Joseph Feibel – September 5, 2020
Originally published by Public Contract Law Journal
Author: Nathaniel Castellano
Readers of this Journal are likely aware of the burgeoning interest in Other Transactions and Other Transactions Authority (OTA). Some believe that agencies endowed with OTA are free from the traditional rules of procurement contracting when forming
Other Transactions. With the freedom of OTA, the theory goes, agencies can contract with the most innovative commercial firms, which might otherwise decline the boilerplate terms and compliance burdens associated with procurement contracting. This article is a reminder that the authority to create an Other Transaction is, at bottom, the authority to create a government contract. It first explains why Other Transactions qualify as contracts and then begins exploring the implications of the contractual nature of Other Transactions. Any private party entering into an Other Transaction should be aware of the significance of contracting with the United States. OTA might clear away many burdensome procurement statutes and regulations, but principles of sovereign immunity and separation of powers, along with the pervasive precedents of the United States Court of Appeals for the Federal Circuit, will continue to ensure that doing business with the federal government, even by “Other Transaction,” is never quite the same as doing business in the commercial market.
I. Introduction and Context
The United States government is looking beyond its cohort of traditional contractors and seeks to build relationships with groundbreaking commercial firms in order to maintain technological and battlefield superiority.1 These relationships are unlikely to be built entirely through traditional procurement contracts, because the most innovative commercial firms often are not dependent on federal funds for revenue and will not accept the boilerplate terms and compliance obligations associated with federal procurement.2 As alternatives to traditional procurement, the U.S. government has recently encouraged use of various non-traditional methods to stimulate and obtain access to commercial innovation, including prize contests,3 public-private partnerships,4 and— the subject of this article—Other Transactions Authority.
OTA is the authority to enter into an Other Transaction.5 Despite its recent popularity, OTA is not new.6 The term “Other Transaction” and the first grant of OTA were crafted by Paul Dembling, drafter of the National Aeronautics and Space Act of 1958 (the “Space Act”) and former General Counsel of the National Aeronautics and Space Administration (NASA).7 To ensure NASA would have all the authority needed in the “Space Race” against the Soviet Union, Dembling drafted the Space Act to afford NASA broad power “to enter into and perform such contracts, leases, cooperative agreements, or other transactions as may be necessary in the conduct of its work and on such terms as it may deem appropriate.”8 Explaining his intent, Dembling later revealed that “other transactions” was a “catchall phrase” intended to provide NASA freedom from traditional procurement regulations and flexibility to structure agreements in line with commercial business practices:
I tried to cover everything else that was [raised by others when discussing NASA’s needs]. When somebody said, well, suppose we have this kind of a transaction or that kind of a transaction, I figured, it may not be covered under contracts, leases, and cooperative agreements. I couldn’t think of any other terminology to use, so I used “other transactions as may be determined or necessary in the conduct of its work.” So it was a sort of catchall phrase that I tried to use . . . . [A]n “other transaction” is not a procurement contract, cooperative agreement, or grant, and, therefore is not subject to the laws, regulations, and other requirements applicable to such contracts, agreements, and grants. It is this flexibility which provides authority to structure agreements in accordance with standard business practices.”9
In the sixty years since Congress granted OTA to NASA through the Space Act, Congress has granted OTA to other agencies as well, including the Department of Energy (DOE), the Department of Health and Human Services (HHS), the Department of Homeland Security (DHS), the Transportation Security Administration (TSA), the Department of Transportation (DOT), and the Department of Defense (DoD).10
DoD now has two distinct types of OTA, currently codified at 10 U.S.C. §§ 2371 and 2371b. The first, § 2371, covers Other Transactions for “basic, applied, and advanced research,”11 and the second, § 2371b, covers Other Transactions for prototype projects.12 Providing a method for DoD to facilitate transition from a prototype project to a production contract, § 2371b allows that, if DoD awards an Other Transaction for a prototype project using “competitive procedures,” then DoD may also issue a follow-on production contract or transaction without the use of further “competitive procedures.”13
