My carrier/shipper contract says my liability as a carrier for freight damage or loss is limited to $1,000,000.00 but the Bills of Lading say my liability as a carrier is limited to $1.00.
Is my limitation $1,000,000.00 or $1.00?
This article explores certain case law developments interpreting the above-illustrated Contract v. Bill of Lading contentions and disputed terms.
With the recent substantial increase in the number of carrier/shipper contracts across all modes of transportation, these kinds of questions seem to be arising more and more often.
There can be conflicts between the terms of a transportation contract in the “classic” sense of a multipage document and the terms of the Bills of Lading serving as contracts of carriage.
Ultimately, transportation contracts are bargained-for in order to shift the relative risk of loss compared to the freight rate charged on a per volume basis. Of course, these are business decisions for carriers and shippers of all types. There is no single right answer whether a carrier (or shipper for that matter) should enter into a contract for transportation services. Legal issues aside, bargaining power is probably the single most important factor for any business entity in making a decision whether to enter into a contract and on what terms. In this sense, entering into a transportation contract is naturally an economic decision – one which only the reader can answer based on all of the facts, conditions and circumstances.
Besides a contract in the sense of a multipage notarized document with all the legal bells and whistles, we all know the Bill of Lading is a contract of carriage. Many such Contracts state (or try to state) they supersede Bills of Lading.
When Contracts are negotiated (and depending, of course, on the level of negotiation and the relative sophistication of the parties) they are generally designed to create a platform to cover all issues and potential future events. This way, both sides can plan ahead and govern their risk for a long-term strategy. Ideally, both sides to the Contract should be in a position to price risk and sustain that price for that risk.
Nevertheless, without a robust institutional corporate internal knowledge, it is possible that those currently in positions of responsibility may not (at least at first blush) know or recall that a Contract governs the situation as it presents itself.
Accordingly, when such a matter arises, and you have checked your internal procedures and located the Contract – it is important to read it.
And I mean really read it; with scrutiny.
Does it apply to the route at issue?
Does it apply to the type of freight at issue?
Was the freight charge based on the Contract?
Does it apply over the Bill of Lading?
Read and re-read the Bill of Lading exclusionary language in the Contract.
Do your facts fit within an exception to the Bill of Lading exclusionary language in the Contract?
Does the Contract state it also contemplates the use of Bills of Lading?
Does the Contract require the carrier to participate in the National Motor Freight Classification?
Is the Contract an effective waiver of the carrier liability provisions of the Carmack Amendment to the Interstate Commerce Act, 49 U.S.C. § 14706?
Does the Contract incorporate 49 CFR § 1005, which are the Federal regulations governing motor carrier liability under the Carmack Amendment?
These are just a few of the kinds of questions to be considered at least at an early stage.
Second, after you finish reading (and I mean really reading) the Contract, read the Bill of Lading.
The Bill of Lading has to have the specific information.
Where do we pick up?
What is the description of the freight?
What is the Class designation?
Who prepared the Bill of Lading?
Did the shipper’s agent (a warehouse or an NVOCC or the like) prepare the Bill of Lading and thus bind the shipper to the Bill of Lading?
Is the Contract identified or referred to in the Bill of Lading?
Is there a separate Contract between the Shipper and the Shipper’s Agent (such as its warehouse or NVOCC)?
Without the specific information in the Bill of Lading, there is no way the carrier and shipper can effectively communicate and no way the carrier can perform its job. Because Contracts have the more general information, the Bills of Lading, of necessity, must contain the more specific information. In this sense, a Contract provision that the Bills of Lading do not apply (other than as a receipt) can be subject to varying degrees of interpretation. After all, the Bills of Lading have to serve a purpose of some sort by providing the specific information to the carrier. The Bill of Lading constitutes the contract of carriage and its terms and conditions are binding on the Shipper, the Shipper’s Agent and the carrier. Albany Ins. Co. v. M/V “Sealand Uruguay,” 2002 WL 1870289 (S.D.N.Y. 2002) and Grace Line, Inc. v. Todd Shipyards Corp., 500 F.2d 361 (9th Cir. 1974).
Taking some of the aforementioned Bill of Lading terms to their logical extreme, if the Contract says the Bills of Lading are only receipts, is the carrier liable if the freight freezes, or the temperature range is exceeded or if the freight was cross-docked and “double stacked” by the carrier? Can we ignore routing obligations if the Bill of Lading says the freight is a “HAZMAT” but the Contract says the Bill of Lading does not apply?
O.K., you really, really read the Contract and really, really read the Bill of Lading. Now what?
Then really, really read the case law (or really, really call your lawyer and have your lawyer read the case law).
The Court addressed this contract v. Bill of Lading analysis in Penske Logistics, Inc. v. KLLM, Inc., 285 F.Supp.2d 468 (D.N.J. 2003). Interpreting a Contract against the Bill of Lading, the Court found the specific bill of lading limitation terms applied instead of the more general Contract – despite the fact the Contract (imperfectly) stated the Bill of Lading did not apply.
The Penske Logistics Court began by stating that a carrier can limit its liability by “written agreement” or “written or electronic declaration.” Id. at 473. The “written declaration” can be a Bill of Lading. Id.
The bill of lading “operates as both the receipt and the basic transportation contract between the shipper/consignor and the carrier, and its terms and conditions are binding.” EF Operating Corp. v. American Bldgs., 993 F.2d 1046, 1050 (3d Cir.1993).
Penske Logistics, Inc. at 473.
In Penske Logistics, the parties presented the Judge with a Contract on the one hand calling for full value liability of $59,283.03 and on the other hand with a specific Bill of Lading prepared by the shipper with a specifically stated declared value of $1.50/lb., which amounted to $6,859.50. Id.
The Judge reviewed both the contract and the Bill of Lading and found the Bill of Lading applied and granted summary judgment to the carrier and limited the damages as per the Bill of Lading to $6,859.50. Id.
The Contract in Penske Logistics provided for full value carrier liability and it attempted to waive the Carmack Amendment through clauses entitled “Cargo Loss,” “Contract Carriage” and “Indemnification.” Id. The contract also referenced Bills of Lading as serving merely as “receipts” and provided that in the event of an inconsistency, the contract would control over the Bill of Lading. Id.
Moreover, the Court ruled the shipper was bound to the specific terms of the Bill of Lading where the shipper or its agent prepared the Bills of Lading.
where a shipper, rather than the carrier, drafts the bill of lading and chooses the release rate, the limitation of liability rate found on the bill of lading will be enforced against the shipper. Siren, Inc. v. Estes Express Lines, 249 F.3d 1268, 1274 (11th Cir.2001) and American Cyanamid Co. v. New Penn Motor Express, Inc., 979 F.2d 310, 314 (3d Cir.1992).
In Penske Logistics, the shipper prepared the Bill of Lading and put the specific released rate valuation on the face of the Bill of Lading and provided it to the carrier with the freight.
The Court rejected the plaintiff shipper’s arguments and ruled the contract in that case was not an effective waiver of the Carmack Amendment under 49 U.S.C. § 14706.
In an interesting ruling, the Court went further holding that the plaintiff was bound by the limitation of liability whether the lawsuit was “construed as one of classic contract interpretation or as within the provisions of the Carmack Amendment.” Penske Logistics at 474.
Accordingly, pursuant to the law set down in Penske Logistics, a shipper may not be able to simply point to the Contract and demand $1,000,000.00 from the carrier under the contract (as per our example above). Depending on the Contract terms and the Bill of Lading terms and the facts and circumstances of your case, it is entirely possible the shipper may be limited to $1.00 (as per our example above) in the Bill of Lading.
In another contract v. Bill of Lading case, Calchem Corp. v. Activsea USA LLC, 2007 WL 2127188, at *1 (E.D.N.Y. 2007), the District Court considered the application of diametrically opposed forum selection clauses; one contained in a written contract and the other contained in the Bill of Lading.
After reviewing the contract, the Bill of Lading and the law, the Court ruled that the terms of the Bill of Lading controlled. The Bill of Lading was issued after the contract was drafted and thus served as an amendment to the contract. See Norfolk Southern Railway Co. v. Kirby, 543 U.S. 14, 19, 125 S.Ct. 385, 160 L.Ed.2d 283 (2004) (describing a bill of lading as “essentially, a contract … [which] records that a carrier has received goods from the party that wishes to ship them, states the terms of carriage, and serves as evidence of the contract for carriage”). Calchem Corp. v. Activsea USA LLC, 2007 WL 2127188, at *1 (E.D.N.Y. 2007). Also, the Bills of Lading were issued well after the Contract was written and thus, the Court considered the Bills of Lading as specific amendments to the more general Contract.
