Court Opinion

ID: 4317952
Source: CourtListenerOpinion
Date Created: 2018-10-03 20:02:31.180205+00
Date Added: 2024-06-11T14:45:13.887682
License: Public Domain

In the United States Court of Federal Claims
                                No. 18-927C
                   (Originally filed: September 25, 2018)
                        (Re-filed: October 3, 2018)1

**********************

ELECTRA-MED CORPORATION, et al.,

             Plaintiffs,
                                             Bid protest; Cardinal change;
v.                                           Contract modification; MSPV-
                                             NG; Sole source; Competition
THE UNITED STATES,                           in Contracting Act; Rule of
                                             two; Kingdomware; SDVOSB;
             Defendant,                      Injunctive Relief; Balance of
                                             the harms; Public interest.
             and

AMERICAN MEDICAL DEPOT, et al.,

             Intervenors.

**********************
      Eric S. Crusius, Tysons Corner, VA, for plaintiffs. Gregory R.
Hallmark, Mary Beth Bosco, Mitchell A. Bashur, and Amy L. Fuentes of
counsel.

       David M. Kerr, Trial Attorney, United States Department of Justice,
Civil Division, Commercial Litigation Branch, Washington, DC, with whom
were Chad A. Readler, Acting Assistant Attorney General, Robert E.
Kirschman, Jr., Director, Claudia Burke, Assistant Director, for defendant.
Steven Devine, Sarah M. McWilliams, and Patrick Turner, U.S. Department
of Veterans Affairs, Office of General Counsel, of counsel.

       Aron C. Beezley, Washington, DC, for Kreisers, LLC, intervenor.

1
  This opinion was originally issued under seal to afford the parties an
opportunity to propose redaction of protected information. The parties have
agreed that no redactions are necessary. The opinion thus appears in full.
Douglas L. Patin, Sarah S. Osborne, and Anna M. Lashley of counsel.

      Kristen E. Ittig, Washington, DC, for Medline, Inc, intervenor. Michael
E. Samuels and Alexandra L. Barbee-Grant of counsel.

      Amy Laderberg O’Sullivan, Washington, DC, for American Medical
Depot, intervenor. Lorraine M. Campos, Robert J. Sneckenberg, Olivia L.
Lynch, and Charlotte E. Gillingham of counsel.

                                 OPINION

Bruggink, Judge.

        This is a protest of a decision by the Department of Veterans Affairs
(“VA”) to modify four existing contracts for the distribution of medical and
surgical supplies. The contracts were modified to expand the scope of work
to include supply as well as distribution. The plaintiffs are suppliers of
medical and surgical items and allege that the change will result in loss of
opportunity to compete to sell their products to the VA. We denied a motion
for a preliminary injunction on July 13, 2018. The case is now presented on
fully-briefed cross-motions for judgment on the administrative record. Oral
argument was held on September 13, 2018. As announced at the conclusion
of oral argument, because the balance of the harms favors the government, we
cannot grant an injunction.

                            BACKGROUND

I. Factual History

        The VA awarded contract No. VA119-16-D-002 to Kreisers, Inc.
(“Kreisers”), No. VA119-16-D-0004 to American Medical Depot (“AMD”),
No. VA119-16-D-0005 to Cardinal Health 200, Inc., and No. VA119-16-D-
0006 to Medline Industries, Inc. (“Medline”) on February 24, 2016. The VA
refers to these companies as the “Prime Vendors” or “PVs” of its Medical-
Surgical-Prime Vendor-Next Generation program (“MSPV-NG” or “MSPV”
generally). Each contract covers a geographical area and requires the PVs to
stock, store, and distribute the medical supplies that are available on the
“Master List” against which VA hospitals can place orders. The agency also
refers to this as the “formulary.” An item on the list comes from a specific
supplier and is available for a set price. The VA local centers place orders

                                     2
with the PVs, which then ship those items to the hospitals and bill the VA for
them. The dispute in this case concerns who should populate the Master List
with particular items, suppliers, and prices. It is worth noting up front that
plaintiffs do not contend that they are able to do the precise work sought by the
modifications–populating the Master List. Rather, they are able to furnish
some of the end-product supplies which will appear on the Master List.

       The MSPV program has been in existence for over a decade. It is
intended to further standardize and expedite the buying process by “narrowing
the range of items purchased to meet a given need in order to improve buying
power, simplify supply chain management, and provide clinical consistency.”
AR 1972. The goal of the VA was to establish a “national strategic sourcing
solution that combines a Government-provided capability for ordering a wide
range of medical and surgical supplies via a master listing with electronic
cataloging (e-catalog) and ordering capability.” Id. VA medical centers
around the country have used the legacy MSPV program to order frequently-
used medical and surgical supplies. In 2016, the Government Accountability
Office (“GAO”) issued a report about the program. It stated that the former
version of the MSPV was not fully realizing its purpose of “standardizing
items used across [the VA’s] medical centers” nor had it achieved cost savings
that ought to follow from the buying power generated by a standardized
ordering process. AR 408.2 The VA hoped to improve outcomes with the new
MSPV.

       The VA actually began the process to replace the legacy MSPV in 2015
when it issued a solicitation seeking prime vendors for four regional indefinite
delivery/indefinite quantity (“IDIQ”) distribution contracts to handle
warehousing, distribution, and delivery of the items that the VA hoped would
eventually populate the Master List. The idea was that the VA would tell the
PVs what items to stock, who to buy them from, and what price to pay. The
PVs would then enter contracts with those VA-identified suppliers for the
price determined by the VA. The VA medical centers could then place orders
for those items with the PVs. The contracts provided for a distribution fee to
be added on top of the price of the orders to reimburse the PVs for their role.