One of the primary attributes of OTA is that traditional procurement statutes and regulations—such as the Competition in Contracting Act (CICA), the Federal Acquisition Regulation (FAR), and the Cost Accounting Standards (CAS)—do not apply, and OTA provides freedom to negotiate intellectual property rights outside the constructs of the Bayh-Dole Act.14 Clearing away onerous procurement laws may enable the government to attract today’s leading innovators as business partners.15 Eliminating the FAR’s strict requirement for full and open competition may also allow agencies, at least in theory, to reduce acquisition lead time.16
But wholesale abandonment of procurement regulations leaves a significant void, because those regulations provide the standard clauses that procurement professionals have studied, used, and litigated for decades.17 Other Transactions are free not just from CAS and the FAR, but essentially all of the standard clauses that agencies rely on to allocate risk and resolve disputes.18 Clauses covering disputes, delays, changes, equitable adjustments, terminations, etc., provide consistency in contract administration that should not be taken for granted.19 In an Other Transaction, however, the allocation of these risks is up for negotiation.20
Given their broad nature, statutory grants of OTA provide very little direction.21 For better or worse, DoD has yet to provide meaningful regulation to govern its use of Other Transactions, perhaps with the exception of detailed regulations governing certain Technology Investment Agreements (TIAs) that are issued as Other Transactions.22 Instead of binding regulation to accompany its increased use of Other Transactions, DoD has opted for informal guidance to using OTA. Most notably, in January 2017 the DoD Director of Defense Procurement and Acquisition Policy (DPAP) issued updated guidance for using prototype OTA.23 December 2018 guidance published by the Office of the Under Secretary of Defense for Acquisition and Sustainment (OUSD (A&S)) superseded the DPAP guidance.24 While the OUSD OTA Guide often uses the mandatory term “shall,” it affirmatively states that, although “this document includes references to the controlling statutory and policy provisions for DoD OT authority, the document itself is not a formal policy document.”25
This absence of statutory and regulatory rules leaves Other Transactions in a barren legal landscape, enlarged by the common inclination to define Other Transactions in terms of what they are not, without being clear about what they are. The most prevalent way of defining “Other Transactions” is the refrain: Other Transactions are not procurement contracts, grants, or cooperative agreements.26 This article focuses on what Other Transactions are: Other Transactions are contracts with the U.S. federal government.27
The contractual nature of Other Transactions is important, because contracting with the federal government is different than contracting among private parties in ways that might not be fully appreciated by the commercial firms and non-traditional contractors that OTA often serves to attract.28 The principal distinctions spring from the federal government’s sovereign immunity, Congress’ “power of the purse,” and the federal common law of contracts, all of which effectively ensure that doing business with the federal government through any means—including Other Transactions—will never be quite the same as doing business in the commercial sector.29 There are three primary categories of issues that parties to an Other Transaction should understand.
First, while judicial review is presumably available under the Tucker Act where the government breaches its contractual obligations under an Other Transaction, sovereign immunity limits the forum and remedies available to the private party in the event of a government breach, as well as the theories of liability that a plaintiff may pursue.30 Litigation of breach of contract claims filed by private parties arising from Other Transactions likely will be limited to the Court of Federal Claims and the Federal Circuit, where principles of federal common law will govern.31 Notably, however, a relatively recent line of Federal Circuit precedent creates the risk that certain Other Transactions may not be subject to judicial review under the Tucker Act, potentially leaving the private party without meaningful legal recourse if the agreement is not drafted carefully.32
Second, failure to work within various limits on agency authority may disrupt the parties’ expectations during the formation and administration of Other Transactions.33 Although important jurisdictional questions remain to be answered, it is clear that non-compliance with preconditions to an agency’s OTA, or arbitrary and otherwise unlawful behavior in connection with the award of an Other Transaction might be bases for protesting an agency’s use of OTA. Beyond the risk of bid protest, legal limits on the authority of any federal agency and its representatives to contractually bind the United States mean that a private firm’s failure to appreciate nuanced issues of federal fiscal law, or limits to a government representative’s authority, could result in an Other Transaction (or modification thereto) being rendered voidable, if not void.34 This risk is magnified by uncertainty regarding which government officials have authority to create, modify, and administer Other Transactions. Further complexity derives from Federal Circuit precedent that restricts the circumstances in which government officials have implied actual authority to create and modify government contracts.35
