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JOHN W. DANFORTH CO. v. VA

December 5, 1978

JOHN W. DANFORTH COMPANY, Plaintiff,
v.
VETERANS ADMINISTRATION, Earl Hill, Stanley Buwaj and Hamberger & Co., Inc.,Defendants



The opinion of the court was delivered by: ELFVIN

FINDINGS OF FACT and CONCLUSIONS OF LAW

Plaintiff John W. Danforth Company ("Danforth") seeks to enjoin the Veterans Administration ("VA") and individual defendants from awarding a contract for certain boiler room construction at the VA Hospital in Buffalo, N. Y. to defendant Hamberger & Co., Inc. ("Hamberger"). Plaintiff also seeks declaratory relief, in particular an order (1) declaring that the VA's designation of the construction project as a total small business set-aside be automatically dissolved and (2) directing that the contract be awarded to plaintiff. Defendants move to dismiss the action for failure to state a claim pursuant to Fed.R.Civ.P. rule 12(b)(6). The motions of plaintiff and defendants have been consolidated in accordance with Fed.R.Civ.P. rule 65(a)(2) and a non-jury trial on the merits has been held.

 FINDINGS OF FACT

 1. On August 29, 1978, the VA issued a project manual and invitation for bids for the replacement of the boiler plant at the VA Hospital in Buffalo, N. Y.. On or about September 7, 1978, Danforth, Hamberger and several other potential prime contractors received said project manual and invitation for bids. Such bids were to be received and opened September 22, 1978. (Bid Invitation No. 528-49-78, August 29, 1978 (Plaintiff's exhibit # 1).)

 2. While the VA asserts that past VA Hospital construction projects had been designated as total small business set-aside projects pursuant to the Small Business Act, 15 U.S.C. § 631 Et seq., no such designation appeared in the project manual and invitation for bids. Some time prior to September 14, 1978, the chief of supply services at the VA Hospital, Earl N. Hill, and the contracting officer, Stanley C. Buwaj, learned that notice of a total small business set-aside had been omitted from the project manual and bid invitation.

 3. Hill and Buwaj had earlier concluded that the construction project should be designated as a total small business set-aside. Such determination was based upon the availability of a sufficient number of small business contractors (five or six) which they believed could handle the boiler replacement contract of about $ 3 million and produce a fair price. *fn1" The number of eligible contractors was estimated through a search of VA records and reliance upon Buwaj's personal knowledge of the Buffalo area construction industry.

 4. Because of technical amendments to the bid and the omission of the total small business set-aside from the bid, a pre-bid conference was held September 14th. Some fifteen potential prime contractors, including Danforth and Hamberger, and subcontractors sent representatives to the conference.

 5. At the conference the VA's retained architects-engineers explained the various technical amendments and Buwaj indicated for the first time that the project had been designated a total small business set-aside. Hill also explained the ramifications of "labor surplus area" requirements. One of the potential contractors (other than Danforth or Hamberger) inquired as to the definition of a small business. In response, Buwaj discussed the total small business set-aside and read 41 C.F.R. § 1-701-1 regarding the size standard of a small business in the construction industry. In addition, he noted that an amendment to the bid (Amendment No. 2) would be issued the following day and read the notice of the set-aside contained therein. As a result of the technical amendments and set-aside, Buwaj announced that the opening of the bids would be delayed until September 27, 1978.

 6. On September 15, 1978, the VA issued Amendment No. 2, said amendment being received by Danforth September 19, 1978. The amendment contained the following notice of a total small business set-aside:

 
"NOTICE OF TOTAL SMALL BUSINESS-LABOR SURPLUS AREA SET-ASIDE
 
"(a) GENERAL: BIDS OR PROPOSALS UNDER THIS PROCUREMENT ARE SOLICITED FROM (1) SMALL BUSINESS CONCERNS AND (2) ELIGIBLE ORGANIZATIONS FOR THE HANDICAPPED AND HANDICAPPED INDIVIDUALS UNDER THE SMALL BUSINESS ACT, THAT AGREE TO PERFORM AS LABOR SURPLUS AREA CONCERNS. AWARDS WILL BE MADE ONLY TO ONE OR MORE SUCH CONCERNS, ORGANIZATIONS, OR INDIVIDUALS. BIDS OR PROPOSAL RECEIVED FROM OTHERS WILL BE CONSIDERED NONRESPONSIVE.
 
"(B) DEFINITION:
 
"(1) THE TERM "SMALL BUSINESS CONCERN' MEANS A CONCERN, INCLUDING ITS AFFILIATES, WHICH IS INDEPENDENTLY OWNED AND OPERATED, IS NOT DOMINANT IN THE FIELD OF OPERATION IN WHICH IT IS BIDDING ON GOVERNMENT CONTRACTS, AND CAN FURTHER QUALIFY UNDER THE CRITERIA SET FORTH IN THE REGULATIONS OF THE SMALL BUSINESS ADMINISTRATION (13 CFTR 121.3-E). IN ADDITION TO MEETING THESE CRITERIA, A MANUFACTURER OR A REGULAR DEALER SUBMITTING BIDS OR PROPOSALS IN HIS OWN NAME MUST AGREE TO FURNISH IN THE PERFORMANCE OF THE CONTRACT END ITEMS MANUFACTURED OR PRODUCED IN THE UNITED STATES, ITS TERRITORIES AND POSSESSIONS, COMMONWEALTH OF PUERTO RICO, TRUST TERRITORY OF THE PACIFIC ISLANDS, AND THE DISTRICT OF COLUMBIA BY SMALL BUSINESS CONCERNS: PROVIDED, THAT THIS ADDITIONAL REQUIREMENT DOES NOT APPLY IN CONNECTION WITH CONSTRUCTION OR SERVICE CONTRACTS. * * *"

 (Amendment No. 2 of bid invitation no. 528-49-78, September 15, 1978 (Government exhibit # 3).)

 7. Subsequent to the pre-bid conference and prior to the submission of its bid, Danforth conducted at least one internal discussion concerning its status as a small business. However, Danforth did not make inquiry of its counsel or the VA regarding such status. Relying upon the bid invitation materials, the amendments thereto, and the award to it of a VA small business set-aside contract in 1977, Danforth chose to certify itself as a small business concern for purposes of the instant bid.

 8. On or before September 27, 1978 various prime contractors submitted bids for the construction project and the same were opened on that date. Danforth submitted the lowest bid of $ 2,959,311 and Hamberger submitted the next lowest bid of $ 3,029,000.

 9. On September 28, 1978, Hamberger contacted Buwaj by telephone and protested awarding the contract to Danforth on the grounds that the latter's profits for the years 1975-77 disqualified it as a small business concern. Hamberger forwarded a letter to Buwaj, confirming the telephone conversation and such size protest. (Letter of Kenneth Zeches, vice president of Hamberger to Stanley C. Buwaj, September 28, 1978 (Government exhibit # 14).)

 10. Buwaj informed Danforth of the size protest on or about September 29th and advised that Hamberger's letter of protest was being forwarded to the Small Business Administration ("SBA") for its consideration.

 11. At that time or shortly thereafter Danforth informed Buwaj that it questioned the validity of the total small business set-aside. Buwaj suggested that Danforth await the SBA size determination before initiating a protest of the set-aside.

 12. On October 31st, SBA forwarded a letter to Buwaj indicating that Danforth did not qualify as a small business concern. The pertinent portion of the letter provides:

 
"The above solicitation calling for "Boiler Plant Replacement" was set-aside for small business concerns. Inasmuch as there was no size standard in the bid and it is necessary to have a size standard to perform a size determination we have determined this bid to be classified ...

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