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B.K. Instrument Inc. v. United States

decided: August 4, 1983.


Appeal from an order of the District Court for the Eastern District of New York, Jack B. Weinstein, Chief Judge, in an action by an unsuccessful bidder for a Government contract, dismissing the complaint on the grounds of lack of standing and subject matter jurisdiction and also on the merits.

Friendly, Oakes and Cardamone, Circuit Judges.

Author: Friendly

FRIENDLY, Circuit Judge:

This expedited appeal from an order of Chief Judge Weinstein in the District Court for the Eastern District of New York, which comes to us on a meagre record, raises important questions concerning litigation between a disappointed bidder for a Government contract and the United States.

The Facts and the Proceedings in the District Court

The facts, to the extent they are revealed by the complaint and plaintiff's motion for a temporary injunction, are as follows: On November 15, 1982, the Commander, U.S. Army Communications --Electronics Command (CECOM), Tactical Radio Branch, headquartered at Fort Monmouth, N.J., issued Solicitation No. DAAB07-83-B-B026, which sought the submission of bids for a quantity of TK-100/G electronic tool kits. The Solicitation provided that bids would be received until December 20, 1982, and opened on that date.

Plaintiff B.K. Instrument, Inc. (BK) submitted a bid of $479,776. One of the representations in the many page Solicitation was filled out as follows:

K. 1. SMALL BUSINESS (See par. 14 on SF 33-A.)

He (X) is, () is not, a small business concern. If offeror is a small business concern and is not the manufacturer of the supplies offered, he also represents that all supplies to be furnished hereunder () will, (X) will not, be manufactured or produced by a small business concern in the United States, its possessions, or Puerto Rico.

Paragraph 14 of Standard Form (SF) 33-A (Rev. 11-81) reads as follows:

SMALL BUSINESS CONCERN. A small business concern for the purpose of Government procurement is a concern, including its affiliates, which is independently owned and operated, is not dominant in the field of operation in which it is submitting offers on Government contracts, and can further qualify under the criteria concerning number of employees, average annual receipts, or other criteria, as prescribed by the Small Business Administration. (See Code of Federal Regulations, Title 13, Part 121, as amended, which contains detailed industry definitions and related procedures).

The cover sheet to the Solicitation notified bidders that this procurement contract contained a provision for a 100% set-aside for small businesses. Section L. 67, Solicitation at p. L-6, incorporated by reference the definition of this set-aside as contained in Defense Acquisition Regulation (DAR) 7-2003.2, 32 C.F.R. § 7:469 (1982). This regulation explained that a manufacturer or regular dealer [small business concern] submitting offers in his own name must agree to furnish in the performance of the contract end items manufactured or produced by small business concerns.

Authority for restricting invitations for solicitations to small businesses is provided by the Small Business Act, 15 U.S.C. § 631 et seq. (1976 & Supp. V 1981), and the Armed Services Procurement Act, 10 U.S.C. § 2301 et seq. (1976 & Supp. V. 1981). See Kinnett Dairies, Inc. v. Farrow, 580 F.2d 1260, 1263 n.3 (5 Cir. 1978).

According to an affidavit by Eugene F. Murphy, BK's executive vice-president and general manager, he was advised by a Mr. Daniels on behalf of the Army on or about March 18, 1983, that in BK's bid the "will not" box concerning subcontractors had been checked. The affidavit avers that Murphy orally advised Daniels that BK intended and agreed to furnish and purchase only end items produced or manufactured by small business concerns. On March 18, Murphy confirmed this in a letter to the Defense Contract Administration in Garden City, N.Y., with a copy sent to Daniels at Fort Monmouth, N.J. The letter concludes, "I trust that this satisfies the immediate question concerning our offer."

