Appendix — Hayes International Corp. v. McLucas

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APPENDIX A

UNITED STATES COURT OF APPEALS,

FIFTH CIRCUIT.

No. 73-2765.

Hayes INTERNATIONAL Corporation, Plaintiff-Appellant,

v.

Dr. Joun L. McLveas, Secretary of the Air Force,

Defendant-A ppellee.

Tur Borrna Company, Intervenor-Appellec.

March 6, 1975.

Appeal from the United States District Court for the

Northern District of Alabama.

Before Turrie, Coreman and Arnsworts, Circuit Judges.

Turtie, Circuit Judge:

This case involves a suit by an unsuccessful bidder for

a Government contract to have the contract awarded to

a competitor set aside as being in violation of the regu-

lations of the Department of Defense governing conflicts

of interest in Federal procurement, § 1-113.2 and Appendix

G of the Armed Services Procurement Regulations

(ASPR), 32 C.F.R. §1-113.2 and Part 141 (1971). The

132 C.F.R. § 1-113.2 (1971) Organizational Conflicts of Interest

provides that:

‘“(a) Appendix G—Rules for the Avoidance of Organiza-

tional Conflicts of Interest sets out some of the more essential

policy considerations of the Department of Defense with

respect to relationships with nonfederal institutions. Specific-

ally, Appendix G describes examples of various organizational

conflicts of interest which might come into being, and rules for

avoidance of such conflicts: and it provides that action must be

taken to avoid placing a contractor in a position where his

judgment might be biased or where he would have an unfair

competitive advantage within the scope and intent of the rules.

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successful bidder, the Boeing Company, joined the suit as

defendant-intervenor.

However, the Appendix cannot of itself impose any obligations

on the contractor: such obligations must be imposed by a con-

tract clause designed to carry out the intent of the Appendix.

Furthermore, potential contractors must be advised in the

solicitation as to the extent of applicability of the rules, and

must be given an opportunity to negotiate on the terms of the

clause and its application.

(b)(1) The contracting officer is responsible for applying the

rules in the Appendix to contracts under his cognizance and

shall determine whether such proposed procurement is subject

to the Appendix... .’’

The general provisions of 32 C.F.R. § 1-113.2 further provide for

procedures by which the contracting officer may determine whether

a potential conflict of interest exists, and the method by which he is

to deal with that potential conflict. It concludes:

‘*(e) The contracting officer shall not impose restrictions

under the Appendix in follow-on procurements on any

prospective contractor in the absence of a specific contractual

agreement with that contractor.”’

Appendix G of the Armed Services Procurement Regulations

states four rules for the avoidance of organizational conflicts of

interest. In the Preamble to those rules the regulation states

‘*Tw]here the Department of Defense does contract for research and

development work, as it must for the bulk of that work, its choice of

a contractor should be based primarily upon two considerations :

‘(1) Getting the job done effectively and efficiently, with due

regard to the long-term strength of the Nation’s scientific and

technical resources, and

(2) Avoiding assignments of work which would create inherent

conflicts of interest.’ ’’

Appendix G then sets out four specific rules on possible organiza-

tional conflicts of interest which state general prohibitions which

are explained and illustrated by specific examples. The rules are

said not to be meant to be viewed as all-inclusive.

**There will undoubtedly oceur cases which are not resolved

by these rules. As the Bell Report [Bureau of the Budget,

Report to the President on Government Contracting for Re-

search and Development, Sen.Doe.No. 94, 87 Cong., Second

Sess. (1962)] said ‘[Conflict of Interest] arises in several

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The district court originally issued a preliminary in-

junction enjoining the Secretary of the Air Force from

forms—not all of which are by any means yet fully under-

stood.’ In order to assist in deciding what, if any, prohibition

should be applied in such instances, the two basic principles of

this Code—(1) preventing conflicting roles which might bias a

contractor’s judgment, and (2) preventing unfair competitive

-advantage—should be paramount. The following rules and

examples are not all-inclusive but merely attempt to achieve

these two goals in a variety of situations. The ultimate test

should always be: Is the contractor placed in a position where

his judgment may be biased, or where he has an unfair com-

petitive advantage? If so, corrective action must be taken in

accordance wth the rules below.’’

The first three of the rules apply specifically when a contractor

agrees to provide Systems Engineering and Technical Director

(SE/TD) for a system, without at the same time assuming overall

contractual responsibility for its development. The terms ‘‘Sys-

tems Engineering’’ and ‘‘Technical Direction’’ are defined within

the rule, and are said to be terms of art relating to military pro-

curement. The last of the four rules applies to situations where a

contractor obtains data in which a competitor has proprietary

rights, and the use of that proprietary data is accordingly limited.

Part 141 of 32 C.F.R. was deleted effective November 5, 1971.

See 36 F.R. 21339 (1971). Despite this deletion, 32 C.F.R. § 113.2

continues to refer to Part 141 as containing the operative rules

governing avoidance of organizational conflicts of interest. The

text of former Part 141 of 32 C.F.R. remains as Appendix G of the

Armed Services Procurement Regulations. At the request of this

Court, counsel for all parties were invited to comment on the con-

tinued legal effect of Appendix G, following its deletion from the

C.F.R. There is no doubt that both the sustaining engineering con-

tracts awarded to Boeing, and the IRAN/Modification contract

awarded to Boeing in 1971 were awarded prior to the deletion of

Part 141 and hence the deletion would have no immediate effect on

the subject matter of this suit. Both counsel for the plaintiff and

the Government have submitted supplemental papers to this Court

to the effect. that the deletion of Part 141 was due to inadvertence,

and that the Air Force has continued to view Appendix G as being

of continued legal effect. Naturally this Court is not prepared to

make findings of fact on this matter. We note that the deletion of

Part 141 creates confusion as to the continued legal effect of the

Rules for Avoidance of Organizational Conflicts of Interest.

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taking any action pursuant to the contract awarded to

Boeing; this Court on October 14, 1971, issued an order

without opinion granting the Secretary of the Air Force’s

motion for a stay pending appeal. The plaintiff, Hayes

International Corporation, then moved the district court

to vacate the preliminary injunction and the matter pro-

ceeded to trial. Hayes stated that the reason it was

requesting that its original preliminary injunction be va-

cated was that it was in the ‘‘best interest of all the

parties that this case proceed as quickly as possible to a

judgment on the merits’’ inasmuch as the challenged con-

tract was then scheduled to extend for as long as five years.

The case was tried without a jury. The trial court found

that Boeing did not enjoy an unfair competitive advantage

over Hayes, nor was it guilty of a conflict of interest which

might have biased its judgment and accordingly held that

the contract was valid. The plaintiff brings this appeal.

We affirm.

I.

Facts

The facts of this case are largely undisputed. While the

expert witnesses at trial differed as to their view of the

applicability of the organizational conflict of interest regu-

lations, and to the extent of Boeing’s actual advantage over

other bidders seeking the contract in question, the case

largely involves the legal issue of the extent to which the

Armed Services Procurement Regulations apply to the

facts of this case.

In March, 1971, the Secretary of the Air Force, acting

through the United States Department of the Air Force,

Air Force Logistics Command, Headquarters Oklahoma

City Air Materiel Area, Tinker Air Force Base, issued

‘‘Requests for Proposals’’ for the procurement of services

to perform the ‘‘inspection and repair as necessary’’

(IRAN), modifications and other related work on the world-

BAL RRM ESR AO PST

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wide Air Force Fleet of KC-135 Aerial Refueling Tankers.

The Requests were issued pursuant to the authority dele-

gated to the Secretary in 10 U.S.C. § 2304(a) (10) (1970).

Pursuant to the Request, on June 23, 1971, the Secretary

awarded contract No. F34601-71-C-3366 to the Boeing Com-

pany, to take effect on July 2, 1971. Hayes International,

the plaintiff in this suit, was one of the two unsuccessful

bidders for this contract.”

Contract 3366 was awarded to Boeing by the Air Force

in the amount of $12,294,894.16 for the first year of per-

formance. The contract was designated to extend over a

five-year period for substantially similar maintenance and

repair work, based upon options available to the Govern-

ment to make periodic work assignments. The five-year

contract was thus valued at approximately $60,000,000.

The KC-135 is an aircraft originally manufactured by

Boeing, and is used by the Air Force as a tanker for sup-

plying fuel in mid-air to other aircraft.2. The IRAN/Modi-

fication contract, as contracts of this sort are referred to

in the industry, provided for three classes of work to be

performed. The successful bidder was first to perform

periodic inspections of each aircraft. The proposal sub-

mitted by each of the bidders described the procedures

the bidder would follow on each aircraft and offered a per

unit price for this work. Secondly the bidder agreed to

perform such modifications as prescribed by the Air Force.

Modifications might be performed only on individual air-

? McDonnell-Douglas Aircraft Corporation was the third bidder

for IRAN/Modification contract 3366.

3The 135 family of aircraft are the military equivalent of the

Boeing 707 commercial aircraft. The KC designation describes a

particular kind of 135 aircraft, and the IRAN/Modification con-

tract in question applied only to that specifie class of 135 aircraft.

Other Boeing built 135 aircraft include: the C-135 cargo plane, the

EC-135 electronics cargo plane, the RC-135 reconnaissance cargo

plane, and the W-135 weather plane.

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craft, as each suffered individual wear and fatigue fol-

lowing use, or as modifications might be prescribed for

each aircraft in the KC-135 fleet. No estimate of total

costs was possible because at the time the proposal was

submitted it was not known how many aircraft would

need modification, or precisely what modifications would

be required. The third part of the work contracted for

by the Air Force under contract 3366 was unscheduled

maintenance at the time the IRAN work was being per-

formed. Following the inspection of each aircraft there

might be a variety of different types of repairs which needed

to be performed. Each bid set out a formula by which

payment could be estimated. This entails largely a desig-

nation of a set fee per man hour of work. Using this

formula, the Air Force would be able to estimate the total

costs of any particular repair on any given number of

aircraft.

Hayes International had been awarded a similar contract

for the forty months preceding the issuance of the Boeing

contract, but lost the 1971 contract for its bid was several

million dollars higher than that submitted by Boeing.

For a number of years before contract 3366 was awarded

Boeing had been under contract to the Air Force to supply

sustaining engineering and related support services for the

KC-135 fleet. Pursuant to these contracts Boeing had made

specific recommendations as to what maintenance and modi-

fications were required on the entire fleet of more than

700 KC-135 aircraft. Boeing continues to operate under

these sustaining engineering and related support services

contracts. These were awarded to Boeing on a “sole

source’’ basis without competition or open bidding,‘ as

*10 U.S.C. § 2304(4) provides for the letting of contracts follow-

ing formal advertising for bids. The section also sets out a number

of exceptions to this requirement of formally advertising for com-

petitive bids, including where the contract is for property or serv-

ices for which ‘‘it is impracticable to obtain competition,’’ -10

U.S.C. § 2304(a) (10).

POR PRN AS SO SEIT ELLIE CLE EGG i

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was customary in awarding sustaining engineering con-

tracts to the original manufacturer of a given aircraft.’

