Opinion ID: 1857859
Heading Depth: 1
Heading Rank: 5

Heading: Value's disqualification.

Text: Value's challenge to the order disqualifying it raises two questions: (1) whether the disqualification was called for; and (2) whether disqualification was to be determined by the agency as a mixed question of law and fact oras it in fact wasby the court as a matter of law. The first question is much easier to answer than the second. Value's challenge to its disqualification is based on several grounds. To begin, Value contends the district court did not apply the correct legal standard in testing for the existence of a conflict of interest. We have not previously set such a standard. In setting about to do so we bear in mind the general observation that competitive bidding statutes are enacted for the protection of the public to secure by competition among bidders, the best results at the lowest price, and to forestall fraud, favoritism, and corruption in the making of contracts. Istari Constr., Inc. v. City of Muscatine, 330 N.W.2d 798, 800 (Iowa 1983); Elview, 373 N.W.2d at 141. The common law did not mandate that public contracts be let upon competitive bidding, rather the requirement is purely statutory and must be considered under the legal authority of the particular governmental entity in question. Cf. 72 C.J.S. Public Contracts § 8 (1975 & 1995 Supp.). Our analysis therefore begins with the statutory provisions and administrative rules which govern DHS. We have already mentioned that the General Assembly directed DHS to award a contract for Medicaid managed mental health care through a competitive bidding process. See 1994 Iowa Acts ch. 1199, § 39; Iowa Admin.Code r. 441-88.62(2). The legislation did not provide DHS with any specific instructions on how to carry out this task, but the department is not entirely without statutory guidance. Iowa Code section 249A.4 explains: The director shall be responsible for the effective and impartial administration of this chapter and shall, in accordance with the standards and priorities established by this chapter, by applicable federal law, by the regulations and directives issued pursuant to federal law, by applicable court orders, and by the state plan approved in accordance with federal law, make rules, establish policies, and prescribe procedures to implement this chapter. Without limiting the generality of the foregoing delegation of authority, the director is hereby specifically empowered and directed to: .... (4) Have authority to contract with any corporation authorized to engage in this state in insuring groups or individuals for all or part of the cost of medical, hospital, or other health care or with any corporation maintaining and operating a medical, hospital, or health service prepayment plan under the provisions of chapter 514 or any health maintenance organization authorized to operate in this state, for any and all of the benefits to which any recipients are entitled under this chapter to be provided by such corporation or health maintenance organization on a prepaid individual or group basis. (Emphasis added.) The statute thus directs DHS, in its impartial administration of the state Medicaid program, to follow federal law concerning the procurement process for the managed mental health care contract. Appendix G, section 10 of 45 C.F.R. part 74 states the rule of the department of health and human services (HHS), DHS's federal counterpart, concerning procurement selection procedures: All procurement transactions, regardless of whether by sealed bids or by negotiation and without regard to dollar value, shall be conducted in a manner that provides maximum, open and free competition consistent with this attachment. Procurement procedures shall not restrict or eliminate competition. Examples of what is considered to be restrictive of competition include, but are not limited to: (1) placing unreasonable requirements on firms in order for them to qualify to do business, (2) noncompetitive practices between firms, (3) organizational conflicts of interest, and (4) unnecessary experience and bonding requirements. (Emphasis added.) [5] This section does not define the term organizational conflict of interest. The term is however defined in the federal acquisition regulation (FAR) [6] this way: Organizational conflict of interest means that because of other activities or relationships with other persons, a person is unable or potentially unable to render objective assistance or advice to the government, or the person's objectivity in performing the contract work is or might be otherwise impaired, or a person has an unfair competitive advantage. 48 C.F.R. § 9.51 (1995). The FAR further states: An organizational conflict of interest may result when factors create an actual or potential conflict of interest on an instant contract, or when the nature of the work on the instant contract creates an actual or potential conflict of interest on future acquisition. In the latter case, some restrictions on future activities of the contractor may be required. 