Summary
In Puglia, which this Court recently decided, the Court applied the APA's deference-to-the-agency standard of review in assessing a disappointed bidder's motion to enjoin the Government from commencing repairs on a Coast Guard cutter.
Summary of this case from Patriot Contract Services v. United StatesOpinion
No. C 04-04794 CRB.
November 19, 2004
MEMORANDUM AND ORDER
Now before the court is a motion by plaintiff Puglia Engineering of California ("Puglia") for a temporary restraining order ("TRO") enjoining defendant, the U.S. Coast Guard, from allowing the commencement of repairs on a Coast Guard cutter, the Long Island. After reviewing the papers submitted by the parties and conducting an expedited hearing, the court hereby DENIES plaintiff's motion for a TRO.
BACKGROUND
This case arises out of the Coast Guard's preliminarily granting, but then rescinding, the award to plaintiff of a government contract to repair the Long Island. The contract provides for major repairs to the ship's hull, which has fallen victim to severe corrosion. On May 28, 2004, the Coast Guard issued its initial Solicitation for bidders on the contract. The Solicitation provided that the contract was a part of the Small Business Administration's ("SBA") Historically Underutilized Business Zone ("HUBZone") set-aside program, which encourages economic development in historically depressed areas by restricting the award of some government contracts to those areas. After receiving four bids, the Coast Guard on August 25, 2004 determined that Puglia had given the best value bid. However, a competing offeror contested the award of the contract based on the allegation that Puglia was not a qualified HUBZone contractor. Based on this challenge, the Coast Guard referred the matter to the SBA to determine whether Puglia should be granted a Certificate of Competency ("COC"). On September 23, SBA awarded Puglia a COC.
In a letter dated October 6, 2004, SBA rescinded Puglia's COC, stating that the Coast Guard "prematurely accepted the COC due to an unfortunate miscommunication between their contracting officer and the [SBA]." By a letter dated October 27, 2004, SBA finally rejected Puglia's COC application. The letter bases the rejection on the Solicitation's classification of the contract as one for "manufacturing." Under such a classification, Puglia must expend at least 50% of the "manufacturing cost" in a HUBZone to qualify for the contract. 13 C.F.R. § 125.6(c)(4). Puglia's work was to be completed outside of a HUBZone and the COC was therefore rejected. If Puglia was not classified as a manufacturer/supplier and instead was classified as providing "services" for the government, then it need only have demonstrated that it spent 50% of labor costs on its own employees or on a HUBZone subcontractor's employees. 13 C.F.R. § 125.6(c)(1).
On November 4, 2004, the Coast Guard awarded the contract to Dakota Creek Industries ("Dakota"). Puglia points out that Dakota's bid was inferior in at least two respects. First, Puglia gave a lower bid of $589,922, versus Dakota's bid of $641,260. Second, Puglia's technical rating was "excellent," whereas Dakota received a mere "good" rating. If Puglia had received a COC, then it undisputedly would have won the contract since it was previously determined to be the "best value" bidder and because the Solicitation provides that award will be given to "the responsible offeror whose proposal . . . is determined to be the best value to the Government." Solicitation § M.1. See 41 U.S.C. § 253b(d)(3) (requiring that procurement contracts be awarded to the bidder "whose proposal is most advantageous to the United States, considering only cost or price and the other factors included in the solicitation.").
Puglia filed a complaint for relief under the Administrative Procedure Act ("APA") and the Declaratory Judgment Act on November 10, 2004. Plaintiff then filed the present ex parte application for a TRO two days later on November 12. Work on the contract was to have begun on November 17, but was delayed pending an expedited briefing and hearing schedule to dispose of the present motion.
DISCUSSION
I. Jurisdiction and Venue
A. Subject Matter Jurisdiction
The government argues that this court lacks subject matter jurisdiction to bring the present claim. Plaintiff concedes that the APA does not serve as a basis for jurisdiction because APA jurisdiction over government bid protest cases was subsumed by 28 U.S.C. section 1491(b), which, under the Administrative Disputes Resolution Act of 1996 ("ADRA"), sunsetted in 2001. See Novell, Inc. v. United States, 109 F.Supp.2d 22, 24-25 (D.D.C. 2000) (sunsetting of section 1491(b) means end of district court jurisdiction over bid protest cases under APA).
