A little over two years ago, I wrote a blog post about the D.C. District Court decision in Fisher-Cal Indus., Inc. v. United States, 839 F. Supp. 2d 218, 219 (D.D.C. 2012), which held that district courts lack jurisdiction over in-sourcing matters.  That case was appealed and the D.C. Circuit Court has affirmed the District Court’s decision.  Fisher-Cal Indus., Inc. v. United States, 12-5155, 2014 WL 1362336 (D.C. Cir. Apr. 8, 2014).  The D.C. Circuit is now the third circuit court to hold that Federal district courts lack jurisdiction over in-sourcing claims, which must be brought at the United States Court of Federal Claims.  See Rothe Development, Inc. v. United States Department of Defense, 666 F.3d 336 (5th Cir. 2011); Vero Technical Support v. U.S. Dep’t of Def., 437 F. App’x 766, 770 (11th Cir. 2011) (unpublished decision). 

On appeal, Fisher-Cal argued that the guiding case on the matter, Distributed Solutions, Inc. v. United States, 539 F.3d 1240 (Fed. Cir. 2008), was misapplied by the D.C. District Court and the Fifth and Eleven Circuits because Distributed Solutions looked to the issuance of the request for information as marking the beginning of the process for determining the agency’s needs, and not the internal agency discussions.  The D.C. Circuit rejected this argument, reaching the same conclusion as the District Court and the Fifth and Eleventh, that a procurement begins with the process for determining a need for property or services, which includes the decision to acquire the services by in-sourcing or outsourcing.   Accordingly, D.C. Circuit held that because the Tucker Act bestows exclusive jurisdiction over suits alleging a procurement violation in the Court of Federal Claims, the District Court properly found that it lacked jurisdiction over the matter.

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On January 29th, the Office of the Assistant Secretary of Defense issued a memorandum requiring agencies to “determine and document final decisions to in-source” and requiring contracting officers to notify their affected incumbent contractors within 20 days of receipt of such in-sourcing decisions.

The memorandum, titled “Private Sector Notification Requirements in Support of In-Sourcing Actions,” comes amidst a series of Court of Federal Claims (COFC) decisions dismissing and denying contractor protests of agency in-sourcing decisions. Most recently, in December, Judge Christine Miller held that a protester had standing to pursue an in-sourcing protest but failed to demonstrate entitlement to injunctive relief. See Dellew Corp. v. United States, — Fed. Cl. — , No. 12-627C, 2012 WL 6690092, (Dec. 20, 2012). Prior COFC decisions had held that an incumbent contractor lacks standing to protest an agency in-sourcing decision where the incumbent’s contract has expired and agency personnel have already assumed performance. See, e.g., Elmendorf Support Servs. Joint Venture v. United States (Elmendorf II), — Fed. Cl. — , No. 12-346C, 2012 WL 3932774 (Sept. 10, 2012) (dismissing protest for lack of standing even though incumbent contract expired after contractor filed protest). One decision went so far as to hold that an incumbent contractor challenging an agency in-sourcing decision lacked “prudential standing” because the personnel regulations alleged to be violated, 10 U.S.C. § 129a and 10 U.S.C. § 2463, were not intended to protect contractors adversely affected by in-sourcing decisions and had too tenuous a relationship to 28 U.S.C. § 1491(b)’s “in connection with a procurement or proposed procurement.” See Hallmark-Phoenix 3, LLC v. United States, 99 Fed. Cl. 65 (2011); but see Elmendorf Support Servs. Joint Venture v. United States (Elmendorf I), 105 Fed. Cl. 203 (2012) (explicitly disagreeing with Hallmark-Phoenix and holding that incumbent contractor challenges to agency in-sourcing decisions do not fail for lack of prudential standing).

The new memorandum may aid contractors in their challenges to agency in-sourcing decisions. The memorandum provides that “No formal hiring or contract related actions may be initiated prior to such notification, except for preliminary internal actions associated with hiring or contract modification.” Additionally, it explains that “Notifications . . . may summarize . . . the requiring official’s final determination as to why the service is being in-sourced and shall be coordinated with the Component’s in-sourcing program official.” The memorandum will be incorporated into the Defense Federal Acquisition Regulation Supplement (DFAR), will be incorporated into a future DoD issuance on in-sourcing, and may spur supplemental agency guidance on in-sourcing and/or related notification requirements.

