The GAO summarily dismissed a protester’s protest for lack of “interested party” standing because the protester recently had concluded an asset sale in which it sold the rights to the relevant contract assets to another company (the Buyer). The decision, Wyle Laboratories Inc., B-416528, is so brief as to appear unremarkable, but its implications cannot be ignored within the world of government contractor mergers and acquisitions.
This protest involved a pre-award challenge to a request for quotations (RFQ) issued on June 4, 2018 by U.S. Customs and Border Protection under the OASIS multiple-award contract vehicle administered by the General Services Administration (GSA). The protest alleged that the RFQ was unduly restrictive of competition in connection with its past performance requirements.
Importantly, on June 5, 2018, protester Wyle entered into an asset purchase agreement (APA) whereby it transferred all the “assets and liabilities used in or relating to performance” of Wyle’s OASIS contract to the Buyer. Like many government contract asset purchases, the transfer of Wyle’s OASIS contract to the Buyer—Wyle’s “successor in interest”—required the Government’s approval of the contract’s novation to the Buyer. The APA specified that the Buyer would be responsible for performance of any task order awarded under the RFQ and that, in the interim period between APA execution and novation approval, Wyle would “cooperate and provide commercially reasonable efforts to assist [Buyer] with submission of proposals in response to requests for task order proposals.”
In mid-June 2018, Wyle, as the contractor still technically holding the OASIS contract—and also technically the prime contractor for the quotation submitted in response to the RFQ—filed the instant protest with GAO.
On June 14, 2018, shortly after executing the asset purchase agreement, Wyle submitted a formal request for GSA to novate its OASIS contract to the Buyer, pursuant to Federal Acquisition Regulation (FAR) 42.1204. The FAR novation process exists because the Anti-Assignment Act prohibits government prime contractors from unilaterally transferring government contracts to third parties. Instead, a contractor must obtain government recognition of such a transfer. Accordingly, FAR 42.1204, titled “Applicability of novation agreements,” provides, in relevant part:
(a) 41 U.S.C. 6305 prohibits transfer of Government contracts from the contractor to a third party. The Government may, when in its interest, recognize a third party as the successor in interest to a Government contract when the third party's interest in the contract arises out of the transfer of:
(1) All the contractor's assets; or
(2) The entire portion of the assets involved in performing the contract. . . .
FAR 42.1204 goes on to list a number of specific documents and information that both a buyer and seller in a government contract asset purchase must submit in connection with a request that the Government approve the novation of the contract from the seller to the buyer.
After Wyle filed the protest, the Government moved to dismiss, arguing that Wyle did not have standing to pursue the protest. Under the applicable law, only an “interested party”—i.e., an “actual or prospective offeror whose direct economic interest would be affected by the award of a contract or the failure to award a contract”—has standing to file a protest. The Government argued that, because Wyle does not plan to perform any task order award resulting from the RFQ, Wyle has no “direct economic interest” in that award.
GAO agreed with the Government based on what it called the “unique circumstances” of the case and dismissed the protest because “Wyle has not demonstrated how the limited ‘prime contract administration responsibilities’ it indicates that it will provide as the ‘prime contractor’ reflect that Wyle has a direct economic interest in the procurement.” GAO indicated that the following facts were dispositive:
Wyle’s protest makes clear that it does not have any intention in its role as the “prime contractor” or otherwise to perform any of the work under the task order. Rather, as Wyle acknowledges, [Buyer] and its subcontractors will perform all of the work under the task order. Where, as here, Wyle’s purpose as the “prime contractor” is a legal requirement of its third-party asset purchase agreement with [Buyer] and Wyle’s only duties as the prime contractor are the administrative responsibilities required to allow [Buyer] 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.
Implications and Conclusion
Despite GAO’s description of the circumstances of Wyle’s protest as “unique,” the reality is that government contract asset purchases requiring novation occur regularly. Moreover, most such asset purchase agreements feature terms substantially similar to those contained in Wyle’s APA. In short, the situation in which Wyle and the Buyer found themselves is far from unique.
The fate of the protest likely would have been no different if the Buyer had filed the protest in its own name: the Government assuredly would have argued that the Buyer also had no standing to protest because it was not the “actual offeror” and was not yet the contract holder. Thus, GAO’s decision presents a troubling Catch-22 for contractors who are active in the government contract M&A world. What steps should these contractors take going forward, in light of the decision?
First, GAO’s decision reminds us that timing is critical. Before determining when to execute a government contract asset purchase, the parties must consider the circumstances surrounding the purchase, including whether a current or impending task order competition under the contract is material to either of the companies. If it is, the parties should carefully weigh the risk that completing the asset sale before the award of the task order might deprive them of their protest rights.
Second, GAO’s decision focused on the fact that Wyle’s responsibilities under the APA were merely administrative in nature and that Wyle expected to perform no work under the task order in question. While this arrangement certainly is common in the context of a government contract asset sale and novation request, perhaps GAO would not have found that Wyle lacked an economic interest in the task order if Wyle was slated to perform at least some of the work under it. Going forward, purchasers of contract assets should consider whether it makes sense for the seller of the assets to retain a portion of workshare under the novated contract in order to help preserve the purchaser’s protest rights.
Third, the brunt of the risk illuminated by GAO’s decision is attributable to the length of time it often takes the Government to consider and approve novation requests. The more time the Government takes, the more task order competitions are susceptible to the risk that they cannot be protested by either party to the asset sale. Contractors should work closely with their counsel to ensure the timely submission of all necessary documentation. Precision with novation paperwork is one of the easiest ways to truncate the novation process.
In sum, GAO’s recent decision requires careful consideration and compels strategic planning in the context of future government contract asset purchases.