2
 The AR contains a 2017 GAO report regarding the MSPV-NG program
which includes statements from and references to an earlier 2016 report
concerning the legacy program.

                                       3
        The VA originally intended to populate the Master List with items and
prices by either using typical competitive government contract vehicles to
select suppliers and prices or by using an “acquisition-like” process to identify
and price items. “Price contracts and agreements for medical/surgical supplies
include: Federal Supply Schedules (FSS), VA National Contracts, Blanket
Purchase Agreements (BPAs), Basic Ordering Agreements (BOAs) with
Ability One Nonprofit Agreements, VISN and facility contracts/agreements.”
AR 23. If the VA did not have a contract vehicle or other pricing agreement
in place, it went through what it described as an “acquisition-like” process
whereby a solicitation for an item or group of items would be issued by the VA
through a normal competition, resulting in tentative winners being selected for
each product solicited. A BPA would then be entered into with those
suppliers, but no orders would be placed. Instead, that supplier and price
would be entered onto the Master List; the PVs would then enter into separate
contracts with the suppliers to buy those items at the VA-agreed upon price.
AR 1974. Alternatively, the VA would identify a supplier of an item it desired
and enter into a sole-source agreement with that supplier for that item, thereby
placing the item on Master List. The population of the Master List was to be
an ongoing process, but the hope was to quickly populate it with many
thousands of items.

        In June 2015, VA issued its first solicitations for 6000 items to be
placed on the Master List. It received responses, however, to only 30% of the
solicitations. Suppliers reported that the VA’s process of issuing solicitations
for small batches of items was contrary to industry practice, which was to
solicit for larger batches of related items. Responding to requests for smaller
batches of items was too time and resource intensive. By April 2016, the VA
had agreements in place for only 200 items. This delayed the rollout of the
MSPV-NG until late 2016. In order to speed up the process of identifying
suppliers for the Master List, the VA largely abandoned the competitive
process and repeatedly used non-competitive alternatives, such as limited
source BPAs with FSS vendors and other similar means. AR 422.

       The MSPV-NG did launch in October 2016 with only approximate
1600 items identified by the VA.3 AR 1982. A November 2017 GAO report

3
 The record contains different figures for how many items were actually
available on the Master List at launch. The J&A reports that 1600 items were
                                                               (continued...)

                                       4
states that medical centers were faced with a drastic change in the Master List
as compared to the old MSPV program. The list was narrowed from hundreds
of thousands of items to a tiny fraction of that at rollout. Substantial effort had
to be undertaken by medical centers to match up supplies previously purchased
off the formulary with the new slimmer list, and this effort was not uniformly
undertaken across all of the VA hospital network. See AR 423-27. As of May
2017 utilization across the nation was approximately 24%. Id. at 428. The
GAO report states that, instead of using the MSPV formulary, medical centers
resorted to charge cards or local contracts. Id. This resulted in far less
utilization of the MSPV-NG than the VA intended and, as GOA reported,
undercut the purpose of the MSPV program. “Greater Utilization of the
MSPV-NG is essential to VA achieving the cost avoidance goal of $150
million for its supply chain transformation effort.” Id. at 429.

        By March 2018, the Master List contained only 7800 out of the 80,000
that the VA anticipated as necessary to support its national healthcare network.
This failure was untenable in the view of the VA, thus it sought rapidly to
enlarge the number of items on the Master List by outsourcing to the PVs the
selection for items to be included on the formulary. In order to do so, it
modified the four PV contracts, allowing the PVs “to assist the Government
in sourcing thousands of new items quickly. This will be accomplished by
allowing the PVs to leverage their existing commercial networks in order to
propose sources and prices for items identified by the MSPV Program Office.”
AR 1974 (Class Justification and Approval). VA retained the ultimate
authority to place items on the Master List, but it no longer bothered to go
through the acquisition-like process of identifying sources and setting prices
through competing BPAs and the like (or other legal non-competitive
alternatives).

       In order to cover its change to the PV contracts from distribution only
to also include supply, the VA issued a Class Justification and Approval
(“J&A”) as required by 41 U.S.C. § 3304(e)(1)(A) (2012), which dictates that
an agency using non-competitive procedures “justif[y] the use of those
procedures in writing and certif[y] the accuracy and completeness of the

3
 (...continued)
on the list in October 2016, while the GAO report states that 6000 were
available at launch, although it states that the formulary was launched in
December 2016.

                                        5
justification.” Subsection (e)(2) then lists the requirements of such a written
justification, which includes, among other things: (A) a description of the
agency’s needs; [and] (B) an identification of the statutory exception from the
requirement to use competitive procedures and a demonstration, based on the
proposed contractor’s qualifications or the nature of the procurement, of the
reasons for using that exception.” Id. § 3304(e)(2)(A)-(B). The exception
identified by the VA was that the “services needed by the executive agency are
available from only one responsible source and no other type of property or
services will satisfy the needs of the executive agency.” Id. § 3304(a)(1); see
AR 1976 (citing subsection (a)(1) as the statutory authority for the sole-source
modification).

