POSTSCRIPT MANDATORY CONSIDERATION OF COMMMERCIAL PRODUCTS

37 Nash & Cibinic Rep. NL ¶ 38

Nash & Cibinic Report | June 2023

The Nash & Cibinic Report

Acquisition Planning

Ralph C. Nash

¶ 38. POSTSCRIPT: MANDATORY CONSIDERATION OF COMMMERCIAL PRODUCTS

In Commercial Products and Services: Raising the Market Research Bar or Much Ado About Nothing?, 32 NCRNL ¶ 52, Steve Schooner discussed the U.S. Court of Appeals for the Federal Circuit’s landmark decision in Palantir USG, Inc. v. U.S., 904 F.3d 980 (Fed. Cir. 2018), 60 GC ¶ 287, affirming the Court of Federal Claims decision at 129 Fed. Cl. 218 (2016), 58 GC ¶ 430. These decisions broke new ground because they ruled that a contractor had the right to challenge an agency’s failure to comply with 10 USCA § 3453 (previously § 2377) and, by implication, the right to at least participate in a competition for the work needed by the agency. We don’t know the extent of these requirements but there have been a few subsequent decisions throwing more light on this issue.

The Statute

First, let’s look at the statute’s use of the word “shall:”

(a) Preference.—The head of an agency shall ensure that, to the maximum extent practicable—

(1) requirements of the agency with respect to a procurement of supplies or services are stated in terms of—

(A) functions to be performed;

(B) performance required; or

(C) essential physical characteristics;

(2) such requirements are defined so that commercial services or commercial products or, to the extent that commercial products suitable to meet the agency’s needs are not available, nondevelopmental items other than commercial products, may be procured to fulfill such requirements; and

(3) offerors of commercial services, commercial products, and nondevelopmental items other than commercial products are provided an opportunity to compete in any procurement to fill such requirements.

(b) Implementation.—The head of an agency shall ensure that procurement officials in that agency, to the maximum extent practicable—

(1) acquire commercial services, commercial products, or nondevelopmental items other than commercial products to meet the needs of the agency;

(2) require prime contractors and subcontractors at all levels under the agency contracts to incorporate commercial services, commercial products, or nondevelopmental items other than commercial products as components of items supplied to the agency;

(3) modify requirements in appropriate cases to ensure that the requirements can be met by commercial services or commercial products or, to the extent that commercial products suitable to meet the agency’s needs are not available, nondevelopmental items other than commercial products;

(4) state specifications in terms that enable and encourage bidders and offerors to supply commercial services or commercial products or, to the extent that commercial products suitable to meet the agency’s needs are not available, nondevelopmental items other than commercial products in response to the agency solicitations;

(5) revise the agency’s procurement policies, practices, and procedures not required by law to reduce any impediments in those policies, practices, and procedures to the acquisition of commercial products and commercial services; and

(6) require training of appropriate personnel in the acquisition of commercial products and commercial services.

(c) Preliminary market research.—

(1) The head of an agency shall conduct market research appropriate to the circumstances—

(A) before developing new specifications for a procurement by that agency;

(B) before soliciting bids or proposals for a contract in excess of the simplified acquisition threshold; and

(C) before awarding a task order or delivery order in excess of the simplified acquisition threshold.

(2) The head of an agency shall use the results of market research to determine whether there are commercial services or commercial products or, to the extent that commercial products suitable to meet the agency’s needs are not available, nondevelopmental items other than commercial products available that—

(A) meet the agency’s requirements;

(B) could be modified to meet the agency’s requirements; or

(C) could meet the agency’s requirements if those requirements were modified to a reasonable extent.

(3) In conducting market research, the head of an agency should not require potential sources to submit more than the minimum information that is necessary to make the determinations required in paragraph (2).

(4) The head of an agency shall document the results of market research in a manner appropriate to the size and complexity of the acquisition.

(5) The head of an agency shall take appropriate steps to ensure that any prime contractor of a contract (or task order or delivery order) in an amount in excess of $5,000,000 for the procurement of products other than commercial products or services other than commercial services engages in such market research as may be necessary to carry out the requirements of subsection (b)(2) before making purchases for or on behalf of the Department of Defense.

(d) Market research for price analysis.—The Secretary of Defense shall ensure that procurement officials in the Department of Defense conduct or obtain market research to support the determination of the reasonableness of price for commercial products or commercial services contained in any bid or offer submitted in response to an agency solicitation. To the extent necessary to support such market research, the procurement official for the solicitation—

(1) in the case of products or services acquired under section 3455 of this title [10 USCA § 3455], shall use information submitted under subsection (d) of that section; and

(2) in the case of other products or services, may require the offeror to submit relevant information. [Emphasis added.]

