Old Dominion Dairy Products, Inc. v. Secretary of Defense

• Decision Date: 30 October 1980
• Docket Number: No. 79-1821,79-1821
• Citation: 203 App. D.C. 371,631 F.2d 953
• Parties: , 27 Cont.Cas.Fed. (CCH) 80,584 OLD DOMINION DAIRY PRODUCTS, INC., Appellant, v. SECRETARY OF DEFENSE et al., Appellees.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 953

631 F.2d 953

203 U.S.App.D.C. 371, 27 Cont.Cas.Fed. (CCH) 80,584

OLD DOMINION DAIRY PRODUCTS, INC., Appellant, v. SECRETARY OF DEFENSE et al., Appellees.

No. 79-1821.

United States Court of Appeals,

District of Columbia Circuit.

Argued June 5, 1980.

Decided July 29, 1980.

As Amended Oct. 30, 1980.

Appeal from the Judgment of the United States District Court for the District of Columbia (D.C. Civil Action No. 79-0981).

Charles D. Ablard, Washington, D. C., forappellant.

William J. Bowman, Asst. U. S. Atty., Washington, D.C., at the time the brief was filed with whom John A. Terry, Michael W. Farrell, Asst. U. S. Attys., Carl S. Rauh, U. S. Atty., Washington, D. C., were on brief, for appellees.

Before TAMM, ROBINSON and EDWARDS, Circuit Judges.

Opinion for the court filed by Circuit Judge EDWARDS.

EDWARDS, Circuit Judge:

This case raises significant questions concerning the manner in which a Government agency (in this case the Department of Defense) may deal with prospective Government contractors. In 1979, appellant, Old Dominion Dairy Products, Inc. (ODDPI), was denied a substantial Government contract, for which it was low bidder, pursuant to a determination by the Government agency's contracting officer that Old Dominion "lacked integrity." At approximately the same time when appellant's bid was being rejected on the first contract, ODDPI bid for a second Government contract and was once again the low bidder. However, based on the earlier determination that Old Dominion "lacked integrity," the contracting officer assigned to handle the second contract concluded that ODDPI had "knowingly and substantially overbilled the Government" in past dealings with the agency. As a consequence of this finding, the ODDPI bid on the second contract was also rejected for an alleged lack of responsibility and integrity.

Since the loss of the Government contract work threatened the very existence of the business, ODDPI immediately filed this suit in District Court upon being notified of the bid rejections. Old Dominion sought declaratory and injunctive relief on the grounds that (1) the agency's contracting officers had no rational basis for determining that Old Dominion lacked integrity, and (2) the agency's contracting officers denied Old Dominion due process of law, in violation of the Fifth Amendment, in determining that ODDPI lacked integrity without giving ODDPI notice of the charges against it or any opportunity to respond to those charges. For relief, Old Dominion sought cancellation of the two contracts awarded to other contractors, new awards of those contracts to ODDPI, and a declaration that Old Dominion did not lack integrity.

Following a three-day evidentiary hearing on the merits, the Honorable Gerhard A. Gesell, District Judge, rejected Old Dominion's claims and entered judgment for the Government. Old Dominion Dairy Products, Inc. v. Brown, 471 F.Supp. 300 (D.D.C.1979). Old Dominion then brought this appeal, again claiming that the contracting officers lacked a rational basis for their decisions and that, in any event, ODDPI had been denied due process of law.

We are mindful of the fact that Government agencies require sufficient latitude to ensure the efficient functioning of agency operations, and that the imposition of stringent due process requirements on every governmental decision could have devastating effects on the conduct of Government business. Nevertheless, we hold that when the Government effectively bars a contractor from virtually all Government work due to charges that the contractor lacks honesty or integrity, due process requires that the contractor be given notice of those charges as soon as possible and some opportunity to respond to the charges before adverse action is taken. Accordingly, we reverse and remand for further proceedings consistent with this opinion.

I.

Old Dominion Dairy Products, Inc. is a small business owned primarily by its President, Joel M. Turner, and his family (Tr. 134). ¹ Old Dominion manufactures and processes dairy products in various countries throughout the world. Almost one hundred percent of the ODDPI operation is directed at obtaining Government contracts to supply dairy products to United States military bases overseas (Tr. 134).

Beginning in 1970, ODDPI performed contracts on Government bases in Taiwan, Cuba, Spain, Okinawa, Korea and Puerto Rico. App. D, exhibit 1. ² The gross sales on these contracts totalled over thirty million dollars. App. D, exhibit 1. Prior to the present controversy, no serious problems had existed in the performance of any of the ODDPI contracts. Old Dominion was regularly solicited by the Government to bid on overseas milk contracts; no claim or determination had ever before been made challenging ODDPI's responsibility or integrity as a Government contractor (Tr. 135-136).