As such, the Bills of Lading controlled over the Contract.
In TMC Co. Ltd. v. M/V Mosel Bridge, 2002 WL 1880722, at *1 (S.D.N.Y. 2002) (another “contract v. Bill of Lading” case) the Court found “the forum selection clause in the way bill, which postdated and is flatly inconsistent with that in the service contract, would have superseded the latter with respect to the cargo at issue.” In TMC Co. Ltd., the court held that under circumstances where the “second contract of a later date,” (i.e., the Bill of Lading), “containing the same subject matter” as the earlier Contract, but with “terms inconsistent” with the earlier Contract, the second contract (the Bill of Lading) will “supersede the former contract even though there is no express agreement that the” later “contract shall have that effect.” Calchem Corp., at * 3 quoting TMC Co. Ltd., supra at * 1.
In Burnell v. Butler Moving & Storage, 826 F.Supp. 65 (N.D.N.Y. 1993), the Court held the shipper was bound to the actions of its agent when its agent prepared a Bill of Lading with terms differing from the Contract language. The Burnell Court held the carrier had a right to assume the shipper’s agent had the authority to bind the shipper to the terms of the limitation of liability which the shipper’s agent put on the bill of lading. As such, the Court enforced the bill of lading with respect to the motor carrier and limited the carrier’s liability to $0.10/lb. as per the Bill of Lading.
Spray-Tek, Inc. v. Robbins Motor Transport, Inc., 426 F. Supp. 2d 875 (W.D. Wis. 2006) presents an interesting carrier rate quote contract v. tariff limitation question.
The sales contract with the shipper was FOB point of manufacture. As such, title to the subject freight transferred to the consignee, Niro, once the freight was loaded on the Defendant motor carrier’s trailer. Prior to loading, Niro contacted the motor carrier and obtained a freight rate quote contract. The rate quote contract was silent on value and did not reference the carrier’s tariff or any limitation of liability. At deposition, the carrier’s representative who prepared the freight rate quote contract testified the value of the freight was not a consideration in setting the freight rate. That testimony is interesting inasmuch as Siren, Inc. v. Estes Express Lines, 249 F.3d 1268, 1268 (11th Cir. 2001) has held the freight rate charge is “indissolubly” bound up with the value of the freight being transported.
Despite that admission, the Court seems to focus correctly on the tariff as controlling over the quote contract. After all, the tariff was incorporated by reference through the Plaintiff’s preparation of the Bill of Lading.
Nevertheless, the Court in Spray-Tek seems to detour into the forest and the question whether the tariff offered a “reasonable opportunity to choose between two or more levels of liability.” Id. at 885. On that point, the Court punts and finds there are questions of fact and denies motions for summary judgment.
This case prominently illustrates two points: (i) the most important consideration in determining the freight rate is the value of the freight and (ii) as a carrier, if you have not done so already, you may want to review your tariff and confirm that it clearly provides for and meets the “magic words” of having “two or more levels of liability,” which, of course will affect the freight rate.
To that end, you may even want to put a “plain language” statement on page one of the tariff to the effect that the tariff offers shippers different releases rate limitations concomitant with different freight rates. This way, as lawyers, we may be in a position to show the Judge right up front on page one of the tariff in plain language, the carrier advised the plaintiff of the existence of relative choices for a higher freight rate.
As a carrier, we are pricing risk when we set a freight rate.
The value of the risk IS the value of the freight.
Not every case says that the Bills of Lading control over a Contract.
Thus, Eastern Fish Company v. South Pacific Shipping Co., 105 F. Supp. 2d 234, 236 (S.D.N.Y. 2000) applied a contract clause related to arbitration (instead of a bill of lading clause on arbitration). That case is rather unusual because no bill of lading was ever issued in that case. The freight was immediately stolen before a Bill of Lading was even issued. There was no bill of lading in that case which could have been interpreted by the court. As such, Eastern Fish Company is not a typical Contract v. Bill of Lading case.
After the rate quote contract was agreed upon between Niro and the carrier, Niro then filled out and prepared the Bill of Lading.
The National Motor Freight Classification (“NMFC”) designation on a Bill of Lading is a choice of limitation of liability. As such, shippers and carriers need to review and consider the Class designation on the Bill of Lading and how that choice relates under the context of the Shipper/Carrier Contract.
In Siren, Inc. v. Estes Express Lines, 249 F.3d 1268 (11th Cir. 2001), the District Court awarded judgment to the plaintiff shipper in the amount of $46,982.16. Siren is a limitation of liability case in a Bill of Lading as opposed to a “Contract v. Bill of Lading” case but the overall analysis would seem to apply to our situation. On appeal, the United States Court of Appeals for the Eleventh Circuit reversed and entered judgment for the released rate limitation on the Bill of Lading in the amount of $8,309.00. Id.
The Court recognized that the shipper filled out the Bill of Lading and put NMFC “Class 85” on the Bill of Lading. The Court held that the shipper’s use of such “industry specific terminology” as “Class 85” was itself a limitation of liability as to the motor carrier and which appeared on the face of the Bill of Lading when the carrier received the freight. Id.
As the Eleventh Circuit explained with respect to the impact of the “released rate” on the Bill of Lading, “assuming [the shipper or its agent] did not actually know that it was limiting [the carrier’s] liability, [the shipper or its agent] certainly should have known.” Siren, Inc. v. Estes Express Lines, 249 F.3d 1268, 1273 (11th Cir. 2001) (emphasis in original).
This may be especially appropriate where the Court is confronted with a sophisticated shipper.
Moreover, in American Cyanamid Co. v. New Penn Motor Express, Inc., 979 F.2d 310, 314 (3d Cir. 1992) the Court enforced the limitation of liability where the “released value was specifically on [the shipper’s] own form of bill of lading”). Much like Siren, American Cyanamid is not a “Contract v. Bill of Lading” case but the reasoning may apply to a matter involving the application of specific Bill of Lading terms over more general Contract terms.
The fact the shipper (or its agent) prepared the Bill of Lading and the motor carrier did not was a critical fact for the Court’s reasoning. As the Siren Court put it, “[t]his Court does not deem it proper or necessary to protect shippers from themselves.” Siren, Inc. v. Estes Express Lines, 249 F.3d 1268, 1271 (11th Cir. 2001).
we hold that when a shipper drafts a bill of lading, incorporating language which is universally understood throughout the motor carrier industry to limit the liability of the carrier, said shipper will be bound by the terms of the contract, irrespective of whether the shipper had actual knowledge of the limiting aspect of those terms.
The Shipper’s Agent’s Secret (or the Shipper’s “Secret Agent”).
The United States Supreme Court has already applied limited liability terms based on the terms entered into through agents. Norfolk Southern Railway Co. v. Kirby, 543 U.S. 14, 125 S. Ct. 385, 160 L.Ed. 2d 283 (2004). The Court’s decision in Kirby was based on the long-standing precedent of Great Northern R. Co. v. O’Connor, 232 U.S. 508, 34 S. Ct. 380, 58 L.Ed. 703 (1914).
In Great Northern, an owner hired a transfer company to arrange for the shipment of her goods. Without the owner’s express authority, the transfer company arranged for rail transport at a tariff rate that limited the railroad’s liability to less than the true value of the goods. The goods were lost en route, and the owner sued the railroad. The Court held that the railroad must be able to rely on the liability limitation in its tariff agreement with the transfer company. The railroad “had the right to assume that the Transfer Company could agree upon the terms of the shipment”; it could not be expected to know if the transfer company had any outstanding, conflicting obligation to another party. Id., at 514, 34 S.Ct. 380. The owner’s remedy, if necessary, was against the transfer company. Id., at 515, 34 S.Ct. 380.
Norfolk Southern Railway Co. v. Kirby, 543 U.S. 14, 33, 125 S.Ct. 385, 398 (2004). The shipper’s agent can bind the shipper with respect to the carrier.
Your facts may be similar (or different) in the event the shipper’s agent filled out the Bill of Lading. Thus, “[w]ithout the owner’s express authority” (and indeed perhaps contrary to the specific terms of the Contract) “the transfer company” (i.e., the shipper’s agent) “arranged for . . . transport at a . . . rate (in the Bills of Lading) that limited the carrier’s liability . . ..” Id.