The modifier “to the maximum practicable” provides a modicum of discretion but the numerous “shalls” make it quite clear that Congress wants to drive the Department of Defense, the National Aeronautics and Space Administration, and the Coast Guard toward the use of commercial products and services to meet their needs.

That leads us to address what we have learned since Palantir.

Subcontractors Also Have Rights

Normally, subcontractors have no right to protest procurement procedures but in this regard the statute is unique. In Percipient.Ai, Inc. v. U.S., 165 Fed. Cl. 331, 2023 WL 2819637 (2023), 65 GC ¶ 101, the court denied a motion to dismiss a potential subcontractor’s protest that the contracting agency had violated the statute by not requiring a contractor to allow it to participate in performing a contract. Subsequently, the decision was vacated on April 27, 2023, and the protest was then dismissed on the grounds that it was a task order protest over which the court had no jurisdiction, No. 23-28C (Fed. Cl. May 17, 2023). However, the reasoning on the commercial product preference is still valid and worth discussing.

Percipient had a commercial software product that fulfilled a key part of the agency’s requirements but it did not compete for the initial contract because it did not have the ability to perform all of the work. After simultaneously awarding the base indefinite-delivery, indefinite-quantity contract and a task order in January 2021, the agency told Percipient in March that it should discuss its participation with the contractor. However, the contractor was not receptive to using that product but intended to develop its own software. When Percipient learned this, it arranged for a demonstration of its software to the agency in December 2021, with the result that some of the agency employees agreed that it met their needs. Percipient continued to work with the agency for another year but finally concluded that the agency did not intend to direct the contractor to use the commercial software. Thus, it filed suit in the Court of Federal Claims.

In denying the Government’s motion to dismiss, the court first held that it had subject matter jurisdiction because Percipient had alleged a non-frivolous violation of 10 USCA § 3453, which constituted “a violation of statute or regulation in connection with a procurement or a proposed procurement,” citing RAMCOR Services Group v. U.S., 185 F.3d 1286 (Fed. Cir. 1999), 41 GC ¶ 361. The court then determined that Percipient had standing even though it was a subcontractor. Citing a number of earlier decisions that had held that parties had standing even though they were not actual or prospective “bidders,” the court reasoned:

Under [10 USCA] § 3453, the critical issue is whether offerors of commercial products have standing. We conclude that they do and that § 3453 does not require an offeror of a commercial product to have bid on the prime contract.

First, unlike most procurement statutes, § 3453 contemplates that offerors of commercial products have rights under the statute. Specifically, § 3453 provides that agencies must give offerors of commercial products “an opportunity to compete in any procurement to fill [the agency’s] requirements.” § 3453(a)(3). And this clause guarantees more than just a right to compete by bidding on the contract because the statute expressly distinguishes between bidders and offerors of commercial products. § 3453(b)(4) (requiring agencies to state their specifications “in terms that enable and encourage bidders and offerors to supply commercial services or commercial products” (emphasis added)); see also Ysleta Del Sur Pueblo v. Texas, 142 S. Ct. 1929, 1939, 213 L. Ed. 2d 221 (2022) (“[D]ifferences in language…convey differences in meaning.”). A violation of § 3453 therefore denies these commercial product owners an opportunity to compete that is guaranteed to them by the statute, and that guarantee would become illusory if offerors of commercial products could not sue under § 3453.

Second, § 3453 imposes an obligation on agencies to incorporate commercial products that continues beyond the contract’s award. For example, agencies must conduct market research even before “awarding a task order or delivery order.” § 3453(c)(1)(C). They must then use the results of that research to identify any commercial products 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.” § 3453(c)(2). So, putting this all together, an agency must conduct market research even after the contract award and then, depending on the results, need to incorporate a commercial product. This means that an agency can still violate § 3453 after the contract award and is why—unlike most other protests—it is irrelevant whether the commercial product offeror bid on the prime contract.

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Third, the statute uniquely expresses a significant preference for commercial products. That preference manifests itself throughout the statute by imposing obligations that require agencies to consider commercial products at nearly every stage of the procurement. This preference then culminates in Congress encouraging agencies to sacrifice their own requirements if doing so would allow the agency to incorporate a commercial product or service. § 3453(b)(3), (c)(2)(C). It would thwart Congress’s intent behind § 3453 if offerors of commercial products could not bring challenges under the statute. [Some citations omitted.]

This interpretation of the statute obviously gives companies with commercial products or services significant rights even if they can’t fulfill all of the requirements in a solicitation. It will be interesting to see how agencies implement this requirement but stalling for two years is clearly not the answer.

