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INTERNATIONAL ENGG. CO. v. RICHARDSON

October 24, 1973

INTERNATIONAL ENGINEERING COMPANY, a Division of A-T-O, Inc., Plaintiff,
v.
Elliot L. RICHARDSON et al., Defendants


Charles R. Richey, District Judge.


The opinion of the court was delivered by: RICHEY

CHARLES R. RICHEY, District Judge.

 Once again this case is before this Court on a Motion for a Preliminary Injunction filed by Plaintiff International Engineering Company (IEC). *fn1" In order to understand the reasons advanced by Plaintiff in support of its Motion, and the Court's reasons for granting thereof, a review of the history of this case will be helpful. The Court will summarize only briefly the history prior to its earlier decision. See International Engineering Company v. Elliot L. Richardson, et al., 361 F. Supp. 818, D.D.C. 1973.

 I. HISTORY OF THE CASE

 In late 1967, IEC conceived a system for guiding bombs or missiles with what is referred to by the parties as a LORAN CÅ system. In February 1968, IEC submitted an unsolicited proposal to the Air Force that detailed the processes and the performance characteristics of the components as IEC had developed them at the time. This proposal, submitted with a restrictive legend that limited its distribution to Air Force personnel, resulted in the Government's award of a contract to IEC that called for Plaintiff to design and construct a "helicopter flyable breadboard LORAN Missile Guidance Subsystem." (See Plaintiff's Exhibit D, Defendant's Exhibit D). The system was to be constructed and furnished by IEC for the purposes of demonstration but was to remain the property of IEC; the information resulting from demonstration of the system was to be provided to the Government as set forth at Paragraph (b)4 of T-119 incorporated by reference into the DD1423 Test Report as follows:

 
"(4) Description of test articles, including test configuration identification and photographs as appropriate." Defendant's Exhibit E.
 
"(1) The Government shall have unlimited rights in:
 
"(i) technical data resulting directly from performance of experimental, developmental or research work which was specified as an element of performance in this or any other Government contract or subcontract; . . .
 
"(ii) technical data necessary to enable manufacture of end- items, components and modifications, or to enable the performance of processes, when the end-items, components, modifications or processes have been, or are being developed under this or any other Government contract or subcontract in which experimental, developmental or research work is, or was specified as an element of contract performance, except technical data pertaining to items, components or processes developed at private expense." (emphasis added).
 
"(iv) technical data pertaining to end-items, components or processes which was prepared for the purpose of identifying sources, size, configuration, mating and attachment characteristics, functional characteristics and performance requirements ("form, fit and function" data, e.g., specification control drawings, catalog sheets, envelope drawings, etc.);" (emphasis added).
 
"(2) The government shall have limited rights in:
 
"(ii) technical data pertaining to items, components or processes developed at private expense, other than such data as may be included in the data referred to in (b)(1)(i), (iii), (iv), (v), and (vi); provided that each piece of data to which limited rights are to be asserted pursuant to (2)(i) and (ii) with the following legend in which is inserted the number of the prime contract under which the technical data is to be delivered and the name of the contractor or subcontractor by whom the technical data was furnished . . ." *fn2"

 Paragraph (d) of the same regulation provides for the removal of unauthorized legends marked on data which the contractor delivers to the Government. The contract interpretation problem confronting the Court turns on the meaning attached to the term "substantiate" as it appears in paragraph (d) which is set forth as follows:

 
"(d) Removal of Unauthorized Markings. Notwithstanding any provisions of the contract concerning inspection and acceptance, the Government may modify, remove, obliterate or ignore any marking not authorized by the terms of this contract on any technical data furnished hereunder if --
 
"(i) the contractor fails to respond within sixty days to a written inquiry by the Government concerning the propriety of the use of the marking, or
 
"(ii) the Contractor's response fails to substantiate his contention that the use of the marking is authorized, in which case the Government shall give written notice to the Contractor." (emphasis added)