A. The Okinawa Contract

On April 8, 1974, the Government awarded ODDPI a contract (hereinafter contract 5016) to deliver milk products on the island of Okinawa (Tr. 25). The contract had an original term of one year, with provisions for annual one-year renewals for a total of four years. ³ The contract was set to finally expire on June 30, 1979. ⁴

In October of 1978, the Pacific Air Force (PACAF) Contracting Center on Okinawa requested an audit of ODDPI's home office in Virginia Beach, Virginia. ⁵ An audit was conducted by the Defense Contract Audit Agency (DCAA) beginning in late January 1979 (Tr. 186). In February of 1979, the contract price analyst at the PACAF Contracting Center in Okinawa, Ms. Rita L. Wells, was sent to assist with the audit of the ODDPI home office (Tr. 186).

Following the compilation of the audit data, Ms. Wells prepared a report analyzing and evaluating the information obtained. App. F, exhibit 5, item 2. The report noted three "irregularities" in the performance of contract 5016. Each one of the alleged irregularities involved what later proved to be seriously disputed interpretations of certain complex provisions in the contract between ODDPI and the Government. ⁶ Ms Wells concluded that the alleged "irregularities indicate an unsatisfactory record of integrity." App. F, exhibit 5, item 2, p. 1. More specifically, Ms. Wells stated in the report that these discrepancies "show a lack of business integrity. The only reason the contractor would have for the above discrepancies would be to recoup undue monies under the contract." App. F, exhibit 5, item 2, p. 4.

In light of the impending termination of contract 5016 on June 30, 1979, in November of 1978 the PACAF Contracting Center in Okinawa solicited bids for a new contract to run for three years beginning July 1, 1979 (Tr. 138). Old Dominion was one of nine contractors solicited and, in January of 1979, ODDPI submitted an initial price proposal (Tr. 141). Two other bidders responded to the solicitation (Tr. 239). Following receipt of the initial proposals, negotiations were scheduled with each contractor. Negotiations with ODDPI were scheduled for March 19-21, 1979 (Tr. 143). Final bids were due on March 26, 1979 (Tr. 153).

Senior Master Sergeant Juan B. Trevino was chosen as contracting officer for the new Okinawa milk contract (Tr. 239). In order to fulfill his duty under applicable regulations to award a contract only to a contractor whom he determined to be "responsible," ⁷ Sergeant Trevino requested information on ODDPI's performance under the old contract from the administrative contracting officer, Mr. Fred Artibee (Tr. 241). ⁸ On March 21, 1979, Mr. Artibee provided Sergeant Trevino with a copy of Ms. Wells' audit report (Tr. 242). Sergeant Trevino reviewed the report and concluded that Old Dominion was not dealing honestly with the Government and was "fraudulently receiving undue profits under the current contract" (Tr. 247, 249). On that same day, a determination was made that ODDPI lacked integrity within the meaning of Defense Acquisition Regulation 1-903.1 (32 C.F.R. 1-903.1) and was thus not "responsible." See App. G, exhibit 6, item 2. Although Sergeant Trevino had a number of telephone conversations with Old Dominion executives between March 21 and March 26, he did not at any point notify Old Dominion of the charges against it or indicate that the responsibility of ODDPI was in question (Tr. 253-254).

On March 26, 1979, best and final offers were submitted by ODDPI and two other contractors. Old Dominion's final proposed price was $8,746,378 (Tr. 147). On that day, Trevino placed a written determination of nonresponsibility, with supporting documents (including the audit report), in the contract file (Tr. 243; App. F). On the following day, Trevino awarded the contract to Foremost Blue Seals, a Japanese contractor, for 2,085,167,081 yen (Tr. 147 251; App. D, exhibit 6). At the dollar/yen ratio quoted for March 28, 1979, the contract award to Foremost was for $10,122,169, or approximately $1,375,000 higher than ODDPI's best and final offer. App. D, exhibit 11.

Upon receiving notice that it had been denied the contract, Old Dominion requested a statement of reasons for the determination of nonresponsibility, a cancellation of the award to Foremost, an award of the contract to ODDPI, and removal of the determination of nonresponsibility from the contract file. App. D, exhibit 7. Sergeant Trevino responded simply that the finding of nonresponsibility was based on the lack of a "satisfactory record of integrity." He refused to cancel the award to Foremost, and stated that "since a determination of nonresponsibility is required to be maintained in the file, removal of that determination is not possible." App. D, exhibit 8.

In so doing, Sergeant Trevino admitted that, but for the determination of nonresponsibility, Old Dominion would have otherwise received the contract. Defense Acquisition Regulation 1-904.1 (32 C.F.R. 1-904.1) provides that "when a bid or offer on which an award would otherwise be made is rejected because the...