By: Paul Emanuelli
This is an excerpt from The Art of Tendering: A Due Diligence Guide, which is available for purchase.
As stated in the first installment in this two-part series entitled Unnecessarily Restrictive Requirements: Part 1 – Canadian Cases, it is a broadly established rule that public institutions should avoid imposing unnecessarily restrictive requirements in their solicitations that could undermine open competition.
In fact, avoiding unnecessarily restrictive requirements is one of the common core global standards that apply to open public procurement. As evidenced by a long line of reported case law, suppliers are becoming increasingly vigilant in their pursuit of a level playing field and are launching an increasing number of bid protests to challenge government’s specifications on the grounds that they are unnecessarily restrictive to competition and contrary to open procurement rules.
This second installment discusses how the prohibition against imposing requirements that are unnecessarily restrictive to competition has also been applied in multiple jurisdictions worldwide.
For example, in its September 1998 decision in American Sports and Fitness Services, Inc., the Office of the New York State Comptroller struck down a contract award after finding that the State University of New York’s branded specifications constituted an unfair sole-source. The bid protest involved a Request for Quotation (RFQ) for exercise equipment containing a list that specified certain brands and stated “Must Be Equipment Listed – No Substitutes”. The Comptroller determined that the University had no basis for determining that the costlier equipment was worth the additional expense without quantifying its advantages through a competitive procurement. It therefore rejected the contract award.
In its March 2002 decision in Whelan Group (Ennis) Ltd. v. Clare County Council, the High Court of Ireland upheld the minimum prior experience requirements established by the government during a prequalification process. The dispute dealt with a pre-screening of contractors for a subsequent invitational tendering process for the award of contracts for the provision of major road improvement works for the Newmarket-on-Fergus area in County Clare, Ireland. The planned works included the construction of nine kilometres of dual carriageway, three kilometres of single carriageway, five bridges, and three underpasses. The value of the works was estimated at £25 million with the projected timeframes estimated as requiring 28 months for completion. The complainant took issue with the minimum prior experience requirements, which required evidence of successful completion of at least one road works project exceeding £10,000,000 over the prior four-year period.
The complainant challenged this requirement as being unnecessarily restrictive and contrary to the public procurement rules. However, the Court disagreed, finding that the requirement was rational and defensible since it: (i) was established based on advice of an expert committee; (ii) was proportionate to the scale of the proposed work; (iii) was intended to minimize construction delays by ensuring that bidders had a proven track record of having completed similar work; and (iv) was transparently disclosed so that all bidders had equal notice of the standard they needed to comply with.
The Court therefore rejected the legal challenge. As this case illustrates, purchasing institutions may be called on to defend the reasonableness of their evaluation criteria against allegations that those criteria are unnecessarily restrictive to competition. Project teams should therefore be prepared to defend the evaluation criteria by ensuring that those criteria are rationally connected to the contract requirements and proportionate to those requirements.
Conversely, in its December 2003 decision in EVN AG, Wienstrom GmbH v. Republik Österreich, the European Court of Justice struck down the government’s environmental criteria as overly restrictive and ordered the re-tendering of the challenged bidding process after determining that the government could not proceed with the remaining criteria since that would have amounted to an improper post-bid rule change. The dispute dealt with an Austrian tender call for the supply of electricity in Carinthia. The complainant challenged the environmental evaluation criterion, which was weighted at 45 percent of the total evaluation and required that the electricity was to be provided from renewable energy sources.
The Court determined that the purchasing institution could take ecologic criteria into account in framing the evaluation criteria and also determined that the allocation of 45 percent of the weightings to those ecological factors was not incompatible with European procurement rules. However, since the purchasing institution lacked the technical ability to verify whether the supply of electricity was actually coming from renewable energy sources, the Court determined that the criterion breached the fair evaluation standards and was therefore contrary to European procurement rules.
Furthermore, the Court ruled that the ecologic criteria were not sufficiently linked to the procurement requirements since they assessed a bidder’s overall ability to provide electricity from renewable sources to the entire marketplace and therefore went beyond the scope of the requirements for the tendered contract. The Court ruled that giving additional points to bidders for being able to provide the largest overall levels of renewable-source electricity beyond the scope of the contract gave an unfair advantage to larger suppliers and undermined the objective of opening the market to competition.
The criteria that awarded points for being able to supply electricity beyond the requirements of the contract was ruled to be contrary to European law and struck down as invalid. The Court therefore concluded that the challenged bidding process needed to be cancelled and re-tendered since, after striking the invalid criteria, the evaluation requirements were changed so significantly so as to amount to a post-bid change to the rules.