        The J&A at issue here states that the VA “proposes to justify and obtain
approval for the execution of contract modifications to modify the process of
creating the Master Item Lists for VA’s [MSPV-NG] . . . contracts.” AR 1972.
It further states that the aim of the MSPV program was to “achieve timely
delivery [of medical supplies] in response to the heavy volume of orders in
support of the [VA’s] urgent operational medical/surgical supply needs. The
[PV] model is required because VA lacks sufficient internal capability to
warehouse, coordinate deliveries, and consolidate supply stores.” Id. The
J&A goes on to state that, once the Master List is sufficiently populated,
“substantial savings in VA’s costs to purchase those supplies is anticipated.”
Id. The reality, however, is that “the MSPV-NG has fallen considerably short
of the intended outcomes. In order to address patient concerns resulting from
VA’s current supply chain inefficiencies, the scope of the proposed
modifications includes changing the regional MSPV-NG contracts from
‘distribution’ contracts to ‘distribution and supply’ contracts . . . .” Id. The
change would enable the PVs to “meet the diverse needs of the VA’s facilities
and the Veterans which they support” by increasing the number of “healthcare
supplies available to VHA facilities nationwide in order to enhance the quality
of care provided to Veterans.” Id. at 1972-73.

        The J&A goes on to state that approximately 80,000 items need to be
on the Master List to fully support the healthcare network but that the
acquisition-like strategy that the VA had been using produced only 7800
entries on the list. This deficiency caused “VA’s healthcare facilities [to]
utiliz[e] a variety of non-p[referred contract methods to procure necessary
items not available on the [Master List].” Id. at 1973. One such method was
the use of purchase cards. The J&A states that this practice “jeopardizes the
MSPV-NG program’s ability to adequately monitor and review supplies being

                                       6
purchased and used for direct patient care.” Id. This is particularly
problematic for “patient health and/or safety” because, without the
standardized ordering process, VA lacks the ability to ensure that supplies are
compliant with safety regulations and lacks the ability to otherwise “monitor[]
and conduct[] appropriate safety and defective-item recalls.” Id. at 1974.
Additionally, the J&A explains that the acquisition-like process of populating
the list “exposes the Master List generation process to all of the delays inherent
in the acquisition process including multiple protests, spotty vendor response,
and several rounds of canceled competitive solicitations.” Id.

        Thus, the J&A explained, the contract modifications sought to
“streamline the MSPV-NG process in order to rapidly expand the quantity and
types of items contained” on the Master List, “allowing the MSPV to continue
maturing as a viable enterprise which is ultimately expected to yield substantial
efficiencies.” Id. The new process—allowing the PVs to populate the
list—was anticipated to quickly place thousands of items on the Master List
by “allowing the PVs to leverage their existing commercial network in order
to propose sources and prices for items identified by the MSPV Program
Office.”4 Id. The J&A detailed that, although the VA continued to control the
trigger on whether an item proposed by a PV was added to the list, if the item
and prices met muster, “the approved items would be added to the Government
master list” without further VA involvement or further competition. Id.

       The period of performance for this sole-source J&A would be 24
months, the remaining life of the PV contracts. The contracting officer (“CO”)
also stated that the modification was expected to add no cost to the MSPV
program because the PVs were given no additional monetary incentive beyond
the distribution fee added to orders to which they were already entitled.5

       The J&A’s rationale for the lack of competition for this new work—
only one responsible source—was that the PVs had the “existing infrastructure,
ordering capability, and required resident knowledge which makes them
uniquely qualified and the only sources currently capable of both enhanced

4
  The J&A also noted that the acquisition-like process would continue to be
used by the VA for certain high volume items “with potential for significant
strategic sourcing efficiencies.” Id. at 1975.
5
 PVs were not entitled to their distribution fee if they were also the supplier
of an item chosen to be on the list.

                                        7
sourcing and distributing required medical commodities throughout the entire
VA healthcare network.” Id. at 1976. The VA stated that any alternative
arrangement “would cause unacceptable delays in fulfilling the VA’s
requirements and would directly impact the health, safety, quality and
timeliness of care to Veterans.” Id. Further, to “solicit, evaluate and fully
implement new competitive contracts rather than fulfill this requirement via
the proposed modification” was anticipated by the VA to take “a minimum of
16 months” while use of the PVs to fill the formulary was expected to take
only three months. Id. The rationale section went on to state that “no other
vendors other than the current PVs” could “quickly add the volume of required
items.” Id. at 1977. The J&A stated that the PVs were positioned to
immediately add this sourcing function to their distribution contract
requirements because “they already have established commercial contracts
with suppliers and have existing relationships with many of the suppliers
where products need to be added.” Id. No effort was made to explain why
four prime vendors were the equivalent of a sole-source or why the contracts
could not be competed nationally between the vendors.

        The VA further stated that this would result in a “significant increase
[to] the safety and efficiency of patient care because VHA’s Ordering Officers
will be able to procure necessary supplies while simultaneously monitoring the
full supply chain for any critical issues” such as safety recalls or non-compliant
or grey-market items. Id. The VA anticipated a $32 million dollar savings
over the 24 months by having a fully formed Master List available for
nationwide ordering (not counting any administrative savings). Id. at 1978.
The J&A added that continuing without this modification would have resulted
in “continued disruption of VA’s healthcare supply chain,” higher cost for
supplies, more man-hours necessary for ordering activity, and all of the
increased risk to healthcare outlined above. Id. “A well-coordinated supply
chain is necessary to ensure VA’s healthcare facilities are fully supported and
Veterans are cared for timely. There are no reasonable, short-term alternatives
that would adequately address these critical circumstances.” Id. at 1979. The
J&A also stated that the MSPV Program Office “considered the impact to
competition that would result” from the modification but explained that this
was an “extraordinary situation” due to the “critical nature of the items that
will be accessible” for use in providing care “to millions of Veterans, and the
need to quickly expand the number of supplies available from the PVs . . .
justif[ies] the unusual measure proposed.” Id.

