GAO Sustains Oracle's Other Transaction Authority (OTA) Protest

GAO's much-anticipated decision in Oracle America, Inc.¹ confirms that GAO will not hesitate to review the details of an agency's use of its Other Transaction Authority (OTA) in lieu of issuing a procurement contract. GAO determined that the US Transportation Command (TRANSCOM) both: (a) failed to properly provide for a follow-on production contract in its initial "prototype OTA" instrument, and (b) issued its sole-source production order before the prototype was complete, in violation of the requirements of the statute that provides OTA.

The Oracle decision acts as a shot across the bow to agencies exploring OTA agreements as alternatives to traditional contracting. OTA is not new, but the recent advent of using OTA for follow-on production contracts, combined with increased government interest in using creative alternatives to traditional procurement procedures, has made OTA agreements particularly popular in recent years. While GAO will not review an agency's award decision once it properly elects to utilize an OTA agreement, GAO will examine the transaction to assess whether the agency properly chose to use an OTA agreement instead of a procurement contract.² That is the context in which GAO sustained Oracle's protest of TRANSCOM's OTA award. GAO did not seek to limit TRANSCOM's ability to use OTA, and specifically declined to find that the agency was obligated to use FAR-based procurement.³ Rather, GAO identified specific process flaws and implied that had the agency written its prototype OTA award slightly differently, and waited slightly longer for completion of the prototype project before issuing its follow-on production order, there may not have been a problem from GAO's perspective.

The Oracle decision does not prevent any agency from seeking to obtain the flexibility and lower administrative burden that comes with OTA, but instead cautions that GAO will not shy away from policing compliance with the strict letter of the statutory provisions that provide OTA.

A. Relevant OTA Context

Beyond its authority to enter into traditional procurement contracts, grants, and cooperative agreements, the Department of Defense (DoD) has an additional authority to enter into "other transactions."⁴ OTA was originally limited to research, and companies that received an OTA award were generally exempted from traditional procurement laws, thus allowing the government to attract non-traditional contractors, such as universities and research institutions that have not established capabilities to comply with the requirements of traditional procurement laws. Due in part to the difficulty of converting such research agreements into production contracts, DoD was given authority to enter into "prototype" OTAs, and, if the underlying prototype OTA agreement is awarded using competitive means, the authority to issue a follow-on production contract without the use of competitive procedures.⁵

The statutory authority to utilize a prototype OTA award is quite broad. They are permitted if "directly relevant to enhancing the mission effectiveness of military personnel and the supporting platforms, systems, components, or materials proposed to be acquired or developed by the Department of Defense, or to improvement of platforms, systems, components, or materials in use by the armed forces."⁶

As use of OTA expands, one lingering question has been what, if any, judicial review is available. GAO previously suggested that it was unwilling to wade into the merits of any agency OTA award determination (i.e., the terms of OTA "solicitations," the Agency's evaluation of OTA respondents), but that it would address whether the Agency's choice of an OTA award, as opposed to a procurement contract, was "knowing and authorized."⁷ It was not clear, however, what specific issues might meet that narrow test. Oracle has established that GAO will delve into allegations of non-compliance with the underlying OTA enabling statute. Thus, the primary significance of the Oracle decision is its confirmation that OTA awards are not entirely immune from review.⁸

B. The Oracle Decision

The Oracle decision stems from a realization by TRANSCOM that risks associated with local server outages could be avoided by migrating to a cloud-based environment, but that its legacy software applications were written in a format that would not allow automatic migration (a problem shared by many agencies).⁹ In need of a novel, creative solution, TRANSCOM turned to the Defense Innovation Unit (Experimental), better known as "DIUx."¹⁰ DIUx was established by DoD in 2015 in order to "accelerate the development, procurement, and integration of commercially-derived disruptive capabilities to regain our nation's technological lead in offensive and defensive capabilities."¹¹

