Steptoe & Johnson PLLC: Contractor Can Challenge Poor Performance Evaluation by Government

Steptoe & Johnson PLLC: Contractor Can Challenge Poor Performance Evaluation by Government

By  Eric J. Hulett

A poor performance evaluation of a contractor on a federal project is a ticking time-bomb waiting to explode on that contractor in future contract bids and can be "potentially devastating to a contractor[.]" Todd Const. L.P. v. U.S., 85 Fed.Cl. 34, 42 (2008) [enhanced version available to lexis.com subscribers].  Past performance evaluations are required to be reviewed as part of the bid process and a poor performance evaluation can cause a lower score resulting in the contractor not being awarded the bid. 

What can a contractor do when faced with a poor performance evaluation that is inaccurate, unfair, or did not conform to proper procedures?  For decades contractors believed that there was no effective way to judicially challenge a poor performance evaluation.  However, in a series of decisions beginning in 2008 and culminating in an opinion from the Federal Circuit Court of Appeals in August 2011, a contractor may now challenge a performance evaluation in court.  See, Todd Const. L.P. v. U.S., 85 Fed.Cl. 34 (2008) ("Todd I"); Todd Const. L.P. v. U.S., 88 Fed.Cl. 235 (2009) ("Todd II") [enhanced version available to lexis.com subscribers]; Todd Const. L.P. v. U.S., 94 Fed.Cl. 100 (2010) ("Todd III") [enhanced version available to lexis.com subscribers]; Todd Const. L.P. v. U.S., ___ F.3d ___,  2011 U.S. App. LEXIS 17980  (Fed. Cir., Aug. 29, 2011) ("Todd IV") [enhanced version available to lexis.com subscribers].

In Todd IV, the Federal Circuit Court of Appeals affirmed the three prior decision of the United States Court of Federal Claims addressing the various issues raised in this case.  The Todd IV Court held that (1) the contractor has standing to challenge the performance evaluation under the Contract Disputes Act, but (2) nevertheless the contractor's allegations were insufficient to state a claim upon which relief could be granted.  These holdings will be separately discussed in the sections below.

1.    A Contractor Has Enforceable Right to Accurate and Fair Performance Evaluation

The United States Army Corps of Engineers retained Todd Construction in 2003 to make repairs to the roofs of buildings at Seymour Johnson Air Force Base in North Carolina.  After the work was completed in September 2005, the Corps conducted a final evaluation of the work and "evaluated the overall performance on the work as unsatisfactory."  "Todd I" at 36.  Todd appealed the contracting officer's decision to the Department of the Army, contending that the decision violated review procedures, was arbitrary, and was not factually supported.  The appeal was denied and the performance evaluation was entered into the Construction Contractor Appraisal Support System ("CASS").  In May 2007, Todd filed a civil action, Todd I, in the United States Court of Federal Claims.  Id.

In Todd I, Todd alleged that (1) the evaluation was arbitrary and capricious, (2) the Corp violated its own regulations and procedures, and (3) the decision was not supported by the facts.  The Government moved to dismiss, arguing that the Complaint failed to state a claim and that the Court lacked subject matter jurisdiction over the claims; more particularly, that the Court lacked jurisdiction because a "challenge to the accuracy and procedural propriety of performance evaluations is not a 'claim' within the meaning of the Contract Disputes Act because it is not made 'as a matter of right' and does not arise from or relate to the contract."  Id. at 37.  After a lengthy though informative dissertation on the historical background of the jurisdiction of the Court of Federal Claims, the Todd I Court then discussed the history of performance evaluations in government contracting, noting that since the 1990s the FAR have required formal performance evaluations, for projects of $550,000 or more and that the evaluations are stored on a central database for six years.  Recognizing therefore that "a negative review is potentially devastating to a contractor" the Court concluded that a performance evaluation should be viewed as raising "issues of contract performance rather than as part of a bid protest when the contractor seeks future government contracts."  Id. at 42. 