       The next section of the J&A detailed the VA’s earlier attempts to use

                                        8
competitive measures to select suppliers for the formulary. It describes this
process as a “substantial previous and ongoing effort[] . . . to maximize and
obtain competition for the required supplies” Id. at 1980. The J&A briefly
described work that began in 2005 with the previous MSPV program. That
effort resulted in seven PV distributor contracts that supported not just the VA
but also various other federal agencies with healthcare supply needs. Two
five-year contracts with these seven PVs made up the duration of the legacy
MSPV program. See id. Those contracts expired in 2015, which, because of
the delays outlined above, caused VA to execute “a set of bridge contracts” to
extend the legacy contracts into April 2016. This was followed by another set
of contract extensions that extended the existing program until April 19, 2017.
See id. at 1981. The next several pages of the J&A contain detailed
information regarding the failed efforts of the VA during this time frame to
solicit suppliers for the initial 7000 items for the new Master List. This
historical compendium concludes with the statement that “new packages [of
solicitations for items] are currently being developed for a projected release of
quarter one 2018,” but “due to protests and current low response rates,
multiple acquisition efforts for medical supplies resulted in little to no return
on investment; hence the current need to amend the [MSPV-NG distribution
contracts] to enable them to function as supply and distribution contracts.” Id.
at 1982.

        The J&A also contains sections dealing with veteran and disabled
veteran preferences for contracts, which promised that the PVs would follow
their own subcontracting plans and that the agency would negotiate new plans
with the PVs to ensure that these goals were met. See id. at 1982-83. Cost
was determined by the VA to be fair and reasonable because the items to be
sourced and supplied by the PVs “are widely available commercial items for
which fair and reasonable pricing can be easily established.” Id. at 1983.
Lastly, a catch-all section for any other facts supporting the justification
recapitulated the VA’s position that its efforts to update the MSPV program
have been unsuccessful. “To avoid potential catastrophic disruption to VA’s
healthcare supply chain, the only feasibly alternative to quickly supply current
and urgent healthcare supply chain needs across the VA network is to use a
more agile process to satisfy requirements.” Id. The section provided some
statistics regarding the problem faced by the VA if it cannot adequately track
product recalls and cited a study to the effect that there is a “major threat to
patient safety” from the use of “grey market” medical supply items. Id. at
1984. The J&A was signed and dated by the CO on March 20, 2018, and
signed several days later by more senior VA personnel on March 23, 2018.

                                       9
       The contract modifications were executed by the four PVs and the CO
in April and May of 2018. The Statement of Work (“SOW”) was amended to
include the following language:

       Additionally, the MSPV shall propose for VA approval, and
       inclusion on the master listing, sources of supply and product
       prices for additional items as requested by VA via a Program
       Office Item List; and shall provide, maintain and distribute all
       such additional items approved for inclusion on the master
       listing.

E.g., AR 380 (modification for Kreisers). The price clause of the PV contracts
was modified to eliminate language stating that the agency would set the prices
paid for items through “separate, price contracts and agreements” with vendors
and replaced it with the statement that the price “reflects the amount agreed to
by the [PV] and the VA, added to the contract via contract modification and
reflected in the MSPV electronic catalog.” E.g., id. at 381. Similarly, the
SOW for “Product Price” was changed to reflect that, instead of the
government setting the catalog price “established by authorized
contracts/agreements,” now “the catalog price of the product shall be the
amount agreed to by the [PV] and the VA.” E.g., id. The appendix of
definitions was amended to revise the definition of the PVs to eliminate any
reference to the PVs maintaining inventory of supplies that the VA contracted
for with other government contract vehicles. See, e.g., id.

II. Procedural History

        On June 27, 2018, plaintiffs filed their complaint here, which
challenges the J&A as insufficient legally to justify the sole-sourcing of
thousands of medical and surgical supply items, many of which the four
plaintiffs assert that they could provide. The complaint alleges that plaintiffs
will lose the opportunity to compete to sell these items to the VA. Plaintiffs
also moved for a preliminary injunction. That motion was briefed, and oral
argument was held on July 12, 2018. We denied the request on the record and
confirmed that denial by order on July 13.6 The process as outlined in the J&A

6
 We denied the motion for preliminary relief on the basis that plaintiffs’ harms
in the short-term were not likely to be realized and based on the government’s
                                                                  (continued...)

                                      10
and contract modifications then began, and some 30,000 items were added to
the Master List in July.

        Three of the PVs, AMD, Medline, and Kreisers, filed motions to
intervene, which were unopposed and granted by the court. Intervenors have
participated in each briefing phase of the case, independently responding to
plaintiffs’ motions and separately moving for judgment.

        The parties have now filed cross-motions for judgment on the
administrative record. After reviewing some of the briefing, the court
convened a status conference with the parties on August 30, 2018, to seek
clarification regarding factual representations made by the parties in their
briefing and regarding statements in the J&A. During that conference,
government counsel deferred to the CO, Dr. Jamie Friedel, to answer many of
the court’s questions, which largely concerned the process for populating the
Master List, both pre and post-modification. Dr. Friedel’s answers were very
helpful in understanding the “acquisition-like” process described in the J&A.
She provided additional context by explaining that, prior to the modifications,
the process for populating the list was largely (90%) by sole-source
procurement justified by the issuance of J&As for the items added to the list
in that manner. See Tr. 12-13 (Aug. 30, 2018). All of those J&As were
published, which meant that they could be challenged through a bid protest.

