The Court of Federal Claims’ recent decision in Axiom Resource Management v. United States, 2007 WL 2840414 (Sept. 28, 2007), illustrates the trend toward more robust judicial review of organizational conflict of interest (OCI) allegations. The case also highlights several issues contractors should consider in drafting successful OCI mitigation plans.
Background
Axiom involved a post-award protest against the TRICARE Management Agency’s (TMA’s) award of a GSA Schedule Task Order to Lockheed Martin Federal Healthcare, Inc. (LMFH) for program management support services for the TRICARE Acquisition Directorate. For OCI purposes, the Solicitation divided the support services generally provided to TMA into three categories:
(1) Category 1 (Internal Support), for services that require access to extensive data about the contracts of other TMA contractors;
(2) Category 2 (Program Management Support), for services such as requirements analysis, acquisition support, and program planning support; and
(3) Category 3 (Product Support), for services such as system design, development, and integration.
The Solicitation stated that the Task Order would involve Category 2 services and advised offerors that their performance of work in any other category would be presumed to create an OCI. Accordingly, LMFH submitted an OCI mitigation plan to prevent LMFH personnel working on the Task Order from disclosing information that would place other Lockheed Martin subsidiaries at an unfair competitive advantage in obtaining Category 3 work. The plan provided for firewalls, access controls, physical security, computer security, nondisclosure agreements, and OCI training.
GAO Protests
Following award to LMFH, Axiom filed a series of GAO bid protests alleging that LMFH had an unmitigable OCI. The GAO dismissed Axiom’s first two protests when TMA agreed to revisit its OCI analysis. The upshot of the “revisitation” was the TMA’s conclusion that the Task Order would require access to information about “purchased care” (contractor-provided healthcare) requirements, but not information about “non-purchased care” (military-provided healthcare) requirements. Accordingly, the contracting officer determined that an OCI would arise only if other Lockheed Martin subsidiaries were to bid on contracts involving “purchased care” requirements. That OCI was mitigated, according to the contracting officer, by TMA and Lockheed Martin “policies” that would preclude Lockheed Martin entities from bidding on Category 3 work involving “purchased care” requirements, while leaving them free to pursue work involving “non-purchased care” requirements. Based upon this analysis, TMA reaffirmed the award to LMFH, resulting in a third GAO protest.
The GAO denied Axiom’s protest, finding that the contracting officer reasonably concluded that LMFH’s mitigation plan adequately addressed potential future OCIs.
Court of Federal Claims Protest
Axiom filed a fourth post-award protest, this time at the Court of Federal Claims. Although the court found that the contracting officer “facially conducted a thorough [OCI] analysis, it held that this was not dispositive of whether he had exercised “common sense, good judgment, and sound discretion” in resolving the conflict, as required by FAR Subart 9.5. Rather, the court found it necessary to conduct a thorough inquiry into the factual basis for the contracting officer’s conclusions and to permit extensive supplementation of the administrative record with testimony from two former senior TMA officials. The former officials testified that, due to the interrelationship between “purchased care” and “non-purchased care” services, work under the Task Order necessarily would require LMFH to obtain access to information regarding, and assist in the development of, TMA’s “non-purchased care” requirements. One of the former officials also testified that the TMA and Lockheed Martin “policies” prohibiting Lockheed Martin entities from bidding for “purchased care” services were voluntary and unenforceable.
Based in significant part on the testimony of the former TMA officials, the court granted Axiom’s motion for judgment on the administrative record. The court found:
(1) That LMFH employees working on the Task Order would have access to information regarding “non-purchased care” requirements, and that such information would provide other Lockheed Martin subsidiaries with an unfair competitive advantage in future procurements for Category 3 services;
(2) That the contracting officer had failed to identify and address the impaired objectivity OCI that would result from LMFH assisting in the development of “non-purchased care” requirements on which other Lockheed Martin subsidiaries later could bid; and
(3) That LMFH’s OCI mitigation plan was inadequate because it did not prohibit LMFH from bidding on future “non-purchased care” requirements, and, in any case, expressed a “policy” rather than an enforceable requirement.
Although the court sustained LMFH’s protest, it concluded that it did not have sufficient information regarding the public interest to craft an appropriate remedy. The court ordered the submission of an amicus brief by the Bureau of Competition of the Federal Trade Commission, the federal agency authorized to monitor and ensure that there is adequate competition in the healthcare industry. Specifically, the court ordered the Bureau of Competition to address whether LMFH should be required to divest existing Category 3 contracts if the award stands, whether the current TMA policy and voluntary LMFH mitigation efforts would be sufficient to address the OCI, and whether the non-disclosure agreements LMFH required former Axiom employees it hired to sign would foreclose future competition when the Task Order expires.
