Request for a permanent injunction barring VA from modifying medical supply distribution contracts to allow the vendors to choose the suppliers of these goods is denied, where the harm to plaintiffs due to a loss of opportunity to compete is speculative and temporary, because the plaintiffs could be selected to provide goods to the distributors and because the contract modifications are intended to last only 18 months. The court found the modifications violated CICA, because the distributors will have no legal obligation to follow the Rule of Two when selecting vendors and disappointed offerors will not have the opportunity to protest an award decision. However, the court found the balance of harms weighed in favor of allowing VA to proceed with this change.
A group of protesters challenging the Department of Veterans Affairs decision to modify four existing contracts for the distribution of medical and surgical supplies filed a request for a permanent injunction, arguing that expanding the scope of work to include supply as well as distribution will result in a loss of opportunity to compete to sell their products to the agency.
American Medical Depot, Kreisers Inc., Cardinal Health 200 Inc., and Medline Industries Inc. each won a contract to stock, store, and distribute medical supplies available for purchase by VA hospitals. Each vendor was awarded a contact covering a specific geographic area.
When VA launched the program, it envisioned the contracted distributors would be able to supply tens of thousands of items to VA Medical Centers, supporting the department’s goal of standardizing the use of items across VA and reducing costs. VA used various contracting tools to identify and obtain the items for inclusion on the master distribution list, including the Federal Supply Schedules, blanket purchase agreements, and basic ordering agreements. However, by March 2018, the distribution master list contained only 7,800 of the 80,000 items VA anticipated.
To increase the number of items available, VA sought to modify its contracts with the plaintiffs to allow them to procure the items to be sold, as well as offer them for distribution to VA medical centers. The agency issued a J&A for the change, which in effect resulted in the award of four sole-source contracts requiring the vendors to select the items to be included on the master list.
A group of medical supply vendors filed this complaint, arguing that the change to the contracts would deprive them of the opportunity to compete to sell their products to VA.
The plaintiffs challenged VA’s decision to modify the contracts and give the prime vendors the task of identifying suppliers for five reasons: lack of competition, failure to consider VA’s statutorily mandated preferences for service disabled veteran-owned small businesses, improper bundling of distribution with supply requirements, inherent conflict of interest due to the PVs also being suppliers of some items, and an illegal outsourcing of inherently governmental functions. The plaintiffs asked the court for a permanent injunction blocking the contract modifications and requiring VA to continue under the current arrangement.
In response, the government moved to dismiss, first arguing the plaintiffs lacked standing because the modifications were within the scope of the original contracts, meaning that the change is not a protestable event. VA also argued that the plaintiffs are not distributors of medical supplies and thus are not eligible for the work being added to the contracts. On the merits, the government argued the J&A was reasonable, that any harm to the plaintiffs is hypothetical, and that VA will be significantly harmed by any further delay in populating the master distribution list.
In its challenge to the protesters’ standing, the government argued that the plaintiffs cannot show that they would have bid on the work added by the modification. The plaintiffs argued they are not protesting the loss of opportunity to become a distributor of medical supplies, but the loss of the chance to compete to be a supplier of these goods directly to VA.
The court agreed with the plaintiffs, finding that the net effect of the modifications is the loss of the opportunity by these plaintiffs to sell their products directly to the government. Under the modified contract scheme, they are at the mercy of the PVs to select them as suppliers and have none of the statutory and regulatory rights afforded by law to bidders for government contracts. While the government argued the plaintiffs do not offer most of the items potentially headed for the formulary, the court still concluded their relative individual loss might be substantial even if there were only a small amount of overlap. T
Next, the court considered the plaintiffs’ arguments that the modifications are illegal as an end-run around the Competition in Contracting Act’s competition mandate and the VA’s obligation to consider veteran-owned small businesses for award of contracts.
In the J&A, VA found that only the four prime vendors were in a position to quickly identify sources and prices for the items VA wanted on the master list. The plaintiffs noted that their loss is at the supplier level, the level of the sales of the individual items to the government.
The government argued that this challenge is untimely, because the actual sale of the items to the government results from a contract between the distribution vendors and VA. Although VA previously used competitive procedures to populate the master list, the arraignment of having distributors sell items to VA medical centers has not changed.
