Panoptic Enterprises'


Federal Acquisition Developments, Guidance, and Opinions

January 2009
Vol. X, No. 1


Court Strikes Down DOD's Small and Disadvantaged Business Contract Goal
USD(AT&L) Permits Certain Foreign Products
GSAR Protests, Disputes, and Appeals Regulations Rewritten
NASA to Rewrite Government Property, IT Security Regulations
Safavian Convicted for Second Time
GAO Protests Increase 17% in Fiscal Year 2008
Nonmanufacturing Rule Waived for Cables, Trailers
Prompt Payment Interest Rate Set at 5 5/8%

Court Strikes Down DOD's Small and
Disadvantaged Business Contract Goal

The United States Court of Appeals for the Federal Circuit declared unconstitutional the Department of Defense’s (DOD’s) goal of awarding 5% of its contract dollars to small disadvantaged businesses (SDBs) on the grounds that it violates the right to equal protection in that it bases the preferential treatment on race. This decision brings into question the validity of other socio-economic programs, particularly the 8(a) program for companies owned and managed by socially and economically disadvantaged individuals.

The case involves Section 1207 of the National Defense Authorization Act of 1987 (Public Law 99-661) (codified at 10 U.S.C. 2323), which first established the 5% goal for contract awards by DOD to SDBs, defined at the time as Black Americans, Hispanic Americans, Native Americans, Asian Pacific Americans, and other minorities. Section 1207 went on to direct that “the Secretary of Defense may enter into contracts using less than full and open competitive procedures (including awards under section 8(a) of the Small Business Act), but shall pay a price not exceeding fair market cost by more than 10 percent in payment per contract to contractors or subcontractors.” DOD implemented this directive by applying a price evaluation adjustment to bids submitted by non-SDB bidders, increasing those bids by 10% percent before comparing them to the bids submitted by SDBs. This statutory provision has been reenacted by Congress several times since then – in 1989, 1992, 1999, 2002, and 2006. It is set to expire in 2009 if not reenacted again.

This decision, Rothe Development Corporation v. Department of Defense and Department of the Air Force (CAFC 2008-1017, November 4, 2008), involves a case filed in 1998 by Rothe Development Corporation against DOD and the Air Force when the Air Force awarded a contract to an Asian-American-owned business despite the fact that Rothe, which is owned by a Caucasian woman, was the lowest bidder. Since then, the Court of Appeals has remanded the case to the District Court twice without reaching the ultimate question of Section 1207’s constitutionality. This is the Court of Appeal’s third decision in the case.

Starting in the late 1980’s, the Department of the Air Force contracted with Rothe to maintain, operate, and repair computer systems at Columbus Air Force Base in Mississippi. In the late 1990’s, the Air Force decided to consolidate Rothe’s contract with a contract for communications services, to issue a solicitation for competitive bids, and to award the contract under the Section 1207 program. Rothe bid $5.57 million. International Computer and Telecommunications, Inc. (“ICT”), a competitor to Rothe owned by a Korean-American couple and certified as a SDB, bid $5.75 million. Although Rothe’s bid was lower than ICT’s bid and was in fact the lowest bid, the Air Force considered Rothe’s bid to be $6.1 million, higher than ICT’s bid, because of the 10% evaluation adjustment. The Air Force awarded the contract to ICT.

Because Section 1207 incorporates an explicit racial classification – the presumption that members of certain minority groups are “socially disadvantaged” for purposes of obtaining SDB status – Section 1207 is subject to “strict scrutiny.” The Court stated, “The Supreme Court has held that government may have a compelling interest in ‘remedying the effects of past or present racial discrimination.’ However, ‘an effort to alleviate the effects of societal discrimination is not a compelling interest.’ Therefore, before resorting to race-conscious measures, the government must ‘identify [the] discrimination [to be remedied], public or private, with some specificity,’ and must have a ‘strong basis in evidence’ upon which ‘to conclude that remedial action [is] necessary.’ Section 1207 ‘must serve a compelling governmental interest, and must be narrowly tailored to further that interest.’”

The government bears the burden of producing strong evidence supporting the legislature’s decision to employ race-conscious action, according to the Court. “We hold that Section 1207, on its face . . . violates the equal protection component of the Fifth Amendment right to due process. Because the statute authorizes DOD to afford preferential treatment on the basis of race, we must apply strict scrutiny. And because Congress did not have a ‘strong basis in evidence’ upon which to conclude that DOD was a passive participant in pervasive, nationwide racial discrimination – at least not on the evidence produced by DOD and relied on by the district court in this case – the statute fails strict scrutiny.” Therefore, according to the Court of Appeals, Section 1207 is unconstitutional, and DOD may not apply it in the award of contracts.

