OPFKE OF THE ATTORNEY GENERAL. STATE OF TEX.kI 

JOHN CORNYN 

December 15.2000 

Mr. Jim Muse 

Executive Director 

General Services Commission 

1711 San Jacinto Street 

Austin, Texas 7871 l-3047 

Opinion No. JC-03 16 

Re: Whether “reverse auctions” constitute a 

permissible method of competitive bidding by 

state agencies (RQ-0257-JC) 

Dear Mr. Muse: 

You have asked this office whether the General Services Commission (“GSC”), in a pilot 

procurement program using electronic commerce technology instituted pursuant to chapter 2177 of 

the Government Code, may conduct competitive bidding by means of a procedure called a “reverse 

auction.” We conclude that, because the so-called “reverse auction” is as you put it “an electronic 

process in which pricing is shared among the participants, “’ it does not constitute a sealed bid 

method and is not permissible under current Texas law. Specific statutory authorization would be 

required before GSC could participate in such a process. 

As you explain the basis ofyour question, “GSC has recently been given authority to conduct 

a pilot procurement program, using electronic commerce technology. One of the optional 

components that electronic purchasing systems offer is a process known as ‘reverse auctions.“’ 

Request Letter, supra note 1, at 2. 

As you point out, “reverse auctions” are not defined in Texas law. Indeed, our research has 

revealed no case law in the United States regarding them, nor have we been referred to any. 

Nevertheless, as we understand it, the reverse auction procedure is fairly simple. Vendors are prequalified to participate in the event, and then “are awarded a contract, in which [they] agree to the 

reverse auctioning process and procedures.” See id. After the vendors are trained in using an on-line 

bid system, the auction is held on a secured web site to which only the vendors, GSC, and the 

company staging the event have access. See id. at 3. Vendors bid against each other, sending the 

price for the goods or services down rather than up (hence the phrase “reverse auction”) until a set 

time. At the expiration of the auction, “[tlhe offeror of the last bid (lowest) amount would be 

eligible to receive an award or purchase order, if otherwise determined to be responsible and in 

compliance with specifications.” Id. 

lLetter from Jim Muse, Executive Director, General Services Commission, to Honorable John Comyn, Texas 

Attorney General at 3 (July 10, 2000) (on tile with Opinion Committee) [hereinafter Request Letter]. 
Mr. Jim Muse - Page 2 (X-0316) 

Your concern is that the auction process requires the sharing of pricing information among 

the competing vendors. Any vendor’s behavior in the auction depends upon its possession of some 

information concerning its competitor’s bids. As we understand it, at a minimum a vendor must 

know that one of its competitors has offered a lower bid before it will bid again. Such an auction 

is markedly different, then, from the sealed bid method which generally characterizes competitive 

bidding. 

As you note, the statute authorizing GSC to conduct the pilot procurement program states 

that “[tlhe requirements of this section are in addition to the requirements of other law relating 

to the solicitation ofbids, proposals, or expressions of interest for a procurement by the commission 

or another state agency. This section [does] not affect any other law that requires the 

commission or another state agency to award a procurement through competitive bidding, 

competitive sealed proposals, or another method.” TEX. GOV’TCODEANN. 5 2177.002(h) (Vernon 

2000). Moreover, GSC is directed, with regard to a variety of electronic methods of submitting bids 

which cannot be “sealed” in a physical sense, to “adopt rules to ensure the identification, security, 

and confidentiality” of such bids. Id. 5 2156.005(b). 

A brief submitted on behalf of a commercial enterprise which organizes “reverse auctions” 

argues that because each bidder in the auction is awarded a contract in which it agrees to be bound 

by the results of the auction, “[tlhe contracts are actually awarded at the end of the first of the two 

steps using a multiple contract award model. The second step-the reverse auction-merely allows 

the contract holders to lower their price after they have a signed contract in hand to get orders under 

the contract.“2 Accordingly, the brief argues that the auction may be regarded as a “multiple award 

contract procedure,” a method ofprocurement permitted under section 2 155.062 ofthe Government 

Code. 

As the briefnotes, the term “multiple award contract” is not defined in the Government Code. 