5 Defendant’s Exhibit No. 2 introduced and received into evi-

dence at trial shows the 74 IRAN/Modification contracts in effect

during FY ’72 and the first quarter of FY ’73 which had been

let by one of the five Air Materiel Areas. These 1RAN/Modifica-

tion contracts were for maintenance on many different types of air-

craft. Of the 74 IRAN/Modification programs, 51 involved air-

craft for which the original manufacturer had obtained engineer-

ing support contracts which the evidence showed were similar to

the sustaining engineering and related support services contracts

Boeing held for the KC-135. In 16 of the 74 IRAN/Modification

programs, the original manufacturer had obtained the IRAN/Modi-

fication contract. Of these 16, 11 held or had held engineering serv-

ice contracts. Five manufacturers who obtained IRAN/Modification

contracts had not previously held engineering support contracts.

Thus 40 IRAN/Modification contracts were awarded to a contrac-

tor other than the original manufacturer, despite the manufac-

turer’s engineering services contracts.

During FY ’72 and the first quarter of FY ’°73 Hayes Interna-

tional, the plaintiff in this suit, had successfully competed against

the original manufacturer holding an engineering support contract

for 3 IRAN/Modification contracts—contracts for the C-130, the

C-123 and the B-57 (during the first quarter of FY °73). Hayes

International on five occasions during the period covered by De-

fendant’s Exhibit 2 had competed for IRAN/Modification con-

tracts where the original manufacturer did not hold sustaining

engineering contracts.

The record shows that manufacturers routinely bid on TRAN/

Modification contracts for aircraft which they had originally pro-

duced ; experts in the field of Air Force procurement testified that

they knew of no instance where a manufacturer had been prohibited

from competing for an IRAN/Modification contract, and further

testified that the Air Force routinely entered into engineering sup-

port service contracts with original manufacturers similar to that

which Boeing held for the KC-135. Finally the record showed that

a manufacturer could obtain substantially greater profit on-per- °

forming IRAN/Modification contracts than it could performing

sustaining engineering services.

Defendant’s Exhibit No. 2 shows that original manufacturers

routinely obtain engineering support service contracts. However,

the 74 IRAN/Modification programs in effect during the five

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The trial court found that Boeing’s relationship under

the sustaining engineering and related support services

contracts was essentially as the ‘‘engineering arm’’ of the

Air Force for the KC-135 fleet.

Among its findings of fact, the trial court found: (1) as

the contractor responsible for sustaining engineering for

the KC-135 fleet, Boeing proposed a number of different

modifications and improvements in the KC-135 design;

(2) Boeing as part of its duties under the sustaining en-

gineering contracts conducted a series of tests, evaluating

fatigue stress, and other factors which affect the durability

and usefulness of each aircraft; and (3) Boeing was thus

privy to technical data it generated as well as that pro-

vided by the Air Force. It was undisputed that Boeing

was responsible for recommending to the Air Force what

priority should be placed on any particular set of repairs.

The repairs and modifications which Boeing recommended

to the Air Force comprised in part the work the IRAN/

Modification contractor would perform. Boeing was thus

in a position to recommend changes and modifications to

aircraft which would enhance the value of the TIRAN/Modi-

fication contract it subsequently was awarded.

Hayes argues as a consequence of Boeing’s sustaining

engineering contracts it violated those D.O.D. regulations

outlawing organizational conflicts of interest—both because

in its dual role as both technical advisor and IRAN/Modif-

cation contractor Boeing was in a position to recommend

work which it eventually performed, thereby raising the

possibility of unneeded repairs being recommended to in-

quarters included in the exhibit show that such engineering sup-

port service contracts do not provide such a competitive advantage

in bidding for TRAN/Modification contracts that manufacturers

with sustaining engineering contracts were able to obtain a signifi-

eant number of IRAN/Modification contracts. Thus the relation-

ship between prior engineering support service contracts and sub-

sequent bidding on IRAN/Modification contracts is uncertain.

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crease its own profits, and in addition because Boeing’s

competitive position was superior to all others bidding for

the IRAN/Modification contract. This latter facet of its

alleged violation of D.O.D. procurement regulations was

due to Boeing’s acknowledged superior opportunity to ob-

tain and assess information—thereby enabling it to know

with greater assurance what types of modifications and re-

pairs would be performed under the IRAN/Modification

contract. Because it alone knew what modifications could

be expected, something which no other competitor knew with

equal certainty,® Hayes alleges Boeing could submit a

lower bid for work all bidders knew was to be performed,

and recoup its profits on the additional work assignments

it alone knew would be forthcoming.

At trial Hayes proved that Boeing recommended three

specific sets of modifications which had the effect of greatly

increasing the value of the IRAN/Modification contract it

obtained, information which neither of its competitors pos-

sessed at the time of bidding. These three sets of repairs

® Hayes International, as the IRAN/ Modification contractor from

1968 to 1971, was aware generally of structural problems in the

aerial boom and the wing for which Boeing recommended modifica-

tions. At trial it was shown that Hayes participated in meetings at

which these problems were discussed, but Hayes did not receive the

same information which Boeing used in recommending modifica-

tions and repairs, and the trial court found that Boeing had access

to confidential and vital information its competitors lacked.

Thus while the evidence showed that Boeing had access to infor-

mation which enabled it to predict with far more certainty what

modifications could be expected during the term of contract 3366, at

the same time all bidders knew that many modifications could be

expected. During the 40 months during which Hayes had held an

IRAN/Modification contract on the KC-135, over 153 modifications

were added to the contract enormously increasing its value. This

was not unusual, and the record shows that the initial predicted

value of a contract was almost always smaller than the ultimate

value the contract was to reach after many modifications were made

to it.

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involved alterations to the aerial boom,’ and two sets of

wing modifications. One of the wing modifications is actually

being performed by Boeing under its IRAN/Modification

contract as is the aerial boom modification but the most

substantial sepair, Wing Fatigue Package V (which was

valued as being in excess of $200,000,000) was awarded to

Boeing subsequent to the filing of this litigation on a sole

source basis. Beyond these specific instances of advance

knowledge of modifications to be performed, Hayes argues

that Bocing’s general responsibility for proposing modifi-

cations and repairs which were to be performed under the

IRAN/Modification agreement constitutes the type of or-

7 The aerial boom is the nozzle by which fuel is transferred in

mid-air from the KC-135 tanker to other aircraft. The alterations

in it which Boeing performs under its IRAN/ Modification contract

have an estimated cost of $2,000,000.

8 The two sets of wing modifications were issued in the form of so-

called ‘‘Wing Fatigue packages,’’ both of which Boeing performed.

Wing Fatigue Package IV was issued to Boeing under the IRAN/

Modification contract 3366. Wing Fatigue Package V involved far

more extensive changes in the wings of every KC-135 aircraft, and

at a unit price of $313,934.00 amounts to a total cost for a modifica-

tion of the entire fleet of over $200,000,000. This modification was

later issued to Boeing under a separate contract, No. F34601-72-C-

4213-PZ,0003, as opposed to being assigned to Boeing under its

IRAN/Modification contract.

Hayes at oral argument and in what it styled a ‘“Supplemental

Statement’’ in effect expanded its requested relief to include an

injunction against the continued operation of this second contract.

The Government argues, in our view correctly, that the second re-

quested injunction constituted a new issue raised on appeal, and

that under cases such as Cliff Food Stores v. Kroger, Inc., 417 F.2d

203, 208 n. 3 (5th Cir. 1969) ; Poston v. Caraker, 378 F.2d 439 (5th

Cir. 1967) ; Humble Oil & Refining Co. v. Martin, 298 F.2d 163 (5th

Cir. 1961), such a new issue cannot be raised at this time on appeal.

It is not necessary to specifically consider the problem vigorously

argued by the parties in supplemental papers whether an injune-

tion could properly issue against this second contract, however,

inasmuch as we affirm the trial court’s denial of the permanent

injunction requested to enjoin enforcement of contract 3366.

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ganizational conflict of interest which is barred by 32 C.F.R.

§ 1-113.2 and Part 141 (1971).

The district court found that while Boeing had access to

vital information concerning the KC-135 fleet it also found

that the Air Force evaluated all recommendations made by

Boeing, and that Boeing was not in a position to make final

decisions on its own recommendations for modifications and

repairs. The district court further found that Boeing was

only one source of ideas for improvement, although it did

not specify what sources other than those within the Air

Force itself affected work specifications and modifications

for the KC-135.

The district court found that the Air Force has made a

practice of awarding sustaining engineering services con-

tracts substantially identical to those with Boeing with the

manufacturers of several other aircraft in its inventory.

Some of these manufacturers have subsequently competed

for IRAN/Modification contracts on the aircraft they were

supplying with sustaining engineering services—at times

being successful, and at times unsuccessful in bidding for

the modifications which they in part pronosed. “he court

noted that Hayes itself had competed occasionally against

the holder of a sustaining engineering contract—winning

some IRAN/Modification contracts, and losing others. The

court found that one such example was the C-130 Lockheed

built aircraft, in which competition Hayes was successful;

the court noted that subsequent to the granting of contract

3366, Hayes and Boeing also competed for work on the

KC-135 A aircraft, where the contract was awarded ulti-

mately to LTV Corporation.

The district court concluded that ‘‘Service Engineering

Contracts with the Air Force do not result in the contrac-

tor being in a conflicting role which might bias its judg-

ment nor do such contracts result in the contractor obtain-

ing an unfair competitive advantage in bidding on future

contracts for work on the aircraft involved.’’ The court

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further found that the award of contract 3366 was ‘‘not

contrary to public policy and the public interest in main-

taining the integrity of the procurement system.’’ The

court made no specific finding as to the applicability of 32

C.F.R. § 1-113.2 and Part 141 to sustaining engineering con-

tracts, but appears to have assumed if an actual conflict of

interest was shown, or if it could be proven that Boeing

enjoyed a superior competitive position due to its sustain-

ing engineering contract, the resulting contract might be

voidable.

II.

STANDING

The district court found that Hayes had standing to chal-

lenge the award of contract 3366. We agree.

The Secretary of the Air Force is required to follow

procedures and practices prescribed by Congress in making

procurement contracts. Foremost among these statutes is

the Armed Services Procurement Act, 10 U.S.C. §§ 2301-

9314 and it was under the authority of this Act that the

contract in question was let. Contract 3366 was awarded

following ‘‘Requests for Proposals’’ which is a procure-

ment procedure available to the Secretary under 10 U.S.C.

§ 2304(a) (10) by which he had authority to by-pass formal

competitive bidding if it is impracticable to obtain compe-

tition.

Congressional limitations on discretionary awards of

procurement contracts have been held to be enacted for the

benefit of the public, not disappointed bidders, American

Smelting & Refining Co. v. United States, 259 U.S. 75, 42

S.Ct. 420, 66 L.Ed. 833 (1922); United States v. New York

® See also, the Federal Property and Administrative Services Act,

41 U.S.C. §§ 251-260 (1970) ; Armed Services Procurement Regu-

lations, 32 C.F.R. Parts 1-39 (1972); and Federal Procurement

Regulations, 41 C.F.R. § 1-1.000 et seq. (1972).

joy PETE MTT ITAL Te NE IT TE ENTE IM ST

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& Porto Rico S. 8S. Co., 239 U.S. 88, 36 S.Ct. 41, 60 L.Ed. 161

(1915), and accordingly under the ‘‘legal interest’’ theory

of standing, Tennessee Electric Power Co. v. Tennessee

Valley Authority, 306 U.S. 118, 59 S.Ct. 366, 83 L.Ed. 548

(1939) ; Alabama Power Co. v. Ickes, 302 U.S. 464, 58 S.Ct.

300, 82 L.Ed. 374 (1938) ; Massachusetts v. Mellon, 262 U.S.