Since jurisdiction can't be found under the APA, Puglia instead argues that jurisdiction rests upon the Suits in Admiralty Act ("SAA"), 46 U.S.C. Appx. §§ 741, et. seq. The SAA waives sovereign immunity and provides for exclusive district court jurisdiction in certain maritime law cases brought against the United States. Plaintiff points out that the United States Court of Federal Claims has ruled that disputes brought by disappointed bidders on government contracts against the United States are maritime contract actions and therefore within the scope of the SAA.Asta Engineering v. United States, 46 Fed. Cl. 674, 675-76 (Fed.Cl. 2000); Bayship Mgmt. Inc. v. United States, 43 Fed. Cl. 535, 536-37 (Fed.Cl. 1999). Furthermore, Asta held that Congress's enactment of the ADRA does not effect the district courts' jurisdiction over maritime contract actions, since such jurisdiction existed prior to section 1491(b). Asta Engineering, 46 Fed. Cl. at 676.
Defendant cites Emery Worldwide Airlines, Inc. v. United States, 264 F.3d 1071 (Fed. Cir. 2001) as authority for the proposition that the ADRA was broad enough to sweep even maritime contract bid protest claims into the jurisdiction of the Court of Federal Claims and out of the jurisdiction of the federal district courts. See id. at 1079-80. Emery Worldwide, however, does not address bid protest claims brought under the jurisdiction granted by the SAA and therefore is not dispositive of the jurisdictional question before the court.
Defendant also argues that the case at bar, which centers on review of agency action under the APA, may not properly be deemed a maritime contract case because there is no contract between the government and Puglia. However, the Court of Federal Claims has found in the context of a bid protest action that the fact that the underlying contract in dispute is a maritime contract is enough to make the case fall under the SAA and vest jurisdiction in the district courts exclusively. See Bayship Mgmt., 43 Fed. Cl. at 537 (Fed.Cl. 1999).
Accordingly, this court has jurisdiction over this case.
B. Venue
The government argues that, if the suit is to be construed as falling under the maritime statutes, then it should have been brought under the Public Vessels Act ("PVA"), 46 U.S.C. § 781, instead of the SAA. If this is true, then the suit would have to be transferred since the only proper venue for a PVA action is in the district in which the ship is located on the day the complaint is filed, 46 U.S.C. § 782, which in this case would be the District of Alaska. However, the PVA is inapplicable since it only applies to tort and salvage claims. See 46 U.S.C. § 781 (referring only to suits "for damages caused by a public vessel of the United States and for compensation for towage and salvage services . . ."); Marine Coatings of Alabama v. United States, 71 F.3d 1558, 1562 n. 5 (11th Cir. 1996) ("Claims involving public vessels other than claims `for damages caused by a public vessel' are covered by the [SAA]."). Here, Puglia has not sought any damages.
Defendant's argument that Thomason v. United States, 184 F.2d 105 (9th Cir. 1950) is mandatory authority requiring application of the PVA to this action also fails. Thomason merely held that the PVA applies to a seaman's wage claim based on "the common usage of the word `damages' as meaning compensation in money for any loss or injury." Id. at 107. As broad as this construction is, it cannot be read to encompass the present claim for injunctive relief since plaintiff does ask this court to award any "compensation in money."
The SAA allows the plaintiff to select the venue in which it resides. 46 U.S.C. Appx. § 742. Therefore venue is proper.
C. Sovereign Immunity
The government also raises sovereign immunity as a defense from suit. However, the government admits that the SAA waives sovereign immunity. Because the SAA applies to this action, the shield of sovereign immunity is not available.
II. Legal Standards
A. Legal Standard for Issuance of a TRO
The standard for issuing a TRO is essentially the same standard as that for a preliminary injunction. The traditional criteria for granting preliminary relief are: 1) a likelihood of success on the merits, 2) the possibility of irreparable injury, 3) a balance of hardships favoring the plaintiff, and 4) that the preliminary relief be in the public interest.Barahona-Gomez v. Reno, 167 F.3d 1228, 1234 (9th Cir. 1999). This test has evolved into the modern test that the plaintiff must "demonstrate either (1) a combination of probable success on the merits and the possibility of irreparable injury if relief is not granted, or (2) the existence of serious questions going to the merits and that the balance of hardships tips sharply in its favor." First Brands Corp. v. Fred Meyer, Inc., 809 F.2d 1378, 1381 (9th Cir. 1987). While this test is phrased in the disjunctive, many courts view it as essentially a single test. Viewed as a single test, the greater the showing of likely success the lighter the burden in terms of the relative hardship, and vice versa. See Regents of Univ. of Calif. v. ABC, Inc., 747 F.2d 511, 515 (9th Cir. 1984).
