The “American Rule” in Bid Protests

On June 14, 2016, the Senate passed the National Defense Authorization Act for Fiscal Year 2017 (NDAA). The Senate bill would change two important aspects of bid protests filed with the Government Accountability Office (GAO). First, the Senate NDAA would impose a “loser pays” scheme on bid protests. Specifically, the new language would require protesters to pay costs on unsuccessful protests when filed by a party with over $100 million in revenue from the previous year. Second, the proposed legislation would require an incumbent contractor who protests the loss of its contract to deposit any profits from the bridge contract into escrow. These profits would be returned to the incumbent protestor only if “the subject of the protest is cancelled and no subsequent request for proposal is released or planned for release,” or the GAO “issues an opinion that upholds any of the protest grounds filed under the protest.” If the bid protest is unsuccessful, however, either the GAO or the contract awardee would recoup the protestor’s profits. The GAO would receive the profits where the protest is not sustained, but the GAO reevaluates its proposals. The contract awardee would receive the profits where the GAO dismisses the protest. The House of Representatives took a more measured approach to bid protest reform. The House version of the NDAA does not include similar bid protest-related provisions—instead, it requires only that the Secretary of Defense contract with an “independent entity with appropriate expertise to conduct a review of the bid protest process related to major defense authorization programs.” The “independent entity” would then publish its findings on March 1, 2017 and file a final report on July 1, 2017. Should the Senate bill become law, it remains unlikely that large contractors will cease protesting the loss of lucrative government contracts. The potential costs are too low to affect a large contractor’s cost-benefit analysis in assessing a protest. The new structure may affect smaller contracts, however, where the risk of fees and lost profits outweigh the value of a successful protest. The Senate bill is likely a response to the long-held view that bid protests on defense procurements cripple the government contracting process. The new language may have some effect on patently frivolous protests. Yet some provisions seem to be an overreaction. Most glaringly, there seems to be no reason why a protestor must forfeit its profits where the government agency reevaluates its proposals or revises its solicitation. Indeed, in 2015 government agencies took voluntary corrective action on 45 percent of bid protests. Under the new language, the incumbent protestor would lose its profits despite the fact that its protest raised enough legitimate points for the agency to reconsider.