447, 43 S.Ct. 597, 67 L.Ed. 1078 (1923), it was thought until

recently that no litigable rights are conferred on unsuccess-

ful bidders by the statutory standards. Thus they were

thought to lack standing to seek to remedy even a blatant

irregularity in the procurement procedures followed by a

Government agency. The leading case for this view is Per-

kins v. Lukens Steel Co., 310 U.S. 113, 60 S.Ct. 869, 84 L.Ed.

1108 (1940), and the Government urges us to follow it as

controlling precedent.

While Perkins has not been expressly overruled by the

Supreme Court, ' the ‘‘legal interest’’ test for standing has

10 See, however, Scanwell Laboratories, Inc. v. Shaffer, 137 U.S.

App.D.C. 371, 424 F.2d 859 (1970) where the court notes several

significant legislative enactments which arguably have the effect of

legislatively overruling Perkins. Foremost is the passage in 1946 of

the Administrative Procedure Act which provides that ‘‘[a] person

suffering legal wrong because of agency action, or adversely affect-

ed or aggrieved by agency action within the meaning of a relevant

statute, is entitled to judicial relief thereof.’’ The Supreme Court

has held that this passage was meant to broaden the concept of

standing in the area of judicial review of administrative actions,

Abbott Laboratories v. Gardner, 387 U.S. 136, 140, 87 S.Ct. 1507,

18 L.Ed.2d 681 (1967).

Until Scanwell federal courts have, with few exceptions, followed

the Perkins rationale that an unsuccessful bidder for a Govern-

ment contract has no standing to complain. Edelman vy. Federal

Housing Administration, 382 F.2d 594 (2d Cir. 1967); United

States v. Gray Line Water Tours of Charleston, 311 F.2d 779 (4th

Cir. 1962); Friend v. Lee, 95 U.S.App.D.C. 224, 221 F.2d 96

(1965).

Scanwell has not been expressly rejected by any Courts of

Appeals which have considered it, and two courts have expressly

adopted its reasoning. Merriam v. Kunzig, 476 F.2d 1233 (3d Cir.

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largely been abandoned. See Sierra Club v. Morton, 405

U.S. 727, 92 S.Ct. 1361, 31 L.Ed.2d 636 (1972) ; Data Proc-

essing Service v. Camp, 397 U.S. 150, 90 S.Ct. 827, 25 L.Ed.

2d 184 (1970) ; Barlow v. Collins, 397 U.S. 159, 90 S.Ct. 832,

25 L.Ed.2d 192 (1970) ; Flast v. Cohen, 392 U.S. 83, 88 8.Ct.

1942, 20 L.Ed.2d 947 (1967). While the Supreme Court has

recognized that earlier cases did establish that standing

would be denied ‘‘unless the right invaded is a legal right,

—one of property, one arising out of contract, one protected

against tortious invasion, or one founded on a statute which

confers a privilege,’’ Tennessee Electric Power Co. v.

T.V.A., 306 U.S. at 137-38, 59 S.Ct. at 369, in Data Proces-

sing Service v. Camp, supra, the Court stated unambigu-

ously that ‘‘the ‘legal interest’ test goes to the merits. The

question of standing is different. It concerns, apart from

the ‘case’ or ‘controversy’ test, the question whether the

interest sought to be protected by the complainant is argu-

ably within the zone of interests to be protected or regu-

lated by the statute or constitutional guarantee in ques-

tion.’’

Where, as here, the plaintiff cannot rely on any specific

statute authorizing judicial review of administrative de-

cision-making, the question of standing hinges on whether

the party has alleged such a ‘‘personal stake in the outcome

of the controversy,’’ Baker v. Carr, 369 U.S. 186, 204, 82

1973) ; William F. Wilke, Inc. v. Department of the Army, 485

F.2d 180 (4th Cir. 1973). This Court in Allen M. Campbell Co. v.

Lloyd Wood Construction Co., 446 F.2d 261, 264 n. 5 (5th Cir.

1971) acknowledged that the question of standing for unsuccessful

bidders was viewed as an open one, and this Court has subsequently

referred approvingly to Scanwell, without adopting it. See Ray

Baillie Trash Hauling, Ine. v. Kleppe, 477 F.2d 696, 704 n. 8 (5th

Cir. 1973).

See generally, Pierson, Standing to Seek Judicial Review of

Government Contracts: Its Origins, Rationale and Effect on the

Procurement Process, 12 B.C.Ind. and Comm.L.Rev. 1 (1970) ;

Comment, Government Contract Bid Protest: Judicial Review and

the Role of the Court of Claims, 39 U.Chi.L.Rev. 814 (1972).

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S.Ct. 691, 703, 7 L.Ed.2d 663 (1962) as to guarantee that

‘‘the dispute sought to be adjudicated will be presented in

an adversary context and in a form historically viewed as

capable of judicial resolution.’’ Flast v. Cohen, 392 U.S. at

101, 88 S.Ct. at 1953. As the Supreme Court noted in Sierra

Club v. Morton, ‘‘{w]here, however, Congress has author-

ized public officials to perform certain functions according

to law, and has provided by statute for judicial review of

those actions under certain circumstances, the inquiry as to

standing must begin with a determination of whether the

statute in question authorizes review at the behest of the

plaintiff.’’ 405 U.S. at 732, 92 S.Ct. at 1365. Recognizing

that ‘‘[c|learly the momentum of recent Supreme Court

decisions is in the direction of finding standing whenever

‘the plaintiff alleges that the challenged action has caused

him injury in fact, economic or otherwise’ and that ‘the in-

terest sought to be protected by the complainant is argu-

ably within a zone of interests to be protected or regulated

by the statute or constitutional guarantee in question.’ ’’

Allen Campbell Co. General Contractors, Ine. v. Lloyd

Wood Construction Co., 446 F.2d 261, 264 n. 5 (Sth Cir.

1971), we believe these are the two tests the plaintiff must

meet in order to establish standing to sue."

11 A third requirement is sometimes added that ‘‘there must be

no ‘clear and convincing’ indication of a legislative intent to with-

hold judicial review.’’ Ballerina Pen Co. v. Kunzig, 140 U.S.App.

D.C. 98, 433 F.2d 1204, 1207 (1970) ; see also Blackhawk Heating

and Plumbing Co. v. Driver, 140 U.S.App.D.C. 31, 433 F.2d 1137

(1970) ; Constructores Civiles De Centro America, S.A. (CON-

CICA) v. Hannah, 148 U.S.App.D.C. 159, 459 F.2d 1183 (1972).

As the D.C. Cireuit recognized in Ballerina Pen, supra, 433 F.2d

at 1207 n. 6, this reviewability test for standing has also been

treated as a separate and distinct issue, Data Processing Service,

Ine. v. Camp, 397 U.S. at 156, 90 S.Ct. 827; Abbott Laboratories

v. Gardner, 387 U.S. 136, 140, 87 S.Ct. 1507, 18 L.Ed.2d 681 (1967).

The distinction between the two methods of dealing with the ques-

tion of the scope of judicial review is murky and we choose to treat

the issues separately.

16a

A. Injury in Fact.

Unlike the type of delicate question which arises when a

plaintiff alleges an injury of a non-economic nature to in-

terests which are widely shared, see, e.g., Sierra Club v.

Morton, supra; United States v. Students Challenging

Regulatory Procedures (S.C.R.A.P.), 412 U.S. 669, 93 S.Ct.

2405, 37 L.Ed.2d 254 (1973), the economic injury suffered

by a losing bidder in seeking a government procurement

contract is manifest. No serious doubt exists that Hayes

International suffered economic loss by virtue of its inabil-

ity to obtain the contract at issue in this case.

B. The Zone of Interest.

Early cases which applied the ‘‘legal interest’’ test of

standing also made the general finding that government

procurement statutes were ‘‘not intended to be a bestowal

of litigable righis upon those desirous of selling to the Gov-

ernment...’’ Perkins v. Lukens Steel Co., 310 U.S. at 127,

60 S.Ct. at 877; American Smelting & Refining Co. v. United

States, supra; Goldberg v. Daniels, 231 U.S. 218, 34 S.Ct.

84; 58 L.Ed. 191 (1913) ; Edelman v. Federal Housing Ad-

ministration, 382 F.2d 594, 597 (2d Cir. 1967) ; United States

vy. Gray Line Water Tours of Charleston, 311 F.2d 779 ( 4th

Cir. 1962). These authorities do not, however, directly

answer the question whether the interests of a disappointed

bidder fall within the zone of interests arguably protected

by a statute or regulation, for even if the plaintiff is unable

to assert a violation of a legal right which the court may

remedy, ‘‘once review is properly invoked, that person may

argue the public interest in support of his claim that the

agency has failed to comply with its statutory mandate.’’

Sierra Club v. Morton, 405 U.S. at 737, 92 S.Ct. at 1367. It

was indeed largely on this premise that a disappointed

bidder is uniquely suited to assert a public interest in the

Government’s compliance with relevant statutes regulating

procurement that led the D.C. Circuit to hold a losing bid-

l7a

der has standing to contest an arguably illegal Government

contract—despite the fact it may not necessarily be able to

assert a ‘‘legal right’’ to the contract. Scanwell Labora-

tories, Inc. v. Shaffer, 137 U.S.App.D.C, 371, 424 F.2d 859

(1970).

Here we believe the interests of competitors are at least

arguably within the zone of interests protected by the De-

partment of Defense regulations or organizational conflicts

of interest. Those regulations, under which this suit was

brought, 32 C.F.R. § 1-113.2 and Part 141 (1971), set out

rules which are intended to achieve two different but related

goals: avoiding those conflicts of interest which bias a con-

tractor’s judgment, and avoiding situations where one con-

tractor has an unfair competitive advantage over another.

It seems probable that this latter goal is at least in part

designed to protect the interests of competitors who are

unable to obtain government contracts due to the superior

competitive position of the successful bidder, whose com-

petitive advantage is the result of its prior confidential

relationship with the Government.

References to the goal of avoiding unfair competitive ad-

vantages for a contractor in a privileged position with the

Government frequently occur in the legislative reports and

hearings preceding drafting of the organizational conflicts

of interest procurement regulation. See, e.g., Organization

and Management of Missile Programs, H.R.Rep. No. 112,

86th Cong., Ist Sess., 88, 92, 95 (1959); House Comm. on

Gov’t Operations Avoiding Conflicts of Interests in Defense

Contracting and Employment, H.R.Rep. No. 917, 88th

Cong., Ist Sess., 4, 52 (1963). While these references draw

no formal distinction between the Government’s interest in

free competition, and the interest of a competitor—these

cited passages do express a broad concern that unfair com-

petition may result, and the regulation subsequently drafted

seems sufficiently broad to incorporate both the Govern-

ment’s interest in lower prices and higher quality through

18a

free competition, as well as the industry’s interest in maxi-

mizing the opportunity for each competitor to bid on an

equal footing.

C. Effect on Future Procurement.

While the Government urges this Court to dismiss the

suit on authority of Perkins v. Lukens Steel, supra, and thus

affirm the requirement that a formal legal interest must be

found before a party has standing to challenge the grant of

a Government contract, the Government also proposed

larger grounds for refusing to review procurement decisions

of the sort involved in this case.’ These concerns are both

serious and important, and we do not feel we can ignore

them. While we ultimately deny the relief the plaintiff re-

quests, we do not do so on the basis that Hayes lacks stand-

ing to raise the issues presented, and we recognize we may

thus occasion other challenges to Government procurement

which necessarily will have effects on the manner in which

the Government conducts military procurement.

