WIC procurement system. Under the sole source system, any price concessions would be provided by the sole source winner and be absorbed by the WIC program. This lawsuit results from the tortured and somewhat suspect 1990 bidding process that ultimately resulted in an open market system.
The Pre-Bid Process
Prior to June 1990, each of the AFASS hospitals contracted separately with an infant formula company to select it as the supplier of formula for use by babies staying in that hospital. In the spring of 1990, the director of AFASS decided to centralize these hospital formula supply arrangements by adopting what is referred to as the hospital rotation system. Under this supply system, the nine AFASS hospitals were divided into three groups. Each company was offered the opportunity to supply free formula to one hospital group and to rotate as the supplier to the other two groups in each of the two succeeding years, provided the company accepted the terms and conditions of the AFASS hospital supply contract. To participate in the rotation system, the companies had to agree to pay $ 50 per baby to AFASS and to rebate at least 40 cents to the WIC program. This 40 cent minimum was premised on the adoption of an open market system. The request for proposals for the rotation system was announced on June 6, 1990.
Just prior to the public announcement of the "rotation system," AFASS had released the solicitation for bids to supply infant formula under Puerto Rico's WIC program. The bidding was to be conducted under the so-called "Florida model" of bidding. Under the Florida model, the companies could submit bids for either the sole source option, the open market option, or both. Again, AFASS officials recognized that if a sole source contract resulted from the WIC bid, the $ 50 per infant payments to AFASS would end because neither the winning nor the losing bidders would have any incentive to continue such payments. A pre-bid conference for June 7, 1990 was scheduled.
On June 5, 1990, Puerto Rico officials held a meeting to discuss its proposed "rotation system" to supply infant formula to its hospitals. Abbott representatives who attended the meeting walked out of the meeting when the discussion by Mead and Wyeth turned to the minimum 40 cent rebate specified in the proposed hospital supply contract. The Abbott officials deemed it inappropriate to discuss prices or market allocations in the presence of competitors. This action on the part of Abbott shows that Abbott officials were senstitive to appropriate legal requirements.
On June 7, 1990, AFASS held its scheduled pre-bid conference on the proposed WIC contract. During the conference, the possibility of Puerto Rico's obtaining a waiver of the sole source requirement from the Department of Agriculture was briefly discussed. All company representatives were of the view that the sole source system would not be in the best interests of Puerto Rico. The comments centered around the "unique" nature of Puerto Rico, namely, its isolation from the mainland which made it vulnerable to a cutoff in supply. The Wyeth representative cryptically wrote in his notes, "Rebate, they are all in agreement. Everyone asked for an open market." After the WIC pre-bid conference was concluded, AFASS notified all bidders that the opening of bids would be postponed until June 14, 1990 in order to give AFASS time to respond to questions raised at the conference.
The First WIC Bid and Post-Bid "Action "
On June 14, 1990, the sealed WIC bids of Abbott, Mead, and Wyeth were opened and announced by Mr. Colon, the AFASS official in charge of the bid. Mead and Wyeth submitted identical bids of 40 cent rebates for both the sole source and open market options. Abbott submitted a 43 cent open market bid and a bid of $ 1.106 for the sole source option. On the basis of these bids, Abbott was the apparent winner of the WIC contract on a sole source basis.
It is conceded by the FTC that Abbott's bid was in every respect proper and lawful. Abbott's bid was based on its objective analysis of what it would take to outbid its competitors. The odd 6 tenths of a cent was tacked on its bid to meet Wyeth's habit of making bids in $ 0.005 increments.
Abbott was surprised by its competitors' low 40 cent sole source bids. Mr. Thomas Hodgson, who at the time held the post of President of Abbott International,
although pleased at having won the sole source contract, was somewhat dismayed with having bid so much higher than Abbott's competitors. From the record, Wyeth and Mead's identical noncompetitive bids strongly suggest the two companies were in communication with each other but not with Abbott.
AFASS officials were displeased with the results of the bid. They were unhappy that Abbott had submitted a "competitive" sole source bid. Right after the bids were opened, disheartened Puerto Rican officials began to look for ways to reverse the results.
On Friday morning, June 15, 1990, Mr. Colon of AFASS called Abbott's Mauricio Hernandez who was stationed in Puerto Rico. Colon asked Hernandez whether Abbott was willing to withdraw its sole source bid. Hernandez passed along this information to Hodgson and other Abbott officials in Illinois. Abbott officials sought the advice of one of its in-house attorneys, Honey Lynn Goldberg. She advised Messrs. Hodgson and Hernandez that Abbott could not legally withdraw its bid.
Based upon Ms. Goldberg's advice, Hernandez told Colon that Abbott could not and would not withdraw its bid. Colon asked Hernandez whether Abbott would sue AFASS if AFASS cancelled the bid. Hernandez again called Hodgson to relay Mr. Colon's question. Hodgson responded that it was not Abbott's policy to sue its customers or the government. Hernandez passed along this response to Colon. Hernandez also told Colon that any legal basis for cancelling needed to be communicated in writing to Abbott.
On Monday morning, June 18, Colon called Abbott's Hernandez and told him that AFASS's failure to include a performance bond in its invitation to bid on the procurement made Abbott's bid cancellable. Colon again sought assurance that Abbott would not sue. Hernandez relayed this information to Hodgson, who insisted that the basis for the cancellation be put in writing. Hodgson also repeated that it is not Abbott's policy to sue governments. This response by Hodgson, which was intended as non-committal, was conveyed by Hernandez to Colon who took it as an acceptance of AFASS' decision to invalidate the first bid.
It is clear that Abbott was skeptical about whether the performance bond was a legitimate basis for cancelling the award. Abbott's lawyer, Goldberg, advised Hodgson that the performance bond was not a valid basis for cancelling the results of the first bid. Others within Abbott thought Abbott should defend its first round win in court. Nevertheless, Abbott did not initiate a lawsuit to contest AFASS's cancellation of its bid. It is Abbott's position that it neither encouraged nor discouraged the Puerto Rican government's cancellation of their successful bid. As Hodgson testified, "We didn't want to take a position on it. It was their call. . . . If they wanted to cancel it, that was their prerogative to cancel."
Abbott's doubts about the legal basis asserted by Puerto Rico for cancellation were shared by USDA officials. Nevertheless, those officials were sufficiently uncertain about the scope of Puerto Rico's legal authority to cancel the bid that they refrained from challenging the cancellation at the time and made no attempt to stop the second round of bidding.
USDA official Vogel explained at trial the reasons why the USDA was reluctant to step in and act. If the USDA had suspected that the bid was being "rigged" in violation of federal law by the Puerto Rican officials, the Department was entitled to cut off all WIC funds to Puerto Rico. It was thought that such an move would be an overreaction in that it would harm WIC recipients--poor women and children. USDA officials thought that such an approach would place the USDA in an unfavorable light. As Vogel testified:
What we didn't want to do is in the pursuit of our concerns with the procurement, be in a position where, from an outsider's point of view, you'd think it was two government agencies squabbling about procurement laws, at the expense of food benefits to needy Puerto Ricans.