Government Contracts Monitor

Reverse Auctions: Beware “Race-to-the-Bottom” vs. a Non-Responsible or Ineligible Bidder

January 23, 2017

Reverse auctions, while offering obvious advantages to the Government in appropriate circumstances, pose a number of challenges for bidders. These challenges include the need to exercise bidding restraint, and fight the animalistic instinct or desire to “win,” particularly at the cost of bidding too low. This is particularly so where there is no prequalification of bidders, and some bidders, while not foreclosed from bidding, may be non-responsible or otherwise ineligible for award. The problem, of course, is that the bidder generally does not know the identity or status of competitors. However, the bidder should know its own break-even point, and needs to restrain its own enthusiasm and not bid below the point at which the bidder could make a reasonable profit in light of known performance risks.

A recent case before the Civilian Board of Contract Appeals (CBCA or Board), while involving a surplus government property sale auction vs. a reverse auction to buy goods or services, exemplifies some of the issues and challenges, as well as the difficulties in trying to recover for ill-advised low bids or acceptance of a price lower (in the reverse auction context) than one wanted.

The case – Sea Shepherd Conservation Society v. GSA, CBCA Nos. 5254, 5255, decided Nov. 21, 2016 – arose out of the auction of certain excess Government property through the GSAAuctions.gov website. The specific items at issue were two former U.S. Coast Guard vessels, the Pea Island and Block Island. As a condition of participating in the auction, bidders were required to acknowledge the governing terms and conditions. One of such provisions, entitled “Eligibility of Bidders,” required that bidders be at least 18 years of age, and not be debarred or suspended from doing business with the Government. Another clause cautioned that bidding was not limited exclusively to U.S. citizens, but that some items could be sold only to U.S. citizens. A further provision notified bidders that the use, disposition and export or re-export of any property was subject to all applicable laws and regulations, specifically including the International Traffic in Arms Regulations (ITAR). For each of the subject vessels, the auction catalogue stated that the successful bidder would be required to complete an “End Use Certificate” prior to removing the vessel, acknowledging the applicable transfer limitations, including those imposed by ITAR.

Three bidders participated in the auction for each vessel, but Bidder 1 failed to meet the $75,000 reserve price and dropped out. Bidder 2 did meet the reserve price. Sea Shepherd then submitted a bid of $100,000 for each vessel. Bidder 2 and Sea Shepherd continued to bid against each other for each vessel. Ultimately, Sea Shepherd placed the highest bid for the Pea Island at $275.800, but lost out on the Block Island when Bidder 2 placed a higher bid than Sea Shepherd’s last bid of $155,100. GSA subsequently determined and advised Sea Shepherd that Bidder 2 was not a U.S. citizen and thus was ineligible to purchase the Block Island. GSA therefore offered the vessel to Sea Shepherd at its last bid of $155,100. Sea Shepherd tried to get GSA to sell the vessel for $100,000, pointing out that Sea Shepherd was the only eligible bidder and that the pricing had run higher solely due to bidding by an ineligible purchaser. GSA declined, stating that Sea Shepherd could either decline or accept at the last offered $155,100. Sea Shepherd promptly accepted. Both sales were promptly concluded, and GSA issued bills of sale on both vessels to Sea Shepherd on December 10, 2014.

Some 10 months later – in early October 2015 – Sea Shepherd submitted two separate certified claims to the GSA Contracting Officer, claiming the amounts Sea Shepherd had paid above its initial $100k bids for each vessel – namely, $175,800 for the Pea Island, and $55,100 for the Block Island, plus interest in each case. The Contracting Officer denied both claims, asserting that Bidder 2 was an eligible bidder and pointing out that Sea Shepherd had willingly increased its bid to the winning amount as to the first vessel, and had revived its $155,100 bid as to the second vessel, knowing that Bidder 2 was not a U.S. citizen.

Sea Shepherd appealed to the CBCA, seeking reformation of both contracts. Sea Shepherd argued that allowing a nonresponsive bidder to participate in the auction was inconsistent with, and did not promote, the fairness and openness contemplated by 41 C.F.R. § 102-38.75(a). GSA moved to dismiss both appeals on jurisdictional grounds, and alternatively for summary relief (i.e., summary judgment). The Board denied GSA’s Motions to Dismiss, but ruled for GSA on the merits and denied the appeals. As to jurisdiction, the Board ruled that it has jurisdiction over reformation claims, even after contract performance is complete. On the merits, the Board disagreed with Sea Shepherd’s analysis, noting that the auction terms and conditions did not limit bidding to U.S. citizens. The Board stated that GSA therefore properly permitted Bidder 2 to bid, but duly precluded it from purchasing the vessel once GSA learned of the bidder’s non-citizenship. The Board pointed out that reformation requires “some grave error or mutual mistake or changed circumstances, such as would render it unconscionable for the government to require performance of the original terms” (citation omitted). GSA stated that “Compliance with auction terms and conditions, even if detrimental to the interest of one of the bidders, is hardly the sort of ‘grave error or mutual mistake or changed circumstance’ which might merit reformation.” Interestingly, the Board did not address Sea Shepherd’s voluntary bidding or revival of its bid as to the Block Island, cited by the CO, both of which arguably further weighed against the requested relief.

Whether the context is a standard auction or a reverse auction, the bottom line is that bidders need to wisely assess the prices they are willing to bid, and should be particularly cautious as to how long they keep bidding once the auction is down to only two bidders. In such cases, the auction risks becoming a game of “chicken,” and the rational bidder needs to know when to stop bidding and pull out. If the other bidder is ineligible or non-responsible, then, as here, you will get a second chance to accept at your last bid. However, you will not be able to turn back the clock and revert to an earlier bid. You therefore should not continue bidding past a point at which you would be comfortable performing. This case also highlights that, if one wants to raise an issue, the time to do so is at the time of award notification or when revival is sought, not, as here, months after acceptance.

With the increasing use of reverse auctions, bidders need to familiarize themselves not only with the governing rules, but also, and equally importantly, with the required bidding discipline necessary to ensure that “winning” is not at the expense of profitability and business success.