As the Court concludes, the “owner’s remedy, if necessary, was against the transfer company” (i.e., the shipper’s agent).
Also, in Orion Insurance Company, PLC v. M/V “Humacao”, 851 F. Supp. 575 (S.D.N.Y 1994), the Court reviewed agency principals and found the shipper’s agent, which agent issued the Bill of Lading, bound plaintiff to the limitation under concepts of apparent authority. The plaintiff’s agent issued an Ocean Bill of Lading with a limitation of liability of $500.00. The ocean carrier moved to limit the damages to $500.00 as per the express terms of the Bill of Lading. The Court granted the motion and limited the amount of the damages. Id.
Moreover, in Jackson v. Brook Ledge, Inc., 991 F. Supp. 640 (E.D. Ky. 1997), the Court held the freight owner’s agent, who issued the Bill of Lading, bound the freight owner to a $1,000.00 limitation of liability.
the long-standing principle that a shipper is deemed to be aware of, and agrees to be bound by, the tariff under which it is shipping, and that before carriage can begin, the parties enter into a contract of carriage embodied in a bill of lading.
National Small Shipments Traffic Conference, Inc. v. U.S., 887 F.2d 443, 446 (3d Cir. 1989).
Although a tariff may or may not be involved in your particular fact pattern and depending on the term of the Contract, the Third Circuit’s reasoning could apply to matters addressing the Contract v. Bill of Lading contention.
Overall, shippers and carriers must be well aware that their agents can bind them and to commitments that may not have been contemplated – especially by the shipper if it has a traditional Contract with the carrier but the shipper’s agent bound the shipper (through the Bill of Lading) to terms contrary to the Contract.
Specific terms (as per Bills of Lading) may trump and supersede more general terms of Contracts.
Thus, it is a fundamental rule of contract construction that “specific terms and exact terms are given greater weight than general language.” Restatement (Second) of Contracts § 203(c) (1981). Aramony v. United Way of Am., 254 F.3d 403, 413 (2d Cir. 2001).
Additional case law interpreting the issue has found that the Bills of Lading are the specific contracts of carriage that govern the transaction. Mafcote Industries, Inc. v. Milan Express Co., Inc., 2011 WL 3924188 (D. Conn. 2011).
Either the Bills of Lading should be considered in whole or not considered at all.
As set forth in Mafcote Industries, an argument could be made (depending of course on the facts of your case) that some terms of the Bills of Lading cannot be parsed out leaving others in. Either the full terms of the Bills of Lading are applicable or none of them are. This follows logically, because the Bills of Lading naturally contain the more specific terms for each transportation including location, quantity, size, description and value. On the other hand, the Contract can contain only general terms.
Either all of the terms of the Bills of Lading have meaning or none of them do. Either there can be no liability for “double stacking” if that appears on the Bill of Lading or if there is liability for breaching that term of the Bill of Lading, is it capped at $1.00 in our example?
Applying terms of a Contract, the Mafcote Court concluded that the Bills of Lading applied (in lieu of a separate contract) because the Bills of Lading were not barred by Contract. Further, use of Bills of Lading was specifically contemplated by the separate Contract.
Read your Contracts and scrutinize them. Read your Bills of Lading with any eye toward practicality and the “real world” of the industry. Act proactively and get all of the information as quickly as you can to your legal department to have them review.
As the cases illustrate, a “Contract v. Bill of Lading” dispute can be very fact sensitive.
Otherwise, if all else fails just write that check for $1.00 and mail it to the shipper and see if they accept it.
The fact the shipper (or its agent) prepared the Bill of Lading and the motor carrier did not was a critical fact for the Court’s reasoning. As the Siren Court put it, “[t] his Court does not deem it proper or necessary to protect shippers from themselves.” Siren, Inc. v. Estes Express Lines, 249 F.3d 1268, 1271 (11th Cir. 2001).
shipper’s agent can bind the shipper with respect to the carrier.
National Small Shipments Traffic Conference, Inc. v. U.S., 887 F.2d 443, 446 (3d Cir.
it is a fundamental rule of contract construction that “specific terms and exact terms are given greater weight than general language.” Restatement (Second) of Contracts § 203(c) (1981).
Aramony v. United Way of Am., 254 F.3d 403, 413 (2d Cir. 2001).


Are Abstract Ideas Not Actually Abstract?
The following post is from Jim Hallenbeck of Schwegman, Lundberg & Woessner.
The word “principle” is used by elementary writers on patent subjects, and sometimes in adjudications of courts, with such a want of precision in its application as to mislead. It is admitted that a principle is not patentable. A principle, in the abstract, is a fundamental truth; an original cause; a motive; these cannot be patented, as no one can claim in either of them an exclusive right. Nor can an exclusive right exist to a new power, should one be discovered in addition to those already known. Through the agency of machinery, a new steam power may be said to have been generated. But no one can appropriate this power exclusively to himself under the patent laws. The same may be said of electricity and of any other power in nature, which is alike open to all and may be applied to useful purposes by the use of machinery. Le Roy, 55 U.S. at 174-75.
That the main merit — the most important part of the invention — may consist in the conception of the original idea — in the discovery of the principle in science or of the law of nature stated in the patent, and little or no pains may have been taken in working out the best mode of the application of the principle to the purpose set forth in the patent. But still, if the principle is stated to be applicable to any special purpose, so as to produce any result previously unknown in the way and for the objects described, the patent is good. It is no longer an abstract principle. It becomes to be a principle turned to account, to a practical object, and applied to a special result. It becomes then not an abstract principle, which means a principle considered apart from any special purpose or practical operation, but the discovery and statement of a principle for a special purpose — that is, a practical invention, a mode of carrying a principle into effect. That such is the law [he observes] if a well known principle is applied for the first time to produce a practical result for a special purpose has never been disputed, and it would be very strange and unjust to refuse the same legal effect when the inventor has the additional merit of discovering the principle as well as its application to a practical object. Le Roy, 55 U.S. at 185-86.
Considering that the abstract idea in Bilski is hedging, which in view of Le Roy v. Tatham equates an abstract idea to a law of nature or mathematical formula, hedging is essentially viewed by the Court as equal to a law of nature – a basic principle. Laws of nature and mathematical formulas are actually not abstract in the sense of being loosely defined, which is how I initially read “abstract ideas” in Bilski. Instead, the opposite is true. A claim to an abstract idea is actually very specific, such as a claim to the Pythagorean Theorem, addition, electromagnetism, or even gravity. Those are very specific things just as hedging is very specific – or concrete, but I will get back to that. A thesaurus is quite helpful in finding a single word with the same meaning as abstract that is more easily understood. Conceptual. An abstract idea is accurately considered to be conceptual as in, “The claim of Bilski was directed at the concept of hedging.” With this definition in mind, the abstract idea holding makes more sense. But, it turns out that abstract ideas are not actually abstract at all.
Nevertheless, I still think the Court took a few mental leaps. For example, hedging didn’t necessarily always exist. Hedging is a method developed by man to mitigate risk. Certainly hedging has been around for centuries. So it must be that when a basic construct created by man becomes so well known and commonly practiced, the concept becomes principle along the same lines as gravity. But considering the precedent of Chakrabarty where anything under the son made by man is patent eligible, wouldn’t Bilski have been better, or at least more simply decided under § 102 or § 103? Diamond v. Chakrabarty, 447 U.S. 303, 309 (1980). Otherwise it seems there is another test missing in the reasoning of Bilski that can be used to tell us when a construct of man becomes so ingrained that the construct is instead conceptual to a level of being a principle.
So it seems that an abstract idea is simply a conceptual process lacking an application that does not preempt all uses thereof.
In view of the June 28, 2010 memo from Robert Bahr (USPTO Acting Associate Commissioner for Patent Examination Policy) providing post-Bilski process claim examination instructions, when a process claim does not meet the Machine or Transformation test, the claim is to be rejected under § 101 unless there is a clear indication that the claim is not directed to an abstract idea. That leads me to my next point – traversal of an assertion that a claim is directed to an abstract idea.
To traverse a holding that a process claim is directed to an abstract idea, it seems necessary to be able to show how the claim does not preempt all uses of the process involved in the claim. Under Flook, the showing must be more than a restriction to a particular field of use and involve more than token post-solution components. Parker v. Flook, 437 U.S. 584, 590 (1978)(see footnote 11).