Delaying agency assumption of performance and notifying contractors of the rationale behind in-sourcing decisions may provide contractors more solid grounds for protests before the COFC. To the extent that the memorandum requires agencies to delay transitioning to their own personnel, affected incumbent contractors may have more time to pursue a COFC protest before the issue is moot. And added transparency regarding the reasoning behind the in-sourcing decision may provide contractors more specific and concrete bases for challenging agency decisions.

Additionally, the memorandum’s incorporation into the DFAR should eliminate any debate over whether incumbent contractors maintain “prudential standing” to challenge agency in-sourcing decisions. 28 U.S.C. § 1491(b)(1) grants the COFC jurisdiction over “any alleged violation of statute or regulation in connection with a procurement or a proposed procurement” (emphasis added). Whether in-sourcing protests are founded on the memorandum’s DFAR provision itself or still pursued under agency personnel statutes, the existence of the new provision should alleviate any potential concerns regarding the viability and reviewability of such protests. Nevertheless, it remains to be seen exactly how agencies will implement the new memorandum and whether it will provide any actual assistance in light of the COFC’s thus far burdensome requirements for in-sourcing protests.
 

Finding a court in which to argue the merits of an in-sourcing case is a seemingly never-ending source of hurdles for disappointed contractors. When the in-sourcing initiative began a few years ago, the legal landscape lacked clarity as to which courts possessed jurisdiction over such claims. Litigation theories were divided as to whether this was an administrative matter under the Administrative Procedures Act, to be brought in the district courts, or a procurement matter under the Tucker Act to be brought at the Court of Federal Claims. As those cases unfolded, with near uniformity, the courts have held that this is a procurement matter to be brought at the Court of Federal Claims. But the challenges facing disappointed contractors did not end at the court house doors at the National Courts Building. Standing issues at the Court of Federal Claims quickly emerged. 

The first two in-sourcing cases at the Court of Federal Claims were sharply divided on this standing issue. In Hallmark-Phoenix 3, LLC, Judge Allegra dismissed the in-sourcing case finding that plaintiff lacked prudential standing because the statutes at issue envision enforcement by legislative oversight through reports and requests to Congress – not judicial review. Hallmark-Phoenix 3, LLC v. United States, 99 Fed. Cl. 65 (2011). Judge Firestone, on the other hand, concluded that prudential standing did not apply to bid protests because the Tucker Act provided its own standing requirements and, in any event, certain in-sourcing provisions were enacted, at least in part, for the benefit of the contracting community. Santa Barbara Applied Research, Inc. v. United States, 98 Fed. Cl. 536 (2011).  In Triad Logistics Services Corporation, the next in-sourcing case to emerge from the Court, Judge Horn added a new twist to the standing issues, holding that Triad was not an interested party because its contract had ended and government employees had begun performing the contract functions prior to when the complaint was filed. Triad Logistics Servs. Corp. v. United States, No. 11-43C (Fed. Cl. Apr. 16, 2012). The Triad decision ultimately left observers with more questions than answers, such as what exactly is an interested party and what would happen if a contract ended by its own terms during the litigation.  

 Fortunately, we did not have to wait long for the answer. Readers of this blog know that we have been keeping our eyes on the case of Elmendorf Support Services. In that case, Judge Bruggink held that the Court had jurisdiction over in-sourcing matters and standing was conferred by the Tucker Act and the “rather generous” definition of procurement supplied by the Federal Circuit in Distributed Solutions. Elmendorf Support Services v. United States, No. 12-346C (Fed. Cl. Jun. 22, 2012) (citing Distributed Solutions, Inc. v. United States, 539 F.3d 1340, 1346 (Fed. Cir. 2008)). However, Judge Bruggink denied plaintiff’s motion for a preliminary injunction and, therefore, the contract at issue in the litigation ended by its own terms on June 29, 2012. Shortly thereafter, the Air Force in-sourced the services previously provided by the plaintiff and on July 2, 2012, the United States filed a motion to dismiss the case as moot.

 

Continue Reading In-Sourcing Troubles? Run, don’t walk, to the Court of Federal Claims.

An interesting development regarding the issues surrounding in-sourcing is unfolding at the Court of Federal Claims, courtesy of Elmendorf Support Services v. United States, No. 12-346C (Crt. Fed. Cl. Jun. 22, 2012). The plaintiff in this case had been providing services to the Air Force since October 1, 2005 with options under the contract through 2015. On February 2, 2011, the Air Force notified the plaintiff that it would not be exercising any further option year periods and would instead be in-sourcing the services provided under the contract. The last option year period executed by the parties ended on June 29, 2012.