In June 2016, DIUx published a Contracting Officer's Statement (CSO) under § 2371b seeking to "award[] funding agreements … to carry out prototype projects" related to solving this problem.¹² DIUx published a consolidated, updated announcement in March 2017 and received 21 solution briefs, including one from eventual OTA awardee REAN, and, notably, not including one from Oracle.¹³ In May 2017, the Government executed a determination and findings (D&F) to approve the use of its OTA authority under 10 U.S.C. § 2371b to award a prototype OTA agreement to REAN.¹⁴

In November 2017, the Government concluded that REAN had "performed the requirements" of the prototype OTA award despite the fact that work was still ongoing on one of the OTA award's modifications.¹⁵ On February 1, 2018, the Government executed a second D&F concluding that the requirements of § 2371b had been met such that that Agency could grant a follow-on production OTA (P-OTA) award.¹⁶

The Agency posted the notice of award to REAN on February 12, and Oracle protested the P-OTA award at GAO on February 20.¹⁷ While Oracle's protest contained a number of grounds, GAO addressed three major points—(1) whether Oracle was an interested party to protest the P-OTA award; (2) whether the underlying prototype OTA agreement provided for the follow-on award of a P-OTA; and (3) whether the initial prototype project was "successfully completed," so as to allow a follow-on P-OTA award.¹⁸

Consistent with its prior precedent, GAO acknowledged that OTA agreements "are not procurement contracts," but found it had jurisdiction to review whether "an agency is improperly using its other transaction authority."¹⁹ GAO also found Oracle to be an interested party to challenge the P-OTA award, despite Oracle's failure to submit a response to the initial prototype OTA award.²⁰ GAO found that the subject matter of the OTA award had significantly changed since the initial CSO in June 2017, and that potential offerors for the initial prototype OTA award, like Oracle, were not sufficiently advised of the possibility of a follow-on P-OTA award to the successful vendor.²¹

As to whether the underlying prototype OTA agreement provided for the follow-on P-OTA award, GAO focused on the statutory text. Under § 2371b(f)(1), an agency's prototype OTA solicitation may "provide for" the sole-source award of a follow-on production contract to the recipient of the prototype OTA. Since the prototype OTA in this case did not mention "follow-on production," GAO found that the Agency lacked the statutory authority to award the P-OTA.²²

Next, GAO also found that the prototype project was not "successfully completed," as required by § 2371b(f)(2)(B) in order to award a P-OTA without competition.²³ While the Agency acknowledged that work was ongoing on modification 5 of the prototype project, the Agency contended that REAN had completed those aspects of the prototype project that were included in the prototype OTA award as initially issued.²⁴ GAO found that the statute required successful completion of "the prototype project provided for in the transaction," meaning the entire prototype project as modified.²⁵

GAO recommended that the Agency terminate the P-OTA award to REAN and "review its procurement authority" in accordance with GAO's decision to either conduct a new procurement under competitive procedures, prepare the appropriate justification to award a contract without competition, or properly award an OTA agreement in accordance with § 2371b.²⁶

C. Implications/Questions Going Forward

It is not unexpected that a decision such as this raises more questions than it answers. The Oracle decision raises some immediate questions and considerations:

• How will agencies that are pursuing OTAs respond? We are likely to see increased reliance on standard form OTA agreement templates in order to avoid the pitfalls of statutory-language omission that the Agency fell into here.
• Is prejudice presumed? GAO seems to have sustained this protest based on drafting technicalities, without consideration of their prejudicial effect.
• Will protest reform efforts respond to this case? This issue seems like one that will raise eyebrows as the Section 809 panel considers bid protest reform and other efforts to empower and streamline non-traditional contracting.
• Will the Court of Federal Claims and/or district courts get in on the action and allow similar protests?

One thing is now clear, however: OTAs are not a get-out-of-protests-free card. Non-traditional contractors exploring OTA opportunities may wish to consult protest counsel going forward to help them assess agency compliance with the rules of the road and identify potential risks.

© Arnold & Porter Kaye Scholer LLP 2018 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.