However, the court found that a new non-trivial competitive harm results from the modifications, which is the loss of competition. Prior to the modifications, VA solicited and entered into purchase agreements with vendors or justified sole-source arrangements. Competition was held and the right to protest attached even when the vendor was a sole-source selection. The subsequent purchase at those prices from those vendors by the PVs and then resale to VA does not change the fact that the government competed or otherwise lawfully avoided competition for each item placed and then purchased off the master list.
After the modification, VA has foresworn competition as unwieldy and impractical. By outsourcing the selection of suppliers to the PVs entirely, the government has avoided the multitude of legal and regulatory requirements. The court found the plaintiffs clearly are not in the same situation now as before the contract modifications.
Next, the court turned to the J&A itself. The plaintiffs noted the J&A is silent as to the availability of suppliers for the many thousands of items that have been and still will be placed on the Master List. 30,000 new items have been placed on the formulary since this protest was filed, and when those items are sold, those sales will not have been competed. The law requires a J&A for that purchase without competition.
The court held that VA could not “hide behind” the prime vendors’ role in adding items to the master list, as that aspect of the contract modification is inseparable from the associated work of picking vendors. By eliminating the price and vendor competitions or competition substitutes, the VA bought itself significant expediency, but the court held it did not buy itself legal cover.
The court found that neither the government nor the intervenors provided a lawful reason why CICA is satisfied by this arrangement. The court understood the need for expediency, but the law provides no such exception to the competition mandate.
The court also found the modifications ignore the requirement for VA to follow the Rule of Two, which requires it to consider whether a service-disabled veteran-owned small business or veteran-owned small business can meet a requirement before procuring the goods otherwise. The four plaintiffs, all SDVOSBs, argue that the new arrangement robs them of their entitlement to a competition limited to only them and other similarly situated VOSBs. The plaintiffs alleged they are able to provide many of the goods needed by the government, and there are more than two of them.
The court found no legal support for the arrangement on this issue. The agency argued that the distributors will be bound by their small-business participation plans, which will protect the rights of VOSBs, and thus the court should be unconcerned, but the court was not persuaded, explaining there is no legal requirement that the distributors consider the Rule of Two. Further, the plaintiffs would not have any right to challenge the selection of non-VOSBs should they ignore this requirement.
However, while the court found the plaintiffs succeeded on the merits, it nonetheless concluded an injunction was not merited.
First, while the plaintiff successfully alleged sufficient harm to establish standing, the court found the loss of opportunity to sell supplies to the government in the future is speculative, given the possibility the plaintiffs could be selected by the distribution vendors as suppliers. Further, the harm is only temporary, as VA intends to replace the contract modification in 18 months. The plaintiffs also alleged the arrangement would weaken their relationships with manufacturers, who could sell directly to the distributors, but again the court found this harm speculative, as the plaintiffs did not identify specific manufacturers with whom their relationships would be damaged.
The court also found the balance of harm favored the government, as an injunction would disrupt the supply chain for medical supplies for VA centers. The plaintiffs argued the previous system worked, but the court found VA presented sufficient evidence that the previous arrangement was failing because VA could not populate the master distribution list quickly enough. Finally, the court held the public interest weighed in favor of allowing VA the ability to provide standardized medical supplies across its medical centers, while potentially lowering costs.
The plaintiffs are represented by Eric S. Crusius, with whom were Gregory R. Hallmark, Mary Beth Bosco, Mitchell A. Bashur, and Amy L. Fuentes, of counsel. Kreisers LLC is represented by Aron C. Beezley of Bradley Arant Boult Cummings LLP. Douglas L. Patin, Sarah S. Osborne, and Anna M. Lashley of counsel. Medline Inc. is represented by Kristen E. Ittig. Michael E. Samuels and Alexandra L. Barbee-Grant of counsel. Americal Medical Depot is represented by Amy Laderberg O’Sullivan. Lorraine M. Campos, Robert J. Sneckenberg, Olivia L. Lynch, and Charlotte E. Gillingham of counsel.
The government is represented by David M. Kerr, Trial Attorney, Department of Justice, Civil Division, Commercial Litigation Branch, with whom were Chad A. Readler, Acting Assistant Attorney General, Robert E. Kirschman, Jr., Director, Claudia Burke, Assistant Director. Steven Devine, Sarah M. McWilliams, and Patrick Turner, Department of Veterans Affairs, Office of General Counsel, of counsel.
