In a second installment of Venable’s Government Contracts Update addressing organizational conflicts of interest (See Government Contracts Update – Organizational Conflicts of Interests, Oct. 2004), this month’s Government Contracts Update focuses on a recent decision of the United States Court of Federal Claims – Axiom Resources Management, Inc. v. U.S., No. 07-532C (Fed Cl. Sept. 28, 2007). At issue in Axiom was the Contracting Officer’s review of potential organizational conflicts of interest of the eventual awardee – Lockheed Martin Federal Health Insurance, Inc.

Organization Conflicts of Interest: Federal Acquisition Regulation (“FAR”) Section 9.5 requires Contracting Officers (“COs”) to identify and mitigate both actual and potential organizational conflicts of interest (“OCIs”). Conflicts can include, inter alia, “biased ground rules,” “impaired objectivity” and “unequal access to information.” 48 C.F.R. § 9.505. Furthermore, the FAR requires COs “exercise [ ] common sense, good judgment, and sound discretion … in both the decision on whether a significant potential conflict exists and, if it does, the development of an appropriate means for resolving it.” Id.

Background: On July 30, 2006, the TRICARE Management Activity (“TMA”), which manages TRICARE, the Department of Defense’s health care program for active and retired members of the Armed Services, issued a Request for Quotation (“RFQ”) for program management support services. In addition to Axiom, Lockheed Martin Federal Health Insurance, Inc., a wholly-owned subsidiary of Lockheed Martin Corporation (“Lockheed Martin”) responded to the RFQ. On September 19, 2006, the CO recommended awarding the contract to Lockheed Martin because it had the highest overall rated proposal, at the lowest price.

Shortly thereafter, on September 25, 2006, Axiom filed the first of what would amount to three protests with the General Accountability Office (“GAO”). In the initial protest, Axiom argued that Lockheed Martin could not be awarded the contract because it had unmitigatable conflicts of interest. The GAO, however, dismissed the protest after the CO promised to evaluate the alleged OCI and issue a new Source Selection Decision. The CO issued an analysis on December 6, 2006 providing that despite an OCI, sufficient protection existed to allow the award to Lockheed Martin.

On December 7, 2006, Axiom filed a second protest with the GAO. Axiom, inter alia, challenged that Lockheed Martin’s performance of the contract created and perpetuated an OCI. In response, the CO took additional corrective action by re-reviewing the OCI issue and issuing another new Source Selection Document. Again, GAO dismissed the protest. This time, the CO found no OCI existed due to various measured implemented by Lockheed Martin, including the signing of non-disclosure agreements by its employees and assertions that it would not participate in certain contracts in the future.

On April 3, 2007, Axiom filed its third protest with the GAO. Again, in addition to other claims, Axiom protested the CO’s analysis of Lockheed Martin’s OCI. GAO denied the protest on July 12, 2007, finding that the CO adequately reviewed and analyzed the current and potential conflicts, and the mitigation plan in place to address any potential conflicts. See Axiom Resource Management, Inc., Comp. Gen. B-298870.3; B- 298870.4, July 12, 2007

The Axiom Decision in the Court of Federal Claims: Following the GAO’s denial of its protest, on July 17, 2007, Axiom filed a complaint with the Court of Federal Claims (“the Court”) seeking injunctive relief. Axiom alleged two counts both focusing on the CO’s failure to adequately and completely assess the potential conflicts of interest. Judge Braden, writing the opinion for the Court, found that the CO, albeit only after Axiom filed its first protest with GAO, properly identified and analyzed Lockheed Martin’s potential OCI. However, she continued: “[t]he fact that the CO facially conducted a thorough analysis … is not dispositive of whether the CO exercised ‘common sense, good judgment and sound discretion … [in] the development of an appropriate means for resolving [a conflict.]’” In fact, she found Lockheed Martin’s proposed mitigation plan lacked meaningful safeguards and the “Administrative Record, in this case, evidences that Lockheed Martin employees working on the Task Order will have access to … information that will give Lockheed Martin an unfair competitive advantage in future procurements.” Furthermore, she felt that the “competitive effect of this advantage is exacerbated by the fact that Lockheed Martin currently is one of the largest government contractors in the country.” Yet, despite these findings, Judge Braden withheld enjoining Lockheed Martin’s receipt of the contract in lieu of her request and consideration of an amicus curiae brief from the Bureau of Competition of the Federal Trade Commission (“FTC”). Specifically, Judge Braden explained that she sought the FTC’s views as to:

(1) whether Lockheed Martin should be required to divest [certain] contracts, if the … award stands; (2) whether current ‘TMA Policy’ and Lockheed Martin’s voluntary mitigation efforts are sufficient to ameliorate the conflicts of interest at issue; and (3) whether the non-disclosure agreements that Lockheed Martin had required Plaintiff’s former employees to sign or other mitigation proposals may foreclose future competition for these services when the current Task Order expires in three years.

Judge Braden took the unusual step of requesting an amicus brief from the FTC because she felt that it was the appropriate body to opine on the subject since it is charged with the responsibility of protecting “the public interest by monitoring and insuring that there is competition in the healthcare service industry.”

Practitioner Tips: OCIs continue to be a concern of the government and may become an even larger concern in the future. Judge Braden’s decision in Axiom, however, illustrates the competing interests at play when government contractors address existing or potential conflicts – meaningful mitigation plans versus the reluctance to restrict competition. Regardless, contractors must:

1. Develop mitigation plans with meaningful safeguards in place to provide assurances to the government that conflicts are mitigated to the greatest extent practicable.

2. Be mindful that the plan’s provisions should not be so restrictive that they restrict competition, e.g., nondisclosure agreements should be focused as narrowly as possible so as to limit any effect such restrictions have on competition.