       Post-modification, as explained by Dr. Friedel, the selection of
suppliers would be handed over to the PVs, although the VA retained the final
word on selection. See id. at 22. The vendors become “subcontractor[s] to the
prime vendor. So they’re telling us this is the supplier for this item at this
price. The prime vendors are doing all the negotiating with the suppliers.
That’s the net change.” Id. At the conclusion of that conference we also
ordered the record supplemented with a presentation made by the VA to
industry that was referenced in the AR.

        Oral argument was held on September 13, 2018, at the conclusion of
which we announced that plaintiffs’ protest would be denied because, although
plaintiffs have carried their burden on proving the J&A deficient, the court was

6
 (...continued)
arguments on the merits that no real change to the ordering process was being
made by the contract modifications. See Tr. 127-28 (July 12, 2018).

                                      11
unwilling to enter an injunction due to the balance of the harms and the
public’s interest in the VA’s uninterrupted provision of healthcare to veterans.
This opinion more fully explains our reasoning.

                             DISCUSSION

       We are fully sympathetic with plaintiffs’ challenge to this
“procurement.” The VA appears to have thrown up its hands in its decade
long effort to develop an efficient system for the procurement of high volume
items by its many field hospitals using competitive or quasi-competitive
methods. It frankly concedes now that using competition is too time
consuming, too fraught with challenges, and too subject to inefficiencies
triggered by the myriad set-asides required by Congress. Having failed
abjectly in prior efforts, what it proposes here is tantamount to a wholesale
outsourcing of a large portion of its management of procurement to a few
private companies. And yet, we are sympathetic. And as we explain below,
we are unwilling to question the agency’s assessment that anything less
dramatic will jeopardize patient care.

        Plaintiffs challenge the decision to modify the contracts and hand the
task of identifying suppliers to the PVs for five reasons: lack of competition,
failure to consider VA’s statutorily mandated preferences for service disabled
veteran-owned small businesses, improper bundling of distribution with supply
requirements, inherent conflict of interest due to the PVs also being suppliers
of some items, and an illegal outsourcing of inherently governmental
functions. Plaintiffs ask the court to enjoin the contract modifications and
require the VA to continue under its prior system of soliciting suppliers
through BPA solicitations and other competition-substitutes.

       Defendant responded by moving to dismiss, arguing that plaintiffs lack
standing because the modifications were within the scope of the original
contracts, meaning that the change is not a protestable event. Defendant also
moved to dismiss for lack of standing on the basis that the plaintiffs are not
distributors of medical supplies and thus are not eligible for the work being
added to the PV contracts. Lastly, on the merits, the government cross-moved
for judgment, arguing that the J&A reasonably justifies the change, that any
harm to plaintiffs is merely hypothetical, that the VA will be significantly
harmed by any further delay in populating the list, and that the public interest
favors timely provision of healthcare to veterans as enabled by this
modification. Intervenors join in these arguments by filing their own cross-

                                      12
motions and, in one case, an independent motion to dismiss.

I. Standing

       Jurisdiction is proper in this court for any challenge to agency action in
connection to a procurement or proposed procurement brought by an interested
party. See 28 U.S.C. § 1491(b) (2012). The interested party requirement
incorporates into our jurisdictional grant the need for the protestor to have a
real stake in the outcome of the procurement. The Federal Circuit has
explained interested party standing as a demonstration by a plaintiff that it is
“an actual or prospective bidder” and that the plaintiff has “a direct economic
interest” in the procurement or proposed procurement. Orion Tech., Inc. v.
United States, 704 F.3d 1344, 1348 (Fed. Cir. 2013). The direct economic
interest prong of the test is met, at least in the post-award context, if a protestor
can show that it would have a substantial chance of receiving the contract
award but for the alleged error. See Digitalis Educ. Sols., Inc. v. United States,
664 F.3d 1380, 1384 (Fed. Cir. 2012) (affirming dismissal for lack of standing
when the protestor could not show that it would have been able to submit a bid
had the agency not sole-sourced the procurement). The question is thus, in the
context of a contract modification supported by a sole-source J&A for work
admittedly not performed by these protestors, what is required to show an
economic interest in the outcome.

        Defendant points to the result in Digitalis as the guiding principle
because, like the protestor there, plaintiffs here cannot show that they would
have bid on the work added by the modification. Plaintiffs thus cannot show
that they have a substantial chance of award but for the alleged errors.

        Plaintiffs respond that they are protesting, not the loss of opportunity
to supplant the PVs as the provider of supplier identification services, but the
loss of the chance to compete to be those suppliers, which is inherent in this
change because the acquisition-like process, which the agency has admitted
was open to competition or other protestable sole-sourcing, is jettisoned by the
modifications. Plaintiffs cite to the RAMCOR decision, in which the Federal
Circuit found jurisdiction in this court to review an agency’s decision to
override the Competition in Contracting Act’s mandatory stay of a
performance/award when a protest is lodged at GAO. The court in RAMCOR
stated that section 1491’s jurisdictional grant “does not require an objection to
the actual contract procurement, but only to the ‘violation of a statute or
regulation in connection with a procurement or proposed procurement.’”

