Axiom Resource Management, Inc. v. U.S.

• Decision Date: 04 May 2009
• Docket Number: No. 2008-5072.,No. 2008-5073.,2008-5072.,2008-5073.
• Citation: 564 F.3d 1374
• Parties: AXIOM RESOURCE MANAGEMENT, INC., Plaintiff-Appellee, v. UNITED STATES, Defendant-Appellant, and Lockheed Martin Federal Healthcare, Inc., Defendant-Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

564 F.3d 1374

AXIOM RESOURCE MANAGEMENT, INC., Plaintiff-Appellee, v. UNITED STATES, Defendant-Appellant, and Lockheed Martin Federal Healthcare, Inc., Defendant-Appellant.

No. 2008-5072.

No. 2008-5073.

United States Court of Appeals, Federal Circuit.

May 4, 2009.

James S. DelSordo, Argus Legal, LLC, of Manassas, VA, argued for plaintiff-appellee.

William G. Kanellis, Trial Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for defendant-appellant United States. With him on the brief were Jeanne E. Davidson, Director, and Kirk Manhardt, Assistant Director. Of counsel was James A. Lewis, Lieutenant Colonel, United States Army Judge Advocate General's Corps, Department of the Army, of Arlington, VA.

Marcia G. Madsen, Mayer Brown LLP, of Washington, DC, argued for defendant-appellant Lockheed Martin Federal Healthcare, Inc. With her on the brief were Luke Levasseur and Robert L. Bronston. Of counsel was Melissa L. Baker.

Before LINN and PROST, Circuit Judges, and ARTERTON, District Judge.^*

PROST, Circuit Judge.

Lockheed Martin Federal Healthcare, Inc. ("Lockheed") and the government (collectively, "Appellants") appeal the February 26, 2008 decision of the United States Court of Federal Claims setting aside the United States Army's award of a TRICARE contract to Lockheed, effective July 21, 2008. For the reasons set forth below, we reverse.

I. BACKGROUND

The United States Department of Defense offers a health care program called TRICARE for active and retired members of the military and their families. This program is managed by the TRICARE Management Activity ("TMA"). TMA hires contractors to perform various services relating to TRICARE operations. TMA classifies the services for which it hires contractors into two categories: (1) "purchased care" requirements, which are requirements for actual health care services; and (2) "non-purchased care" requirements, which are requirements for non-health care services such as support services and infrastructure. The contract at issue in this case is for a non-purchased care requirement.

Because TMA hires contractors to provide a wide variety of services, there are concerns that in some circumstances contractors that are awarded multiple contracts may be subject to organizational conflicts of interest ("OCIs"). Sections 9.500 et seq. of the Federal Acquisition Regulation ("FAR") provide rules and procedures for "identifying, evaluating, and resolving organizational conflicts of interest." 48 C.F.R. § 9.500(a). Under 48 C.F.R. § 9.504(a), contracting officers ("COs") are required to "analyze planned acquisitions in order to (1) [i]dentify and evaluate potential organizational conflicts of interest as early in the acquisition process as possible; and (2) [a]void, neutralize, or mitigate significant potential conflicts before contract award."

In order to assist COs and contractors in identifying OCIs, TMA classifies its non-purchased care requirements into three categories:

Category 1: TMA Internal Support: Services which, by their very nature, give the Contractor access to extensive data about the contracts of all other TMA contractors.

Category 2: Program Management Support: Services which assist TMA in planning and managing its activities and programs. This includes, for example: requirements analysis, acquisition support, budget planning and management business process reengineering, program planning and execution support, and independent technical management support.

Category 3: Product Support: Services or end items required to meet the mission requirements of TMA's non-purchased care activities and programs. This includes, for example: concept exploration and development; system design; system development and integration; COTS procurement and integration; internal development testing; deployment; installation; operations; and maintenance.

Axiom Res. Mgmt., Inc. v. United States, 78 Fed.Cl. 576, 579 (2007) ("Axiom I"). The following explanation was included in the Request for Quotations ("RFQ") issued for the contract at issue in this case:

Contractor participation in more than one of these areas may give rise to an unfair competitive advantage resulting from access to advance acquisition planning, source selection sensitive or proprietary information. Furthermore, contractor participation in more than one area may give rise to a real or apparent loss of contractor impartiality and objectivity where its advisory or planning assistance in one area potentially affects its present or future participation in another area.

Id.