B. Legal Standard under the APA
The plaintiff's claim for relief in this case is governed by the Administrative Procedure Act ("APA"), which sets forth the standard of judicial review of informal (ie. non-adjudicatory) agency activities. A court may only invalidate such activities if they were "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). Administrative decisions are entitled to a presumption of validity, and "[a]bsent a showing of arbitrary action, [courts] must assume that the agencies have exercised this discretion appropriately." Kleppe v. Sierra Club, 427 U.S. 390, 412 (1976).
The government argues that decision under the APA in this case is precluded by the Supreme Court's ruling in Norton v. Utah Wilderness Alliance, 124 S.Ct. 2373 (2004). There, the Court held that the APA's mandate of judicial review of an agency's "failure to act" under 5 U.S.C. § 702(1) is limited to an agency's failure to engage in legally required actions. Id. at 2379. Here, Norton does not preclude decision because plaintiff's claims fall under 5 U.S.C. § 706(2)(A), not § 702(1).
This standard of review is highly deferential. "Review under the arbitrary and capricious standard is narrow and the reviewing court may not substitute its judgment for that of the agency." Western Radio Services Co. v. Espy, 79 F.3d 896, 900 (9th Cir. 1996). The court may reverse an agency decision:
only if the agency relied on factors Congress did not intend it to consider, entirely failed to consider an important aspect of the problem, offered an explanation that ran counter to the evidence before the agency, or offered one that is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.Id.
Courts have come to similar conclusions with respect to disappointed bidder cases, finding that the protesting contractor must demonstrate either (1) the procurement official's decision had no rational basis, or (2) the procurement procedure involved a clear and prejudicial violation of applicable statutes or regulations. Kinnett Dairies, Inc. v. Farrow, 580 F.2d 1260, 1271 (5th Cir. 1978).
III. Temporary Restraining Order
A. Likelihood of Success on the Merits
Puglia's claims on the merits reduce to three arguments: (1) the SBA lacked the authority under the relevant regulations to rescind Puglia's COC; (2) the contract was improperly classified as one for manufacturing; instead it should have been deemed one for services; (3) the Coast Guard improperly failed to apply its own independent judgment with respect to plaintiff's qualifications as a HUBZone contractor.
1. SBA's Authority to Rescind the COC
Plaintiff argues that the relevant regulations limit SBA's authority to rescind COCs. The regulation states:
Reconsideration of COC after issuance.
(1) An approved COC may be reconsidered and possibly rescinded, at the sole discretion of SBA, where an award of the contract has not occurred, and one of the following circumstances exists:
(i) The COC applicant submitted false or omitted materially adverse information;
(ii) New materially adverse information has been received relating to the current responsibility of the applicant concern; or
(iii) The COC has been issued for more than 60 days (in which case SBA may investigate the firm's current circumstances).13 C.F.R. § 125.5 (l)(1). Even if Puglia is correct that this standard constrains rescission, the Coast Guard's stated reason for the rescission that it had "prematurely accepted the COC due to an unfortunate miscommunication between [the] contracting officer and the [SBA]" can be read as falling within subsection (ii) above. Therefore, Puglia has not demonstrated that the SBA was arbitrary and capricious in determining that it had the authority to rescind the COC.
2. Classification of the Contract as One for Manufacturing/Supplies
The issue of whether the contract is for manufacturing is important because both parties read 13 C.F.R. § 125.6(c), as providing for different standards for qualifying HUBZone contractors based on that designation. The section states:
Both parties and the SBA's rejection letter incorrectly cite this provision of law as 13 C.F.R. § 126.700(a). Prior to Puglia's COC application, the C.F.R. was amended in a non-substantive manner that moved the provisions to 13 C.F.R. § 125.6(c). See 69 Fed. Reg. 29411 (setting effective date of amendments as June 23, 2004, and stating it applies to "all pending HUBZone applications").
(c) A qualified HUBZone SBC prime contractor can subcontract part of a HUBZone contract (as defined in § 126.600 of this chapter) provided:
(1) In the case of a contract for services (except construction), the qualified HUBZone SBC spends at least 50% of the cost of the contract performance incurred for personnel on the concern's employees or on the employees of other qualified HUBZone SBCs;
. . . .