As this case illustrates, while purchasing authorities may have some latitude to take non-commercial elements, such as environmental factors, into consideration in the development of their evaluation criteria, those criteria must be capable of verification to support open and transparent competition. Furthermore, those non-commercial elements should be proportionate to the scope of the tendered contract and should not provide larger suppliers with an unnecessary unfair competitive advantage based on their larger overall capacity where that additional capacity is surplus to the needs of the tendered contract.
Further, in its July 2009 decision in Textron Inc., the Office of the New York State Comptroller rejected a contract award by the Department of Parks and Recreation due to branded specifications. The dispute involved a solicitation for 50 electric golf carts that named a specific manufacturer. The Department defended the specifications on the basis that the branded golf carts came with lighter aluminium frames, which caused less wear and tear on the golf course. The Comptroller disagreed, finding that the Department was unable to provide any empirical evidence to support its claim regarding the branded technical specifications. The contract award was denied.
Similarly, in its January 2015 decision in Smith and Nephew, Inc., the U. S. Government Accountability Office (GAO) found that the Department of Veteran’s Affairs issued a solicitation with unnecessarily restrictive specifications. The case dealt with a solicitation for sterile wound dressings. The complainant alleged that the required dressing absorption capacity was not necessary to meet the Department’s needs and therefore undermined fair and open competition. Rather than explaining how the requirements were geared to actual needs, the Department maintained that its goal was to “procure the most absorbent and fluid-handling capable dressings available” and therefore selected a “top tier” product. The GAO found that the Department had the onus of establishing that the requirement reasonably met its needs and that it failed to meet that onus.
The GOA found that in developing its restrictive specifications, the Department ignored the market information it had collected in a prior Request for Information (RFI) process. The GAO directed the Department to engage in an internal review process that properly documented its product requirements and to develop revised RFQ specifications that were appropriately aligned to those needs.
Conversely, in its March 2015 decision in the Matter of Blueline Commuter Inc. v. Montgomery County, the New York Supreme Court – Appellate Division upheld the safety standards established in a school bus services Request for Bids (RFB) process. A bus contractor challenged the safety requirements, which exceeded statutory minimum standards by requiring that contractors have a fleet-wide out-of-service rate of less than 15 percent. The Court rejected the contractor’s challenge after finding that the RFB specifications were not anti-competitive since they did not create a situation where only one contractor could meet the required standard or result in unfair dealing or statutory violations.
Rather than being unlawful, the Court found that Montgomery County’s safety standard was validly rooted in the public interest. The Court therefore dismissed the challenge, finding that the complainant had failed to establish that the requirements were improper, created an unfair process, or contravened applicable statutory provisions. As this case illustrates, while government bodies remain subject to legal challenge when establishing bid evaluation and contract performance standards, they retain the right to set such requirements provided that those requirements do not run contrary to applicable legal standards.
However, in its March 2015 decision in CGI Federal Inc. v. United States, the US Federal Court of Appeals ruled that delayed payment provisions contained in the federal government’s Medicare and Medicaid overpayment recovery contracts violated government regulations that mandate commercially reasonable contract terms with suppliers.
The case dealt with a federal government Request for Quotations (RFQ) issued in 2014 for overpayment recovery services relating to the federal Medicare and Medicaid programs. The contract terms contained in the new RFQs amended prior payment provisions that typically entitled government contractors to commission payments for the collection of Medicare and Medicaid overpayments 41 days after the issuance of a demand letter. The contract terms in the new 2014 RFQs required government contractors to wait until the overpayment demand process passed the second level of a five-level appeal process, which, as the Court noted, “typically occurs somewhere between 120 and 420 days after the demand letter.” Rather than bidding on the new terms, CGI filed a bid protest. The US Court of Federal Claims rejected the protest after ruling that the payment terms did not violate statutory or regulatory provisions. CGI appealed. The US Federal Court of Appeals reversed the trial decision, ruling in favour of CGI after finding that the revised payment terms in the new federal government RFQs were in contravention of Part 12 of the Federal Acquisition Regulations, which prohibit the federal government from including terms in its solicitations or contracts that are inconsistent with customary commercial practice.
Similarly, in its January 2016 decision in Ostas celtnieks SIA v. Talsu novada pašvaldība, the European Court of Justice ruled that a Latvian municipality’s requirement that contractors enter into prescribed co-operation agreements with their subcontractors was unnecessarily restrictive and contrary to the European procurement Directive. The case dealt with a road repair contract. The bidder successfully challenged the co-operation agreement requirement since the Court found that under European law, “the tenderer is free to choose…the legal nature of the links it intends to establish with the other entities on whose capacities it relies in order to perform a particular contract.”