Murphy's affidavit also alleges that on April 6, 1983, he met with a Government contracting officer, Ms. Maureen E. Cook, advised her that the bid form had been erroneously checked, and further advised that BK "would immediately file a bid protest with the Comptroller General, if her determination of ineligibility were not reversed." Although BK's papers are unclear in this respect as in others, Murphy seems to have left with the contracting officer a new page in which the "will" rather than the "will not" box concerning subcontractors was checked. It is said that despite this the Army, by a letter of April 14, 1983, which is not in the record, ruled that BK was ineligible. Murphy avers that, upon receiving the Army's April 14 letter on April 19, 1983, BK immediately filed a protest with the Comptroller General,*fn1 and sent a copy to the contracting officer. Despite this, according to Murphy, he learned on April 26, 1983 that the contract had been awarded to American Kal Enterprises, Inc. (Am Kal), whose bid was higher by $14,979. It is undisputed that the award to Am Kal occurred on April 14.

On May 2, 1983, BK instituted this action against the United States, the Secretary of Defense, the Commanding General of U.S. Army CECOM (the U.S. defendants) and Am Kal. There is no indication that process has ever been validly served on Am Kal. The complaint asserted that in refusing to allow BK to correct its bid and in awarding the contract to Am Kal, the U.S. defendants had violated section 724 of the Defense Appropriations Act of 1981, Pub. L. No. 96-527, 94 Stat. 3068, 3085-86 (1980), which requires that contracts let under this statute be awarded to the lowest responsible bidders*fn2 and had acted arbitrarily, capriciously and without substantial basis in violation of DAR 2-407.8(b), 32 C.F.R. § 2:41 (1982). BK sought an order declaring itself to be a responsive bidder, enjoining the Government from relying on its determination of non-responsiveness, declaring BK to have been the lowest responsive, responsible bidder under Solicitation No. DAAB07-83-B-B026 and directing the award of any contract thereunder to BK, vacating the award to Am Kal, and, presumably in the alternative, awarding BK its bid preparation costs.

BK submitted along with the complaint an order requiring defendants to show cause why injunctive relief should not be granted and restraining the defendants from proceeding under the contract awarded to Am Kal pending the hearing of the motion for an injunction. The district court did not sign the order to show cause but heard counsel for BK and the U.S. defendants on May 2, 1983. No papers seem to have been submitted by the U.S. defendants. Most of the discussion concerned BK's standing and the supposedly exclusive jurisdiction of the Claims Court. The court announced that it would dismiss "on the ground of lack of jurisdiction following what it understands the ruling case law in Edelman", to wit, Edelman v. Federal Housing Administration, 382 F.2d 594 (2 Cir. 1967), and also that "even if there were jurisdiction, the Court would dismiss on the merits since the Government followed its own regulations exactly." An order dismissing the complaint with prejudice was entered on the same day. On May 26, 1983, the Comptroller General dismissed BK's protest without passing on the merits, in accordance with his practice that a judicial dismissal with prejudice constitutes a final adjudication on the merits barring further action by him.

BK appealed from the district court's order of dismissal. It moved in this court for a stay of performance of the contract pending appeal or, in the alternative, for an expedited appeal. On May 24, 1983, another panel denied the former motion but granted the latter. Unhappily the multitude and difficulties of the legal questions and our desire to circulate the opinion to all active judges of the court because our rulings on standing and waiver of sovereign immunity depart from positions previously taken*fn* have prevented an earlier decision.


In holding that BK lacked standing, the district court relied on a passage in this court's opinion in Edelman v. Federal Housing Administration, supra, 382 F.2d at 597, reading as follows:

It is well established that an unsuccessful bidder has no standing in a suit to challenge the legality of the bidding procedure. Perkins v. Lukens Steel Co., 310 U.S. 113 [84 L. Ed. 1108, 60 S. Ct. 869] (1940); Fulton Iron Co. v. Larson, 84 U.S. App. D.C. 39, 171 F.2d 994 ([D.C. Cir.]) 1948]; Heyer Products Co. v. United States, [135 Ct. Cl. 63, 140 F. Supp. 409 (1956)]. Bidding procedures are for the benefit of the public generally and confer no private rights on the bidder. It avails appellant nothing to assert that he is not an unsuccessful bidder because Tally's bid was void; this is the issue which he is barred from litigating.

Although the quotation was apposite, developments in the law of standing since 1940 have deprived the Lukens case and consequently Edelman of precedential value with respect to a situation like that here at issue.