                                         13
RAMCOR Servs. Group, Inc. v. United States, 185 F.3d 1286, 1289 (Fed. Cir.
1999) (quoting 28 U.S.C. § 1491(b)). Plaintiffs also cite to the Distributed
Solutions and McAfee decisions as situations similar to the one presented by
this protest where the plaintiffs were not challenging agency action as direct
bidders for the work being acquired by the agency but instead as losers of the
opportunity to compete for other subsidiary work. In both of those cases,
jurisdiction was found. Distributed Solutions, Inc. v. United States, 539 F.3d
1340, 1345-46 (Fed. Cir. 2008) (finding jurisdiction where the protestor lost
the opportunity to compete to provide software to the agency when the agency
modified a current contract to give that contractor the responsibility to select
the software vendor); McAfee, Inc. v. United States, 111 Fed. Cl. 696, 707-708
(2013) (finding jurisdiction to protest the decision of the Air Force to move
from multiple providers of network security to a sole provider without the need
to show that the contract modification to effect the change was out-of-scope).

       We agree with plaintiffs. The net effect of the modifications is the loss
of the opportunity by these plaintiffs to sell their products directly to the
government. Under the modified PV contract scheme, they are at the mercy
of the PVs to select them as suppliers and have none of the statutory and
regulatory rights afforded by law to bidders for government contracts. It is no
answer, as the intervenors suggest, that plaintiffs do not offer most of the items
potentially headed for the formulary. Their relative individual loss might be
substantial even if there were only a small amount of overlap. They have thus
shown a non-trivial competitive injury because of the clear potential to deprive
them of sales to the government. Standing is established.

II. The Merits

        Jurisdiction established, we turn to plaintiffs’ arguments that the
modifications are illegal as an end-run around the Competition in Contracting
Act’s (“CICA”) competition mandate and the VA’s obligation to consider
veteran-owned small businesses for award of contracts. We need not consider
plaintiffs’ other arguments because these first two, or just the first, are
sufficient to establish the insufficiency of the J&A.7

7
 The agency argues that the addition of “supply” to the distribution contracts
was not a cardinal change and hence not protestable. We assume this
argument was added for levity.

                                       14
       A. The Contracts’ Modifications Are an End-Run Around CICA

        CICA requires that, except as otherwise provided by law, agencies
procuring goods or services must use “full and open competition through the
use of competitive procedures in accordance with the requirements of this
division and the Federal Acquisition Regulation.” 41 U.S.C. § 3301(a)(1)
(2012). CICA itself provides a number of exceptions to the full and open
competition requirement in section 3304. As detailed above, the VA availed
itself of subsection (a), which allows an agency to select a single source and
buy from that source when the agency determines that the goods or services
needed “are available from only one responsible source and no other type of
property or services will satisfy the needs of the executive agency.” Id. §
3304(a)(1). The agency found that only the four PVs were in a position to
quickly identify sources and prices for the items the VA wanted on the Master
List.8 It justified the sole-source award of the modifications for that reason.
The inquiry does not end there, however.

       Neither we nor the plaintiffs question the government’s conclusion that
the PVs are well, and perhaps critically, positioned to rapidly populate the
VA’s national formulary for medical supplies. The contract modifications may
indeed be justified as sole-source changes in scope, but CICA applies to the
purchase of all goods and services unless otherwise exempted by law.
Plaintiffs’ point is that their loss is at the supplier level, the level of the sales
of the individual items to the government. Neither the government nor the
intervenors answer this question other than to suggest that this problem pre-
existed the change and thus this challenge comes too late.

8
  We note the inherent contradiction behind the idea that four sole-source
modifications are needed to do identical work that supposedly only “one
responsible source” could provide. At oral argument, defendant suggested that
the court need only look to the geographic divide between the four contractors
to assuage our concerns. That answer only begs the question. The J&A makes
no attempt to explain whether these contractors are physically able only to
provide sources for formulary items within their regions; we note that the
Master List is not regional, it is national in scope. Nevertheless, this is not the
reason that brings us to our ultimate conclusion, and we note that plaintiffs did
not raise this problem (understandably, as plaintiffs are not concerned with the
actual distribution work that the PVs undertake).

                                         15
       Defendant points to the fact that both pre and post-modification the
actual sale of supply items to the government was and is between the PVs and
the VA. Although competition or competition substitutes were used prior to
the modification, avers defendant, it was always and still is the PVs selling to
the VA. Plaintiffs are thus too late, urges the government and intervenors.

        We agree with plaintiffs, however, that this fact is not dispositive
because a new non-trivial competitive harm results from the modifications,
which is the loss of competition. Prior to the modifications, VA solicited and
entered into purchase agreements with vendors or justified sole-source
arrangements (as the case most frequently was). Competition was had and the
right to protest attached even when the vendor was a sole-source selection.
The subsequent purchase at those prices from those vendors by the PVs and
then resale to VA does not change the fact that the government competed or
otherwise lawfully avoided competition for each item placed and then
purchased off the Master List. The intermediary step provided by the PVs
makes no difference.

       After the modification, the VA has foresworn competition as unwieldy
and impractical. By outsourcing the selection of suppliers to the PVs entirely,
the government has avoided the multitude of legal and regulatory requirements
appurtenant to a federal procurement.9 The change is obvious. Plaintiffs are
not in the same situation today as they were when the MSPV-NG contracts
were competed and originally awarded. Thus neither waiver nor laches
applies. CICA has been violated unless the J&A provides legal cover for the
lack of competition. As we explain next, it does not.