Another possible way to traverse an assertion that a process claim is directed to an abstract idea is to attack the grounds upon which the process is considered to be an abstract idea. For example, the majority in Bilski cited Judge Rader’s dissenting opinion where he asserted that “[h]edging is a fundamental economic practice long prevalent in our system of commerce and taught in any introductory finance class.” The tactic here may be to lodge a demurrer as to the asserted facts and traverse the conclusion that the construct of man has reached the point of being an abstract idea, a.k.a. a principle.
My investigation into the rightful meaning of “abstract idea” lead me to a thesaurus as previously mentioned. I noted that “concrete” is an antonym of “abstract.” That reminded me of the useful, concrete, and tangible (UCT) test from State Street … the same case the Bilski Court refused to endorse. Could it be that the reason the UCT test didn’t work well is that the concrete portion of the test was not definitionally understood as the opposite of an abstract idea? Perhaps with the background of Bilski and a proper definitional context for “concrete,” the best way forward would be for the Federal Circuit to take the Supreme Court up on its challenge for “development of other limiting criteria that further the purpose of the Patent Act” by affirming the UCT test pronounce by Judge Rich (whom by the way Justice Stevens was so quick to quote in his contrarian concurring opinion).
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2 Responses to Are Abstract Ideas Not Actually Abstract?
Jim, thanks for the thought provoking post. I too have been thinking a lot about the meaning of “abstract”.
I think the courts go way off base with using the phrase “abstract idea” to capture everything they think is wrong with [un]patentable subject matter.
As you pointed out, one sense of “abstract” is “not concrete” or “not tied to the physical world”. I don’t see how anyone can say with a straight face that a computer executing software is abstract in this sense of the word. An idea, abstract by definition, is taken out of the realm of abstract by a computer implementing the idea.
Another sense of “abstract” is “fuzzy” or “not well defined” or “details not yet figured out”. That sense of “abstract” has no place in 101 analysis, since that concern is addressed by 112.
The real concern the courts seem to have with defining the limits of patentable subject matter is something else entirely: “preempts all uses”. “Abstract idea” is a terrible way to express “preempts all uses”. “Preempts all uses” has to do with breadth of a claim. My answer to that: so what?
My claim to a computer executing an inventive Fast Fourier Transform (FFT) algorithm preempts all uses of that algorithm — from GPS receivers to cell phones to weapons systems. So what?
Why is this different than a claim to a inventive fastener, ala the Torx(R) screw. A patent on a fastener preempts all uses of that fastener, from bookshelves to computer cases to auto parts. Isn’t that the whole point of a patent — to exclude others in as many fields as possible?
And what really confuses me is that the court’s (Supreme and Fed. Cir.) insistence that fields of use limitation don’t take the claim out of the realm of abstract. Yet it’s precisely a field of use limitation that would address the court’s concern with “preempts all use”.
Interesting idea. Off the top of my head, I can’t think of any claims that would pass MoT yet fail UCT. That is, it seem so me that a machine makes the claim concrete, and a transformation makes the claim tangible. OTOH, perhaps there are ways to achieve concrete other than a machine — surely throwing a baseball and swinging a cat are concrete, since they exist in the physical world — so maybe the two tests are not coextensive. I dunno what to do with the useful prong of the test.


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Live Premier League coverage continues Saturday at 10 a.m. ET, with Newcastle v. Southampton on NBCSN. Also Saturday at 10 a.m. ET, NBC Sports Gold presents four exclusive matches: Everton v. Brighton & Hove Albion, Huddersfield v. Swansea City, West Bromwich Albion v. Leicester City, and West Ham v. Burnley.
Saturday at 12:30 p.m. ET, NBCSN and Universo host coverage of Chelsea v. Crystal Palace. Currently in fifth place, Chelsea look to rebound following a 1-0 loss to league-leaders Manchester City, and keep their hopes of a top-four finish and next season’s Champions League alive.
Live Premier League coverage on Sunday, March 11, begins at 8:30 a.m. ET with Premier League Live on NBCSN, followed by Arsenal v. Watford at 9:30 a.m. ET, and Bournemouth v. Tottenham at Noon ET on NBCSN and Telemundo.
This week’s live match coverage wraps up on Monday, March 12, with Premier League Live at 3 p.m. ET on NBCSN, followed by Stoke City v. first-place Manchester City at 4 p.m. ET on NBCSN and Universo. Manchester City continued their dominant run toward the Premier League title with a 1-0 win over Chelsea on Sunday, maintaining their 16 point lead at the top of the table.

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Oracle contends that the agency did not have the authority to award the [Production-Other Transaction Agreement] P-OTA because, in the protester’s view, the initial, prototype OTA was commercial in nature and thus did not qualify as a prototype project under 10 U.S.C. § 2371b(a). Protest at 5, 20‑24. The Army argues the prototype OTA properly qualified as a prototype project because it complied with internal guidance. COS/MOL at 14. The agency sought a “repeatable process that highly automates the installation of these applications and the op[eration]s and maintenance of these applications down the road into a commercial cloud environment,” which, it argues, meets the definition of a prototype project. Tr. at 421:8-12. In this regard, the agency contends that a commercial program could still qualify as a prototype project if it had not been previously deployed within the DoD, in part due to the DoD’s stringent security requirements. Id. at 408:12-15, 415:17-22. In this regard, neither the agency nor the protester could identify any DoD entity that had successfully implemented a similar automated migration program. Id. at 408:19-21.
A prototype project can generally be described as a preliminary pilot, test, evaluation, demonstration, or agile development activity used to evaluate the technical or manufacturing feasibility or military utility of a particular technology, process, concept, end item, effect, or other discrete feature. Prototype projects may include systems, subsystems, components, materials, methodology, technology, or processes. By way of illustration, a prototype project may involve: a proof of concept; a pilot; a novel application of commercial technologies for defense purposes; a creation, design, development, demonstration of technical or operational utility; or combinations of the foregoing, related to a prototype.
AR, Tab 16, OT Prototype Guide, at 4.
We find that the original effort procured under the prototype OTA properly consisted of a prototype project. In this regard, the migration of TRANSCOM’s applications can fairly be called a “pilot” or “test” program, as well as a “demonstration” of REAN’s capabilities. The agency procured an “agile systems development enterprise” that included “the demonstration of a repeatable framework consisting of tools, processes and methodologies for securing, migrating (re-hosting) and refactoring, existing applications into a government-approved commercial cloud environment.” AR, Tab 6a, Prototype OTA, at 12. The initial award consisted of a proof of concept. AR, Tab 5a, Prototype OTA D&F, at 4.
Although the protester urges our Office to apply a dictionary definition of “prototype,” instead of that in the OT Prototype Guide, we decline to do so where the agency guidance was published well in advance of the AOI and the protester does not explain how the definition in the OT Prototype Guide is improper, ambiguous, or should be disregarded in favor of another definition. See, e.g., AINS, Inc., B‑400760.4, B-400760.5, Jan. 19, 2010, 2010 CPD ¶ 32 at 11 (relying on internal guidance for definition of terms); Protest at 22-23. On this record, we conclude that the underlying prototype OTA properly consisted of a prototype project.
This protest also challenges the agency’s use of its statutory authority to award a follow-on P-OTA under 10 U.S.C. § 2371b(f). Both Oracle and the Army agree that the P-OTA was awarded without competitive procedures, relying on the exception under subsection (f)(2). Protester Post-Hearing Brief at 22-25; Agency Post-Hearing Brief at 7. Oracle argues that the Army lacked the authority to award a follow-on P-OTA because the prototype OTA did not provide for a follow-on P-OTA, as required by subsection (f)(1). Protester Comments at 24-25. Oracle also alleges that the P-OTA award was improper because the prototype project is not complete, a prerequisite to award under subsection (f)(2)(B). Protester Post-Hearing Brief at 64. The agency contends that its award of the P-OTA complied with the relevant statutory requirements to enter into a follow-on production transaction. COS/MOL at 50. Here, we find that the Army did not comply with the statutory provisions regarding the award of a P-OTA because the prototype OTA did not provide for the award of a follow-on production transaction and because the prototype project provided for in the prototype OTA has not been completed.
(1) A transaction entered into under this section for a prototype project may provide for the award of a follow-on production contract or transaction to the participants in the transaction. A transaction includes all individual prototype subprojects awarded under the transaction to a consortium of United States industry and academic institutions.
(B) the participants in the transaction successfully completed the prototype project provided for in the transaction.