48 C.F.R. § 9.502(c) (emphasis added). Contracting officials are directed to identify potential organizational conflicts of interest early in the procurement process and to avoid, neutralize, or mitigate those conflicts before awarding the contract. Id. § 9.504(a)(1), (2). Disqualification of a bidder is appropriate where the existence of a conflict of interest cannot be avoided or mitigated. Id. § 9.504(e). Recognizing that allegations of conflicts may arise in factual situations not expressly addressed in the FAR sections (to be discussed below), contracting officials are advised to examine each situation individually and to exercise common sense, good judgment, and sound discretion in resolving the matter. Id. § 9.505. The underlying goal is to prevent (1) the existence of conflicting roles that might bias a contractor's judgment, and (2) unfair competitive advantage. Id. As previously indicated, the FAR describes a number of situations in which an organizational conflict of interest may arise. These situations may be grouped into three broad categories. The first category consists of those instances where a firm, by virtue of its performance of a government contract, has to some degree set the ground rules for the government contract at issue by, for instance, writing the work statement or drafting the contract specifications. §§ 9.505-1, 9.505-2. In such cases the concern is that the firm could either skew competition in favor of itself when developing the terms of the procurement, or, through its inside knowledge of the agency's requirements, gain an unfair advantage in the competitive bidding process. Aetna Gov't Health Plans, Inc.; Foundation Health Fed. Serv., Inc., 74 Comp.Gen. ___, ___ (1995). The second category encompasses those situations where a firm's work under one government contract might require an evaluation of its own performance under another government contract. 48 C.F.R. § 9.505-3. In these types of cases, the firm's ability to impartially render objectivity can be questioned. See Aetna, 74 Comp.Gen. at ___. The third category involves circumstances in which a firm has access to nonpublic information as part of its performance of an earlier government contract that may provide it with a competitive advantage in the current government contract in question. 48 C.F.R. § 9.505-4; Aetna, 74 Comp.Gen. at ___. The present allegations involve the first and third of these categories. Cases interpreting FAR require a moderate level of proof to establish a violation. On the one hand a bidder may be disqualified based on an appearance of impropriety where the bidder may have gained an unfair competitive advantage through an actual or potential conflict of interest in the procurement process. Compliance Corp. v. United States, 22 Cl.Ct. 193, 200 (1990). On the other hand mere conjecture, innuendo, or speculation of an actual or potential conflict of interest, without factual support, provide no basis for disqualification. Informatics Gen. Corp. v. Weinberger, 617 F.Supp. 331, 334 (D.D.C.1985); NES Gov't Serv., Inc.; Urgent Care, Inc., B-242358, Oct. 4, 1991, 91-2 CPD ¶ 291; Eagle Research Group, Inc., B-230050, May 13, 1988, 82-2 CPD ¶ 123. The degree of evidence sufficient to support disqualification has been described this way: It is true that a determination to exclude an offeror must be based on hard facts, rather than mere suspicion. Clement Int'l Corp., B-255304.2, 94-1, April 5, 1994, CPD ¶ 228; see also CACI, Inc.-Fed. v. United States, 719 F.2d 1567 (Fed.Cir. 1983). The facts that are required, however, are those which establish the existence of the organizational conflict of interest, not the specific impact of that conflict. Once the facts establishing the existence of an organizational conflict of interest are present, reasonable steps to avoid, mitigate, or neutralize the conflict are required without further need for hard facts to prove the conflict's impact on the competition. Where, as here, the facts demonstrate that an organizational conflict of interest exists, the harm from that conflict, unless it is avoided or adequately mitigated, is presumed to occur. .... [Furthermore,] [t]here is a presumption of prejudice to competing offerors where an organizational conflict of interest (other than a de minimis matter) is not resolved. Organizational conflicts of interest call into question the integrity of the competitive procurement process, and, as with other such circumstances, no specific prejudice need be shown to warrant corrective action. See, e.g., NKF Eng'g, Inc. v. United States, 805 F.2d 372, 376 (Fed.Cir.1986); Compliance Corp. v. United States, 22 Cl. Ct. 193 (1990), aff'd, 960 F.2d 157 (Fed.Cir. 1992). For that reason, we have sustained a protest where the awardee obtained its competitor's information improperly, even though that information may not have given the awardee a competitive advantage. Litton Sys., Inc., 68 Comp.Gen. 422 (1989), 89-1 CPD ¶ 450. Aetna, 74 Comp.Gen. at ___. These principles of federal law necessarily control our answer to Value's two disqualification questions. In answer to the first of them, we think the district court clearly applied the correct legal standard for determining the existence of a conflict of interest. Value contends a mere appearance of impropriety is insufficient to support disqualification, that an actual conflict of interest must be shown. This argument was rejected in NKF Engineering, Inc. v. United States, 805 F.2d 372, 376 (Fed.Cir.1986) (appearance of impropriety sufficient to disqualify if based on facts and not mere innuendo). The rule that an appearance of impropriety provides a sufficient basis for disqualification stems from the government's strict policy in avoiding conflicts of interest. Radiation Safety Serv., Inc., B-237138, Jan. 16, 1990, 90-1 CPD ¶ 56. We hold the district court utilized the correct legal standard. Value next asserts that, regardless of the legal standard, the district court had no factual basis upon which to conclude an organizational conflict of interest existed. Value thus argues its disqualification must be reversed and the initial agency determination affirmed. We reverse the