       B. The J&A Does Not Justify the Lack of Competition at the Supply
       Level

       As plaintiffs rightly point out, the J&A is silent as to the availability of
suppliers for the many thousands of items that have been and still will be
placed on the Master List. 30,000 new items have been placed on the

9
 It is also no answer to suggest, as defendant does, that the VA still holds a
veto power over the selection of sources, as it did before the modifications.
The fact that the agency might reject a PV’s selection of a vendor suggests
nothing with regard to whether the ultimate selection of a vendor for that item
will be lawful. The J&A is clear; avoiding competition is the aim.

                                        16
formulary since this protest was filed. The record does not indicate whether
any items have been ordered from those 30,000, but regardless, when they are,
those sales will not have been competed. The law requires a justification and
approval for that purchase without competition. It is no answer to hide behind
the PVs’ role in adding to the list of items in the formulary. That aspect of the
modification is inseparable from the associated work of picking vendors. By
eliminating the price and vendor competitions or competition substitutes, the
VA has no-doubt bought itself significant expediency. But it has not bought
itself legal cover.

        The J&A is silent as to the purchase of any particular item on the now
much-expanded list. Neither the government nor the intervenors have
provided a lawful reason why CICA is satisfied by this arrangement. Section
3304(a) allows agencies to forego full competition when they conclude and
explain that only one source can provide what they are purchasing, but that is
a far different circumstance than that provided by this case. We understand the
attraction; expediency is undoubtedly key when it comes to purchasing medical
supplies, but Congress has made no such particular exception to the
competition mandate. We are thus left to conclude that the law has been
violated.

       C. The Modifications Ignore the VA’s Rule of Two Requirement

        Plaintiffs’ second merit-based challenge regards the VA’s unique
requirement that it must consider whether a service-disabled veteran-owned
small business (“SDVOSB”) or, failing that, veteran-owned small business
(“VOSB”) could provide the goods it wishes to procure. If two or more such
entities could provide the items, the VA is required by law to attempt to buy
from those sources by running a competition limited to only those concerns.
This is the “rule of two.” 38 U.S.C. § 8127(d) (2012); Kingdomware Techs.,
Inc. v. United States, 136 S. Ct. 1969, 1976-77 (2016). The four plaintiffs are
SDVOSB companies and argue that, not only does the new PV-provided
sourcing violate CICA’s competition requirements, but it also robs them of
their entitlement to a competition limited to only them and other similarly
situated VOSBs.

       The Supreme Court has left no doubt that the Veterans Benefits, Health
Care, and Information Technology Act of 2006, codified at sections 8127 and
8128 of title 38, requires that the “rule of two” be applied to every purchase
possible made by the VA with limited exceptions. Kingdomware, 136 S. Ct.

                                       17
at 1977. Plaintiffs allege that they stand ready to provide many of the goods
needed by the government here, and there are more than two of them.
According to Kingdomware, VA must consider awarding to them. The PVs,
on the other hand, as private businesses, are not under such constraints and
thus plaintiffs are harmed. We agree.

        The government again provides no legal cover for this arrangement.
Defendant and intervenors instead suggest that the PVs will be bound by their
small-business participation plans, which will protect the rights of VOSBs, and
thus the court should be unconcerned. We are not so sanguine. There is no
legal requirement that the PVs consider whether two VOSBs can provide an
item that they source for the Master List nor is there any requirement that they
limit their consideration to such businesses. Further, plaintiffs would not have
any right to challenge the selection of non-VOSBs by the PVs should they
ignore this requirement. The government might attempt to hold the
intervenors’ feet to the fire in this regard, as a contract administration issue,
but plaintiffs have lost valuable procurement rights in the process. The PVs
are private purchasers untethered to the FAR, VA regulations, and
procurement statutes.

        The bevy of protests filed in this court and at GAO since the Supreme
Court’s decision in Kingdomware are evidence enough that these requirements
are strict and difficult to follow in the mean and no doubt doubly so when the
law requires that they be applied without fail or exception. And yet the law
remains. Only Congress has the kill switch. Plaintiffs are correct that 38
U.S.C. § 8127 is violated by the VA’s outsourcing of its selection of supply
vendors.

III. An Injunction Is Not Warranted

        Because plaintiffs have shown a violation of procurement law, we must
consider whether an injunction is appropriate. The four factors we must
consider are 1) whether plaintiffs have succeeded on the merits, as they must
to receive permanent injunctive relief; 2) whether plaintiffs will suffer
irreparable harm absent the injunction; 3) whether the balance of the hardships
to the respective parties favors an injunction; and 4) whether it is in the public
interest to grant the requested relief. PGBA, LLC v. United States, 389 F.3d
1219, 1229 (Fed. Cir. 2004). Success on the merits is established, but an
injunction is not merited.

                                       18
       A. Irreparable Harm to Plaintiffs

       Plaintiffs allege two types of harm from the VA’s actions, the first,
discussed in detail above, is the loss of opportunity to compete to sell supplies
to the government. This is a pecuniary harm. Although this is sufficient to
establish standing, we note that this harm is at least somewhat speculative
given the possibility these plaintiffs could ultimately be selected by the PVs to
supply the VA. Further, this harm is only temporary. This modification to the
MSPV is slated to be replaced again in about eighteen months.