(3) Contracts and transactions entered into pursuant to this subsection may be awarded using the authority in subsection (a), under the authority of chapter 137 of this title, or under such procedures, terms, and conditions as the Secretary of Defense may establish by regulation.
The starting point for our analysis is the statutory language used by Congress. See Consumer Prod. Safety Comm’n v. GTE Sylvania, Inc., 447 U.S. 102, 108, 100 S. Ct. 2051, 64 L. Ed. 2d 766 (1980) (“We begin with the familiar canon of statutory construction that the starting point for interpreting a statute is the language of the statute itself.”). In construing the statute, “‘we look first to its language, giving the words used their ordinary meaning.’” Ingalls Shipbuilding, Inc. v. Director, Office of Workers’ Compensation Programs, 519 U. S. 248, 255, 117 S. Ct. 796, 136 L. Ed. 2d 736 (1997) (quoting Moskal v. United States, 498 U. S. 103, 108, 111 S. Ct. 461, 112 L. Ed. 2d 449 (1990)). Generally, we must give effect to all words in the statute, as Congress does not enact unnecessary language. Life Techs. Corp. v. Promega Corp., 580 U.S. __, __, 137 S. Ct. 734, 740, 197 L. Ed. 2d 33, 41 (2017) (citing Hibbs v. Winn, 542 U.S. 88, 89, 124 S. Ct. 2276, 159 L. Ed. 2d 172 (2004)). It is a cardinal principle of statutory construction that a statute ought to be so construed that, if it can be prevented, no clause, sentence, or word shall be superfluous, void, or insignificant. TRW Inc. v. Andrews, 534 U.S. 19, 31, 122 S. Ct. 441, 151 L. Ed. 2d 339 (2001), citing Duncan v. Walker, 533 U.S. 167, 174, 121 S. Ct. 2120, 2125, 150 L. Ed. 2d 251 (2001). If the statutory language is clear and unambiguous, the inquiry ends with the plain meaning. Myore v. Nicholson, 489 F.3d 1207, 1211 (Fed. Cir. 2007) (internal citations omitted). GAO likewise applies the “plain meaning” rule of statutory interpretation. See, e.g., Technatomy Corp., B-405130, June 14, 2011, 2011 CPD ¶ 107.
Applying the principles above to the language of 10 U.S.C. § 2371b(f), we conclude that a follow-on P-OTA may only be awarded to the prototype transaction participants without the use of competitive procedures if the “transaction entered into under this section for a prototype project”--i.e., the prototype OTA itself--“provide[d] for the award of a follow-on production contract or transaction to the participants in the transaction.” 10 U.S.C. § 2371b(f)(1), (2). The Army acknowledges that the prototype OTA does not in any way “provide for” a follow-on P-OTA. Agency Post-Hearing Brief at 10. The agency contends, however, that the June 2016 CSO’s references to a possible follow-on P-OTA satisfy the statutory requirement to “provide for” a P‑OTA. Id. at 11 (“The language in the CSO has the same effect as if it were specifically incorporated in the individual prototype OTAs – it is clearly an optional part of the intent of the parties from the inception, if the prototype is successful.”); see also tr. at 257:5-13 (“Q. Where is your . . . authority to award a follow-on production transaction without having that follow-on transaction being initially provided for in a transaction under paragraph [(f)]1? A: Again, I point to the CSO and the fact that we had in there[,] in the solicitation document that we were going to potentially go to commercial.”).
The agency argues that the CSO’s language properly “provides for” a follow-on P‑OTA in accordance with subsection 2371b(f)(1), in order to allow for a non-competitive award of a P-OTA under (f)(2). Agency Post-Hearing Brief at 10-11. This position, however, fails to consider that such award is only permitted if there is a provision for follow-on production included in “[a] transaction entered into under this section.” 10 U.S.C. § 2371b(f)(1). In this regard, the CSO (and for that matter, the AOI) cannot be a “transaction [that is] entered into,” because it is a standalone announcement. Id. The “transaction” is the legal instrument itself, and not the solicitation documents. MorphoTrust, supra, at 6; see also Exploration Partners, supra, at 4. Thus, the only reasonable reading of this phrase is as a reference to the prototype OTA itself, which does qualify as a “transaction [that is] entered into.” Id. We therefore conclude that the Army’s argument as to the sufficiency of the CSO references is unreasonable because it neither reflects the ordinary meaning of the statute nor accounts for all of the phrases therein. TRW Inc. v. Andrews, supra; Alaska Dept. of Envtl. Conservation v. Environmental Protection Agency, 540 U.S. 461, 489 n.13, 124 S. Ct. 983, 157 L. Ed. 2d 967 (“a statute ought, upon the whole, to be so construed that, if it can be prevented, no clause, sentence, or word shall be superfluous, void, or insignificant”) (citation omitted).
Not only is this reading consistent with the plain meaning of the statute, but it is also concordant with the agency’s own internal guidance, which advises that the agency’s “acquisition approach should . . . [a]ddress the OT source selection process, the nature and extent of the competition for the prototype project, and any planned follow-on activities.” AR, Tab 16, OT Prototype Guide at 10; id. at 6 (“It is the Agreements Officer’s responsibility to ensure that the terms and conditions negotiated [for the prototype OTA] are appropriate for the particular prototype project and should consider expected follow-on needs.”). The agency explains, however, that although all of the DIUx OTAs contemplate that the prototype “projects may eventually result in follow-on production,” planning for a P-OTA was not addressed at the time of the award of the prototype OTA because “it’s too early in the process.” Tr. at 157:18-20; 158:1.
Thus, because the plain and unambiguous meaning of the statute provides that the Army only has the authority to award a follow-on P-OTA if it was provided for in the prototype OTA, and because the prototype OTA here included no provision for a follow-on P-OTA, we conclude that the Army lacked the statutory authority to award the P-OTA and sustain the protest on this basis.
As another prerequisite to award of a P-OTA without competition, subsection (f)(2) states that “the participants in the transaction [must have] successfully completed the prototype project provided for in the transaction.” 10 U.S.C. § 2371b(f)(2)(B). Oracle asserts that the agency lacked authority to award the P-OTA because the prototype project was not completed. Protester Post-Hearing Brief at 63-64. The Army contends that “[t]he prototype project was successfully completed (as required by section (f)(2)(B)) under the prototype other transaction agreement awarded to REAN on May 23, 2017.” COS/MOL at 22.
The prototype OTA as awarded contemplated the migration of six applications, and the option to migrate an additional six. AR, Tab 6a, Prototype OTA, at 4, 7. The prototype OTA was subsequently modified to include enclave migration. AR, Tab 7e, Amend. P0005, at 1 (“The purpose of this modification is to incorporate the movement of Enclaves into the prototype effort.”). The enclave work was not completed on February 1, 2018, when the Army signed the D&F approving the award of the P-OTA and awarded the P‑OTA. Tr. at 86:18-20.
The Army acknowledges that the enclave work is not complete, but contends that its award of the P-OTA was nevertheless in compliance with the statute because REAN had completed those “parts of the prototype” project that were included in the P-OTA. COS/MOL at 30 (“Only those same capabilities successfully prototyped are included in the production OT.”); tr. at 471:19. Because award of a P-OTA requires “successful complet[ion of] the prototype project provided for in the transaction,” the Army in essence argues that, for the purposes of awarding the $950 million P-OTA, the enclave work is not part of the prototype project. COS/MOL at 21; 10 U.S.C. § 2371b(f)(2).
We apply the same principles of statutory interpretation described above to determine whether the requirement for successful completion of “the prototype project provided for in the transaction” refers to all of the prototype project or only the project as initially awarded. Again, the plain meaning of the phrase “completed the prototype project provided for in the transaction” is the entire prototype project described in the transaction, i.e., the instrument itself. Here, the record shows that the transaction includes enclaves. Furthermore, if the enclaves were not properly part of the “prototype project,” then they would not be included in the Army’s award authority under 10 U.S.C. § 2371b(a).