In its seminal opinion of Scanwell Laboratories, Ine. v.

Shaffer, supra, the D.C. Circuit Court took note that there

12The Supreme Court in Perkins expressly referred to the

possible effects on the procurement process as contributing to its

holding that an unsuccessful bidder lacked standing to sue.

‘Courts should not, where Congress has not done so, subject

purchasing agencies . . . to the delays necessarily incident to

judicial scrutiny at the instance of potential sellers .... A

like restraint applied to purchasing by private business would

be widely condemned as an intolerable business handicap. It

is, as both Congress and the courts have always recognized,

essential to the even and expeditious functioning of Govern-

ment that the administration of the purchasing machinery be

unhampered.’’ 310 U.S. at 130, 60 S.Ct. at 878.

See also, Lind v. Staats, 289 F.Supp. 182, 186 (N.D.Cal. 1968)

for a strong statement of the possible harm resulting from interfer-

ence with essential Government procurement. See also discussion

M. Steinthal and Co. v. Seamans, 147 U.S.App.D.C. 221, 455 F.2d

1289, 1300 (1971).

LL OL LTE NEL LONI SE OTR IE PPE AGE A RA NEE SEEN = i.

19a

were justifiable concerns that judicial review of procure-

ment decisions may have a disastrous effect on the efficient

operation of Government procurement. In matters such

as the one before us in this case, where the procurement de-

cision touches on weapons systems which may have a vital

impact on national defense, the courts must be wary of in-

truding into areas where they have neither special compe-

tence nor the ability to act expeditiously.* Despite these

concerns, we feel we must follow the line of authority which

began with Scanwell.

There is now a substantial body of case law in the D.C.

Circuit which by now almost routinely applies Scanwell

and grants judicial review of procurement decisions. See

e.g., P.A.M. News Corp. v. Hardin, 142 U.S.App.D.C. 227,

440 F.2d 255 (1971); National Automatic Laundry and

Cleaning Council v. Shultz, 143 U.S.App.D.C. 274, 443 F.2d

689 (1971) ; Blackhawk Heating and Plumbing Co. v. Driver,

140 U.S.App. D.C. 31, 433 F.2d 1137 (1970); Ballerina Pen

Co. v. Kunzig, 140 U.S.App.D.C. 98, 433 F.2d 1204 (1970),

cert denied 401 U.S. 950, 91 S.Ct. 1186, 28 L.Ed.2d 234

13 Our decision in Allen M. Campbell Co. v. Lloyd Wood Con-

struction Co., 446 F.2d 261 (5th Cir. 1971) demonstrates the type

of inefficiency which may be occasioned by judicial review of pro-

curement decisions. In that case the district court originally

entered an injunction restraining the Air Force from entering into

a contract for the construction of housing when the plaintiff con-

tended that the bidder to whom the contract was to be awarded was

ineligible because it was not a ‘‘small business’’ within the mean-

ing of the relevant statute. 318 F.Supp. 1167 (N.D.Ala. 1970). The

Air Force because it determined that the housing was urgently

needed, complied with the injunction and awarded the contract to

the plaintiff. On appeal, this Court determined that the Air Force’s

original determination was reasonable, and that the injunction had

been erroneously granted. Subsequently, the Court of Claims

ordered the Government to pay damages to the original successful

bidder flowing from the Air Force’s obedience to the district court’s

order. 467 F.2d 931, 199 Ct.Cl. 515 (1972). As a consequence of

this litigation, the Government was in effect required to pay two

different bidders for the same work.

20a

(1971) ; M. Steinthal and Co. v. Seamans, 147 U.S.App.D.C.

221, 455 F.2d 1289 (1971); Wheelabrator Corp. v. Chafee,

147 U.S.App.D.C. 238, 455 F.2d 1306 (1971); Kentron

Hawaii, Ltd. v. Warner 156 U.S.App.D.C. 274, 480 F.2d

1166 (1973). As that Court observed in M. Steinthal and

Co., supra, the administration of suits involving military

procurement has not been without its problems—frivolous

suits are occasionally filed, and not infrequently the delay

occasioned by judicial review has a harmful effect on the

smooth and efficient operation of military procurement.

Procurement decisions are frequently complex and involve

factual issues courts are ill-equipped to settle. Obviously

many procurement decisions involve delicate questions of

policy which are better left to the expertise of an executive

agency to answer.

At least in part the problem has been to develop proper

standards in determining when a discretionary injunction

should issue. Many different factors are necessarily taken

into account in making a decision of this sort, and the

experience in the D.C. Cireuit has shown that the grant of

an injunction which has the effect of delaying possibly vital

procurement may have grave effects on the national inter-

est. Among the various factors which have been expressly

recognized as proper to take into account in determining

whether an injunction should issue are: (1) the importance

to national defense of the item to be procured;* (2) the

availability of alternative remedies, either in the Court of

Claims “ or a bid protest claim to the General Accounting

14 Ray Baillie Trash Hauling, Inc. v. Kleppe, 477 F.2d 696 (5th

Cir. 1973).

15 VW. Steinthal and Co., supra, 455 F.2d at 1302. The damages

available in the Court of Claims are normally limited to those costs

associated with preparation of the losing bid. See Keco Industries,

Ine. v. United States, 428 F.2d 1233, 192 Ct.Cl. 773 (1970) ; Robert

F. Simmons and Associates v. United States, 360 F.2d 962, 175 Ct.

Cl. 510 (1966) ; Heyer Products Co. v. United States, 140 F.Supp.

409, 135 Ct.Cl. 63 (1956) and 177 F.Supp. 251, 147 Ct.Cl. 256

(1959).

ie. .

OLMIS A IO TOTES miamssme comes seo b

2la

Office ;° and (3) the substantial likelihood that statutory

standards were in fact violated.” Further the plaintiff has

been held to bear a heavy burden of proving that a pro-

curement officer’s decision was genuinely arbitrary and un-

reasonable.’ We agree that there is a ‘‘strong public inter-

est in avoiding disruptions in procurement, and for with-

holding judicial interjection unless it clearly appears that

the case calls for an assertion of an overriding public in-

terest [at] ‘in having the agencies follow the regulations

which control government contracting.’’’ M. Steinthal

and Co., supra, 455 F.2d at 1300. At the same time, we do

not believe that denying review altogether is the proper

way to temper judicial discretion in granting injunctions

which may have harmful effects on military and Govern-

ment procurement.

16 Wheelabrator Corp. v. Chafee, 147 U.S.App.D.C. 238, 455 F.2d

1306, 1313 (1971). See 4 C.F.R. Part 20 for the bid protest pro-

cedures issued by the Comptroller General, and see generally,

Cibinie and Lasken, The Comptroller General and Government Con-

tracts, 38 Geo.Was.L.Rev. 349 (1970).

T As the D.C. Circuit specifically noted in M. Steinthal and Co.,

supra, 495 F.2d at 1301, the federal courts must pay particular

respect to what might be fairly called the ‘‘common law of govern-

ment procurement’’—the body of rulings determinations emanating

from executive officials and the uniquely situated appeals determi-

nations of the Comptroller General and quasi-judicial boards such

as the boards of contract appeals in many of the various procure-

ment agencies. Thus the deference normally owed an agency’s

interpretation of its own authorizing statutes and regulations may

in some cases induce a federal court in its sound equity diseretion

to withhold issuance of the preliminary injunction if the ageney ean

demonstrate the likelihood that its procurement decisions followed

accepted agency practice.

8 Kentron Hawaii, Ltd. v. Warner, 156 U.S.App.D.C. 274, 480

F.2d 1166 (1973) ; M. Steinthal and Co., supra, 455 F.2d at 1301;

Continental Business Enterprises, Ine. v. United States, 452 F.2d

1016, 196 Ct.Cl. 627 (1971) ; Keco Industries, Inc., supra, 428 F.2d

at 1240.

22a

III.

REVIEWABILITY

The Administrative Procedure Act, 5 U.S.C. § 701(a)

provides that the provisions of the Act authorizing judicial

review apply ‘‘except to the extent that—(1) statutes pre-

clude judicial review; or (2) agency action is committed to

agency discretion by law.’? The Supreme Court has held

that there is virtually a presumption in favor of judicial re-

view, Abbott Laboratories v. Gardner, 387 U.S. 136, 140, 37

S.Ct. 1507, 18 L.Ed.2d 681 (1967) unless a contrary pur-

pose is fairly discernible in the statutory scheme. Data

Processing Service v. Camp, 397 U.S. 150, 157, 90 S.Ct. 827,

25 L.Ed.2d 184 (1970). Agency action is normally found to

be non-reviewable ‘‘only upon a showing of ‘clear and con-

vincing evidence’ of a contrary legislative intent.’’ Abbott

Laboratories v. Gardner, 387 U.S. at 141, 87 S.Ct. at 1511.

32 C.F.R. § 1-113.2 and Part 141 do not expressly pre-

clude judicial review, but neither do they mandate it.

Clearly the absence of statutory language expressly author-

izing judicial review is insufficient to offset the presumption

that administrative action is reviewable. ‘‘Indeed, judicial

review of such administrative action is the rule, and nonre-

viewability an exception which must be demonstrated.’’

Barlow v. Collins, 397 U.S. 159, 166, 90 S.Ct. 832, 838, 25

L.Ed.2d 192 (1970). However, ‘‘[a] clear command of

the statute will preclude review; and such a command of the

statute may be inferred from its purpose.’’ Id. at 167, 90

S.Ct. at 838.

The Government points to those provisions of the regula-

tions which provide that ‘‘[a]ny of the prohibitions

imposed by these rules may be waived by an Assistant

Secretary of a military department or the Director of a

defense agency if he determines that a failure to waive the

prohibition will be prejudicial to the best interests of the

Government,’’ 32 C.F.R. Part 141 (1971) as well as the

repeated statement that ‘‘[a]ll prospective contractors will

PB RIA ROLLS OI ILL T LOM LEE LD LOI LI SOLE IE *

23a

be advised of the applicability of the rules by a notice in

solicitations and by a clause in resulting contracts,’’ Id.,

and ‘‘[t]he contracting officer shall not impose restrictions

under the Appendix in follow-on procurements on any

prospective contractor in the absence of a specific contrac-

tual agreement with that contractor,’’ 32 C.F.R. § 1-113.2(c)

and argue that taken together they amount to such a ‘‘clear

command’’ that the regulations are meant to be applied only

at the discretion of the agency.

That part of Appendix G which provides for ‘‘Review

and Waiver’’ seems to us to grant substantial discretion

to procurement officers. Indeed, Hayes concedes that the

Air Force could have made the decision to waive the appli-

cation of the Rules on Avoidance of Organizational Con-

flicts of Interests. Implicitly the plaintiff also concedes

that were such a decision made, it likely would be unre-

viewable as it would be one of those ‘‘rare instances where

‘statutes are drawn in such broad terms that in a given

case there is no law to apply.’’’ Citizens to Preserve

Overton Park v. Volpe, 401 U.S. 402, 410, 91 S.Ct. 814, 821,

28 L.Ed.2d 136 (1971). We do not pass on that question,

however, as such a waiver decision was not made in this

ease. Rather, the Air Force has determined that the Rules

on Avoidance of Organizational Conflicts of Interest are

never applicable to the type of engineering contracts which

Boeing held prior to the grant of IRAN/Modification con-

tract 3366. In our view, this construction of the regulations

is a decision other than a specific decision to waive the

application of the rules in a particular instance, having

made the decision that a failure to do so would be ‘‘preju-

dicial to the best interests of the Government.’’