 During the time frame for constructing the "Breadboard system" called for in the contract, January 1968 through June 1970, IEC developed an advanced circuitry LORAN CÅ Navigation System, at what it alleges to be substantial private expense. As will be discussed in greater detail below, the Government disagrees on the material fact of whose money paid for the development of the Navigation System and argues that the system was developed through Government funding of the contract. *fn3" The Government's position on the question of funding was made known after the original contract had been modified twice to incorporate the Navigation System into other parts of a LORAN guided bomb and to run simulated tests on a computer, and after IEC had submitted several technical reports which contained a detailed description of the internal operations in terms of mathematical and logic diagrams of IEC's precontract components that the Air Force Project Engineer, Mr. Rustenberg, requested in the belief that the information would be helpful to the Air Force in evaluating the test results. (See Contracting Officer's Statement of Reasons for Decision of 2 October 1972; Rustenberg Deposition, pages 29, 34-36). Between October 1970 and November 1970 IEC submitted technical reports which contained "limited rights" legends intended to prevent the release of components' specifications to IEC's competitors. The Air Force never challenged the restrictive legend on the first report, 71-05. However, the first Contracting Officer assigned to the IEC contract questioned the appropriateness of restrictive markings placed by IEC on the second Technical Report, 70-6-4, on the grounds that the restrictive legend was of the kind used for proposals and not contract reports. IEC offered to delete the material altogether and simply comply with the limited requirements of the contract. IEC also submitted an amended proprietary legend. In July 1971 the Contracting Officer decided to accept the amended markings without further question for the following reason:

 
"the issuance of P0006 (a contract modification) directing a continuation of the effort initiated under P0003 (an earlier contract modification) constituted a tacit acceptance by the Government." (Exhibit 1 to Harsfield deposition).

 In so deciding, the Contracting Officer chose to reject the request of the Contract Engineer, Mr. Rustenberg, that the restrictive legend be ruled improper under the terms of the contract. It is noteworthy that Mr. Rustenberg as early as March 1971 requested the proprietary data to facilitate the Air Force's evaluation of the test results. (Rustenberg Deposition, page 29).

 Sometime before the submission of the third report, a new Contracting Officer, Mr. Harsfield, began work on the contract. Mr. Rustenberg served as technical advisor to the new Contracting Officer and on his behalf reviewed the third report. (Rustenberg Deposition, page 31). That report was accepted as submitted without immediate objection.

 It was in October and December 1971 respectively that the third technical report and the final report on the original contract and all modifications were submitted and, like the earlier reports, they contained the detailed descriptions of the components requested by Mr. Rustenberg and bore proprietary legends. At the end of December 1971 and almost nine months later in June 1972, the Contracting Officer sent letters to IEC recommending that IEC remove the proprietary markings or furnish substantiation to the contrary. IEC replied January 5, 1972 to the Contracting Officer's December 1971 correspondence but received no further response from the Government until a letter was received June 5, 1972, wherein the Contracting Officer stated that the IEC submission "fails to justify the use of their legend or show that any restriction is authorized." (See Plaintiff's Exhibit M). He further noted that the reports would be used with unlimited rights. IEC obtained an agreement on the part of the Air Force not to release the reports pending a meeting "to discuss the proprietary rights question." This meeting occurred June 26, 1972 and was conducted by Mr. Harsfield. During the course of the meeting, IEC submitted a three-page outline and made a two hour oral presentation which was deemed vague by the Contracting Officer who requested additional substantiation. At no time during the meeting did Mr. Harsfield question the IEC position. (Harsfield Deposition, pp. 76-77). Shortly thereafter, the Contracting Officer executed a final acceptance on the contract and final payment was made by the Air Force at the end of September 1972. The Contracting Officer received no further efforts at substantiation by IEC and, by letter dated October 2, 1972, informed the Contractor that the reports would be used by the Government with unlimited rights.

 During January 1973 the Contracting Officer's decision was reviewed by personnel of the Headquarters, Air Force Systems Command, and of the Chief of Staff, United States Air Force and, later, by the Assistant General Counsel for the Air Force who requested that IEC submit further written material and that the Contracting Officer consider it. This material was submitted in IEC's letter dated February 8, 1973 and failed to change the opinion of the Contracting Officer.

 Plaintiff then brought this action to enjoin the Secretary of the Air Force from releasing the reports. In particular, IEC contended that it had met the burden of substantiating its proprietary claim as it interpreted the import of the term "substantiate." Plaintiff further argued that the Contracting Officer's failure to provide reasons for not agreeing with IEC's proprietary claim made it impossible to inveigh against his decision once further submissions were sought. Defendant responded by challenging the jurisdiction of the Court.

