The Importance of Establishing Prejudice in Bid Protests

Contractors filing bid protests necessarily focus on the alleged errors in the procurement process, as establishing these errors is essential to prevailing in the protest. However, a recent—and rare—decision by the Federal Circuit serves as a critical reminder that in addition to establishing procurement errors, protestors must demonstrate prejudice from the alleged errors.

In System Studies & Simulation, Inc. v. United States CAE USA Inc., the Federal Circuit was presented with an appeal by disappointed bidder System Studies & Simulation, Inc. (SSSI). SSSI had appealed a decision by the Court of Federal Claims in which the court found errors in the procurement, but ultimately denied the protest on the basis that SSSI had failed to establish prejudice.

Without demonstrating that the error had prejudiced SSSI, the Claims Court determined there was no basis for sustaining the protest, despite having affirmatively determined that the contracting agency had acted irrationally. Specifically, the Claims Court found that the agency had acted arbitrarily and capriciously in identifying an aspect of the CAE's winning proposal as a "strength." However, the Claims Court determined that because CAE's proposal was "clearly superior" and the erroneously identified strength was within a "non-price-factor" category, it was not prejudicial.

Critically, SSSI's argument on appeal was that when an aspect of the agency's evaluation is found to be arbitrary, the error must be presumed to be prejudicial. This argument was conclusively rejected by the Federal Circuit.

In its decision, the Federal Circuit reviewed the Administrative Procedure Act's standards governing judicial review of agency decisions, as well as the legal precedent set by the courts, and affirmed that protestors must establish both error and prejudice resulting from the error. In the court's words:

[T]the challenger of agency action generally bears the burden of showing that an error was harmful—that is, that it was prejudicial ….

These dual requirements set up a two-part test that courts and the Government Accountability Office follow when evaluating the merits of protests: "We first ask 'whether the agency's actions were "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law"'; if so, we ask whether the error was 'prejudicial.'"¹ The two-step analysis (error and prejudice) is required regardless of whether the agency was found to act arbitrarily/capriciously or in violation of the law.

The lesson from this decision is clear: for each alleged error in the procurement process, contractors must explain why the error was prejudicial—failure to do so will result in denial of the protest.

FOOTNOTE

1 Id.