The Court acknowledged that the FAR defines "claim" broadly as a demand seeking monetary compensation, adjustment of the contract terms, or other relief "arising under or relating to this contract."  Id., citing FAR 52.233-1.  The fundamental question then is whether a performance evaluation challenge seeks relief arising under or relating to the contract.  The Court concluded that "[i]t simply defies reason to contend, as the Government does, that Todd's assertion that its performance evaluations were inaccurate and procedurally improper does not bear any relationship to the terms or performance of the contract. . . If there had been no contract, there would be no evaluations. . . As a matter of logic, a performance evaluation relates to the contractor's performance under the contract, in the same way that any evaluation relates to the thing evaluated."  Id. at 44-45.  The Court then held "that Todd has satisfied the 'jurisdictional prerequisite' of having submitted a CDA claim to the contracting officer and having obtained a final decision on that claim."  Id. at 45.  Consequently, the Court denied the motion to dismiss based on lack of subject matter jurisdiction but requested further briefing on the issue of whether the Complaint stated a claim upon which relief could be granted.

In Todd II, following additional briefing, the Court, with the same presiding judge, attempted to determine if Todd had stated a claim upon which relief could be granted.   The Court held that it did possess authority to enter a declaratory judgment and, coupled with that, the jurisdiction to remand with "proper and just" directions to the contracting officer.  Id. at 243-245. "In the event that the Court finds procedural deficiencies or an unfair evaluation, the Court should use its power to issue a declaratory judgment to assist the agency, on remand, to address the identified concerns . . . '[I]t makes . . . little sense for the court simply to inform the agency that they got it wrong and to go back and try again . . . [I]t is incumbent on the court to provide the agency sufficient guidance for the agency to correct its flaws the second time around.'"  Todd II, 88 Fed.Cl. at 246, quoting McCarthy, et al.,Revisiting the Past: Todd Construction, Inc. v. U.S. and Judicial Review of Past Performance Evaluations, Part II,BNA's Federal Contracts Report (March 9, 2009). While quickly concluding that the Court could readily review the contracting officer's procedural compliance de novo, the Court concluded that a more deferential review of the substance of performance evaluations was warranted.  "Thus the court will review the 'accuracy' and 'fairness' of a performance evaluation rating to determine whether 'the discretion employed in making the decision is abused, for example, if the decision was arbitrary or capricious.'. . . Thus, the Court agrees with the defendant that it would be improper for the Court to conduct a new evaluation[.]"  Id. at 248.  Although agreeing with Todd on the legal analysis, the Court was unsatisfied with the state of the pleadings and ordered that Todd file an Amended Complaint to attempt to more clearly state a claim upon which relief could be granted.

In Todd III, the Court, with the same presiding judge, ruled upon the Government's motion to dismiss Todd's Amended Complaint.  The Court granted in part and denied in part the dismissal based on lack of subject matter jurisdiction and granted the motion to dismiss for failure to state a claim.  The Court concluded that "[t]here is no question that the provision the Court analyzed in Todd I, FAR 36.201, is specifically, rather than merely arguably, applicable to Todd's contract.  As it existed during the events in question, 36.201 mandated that 'Each performance report shall be reviewed to ensure that it is accurate and fair.' . . . Furthermore, the regulation requiring fair and accurate performance evaluations reflects a significant procurement policy that is aimed at both the Government and the individual contractor.  Agencies have been required to prepare performance evaluations for some time, [citation omitted] including requirement that 'each performance report shall be reviewed to ensure that it is accurate and fair'. . . Thus a significant goal of the past performance evaluation regulations is to ensure the accuracy and fairness of the evaluation, which requires conferring rights upon the contractor to, among other things, review and comment upon the evaluations. . . It would not advance the legislative goal to allow contracting officers to abuse their discretion by entering arbitrary and capricious performance evaluations into government-wide databases to be preserved for years.  To the contrary, permitting contractors to challenge arbitrary evaluations would assist in creating reliable evaluation histories. [citation omitted]"  Id. at 110-112.  Therefore, the Court held that "contractors possess rights capable of enforcement if the regulation is violated" and thus denied the Government's motion to dismiss for lack of subject matter jurisdiction.  Id.  While Todd won the battle by establishing a right to seek judicial relief for a poor performance evaluation, Todd lost the war when the Court dismissed the amended complaint for failing to state a claim due to insufficient pleading.