Lessons Learned
Several lessons can be learned from the Axiom case.
First, the opinion reflects the court’s view that OCIs have become one of the most significant legal and policy issues in government contracting. In this regard, the first paragraph of the opinion provides as follows:
The federal government’s increased use of and dependence on outside contractors to perform essential government functions often entails providing these contractors with governmental, business proprietary, and otherwise private information to perform their duties. This has increased potential and actual conflicts of interest regarding how, and the extent to which, such information is utilized in performing contract services and otherwise. Establishing the parameters of access to and use of this information will be among the most important decisions that the United States Court of Claims and the United States Court of Appeals for the Federal Circuit will make in the next few years – not only for government contract jurisprudence, but to maintain competition in this growing segment of the economy.
This language strongly suggests that the court intends to take a more active role in shaping OCI law and policy. It further suggests that the court’s primary focus will be ensuring that there is adequate competition for government contracts – a goal the court seems to view as favoring a broader reading of OCI prohibitions.
Second, although the GAO has evidenced increased willingness to second guess agency conclusions with respect to certain types of OCIs, Axoim suggests that the Court of Federal Claims may be a more protestor-friendly forum than the GAO for OCI cases that involve significant elements of factual dispute. In contrast to the GAO, which deferred to the contracting officer’s judgment that LMFH would not require access to information regarding “non-purchased care” services, the court conducted its own detailed, factual analysis. Of particular significance, the court did not confine its inquiry to the administrative record, but instead received expert testimony regarding the internal workings of the Agency, the nature of its programs, and the relationship between “purchased” and “non-purchased” care. Thus, when establishing an OCI requires the protestor to demonstrate facts that are not apparent from the agency report, or that are disputed, the protestor may find the Court of Federal Claims to be a more favorable forum than the GAO.
Third, Axiom suggests that the Court of Federal Claims may be willing to apply a more stringent standard of review in OCI cases than the test used by the GAO. At oral argument, the Government contended that the proper standard of review was whether the contracting officer acted reasonably in concluding that LMFH did not have an unmitigable OCI. The court, however, noted that this standard of review is relevant when the court’s evaluation is made under the “arbitrary and capricious” prong of the Administrative Procedure Act, but inapplicable were “the record contains substantial evidence that one or more FAR provisions have been violated.” Although the court did not ultimately decide the case on this issue, the court’s comments pave the way for a protestor to argue, in some cases at least, that a contracting officer’s OCI analysis is not entitled to any deference whatsoever.
Fourth, Axiom serves as a reminder that merely proposing an OCI mitigation plan is not enough. Rather, the plan must be adequate actually to mitigate the type of OCI at issue. For example, firewalls and nondisclosure agreements alone will not mitigate an impaired objectivity OCI; rather, recusal from activities with respect to which a contractor’s objectivity may be impaired is generally required. Moreover, a mitigation plan that merely expresses the contractor’s “policy” is unlikely to withstand scrutiny. Rather, the plan must be contractually binding and should include some mechanism for the government to verify compliance.
Finally, the court’s analysis with regard to the appropriateness of injunctive relief suggests that contractors must now consider whether their OCI mitigation plans will unduly restrict future competition. Under OCI law, the primary concern to date with respect to an unequal access to information OCI is that it will place the contractor at an unfair competitive advantage in future procurements. The more an OCI mitigation plans restricts the flow of information, the more likely it will be to mitigate this concern. In Axiom, however, the court expressed the opposite concern – that restrictions on the disclosure of information may unduly restrict competition, such as by preventing contractor personnel from working for competing contractors in the pursuit of future requirements. The court’s analysis suggests that a contractor may be required not only to mitigate the risk of unequal access to competitively useful, non-public information, but also that it do so in a manner that does not unduly restrict future competition for related requirements. Unfortunately, the court provided no guidance regarding how a contractor might go about this formidable task.
Keith R. Szeliga is an associate in the Government Contracts & Regulated Industries Practice Group of Sheppard Mullin Richter & Hampton’s Washington, D.C. office. For additional information regarding the identification and mitigation of OCIs, please see Mr. Szeliga’s recent Public Contract Law Journal article, entitled “Conflict and Intrigue in Government Contracts: A Contractor’s Guide to Identifying and Mitigating Organizational Conflicts of Interest.”
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