(4) In the case of a contract for procurement of supplies (other than procurement from a regular dealer in such supplies), the qualified HUBZone SBC spends at least 50% of the manufacturing cost (excluding the cost of materials) on performing the contract in a HUBZone. One or more qualified HUBZone SBCs may combine to meet this subcontracting percentage requirement;13 C.F.R. § 125.6(c) (emphasis added). Because Puglia would have used subcontractors, this section applies.
The SBA found that the solicitation provided for a manufacturing contract and therefore the government was procuring supplies under subsection (4). Puglia maintains that the contract is one for services, meaning subsection (1) applies.
a. NAICS
The SBA's letter states that it decided that the contract was for manufacturing based on the solicitation's use of the North American Industry Classification System ("NAICS") code for "Ship Building and Repair," which falls under the heading of "Manufacturing." Puglia insists that the SBA's use of the NAICS code to deem the solicitation to be for a manufacturing contract is irrational because the SBA typically uses NAICS codes to determine the size of the business, and not to determine the type of contract. See 13 C.F.R. § 121.201 (SBA regulations incorporating NAICS and providing size standards for small businesses).
However, NAICS codes are used for the collection and aggregation of economic and statistical data in a wide variety of areas, by three nations, and therefore may be reasonably used as a classification system in a variety of contexts. See, e.g., City of Allentown v. MSG Assocs., 747 A.2d 1275, 1280 n. 7 (Pa.Commw.Ct. 2000) (discussing use of NAICS by the business community, OSHA and the Bureau of Labor). In addition, as plaintiff argues, the contract in dispute is for major restoration and replacement of the ship's hull at the contractor's facilities — an activity that can reasonably be understood as more similar to a manufacturing job than to the provision of a service. Had the Coast Guard determined that the repairs were of more minor proportions, it could have given the job a non-manufacturing NAICS classification, such as 488390 ("Other Support Activities for Water Transportation"). See 13 C.F.R. § 121.201.
Puglia also argues that it was irrational to use the NAICS to apply section 125.6(c)'s geographical limitations because ship repair often occurs where the ship is located. This argument fails because there is no dispute that the contract in issue will be performed at the facilities operated by the contractor. Puglia also finds support for its position in a footnote to the SBA regulations containing the NAICS which states that contractors engaged in "major rebuilding and overhall do not necessarily have to meet the criteria for being a `manufacturer'" although the activities receive a manufacturing code. 13 C.F.R. § 121.201 n. 6. The statement, however, is not mandatory and therefore implies that it is within the SBA's and contracting officer's discretion to determine whether or not a particular concern is a manufacturer. Plaintiff cannot prevail under an arbitrary and capricious standard by pointing to open ended statements in the regulations.
b. Labor Statutes
Puglia next argues that two thirty-year-old Department of Labor (DOL) opinions stating that the Davis-Bacon act, and not the Walsh-Healey Public Contracts Act, applies to ship repair contracts demonstrate that the SBA's determination was arbitrary and capricious. The solicitation, however, incorporates Walsh-Healey. Puglia argues that the conflict between the solicitation and the DOL demonstrates the Coast Guard's irrationality in classifying the solicitation. Also, because Walsh-Healey applies to manufacturers, the DOL's alleged position would lend some support to plaintiff's claim that the contract in issue is not a manufacturing contract.
Whatever value the DOL's opinion has to plaintiff has been sufficiently rebutted by the government. First, defendant submitted two recent DOL opinions which found Walsh-Healey to apply to particular Coast Guard ship repair contracts. The government secondly points to 10 U.S.C. § 7299, which states that "each contract for the construction, alteration, furnishing or equipping of a naval vessel" is subject to Walsh-Healey.See also 61 Fed. Reg. 40714 (indicating that coast guard ships are "naval vessels"). One could reasonably interpret "alteration, furnishing or equipping" to encompass repairs. While Puglia cites GAO and Maritime Administration opinions finding the contrary, this merely illustrates that reasonable minds can differ with respect to this issue and thus counsels against a finding that the Coast Guard was arbitrary and capricious. Moreover, if plaintiff is correct that the DOL's opinion is controlling on the disposition of the case at bar, then the other authority it cites is irrelevant.