EDITOR’S NOTE: While this decision affects only DOD’s SDB preference program, the same arguments can be made against any of the socio-economic programs Congress has enacted to remedy discrimination, including other agencies’ SDB and woman-owned small business programs, and the Small Business Administration’s 8(a) program, which provides business development assistance to SDBs. It is conceivable that Rothe will be cited in challenges to these and other similar programs.

However, the Court of Appeals pointed to a way out: “If Congress reenacts Section 1207 again before it is set to expire in 2009 – as Congress is free to do – we cannot now predict, nor do we intend to prejudge, whether any such new enactment will be supported by a ‘strong basis in evidence.’” In other words, if Congress sets out the evidence of racial discrimination, evidence of the government’s participation in that discrimination, the compelling governmental interest the remedy is addressing, and how that remedy is narrowly tailored to further that interest, then Section 1207 may pass the “strict scrutiny” test and be constitutional.

USD(AT&L) Permits Certain Foreign Products

The Under Secretary of Defense (Acquisition, Technology, and Logistics) (USD(AT&L)) has extended for one year the waiver permitting certain items manufactured by the United Kingdom (UK) to be acquired by the Department of Defense (DOD), and extended the waiver of the restriction on foreign-made para-aramid fibers and yarns to all qualifying countries. Also, a little cleaning-up of the DFARS was conducted to remove a reference to a law that is now covered by the FAR.

GSAR Protests, Disputes, and Appeals Regulations Rewritten

The General Services Administration (GSA) is finalizing, with changes, the rewrite of GSA Acquisition Regulation (GSAR) Part 533, Protests, Disputes, and Appeals, as part of the GSAR rewrite initiative.

No comments were submitted in response to the proposed changes. However, the GSA Office of General Counsel requested that certain language be retained and not deleted as proposed.

The new GSAR Part 533:

For more on the proposed rule, see the July 2008 Federal Contracts Perspective article “GSAR Undergoing Rewrite.”

In addition to the rewrite of GSAR Part 533, GSA published a proposed rewrite of GSAR Part 536, Construction and Architect-Engineer Contracts. This proposed rewrite would:

Comments on the proposed rule must be submitted no later than February 2, 2009, by any of the following means: (1) eRulemaking Portal: http://www.regulations.gov; (2) fax: 202-501-4067; or (3) mail to: General Services Administration, Regulatory Secretariat (VPR), 1800 F Street, NW, Room 4041, ATTN: Laurieann Duarte, Washington, DC 20405. Identify comments as “GSAR Case 2008-G509.”

NASA to Rewrite Government Property, IT Security Regulations

The National Aeronautics and Space Administration (NASA) is proposing to rewrite NASA FAR Supplement (NFS) Part 1845, Government Property, and the associated property-related provisions, clauses, prescriptions, and procedures to bring it into alignment with changes made to FAR Part 45 by Federal Acquisition Circular (FAC) 2005-17, which simplified government property procedures, clarified language, eliminated obsolete requirements related to the management and disposition of government property in the possession of contractors, and reduced 19 clauses to three (for more on FAC 2005-17, see the June 2007 Federal Contracts Perspective article “FAR Coverage on Government Property Simplified, Clarified, Trimmed”).

Also, this proposed NFS Part 1845 rewrite includes agency-level procedures and provision and clause language requiring that contractor-acquired assets which become capital assets of the government be identified. This is a requirement of the Statement of Federal Financial Accounting Standard (SFFAS) No. 6.

Comments on the proposed rule must be submitted no later than February 2, 2009, by any of the following means: (1) eRulemaking Portal: http://www.regulations.gov; (2) e-mail: carl.c.weber@nasa.gov; or (3) mail to: Carl Weber (Mail Stop 5K80), NASA Headquarters, Office of Procurement, Contract Management Division, Washington, DC 20546. Identify comments as “RIN number 2700-AD37.”

In addition, NASA would revise NFS 1804.470, Security Requirements for Unclassified Information Technology (IT) Resources, and the corresponding clause NFS 1852.204-76, to update requirements related to IT security, consistent with federal policies for the security of unclassified information and information systems. The proposed rule would impose no new requirements. It would define applicability more clearly, update procedural processes, eliminate the requirement for contractor personnel to meet the NASA System Security Certification Program, and provide a website link to a library where contractors can find all underlying regulations and referenced documents (new paragraph (b) of revised NFS 1804.470-3, IT Security Requirements – https://itsecurity.nasa.gov/policies/index.html).