In Todd IV, the United States Court of Appeals for the Federal Circuit affirmed the United States Court of Federal Claims' decisions concerning jurisdiction, standing, and failure to state a claim.  While ultimately dissatisfied with Todd's pleadings, the Court did make clear that it affirmed the substance of the lower court's analysis of the law.  The Court noted that the Government continued to argue that, even if performance evaluations "relate to the contract" under the CDA, those specific regulations do not create a cause of action for contractors because those regulations exist for the primary benefit of the government and not the contractors.  Id. at *7.  The cases relied upon by the Government require that the disputed regulation must protect or benefit a class of persons who "must be more than an 'incidental beneficiary' of the regulation."  Id.  "However, it is possible for a regulation or law to benefit both the government and a class of privates parties. . . As history demonstrates, even the government viewed fair and accurate performance evaluations as providing substantial benefits to contractors.  That is not a situation in which the contractors are merely 'incidental beneficiaries' of the regulations."  Id.  Nevertheless, even this contractor-favorable reading of the regulations could not save Todd's Complaint.  As discussed in Section 2 below, the Todd IV Court ultimately dismissed the Complaint and Amended Complaint for failure to state a claim due to insufficiencies in the pleadings.

2.   A Complaint Must Allege Facts That If True Would Have Resulted in Different Evaluation

Although the overwhelming number of pages in the four Todd decisions is devoted to analysis of whether the court has jurisdiction and thus whether the contractor has a right to challenge a poor performance evaluation, the discussion of the sufficiency of the pleadings should not be overlooked.  While Todd won the battle of establishing a right to judicial review and relief for a poor performance evaluation, it lost the war when its Complaint and Amended Complaint were dismissed for failure to state a claim due to insufficiencies in the pleadings.

In Todd I the Court ordered additional briefing on this issue.  In Todd II the Court reviewed Todd's Complaint, noting that the Complaint was "a mere three pages" and asserted claims that the Army Corps of Engineers acted (1) arbitrarily, capriciously, and abused its discretion, (2) exceeded its statutory and regulatory authority, (3) failed to properly observe procedures required by law, and (4) was unsupported and unwarranted by the facts.  The Complaint sought relief for "[a] judicial determination that the Corps' final decision is unlawful and should be set aside; (b) [a]n order directing the Corps to remove the final performance evaluations from CCASS [Construction Contractor Appraisal Support System]; and (c) [f]or such other relief as this Court deems proper, including interest, costs and attorney's fees . . ."  Id. at 248.  The Court held that it did not possess authority to grant the relief sought in paragraphs (a) and (b) of the Complaint.  However, the Court held that it does have authority to remand the case with directions to cure procedural deficiencies and re-examine evaluation ratings, build a proper record, and assign a rating supported by the record. On the other hand, the "Court does not possess the power to mandate that upon remand the agency assign a particular rating, withdraw a rating, or remove a rating from the prescribed database."  Id. at 49.  Although concluding that Todd's Complaint failed to meet with pleadings standards, the Court ruled that Todd could file an Amended Complaint to attempt to state a claim upon which relief could be granted.

In Todd III, the Court, with the same presiding judge, ruled upon the Government's motion to dismiss Todd's Amended Complaint.  The Court granted in part and denied in part the dismissal based on lack of subject matter jurisdiction and granted the motion to dismiss for failure to sate a claim.  However, the Court, even assuming the factual allegations in Todd's Complaint to be true, could not conclude that the Complaint stated a claim.  Todd alleged that it provided some submittals timely but admitted others were not.  Todd acknowledged the Government's dissatisfaction with some of its subcontractors but Todd's response was that the subcontractors' poor performance was "unforeseeable" to Todd and not "a reflection of Todd's management or supervisory capabilities."  Id. at 115.  The Court found these arguments unpersuasive.  "Todd's statements regarding its lack of responsibility for its subcontractors are legal conclusions, not facts, and are inconsistent with the pertinent law. (citations omitted)"  Id.  Thus, no deference was accorded Todd's arguments.  "The subcontractors' performance was inexcusable and there is nothing in the amended complaint beyond Todd's bare assertion of non-responsibility to support any conclusion that assigning 'unsatisfactory' ratings was an abuse of discretion."  Consequently, the Complaint was dismissed.

