Open-market buys deserve equality

What do you do if you are a government buyer and you want to purchase, for example, a point-of-use automated medication supply system from a General Services Administration schedule vendor and a couple of smaller, related items that aren't yet available on the schedule? If you happen to be the Army Medical Command—or, for that matter, almost any other government buyer—you simply toss your open market items into your schedule shopping bag and proceed to the checkout line. Well, not anymore, according to the General Accounting Office.

Last month, in a protest decision involving the Army Medical Command and Pyxis Corp., GAO ruled that combining nonschedule purchases, commonly known as open-market items, with schedule purchases without following applicable procurement regulations is illegal (See FCW, Aug. 9). This ruling brings to an end a practice that agencies have employed—and GSA and GAO have explicitly endorsed—since the beginning of the multiple-award schedule (MAS) program. From now on, agencies must ensure that their purchases of open-market items comply with all procurement regulations. This change, which is not a change in the law but only in the enforcement of current law, no doubt will be bemoaned by government buyers and GSA alike.

Federal agencies for years have purchased open-market items in conjunction with schedule purchases with GSA's blessing. So long as the purchases remained below a certain threshold (which varied from year to year and even from contracting officer to contracting officer), GSA considered the practice to fall within an exception to the Federal Acquisition Regulation's competition requirements.

In 1997, however, the U.S. Court of Federal Claims in a case involving ATA Defense Industries Inc. declared that there is no small or incidental exception to the legal requirement that agencies obtain full and open competition. According to the court, unless a product could be classified as de minimis—something that is clearly smaller than "small" or "incidental"—in the context of a schedule purchase, the law required that the product be procured on a competitive basis. GSA and its customers, however, largely ignored the ATA decision, relying instead on a contradictory GAO decision issued the same year in a case involving Vion Corp., which affirmed the legality of incidental open-market purchases.

The Pyxis decision explicitly overrules the Vion case and follows the court decision regarding ATA. Thus, according to the U.S. comptroller general, open-market items may no longer be purchased from a schedule vendor "unless applicable acquisition regulations have been followed"—that is, if competition is involved. GAO is correct, just as the court was correct in 1997: There is no incidental exception to competition. And it is a good thing there isn't.

While the Pyxis decision might be viewed by GSA and its customers with a certain amount of melancholy, it is a good decision. The practice of avoiding competition through the purchase of open-market items is not victimless. While it may benefit GSA by increasing its industrial funding fee collections and agencies by reducing their competition expenses, it hurts many vendors, especially small and disadvantaged vendors, whose very survival often depends on their ability to capture orders for those incidental items that the big guys choose, for whatever reason, not to put on the schedule. Without these opportunities, many small vendors would be unable to break into the federal marketplace.

But the practice of purchasing open-market items without following applicable procurement regulations damages the federal procurement system in a more fundamental way. Like many recent regulatory innovations, GSA's MAS program was created to streamline the way the federal government buys commercial goods and services. If agencies are viewed as using this contractual vehicle to avoid competition, we can kiss future streamlining efforts goodbye.

Indeed, to some extent, the Defense Department is seeing this possibility flash before its eyes as it witnesses the fallout from a recent inspector general's audit regarding its use of multiple-award, task-order contracts. According to the IG, DOD no longer takes "full advantage of the benefit of having multiple bidders." As a result of this report, DOD recently announcednew reporting and monitoring requirements relating to task-order awards—clearly not a movement aimed at streamlining the procurement process.

In the end, there are more reasons to like the GAO's Pyxis decision than to dislike it. But whether you like it or not, there is at least one very good reason to abide by it, as the Army Medical Command learned firsthand in July as the subject of the Pyxis protest. Buyers who persist in using the fabled open-market item exception to avoid competition can expect to see their procurements overturned if challenged by disappointed offerors. Most agencies would fare better doing it right the first time than taking their chances before GAO. Having pursued and defended several protests over the past few years, it seems to me to be easier to do it right the first time.

-- Aronie is a member of the law firm Fried, Frank, Harris, Shriver & Jacobson, where he counsels and represents government contractors before a wide array of judicial, administrative and legislative forums. He can be reached at (202) 639-7336.