agency's decision only under the circumstances listed in Iowa Code section 17A.19(8). In reviewing the merits of Value's assignment, we consider both the administrative record and the additional evidence presented to the district court. Community Action Research Group, 275 N.W.2d at 219. Contrary to Value's assertion, the evidence supporting disqualification was overwhelming. Pursuant to the discovery order, Medco established a paper trail detailing the conflict of interest. To briefly summarize, on November 23, 1993, two DHS staff members (Donald Herman and Nan Foster Riley) held a telephone conference with Lewin's vice president (Robert Atlas) concerning a policy analysis for managed mental health care in Iowa. The DHS staffers explained the policy analysis could potentially be a springboard for an RFP and procurement, and they told Lewin's vice president that contractors doing policy analysis on mental health must assure us that they won't, or their company won't, be a bidder. The vice president responded that this was unlikely because Lewin's affiliated company (Value) had not previously entered the Medicaid arena. In a letter dated December 3, 1993, from DHS to Lewin, DHS confirmed to Lewin that it intended to go forward with a managed mental health care program for Medicaid recipients in Iowa, and asked if Lewin could prepare a feasibility study which might be extended into the actual preparation of an RFP and procurement of a contractor. DHS repeated the caveat mentioned during the recent telephone conference: It will, of course, be necessary to limit your involvement in the RFP if you or your parent company or Unisys Corporation anticipate bidding on the mental health management contract. Please let us know the following as soon as possible: (1) is Lewin, its parent company, or any of its subsidiaries, or the Unisys Corporation planning to submit a proposal in response to the RFP which will be released as a result of this project?; (2) is Lewin willing/able to begin the policy analysis immediately in order to accommodate the projected timeframes? Contrary to its initial belief, Lewin soon became aware Value would submit a bid. Because of the potential conflict of interest, Lewin surreptitiously sought the assistance of HMA. A December 17, 1993, letter from Lewin's vice president to an HMA principal (Sally Hetrick)which has become known as the pickle memocontained the following message: Also, FYI, Unisys and Value Behavioral Health are teaming up to bid. I'm trying hard to avoid getting in a pickle. You may play a key role. Let's talk Monday about S and other items. This letter is significant for several reasons. Lewin had a preexisting business relationship with HMA, and at the time the two were working together on Medicaid programs in Connecticut and Montana. Lewin also had recently (on December 8, 1993) entered into a subcontract with HMA for assistance on the Iowa project. Lewin's plan to use HMA to avoid a conflict of interest on the Iowa managed mental health care contract came to fruition in a letter to DHS dated December 23, 1993. Lewin's vice president wrote: In our recent discussions concerning the new mental health initiative, you asked me what it would cost for Lewin to help on a number of tasks, specifically: (1) Policy analysis to help the department complete program specifications. (2) Preparation of an application for a federal waiver. (3) Computation of the mental health services capitation rate. (4) Preparation of an RFP. (5) Defining bidder evaluation criteria and assisting in reviewing proposals. Since Lewin's sister company, Value, is planning to bid on the mental health contract, it would be inappropriate for us to work on tasks four and five. We have, therefore, asked HMA to give you a quote for their assistance on those tasks. On the earlier tasks, our view is that we could provide the assistance you need and not have a conflict. We have already established an embargo on communications between Lewin and Value with regard to all Iowa matters. Two observations are notable. First, nothing in the record suggests Lewin disclosed its business relationships with HMA to DHS. In light of the pickle memo, this omission is suspect. Second, the self-proclaimed embargo did not bar communications between Unisysa potential bidderand its subcontractor, Lewin. On January 5, 1994, DHS entered into a contract with HMA to draft the RFP for the Medicaid managed mental health care plan of Iowa, a service Lewin said it could not provide because of a conflict of interest. The contract between DHS and HMA, however, contains no conflict-of-interest provision. Furthermore, there was no embargo on communications between HMA and Lewin. In a related development, on March 2, 1994, Unisys returned to DHS a contract amendment originally dated January 10, 1994, expanding the responsibilities of Unisys to include consulting on additional managed health care matters. In the cover letter, a Unisys representative explained: As we discussed this date, the work assigned under task ten will be performed exclusively by Lewin, our subcontractor. Thus, all information (deliverables, reports, documentation, etc.) will be their product and Unisys will not receive, provide input to, or assess their work in any way. This letter has been characterized as a second embargo on communications (this time between Lewin and Unisys) in connection with the Iowa program, and was apparently intended to plug the gap in the first embargo. By this time, however, Unisys had already teamed with Value to submit a bid on the project, the feasibility aspects of the mental health care