Such a construction of the regulations ‘‘does not signifi-

cantly engage the agency’s expertise,’’ Barlow v. Collins,

397 U.S. at 166, 90 S.Ct. at 837, for ‘‘Courts are as expert

as administrators in matters of statutory construction.’

Kast Oakland-Fruitvale Planning Council v. Rumsfeld, 471

24a

F.2d 524, 529 (9th Cir. 1972). See Barlow v. Collins, 397

U.S. at 166, 90 S.Ct. 832.”

Thus the issue in this case comes down to the relatively

straightforward one of the extent to which the Department

of Defense rules on avoidance of organizational conflicts of

interest were meant to apply to the type of engineering con-

tracts which Boeing held for the KC-135. The decision that

Boeing’s sustaining engineering and related support serv-

ices contracts did not come within the purview of the rules

was not made on the basis of the ‘‘best interests of the

Government,’”’ rather the record shows it was made on the

basis of a construction of the language of the regulations,

and the legislative history surrounding the drafting of the

rules. Such matters are eminently fit for judicial review,

and while naturally an agency’s interpretation of its own

regulations is subject to substantial deference,” this does

not amount to unreviewable discretion within the meaning

of §701(a) of the Administrative Procedure Act.”

19 An analogous question would be the extent to which an agency

has discretion to construe its own authorizing legislation to deter-

mine the extent to which its decisions are to be unreviewable. In

such eases, normally the initial inquiry as to the construction of an

agency’s authorizing legislation is held to be a matter proper for

judicial review, even if ultimately the decision is that the agency

has unreviewable discretion under that legislation. See East Oak-

jand-Fruitvale Planning Council v. Rumsfeld, supra; Fletcher v.

Housing Authority of Louisville, 491 F.2d 793 (6th Cir. 1974).

Similarly, ‘‘ ‘[w]here the only or principal dispute relates to the

meaning of the statutory term’. . . [the controversy] presents

issues on which courts, and not [administrators], are relatively

more expert.’’ Barlow v. Collins, 397 U.S. at 90 166 S.Ct. at 837,

citing Hardin v. Kentucky Utilities Co., 390 U.S. 1, 14, 88 S.Ct.

651, 19 L.Ed.2d 787 (Harlan, J., dissenting).

20 See generally, 4 K. C. Davis, Administrative Law Treatise,

§ 30.12 (1958).

21'The Government and Boeing argue that by the terms of 32

C.F.R. § 1-113.2 and Part 141, the failure of the government to

include provisions in Boeing’s sustaining engineering contracts

barring future bidding on IRAN/Modification contracts should

8 PERLE LTE GIG pL SEILER EL ISAT ER ee i hb

25a

IV.

APPLICABILITY OF THE DEPARTMENT OF DE-

FENSE RULES ON AVOIDANCE OF ORGANIZATION-

AL CONFLICTS OF INTERESTS TO ENGINEERING

SUPPORT CONTRACTS

As the Government has had to rely increasingly on the

use of private contractors to perform tasks which might

previously have been performed by Government employees,

the problem of reconciling the private interests of independ-

ent contractors with the public mission they are called upon

to perform has resulted in substantial legislative concern

about conflicts of interest. The problem has been particu-

larly acute concerning use of individual Government em-

ployees who have some interest in private concerns, and

both the legislation and the literature concerning this ques-

tion of so-called ‘‘individual conflicts of interest’’ have

been extensive.”” Such ‘‘individual conflicts of interest’’

preclude retroactive application of the Rules on Organizational

Conflicts of Interest. We note without passing on the question

that other procurement regulations have been held to be self-

enforcing despite the failure to include them in specific contracts,

see, e.g., G. L. Christian and Associates v. United States, 312 F.2d

418, 160 Ct.Cl. 1 (1963). Further the Comptroller General has

recently decided that the failure to include such a ban in a prior

contract need not bar an application of restrictions similar to

those of 32 C.F.R. Part 141, if such a restriction is made con-

sistent with 10 U.S.C. §2304(g¢) which requires solicitation of

proposals ‘‘from the maximum number of qualified sources consist-

ent with the nature and requirements of the supplies or services

to be procured.’’ Decision of the Comptroller General, B-181448

of October 15, 1974. See OGC Newsletter, Office of the General

Counsel, Dept. of the Navy, Vol. 21, No. 4 (12/16/74).

22 See 18 U.S.C. §§ 201-219 (1964). See generally, Manning,

Federal Conflict of Interest Law (1964) ; Perkins, The New Federal

Conflict of Interests Law, 76 Harv.L.Rev. 1113 (1963) ; Petrowitz,

Conflict of Interests in Federal Procurement, 29 Law and Contemp.

Prob. 196 (1964) ; Pasley, Individual Conflicts of Interest (Brief-

ing Paper No. 64-4, Federal Publications, Inc.) (1964).

26a

have been defined as ‘‘the clash, or appearance of a clash,

between a Government official’s interest in performing his

official duties and his interests in his private—and espe-

cially his private economic—affairs.’’ Association of the

Bar of the City of New York, Conflict of Interests in Fed-

eral Service, 3 (1960). Here the statutory restrictions

are relatively clear, and well understood. The same cannot

be said of ‘‘organizational conflicts of interest’? which

have been described by one of the leading scholars in the

field as a ‘‘more mysterious, arcane subject, on which much

less has been published and about which very little that

is definitive can yet be said.’’ Pasley, Organizational Con-

flicts of Interests in Government Contracts, 1967 Wis.L.

Rev. 5, 6.

‘Organizational conflicts of interest,’? unlike ones con-

cerning individual employees, normally do not arise in most

aspects of public service. Rather they have been described

as ‘‘essentially creatures of federal government contract

law and policy, more specifically of research and develop-

ment contracting and of complex space age technology.’’

Pasley, Id.

32 C.F.R. §1-113.2 and Part 141 were drafted to deal

with what a series of Congressional hearings and reports

identified as the continuing problem of organizational con-

flicts of interest in aerospace procurement.” At trial the

23 See for his account of the development of the D.O.D. regula-

tions, Pasley, Organizational Conflicts of Interest in Government

Contracts, 1967 Wis.L.Rev. 5, 6 et seq. See also House Committee

on Government Operations, Organization and Management of

Missile Programs, H.R.Rep.No.1121, 86th Cong., Ist Sess. (1959) ;

House Committee on Government Operations, Air Force Ballistic

Management (Formation of Aerospace Corporation), H.R.Rep.No.

324, 87th Cong., 1st Sess. (1961); U.S. Bureau of the Budget, Re-

port to the President on Government Contracting for Research and

Development, S.Doc.No.94, 87th Cong., 2nd Sess. (1962); House

Committee on Government Operations, Avoiding Conflicts of In-

terest in Defense Contracting and Employment, H.R.Rep.No.917,

27a

Government introduced witnesses who either participated

in the drafting of the regulations in question, or who sub-

sequently were responsible for applying them in military

procurement contracts, who testified that the rules were

intended to apply to situations where a highly specialized

contractor engaged in what was called ‘‘systems engineer-

ing’’ and ‘‘technical direction.’’** ‘‘Systems engineer-

ing’’ is defined by 32 C.F.R. Part 141 to include ‘‘a com-

bination of substantially all the following activities: de-

termination of specifications, identification and solution of

interfaces between parts of the system, development of

test requirements or plans and evaluation of test data,

and supervision of design work.’’ The term ‘‘technical

direction’’ is similarly defined to include ‘‘a combination

of substantially all the following activities: preparation of

work statements for contractors, determination of para-

maters, direction of contractors’ operations, and resolu-

tion of technical controversies.’’ While some of these

technical terms seem so conceptually broad as to include

some, although certainly not all, of Boeing’s responsibilities

under its sustaining engineering contracts, Government

witnesses at trial testified that the type of post-production

engineering which Boeing was expected to perform under

88th Cong., Ist Sess. (1963); Hearings Before the Sub-Committee

of the House Committee on Government Operations, Organization

and Management of Missile Programs, 86th Cong., 2nd_ Sess.

(1960) ; Hearings Before a Sub-Committee of the House Commit-

tee on Government Operations, Systems Development and Man-

agement, 85th Cong., Ist Sess. (1963).

*4 Among the other equally ambiguous generic terms used to

describe similar functions are: ‘‘systems analysis and engineering

and technical monitoring and direction,’’ Staff of Sub-Committee

for Special Investigations of the House Committee on Armed

Services, 89th Cong., Ist Sess., The Aero Space Corporation 7

(Comm.Print. 1965) or, more generally, ‘‘ Planning, technical, ana-

lytical, or other consulting services.’’ Proposed Atomic Energy

Commission, ‘Statement of General Policy for the Avoidance of

Organizational Conflicts of Interest,’’ 31 F.R. 2699, 2700 (1966).

28a

its sustaining engineering contracts was qualitatively dif-

ferent from the kind of engineering effort described by the

terms ‘‘systems engineering’’ and ‘*technical direction.”’

Typically this latter type of engineering was said to involve

development of new systems, and the coordination of the

contributions of a number of sub-contractors in an effort

to speed research, development and production.

The Government relies not only upon what individuals

who participated in the drafting of the regulations sug-

gested was the intent behind the language used within the

regulation, but also refers to the specific instances of sys-

tems engineering and technical direction which had been

identified by Congressional committees investigating

organizational conflicts of interest as creating a problem

which required a solution.”

Expert Government witnesses testified that there were

fundamental differences between the type of engineering

responsibilities involved in developing a new weapon sys-

tem, and that which are involved in performing mainten-

ance engineering on an existing system. These witnesses

25 The prototype of such a contractor was the Ramo-Wooldridge

Corporation, later known as the Thompson-Ramo- Wooldridge Cor-

poration, later responsible for the separate incorporation of Space

Technology Laboratories, a wholly-owned subsidiary of Thompson-

Ramo. The history of these corporations, and their role in develop-

ing the ballistic missile system for the Air Force are extensively

reported in two House of Representative’s reports, H.R.Rep.No.

1121, and H.R.Rep.No.324, supra, note 23. Ramo-Wooldridge

was responsible for the coordination of sub-contracting in the de-

velopment of the ballistic missile system—and as such had enor-

mous influence in making decisions about what equipment and

services should be acquired by the Government. It seems plain

to us that if what Ramo-Wooldridge was performing in the late

‘50s is what the terms ‘‘systems engineering’’ and ‘‘technical

direction’? were meant to describe, then Boeing’s sustaining engi-

neering contracts bear no meaningful relationship to the type of

engineering responsibilities vested by the Air Force in the Ramo-

Wooldridge Corporation.

LORE RPSL IB NOONE NTS, 8 URN Lop RIC Noe IM ETS \.

29a

testified that contracts led by the Logistics Command

simply were not ‘‘system engineering’’ or ‘‘technical direc-

tion’’ contracts within the meaning of the regulations.

Sustaining engineering was identified as resembling ‘‘fix-

it’’ engineering although the precise conceptual differences

between such ‘‘fix-it’’ engineering and the ‘‘very sophisti-

cated type of technical management’’ which was said to be

involved in systems engineering and technical direction

were left largely unarticulated.