Lukens was not an action by a low bidder to enjoin an award to a higher one but a suit by seven iron and steel producers to enjoin the Secretary of Labor, five other members of the Cabinet and all government procurement officials from applying regulations which defined the term "locality" in the minimum wage provision of the Public Contracts (Walsh-Healey) Act of 1936, § 1(b), 49 Stat. 2036, 2036-37 (current version at 41 U.S.C. § 35), as dividing the country into six localities rather than the much larger number of units which the plaintiffs considered proper. The Court, speaking through Justice Black, was obviously perturbed that as a result of the order of the Court of Appeals for the District of Columbia Circuit, 70 App. D.C. 354, 107 F.2d 627 (1939), granting relief, "The Public Contracts Act, so far as the steel industry is concerned, has been suspended for more than a year, with no bond or security to protect the public's interest in the maintenance of wage standards contemplated by Congress, should the suspension ultimately appear unwarranted or unauthorized." 310 U.S. at 123. It was in this context that the Court made its oft-quoted observations that, 310 U.S. at 125 (footnote omitted):

It is by now clear that neither damage nor loss of income in consequence of the action of Government, which is not an invasion of recognized legal rights, is in itself a source of legal rights in the absence of constitutional legislation recognizing it as such;

and that R.S. 3709 (codified as amended at 41 U.S.C. § 5), which required in general terms that all Government purchases and contracts for supplies or services other than personal services shall be made after public advertising "was not enacted for the protection of sellers and confers no enforceable rights upon prospective bidders." 310 U.S. at 126.

Enactment of section 10 of the Administrative Procedure Act (APA), ch. 324, 60 Stat. 237, 243, in 1946, now codified and amended as the first sentence of 5 U.S.C. § 702, that "[a] person suffering legal wrong because of agency action, or adversely affected or aggrieved by agency action within the meaning of a relevant statute, is entitled to judicial review thereof," had inevitable implications for Lukens, although these were slow in manifesting themselves. See K. C. Davis, Administrative Law Treatise, 1970 Supplement § 22.20, at 778-82 (1971). What Professor Davis calls "the first basic rejection" of Lukens, id. § 22.20, at 781, was an opinion of Judge Burger, as he then was, for the Court of Appeals for the District of Columbia Circuit in Gonzalez v. Freeman 118 U.S. App. D.C. 180, 334 F.2d 570 (1964), which held that the plaintiffs who had been debarred by the Secretary of Agriculture from participating in certain contracts with the Commodity Credit Corporation had standing to seek judicial review. The Gonzalez opinion acknowledged that it was correct "broadly speaking, to say that no citizen has a 'right', in the sense of a legal right, to do business with the government," 344 F.2d at 574, citing Lukens, but went on to observe that this "cannot mean that the government can act arbitrarily, either substantively or procedurally, against a person or that such person is not entitled to challenge the processes and the evidence before he is officially declared ineligible for government contracts." Id.

Although the Gonzalez opinion was limited to debarment from participating in government contracts, that deferential limitation of the assault on Lukens did not long endure. In Scanwell Laboratories, Inc. v. Shaffer, 137 U.S. App. D.C. 371, 424 F.2d 859 (D.C. Cir. 1970), Judge Tamm, writing for the court, sustained the standing of an unsuccessful bidder to challenge an award on the ground that the Government had decided arbitrarily and capriciously that the successful bid was responsive. The opinion noted that Lukens "was decided during the heyday of the legal right doctrine, and before the passage of the Administrative Procedure Act," id. at 866, and would have to be decided differently on its own facts as a result of the Fulbright Amendment of 1952, Pub. L. No. 429, § 301, 60 Stat. 296, 308 (current version at 41 U.S.C. § 43a), which incorporated certain provisions of the APA in the Walsh-Healey Act, with the sponsor avowing the intention "'to overturn that [the Lukens ] decision. '" 424 F.2d at 866 (quoting 98 Cong. Rec. 6531 (1952)).

