September 23, 2019

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Federal Circuit Charts New Terrain in Commercial Item Contracting

Last month, the Federal Circuit weighed in on a largely-overlooked provision in the Federal Acquisition Streamlining Act (“FASA”) that requires federal agencies, to the maximum extent practicable, to procure commercially available goods and services to meet their needs.  In the case — Palantir USG v. United States — the court affirmed the decision by the Court of Federal Claims (“COFC”) enjoining the Army from proceeding with its Distributed Common Ground System – Army Increment 2 (“DCGS-A2”) procurement until it complies with the FASA provision.  This bid protest decision has potentially significant implications for commercial item contractors.

DCGS-A2 is not your average solicitation for an IT system.  It is phase two of the Army’s flagship system for processing multi-sensor intelligence — a program that the Army has spent nearly two decades and billions of dollars trying to develop.  For several years prior to the release of the DCGS-A2 solicitation, Palantir — the protester — informed the Army that the company already had a commercial item that Palantir believed fit the Army’s requirements.  Despite Palantir’s communications regarding the capabilities of its product, the Army issued a single-source indefinite-delivery/indefinite-quantity solicitation focused on developing a new intelligence data management system — essentially from scratch.  Palantir protested the solicitation and argued that it violated FASA’s mandate regarding the use of commercial items.

FASA’s legislative history reflects Congress’s understanding that purchasing commercial and nondevelopmental items can eliminate the need for research and development, minimize acquisition lead time, and reduce costs.  FASA requires that agencies, “to the maximum extent practicable,” acquire commercial items or nondevelopmental items to meet their needs.  To that end, agencies must first conduct market research before developing new specifications and before soliciting proposals.  See 10 U.S.C. § 2377(c)(1).  And they must use that market research to determine whether there are commercial items that:  (1) meet the agency’s requirements; (2) could be modified to meet the agency’s requirements; or (3) could meet the agency’s requirements if those requirements were modified to a reasonable extent.  Id. § 2377(c)(2).

COFC concluded that the Army failed to comply with the requirements under § 2377(c)(2), and the Federal Circuit affirmed.  The Army was clearly on notice of the possibility that commercial items could satisfy its needs — indeed, its own studies identified the potential for a commercial solution.  Yet the Army still decided to develop its own system, and its explanation for that decision offered only a “conclusory assessment” that certain DCGS-A2 requirements were not commercially available.  So although the Federal Circuit was willing to uphold a permanent injunction on these extreme facts, it is less clear whether courts would have a similar appetite to upset a procurement where an agency had some documented reasoning for its decision — even if the reasoning was less than perfect.

The Palantir decision nonetheless has potentially significant implications for commercial item contractors.

First, the decision underscores the importance for commercial item contractors to respond to RFIs and otherwise communicate their capabilities to procuring agencies.  Part of what made Palantir’s protest persuasive was the record of its clear and repeated communications to the Army during the acquisition planning stage regarding its product and what its product could do.  Those early communications laid the groundwork for a strong protest down the road.

Second, the decision opens the door for protests challenging an agency’s decision not to proceed with a commercial item procurement.  Few scenarios will present facts as compelling as the courts encountered here, but the decision sets a precedent for similar protests where an agency makes an irrational decision.

Third, the decision is a good example of why forum choice sometimes matters.  Palantir had originally protested — and lost — at the Government Accountability Office (“GAO”).  Only when it refiled at COFC did its protest gain traction.  This fits within a trend of COFC and the Federal Circuit taking a more searching review of pre-award protests that challenge an agency’s acquisition approach.  For example, in a 2015 case, CGI Federal v. United States, the Federal Circuit concluded that a commercial item solicitation issued by the Centers for Medicare and Medicaid Services impermissibly deviated from customary commercial terms — after the protester initially lost that argument at GAO.

The ripple effects of Palantir — for example, on how agencies conduct and document market research, and how contractors influence acquisition approaches — is something to monitor in the coming months and years.

© 2019 Covington & Burling LLP

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About this Author

Jason A. "Jay" Carey, Covington Burling, Government Contracts Attorney,
Partner

Jason Carey represents clients in litigation with the government and other private parties, counsels clients regarding a wide range of formation and compliance matters, and defends clients under investigation by federal and state governments. Mr. Carey regularly represents government contractors in bid protests before the U.S. Government Accountability Office and the Court of Federal Claims. He has prosecuted and defended more than 80 protests covering a wide range of procurements, such as:

  • aerospace and defense (including an $11B launch services contract);
  • ...
202 662 5186
Kayleigh Scalzo, Covington, Litigation attorney
Associate

Kayleigh Scalzo represents clients in a broad array of high- stakes litigation matters with the government and other private parties. She litigates bid protests at the Government Accountability Office, Court of Federal Claims, state courts, and before federal and state agencies. Ms. Scalzo also litigates Administrative Procedure Act cases and other civil matters in the U.S. Courts of Appeals and U.S. District Courts.

Kayleigh Scalzo represents clients in a broad array of high- stakes litigation matters with the government and other private parties. She litigates bid protests at the Government Accountability Office, Court of Federal Claims, state courts, and before federal and state agencies. Ms. Scalzo also litigates Administrative Procedure Act cases and other civil matters in the U.S. Courts of Appeals and U.S. District Courts.

202-662-5133
Pierre Hines, Covington, Government Contracts Attorney
Associate

Pierre Hines provides counseling, investigation, and litigation services to government contractors – particularly those in the defense, healthcare, and information technology industries. He counsels clients in connection with M&A due diligence involving government contractors, along with complex issues arising under the FAR. He conducts internal investigations involving alleged fraud and FCA violations.  Mr. Hines also litigates contract disputes in federal courts and administrative tribunals.

Prior to joining Covington, Mr. Hines was a law clerk to the...

202-662-5239