Further, in its July 2016 decision in Ambisig — Ambiente e Sistemas de Informaçao Geográfica SA v. AICP — Associaçao de Industriais do Concelho de Pombal, the European Court of Justice struck down a statutory provision in a Portuguese procurement law that required bidders to submit a notarized declaration with their bids. The dispute dealt with a tendering process for a public service contract which required the submission of a technical certification letter from a past customer or, alternatively, a notarized self-declaration. The complainant, a bidder that was rejected for failing to meet that technical certification requirement, brought a legal challenge against the validity of the notarization requirement. The Court agreed that the notarization requirement imposed unnecessary barriers to competition that were contrary to the European procurement rules and therefore void.
The Court therefore struck down the statutory requirement in the Portuguese law. As this case illustrates, purchasing institutions should avoid imposing unnecessary requirements in their bidding processes since procurement rules typically prohibit imposing unnecessary restrictions and barriers to competition, particularly when those requirements put a disproportionate burden on smaller suppliers or suppliers from other jurisdictions.
Further, in its February 2017 decision in Pitney Bowes, Inc., the U.S. Government Accountability Office (GAO) ordered the redraft of a solicitation document after finding that the government failed to justify the challenged specifications. The case dealt with a Request for Quotations (RFQ) for mail inserter/folder machines that could be reloaded “on the fly” and could handle all types of envelopes. The complainant challenged the specifications as unduly restrictive and asserted that they constituted a de facto sole-source. The GAO agreed, finding that the government failed to establish that the specifications were reasonably necessary to meet its operating needs.
Similarly, in its April 2017 decision in ‘Borta’ UAB v. Klaipėdos valstybinio jūrų uosto direkcija VĮ, the European Court of Justice struck down tender call subcontractor regulations for being overly restrictive to competition. The dispute dealt with a tendering process for port construction work at the national seaport in Klaipėda, Lithuania, which required that the “main works” be performed by the prime contractor rather than subcontractors. While the purpose of the regulation was to prohibit companies with no capacity from bidding and then subcontracting all of the work, the Court ruled that the regulation went beyond what was required to achieve the objective since the objective could be achieved by setting a percentage of work to be performed by the prime contractor, rather than by prohibiting subcontractors from performing any of the work that was defined as the “main works”.
The Court therefore ruled that the Lithuanian law was inconsistent with the European prohibitions against unnecessarily restrictive requirements and was therefore void. As this case illustrates, care should be taken to avoid imposing restrictions on the procurement process that are overly broad and disproportionate to their intended purpose. In such instances, the principle of minimal intrusion should inform the creation of any regulatory requirements imposed on the public procurement process.
Further, in its November 2017 decision in Global SuperTanker Services, LLC., the U.S. Government Accountability Office (GAO) ordered the redraft of a solicitation after finding that the government was unable to defend the challenged specifications. The case dealt with an RFP for airtanker services for wildlife firefighting. The complainant challenged the government’s 5,000-gallon maximum size restrictions, arguing that it unduly limited competition. The GAO agreed, noting that the government had the onus of justifying restrictive specifications and stating that after reviewing the record it was “unable to conclude that the specifications included in the RFP are necessary to meet the agency’s needs.”
Finally, in its July 2019 decision in Oracle America, Inc. v. The United States, the United States Court of Federal Claims upheld the award of a large cloud computing contract to a single supplier. The protest involved a multi-billion-dollar Department of Defense (DoD) Joint Enterprise Defense Infrastructure (JEDI) cloud procurement. Oracle America, Inc. challenged the process, arguing that a single award, as opposed to multiple awards, was a violation of law, and that the technical security requirements were an unfair restriction on competition. The Court rejected the challenge. It found that the technical security standards were valid and that those security requirements justified the award to a single contractor.
While it agreed that some aspects of the technical security requirements were driven by the government’s desire to award to a single supplier, the Court ultimately found that those standards were primarily based on the minimum-security standards needed for the proper processing and storing sensitive military information. In fact, the Court found that if the government had allowed for multiple awards, those security requirements would have increased rather than decreased, which rendered the single award scoping issue moot since the complainant was unable to meet the existing security requirements, let alone more stringent ones.
After noting that Oracle had conceded that it could not meet the threshold security requirements and that it could not “demonstrate prejudice as a result of any other possible errors”, the Court dismissed the complaint. While this bid protest challenge was ultimately unsuccessful, this case underscores how the scoping and technical threshold decisions made in high-profile and high-value projects remain subject to a high degree of scrutiny and to potential legal challenge. Purchasing institutions should therefore ensure that these project design decisions are made through defensible and well documented procedures and are free from any material conflicts of interest.
As these cases illustrate, public institutions should carefully consider the requirements set down in their solicitation documents to ensure that they do not create unnecessarily restrictive barriers to open competition, since the introduction of bidding barriers creates a heightened risk of legal challenge.