The plaintiff produced no evidence as to the intent of

the draftsman of 32 C.F.R. § 1-113.2 and Part 141, nor any

evidence as to how the terms ‘‘system engineering’’ and

‘*technical direction’’ are viewed by specialists in military

procurement. Rather Hayes simply says that to read the

language of the regulation is enough, that the words are

so clear no extrinsic evidence is required. However, it

only requires a single attempt to read and understand the

cabalistic jargon of the regulations to conclude that the

words cannot stand alone.

We do not feel that the plaintiff has offset the weight

we attach to the administrative interpretation of the regu-

lations and to the intent attributed to the draftsman of the

regulation by participants in the drafting process. One

such participant in the drafting process, then a special as-

sistant to the Secretary of Defense, has described the pro-

blems the regulations were designed to solve. Yarmolin-

sky, Organizational Conflicts of Interest, 24 Fed.B.J. 309

(1964). He describes the development of ‘‘systems en-

gineering and technical direction’’ as responding to a need

which arose ‘‘because weapons systems had become so

complex that the job of fitting together separate systems,

sub-systems, and sub-sub-systems, turned out to be at least

as important as the job of producing component elements.

Contractors were needed to perform what came to be called

systems engineering and technical direction, which amount-

ed to giving the contractor a very large say in what the

ultimate customer—the Government— was going to buy.’’

* eee ae Re

30a

We are thus unable to read 32 C.F.R. §1-113.2 and Part

141 so broadly as to encompass all engineering tasks as-

signed by contract by the military. Such a reading is in-

consistent with the background to the drafting of the re-

gulation, and has never been the interpretation placed upon

it by the agencies responsible for military procurement.

In our view, the limited reading placed on the regulations

by the various procurement agencies is consistent with the

legislative materials which prompted the drafting of the

regulation originally, and with the attempted solution of

the specific problem those legislative hearings and reports

documented.

We thus conclude that the Air Force’s administrative

interpretation of 32 C.F.R. $1-113.2 and Part 141 is a per-

missible interpretation, and we do not disturb it.”

Accordingly, we affirm the judgment of the trial court.

26 The plaintiff proposes an alternative basis on which it seeks to

have contract 3366 voided. Relying on what it identifies as the

rationale of United States v. Mississippi Valley Generating Co., 364

U.S. 520, 81 S.Ct. 294, 5 L.Ed.2d 268 (1961), the plaintiff proposes

that a general publie policy against conflicts of interests is suffi-

ciently strong to justify voiding a contract which arguably is

tainted by such a conflict of interest. We feel we must decline the

invitation to develop such a novel ‘‘federal common-law of Gov-

ernment procurement,’’ premised upon what a court can be per-

suaded is desirable procurement policy.

No authority is cited for this dramatie use of federal equity

power save the Mississippi Valley Generating case, and it is ad-

mittedly distinguishable on the grounds that it involved the vio-

lation of a penal conflict of interest statute, and thus did not

require a decison to void a Government contract premised solely

on the court’s intuitive sense of what is desirable public policy.

The penal statute in question, 18 U.S.C. § 434 was said to be given

its ‘‘fair meaning in accord with the evident intent of Congress,”’

364 U.S. at 550, 81 S.Ct. at 309, and the Supreme Court by its

own terms did nothing more than construe that intent. We find

nothing in the case which authorizes so broad a use of discretionary

power as to justify creating new and novel limitations on military

procurement.

|

VESPA TE LPT FILO BE LS

3la

APPENDIX B

IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN

DISTRICT OF ALABAMA, SOUTHERN DIVISION

Crviz Action No. 71-831-A

Hayes INTERNATIONAL Corporation, Plaintiff

v.

Dr. Rosert C. Szamans, Jr., Secretary of the

Air Force, Defendant

Tue Bortne Company, a Corporation, Intervenor

Order of Dismissal

In conformity with the Findings of Fact and Conclusions

of Law entered contemporaneously herewith,

It is Orperep, Apsupcep and Drcreep by the Court that

plaintiff is not entitled to the relief for which it prays;

that this action be and the same is hereby dismissed; and

that the costs of court incurred herein be and the same

are hereby taxed against plaintiff.

Done this 30th day of April, 1973.

/s/ Seymour H. Lynne

Senior Judge

32a

IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN

DISTRICT OF ALABAMA, SOUTHERN DIVISION

Civiz Action No. 71-831-S

Haves InTeRNATIONAL Corporation, Plaintiff

v.

Dr. Rosert C. Szamans, Jr., Secretary of the

Air Force, Defendant

Tue Borrnca Company, a Corporation, Intervemor

This cause, coming on to be heard, was submitted upon

the alternative prayers of plaintiff for a permanent in-

junction or a declaratory judgment upon the pleadings and

the proof. After full consideration thereof, aided by the

memoranda and oral arguments of able counsel, the Court

proceeds to make and enter the following findings of fact

and conclusions of law:

FINDINGS OF FACT

(1) On or about March 29, 1971, defendant, acting

through the United States Department of the Air Force,

Air Force Logistics Command, Headquarters Oklahoma

City Air Materiel Area, Tinker Air Force Base, Okla-

homa, 73145, issued Request for Proposals (RFP) No.

F34601-71-R-1488 for the procurement of certain services

to perform the ‘‘inspection and repair as necessary’’

(IRAN), modifications (otherwise known as Technical Or-

der compliance) and other related services on the world-

wide Air Force fleet of KC-135 aerial refueling tankers.

The RFP was issued pursuant to the authority delegated

to the defendant in 10 U.S.C. § 2304(a)(10) (1970), and

requested proposals to be submitted by offerors on or be-

fore 4:30 p.m., Central Standard Time, May 17, 1971.

The date for receipt of proposals was later extended to

June 4, 1971.

33a

(2) Pursuant to the Request for Proposals, on June 23,

1971, defendant awarded Contract No. F34601-71-C-3366

to The Boeing Company (hereinafter ‘‘Boeing’’), effec-

tive July 2, 1971, in the amount of $12,294,894.16 for the

first year of performance. The provisions of the RFP

and of the resulting contract anticipated delivery by the

Air Force of KC-135 aircraft to Boeing for IRAN/Modi-

fication work beginning on or about October 12, 1971.

(3) At the time of the solicitation of the Request for

Proposals, plaintiff, Hayes International Corporation, was

performing similar IRAN/Modification services for the

Air Force on the KC-135 fleet under Contract No.

F'34601-68-C-3607, and had been doing so since March, 1968.

(4) Such contract contemplated a five-year period of

substantially similar work requirements based upon annual

options available to the Government.

(5) Plaintiff initiated an inquiry to the Air Force be-

cause of the inconsistency between the face amount of the

contract and a newspaper report of the potential value

of the contract to Boeing. The purpose of the inquiry

was to ascertain the nature and extent of other contracts

prevailing between Boeing and the Air Force which also

concerned the KC-135 fleet. On the basis of a review of

such other contracts supplied to plaintiff by the Air Force

pursuant to the Freedom of Information Act, plaintiff

concluded that:

(a) Boeing held a privileged relationship with the

Air Force as the only contractor providing engineering

services and recommendations on maintenance require-

ments and modifications which should be performed

on KC-135 aircraft;

(b) that privileged relationship was of such a nature

that Boeing alone, among the offerors for Contract

No. F34601-71-C-3366, had superior knowledge and

information concerning pending modifications to the

34a

KC-135 fleet that would result in work requirement

changes and additions to IRAN/Modification Contract

No. F34601-71-C-3366; and, therefore,

(c) the competition for Contract No. F34601-71-C-

3366 was unfair and Boeing had an unfair competitive

advantage over all other offerors;

(d) a conflict of interest existed between Boeing’s

performance of sustaining engineering services for the

Air Force on the KC-135 fleet and the performance of

IRAN/Modification services under Contract No.

F34601-71-C-3366 ; and

(e) Boeing’s judgments and engineering decisions

made under its KC-135 service contracts with the Air

Force would be biased in favor of maintenance require-

ments and modifications which Boeing would perform

and receive the economic benefit of as the IRAN /Modi-

fication contractor under Contract No. F34601-71-C-

3366.

(6) On July 15, 1971, plaintiff submitted various ques-

tions to the Air Force concerning the bidding and award

of Contract No. F34601-71-C-3366, and particularly con-

cerning the unfair competitive advantage which Boeing

enjoyed in the alleged ‘‘Competition’’ for the contract.

Additionally, plaintiff pursued its administrative remedies,

to the extent they existed, by consulting with and bring-

ing the questions of unfair competition, conflict of interest,

and bias to the personal attention of, among others, the

then Assistant Secretary of the Air Force, Philip N.

Whittaker. All such inquiries were to no avail.

(7) At all times pertinent to this litigation, specifically

prior to, at the time of, and after the award of Contract

No. F34601-71-C-3366 to Boeing for IRAN/Modification

services on the KC-135 fleet, Boeing and the Air Force

were parties to a_ series of contracts whereunder Boeing

furnished the Air Force sustaining engineering and re-

PARE LEP ELE YAEL CLIO POLLEN BELO EIDE LY LID ME EERE RE LINES OIE OES E EE NL HORI MD. AP

™

35a

lated support services on the worldwide Air Force KO-135

fleet. Pursuant to these contracts, Boeing advised and

recommended to the Air Force what specific maintenance

and modification requirements were to be performed on

the entire Air Force fleet of more than 700 KC-135 air-

craft. Boeing continues to operate under such contracts

and to provide these services for the Air Force on the

KC-135 fleet at this time. The contracts include Nos.

F'34601-71-C-0799; F34601-72-C-1782; F34601-72-C-2039;

¥34601-71-D-2291; and ¥34601-71-A-1408, all as amended,

modified, superseded, or replaced by substantially similar

contracts.

(8) All of the KC-135 sustaining engineering and re-

lated support services contracts referenced in the prior

numbered finding were awarded to Boeing by the Air

Force on a ‘‘sole source’’ basis without competition or

open bidding.

(9) During the early part of the 1950’s, Boeing devel-

oped a prototype jet transport aircraft, which was pri-

vately financed, and subsequently developed a tanker air-

craft for use by the Air Force from this prototype. The

Air Force has procured 732 of these aircraft from Boeing,

having an inventory value of $1,692,134,780.00. This air-

craft, known as the KC-135A, has the mission of provid-

ing worldwide aerial refueling support for all ‘First

Line’’ bombers, fighters, tactical and special mission air-

craft (reconnaissance and weather configuration).

(10) Pursuant to the KC-135 sustaining engineering and

related support services contracts, Boeing functions as the

engineering arm of the Air Force for the KC-135 fleet.

Because of the information provided to Boeing by the Air

Force to perform under such contracts, Boeing had access

to vital information concerning the KC-135 fleet.

(11) As with all its aircraft, the Air Force has the

responsibility of assuring that the KC-135A aircraft are

36a

properly maintained and ready to fulfill critical National

Defense mission requirements. This maintenance work

may be done in Air Force facilities or it may be contracted

out to private contractors. During the first ten years of

operation, modification and maintenance work on the KC-

135A aircraft was performed primarily in Air Force facili-

ties. By December of 1967, other Air Force work had led

the Air Force to conclude that the modification and main-

tenance work on the KC-135A aircraft should be con-

tracted out. In January, 1968, proposals were received

from five contractors including plaintiff and Boeing.