Plaintiff filed a bid protest at the Court of Federal Claims on June 1, 2012. As is common with bid protests filed at the Court of Federal Claims, plaintiff also filed a motion for preliminary injunction seeking to enjoin the Air Force from in-sourcing the activities during the pendency of the litigation. Also as expected given recent history, the United States filed a motion to dismiss for lack of subject matter jurisdiction and lack of standing. 

On June 22, 2012, the Court of Federal Claims, Judge Bruggink, denied the government’s motion to dismiss. Judge Bruggink found that because the decision to in-source “necessarily included the process for ‘determining the need for . . . services’ that plaintiff currently provides, the in-sourcing decision-making process was ‘in connection with a procurement or proposed procurement’ within the rather generous definition adopted by the Federal Circuit” in Distributed Solutions, Inc. v. United States, 539 F.3d 1240 (Fed. Cir. 2008). Judge Bruggink also found that plaintiff’s case was not barred by prudential standing concerns and, in this regard, found instructive the Court’s holding in Santa Barbara Applied Research, Inc. v. United States, 98 Fed. Cl. 536 (2011). In a direct rebuke to Judge Allegra, Judge Bruggink also cited a recent Supreme Court decision to conclude that prudential standing was not meant to be especially demanding. See Match-E-Be-Nash-She-Wish Band of Pottawatomi Indians v. Patchak, Nos. 11-246, 11-247, 2012 WL 2202936 (U.S. June 18, 2012).

Continue Reading More In-Sourcing News

Developments continue surrounding the issue of in-sourcing. Turning first to the developments at the Court of Federal Claims, Judge Horn, recently dismissed an in-sourcing claim after finding that Plaintiff was not an interested party. Triad Logistics Servs. Corp. v. United States, No. 11-43C (Crt. Fed. Cl. Apr. 16, 2011).  The Court held that while it has subject matter jurisdiction over in-sourcing claims generally, with regards to the particular in-sourcing claim at issue, the Plaintiff was not an interested party because the contract had already been completed. Accordingly, the Court found that Plaintiff lacked standing and dismissed the case.

To understand the scope of the Triad decision, a brief analysis of the procedural posture presented in the case is required. Plaintiff, Triad Logistics Service Corporation provided vehicle operations and maintenance services to the Air Force. During performance under the third option year, the Air Force informed Triad that it would be in-sourcing the services provided under the contract, and therefore not exercising a fourth option year. Instead, the Air Force modified the contract to extend performance for a brief period, at which time the contract ended by its own terms. Triad initially protested at the Government Accountability Office, which was dismissed on November 24, 2010 for failure to set forth a valid basis of protest. 

Triad then filed it’s first protest at the Court of Federal Claims on November 29, 2010, the same day its extended contract ended. At the initial hearing on Triad’s first protest, the Air Force admitted there were errors in the cost calculation comparing the cost of contracting for the services versus performing the services internally. The Court therefore dismissed that complaint to allow the Air Force to perform a recalculation and make a final in-sourcing decision. On December 16, 2010, the Air Force again concluded that it would be less expensive to in-source the services. 

Triad filed its second protest at the Court, the one at issue here, on January 14, 2011. The Court dismissed the case, holding that Triad was not an interested party because its contract had ended and government employees had begun performing the contract functions prior to when the second complaint was filed. Therefore, the Court found that Triad no longer possessed the required direct economic interest in a contract to qualify as an interested party. The Court seems to suggest that Triad’s claim may be more akin to an out-sourcing claim, which the Appropriations Acts strongly discourage. 

Continue Reading In-sourcing Update

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The Department of Defense (“DoD”) continues to contract out work that should be handled by federal employees, according to a new Government Accountability Office (“GAO”) study, which finds shortcomings in DoD’s tracking and management of such “inherently governmental” tasks.

The study urges DoD to better police its inventory of contracts—and bring in-house those functions too sensitive or policy-oriented for private contractors. DoD has agreed with the findings and has pledged to carry out GAO’s recommendations within the next year.

Inherently governmental functions are tasks intimately related to the public interest and that require discretion or value judgments in making decisions for the federal government. FAR § 7.503(c) contains a lengthy list of examples: criminal investigations, determinations of budget priorities, and setting agency policy, among many others. In addition, some functions not inherently governmental may still have to be brought in-house. FAR § 7.503(d) contains examples: budget preparations, evaluation of contractors, and inspection services, among others.

Congress, in section 803(c) of the National Defense Authorization Act for Fiscal Year 2010, directed GAO to report annually for three years on DoD’s inventory of contractor activity. In its first report, in January 2011, GAO found numerous holes in DoD’s inventory protocols and recommended the agency establish a plan for achieving goals and a time frame for reform. The new GAO study, however, finds only “limited progress” by DoD in meeting those goals.