project had already been completed by Lewin, and HMA was working on the RFP. Its effectiveness, therefore, is questionable. Finally, on March 11, 1994, DHS issued the RFP prepared by HMA. The RFP favored the technical criteria of the bids over the cost criteria. Particularly, the bids were required to be within a range of eighty-six to eighty-eight percent of the projected cost for an unmanaged health care system. This narrow two percent range effectively eliminated the role of price in the bidding process. In contrast, the RFP required a proposal to meet a 340-point threshold score out of a possible 400 points regarding technical criteria before a vendor's bid could receive further consideration ( i.e., before its cost bid would be reviewed). The requirements were developed because of DHS's understandable desire for quality care in a managed system, and the determination, after consultation with HMA, that any bid below the eighty-six percent floor necessarily sacrificed quality in favor of cost savings. We have already mentioned the expert who believed that this de-emphasis on cost incidentally benefitted less experienced bidders (such as Value) over those bidders with more experience in the Medicaid managed health arena (such as Medco). This evidence convincingly demonstrates an appearance of impropriety that tainted the procurement process. The interrelationships between Unisys, Lewin, HMA, and Value, coupled with the unique position each entity occupied, creates what one authority described as a certain aroma that is hard to purify. NKF Eng'g, 805 F.2d at 377. The district court here described the dilemma this way: Value Health should not be allowed to make money through [one subsidiary] Lewin advising the state on implementing managed mental health care and through [another subsidiary] Value obtaining the contract. Bidders should not be left to wonder if another bidder's relationship with state contractors provided a competitive advantage. Value nevertheless insists that, because there is no direct evidence that the voluntary embargo with Lewin was violated (a point on which the district court agreed), a conflict of interest cannot be said to have occurred. This argument reflects a misunderstanding of the nature of organizational conflicts of interest. While a `Chinese wall' arrangement may resolve an `unfair access to information' conflict of interest, it is virtually irrelevant to an organizational conflict of interest involving potentially impaired objectivity. Aetna, 74 Comp.Gen. at ___. Here the only parties who worked on the RFP development processLewin (providing policy analysis which served as a springboard to the RFP) and HMA (actual preparation of the RFP)had a direct (subsidiary) or indirect (undisclosed business relationship with the subsidiary) relationship respectively to the (initially) successful bidder, Value. Each occupied a position to advise DHS in a potentially biased manner so as to enhance Value's chances of obtaining the contract. It therefore appears that an organizational conflict of interest existed that provided Value with an unfair competitive advantage in the procurement process. When we reach the second disqualification question, we come to Value's strongest argument for reversal: whether disqualification should have been ordered as a matter of law. Value correctly notes the regulations did not mandate disqualifications for every actual or potential organizational conflict of interest. Indeed, as mentioned, contracting officials are directed to take steps to avoid or mitigate conflicts of interest. See 48 C.F.R. § 9.504. We have already mentioned this was not sufficiently accomplished here through Lewin's voluntary and unenforceable promises of communications embargos. But the question recurs: is this a determination that is properly for a court to make, especially in light of the deference courts owe to administrative agencies? Or is this one of those situations, recognized in Aetna, where an organizational conflict of interest is incapable of mitigation? 75 Comp.Gen. at ___ ([W]here the integrity of the system is at issue, the honesty and good faith of the individual actors cannot render behavior permissible where it would otherwise be improper. For this reason, an agency's confidence in an individual contractor's probity cannot eliminate or mitigate what would otherwise be an organizational conflict of interest.) (footnote omitted). In the final analysis the question, as is true with many questions we face, comes down to a matter of degree. When it wrestled with this issue, the district court had to ponder, just as we have, whether it could affirm on still another further review proceeding following still another remand, if the agency again awarded the contract to Value. Just as the district court was, we are satisfied this conflict was of the sort that could neither be avoided nor mitigated. Persons or enterprises bidding on public contracts must do so on a level playing field. The field here, when all facts finally came to light, did not appear level because of one bidder's (Value's) relationship with insiders who helped superintend the process for receiving and evaluating the bids. Because of the appearance of a conflict of interest, it will not suffice to tell other bidders not to worry because of the niceties of self-structured embargoes. The case involves an organizational conflict of interest that was incapable of mitigation. The district court was therefore correct in holding as a matter of law that Value was disqualified. What we have said makes it unnecessary to discuss other contentions. AFFIRMED.