Under the Competition in Contracting Act of 1984 (CICA) and our Bid Protest Regulations, we review protests concerning alleged violations of procurement statutes or regulations by federal agencies in the award or proposed award of contracts for the procurement of goods and services, and solicitations leading to such awards. See 31 U.S.C. §§ 3551(1), 3552; 4 C.F.R. § 21.1(a). We have also found that agreements issued by an agency under its “other transaction” authority “are not procurement contracts, and therefore we generally do not review protests of the award, or solicitations for the award, of these agreements under our bid protest jurisdiction.” Rocketplane Kistler, B-310741, Jan. 28, 2008, 2008 CPD ¶ 22 at 3; see also Exploration Partners, LLC, B-298804, Dec. 19, 2006, 2006 CPD ¶ 201 at 3 (finding that “other transaction” agreements, cooperative agreements, and other non-procurement instruments are not procurement contracts); Strong Envtl., Inc., B-311005, Mar. 10, 2008, 2008 CPD ¶ 57 at 4 (GAO does not have jurisdiction to consider the award of a cooperative agreement); Sprint Commc’ns Co. L.P., B-256586, B-256586.2, May 9, 1994, 94-1 CPD ¶ 300 at 3. We will review, however, a timely protest that an agency is improperly using its “other transaction” authority. See Rocketplane Kistler, supra.
We find that TSA has statutory authority to enter into “other transaction” agreements, and the protester has not shown that TSA’s use of this authority for the Pre✓® Application Expansion Initiative is inconsistent with TSA’s statute.
Congress granted “other transaction” authority to TSA. Specifically, TSA “is authorized to enter into and perform such contracts, leases, cooperative agreements, or other transactions as may be necessary to carry out the functions of the Administrator and the Administration.” 49 U.S.C. § 106(l)(6) (emphasis added). Further, it is clear that the solicitation here for the TSA Pre✓® Application Expansion Initiative falls within the scope of TSA’s “other transaction” authority. Unlike the limited “other transaction” authority provided to certain other federal agencies, TSA’s “other transaction” authority may be used for any purpose “necessary to carry out” the agency’s functions. There is no express statutory prohibition on TSA using its “other transaction” authority for the Pre✓® Application Expansion Initiative, nor any statutory requirement that this particular program be done by means of a procurement contract.
Where, as here, a decision--such as whether to use “other transaction” authority--is authorized by statute or regulation, our Office will not make an independent determination of the matter. MCR Fed., LLC, B‑401954.2, Aug. 17, 2010, 2010 CPD ¶ 196 at 5; Knights’ Piping, Inc.; World Wide Marine & Indus. Servs., B‑280398.2, B-280398.3, Oct. 9, 1998, 98-2 CPD ¶ 91 at 6. Instead, our review of a discretionary agency action is limited to whether the action undertaken was a knowing and authorized one. See, e.g., CIGNA Gov’t Servs., LLC, B-401068.4, B‑401068.5, Sept. 9, 2010, 2010 CPD ¶ 230 at 14 (holding that our review of an agency’s discretion to waive an organizational conflict of interest was confined to whether the waiver outlined the extent of the conflict and was executed by a duly-authorized agency official).
Here we find TSA’s decision to use its “other transaction” authority unobjectionable. In this regard, the record reflects that the head of the TSA contracting activity prepared and duly executed a written determination that outlined the rationale for the agency’s use of its “other transaction” authority for the TSA Pre✓® Application Expansion Initiative. The determination first recognized the “other transaction” authority possessed by the agency. The determination also included a detailed discussion of the bases for his conclusion that an “other transaction” agreement would provide flexibilities necessary to the successful accomplishment of the program, and would be in the best interests of the government. See AR, Tab 2, TSA D&F, Dec. 12, 2014, at 1-2. Additionally, there is no dispute that the head of the TSA contracting activity was authorized to make such a determination, or that the resulting solicitation was consistent in scope with the approved use of the agency’s “other transaction” authority. We therefore have no basis to question the reasonableness of the agency’s actions. See CIGNA Gov’t Servs., LLC, supra.
MorphoTrust does not dispute that TSA possesses “other transaction” authority. Rather, MorphoTrust maintains that the agency is required by the Federal Grant and Cooperative Agreement Act (FGCAA) to conduct the TSA Pre✓® Application Expansion Initiative as a procurement contract. We disagree.
The protesters each raise various arguments about the terms and conditions of the [notice of funding availability] NOFA. All of the protesters argue that HUD’s use of a NOFA, and the characterization of the [Annual Contributions Contract] ACCs that HUD seeks to award via this NOFA as cooperative agreements, are improper. The protesters contend that HUD is seeking contract administration services that must be solicited through a procurement instrument that results in the award of contracts.
The Federal Grant and Cooperative Agreement Act (FGCAA) establishes the general criteria that agencies must follow in deciding which legal instrument to use when entering into a funding relationship with a state, locality or other recipient for an authorized purpose. 31 U.S.C. §§ 6301-6308 (2006). In this regard, the FGCAA provides that an agency must use a procurement contract when “the principal purpose of the instrument is to acquire (by purchase, lease, or barter) property or services for the direct benefit or use of the United States Government;” or the agency otherwise “decides in a specific instance that the use of a procurement contract is appropriate.” 31 U.S.C. § 6303.
The FGCAA further provides that an “agency shall use a cooperative agreement” when the principal purpose of the relationship “is to transfer a thing of value to the State, local government, or other recipient to carry out a public purpose of support or stimulation authorized by law of the United States instead of acquiring (by purchase, lease, or barter) property or services for the direct benefit or use of the United States Government,” and “substantial involvement is expected between the executive agency and the State, local government, or other recipient when carrying out the activity contemplated in the agreement.” 31 U.S.C. § 6305.
Put differently, the use of a grant or cooperative agreement is appropriate if the principal purpose of the agreement is to provide assistance to the recipient to accomplish a public objective authorized by law. In contrast, if the federal agency’s principal purpose is to acquire goods or services for the direct benefit or use of the federal government, then a procurement contract must be used.
Our Office has recognized that it is often difficult to draw fine lines between the types of arrangements that require the use of procurement contracts and those that do not. Environmental Protection Agency--Inspector General--Cooperative Agreement--Procurement, B-262110, Mar. 19, 1997, 97-1 CPD ¶ 131 at 4. The principal purpose of the relationship between the federal government and the state, local government, or other entity is not always clear, and we have recognized that this can be particularly so where the federal government provides assistance to specified recipients by using an intermediary. GAO, Principles of Federal Appropriations Law, vol. II, at 10-20 (3rd ed. 2006); see 360Training.com, Inc. v. United States, 2012 U.S. Claims LEXIS 502 at *11-12 (Fed. Cl. Apr. 26, 2012). The intermediary or third party situation arises where an assistance relationship, such as a grant or cooperative agreement, is authorized to specified recipients, but the Federal grantor delivers the assistance to the authorized recipients by utilizing another party. GAO, Principles of Federal Appropriations Law, Vol. II, at 10-19. In such circumstances, “[t]he choice of instrument for an intermediary relationship depends solely on the principal federal purpose in the relationship with the intermediary.” S. Rep. No. 97-180, at 3 (1981) quoted in GAO, Principles of Federal Appropriations Law, vol. II, at 10-20.
In this regard, where the government’s principal purpose is to “acquire” an intermediary’s services, which ultimately may be delivered to an authorized recipient, or if the agency otherwise would have to use its own staff to provide the services offered by the intermediary to the beneficiaries, then a procurement contract is the proper instrument. Id; 360Training.com v. United States, Inc., supra; Civic Action Institute, B-206272, Sept. 24, 1982, 82-2 CPD ¶ 270 at 4, aff’d, Civil Action Institute--Recon., B-206272.2, Nov. 2, 1982, 82-2 CPD ¶ 399. On the other hand, where the Government’s principal purpose is to “assist” the intermediary in providing goods or services to the authorized recipient, the use of an assistance instrument, such as a cooperative agreement, is proper. GAO, Principles of Federal Appropriations Law, vol. II, at 10-20.
The FGCAA gives agencies considerable discretion in determining whether to use a contract, grant, or cooperative agreement, and our Office will not question such determinations unless it appears that the agency acted unreasonably, disregarded statutory and regulatory guidance, or lacked authority to enter into a particular relationship. Civic Action Institute, supra, at 3. In determining whether an agency’s selection and proposed use of a grant or cooperative agreement, rather than a contract, is reasonably based and consistent with statutory and regulatory guidance, our analysis of the nature of the contemplated relationship between the federal agency and the other party includes the consideration of the substance of the proposed agreement based upon the surrounding circumstances. B-257430, Sept. 12, 1994.