The Army’s FY2009 inventory review found 1,935 instances where inherently governmental tasks were contracted out. The Air Force review found 91. The tasks included engineering and technical services, program management, and support services.  In the new study, GAO examined 12 of these improperly contracted-out tasks in-depth and found eight of them were still in the hands of private contractors despite GAO and Congress’s prior warnings.  In general, the GAO study concludes DoD needs  “greater accountability and management attention” in managing its contractor inventory.

With GAO slated to revisit the issue again in a year, DoD will likely increase its efforts to bring certain contracts in-house. Federal contractors would be wise to evaluate whether their work falls into the inherently governmental category and thus possibly work the federal government will soon seek to reclaim.

Just a quick in-sourcing update for today. On March 19, 2011, in Fisher-Cal Industries, Inc. v. United States, et. al, the United States District Court for the District of Columbia issued an opinion dismissing plaintiff’s in-sourcing claim. No 11-791 (D.D.C. Mar. 19, 2012). As I discussed in my blog post about the Fifth Circuit’s decision in Rothe Development, Inc., various courts have been attempting to interpret the Tucker Act to determine whether that Act provides standing for contractors to pursue in-sourcing claims and which court would have jurisdiction. Consistent with the Fifth and Eleventh Circuits, the D.C. District Court held that district courts lack subject-matter jurisdiction over in-sourcing claims. See Rothe Development, Inc. v. United States Department of Defense, 666 F.3d 336 (5th Cir. 2011); Vero Technical Support v. U.S. Dep’t of Def., 437 F. App’x 766, 770 (11th Cir. 2011) (unpublished decision). Although plaintiff argued that its claim solely challenged the government’s compliance with its own guidelines and procedures and therefore fell under the Administrative Procedure Act (“APA”), the court held that a decision to in-source is a decision in connection with a procurement under the Tucker Act and therefore the court was without jurisdiction. The court noted that although “the APA waives sovereign immunity, it does so only to the extent that no other statute ‘expressly or impliedly forbids the relief which is sought.’” Because the Tucker Act allows plaintiffs to challenge in-sourcing decisions at the Court of Federal Claims, the APA can not provide concurrent jurisdiction in the district courts. Finally, and most interestingly, the Court addressed plaintiff’s argument that it was not an interested party as required by the Tucker Act, and held that it need not resolve that issue because it is the Court of Federal Claims that must address the merits of plaintiff’s claims and whether plaintiff has the ability to pursue them at all.

Stay tuned though, as it looks like there have been exciting developments on the issue at the Court of Federal Claims and the decision on another in-sourcing case should be unsealed very soon.

On December 29, 2011, the Fifth Circuit issued its opinion in Rothe Development, Inc. v. United States Department of Defense, No. 11-50101 (5th Cir. Dec. 29, 2011), affirming the district court’s dismissal of an in-sourcing claim for lack of subject-matter jurisdiction. Under the Tucker Act, the Court of Federal Claims is vested with exclusive jurisdiction over actions by interested parties “objecting to . . . any alleged violation of statute or regulation in connection with a procurement or a proposed procurement.” 28 U.S.C. § 1491(b)(1). The jurisdictional issue raised in in-sourcing cases such as Rothe is whether an agency’s decision to in-source is a decision “in connection with a procurement or a proposed procurement.” The Fifth Circuit concluded that “it clearly is.”

In an attempt to avoid falling under the purview of the Tucker Act, Rothe argued that it was not an interested party as required by that statute. The Fifth Circuit rejected this argument because Rothe’s complaint specifically stated that it was seeking to keep its scope of work as the low cost provider, demonstrating that it has an economic interest as a prospective bidder. The court also held that in-sourcing falls within the broad definition of “procurement” as that term has been defined by the Federal Circuit. In Distributed Solutions, Inc. v. United States, the Federal Circuit held that “the term ‘procurement’ includes all stages of the process of acquiring property or services, beginning with the process for determining a need for property or services and ending with contract completion and closeout.” 539 F.3d 1340, 1345 (Fed. Cir. 2008). Accordingly, the Fifth Circuit held that the process for determining a need necessarily includes “the choice to refrain from obtaining outside services.” Therefore a complaint challenging an in-sourcing decision is an action alleging a violation of statute or regulation in connection with a procurement, for which jurisdiction is exclusively vested in the Court of Federal Claims.

