Prejudice Not Presumed Despite Arbitrary and Capricious Decision by Agency

Dunlap Bennett & Ludwig PLLC

In a recent decision by the U.S. Court of Appeals for the Federal Circuit (CAFC), System Studies & Simulation, Inc. v. U.S., No. 2021-1469 (Fed. Cir. Dec. 30, 2021), the CAFC issued an important decision holding that prejudice will not be presumed despite irrational or arbitrary and capricious agency action. 

In 2020, System Studies & Simulation, Inc. (S3) filed a post-award bid protest at the U.S. Court of Federal Claims (COFC) asserting that the agency improperly awarded a helicopter flight training support contract. System Studies & Simulation, Inc. v. U.S., 152 Fed. Cl. 74 (2020). S3 argued that the agency had arbitrarily and capriciously assigned a strength to the awardee’s billing approach, which purported to provide “significant cost savings benefit” but were at best speculative. Id. at 90.

The COFC agreed with S3 that the agency’s decision to award this strength lacked a rational basis. Id. 91–92. However, the COFC upheld the agency’s decision because S3 failed to demonstrate that the agency’s error was prejudicial or that but for this purported error, there was a reasonable likelihood that it would have been awarded the contract. Id. at 94. The Court stated that S3 failed to demonstrate it that “there was a substantial chance it would have received the contract award.” Id. at 95 (citing Galen Med. Assocs., Inc. v. U.S., 369 F.3d 1324, 1331 (Fed. Cir. 2004) (quoting Statistica, Inc. v. Christopher, 102 F.3d 1577, 1581 (Fed. Cir. 1996)). The COFC based its determination on the following considerations: 1) the erroneously assigned strength had been treated as falling within a non-price-factor category for which awardee’s proposal had already been rated “clearly superior;” 2) the agency did not consider the strength in assessing awardee’s price; and 3) and eliminating the strength would not have affected the best-value tradeoff analysis. Id. at 95-96. 

Undeterred, S3 appealed to the CAFC arguing that “there is a presumption of prejudice whenever the Claims Court determines that the agency acted irrationally in making an award decision.” System Studies & Simulation, Inc. v. U.S., No. 2021-1469 at 7 (Fed. Cir. Dec. 30, 2021). S3’s argument relied on language from Impresa Construzioni Geom. Domenico Garufi v. U.S. (“Impresa”), 238 F.3d 1324 (Fed. Cir. 2001), in which the CAFC stated that “a bid award may be set aside if either: (1) the procurement official’s decision lacked a rational basis; or (2) the procurement procedure involved a violation of regulation or procedure” and “[w]hen a challenge is brought on the second ground, the disappointed bidder must show “a clear and prejudicial violation of applicable statutes or regulations.” Id. at 2-3. Additionally, S3’s argument highlighted the COFC and CAFC precedent that holds prejudice can be implied or presumed from an irrational or arbitrary and capricious agency action. Id. at 3 (citing Caddell Construction Co. v. United States, 125 Fed. Cl. 30, 50 (2016); Textron, Inc. v. United States, 74 Fed. Cl. 277, 329 (2006); and DynCorp Int’l LLC v. United States, 148 Fed. Cl. 568, 584-85 (2020)). 

The CAFC found S3’s arguments unpersuasive, holding that despite the uncertain case law, “there is no presumption of prejudice when a protestor demonstrates irrationality in an agency decision.” Id. Rather, to demonstrate prejudice, S3 needed to show “that there was a ‘substantial chance’ it would have received the award but for” the inclusion of the erroneous strength. Id. (citing Bannum, Inc. v. United States, 404 F.3d 1346, 1351 (Fed Cir. 2005). In Bannum, the CAFC explained that a protester must show “that there was a substantial chance it would have received the contract award but for that error” and “[t]his test is more lenient than showing actual causation, that is, showing that but for the errors would have won the contract.”Id. at 1358 (citing Info. Tech. & Applications Corp. v. United States, 316 F.3d 1312, 1319 (Fed. Cir. 2003); Alfa Laval Separation, Inc. v. United States, 175 F.3d 1365, 1367 (Fed. Cir. 1999); and Data Gen. Corp. v. Johnson, 78 F.3d 1556, 1562 (Fed. Cir. 1996)).

This case is an important reminder for protesters that the court prejudice will not presume prejudice upon a showing of improper agency action, no matter how egregious an agency error may seem. Rather, a protester must show not only improper agency action and how that improper action prejudiced the protester. Stated differently, a protester must demonstrate the agency’s action was arbitrary, capricious, or an abuse of discretion, and then explain to the court how that improper action could have changed the award determination. 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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