(12) The 1968 procurement of maintenance and modifica-

tion work on the KC-135A aircraft, known as TRAN/Modi-

fication work was contracted to plaintiff, Hayes Interna-

tional Corporation, since it was determined to be the

lowest, responsive proposer on the 1968 procurement. This

contract was extended through exercise of options through

the first 90 days of fiscal year 1972, and was numbered

F34601-68-C-3607.

(13) Following essentially the same procedures as in

1968, the Air Force again requested proposals for a new

modification and maintenance work contract on the

KC-135A aircraft by Request for Proposal issued March

29, 1971. In response to this RFP, three bids were sub-

mitted, proposals from Hayes International Corporation,

The Boeing Company, and McDonnell-Douglas Company.

As a result of this competition, The Boeing Company was

awarded the IRAN/Modification Contract F34601-71-C-

3366 because it was the lowest, responsive, responsible

proposer. The Boeing Company’s proposal was several

million dollars lower than was _plaintiff’s. McDonnell-

Douglas, who was the other bidder on this procurement,

submitted a manpower estimate which was approximately

one million (1,000,000) man-hours less than the Hayes es-

timate and was more comparable to the man-hours estimate

presented by Boeing.

ok ol a al al ER ENE BYNES,

37a

(14) The modification work called for by the contract

at issue here originates when changes or improvements

are recommended. The manufacturer of the KC-135A air-

craft, a highly sophisticated technological system, is one

source of ideas for improvement. Once a change or im-

provement is proposed, the Air Force screens the proposals

before it actually makes the decision to incorporate any

change. These procedures include all improvement ideas

furnished to the Air Force’s Engineer Services Division.

If considered sound, they are subsequently transmitted to

the systems manager of the KC-135A aircraft system.

This individual is responsible for determining that further

required review procedures are followed prior to any

recommended change being accepted for use on the

KC-135A aircraft. Configuration Control Boards may give

additional technical and engineering evaluation as to the

basic improvement. If these boards, composed of techni-

cians and engineers experienced and authoritative in the

military aircraft field, conclude that the specific improve-

ment should be incorporated into the aircraft, the systems

manager is then responsible for directing the idea to its

final stage, to see that it is incorporated into the aircraft,

and that all technical manuals are accordingly modified

or updated. The final decision regarding the making of

any modification is made by the Air Force.

(15) After a modification is approved by the Air Force,

a Technical Order (TO) is prepared which involves setting

out the technical terms so that installation service can

be performed. The function of a Technical Order is to

finally relate every step as simply as possible so that

qualified personnel can understand how to do the job at

the field level.

(16) Technical Orders are also prepared so that per-

sonnel will have detailed instructions for performance

of maintenance work (IRAN). If, in the course of tear-

ing down or disassembling an aircraft or system or equip-

ment therein and inspecting it, it is determined that re-

38a

pairs are necessary, such repairs are made. The inspec-

tions and repairs are made in compliance with the IRAN

work statement in the IRAN/Modification contract, which

work statement is prepared solely by the Government.

Technical Orders for maintenance of the KC-135A aircraft

were basically established at the time of acquisition of the

aireraft. The manufacturer of the aircraft, Boeing, does

assist necessarily in preparation of changed Technical

Orders for performance of maintenance work but, as with

other Technical Orders, each Technical Order is analyzed

by the Air Force at the time it is implemented. The changes

in Technical Orders at this time are few and inconsequen-

tial compared to the entire body of basic TO’s related to

IRAN.

(17) At the time offers were solicited on the first con-

tract for modification and maintenance work on the

KC-135A aircraft in 1968, none of the potential contractors

complained or alleged that Boeing was precluded from

bidding on the contract due to bias or unfair competitive

advantage. Likewise, the contracting officer was never

presented with any questions of biased judgment or un-

fair competitive advantage relating to Boeing’s eligibility

in the competition for contract F34601-71-C-3366 either

before award or immediately subsequent thereto. If plain-

tiff had ever lodged any formal complaint and set forth

its reasons for excluding Boeing as a competitor, the Con-

tracting Officer would have been required, under his re-

view authority, to render a final decision and submit same

through channels to the Assistant Secretary of the Air

Fe-ece (I&L) for decision. No such action was ever

initiated or requested by Hayes. No protest was made to

the Comptroller General of the United States.

(18) The Air Force has engineering services contracts

substantially identical to those with Boeing for the

KC-135A (F34601-71-C-0799, F3460i-71-A-1408, F34601-67-

('-0419, etc.) with the manufacturers of several other air-

ee ee i ae oe 2 Oe Bie eee

39a

eraft in its inventory. Certain of these same manufac-

turers have competed for IRAN/Modification contracts on

the aircraft involved and have been successful in some

competitions and unsuccessful in others. Hayes has com-

peted for some of these same contracts and has been sue-

cessful in certain competitions against these aircraft man-

ufacturers who have engineering services contracts on the

aircraft involved. One instance of such success was with

relation to the C-130 Lockheed-built aircraft, which com-

petition took place after that for contract F34601-71-C-3366.

Hayes also competed for work on the KC-135A aircraft

after award of F34601-71-C-3366, which competition was

won by LTV Corporation.

(19) Service engineering contracts with the Air Force

do not result in the contractor being in a conflicting role

which might bias its judgment nor do such contracts result

in the contractor attaining an unfair competitive advan-

tage in bidding on future contracts for work on the air-

craft involved.

(20) In bidding upon and being awarded Contract No.

F'34601-71-C-3366, Boeing

(a) was not involved in conflicting roles which might

bias a contractor’s judgment; and

(b) did not have an unfair competitive advantage.

(21) The bid of the Boeing Company under the sub-

ject RFP was not materially unbalanced as to price and

does not reflect superior knowledge and inside information

available to Boeing by virtue of its engineering services

contracts with the Air Force for the KC-135 which was un-

available to other offerors.

(22) The award of Contract F34601-71-C-3366 was not

contrary to public policy and the public interest in main-

taining the integrity of the procurement system.

40a

CONCLUSIONS OF LAW

(1) This Court has jurisdiction of the subject matter of

this action for declaratory judgment and injunctive relief

and the parties pursuant to 28 U.S.C. §§ 1331, 1361, 2201

and 2202 (1964); and Section 10 of the Administrative

Procedure Act [5 U.S.C. §702 (1970)]. There is now

existing between the parties an actual and justifiable con-

troversy.

(2) The award of Contract No. F34601-71-C-3366 to

Boeing has not resulted in an inherent and illegal conflict

of interest with respect to Boeing by virtue of its contracts

(F34601-71-C-0799 and related contracts) with the Air

Force for sustaining engineering and other related service

work on the KC-135A aircraft. Such award was not arbi-

trary and capricious, and not contrary to public policy and

the public interest in maintaining the integrity of the pro-

curement system, and not contrary to the applicable law.

(3) The plaintiff (Hayes International Corp.) has failed

to establish the award of Contract No. F34601-71-C-3366

by the Department of the Air Force to the Boeing Com-

pany was improper because of the existence of any un-

fair competitive advantage.

(4) The application for permanent injunction or, in the

alternative, for a declaratory judgment, should be denied.

An order of dismissal will be entered in accordance with

the foregoing findings and conclusions.

Done this 30th day of April, 1973.

/s/ Seymour H. Lynne

Senior Judge

4la

APPENDIX C

Armed Services Procurement Regulation

1—113.2 Organizational Conflicts of Interest.

(a) Appendix G—Rules for the Avoidance of Organiza-

tional Conflicts of Interest sets out some of the more

essential policy considerations of the Department of De-

fense with respect to relationships with non-Federal

institutions. Specifically, Appendix G describes examples

of various organizational conflicts of interest which might

come into being, and rules for avoidance of such conflicts;

and it provides that action must be taken to avoid placing

a contractor in a position where his judgment might be

biased or where he would have an unfair competitive ad-

vantage within the scope and intent of the rules. However,

the Appendix cannot of itself impose any obligations on the

contractor; such obligations must be imposed by a contract

clause designed to carry out the intent of the Appendix.

Furthermore, potential contractors must be advised in the

solicitation as to the extent of applicability of the rules,

and must be given an opportunity to negotiate on the terms

of the clause and its application.

(b)(1) The contracting officer is responsible for applying

the rules in the Appendix to contracts under his cognizance

and shall determine whether each proposed procurement

is subject to the Appendix.

(2) If the contracting officer initially determines with

respect to a particular procurement that a potential conflict

of interest exists, he shall, before issuing the solicitation,

prepare a written analysis, including a statement as to

which of the four rules (or other conflict of interest not

stated in the rules) he considers applicable, and a recom-

mended solicitation notice and clause designed to avoid the

organizational conflict of interest. A standard form of

solicitation notice or clause is not prescribed in this Regu-

lation since such notices and clauses must be especially

42a

adapted to apply the principle of the rules to the specific

facts of each contractual situation. The clause shall spell

out the specifie extent of any future restrictions on the

contractor. The restrictions of the proposed clause shall

also have a specific time period of effectiveness. As a

general rule, the time effectiveness of any clause which ex-

cludes the contractor from participation in subsequent pro-

curement shall have a fixed term of reasonable duration as

appropriate, except that where Rule 1 of Appendix G is

involved the exclusion shall be permanent. A fixed term

of reasonable duration is measured by the time required

to avoid the circumstance of unfair competitive advantage.

This is variable; for example, it may run to the date of

award of the first production contract or for a stated period

of time. (See Rules 2 and 3 of Appendix G.) In no event

shall an exclusion be stated in the clause without a specific

date, or an event certain, terminating the effectiveness of

the exclusion except where Rule 1 is involved.

(3) The contracting officer shall include the determina-

tion, together with the written analysis, in the negotiation

file or record. The approved solicitation notice and pro-

posed clause shall then be included in the solicitation,

together with a clear statement that the proposed clause

and the application of the Appendix are subject to negotia-

tion.

(4) In no ease shall the clause included in a solicitation

or in a contract (including letter contracts) pursuant to

this paragraph 1—113.2 defer the determination of the

application of the Appendix to a time after the contract

has been awarded.

(5) Where a contract contemplates a Rule 4 situation, it

is incumbent on the contracting officer to assure himself

that the agreement called for by Rule 4 is in fact executed,

and that copies thereof are made available to the Govern-

ment.

43a

(c) The contracting officer shall not impose restrictions

under the Appendix in follow-on procurements on any

prospective contractor in the absence of a specifie con-

tractual agreement with that contractor. If, during the

effective period of any restriction, procurement responsi-

bility for the system or item involved is transferred from

the procuring activity which imposed the restriction that

activity shall notify the transferee of the restriction and

send it a copy of the contract under which it was imposed.

(d) The Departments shall maintain, in accordance with

Departmental procedures, and for an appropriate period of

time as determined by the circumstances, a record of all

solicitation notices and all clauses incorporated in contracts

pursuant to this paragraph 1—113.2.

44a

APPENDIX G

Avoidance of Organizational Conflicts of Interest

I. PREAMBLE

The Report to the President on Government Contracting

for Research and Development (generally known as the

Bell Report) states that ‘‘today about 80% of Federal ex-

penditures for research and development are made through

non-Federal institutions’’ and that ‘‘there is no doubt that

the Government must continue to rely on the private sector

for the major share of the scientific and technical work

which it requires.”’