With the Fifth Circuit decision in Rothe, the body of case law continues to develop regarding the proper jurisdiction for in-sourcing claims. The Eleventh Circuit, the only other circuit court to address the issue, also has held that the district courts lack subject-matter jurisdiction over in-sourcing claims. See Vero Technical Support v. U.S. Dep’t of Def., 437 F. App’x 766, 770 (11th Cir. 2011) (unpublished decision). Importantly, both circuit opinions opined on the proper jurisdiction for in-sourcing claims, holding that the claims fall within the scope of the Tucker Act and the exclusive jurisdiction of the Court of Federal Claims.  However, the jurisdictional question still lingers, as the Court of Federal Claims is currently divided on the issue, with one case holding that the Court has jurisdiction, see Santa Barbara Applied Research, Inc. v. United States, 98 Fed. Cl. 536 (2011), and one case holding that the Court does not have jurisdiction over such claims because a disappointed contractor lacks prudential standing, see Hallmark-Phoenix 3, LLC v. United States, 99 Fed. Cl. 65 (2011). As well, one district court in the Western District of Oklahoma found that it had jurisdiction over an in-sourcing claim, see K-Mar Indus., Inc. v. U.S. Dep’t of Def., 752 F. Supp. 2d 1207 (W.D. Okla. 2010). We will continue to monitor developments in this area as new cases provide guidance on this jurisdictional enigma.

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In Santa Barbara Applied Research, Inc. (“SBAR”) v. United States, No. 11-86C (May 4, 2011), Judge Firestone of the United States Court of Federal Claims (“COFC”) ultimately upheld the Air Force’s in-sourcing decision on facts that are largely sui generis. However, before ruling in the Air Force’s favor on the merits of the cost comparison, Judge Firestone first unequivocally held that the COFC has subject matter jurisdiction to hear a challenge to a DoD in-sourcing decision, and the Plaintiff, the incumbent provider of the in-sourced services, had standing to bring such a challenge.

As a threshold matter, the government did not dispute that the COFC had jurisdiction to hear SBAR’s in-sourcing challenge under the Tucker Act, 28 U.S.C. § 1491(b)(1), because the matter involved the “alleged violation of statute or regulation in connection with a procurement or proposed procurement.” The government’s position on the COFC’s exclusive jurisdiction to hear in-sourcing challenges was consistent with the position that it has taken in a number of recently filed in-sourcing challenges in the district courts.

However, in moving to dismiss SBAR’s challenge for a lack of standing, the government staked out a position that was directly inconsistent with the arguments that it had advanced in moving to dismiss the district court in-sourcing cases. In this regard, the government moved to dismiss the SBAR challenge at the COFC on the grounds that, inter alia, SBAR was not an “interested party” because the matter did not involve a formal public-private competition, and, therefore, SBAR purportedly did not suffer the competitive injury necessary for standing under section 1491(b)(1). In advancing this argument, the government relied on the Federal Circuit’s prior decisions in American Federation of Government Employees, AFL-CIO (“AFGE”) v. United States, 258 F.3d 1294 (Fed. Cir. 2001) and Weeks Marine, Inc. v. United States, 575 F.3d 1352 (Fed. Cir. 2009).

Remarkably, in the district court actions where the government moved to dismiss on the grounds that the COFC had exclusive jurisdiction, the plaintiffs in those cases argued that dismissal was not proper because, inter alia, the in-sourcing challenges were not “bid protests” and the plaintiffs were not interested parties to pursue such actions at the COFC. In response, the government asserted that the plaintiffs were in fact interested parties and could demonstrate prejudice because an in-sourcing decision necessarily involves consideration of whether it is in the best interests of the government to contract for its requirements, and contractors interested in bidding on such contracts are affected and suffer injury when the decision is made not to contract. Despite taking a directly contrary position before the COFC, the government further argued in the district court matters that AFGE and Weeks Marine did not support the argument that the plaintiffs lacked interested party status. See, e.g., Government’s Replies to Plaintiffs’ Motions to Dismiss in Rothe Development, Inc. (5:10-CV-00743-XR (Western Dist. Of Tex.)); K-MAR Industries, Inc. (CIV-10-984-F (Western Dist. Of Okla.)); Vero Technical Support, Inc., (10-14162-CIV-GRAHAM/LYNCH (Southern Dist. of Fla)).

In an apparent attempt to reconcile its inconsistent positions on standing to challenge in-sourcing decisions, in an April 2011 filing in Triad Logistics Svs., Corp., which is another in-sourcing challenge pending before the COFC, the government acknowledged to Judge Horn that “the United States’ position with respect to these issues has developed over time.” That seems to be quite the euphemism.