The court rejects plaintiff's evidentiary objections to these documents because declarations submitted at the hearing properly authenticate them and based also upon the government's proffer of admissibility at the hearing.
c. SBA Regulations
Puglia claims that SBA regulations preclude the classification of the disputed contract as one for supplies. Puglia cites 13 C.F.R. § 125.6(e)(3), which defines "cost of manufacturing" in reference to the production of an "end item" and 13 C.F.R. § 121.406(b)(2), which states that "there can be only one manufacturer of an end item." According to Puglia, these statements support the view that repair work is not manufacturing. However, Puglia neglects to include in its quotation of these regulations the critical limitation that this rule applies only "[f]or size purposes." 13 C.F.R. § 121.406(b)(2). It is therefore not proof that the SBA acted irrationally.
3. Coast Guard's Failure to Apply Independent Judgment
Puglia's final argument is that the Coast Guard erred by deferring completely to the SBA's determination regarding plaintiff's qualifications as a HUBZone contractor. Plaintiff, however, fails to state any authority stating that the Coast Guard has a mandatory obligation to second guess the SBA's denial of a COC. See FAR 19.602-3(c)(3) (making Coast Guard's ability to reconsider COC denial discretionary).
B. Balance of Hardships and Public Interest Factors
Puglia's states correctly that it will suffer irreparable harm absent an injunction because a disappointed bidder cannot recover anticipated profits. See Hawaiian Dredging Constr. Co. v. United States, 59 Fed. Cl. 305 (2004) (finding irreparable harm because protesting bidder is entitled only to bid preparation costs; only way to recover lost profits is by an injunction). Puglia also argues that awarding it the contract is in the public interest because the government would spend less money if plaintiff were the contractor.
The government replies that both it and the public could suffer serious harm if an injunction is issued. The government cites the Long Island's importance to national security, public safety and law enforcement. Affidavit of Capt. Philip H. Sullivan, USCG ¶ 5 (giving technical opinion that delay in critically needed repairs would create significant limitations on use of ship); Affidavit of Lt. Kurt W. Cox, USCG ¶¶ 3-11 (discussing cost of delays to Coast Guard duties). Further delay in the Long Island's repair may also endanger its crew because of the critical need for repairs and because of winter weather conditions it would face in returning to Alaska. Affidavit of Capt. David T. Glenn, USCG ¶ 8.
Puglia responds to the government's showing of irreparable harm by arguing that the government has the power to relieve such harms simply by awarding plaintiff the contract. This argument, however, runs headlong into Puglia's contention that the primary purpose of a preliminary injunction is to preserve the status quo pending a final determination on the merits. Reply at 2, citing Chalk v. U.S. Dist. Court, Cent. Dist. of Cal., 840 F.2d 701, 704 (9th Cir. 1988). Puglia essentially asks this court to enter an order that would either directly or indirectly force the Coast Guard to rescind its contract with Dakota and grant it to plaintiff. This is a 180 degree shift from the status quo and therefore would not be proper at this stage.
C. Application of TRO Standard
This court finds that both parties have demonstrated the potential for serious harm. In such a situation, the plaintiff must show a high likelihood of success on the merits. Plaintiff has not this burden. Both the NAICS codes and the designation of the contract under Walsh-Healey provide rational bases for the government's decision. The NAICS coding in the solicitation reasonably supports an understanding that serious repair and replacement of the Long Island's hull at the contractor's shipyard are more akin to a manufacturing activity than to the performance of services. Secondly, the reasonable dispute about the application of Walsh-Healey to the contract illustrates that it was neither arbitrary nor capricious for the Coast Guard to reference that statute in the solicitation. Indeed, the DOL's recent statements that it should be applied to ship repair indicates a legitimate understanding that such repairs do constitute manufacturing — an understanding that the Coast Guard could have relied upon. The Federal Acquisition Regulations ("FAR"), cited in plaintiff's brief, further support the notion that the ship repair can fall within at least one definition of "supplies." See FAR 2.101(defining "Supplies" to include "the alteration or installation" of "ships" and ship "parts"); Century Marine Corporation-Reconsideration, B-233574.2, 89-1 C.P.D. ¶ 505 (May 25, 2989) (GAO decision confirming that FAR defines alteration of vessels as "supplies"). Plaintiff has therefore failed to make a convincing showing that it would be likely to prevail upon its claims in the complaint.
CONCLUSION
For all of the reasons stated above, plaintiff's motion for a temporary restraining order is DENIED.
IT IS SO ORDERED.