In Todd IV, the United States Court of Appeals for the Federal Circuit affirmed the United States Court of Federal Claims' decisions concerning jurisdiction, standing, and failure to state a claim.  Although the Court's rulings regarding standing and jurisdiction favored Todd, ultimate victory could not be achieved because the facts, as pled, even if true, did not state a claim.  After reciting the lengthy history of this dispute, the Court noted that in Todd's initial Complaint "Todd did not challenge any particular performance ratings.  Instead, it merely pled that the government issued overall unsatisfactory performance evaluations and that these ratings were arbitrary and capricious."  Id. at *2.  Reviewing Todd's Amended Complaint, the Court was likewise unimpressed, noting that "[a]lthough Todd added a series of factual allegations, it again did not specifically identify which unsatisfactory ratings were arbitrary and capricious,  The complaint appeared to challenge primarily the unsatisfactory ratings related to Todd's timeliness of performance.  For each project, Todd asserted that particular delays were caused by its subcontractors, the government, or other 'unforeseeable event[s] [] not caused by Todd.'"  Id. at *3.   "Here, Todd must plead facts which give rise to a plausible inference that the government abused its discretion in awarding the negative performance ratings. . . Comparing the factual allegations in the complaint with the performance evaluations, we conclude that the government is correct.  All of the facts alleged by Todd could be true and yet it does not follow that any of the unsatisfactory ratings were an abuse of discretion or should be changed."  Id.  A helpful description of the contents of a pleading that may be successful, in contrast, may be discerned from the Court's final paragraph:

Todd's complaint raised issues related to the timeliness of its performance (e.g., "adequacy of initial progress schedule," "adherence to approved schedule," "submission of required documentation," and "resolution of delays"). (citation omitted)  In this respect, Todd merely alleged that the "delays . . . were caused by unforeseen events, many of which were neither the fault nor the responsibility of Todd." (citation omitted).  Although Todd alleged that numerous specific delays were not Todd's responsibility, those allegations cannot change the fact that  Todd admits in its appeal brief that some delays were not the government's fault but were instead caused by Todd's subcontractors.  We have previously explained that "a contractor is responsible for the unexcused performance failures of its subcontractors." (citation omitted)  Todd has failed to allege facts that would excuse its subcontractors' delays.  Todd's bare assertion that it is not responsible for the actions of its subcontractors is a legal conclusion, and we are not required to assume that legal conclusions are true. (citation omitted)  Todd also specifically admitted in the complaint that it delivered only "the majority [i.e., not all] of the [required] submittals" to the government on time. (citation omitted)  The performance evaluations do not specify how much delay the government attributed to Todd; they simply indicate that Todd's performance was untimely.  To raise a plausible inference that the ratings were arbitrary and capricious, the contractor would, at the very least, need to allege facts indicating that all of the substantial delays were excusable.  Todd has not done so, and we therefore agree with the Claims Court that its complaint was properly dismissed under Rule 12(b)(6).

Todd IV at *9.

3.   Concluding Thoughts

In these tough economic times, any competitive disadvantage can be crippling to a contractor's business.  Performance evaluations by the federal government have become an increasingly critical factor in whether a contractor is selected for a government construction project.  Challenging performance evaluations that are factually incorrect or otherwise arbitrary or capricious is more important than ever.  The Todd IV decision confirms that contractors may seek judicial relief for improper performance evaluations.  The four Todd decisions provide useful guidance to those contemplating such a challenge.

For additional articles on this issue see:  Bruner & O'Connor on Construction Law, § 2:99; Schneier, 32 No. 10 Construction Litigation Reporter 14 (Oct. 2011); Schneier, 31 No. 10 Construction Litigation Reporter 18 (Oct. 2010); Sweeney, et al., 2011 Construction Law Update, § 8.02 (Aspen Pub.); 53 No. 43 Government Contractor ¶ 299 (Sept. 14, 2011); Kara M. Sacilotto, 11-10 Briefing Papers 1 (Sept. 2011).

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