 In consideration of Plaintiff's Motion for Preliminary Injunction and Defendant's Motion to Dismiss, the Court was confronted with close questions concerning the application of sovereign immunity and permissible review under the Administrative Procedure Act, 5 U.S.C. § 701 et seq. (1970). The Court's analysis led it to the conclusion that the APA provided a basis for subject matter jurisdiction and served as a waiver of sovereign immunity. Before turning to the question of the preliminary injunction, however, the Court determined that a statement of reasons by the Contracting Officer was essential to effective judicial review. Therefore the Court denied Defendant's Motion and took under advisement Plaintiff's Motion together with the contract terms and IEC's description of the Contracting Officer's actions upon which that motion was based. Rather than step blindly, and therefore dangerously, into a procurement operation foreign to the judicial process of conflict resolution, the Court remanded the case to the Contracting Officer for an explanation of his actions sufficient to permit the Court to proceed with its unique review of the contract dispute at bar. As an interim measure the Court requested and the Government agreed not to release the alleged proprietary data until the Court could review the Contracting Officer's statement of reasons and Plaintiff's response thereto and rule on Plaintiff's Motion for a Preliminary Injunction.

 The Court attempted through its Opinion and Order of July 10, 1973 to obtain the information necessary for effectively resolving what the Court perceived as, in essence, a familiar judicial problem of contract interpretation, but a problem uniquely situated in the Federal procurement field. In light of the information received pursuant to the Court's Order, the Court has had sufficient opportunity to probe the interrelated ASPR provisions, the contract terms and the positions of the parties to the extent that the Court believes Plaintiff's Motion for a Preliminary Injunction should be granted.

 In view of the extraordinary relief the Court grants Plaintiff in its Order issued of even date with the Memorandum Opinion, it is necessary to air the Court's thoughts regarding the appropriateness of the action taken herein. Judicial forays into the procurement process are regarded with skepticism in this Circuit due in large part to the complexity of the rules and regulations governing procurement and the expertise required for efficient administration of the procurement process within the regulatory web. See M. Steinthal & Co. v. Seamans, 147 U.S. App. D.C. 221, 455 F.2d 1289 (1971). Our Court of Appeals in past decisions has highlighted the public interest in fairness and compliance with regulations in lawsuits brought by disappointed bidders on government contract, only to ultimately decide that this interest is outweighed by the public interest in efficient operation of government. See A. G. Schoonmaker Co. v. Resor, 144 U.S. App. D.C. 250, 445 F.2d 726; M. Steinthal & Co. v. Seamans, supra. The Court of Appeal's concern in these cases with the inefficiencies that obtain from extensive review of contract awards prompted its determination that the District Courts should refuse to review appeals from contract awards where the highly subjective decision of a contracting officer who relied on specialized technical knowledge is in question. In light of this concern, the District of Columbia Circuit and the Fifth Circuit have held that where an agency or official other than the contracting officer reviews the latter's decision, courts will defer to administrative expertise. For example, see Allen M. Campbell Co. v. Lloyd Wood Construction Co., 446 F.2d 261 (5th Cir. 1971); A. G. Schoonmaker Co. v. Resor, supra; M. Steinthal & Co. v. Seamans, supra.

 As the above cases and other procurement cases like them reflect courts' efforts to balance the competing interests that favor or oppose review, so does the history of this case demonstrate this Court's careful attempts to identify and balance the competing interests. That weighing of interests has led the Court to the opinion that the public interest, as well as Plaintiff's, is best served by granting Plaintiff the injunctive relief it seeks.

 In deciding to review IEC's claim under the Administrative Procedure Act, supra, the Court relied on the landmark decision by the United States Court of Appeals in Scanwell Laboratories, Inc. v. Shaffer, 137 U.S. App. D.C. 371, 424 F.2d 859 (1970). In Scanwell, the Court of Appeals held that disappointed bidders for government contracts have standing under the A.P.A., 5 U.S.C. § 701(A) (2) (1970), to bring suit for declaratory and injunctive relief in order to determine the validity of the agency's actions. Although Scanwell involved disappointed bidders whose legal rights when denied a contract were somewhat unclear and the instant case concerns a party under contract with the government and possessing definite contractual rights, it is the Court's opinion in the setting of this case that review should be made available to both "potential sellers and those already under government contract," *fn4" and that an appropriate remedy should be made available "to correct [governmental] overreaching." *fn5" Like the Court of Appeals' decision in Scanwell to abandon the traditional refusal of courts to intervene in the procurement process, the Court's decision to intervene here is supported by two interests: first, the interest in IEC as an individual allegedly harmed by illegal, arbitrary and capricious action by the contracting officer; and second, the interest of the public, represented by IEC as a "private attorney general," in having government contracts administered fairly and according to the regulations. Only if contractors are assured fair and equitable treatment by contracting officers can the long-term integrity, economic welfare and efficiency of the procurement process be advanced.

