Protest Case: Hydraulics International v. The United States

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The U.S. Court of Federal Claims released its opinion in the Hydraulics case (No. 22-364) 0n August 8, 2022. The action that was protested related to a subproject award under the Army’s Aviation and Missile Technology Consortium (AMTC) other transaction (OT) agreement. The full court decision is available online and it has been the subject of commentaries by lawyers and in legal publications. There were two main parts to the case. The most pertinent for practitioners of innovative contracting was its decision on jurisdiction. The court found that it had jurisdiction to hear the case based on the language of its jurisdictional statute (28 U.S.C. 1491): “in connection with a procurement or proposed procurement.” The court found that the subproject award was “in connection” with a proposed procurement since a follow-on production contract or transaction was the possible result of a successful prototype project. It then found on the merits for the government. In doing so the court stated the “Army in partnership with AMTC” did not act “irrationally, arbitrarily, capriciously, abuse its discretion” or otherwise “violate the law.” In other words it applied its usual standard to review the protest.

The Government Contractor magazine (Vol. 64, no. 33, 31 August 2022) was one of the publications that published a summary of the case. My Practitioner’s Comment was included along with their straightforward analysis of the decision. As my comments show both the government and court demonstrated a profound lack of understanding of the structure, relationships, and implications of the OT agreement in question and the subproject award. Key questions went unaddressed and unanswered. What form of legal entity, if any, is AMTC? Is there a conflict in the consortium management firm negotiating the subproject award while having a funded contractual relationship with the potential recipient of the subproject award and a funded contractual relationship with the awarding government organization? Can the subproject award be an OT under section 4022 if it is awarded by a private company rather than the government? The lack of answers in the opinion as well as misstatements by the government and court make the case worth scrutiny.

Following excerpt is from The Government Contractor magazine (Vol. 64, no. 33, 31 August 2022)

Practitioner’s Comment—Hydraulics International reached the correct outcome for the wrong reason. Along the way, the case contains some remarkably inaccurate statements that demonstrate a dearth of knowledge and need for education among the Government legal and contracting community related to OTs.

The first statement is the COFC’s quotation of the Government’s position in its reply brief that Congress provided OTA contracting authority to DOD “specifically to exempt these prototype projects” from “review by this court.” To find otherwise would “not just defy reason, it would obliterate it.” As the COFC’s opinion makes clear, it did not accept this argument. The fact that the Government would make such a bold, definitive, and inaccurate statement is remarkable.

I can speak with some authority on this subject since I was the author and primary advocate of both the original research OT legislation (§ 251, P.L. 101-189) and the expansion of the authority to address prototype projects (§ 845, P.L. 103-160).   In interactions with members of Congress and staff, the issue of protests was discussed. Then and since, I have pointed out that the Government Accountability Office has long held that its protest jurisdiction was limited to procurement contracts and did not extend to non- procurement agreements such as grants. Thus GAO’s review of an OT protest would be limited to the threshold question of whether the OT, the non-procurement agreement, was awarded consistent with the statute or should have been awarded as a procurement contract. With respect to court jurisdiction, I merely related my opinion that it was uncertain how a district court or the Claims Court would react. The scope of any review would be limited since unlike procurement contracts OTs were constrained by few laws and regulations.

Before the enactment of prototype authority, the Court of Claims had entertained a protest of a research OT issued under the Technology Reinvestment Project. In a summary disposition, the protest was denied. However, the possibility of an OT protest in court was not ruled out. Furthermore, with regard to the intent of Congress, the only legislative history of the original prototype authority is contained in a colloquy on the Senate floor among Sens. Nunn, Bingaman and Warner. The subject of protest is not mentioned in that colloquy.

The contractual action at issue in this case was a subproject of a consortium (AMTC) OT agreement. The COFC apparently assumed that the consortium has the capacity to contract. The term consortium does not necessarily import a business organization with a capacity to enter into contracts. The publicly available information on most OT consortia is opaque on this issue, but it seems many are unincorporated associations.

The COFC’s opinion states that the Army awarded the OT agreement to AMTC. AMTC “is managed by Advanced Technology International” (ATI). “[T]hrough the OTA, ATI manages several prototype projects.” Then comes another remarkable statement. ATI issues project solicitations to “members of the AMTC and enters further OTAs with selected contractors.” It is clear from sub section (a) of the prototype authority (10 USCA § 4022) that only certain Government officials and their delegees have authority to award prototype OTs. The opinion does not state, and it seems highly unlikely, even if it were legal, that ATI has been delegated authority to enter into an OT with a contractor. The relationship between ATI and the recipient of a subproject award is a commercial contract. The commercial contract in question is a subcontract of the basic OT agreement.

The COFC mistook the relationships among the parties and mischaracterized key relationships. Finding that the dispute in question involved the failure to award a subcontract should have been dispositive of the case. A subcontractor or potential subcontractor generally does not have standing to file a protest or initiate a dispute on its own. To give the COFC its due, its findings of fact were based on the administrative record submitted by the Government. The plaintiff was apparently either unaware of the facts or chose not to inform the Court.

Finally, it is worth pointing out that the Government can protect itself from challenges like this by asserting that any follow-on activity (the “production contract or transaction”) will not be a procurement contract. That leaves open the options of a production OT or an instrument under “such procedures…as the Secretary of Defense may establish.”

written by Richard L. Dunn