Judge: IBM gamed procurement system in CIA cloud bid
A U.S. Court of Federal Claims judge said IBM "manipulated its pricing to create a bid protest" and "intentionally manufactured a protest argument" against Amazon Web Services, which went on to win a $600 million cloud computing contract from the CIA that Big Blue later protested. He overturned IBM's successful bid protest and ordered AWS to get back to work building a cloud computing infrastructure for the intelligence community.
"IBM appears to have intentionally manufactured a protest argument relating to the [scenario] pricing requirement, which it hoped to pursue if it lost the [cloud] competition with AWS," Wheeler wrote in his opinion. "Knowing full well from its pre-proposal questions what the [scenario] requirements were, IBM drastically departed from the approach followed in its initial proposal when it came to submitting its final proposal revision. If it did not win the award, IBM could argue that the agency did not evaluate . . . prices on a common basis."
Wheeler said GAO's decision to uphold IBM's bid protest was irrational because IBM "lacked any chance" to win the contract.
Amazon CIA cloud row: US judge slaps down IBM as 'manipulative', inferiorAmazon CIA cloud row: US judge slaps down IBM as 'manipulative', inferior
Amazon was awarded the contract on February 14, 2013. IBM formally protested this decision, claiming its offer should be reconsidered because Big Blue staff had failed to properly understand a key data-processing requirement.
But, far from not understanding that requirement, the court opinion indicates IBM grasped the requirement yet decided to submit a flawed proposal to give itself a chance to force a second evaluation if the contract went to AWS, as it did.
The contentious section asked the parties to price up a fault-tolerant cluster of 1,000s of commodity servers running a MapReduce scatter-gather job on about 100TB of data with a 100 per cent duty cycle. In other words, the CIA wanted Amazon and IBM to cost out a cloud cluster that would run MapReduce continuously for a year so spies could prod large chunks of data.
Both IBM and Amazon appeared to understand this in their initial bids, and submitted plans to do so, Judge Thomas C. Wheeler wrote in his court opinion. When it came to submitting its final official bid for the CIA contract, something curious happened: IBM handed in a "dramatically different interpretation" of the MapReduce cluster specification, by pricing out an analytics tool that would execute a single 100TB processing run. "There is no explanation in the record for this drastic IBM pricing change," the federal court ruled.
IBM's pricing dramatically reduced the apparent cost of its bid, but to effectively evaluate it against Amazon, which had priced out a full-year cost of a cluster, the government had to scale up IBM's cost to cover a 12-month period. It was this calculation that IBM subsequently disputed.
"It is obvious that when IBM deviated from its initial approach, it did so as a way to manipulate the situation in its favor," the court ruled. "Such gamesmanship undermines the integrity of the procurement process."
Selected and rearranged excerpts from In the United States Court of Federal Claims,
No. 13-506C (Reissued for Publication: November 8, 2013)
At issue is the agency’s decision to take corrective action by inviting a new round of final proposal revisions from Plaintiff Amazon Web Services, Inc. (“AWS,” or “Amazon”) and Defendant-Intervenor IBM U.S. Federal (“IBM”). Previously, in its original evaluation of proposals, the agency had found AWS’s proposal to be far superior to IBM’s proposal, even though AWS had proposed a higher price. In a “best value” award decision, the agency determined that the higher price it would pay to AWS was justified. The agency awarded the C2S contract to AWS on February 14, 2013.
IBM filed a bid protest at the Government Accountability Office (“GAO”) on February 26, 2013 challenging various aspects of the agency’s procurement including the evaluation process. The agency initially stopped AWS’s contract performance pursuant to the automatic stay provisions of the Competition in Contracting Act, 31 U.S.C. § 3553(d)(3) (“CICA”), but later issued an override of the stay on March 15, 2003 to allow AWS’s performance to proceed. The GAO bid protest was sharply contested. AWS contends that it handily won the competition with IBM, and that IBM suffered no prejudice and lacks standing because it has no substantial chance of receiving the contract award. Absent a legitimate, prejudicial procurement violation, AWS objects to competing again with IBM to win the same C2S contract, especially where so much information has been released to IBM during the debriefing process.