 Thus the Court regards this suit as one brought, in part, in the public interest to prevent arbitrary or capricious decision-making in the administration of government contracts and, particularly, to restore the role of the contracting officer to one who tests evidence by procedures sufficiently adversary in nature to provide a reasonable guarantee of its reliability. See Scanwell Laboratories, Inc. v. Shaffer, supra; Mobil Oil Corporation v. Federal Power Commission, D.C. Cir., 157 U.S. App. D.C. 235, 483 F.2d 1238, 1973. It is no longer reasonable for courts to take the position that regulations governing contracting are for the protection of the government and the public and not for the protection of those who bid for and perhaps obtain contracts with government. *fn6" The public interest cannot turn solely on efficient procurement, but has to fasten on the fairness and integrity along with the efficiency of the procurement process which at this point in this country's history accounts for payments amounting to more than one-half of all federal expenditures. *fn7" Negotiated contracts like IEC's provide more than half the dollar value of all federal procurements *fn8" and upwards of 85% of the dollar value of military procurements. *fn9" In view of the mushrooming economic development of the procurement process, the Court has determined that the public interest would be best served by a limited and expedited review of the government's administration of the IEC contract, notwithstanding the delay in the completion of the government's feasibility studies in this defense area. The government has noted in its submissions to the Court that IEC's components are technologically undesirable and have no practical value to the government aside from providing future government contractors with a blueprint of what not to do. In light of the purpose to which the government intends to put the data in question, the Court is of the opinion that review of this suit in no way delays procurement for the national defense. *fn10" For the aforementioned reasons, the Court believes this case "calls for an assertion of an overriding public interest 'in having agencies follow the regulations which control government contracting. '" M. Steinthal & Co. v. Seamans, supra, 147 U.S. App. D.C. 221, 455 F.2d 1289, quoting Scanwell Laboratories v. Shaffer, supra, 424 F.2d at 864.

 It is within this Court's discretion to refuse to entertain a suit for injunctive relief in light of the potentiality of a damages remedy in the Court of Claims. M. Steinthal & Co. v. Seamans, supra. However, the Court doubts both the likelihood and adequacy of a damages remedy in the Court of Claims. An effective remedy in damages arguably would be IEC's lost profits from unauthorized disclosure of its trade secrets. See Uniform Commercial Code § 2-708(2) (1972 edition). However, there are few satisfactory methods to measuring the value of losses resulting from the unauthorized disclosure of trade secrets. See Precision Plating & Metal Finishing, Inc. v. Martin-Marietta Corp., 435 F.2d 1262 (5th Cir. 1970); Appeal of Joanell Laboratories, Inc., 72-1 BCA par. 9218. Especially where the only potential buyer of products related to IEC's trade secrets refuses to recognize any practical value in the goods themselves. Most importantly, however, the Court is convinced that irreparable injury would result from the unauthorized disclosure of IEC's trade secrets. Therefore, it is not significant whether or not plaintiff could avail itself of damages to some amount not measured by anticipated profits through successful adjudication of its rights in the Court of Claims. It seems more important that IEC be able to obtain the injunctive relief which the strength of its claim merits, but which the Court of Claims cannot provide. See United States v. King, 395 U.S. 1, 89 S. Ct. 1501, 23 L. Ed. 2d 52 (1969). The Court's decision to proceed with its review of Plaintiff's motion for a preliminary injunction in light of the recent submissions to the Court by the parties in this case, particularly the statement of reasons provided by the contracting officer and his deposition, is within its discretion and consistent with the viewpoint expressed by the Court of Appeals in M. Steinthal & Co. v. Seamans, supra, where Judge Leventhal suggested the appropriateness of intervention by the District Court in certain circumstances:

 
"To avoid any confusion, it is not being stated here that the damages available to the disappointed bidder, which do not comprehend anticipated profit, are automatically an 'adequate' legal remedy as to warrant dismissal for want of equity of every injunction action regardless of the strength of plaintiff's claim on the merits." 455 F.2d at 1302 (1970).

