoted by Transource did not meet TAA requirements, pointing to an earlier notification from the manufacturer that some of its products no longer complied with the TAA due to changes in component manufacturing. In response, Transource submitted an updated manufacturer certification from April 2024, stating that the quoted monitors were assembled in Mexico, a designated TAA-compliant country. The Air Force accepted this certification and awarded the contract to Transource. HPI Federal, however, protested, asserting that assembly alone in Mexico was insufficient to satisfy the TAA’s substantial transformation standard.
Decision: The GAO sustained the first ground of the protest, agreeing with the protester that the certification of assembly in Mexico did not automatically establish TAA compliance. The certification was deemed insufficient because it failed to specify whether the assembly process in Mexico involved substantial transformation, such as a fundamental change in the character or use of the components. The GAO explained that while assembly can sometimes meet the substantial transformation standard, it must involve a process complex enough to significantly alter the product’s nature.
As a result, the GAO concluded that the Air Force had not conducted an adequate review to determine whether the monitor assembly in Mexico met TAA requirements. However, the GAO denied the second ground of the protest, which involved other computer accessories, as the protester did not provide specific evidence of TAA noncompliance for those items.
Citation: HPI Federal, LLC, B-422583 (Aug. 9, 2024).
Eleventh Circuit Clarifies Fiduciary Duties in the Context of a Joint Venture
Background: Yorktown, a mentor business participating in the SBA’s mentor-protégé program, filed a lawsuit against its protégé, Threat Tec, alleging that Threat Tec breached its fiduciary duties of loyalty and care as a managing member of their joint venture (“JV”), which was servicing a U.S. Army contract.
The relationship between Yorktown and Threat Tec deteriorated, leading Yorktown to sue for breach of fiduciary duty, among other claims, asserting that Threat Tec had deprived Yorktown of its rights and benefits under the JV agreement. During the litigation, Threat Tec sent Yorktown a letter on the JV’s letterhead, notifying Yorktown that its subcontract was being terminated under the subcontract’s termination for convenience provision.
Allegations and District Court Ruling: Yorktown’s breach of fiduciary duty claim alleges that Threat Tec misused its control over the JV and the termination clause in the subcontract to unfairly seize Yorktown’s workshare in a government contract. In response, the district court granted a preliminary injunction, preventing the termination of Yorktown’s subcontract. Threat Tec subsequently appealed the ruling.
Key Appellate Court Findings: The Eleventh Circuit affirmed the district court’s ruling, holding that Threat Tec, as the managing member of the JV, owed Yorktown the traditional fiduciary duties of loyalty and care owed between members of a limited liability company. The court supported the district court’s conclusion that Threat Tec had not acted in the best interests of the JV’s members when it attempted to unilaterally dissociate Yorktown from the Army contract. The court further noted that Threat Tec’s abrupt termination of Yorktown violated SBA regulations, which mandate 30 days' advance notice to the other party in a mentor-protégé relationship and to the SBA.
The Eleventh Circuit also agreed with the district court’s finding that Yorktown would suffer irreparable harm without the injunction. It recognized that intangible injuries, such as damage to Yorktown’s business reputation and the difficulty of quantifying the loss of skilled employees, justified the injunction. Furthermore, the court emphasized that the sudden termination of Army contract work could negatively impact contracting officers’ assessments of Yorktown’s past performance, harming its reputation and future competitiveness for government contracts.
Citation: Yorktown Systems Group Inc. v. Threat Tec LLC, 108 F.4th 1287 (11th Cir. 2024)
GRSM Government Contracts Practice Group
GRSM’s government contracts team has considerable experience defending and enforcing the rights of our contractor clients in disputes against government entities and private businesses. In addition to litigating claims in state and federal courts, we routinely handle matters before administrative tribunals, such as the Government Accountability Office, the Small Business Administration, and the Armed Services Board of Contract Appeals.
Our team of attorneys is located throughout the United States, which allows the firm to represent contractors, regardless of size, and in a wide variety of industries, including defense, information technology, construction, and aerospace, among others. Please contact the authors with any questions.
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