The Scanwell court also referred to the pertinent legislative history of the APA which supported a frustrated bidder's standing to seek judicial review. Both the Senate Committee and the House Committee stated: "This subsection [APA § 10, 5 U.S.C. § 702] confers a right of review upon any person adversely affected in fact by agency action or aggrieved within the meaning of any statute." S. Doc. No. 248, 79th Cong., 2d Sess. 212, 276 (1946).

The ink had hardly become dry on Scanwell when the Supreme Court decided Association of Data Processing Service Organizations, Inc. v. Camp, 397 U.S. 150, 25 L. Ed. 2d 184, 90 S. Ct. 827 (1970), and Barlow v. Collins, 397 U.S. 159, 25 L. Ed. 2d 192, 90 S. Ct. 832 (1970). The Court in Data Processing repudiated the "legal right" doctrine as a test of standing; it substituted a two-fold standard, whether the plaintiff "alleges that the challenged action has caused him injury in fact," 397 U.S. at 152, and "whether the interest sought to be protected by the complainant is arguably within the zone of interests to be protected or regulated by the statute or constitutional guarantee in question." 397 U.S. at 153, see Barlow, supra, 397 U.S. at 164-65. Justices Brennan and White believed it was enough for the plaintiffs to have alleged that the challenged action had caused injury in fact. 397 U.S. at 168, 170-73. Professor Davis has advocated, long and persuasively, that these Justices were correct, see 4 K.C. Davis, Administrative Law Treatise §§ 24:2-24:3, at 211-19 (2d ed. 1983), and that the "zone" qualification, although continuing to be referred to in some opinions, is no longer a vital part of the Supreme Court's jurisprudence with respect to standing. Id. § 24.17, at 273-80.*fn3 We do not need to decide the question here. In our view section 724 of the Defense Appropriations Act of 1981, which requires that contracts let under that statute be awarded to the lowest responsible bidders, and 10 U.S.C. § 2305(c), which requires the award of advertised government contracts "to the responsible bidder whose bid conforms to the invitation and will be the most advantageous to the United States, price and other factors considered," meet the added requirements of the majority in Data Processing and Barlow, even if these have not been eroded as Professor Davis contends.

The governing statutes in this case, section 724 of the Defense Appropriations Act of 1981, and 10 U.S.C. § 2305(c), are far more specific in their reference to bidders than was the provision of the Public Contracts (Walsh-Healey) Act at issue in Lukens. The Report of the House Committee accompanying the predecessor of § 2305(c) explained that the Government should use "sound business judgment" to evaluate a bidder's "experience, facilities, technical organization, reputation, financial resources, and other factors." H.R. Rep. No. 1064, 80th Cong., 2d Sess., reprinted in 1948 U.S. Code Cong. & Ad. News 1048, 1064. When, as is the case here although not in Lukens, the issue is whether the low bidder was capriciously rejected, it is hard to sustain the thesis that the unsuccessful bidder is not even "arguably within the zone of interests to be protected or regulated," especially given the congressional direction to evaluate proposed bids carefully based on individual qualities of soliciting contractors.

Doing business with the Government has become an important part of American economic life; arbitrary deprivation of government contracts on non-discretionary grounds is a serious wrong against which Congress may well have wished to protect when it stiffened the bidding statutes. Indeed, Congress amended the Armed Services Procurement Act in 1955 to require that all bids and invitations to bid contain specifications which would give prospective bidders sufficient information to permit them to bid responsibly. Congress enacted this amendment, Act of Aug. 9, 1955, ch. 628, § 15(c), 69 Stat. 547, 551-52 (codified at 10 U.S.C. § 2305(b)), to correct the "deplorable" situation whereby procurement agencies had not given their notices to bid in sufficient detail, thus needlessly injuring prospective bidders. See H.R. Rep. No. 1350, 84th Cong., 1st Sess., reprinted in 1955 U.S. Code Cong. & Ad. News 2713, 2722. As Judge Tamm said in Scanwell, supra, 424 F.2d at 864:

When the Congress has laid down guidelines to be followed in carrying out its mandate in a specific area, there should be some procedure whereby those who are injured by the arbitrary or capricious action of a governmental agency or official in ignoring these procedures can vindicate their very real interests, while at the same time furthering the public interest. These are the people who will really have the incentive to bring suit against ...

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