 III. THE SCOPE OF REVIEW AND THE NATURE OF RELIEF GRANTED

 The absence of case law regarding the appropriate standard of review in a procurement dispute like the case at bar presents the Court with two alternatives: (1) apply the most appropriate Administrative Procedure Act standard of review; or (2) evaluate the merits of the case in accordance with settled principles of contract law. See United States v. Little Lake Misere Land Co., Inc., 412 U.S. 580, 93 S. Ct. 2389, 37 L. Ed. 2d 187 (decided June 18, 1973). At this stage in the litigation the Court need not decide the merits. However, the appropriate standard of review takes on significance in its limited application within the judicial guidelines for issuing preliminary injunctive relief. The standards for granting preliminary equitable relief are set out in Virginia Petroleum Jobbers Assn. v. FPC, 104 U.S. App. D.C. 106, 259 F.2d 921, 925 (1958). Among those standards is the requirement that there be a likelihood of plaintiff's success on the merits. (See page 651 infra). In order to best apply the criteria set forth in Virginia Jobbers, the Court shall undertake to evaluate the merits of IEC's claims under the appropriate APA standard as well as under accepted contract law principles.

 Although this Court relied on the decision in Scanwell and the controlling interests identified therein in deciding the appropriateness of review in the case at bar, the Court is unable to glean from Scanwell a clear articulation of the scope of review appropriate to the case at bar. Therefore the Court looks initially to the Administrative Procedure Act for standards applicable to the review of the instant complaint which challenges the Contract Officer's contract interpretations and the actions he has taken in response to those interpretations. Fortunately, the Act provides standards that are applicable to the instant dispute. *fn11" The review section of the APA insulates certain agency actions from review "to the extent that (1) statutes preclude judicial review; or (2) agency action is committed to agency discretion by law." 5 U.S.C. § 701 (1970). However, the interpretation given § 701 in this Circuit provides this Court with a good deal of latitude in determining the extent to which a statute or regulation operates to make a discretionary decision unreviewable, particularly where, as here, a procurement regulation authorizes a discretionary determination by the contracting officer. See Wheelabrator Corp. v. Chafee, 147 U.S. App. D.C. 238, 455 F.2d 1306, 1311-1312 (1971); Blackhawk Heating & Plumbing Co. v. Driver, 140 U.S. App. D.C. 31, 433 F.2d 1137 (1970).

 Several procurement cases in which courts have treated questions of governmental overreaching find their genesis in circumstances where the government accepts one bid over another or decides to cancel a contract. In both situations the contracting officer, or the Secretary of the instant agency depending upon the particular setting, takes action pursuant to an express statutory mandate. See M. Steinthal and Co. v. Seamans, supra ; Udall v. Littell, 125 U.S. App. D.C. 89, 366 F.2d 668 (1966); Littell v. Morton, 445 F.2d 1207 (4 Cir., 1971). The approach of the courts in those cases is apposite to the instant dispute involving the exercise of administrative discretion pursuant to an Armed Services Procurement Regulation incorporated by reference into the IEC contract. Without question the relevant regulation, ASPR 7-104.9, commits the interpretation of the Technical Rights in Data Clause to the contracting officer. (See Appendix). With respect to his interpretation, therefore, the Court may not directly review its legal propriety. The Act commands that courts refrain from such review where legal interpretation is entrusted to the agency, 5 U.S.C. § 701. However, the Act expressly provides that the courts "shall . . . hold unlawful, . . . agency actions, findings and conclusions found to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2) (A). Under this provision, the Court must undertake a limited review of the contracting officer's decisions rendered pursuant to the Rights in Data clause to determine whether it is likely that he acted arbitrarily and without a rational basis. Udall v. Littell, supra ; M. Stenthal & Co. v. Seamans, supra.

 The above background is important to an understanding of the issues related to the Court's decision to issue a preliminary injunction, particularly the issue whether there is a likelihood that IEC will prevail on the merits. That issue along with several others is determinative of plaintiff's motion for a preliminary injunction. In Virginia Petroleum Jobbers Assoc. v. FPC, 104 U.S. App. D.C. 106, 259 F.2d 921 (1958), the United States Court of Appeals for the District of ...


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