In such contracting, it is the policy of the Department of

Defense that the contractor should be given the maximum

responsibility and authority for the performance of as-

signed tasks, and these tasks be of such a nature, even

when they are part of a major system, as to be self-con-

tained from a management point of view. The Report

further states that there are certain essential management

functions in the research and development area that must be

retained within Government. For instance, the integra-

tion and coordination of the separate parts of a large wea-

pons system contract involving several major contractors

would, as a general rule, be handled by Government agen-

cies. To achieve this integration and coordination, how-

ever, special arrangements are sometimes needed such as

are made with nonprofit organizations and industrial or-

ganizations. In this case, the Government must be able to

establish rules for its relationships with the nonprofit or

industrial organizations which may be stricter than those

normally employed with prime contractors. All prospective

contractors will be advised of the applicability of the rules

by a notice in solicitations and by a clause in resulting con-

tracts.

Where the Department of Defense does contract for

research and development work, as it must for the bulk of

45a

that work, its choice of a contractor should be based pri-

marily upon two considerations:

‘*(1) Getting the job done effectively and efficiently, with

due regard to the long-term strength of the

Nation’s scientific and technical resources, and

**(2) Avoiding assignments of work which would create

inherent conflicts of interest.’’

The Report points out that while there are advantages

and disadvantages to the various types of organizations

within the private sector (universities, private nonprofit

organizations and industrial corporations), these types of

organizations should not ‘‘be given areas of monopoly on

different kinds of work,’’ or be permitted to develop a

privileged relationship to the Department of Defense.

In connection with the second criterion, the Report pro-

poses that each department develop a ‘‘Code of Conduct’’

for organizations in the research and development field.

These rules have been developed in accordance with that

instruction.

It should be borne in mind that the pragmatic test for

the selection of a contractor for a particular research and

development contract covers both profit and nonprofit or-

ganizations, including those created largely or wholly with

Government funds. But the rules do not deal with the

criteria for the creation of additional Government-spon-

sored nonprofit organizations in this category. It is the

policy of the Department of Defense that such organiza-

tions are created only under extraordinary circumstances,

when private resources are not available to accomplish a

necessary objective beyond the scope of in-house capabil-

ities. Their termination is governed by the organic

statutes of the individual organizations. These rules

should make it even less likely that any additional Gov-

ernment-financed nonprofit organizations need be created.

46a

While these organizations are in existence they will be

treated by the Department on arms length basis, as the

rules prescribe.

Il. Ruies

The following rules state general prohibitions which are

then explained and illustrated by specific examples. There

will undoubtedly occur cases which are not resolved by these

rules. As the Bell Report said, ‘‘(Conflict of Interest]

arises in several forms—not all of which are by any means

yet fully understood.”’ In order to assist in deciding what,

if any, prohibitions should be applied in such instances,

the two basic principles of this code—(1) preventing con-

flicting roles which might bias a contractor’s judgment,

and (2) preventing unfair competitive advantage—should

be paramount. The following rules and examples are not

all inclusive but merely attempt to achieve these two goals

in a variety of situations. The ultimate test should always

be: Is the contractor placed in a position where his judg-

ment may be biased, or where he has an unfair competitive

advantage? If so, corrective action must be taken in ac-

cordance with the rules below.

As used in these rules, ‘‘contractor’’ means the person

under contract to the Department of Defense to perform

the work described in each rule, and its affiliates; ‘‘system”’

means system, subsystem, project or item. The term

‘‘systems engineering”’ includes a combination of sub-

stantially all the following activities: determination of

specifications, identification and solutions of interfaces

between parts of the system, development of test require-

ments or plans and evaluation of test data, and supervision

of design work. The term ‘‘technical direction’’ includes a

combination of substantially all the following activities:

preparation of work statements for contractors, determina-

tion of parameters, direction of contractors’ operations,

and resolution of technical controversies.

47a

1. If a contractor agrees to provide systems engineering

and technical direction (SE/TD) for a system, without at

the same time assuming over-all contractual responsibility

for: (a) development, or (b) integration, assembly and

checkout (IAC), or (c) production of the system, then that

contractor shall not later be allowed to supply the system

or any major components thereof, or to be a subcontractor

or consultant to a supplier of the system or any major

components thereof.

Explanation: The SE/TD contractor occupies a highly

influential and responsible position as an agent of the De-

partment of Defense both in determining basic concepts

of a system and in supervising their execution by other

contractors. To assure the objectivity of its services and

hence a more soundly planned system, the SE/TD contrac-

tor must not be in a position to make decisions which

could favor its own products. Furthermore, it would be

inconsistent with the managerial responsibility of an SE/

TD contractor for it to be concurrently one of the compo-

nent suppliers.

Example A: Company A agrees to provide SE/TD for -

the Navy on the power plant for a group of submarines

(i.e., turbine, drive shafts, props, ete.). Company A shall

not be allowed to supply any power plant components.

Company A can, however, supply components of the sub-

marine unrelated to the power plant (e.g., fire control, navi-

gation, ete.). In this example, the system is the power

plant, not the submarine, and the ban on the supply of

components is coterminous with the system only.

Example B: Company A is the SE/TD contractor for

system X. After some progress, but prior to completion,

the system is cancelled. Later, system Y is developed to

achieve the same purposes as system X, but in a funda-

mentally different fashion. Company B is the SE/TD con-

tractor for system Y. Company A may bid to produce

system Y or its components.

48a

2. If a contractor agrees to prepare and furnish com-

plete specifications covering nondevelopmental items to be

used in competitive procurement, that contractor shall not

be allowed to furnish such items, either as a prime or sub-

contractor, for a reasonable period of time including, at

least, the initial procurement. This rule shall not apply to:

a. Contractors who furnish at Government request spe-

cifications or data with respect to the product they fur-

nished, even though the specifications or data may have

been paid for separately or in the price of the product.

b. Situations where one or more contractors acting as

industry representatives assist Department of Defense

agencies in preparing, refining or coordinating specifica-

tions, regardless of source, which assistance is supervised

and controlled by Government representatives.

c. Contracts for developmental or prototype items.

Explanation: If a single contractor is engaged by the

Government to draft complete specifications for nondevel-

opmental equipment, he should be eliminated for a reason-

able time from competition for production based on the

specifications. This should be done in order to avoid a

situation where he could draft specifications which would

favor his own products or capabilities. In this way the

Government can be assured of getting unbiased advice as to

the content of its specifications and can avoid allegations of

favoritism in the award of production contracts.

In development work it is normal to select firms which

have done the most advanced work in the field. It is to be

expected that these firms will design and develop around

their own prior knowledge. Development contractors can

frequently start production earlier and more knowledgeably

than firms which did not participate in the development,

and this affects the time and quality of production, both

of which are important to the Department of Defense. In

many instances the Government may have financed such

49a

development. Thus, the development contractor may have

an unavoidable advantage which is not considered unfair

and no prohibition should be imposed.

In instances of cooperation between industry and De-

partment of Defense agencies to prepare, refine or coordi-

nate specifications, there is continuous participation and

supervision by Government representatives and, usually,

more than one contractor concerned. In these cireumstan-

ces Government supervision prevents the establishment of

specifications oriented to favor a given contractor’s prod-

ucts or capabilities.

Example A: Company A prepares updated Government

specifications for a standard refrigerator to be procured

competitively. Company A shall not be allowed for a rea-

sonable period of time to compete for supply of the re-

frigerator.

Example B: Company A designs or develops a new

electronic equipment and, as a result of the design or de-

velopment, prepares specifications. Company A may sup-

ply the electronics equipment.

Example C: XYZ Tool Company and/or KLM Machinery

Company representing the American Tool Institute work

under the supervision and control of Government repre-

sentatives to refine specifications or to clarify the require-

ments of a specific procurement. These companies may sup-

ply the item.

3. If a single contractor, other than a company which

has participated in the development or design of a system,

agrees to assist the Department of Defense or a contractor

of the Department of Defense in the preparation of a state-

ment of work, or agrees to provide material leading direct-

ly, predictably, and without delay to a statement of work,

to be used in the competitive procurement of a system or

services, that contractor shall not be allowed to supply

the services, or the system or major components thereof,

50a

unless he is the sole source. The content of a statement of

work shall not be considered predictable if more than one

contractor is involved in the preparation of material lead-

ing to it.

Explanation: The various services related to a statement

of work to be used in a competitive procurement should

normally be performed by the Department of Defense.

However, when it is necessary to seek the assistance of

contractors, they may often be in a position to favor their

own products or capabilities. To overcome this possibility

of bias, such contractors are to be prohibited from sup-

plying a system or services procured on the basis of work

statements growing out of their services.

No prohibitions are imposed on development contractors

for the reasons given in the explanation to Rule 2.

Example A: Company A receives a contract to define the

detailed performance characteristics the Department of

Defense will require for the purchase of rocket fuels. A

has not developed the particular fuels. At the time the con-

tract is awarded, it is clear to both parties that the perform-

ance characteristics arrived at will be used by the Depart-

ment of Defense to choose competitively a contractor to

develop or produce the fuels. Company A shall not be

permitted to bid on this procurement.

Example B: Company A receives a contract to prepare

a detailed plan for the procurement of services aimed at the

advanced scientific and engineering training of Department

of Defense personnel. It suggests a curriculum which the

Department of Defense endorses and incorporates in

requests for proposals to various institutions to establish

and conduct such training. Company A shall not be per-

mitted to bid on this procurement.

Example C: Company A prepares a feasibility study of

a new weapons system without proposing in detail the

bE dail be an tg ees Re ea) a i eo dr hl te: pow

5la

characteristics of a possible final device. It may bid to

produce the system or components thereof.

4. If a contractor agrees to conduct studies or provide

advice concerning a system, which work requires access to

proprietary data of other companies, the contractor must

agree with such companies to protect such data from un-

authorized use or disclosure so long as it remains pro-

prietary. In addition, the contractor shall not be permitted

to utilize the data in supplying the system, or components

thereof, procured, either by formal advertising or negotia-

tion, as a direct result of that study or advice, or in per-

forming for the Department of Defense additional studies

in the same field which are obtained competitively.

Explanation: Proprietary data is information considered

so valuable by its owners that it is held secret by them and

their licensees. Where a contractor must obtain such data

from others for purposes of the study, and can obtain it by

the leverage of the Department of Defense contract, he

will gain an advantage over other companies unless there

are restrictions upon his use of the data. Such restrictions

are necessary both to protect the data, and to encourage

companies to furnish it to contractors for the necessary

performance of the Department of Defense contract. The

rule is not intended to protect proprietary data furnished

voluntarily by companies without limitations as to use, or

data which falls into the public domain.

Example A: Company A is selected to study the use of

lasers in military communications. The Department of

Defense will request that firms doing research in the field

make proprietary data available to A. In order to receive

the contract, A must agree with such firms to protect any

proprietary data it obtains, so long as it remains pro-

prietary, and shall not be permitted to utilize the data in

supplying any lasers to the Department of Defense.

Furthermore, while A could not receive a competitively

awarded contract to perform additional studies of lasers

I 85 8.28 CLE ON NOONE EE PONG IORI REY NTT

52a

using such data, it may receive a sole source contract for

such studies.

Review and Waiver

The contracting officer is responsible for applying these

rules to contracts under his cognizance. If the prospective

contractor disagrees with his decision, the contracting

officer shall report his decision, and the contentions of the

contractor, through channels to an Assistant Secretary of

a Military Department or the Director of a Defense Agency

for decision.

Any of the prohibitions imposed by these rules may be

waived by an Assistant Secretary of a Military Department

or the Director of a Defense Agency if he determines that

a failure to waive the prohibition will be prejudicial to the

best interests of the Government.