Comments on the proposed rule must be submitted no later than February 2, 2009, by any of the following means: (1) eRulemaking Portal: http://www.regulations.gov; (2) e-mail: ken.stepka@nasa.gov; or (3) mail to: Ken Stepka (Mail Stop 5P86), NASA Headquarters, Office of Procurement, Contract Analysis Division, Washington, DC 20546. Identify comments as “RIN number 2700-AD46.”

Safavian Convicted for Second Time

On December 19, 2008, David Safavian, the former Office of Federal Procurement Policy (OFPP) administrator and former General Services Administration (GSA) chief of staff, was found guilty of obstructing a GSA internal investigation and making false statements regarding his relationship with Jack Abramoff, who pleaded guilty in 2006 to charges of conspiracy, mail fraud, and tax evasion and was sentenced to four years in prison. Safavian was convicted in 2006, but the conviction was overturned in June 2008, and Safavian was retried in October 2008.

The jury found Safavian guilty on four of the five counts. He faces a maximum sentence of five years in prison on each of the four counts, a $250,000 fine, and three years of supervised release. A sentencing date has not been set by the court.

For more on Safavian and his case, see the July 2008 Federal Contracts Perspective article “Safavian Conviction Overturned,” which has links to six previous Federal Contracts Perspective articles.

GAO Protests Increase 17% in Fiscal Year 2008

The Government Accountability Office (GAO) has reported to Congress that the number of protests filed with it increased by 17% between Fiscal Years (FY) 2007 and 2008, up from 1,411 cases to 1,652 cases. This is the highest number of protests filed with GAO since 1997, when 1,707 protests were filed. In addition, the “effectiveness rate” (the number of protestors obtaining some form of relief) increased from 38% in FY 2007 to 42% in FY 2008. The rate had been within 34% to 39% between FY 2004 and FY 2008.

There are several factors that probably have contributed to this increase. One is the increasing amount of money the government is spending through contracts, either economic stimulus or increased contracting-out of government functions, means there are more contracts to protest. Another is the economic troubles many companies are facing has made them desperate to use any means to obtain a government contract. Finally, the GAO’s jurisdiction has expanded so it now can entertain protests against task orders (see the December 2008 Federal Contracts Perspective article "GAO Reasserts Authority on Task Order Protests").

While the number of protests increased, the number of protests that GAO decided actually decreased from 335 in FY 2007 to 291 in FY 2008 (a protest may not be decided if it is withdrawn by the protester, is dismissed by GAO because it was not filed in a timely manner, etc.). And the “sustain rate” (GAO rules in favor of the protester), dropped from 27% in FY 2007 (91 out of 335) to 21% in FY 2008 (60 out of 291).

Nonmanufacturing Rule Waived for Cables, Trailers

The Small Business Administration (SBA) is waiving the nonmanufacturer rule for the following industries: control cable and conductors under North American Industry Classification System (NAICS) code 335931, product service code 6145; trailers and heavy duty truck tractors, NAICS code 333924, product service code 2330; and line hardware (insulator strings), NAICS code 335932, product service code 5975. SBA invited the public to comment on these proposed waivers or to provide information on potential small business sources for these products. No comments were submitted in response to the proposed waivers, so the waivers are granted. For more on the proposed waivers, see the November 2008 Federal Contracts Perspective article “Nonmanufacturer Rule Waivers Proposed.”

The SBA regulation on the nonmanufacturer rule is in Title 13 of the Code of Federal Regulations (CFR), Business and Credit Administration; Part 121, Small Business Size Standards; under paragraph (b) of 121.406, How Does a Small Business Concern Qualify to Provide Manufactured Products Under Small Business Set-Aside or MED [Minority Enterprise Development] Procurements? The SBA regulation on the waiver of the nonmanufacturer rule is 13 CFR 121.1202, When Will a Waiver of the Nonmanufacturer Rule Be Granted for a Class of Products?

Prompt Payment Interest Rate Set at 5 5/8%

The Treasury Department has established 5 5/8% (5.625%) as the interest rate for the computation of payments made between January 1 and June 30, 2009, under the Prompt Payment Act and the Contracts Disputes Act. This rate is also used in facilities capital cost of money calculations. The interest rate for the prior six-month period (July 1, 2008, through December 31, 2008) was 5 1/8% (5.125%). The interest rate for January 1, 2008, through June 30, 2008, was 4 3/4% (4.75%).

All prompt payment interest rates since 1980 (in six-month increments) are available at http://www.treasurydirect.gov/govt/rates/tcir/tcir_opdprmt2.htm.

FAR Subpart 32.9, Prompt Payment; FAR Subpart 33.2, Disputes and Appeals; FAR 31.205-10, Cost of Money; and Cost Accounting Standard (CAS) 9904.414, Cost of Money as an Element of the Cost of Facilities Capital, are affected by this interest rate.

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