As a threshold matter, IBM lacked any chance of winning a competition with AWS for this C2S contract, and therefore IBM could not show any prejudice from either of the two grounds on which the GAO sustained IBM’s protest. The GAO’s decision does not even mention the existence of any “prejudice” to IBM, thus indicating that the GAO did not apply any “prejudice” requirement to IBM’s protest. Similarly, the GAO did not consider whether IBM had standing to bring the protest. If IBM did not have a chance of being awarded the contract, it did not have the necessary standing as an interested party to pursue its bid protest. See Labatt Food Serv., Inc. v. United States, 577 F.3d 1375, 1379-80 (Fed. Cir. 2009).
Moreover, IBM appears to have intentionally manufactured a protest argument relating to the Scenario 5 pricing requirement, which it hoped to pursue if it lost the C2S competition with AWS. Knowing full well from its pre-proposal questions what the Scenario 5 requirements were, IBM drastically departed from the approach followed in its initial proposal when it came to submitting its final proposal revision. If it did not win the award, IBM could argue that the agency did not evaluate Scenario 5 prices on a common basis. IBM was the only offeror who appeared to “misunderstand” the Scenario 5 pricing requirements.
The GAO made no mention of IBM’s manipulation of the procurement process, but instead sustained the protest allegedly for lack of a common basis to evaluate the offerors’ Scenario 5 prices. Even if the proposals from AWS and IBM presented a closer “best value” award decision, the Court could not justify rewarding IBM with another chance of competing for the C2S contract under these circumstances.
Although IBM was not satisfied with the agency’s answers, it did not seek further clarification or file a bid protest. Instead, IBM submitted its initial proposal with a Scenario 5 data analytics solution that processed 100 TB of data continuously throughout the year, at a price of approximately $[. . .]. The other offerors, including Amazon, interpreted Scenario 5 in the same way, as requiring continual data analytics deployment for a full year, or 8,760 hours. IBM continued to price Scenarios 1 through 4, which also specified a 100% duty cycle, based on the continuous operation of the called-for servers for the year. During discussions with IBM, the agency identified each instance in which IBM failed to follow the pricing scenario directions. However, the evaluators did not identify any issue regarding IBM’s approach to Scenario 5, because IBM had offered a solution operating at a 100% duty cycle for 12 months, and IBM’s proposed price was consistent with the prices of the other offerors. AR 10388, Holloway Test.; AR 3120 (noting issues with IBM scenario pricing assumptions, but not Scenario 5). The agency thus effectively conveyed to IBM that it had correctly followed the Scenario 5 instructions.
If “the agency entirely fail[s] to consider an important aspect of the problem[ or] offer[s] an explanation for its decision that runs counter to the evidence before the agency,” then the resulting action lacks a rational basis and, therefore, is defined as “arbitrary and capricious.” Ala. Aircraft Indus., Inc.-Birmingham v. United States, 586 F.3d 1372, 1375 (Fed. Cir. 2009) (quoting Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983)) .
“[B]ecause the question of prejudice goes directly to the question of standing, the prejudice issue must be reached before addressing the merits.” Labatt, 577 F.3d at 1378 (internal quotation marks omitted). A bid protestor has been prejudiced when it can show that, “but for [a significant error in the procurement process], it would have had a substantial chance of securing the contract.” Id.
“De minimis errors in the procurement process do not justify relief,” and “[t]he protestor bears the burden of proving that a significant error marred the procurement in question.” Glenn Def. Marine (Asia), Pte Ltd. v. United States, 720 F.3d 901, 907 (Fed. Cir. 2013). This burden “is greater in negotiated procurement, as here, than in other types of bid protests because ‘the contracting officer is entrusted with a relatively high degree of discretion.’” Id. (quoting Galen Med. Assocs., Inc. v. United States, 369 F.3d 1324, 1330 (Fed. Cir. 2004)).
AWS’s offer was superior in virtually every way but price, and IBM’s advantage in that area was likely not as great as IBM attempted to make it appear. Nevertheless, the GAO sustained IBM’s protest on two grounds: (1) the agency’s Scenario 5 price evaluation lacked a common basis and was therefore unreasonable; and (2) the agency materially relaxed a solicitation requirement for AWS, but not for the other offerors. See AR 10706.