In contending that the instruments at issue here are properly designated cooperative agreements, HUD points out that The Housing Act of 1937, as amended and codified, provides that it “is the policy of the United States . . . to assist states and political subdivisions of States to address the shortage of housing affordable to low-income families.” 42 U.S.C. § 1437(a)(B); AR at 11; Supp. AR at 2. HUD maintains that the NOFA, which will result in the issuance of cooperative agreements, is in furtherance of the Act’s stated policy to provide assistance to states and political subdivisions of states. HUD specifically argues here that the “principal purpose of the ACCs between HUD and the PHAs is to assist the states and local governments by having PHAs, which are governmental entities, administer [HAP] contracts with property owners in order to serve the federal, state, and PHAs’ public purpose of promoting affordable housing for low-income families.” AR at 11.
Referencing the FGCAA criteria for cooperative agreements, HUD further explains that through the ACCs, HUD transfers a “thing of value” to the PHAs, by providing the PHAs with the funds necessary to make payments under the HAP contracts, as well as by paying the PHAs an “administrative fee” that compensates the PHAs for its services. AR at 12. HUD notes here that under the ACC, a PHA may use the “excess funds generated by the ACC to provide additional housing services” under other programs supported by the PHA, and that HUD is therefore supporting “the PHA’s public purpose.” Id.
HUD further maintains that it “is not assigning work to PHAs that it is otherwise required to do,” based upon its view that HUD “is not obligated to administer the HAP contracts itself.” AR at 13. HUD argues here that “[t]here is nothing in the United States Housing Act of 1937, or, more specifically, Section 8 of that Act, that obligates HUD to administer HAP contracts.” Supp. AR at 10. HUD also explains that the cognizant PHAs, rather than HUD, are listed as contract administrators on the majority of HAP contracts currently in effect, and that because of this, HUD is not obligated to serve as a contract administrator. Id. HUD thus concludes that its issuance of a NOFA providing for the issuance of cooperative agreements for the administration by PHAs of Project-Based Section 8 HAP contracts was reasonable and consistent with applicable statutes and regulations.
In addressing HUD’s arguments, we begin with the agency’s assertion that the principal purpose of the ACCs to be awarded under the NOFA--consistent with The Housing Act of 1937--is to “assist” PHAs “to address the shortage of housing affordable to low-income families” by providing a thing of value, that is, money, to the PHAs. See 42 U.S.C § 1437(a)(B); AR at 11; Supp. AR at 2. In this regard, we find unpersuasive HUD’s argument that its payments to property owners in accordance with the terms of its HAP contracts can properly be considered as the transfer of a thing of value to the PHAs. As set forth above, although the HAP contract payments are made through the PHAs in accordance with their obligations under the ACCs to administer the HAP contracts, the PHAs themselves have no rights to the payments (or control over them) once HUD authorizes the payments and transfers the funds to the PHAs for distribution. The PHAs, consistent with their roles as contract administrators, act only as a “conduit” for the payments. See AR, Tab 4, 53 Fed. Reg. 8050 (1988), at BATES 247 (HUD’s explanation as to why it views its Section 8 housing assistance payments as “outside the scope” of Office of Management and Budget’s Circular A-102 that governs grants and cooperative agreements with state and local governments). That is, and as described above, the PHAs have no right to retain or use for other purposes any of the funds it receives for payment to the property owners. In fact, the ACCs require that the funds, once received by the PHAs from HUD, be promptly transferred to the property owners, and require that any excess funds and interest earned on HAP funds by the PHAs be remitted to HUD or invested in accordance with HUD requirements. AR, Tab 3, ACC, at BATES 194.
Next, although we agree that HUD is clearly providing “a thing of value” to the PHAs through HUD’s payment of an administrative fee, we do not agree that the principal purpose of HUD’s payment of administrative fees to the PHAs is to “assist” the PHAs in the performance of their mission. Rather, as evidenced by the record, the administrative fees are paid to the PHAs as compensation for their provision of service--i.e., administering the HAP contracts. This arrangement, that is, the payment of fees by HUD for the PHAs’ services as contract administrators, is provided for by the NOFA and ACCs to be awarded. See AR, Tab 3, ACC, at BATES 194 (“The PHA shall use Administrative Fees to pay the operating expenses of the PHA to administer HAP Contracts”).
We also disagree with HUD’s assertion that it is under no obligation to administer the HAP contracts because the PHAs, and not HUD, are listed as the contract administrators on most HAP contracts. In this regard, the “HUD Occupancy Handbook” acknowledges, in the context of the Project-Based Section 8 rental assistance program, that “HUD has primary responsibility for contract administration but has assigned portions of these responsibilities” to PHAs whose “responsibilities focus on the day-to-day monitoring and servicing of Section 8 HAP contracts.” Supp. AR, Tab 17, HUD Occupancy Handbook 4350.3 REV-1, at BATES 533. Further, the Project-Based Section 8 HAP “Basic Renewal Contract” provided by HUD specifically obligates HUD, and not the contract administrator, to provide the housing assistance payments. Supp. AR, Tab 18, Project-Based Section 8 HAP Basic Renewal Contract, at BATES 546. HUD’s HAP Basic Renewal Contract notes elsewhere that “HUD shall take any action HUD determines necessary for the continuation of housing assistance payments to the Owner in accordance with the Renewal Contract” where a PHA, serving as the contract administrator, fails to transfer the housing assistance payments to the property owner as required under the relevant HAP contract. Id. at BATES 551.
Given our view, as set forth above, that HUD is legally obligated to pay the property owners under the terms of the HAP contracts, and HUD’s recognition that it has primary responsibility for contract administration but has assigned portions of these responsibilities to PHAs, we also find that HUD’s principal purpose for its relationship with the PHAs as contemplated by the NOFA and set forth in the ACC, is to acquire the PHAs’ services as contract administrators. In this regard, the asserted “public purpose” provided by the PHAs under the NOFA--the administration of HAP contracts--is essentially the same purpose HUD is required to accomplish under the terms of its HAP contracts, wherein HUD is ultimately obligated to the property owners. As such, the principal purpose of the NOFA and ACCs to be awarded under the NOFA is for HUD’s direct benefit and use. B-257430, Sept. 12, 1994, at 4. Again, the NOFA provides, and HUD’s past practices demonstrate, that if a PHA is unable to provide contract administration services for the Project-Based Section 8 rental assistance program, HUD staff has provided and will provide such services. See 360Training.com v. United States, Inc., supra (an agency is acquiring the intermediary’s services for its own direct benefit or use if the agency otherwise would have to use its own staff to provide the services offered by the intermediary); see also GAO, Principles of Federal Appropriations Law, Vol. II, at 10-20.
For the reasons set forth above, we conclude that HUD’s issuance of a NOFA providing for the award of cooperative agreements was unreasonable and in disregard of applicable statutory guidance. We also conclude that HUD is required to use a procurement instrument that results in a contract in order to obtain the provision of contract administration services by PHAs for the Project-Based Section 8 HAP contracts. Finally, given our conclusion that HUD should use a procurement instrument that results in the award of contracts, rather than a notice that results in the execution of cooperative agreements, these protests fall squarely within the jurisdiction of our Office. See Energy Conversion Devices, Inc., supra.
The protesters also argue that certain terms of the NOFA are inconsistent with procurement statute and regulation, including the FAR, and are otherwise improper. We need not address these concerns. In this regard, HUD “admits that it did not follow the requirements in CICA or the FAR” in preparing its NOFA, and that it “would expect the protests to be sustained” should our Office determine, as we have, that the protests are within GAO’s jurisdiction. HUD Response to Protesters’ Requests for Documents (June 12, 2012) at 2. As a result, the protests are sustained.
(2) the agency decides in a specific instance that the use of a procurement contract is appropriate.
NASA obtains no vehicles, supply service, prototype, hardware, or other property, no systems or vehicle designs, and only the minimum Government-purpose data rights legally required by the Space Act. The Announcement does not provide NASA any right to future use of systems and vehicles developed and demonstrated under COTS Phase 1, for [International Space Station] supply missions or for any other purpose. The participant, not NASA, proposes the capabilities it will demonstrate and establishes the technical and schedule milestones for those demonstrations.
For the reasons explained below, however, the Court finds that it need not resolve many of these questions in order to dispose of this case. Having found jurisdiction to determine whether the [performance-based annual contributions contracts] PBACCs are procurement contracts or cooperative agreements, the Court must now proceed to analyze this question on the merits. If, following such an analysis, the Court finds that the PBACCs are procurement contracts, CICA would apply, and further related analysis would become necessary. However, because the Court does not reach this conclusion, but instead finds that HUD has properly classified the PBACCs as cooperative agreements, it need not reach any CICA-related issues raised by the parties.