Trying But Failing Meets The Test

In mLINQS, LLC v. U.S., ___ Fed. Cl. ___, 2023 WL 2366654 (Mar. 6, 2023), the Air Force sought software to modernize one of its functions. Beginning in August 2016, it conducted 18 months of market research, including issuing requests for information, holding discussions with the Government’s subject-matter experts, and reviewing and evaluating relevant market information. Then, in September 2018 it awarded a sole-source contract to mLINQS to test its software. In June 2021, the Air Force decided not to proceed further on that contract but to conduct another round of market research. The result was the issuance of a solicitation in October 2021 to obtain a contractor to write new software to meet its needs. Subsequently, that solicitation was cancelled and the Air Force awarded a task order on one of its IDIQ contracts. mLINQS challenged this course of action on several grounds in the Court of Federal Claims.

The court denied the protest and stated with regard to the ground that the Air Force had failed to comply with the commercial product preference:

Although [the Federal Acquisition Streamlining Act] requires the procuring agency to seek a commercial solution to the maximum extent practicable, it does not mandate the use of a [commercially available off-the-shelf] item. FASA requires the government procure commercial products so long as they meet the agency’s needs. See 10 U.S.C. § 3453(c)(2). In implementing FASA’s commercial preference policy, the [Federal Acquisition Regulation] obligates agencies to conduct market research to determine whether commercial items are viable before procuring a product or service. FAR 10.002(c); FAR 11.002(a)(2). The Air Force and mLINQS worked together for three years before “it became apparent to both the Air Force and mLINQS that the moveLINQS software could not fulfill the Air Force [Permanent Change of Station] Automation requirement without modifications.” The ongoing relationship between the agency and mLINQS’s COTS software—coupled with the Air Force’s two formal market research inquiries—supports the conclusion a COTS product was not suitable for the Air Force’s “unique needs.” The Court, accordingly, holds the Air Force satisfied its obligation under the FASA and the FAR to accommodate commercial solutions to the maximum extent practicable.

The interesting feature of this decision is its reference to meeting the requirement “without modifications.” The statute clearly calls for modifying a commercial product to meet the Government’s needs and, in fact, there were some attempts during mLINQS’ three-year contract to modify the software.

Consolidating Requirements Which Forces Commercial Product Vendor To Be A Subcontractor Is OK

In C3.ai, Inc., Comp. Gen. Dec. B-418676, 2020 CPD ¶ 256, 2020 WL 4569173, the agency was seeking a contractor “who can provide System Engineering and Third Party System Integration services to support the procurement, implementation and operation of a hybrid and multi-cloud deployable development and production platform for [artificial intelligence and machine learning (AI/ML)] solutions and applications across the Department of Defense [DOD] at enterprise scale in all security enclaves.” It determined through market research that this was not a commercial service although some commercial products could be used. The agency therefore conducted the procurement under Federal Acquisition Regulation Part 15 procedures. C3.ai protested, arguing that the procurement should have been conducted using FAR Par 12 procedures. The Government Accountability Office denied the protest and stated with regard to the contention that the agency had violated the commercial product/services preference:

When an agency seeks to procure separate and multiple requirements under a single contract, there is potential for restricting competition by excluding firms that furnish only a portion of the requirement; we therefore review challenges to such solicitations to determine whether the approach is reasonably required to satisfy the agency’s needs. A protester’s disagreement with the agency’s judgment concerning the agency’s needs and how to accommodate them, without more, does not show that the agency’s judgment is unreasonable.

The record reflects that the agency decided “to procure the JCF requirement as one single integrator contract [in order] to minimize risk to the Government, scale adoption of AI across the [DOD], and to provide efficiencies in cyber security…. [The agency] also identified considerable efficiencies with a consolidated procurement in terms of obtaining ATOs for the AI/ML platforms…. [The agency] also found a benefit in the integrator providing a single point of customer support for all AI software, as opposed to separate customer support for each software.

• * *

The protester has not shown that the agency’s decision to consolidate commercial and non-commercial requirements is clearly unreasonable. While some of the individual components here would likely be considered commercial items if acquired individually, we think that the language of 10 U.S.C. § 2377 [now § 3453] instructing the agency to consider modification of the agency’s requirements or modifications of the commercial items themselves does not, in every case, force an agency to have to separate out all potentially commercial items from a procurement. [Citations omitted.]

The End Result

We’re learning that the commercial product/services preference is real and that it can be enforced through the protest process. But there are limitations. An agency doesn’t have to work a long time to see if a commercial product will work. And it doesn’t have to cut up its procurement to buy only a commercial product. Rather, it is proper to treat the commercial product as a subcontract requirement. These seem to us to be sensible rules. RCN

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