Incomplete Novation = No Direct Economic Interest

Parties with an unapproved novation agreement aren’t eligible to protest agency award decisions. The GAO found that under the bid protest provisions of the Competition in Contracting Act of 1984 only an “interested party” may protest a federal procurement. The protester must be an actual or prospective offeror to have a direct economic interest in the award of a contract.

In the Matter of: Wyle Laboratories, Inc., File:  B-416528, dated September 7, 2018 the GAO held Wyle did not have a “direct economic interest in the procurement.” Its decision was based on the fact that Wyle’s Novation Agreement hadn’t been approved by the GSA.  Therefore, it was not an interested party and its protest was dismissed.

Wyle wanted to challenge the terms of a request for quotation (RFQ), but the GAO found Wyle’s executed asset purchase agreement transferring all of the “assets and liabilities used in or relating to the performance” of its federal contracts to another party (the name of the purchaser was redacted in the published decision) deprived it of an economic interest in the procurement.  The agreement expressly required Wyle to submit proposals in response to task order solicitations “during the interim period and before a full novation is granted.”

Wyle submitted its novation documentation to the GSA detailing its agreement with the purchaser on June 14, 2018 and asked GSA to recognize the purchaser as the successor-in-interest to Wyle’s federal contracts.  But the GSA had not approved the novation agreement by the time Wyle submitted its offer.

When Wyle and its successor-in-interest, submitted a quotation in response to the solicitation its expressly stated that Wyle would serve as the prime contractor until its federal contracts were novated.  At the time of novation, the successor-in-interest to Wyle would become the prime contractor.  The proposal detailed the fact that the successor-in-interest was the incumbent contractor for the same work being procured for the past eight years.

In this case there was no dispute that the offer submitted in response to the solicitation was tendered by Wyle and its successor-in-interest.  So, according to the GAO, Wyle qualified as an “actual” bidder or offeror, however, because it was in the process of transferring its federal contracts to a successor-in-interest, it did not have a direct economic interest in the procurement.

In considering whether a protester has a direct economic interest in a procurement, the GAO says that it “considered whether an entity has the capability and intent to compete under the solicitation.”  Wyle argued it had a direct economic interest because the solicitation does not prohibit the prime/subcontractor teaming arrangement it proposed until the novation is approved.  The GAO, on the other hand, concluded that even with the proposed teaming arrangement, Wyle failed to demonstrate that it has a direct economic interest in the procurement because it submitted the quotation on behalf of its successor-in-interest solely to comply with its contractual obligations under the asset purchase agreement.

The GAO also held that Wyle failed to show its how its “prime contract administration responsibilities” it would provide until the novation is approved give Wyle a direct economic interest.  GAO found that Wyle did not have any intention in its role as the “prime contractor” to perform any of the work under the task order.  GAO wrote: “Where, as here, Wyle’s purpose as the “prime contractor” is a legal requirement of its third-party asset purchase agreement with [DELETED] and Wyle’s only duties as the prime contractor are the administrative responsibilities required to allow [DELETED] and its subcontractors to perform under the task order until the novation is finalized, and where Wyle acknowledges that it does not intend to perform any of the work required under the solicitation, we do not believe that the protester has demonstrated sufficient direct economic interest in the procurement to qualify as an interested party.”

The stakes for Wyle and its purchaser are huge – the estimated value of the task order at issue exceeds $10 million.  To find that Wyle didn’t have a direct economic interest in the procurement defies logic.  It is another reason why, depending on the procurement and its value to the Client, we are advising Clients to bypass the GAO and file bid protests in the US Court of Federal Claims.

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