        The second type of harm alleged by plaintiffs is damage to their
relationships with their manufacturing partners. As explained in their brief,
“by funneling sales of the MSPV items to other distributors, rather than
Plaintiffs, the changes to the program will significantly lessen the value of the
manufacturers’ relationships with Plaintiffs as distributors.” Pls.’ Mot. for J.
on the AR 42. Damage to manufacturer relationships is also speculative.
Plaintiffs do not identify specific manufacturers of any items with whom their
relationships will be jeopardized. Further, if they are selected by a PV to
supply items to the government, this harm will be ameliorated. Additionally,
this problem might have arisen even absent the change. There is no guarantee
that these suppliers would have won their bids to supply any items to the VA.
This harm is too attenuated from the challenged agency action to weigh in
plaintiffs’ favor.

       We find harm to plaintiffs in the loss of the opportunity to compete.
There is no remedy at law absent an injunction; the harm is thus irreparable.
But we note that it does not weigh as heavily in plaintiffs’ favor as they allege
because it is temporary and somewhat speculative.

       B. Balance of the Harms

        Defendant argues that the harm to the VA overwhelms any risk to
plaintiffs. Defendant avers that enjoining the VA from continuing to populate
the Master List through the efforts of the PVs will disrupt the VA’s supply
chain for medical and surgical supplies. This disruption has two facets. The
first is the loss of potential savings realized through the enhanced buying
power offered by centralizing and standardizing the purchase of frequently
used medical supplies across the VA’s network. The second is the inability to
properly monitor and review the purchase of these supplies absent this
standardization. Without a centralized supply chain in place, the VA loses the

                                       19
ability to adequately monitor the quality and regulatory compliance of the
supplies purchased through other contractual means. Without this oversight,
the VA may miss product recalls and the sale and use of grey-market items at
various hospitals. This in turn has potential to affect clinical outcomes and
patient health, the real end goal of any medical system. Thus, in defendant’s
view, even assuming plaintiffs’ harms, the VA’s potential harm is far too great
to risk enjoining the MSPV program.

       As rebuttal, plaintiffs argue that the previous system for populating the
formulary works, at least to an extent, so the harm to the government is not
irreparable. Plaintiffs also offer that, even assuming arguendo the harms
proffered by the government, the MSPV contract modifications will not solve
the longer term problems outlined by the GAO report and the J&A. Plaintiffs
urge that the VA should consider leadership and organizational changes and
oversight efforts better tailored for the long-term success of the MSPV
program.

        We agree with defendant, however. The history of the MPSV-NG and
the J&A speak for themselves. The new formulary is failing absent the ability
to rapidly populate the Master List. The VA selected the four PVs as
particularly well-situated to take that task off the government’s hands and with
it, relieve the VA from the web of public procurement preferences and
requirements which have ensnared this program from inception. Plaintiffs’
own complaint makes the case. We have no basis to question the
representations made in the J&A about the potential effect on the provision of
healthcare that comes from the inability to properly manage the VA’s supply
chain for medical and surgical supplies. Likewise we have no reason to doubt
the method chosen to remedy these compelling problems. It is only rational
that a standardized ordering process is of little benefit to hospitals if it does not
offer a fulsome selection of supplies needed by hospitals. It also follows that
having a well-populated centralized catalog of supplies that have been properly
vetted for safety and effectiveness is necessary to achieve the supply chain
management benefits mentioned above. Those benefits have positive effects
on the provision of healthcare to veterans. We thus find that the harm to the
VA outweighs that to plaintiffs.

       C. Public Interest

       We begin with the obvious: the public does have an interest in the law
being followed as it applies to public procurement. We have long recognized

                                         20
this as sufficient to support an injunction absent some other countervailing
public interest. This case presents one of the few in which we find another
interest to outweigh it. We agree with defendant that the provision of high
quality healthcare to veterans is a weighty public interest. As we explained
above, we find it rational that healthcare is negatively affected when the supply
chain for medical supplies is disrupted, and we find it rational that the VA’s
chosen method to fix that supply chain will do so, at least temporarily, which
is all the modifications purport to be. The benefits from a well-managed
supply chain can only inure to veterans if that supply chain is fully utilized and
can provide the wide variety of items that VA health centers need to provide
quality healthcare. The public interest therefore does not favor an injunction.

                             CONCLUSION

       In this case, the VA is hamstrung by the myriad requirements and
preferences layered onto the process of federal purchasing, and especially the
preferences unique to the VA. The complaint here is exhibit A. Plaintiffs are
correct that Congress has granted to them and bidders generally a variety of
rights when it comes to selling things to the VA. It is for Congress and the
voters to weigh the merits of the benefits and burdens imposed by such a
labyrinth of legal and regulatory hoops and hurdles. This case presents a
circumstance in which the VA could not timely clear the hurdles. The result
is danger to veterans’ healthcare and increased cost to the government. The
agency found a detour around the obstacles and tried to legally justify it. It
could not do so, but the court is in no position to restore the status quo ante by
enjoining a process aimed at protecting and improving the management of the
VA’s supply chain for medical and surgical supplies. The equities do not
favor the plaintiffs: the harm to the plaintiffs is somewhat speculative, while
the harm to the agency is real and potentially grave. The public interest favors
avoiding those harms. The protest must therefore be denied. Accordingly, the
following is ordered:

       1. Plaintiffs’ motion for judgment on the administrative record is
       denied.

       2. Defendant’s and intervenor’s motions to dismiss are denied.

       3. Defendant’s and intervenors’ motions for judgment on the
       administrative record are granted.

                                       21
4. The Clerk of Court is directed to enter judgment for defendant. No
costs.

                                         s/Eric G. Bruggink
                                         Eric G. Bruggink
                                         Senior Judge

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