The contract at issue is for program management support for the TRICARE Acquisitions Directorate and falls within Category 2. The RFQ was issued on July 30, 2006, and bids were submitted by Lockheed and Axiom Resource Management, Inc. ("Axiom"), the incumbent contractor for the services, on August 14, 2006. After rating each bid, the CO awarded the contract to Lockheed on September 19, 2006.

On September 25, 2006, Axiom filed its first bid protest with the Government Accountability Office ("GAO"), alleging, inter alia, that the award to Lockheed was illegal because of an unmitigated OCI. The GAO dismissed the protest on October 31, 2006, after the CO notified the GAO that he would analyze the alleged OCI and issue a new source selection decision. Approximately one month later, the CO completed his OCI assessment, concluding that an unequal access to information conflict¹ would arise in the future if Lockheed were to bid on requirements for purchased care services. However, the CO also concluded that the mitigation plan Lockheed submitted along with its bid was sufficient to protect the government against this potential future OCI. Accordingly, the CO awarded the contract to Lockheed.

Upon learning of the renewed award, Axiom reasserted its allegation that Lockheed's OCI disqualified it from performing the contract in a second bid protest with the GAO. In response, the CO again agreed to reevaluate the alleged OCI. After another review, which included an extensive analysis by TMA, the CO again concluded that an unequal access to information conflict might arise if Lockheed bid on purchased care requirements in the future. However, the CO also concluded that this OCI and any potential OCIs arising out of Lockheed's work on Category 3 contracts were resolved by Lockheed's mitigation plan and a prohibition against Lockheed bidding on future purchased care requirements. The CO again awarded the contract to Lockheed.

On April 3, 2007, Axiom filed a third bid protest based on the same alleged OCI. On July 12, 2007, the GAO denied the protest, finding that the CO's "extensive analysis" and "comprehensive approach used to address[ ] any conflicts that may arise" were not unreasonable. In re Axiom Res. Mgmt., Inc., No. B-298870.3, 2007 WL 2141694, at *6 (Comptroller General July 12, 2007).

On July 17, 2007, Axiom filed a complaint in the United States Court of Federal Claims alleging, inter alia, that the government violated FAR § 9.500 et seq. and acted arbitrarily and capriciously by awarding the contract to Lockheed. Axiom I, 78 Fed.Cl. at 585. In its September 28, 2007 decision, the court determined that the CO

abused his discretion in violation of FAR § 9.5 by awarding the Task Order to Lockheed Martin, without developing a mitigation plan that does not afford Lockheed Martin any significant competitive advantages, is enforceable, i.e., subject to court order, and otherwise does not impose any anticompetitive effects on future competition.

Id. at 600. However, the court did not immediately enter a permanent injunction barring Lockheed from performing the contract. Instead, the court asked for additional briefing from the parties and stated that it would request advice from the Federal Trade Commission Bureau of Competition on whether the public interest favored an injunction. Id. at 601.

On February 26, 2008, the court issued its final decision. Axiom Res. Mgmt., Inc. v. United States, 80 Fed.Cl. 530 (2008) ("Axiom II"). In its decision, the court noted that the Federal Trade Commission declined the court's invitation to comment. Id. at 531 n. 8. Additionally, the court outlined its attempts to reach an agreement with the government to have an independent auditor put in place to monitor the enforcement of Lockheed's mitigation plan. Id. at 532-35. Because the government would not accept the proposed oversight, the court enjoined the government from exercising its option to renew Lockheed's contract on July 21, 2008. Id. at 539. Lockheed and the government appealed. We have jurisdiction under 28 U.S.C. § 1295(a)(3).

II. DISCUSSION

Appellants allege that the Court of Federal Claims committed two principal errors. First, they argue that the court violated established principles of administrative law by permitting Axiom to supplement the record with affidavits created for litigation and then extensively relying on those affidavits to support its decision. Second, they assert that the court failed to properly review the record under the "arbitrary and capricious" standard set forth in the Administrative Procedure Act ("APA"). We agree on both grounds.

A. Supplementation of the Record

"Evidentiary determinations by the Court of Federal Claims, including motions to supplement the administrative record, are reviewed for abuse of discretion." Murakami v. United States, 398 F.3d 1342, 1346 (Fed.Cir.2005). A trial court's determination of an evidentiary matter constitutes an abuse of discretion if, for example, it is "clearly unreasonable, arbitrary, or fanciful" or is "based on an erroneous construction of the law." Air Land Forwarders, Inc. v. United States, 172 F.3d 1338, 1341 (Fed.Cir.1999).²

Appellants argue that the Court of Federal Claims erred by permitting Axiom to supplement the record with materials that were not before the agency, including legal...