Nor has our research disclosed any definition for the term in Texas case law. The General Services 

Commission, by rule, defines the multiple award contract procedure as “[a] purchasing procedure 

by which the commission establishes one or more levels of quality and performance and makes more 

than one award at each level.” 1 TEX. ADMIN. CODE 5 113.2(24) (2000) (emphasis added). 

Particularly in light of that rule, the construction the brief offers appears a strained one. The ultimate 

contract for goods or services would not, after all, be awarded to every participant in the auction, but 

solely to the lowest bidder, assuming such bidder would have met all other necessary qualifications. 

The brief farther argues that the “reverse auction” procedure ensures the identification, 

security, and confidentiality of electronic bids. In particular, it asserts that “[clonfidentiality is 

maintained as to the source of each online bid-the real time system does not identify bidders to their 

competitors, only the amount of the lowering prices.” Akin, Gump Brief, supra note 2, at 6. 

‘Brief from Nanette K. Baird, Akin, Gump, Strauss, Hauer & Feld, L.L.P., Attorneys at Law, to Honorable 

John Comyn, Texas Attorney General at 2-3 (Aug. 23,200O) (on tile with Opinion Committee) [hereinafter Akin, Gump 

BIiefJ. 
Mr. Jim Muse - Page 3 (JC-0316) 

However, this argument fails to note that the statutory language does not require GSC to ensure the 

confidentiality of the bidder, but the confidentiality of the bid. See 'RX. G&T CODE ANN. 5 

2156.005(b) (Vernon 2000). To the extent that participants have information of any sort regarding 

other bids, those bids cannot be said to be confidential; and absent some amount of such knowledge, 

as we have noted before, the auction cannot proceed. 

In our view, the situation presented by this request is analogous to that presented by Attorney 

General Opinion MW-440. In that case, one of your predecessors asked this office whether GSC 

might “employ the competitive sealed proposal method as an alternative to competitive sealed 

bidding.” Tex. Att’y Gen. Op. No. MW-440 (1982 ) at 1. We replied in the negative, finding that 

this proposal “closely resemble[d] the suggested statutory provisions” of the Model Procurement 

Code, and noting that “[t]he suggested code has not been adopted by the Texas Legislature .” 

Id. at 3. We relied upon the case of Niles v. Harris County Fresh Water Supply Dist. No. IA, 336 

S.W.2d 637 (Tex. Civ. App.-Waco 1960, writ ref d), which held that “compliance with [the 

competitive bidding statute] is mandatory.” Niles, 336 S.W.2d. at 638; Tex. Att’y Gen. Op. No. 

MW-440 (1982) at 3-4. The Texas Legislature, persuaded of the value of the competitive sealed 

proposal method, thereafter specifically amended the state’s procurement laws to allow for it. See 

TEX. GOV’T CODE ANN. 5s 2156.121-.127 (Vernon 2000) (chapter 2156, subchapter C). 

Competitive bidding statues are, as we have noted, mandatory. See Niles, 336 S. W.2d at 638; 

accord Richmond Printing v. Port of Houston Auth., 996 S.W.2d 220, 224 (Tex. App.-Houston 

[14th Dist.] 1999, no pet.). Moreover, “[wlhen a governmental entity enters into a contract that 

violates or fails to conform with the Constitution or a statute of the state, the governmental entity 

is not liable in contract.” Richmond Printing, 996 S.W.2d at 224. Therefore, ifwe are correct that 

the so-called “reverse auction” procedure does not fall within the definition of competitive bidding, 

a contract resulting from such a procedure would be invalid. See id. Consequently, should you 

decide that engaging in such a purchasing method would be advantageous for the State of Texas, we 

believe GSC should seek specific statutory authority to do so from the Texas Legislature. 
Mr. Jim Muse - Page 4 (~~-0316) 

SUMMARY 

So-called “reverse auctions” do not constitute competitive 

bidding for the purposes of chapters 2155, 2156, and 2157 of the 

Government Code. The General Services Commission may not 

purchase goods and services through “reverse auctions” without 

specific statutory authority to do so. 

Attorney General of Texas 

ANDY TAYLOR 

First Assistant Attorney General 

CLARK KENT ERVIN 

Deputy Attorney General - General Counsel 

SUSAN D. GUSKY 

Chair, Opinion Committee 

James E. Tourtelott 

Assistant Attorney General - Opinion Committee