Accordingly, the Court will explain why, after examining the Housing Act of 1937, as amended, and in light of the standards set forth in the [Federal Grant and Cooperative Agreement Act] FGCAA, it has determined that the PBACCs are best classified as cooperative agreements rather than procurement contracts.
The Federal Grant and Cooperative Agreement Act of 1977, or FGCAA, “provides guidance to executive agencies in determining which legal instrument to use when forming a [contractual] relationship” between the agency and another party. 360Training.com, 104 Fed. Cl. at 579; 31 U.S.C. §§ 6301-6308. The FGCAA establishes what is sometimes referred to as the “principal purpose” test, providing that “[a]n executive agency shall use a procurement contract as the legal instrument reflecting a relationship between the United States Government” and a recipient when “the principal purpose of the instrument is to acquire (by purchase, lease, or barter) property or services for the direct benefit of the United States Government[.]” 31 U.S.C. § 6303 (emphasis added). Conversely, the FGCAA counsels that “[a]n executive agency shall use a cooperative agreement … when (1) “the principal purpose of the relationship is to transfer a thing of value” to the recipient in order “to carry out a public purpose of support or stimulation authorized by a law of the United States,” and (2) “substantial involvement is expected between the executive agency and the State, local government, or other recipient when carrying out the activity contemplated in the agreement.” Id. § 6305 (emphasis added).
The FGCAA standards are expressed in mandatory, not precatory, terms. Nonetheless, as HUD and at least some of the Plaintiffs recognize, these standards do not provide hard-and-fast, one-size-fits-all rules. Rather, because every agency has inherent authority to enter into procurement contracts, but must be specifically authorized by statute to enter into assistance agreements, the FGCAA standards must be applied within the context of the agency’s specific statutory mandate in entering into the contractual relationship in question. U.S. Government Accountability Office, Principles of Federal Appropriations Law, Vol. II, p. 10-17 (2006) (“GAO Redbook”) (“[T]he relevant legislation must be studied to determine whether an assistance relationship is authorized at all, and if so, under what circumstances and conditions.”); see also HUD Mem. at 26 (“Although Congress enacted the FGCAA … to establish criteria for Federal agency use of grants, cooperative agreements, and procurement contracts, the decision as to which legal instrument is appropriate depends, in the initial analysis, on the agency’s statutory authority.”); NHC Mem. at 39 (“There are two steps involved in conducting an FGCAA analysis, and we do not disagree that the first step in determining the correct funding instrument” is to examine “‘whether the agency has statutory authority to engage in assistance transactions at all’”) (quoting GAO Redbook at 10-17”); AHSC Mem. at 37 (similar).
In order to determine whether the PBACCs are procurement contracts or cooperative agreements, the Court will therefore begin with a close examination of the “precise statutory obligations” underlying these contracts, as contained in the 1937 Housing Act, as amended. 360Training.com, 104 Fed. Cl. at 579. Once the nature of these obligations has been determined, the Court will then examine them in light of the standards delineated by the FGCAA. See GAO Redbook at 10-17 (“[D]eterminations of whether an agency has authority to enter into [cooperative agreements] in the first instance must be based on the agency’s authorizing or program legislation. Once the necessary underlying authority is found, the legal instrument … that fits the arrangement as contemplated must be used, using the [FGCAA] definitions for guidance as to which instrument is appropriate.”).
The PBACCs are Consistent With the Standards for Cooperative Agreements Set Forth in the FGCAA.
As explained above, the FGCAA establishes a “principal purpose” test for the determination of whether a particular governmental contract is properly categorized as a procurement contract or a cooperative agreement. When “the principal purpose of the instrument is to acquire (by purchase, lease, or barter) property or services for the direct benefit of the United States Government,” an agency must use a procurement contract. 31 U.S.C. § 6303 (emphasis added). Conversely, when (1) “the principal purpose of the relationship is to transfer a thing of value” to the recipient in order “to carry out a public purpose of support or stimulation authorized by a law of the United States,” and (2) “substantial involvement is expected between the executive agency and the State, local government, or other recipient when carrying out the activity contemplated in the agreement,” the agency may use an assistance agreement. Id. § 6305 (emphasis added).
Citing these standards, the Government argues that the contracts in question hew much more closely to the latter definition. Specifically, HUD posits that it “has not and is not acquiring any services when it grants administrative authority and transfers funds to [Public Housing Authorities] PHAs via the [annual contributions contracts] ACCs,” but “[r]ather … is engaged in a core statutory duty of providing funding assistance to state-sponsored PHAs[.]” HUD Mem at 22. Moreover, HUD argues that it “has retained authority to make certain decisions [and] to control the administration of the program … to ensure that Federal funds are spent in strict accordance with the terms of the HAP contracts and Federal law,” which dovetails with the FGCAA’s instruction that “substantial involvement” on the part of the Government is indicative of a cooperative agreement, not a procurement contract. Id. at 32.
Whether a contract is a procurement contract or a cooperative agreement is a question of law. Maint. Eng’rs v. United States, 749 F.2d 724, 726 n.3 (Fed. Cir. 1984). On appeal, Appellants argue that the Court of Federal Claims erred in holding that the [performance-based annual contributions contracts] PBACCs at issue are cooperative agreements, as opposed to procurement contracts. They also argue that, in any event, the trial court erred by failing to address whether the [Notice of Funding Availability] NOFA’s anticompetitive provisions are arbitrary and capricious under the APA.
With respect to Appellants’ first argument, this court agrees with Appellants that the [Performance-Based Contract Administrators] PBAACs are procurement contracts and not cooperative agreements. Based on this record, the primary purpose of the PBACCs is to procure the services of the PBCAs to support HUD’s staff and provide assistance to HUD with the oversight and monitoring of Section 8 housing assistance. For example, the PBCA outsourcing program was created in response to federal budget restraints and sought to “improve the oversight of HUD’s project-based program.” J.A. 300/A.R. 253. HUD acknowledged its intention “to procure the services of contract administrators to assume many of these specific duties, in order to release HUD staff for those duties that only government can perform and to increase accountability for subsidy payments.” J.A. 300/A.R. 259 (emphasis added). HUD also acknowledged that due to “major staff downsizing . . . HUD sought new ways to conduct its business[,] such as the Request for Proposals for outside contractors to administer HUD’s portfolio of Section 8 contract[s].” J.A. 300/A.R. 3764 (emphasis added).
The record in this case also shows that HUD’s 1999 RFP, which contains substantially similar terms as the 2011 and 2012 competitions, stated that it “pays billions of dollars annually to [project owners and] seeks to improve its performance of the management and operations of this function through this RFP.” J.A 300/A.R. 428. The RFP added that it would evaluate the proposals “to determine which offerors represent the best overall value . . . to the Department.” J.A. 300/A.R. 442 (emphasis added). And, as recently as 2013, HUD has acknowledged that “PBCAs have helped make HUD a leader among Federal agencies in reducing improper payments,” J.A. 300/A.R. 1963, and that “PBCAs are integral to the Department’s efforts to be more effective and efficient in the oversight and monitoring of this program.” J.A.300/A.R. 1960. HUD has also consistently described the role of the PBCAs as “support” for HUD’s Field Staff. J.A. 300/A.R. 1964 (“Field Staff perform the following functions, with support from PBCA’s, to administer the [program] . . . .”).
The record belies HUD’s argument that the housing assistance payments it makes to the PBCAs are a “thing of a value” within the ambit of 31 U.S.C. § 6305. HUD has a legal obligation to provide project owners with housing assistance payments under the HAP contracts. See J.A. 300/A.R. 2276. Transferring funds to the PBCAs to transfer to the project owners is not conferring anything of value on the PBCAs, especially where the PBCAs have no rights to, or control over, those funds. Moreover, the PBCAs must remit any excess funds and interest earned back to HUD. J.A. 300/A.R. 2849.
Likewise, the administrative fee paid to the PBCAs do not constitute a “thing of value” either. While money can be a “thing of value” under 31 U.S.C. § 6305 in certain circumstances, the administrative fee here appears only to cover the operating expenses of administering HAP contracts on behalf of HUD.
At most, HUD has merely created an intermediary relationship with the PBCAs “[w]here the [PBCAs are] not receiving assistance from the federal agency but [are] merely used to provide a service to another entity which is eligible for assistance.” S. Rep. No. 97-180, at 5 (1981). “The fact that the product or service produced by the intermediary may benefit another party is irrelevant.” Id. In the case of an intermediary relationship, “the proper instrument is a procurement contract.” Id. V.