Regarding the first ground, the GAO makes no mention of prejudice whatsoever, despite its being raised and argued by both AWS and the agency. Regarding the second, the GAO notes—without any explanation—that “[i]n [its] view, IBM’s assertion that the level of risk to the contractor was reduced by this modification is sufficient to establish prejudice.” AR 10712 n.4, IBM U.S. Federal, 2013 CPD ¶ 142. In neither instance is there any consideration of the proper legal standard for prejudice, nor is there any evidence that IBM met its burden of proof for establishing such prejudice. Consequently, there is no justification for even reaching the merits of IBM’s protest.
The bottom line is that IBM did not lose the competition because of the Scenario 5 price evaluation or AWS’s post-solicitation negotiations, but because of the overall
inferiority of its proposal. This proposal contained numerous weaknesses, including some “significant” weaknesses, a technical deficiency, and an overall high risk rating.
AR 4638-69; AR 5065-67 (describing “multiple weaknesses,” a technical “deficiency,” and “multiple concerns” creating a high price risk).
“[S]tanding is a threshold jurisdictional issue,” and “prejudice (or injury) is a necessary element of standing.” Myers Investigative & Sec. Servs., Inc. v. United States, 275 F.3d 1366, 1369 (Fed. Cir. 2002). To establish prejudice, IBM had to “show that there was a ‘substantial chance’ it would have received the contract award but for the
alleged error in the procurement process.” Info. Tech. & Applications Corp. v. United States, 316 F.3d 1312, 1319 (Fed. Cir. 2003) (quoting Alfa Laval Separation, Inc. v. United States, 175 F.3d 1365, 1367 (Fed. Cir. 1999)).
IBM failed to make such a showing, and the GAO failed to make relevant findings or apply the proper legal standards. In fact, other than the GAO’s unexplained acceptance of IBM’s speculation that it had suffered prejudice, see AR 10712 n.4, IBM U.S. Federal, 2013 CPD ¶ 142, the GAO made no mention of prejudice to IBM at all. Such a “fail[ure] to consider an important aspect of the problem” is, by itself, sufficient to render the GAO’s decision arbitrary and capricious. Ala. Aircraft, 586 F.3d at 1375 (quoting Motor Vehicle Mfrs. Ass’n., 463 U.S. at 43).
Timeliness, like prejudice, is a threshold issue that must be addressed prior to reaching the merits of a bid protest. See, e.g., Goel Services, Inc., B-310822.2, 2008 CPD ¶ 99 (Comp. Gen. May 23, 2008) (“Our timeliness rules reflect the dual requirements of giving parties a fair opportunity to present their cases and resolving protests expeditiously without unduly disrupting or delaying the procurement process. In order to prevent these rules from becoming meaningless, exceptions are strictly construed and rarely used.” (citation omitted)).
Where, as here, an offeror misses its opportunity to fairly challenge the terms of a solicitation, it cannot then be allowed to avoid the timeliness bar by mischaracterizing its case as an evaluation challenge. This timeliness rule aptly describes what IBM attempted to do. Nevertheless, the GAO concluded that the agency’s “price evaluation” method was unreasonable and sustained IBM’s protest on that ground. AR 10707-10. This conclusion, however, completely ignored the blatant manner in which IBM manipulated the situation to its advantage.
IBM filed its protest and feigned ignorance of the reasons for the agency’s actions, pretending not to understand why “the agency determined that the solution should be available throughout the year.” In reality, IBM was well aware that the agency had made this determination long before its final price evaluation. Such gamesmanship undermines the integrity of the procurement process and should not be rewarded with circumvention of the timeliness requirement.
There is no such thing as a perfect procurement. Thus, a bid protestor must show prejudice, not mere error, for “[n]ot every error compels the rejection of an award.” Grumman Data Sys. Corp. v. Dalton, 88 F.3d 990, 1000 (Fed. Cir. 1996). Rather, it is “the significance of errors in the procurement process [that determines] whether the
overturning of an award is appropriate,” and it is the protestor who “bears the burden of proving error in the procurement process sufficient to justify relief.” Id. IBM never met that burden, and the GAO neglected to address it. Even if IBM’s arguments regarding the price evaluation and modified solicitation requirement were persuasive, it remains implausible that there would be any effect on the outcome of the procurement. AWS’s offer was superior, and the outcome of the competition was not even close.
So, was this a "frivolous protest"?
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