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June 19, 1996

UNITED STATES OF AMERICA, et al., Defendants.

The opinion of the court was delivered by: HOGAN

 Pending before the Court in this government contracts case are cross-motions for summary judgment and the defendants' incorporated motion to dismiss. The Court has exhaustively reviewed the parties' briefs on the motions, the oral arguments presented to the Court, and the supplemental briefs submitted after the hearing. For the reasons stated below, the Court will grant the plaintiffs' motion for summary judgment and deny the defendants' motion to dismiss or for summary judgment.


 This case concerns the United States military's bidding process for commercial freight shipments. The Military Traffic Management Command ("MTMC") is responsible for arranging these shipments for all branches of the military. The dispute centers around one subset of this business, Foreign Military Sales ("FMS") shipments, in which foreign governments buy goods from the United States. The plaintiffs, comprised of two groups of carriers providing freight transport to MTMC for FMS and other shipping activity, challenge a notice promulgated by MTMC which seeks to alter bidding procedures for FMS shipments.

 The effect of MTMC's proposed change upon the FMS bidding process is only understandable in the context of the procedure MTMC uses for other shipping transactions. Carriers are invited to bid in one of two ways: they can respond to solicitations for "tenders," or bids, for general traffic ("GT") contracts, or submit unsolicited voluntary tenders for other business. GT contracts are requirements contracts: they encompass all of the shipping business from a particular military installation for a specific period of time. The unsolicited voluntary bids are used to fill other shipping needs. In both cases, carriers usually bid at rates lower than normal commercial rates.

 Shipments of FMS goods are not covered by these bid procedures. FMS bids are submitted separately, and carriers charge more than the "tender rate" they are willing to accept for GT and voluntary tender business. As explained in much greater detail below, this difference between FMS and non-FMS rates stems from a statutory provision allowing the government to accept discounted rates for its own shipping.

 The Arms Export Control Act, 22 U.S.C. § 2751 et seq., governs some aspects of FMS transactions. The statute requires that the foreign government purchasing the goods pay all of the administrative expenses associated with the sale. 22 U.S.C. §§ 2761(a), 2761(e), 2792(b). This includes shipping to the foreign country. Sometimes the foreign government arranges its own shipping, but on other occasions MTMC makes the arrangements. When MTMC coordinates the shipping, it collects the payment from the foreign government and reimburses the carrier.

 The method for extracting shipping costs from the foreign government is not precise. Usually, a percentage of the total sales amount is added to cover shipping. Sometimes this amount is more than the carrier's bill, and MTMC keeps the extra funds. Regardless of how the foreign government is billed, the payment associated with shipping costs goes into a revolving fund. The defendants have stated that the fund is operated with the purpose of keeping it balanced, but the plaintiffs suggest that MTMC regularly turns a profit.

 On December 13, 1995, MTMC published a "Notice" in the Federal Register stating that in the future, carriers submitting bids for GT or voluntary tender work will have to include FMS shipments in their bid, all at one rate. Movement of Foreign Military Sales (FMS) Shipments--Policy Change, 60 Fed. Reg. 64031 (Dec. 13, 1995). Essentially, the notice establishes a new condition precedent for carriers who seek the government's GT and voluntary tender business: they must agree to accept FMS work at the same rate. Though the Notice scheduled the change to be phased in over time, all existing contracts would eventually have to include bids for FMS work. The plaintiffs challenge the validity of the Notice on several procedural and substantive grounds, discussed in turn below.


 A. Applicability of APA Rule Making Procedures

 The Notice promulgated by MTMC did not set forth any procedures or establish a time period for public comment to its effective date. The plaintiffs argue that the Notice is invalid because MTMC did not comply with 5 U.S.C. §§ 553(b), (c), and (d), provisions of the Administrative Procedure Act ("APA"), which require agencies to provide a notice and comment period for substantive rules. However, matters "relating to . . . public property, loans, grants, benefits, or contracts" are exempt from the requirements of § 553. 5 U.S.C. § 553(a)(2). This exemption applies squarely to MTMC's Notice.

 The D.C. Circuit has never had occasion to hold that the "contracts" provision in § 553(a)(2) exempts procurement regulations from the notice-and-comment requirements. However, it has remarked that

the salutary effect of the [APA's] public comment procedures cannot be gainsaid, so only reluctantly should courts recognize exemptions therefrom. But even construed narrowly, § 553(a)(2) cuts a wide swath through the safeguards generally imposed on agency action.

 Humana of South Carolina, Inc. v. Califano, 191 U.S. App. D.C. 368, 590 F.2d 1070, 1082 (D.C. Cir. 1978). In that case, the Court noted that the legislative history of the APA only minimally limited the reach of § 553(a)(2), by requiring that subjects listed as exempted must be "clearly and directly involved" in the agency action at issue.

 Here, there is no question that the Notice clearly and directly involved public contracts, in the form of FMS shipment agreements. Thus, the Notice is exempt from the requirements of § 553. See Essex Electro Engineers, Inc. v. United States, 960 F.2d 1576 (Fed. Cir.), cert. denied, 506 U.S. 953, 121 L. Ed. 2d 333, 113 S. Ct. 408 (1992) (holding that Federal Acquisition Regulations interpreting the Contracts Dispute Act were exempt from § 553). *fn1"

 In one case, the D.C. Circuit did hold that a particular agency action was not within the public contracts exception. In Independent U.S. Tanker Owners Committee v. Lewis, 223 U.S. App. D.C. 185, 690 F.2d 908 (D.C. Cir. 1982), the Court examined regulations setting forth procedures under which owners of merchant marine ships could reimburse the United States for construction subsidies, thereby freeing the ships to compete in the U.S. domestic market. The agency argued that the regulations were merely part of the contracting process under which the government chose to subsidize some ship construction, but the Court held that since the prohibition against subsidized merchant marine ships participating in the domestic market was established by statute, ...

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