Third, parties should understand that the federal common law of contracts dictates methods of interpretation different from the principles that usually apply to private contracts.36 The Federal Circuit adheres to the “plain meaning” rule, often declining to consider extrinsic evidence to determine the parties’ intent.37 The Federal Circuit and its predecessor have also traditionally declined to apply the doctrine of contra preferentum to interpret ambiguous clauses against the government drafter where the ambiguity is patent and the private party failed to seek clarification prior to contract formation.38 It is not yet clear whether or how this so-called “patent ambiguity doctrine” might apply to Other Transactions; but, until courts provide clarity, parties to an Other Transaction should appreciate the uncertainty regarding which party bears the risk of ambiguous terms and conditions.39 Similarly, the Federal Circuit and its predecessor have applied the Christian doctrine to incorporate by operation of law certain mandatory contract clauses.40 While it is not yet clear whether this doctrine might apply to Other Transactions, it should at least be safe to conclude that just because the Christian doctrine requires that a FAR clause be incorporated into a procurement contract (such as the Termination for Convenience clause) the same clause should not necessarily be incorporated into an Other Transaction, unless some statute or regulation reflecting important public policy makes that clause mandatory for the Other Transaction at issue.41
While many of the questions discussed in the following sections lack definitive answers, it is at least clear that the law applicable to Other Transactions is quite different than the law applicable to commercial contracts. Before proceeding, it is important to keep in mind three limitations to the scope of this article. First, this article addresses Other Transactions entered between private parties and federal agencies, not so-called “consortia” agreements. Second, the article does not address the risks that private parties to an Other Transaction may face due to the federal government’s arsenal of tools designed to combat fraud, waste, and abuse in public spending, such as the False Claims Act, Anti-Kickback Act, or suspension and debarment.42 Third, this article does not attempt to describe the means by which the government might seek redress for any alleged breach of an Other Transaction by a private party, other than to suggest that the answer in any case likely will relate to the terms of the Other Transaction’s dispute resolution provisions.43 The author wholeheartedly encourages others to research and analyze these important issues, but does not attempt to resolve them here.
II. Premise: Other Transactions Are Contracts with the Government
As the title suggests, the premise of this article is that Other Transactions are contracts with the federal government. This should not be surprising. Indeed, in the only published Court of Federal Claims decision the author is aware of addressing an alleged breach of contract involving an Other Transaction, the conclusion that the parties created a contract was apparently so obvious that the issue did not warrant discussion in the opinion.44 The 2018 OUSD OTA Guide expressly advises in its “Myths and Facts” section that Other Transactions are legally enforceable contracts:
Myth 3: Since an OT is termed an “agreement,” it is not a contract.
FALSE. When most people in the [g]overnment hear the term “contract,” they automatically think “Federal Acquisition Regulation (FAR)-based procurement contract” awarded under the traditional acquisition process and subject to all of the federal acquisition statutes and regulations. OT agreements are not procurement contracts, but they are legally valid contracts. They have all six legal elements for a contract (offer, acceptance, consideration, authority, legal purpose, and meeting of the minds) and will be signed by someone who has the authority to bind the federal government (i.e. an Agreements Officer (AO)). The terms and conditions can be enforced by and against either party. The organizations within DoD routinely using OTs have called them agreements to ensure that there would be no confusion between these arrangements and FAR based procurement contracts.45
That Other Transactions are contracts is consistent with Federal Circuit precedent that: “[A]ny agreement can be a contract within the meaning of the Tucker Act, provided that it meets the requirements for a contract with the [g]overnment, specifically: mutual intent to contract including offer and acceptance, consideration, and a [g]overnment representative with actual authority to bind the [g]overnment.”46 The Federal Circuit also has indicated that the existence of a contract is not dependent on the parties’ use of the term “contract.”47 There is plentiful precedent from the Federal Circuit and Court of Federal Claims finding enforceable contracts between a private party and the government in non-procurement settings, including grants, cooperative agreements, prize contests, and other resource sharing agreements.48
The Supreme Court’s decision in Kingdomware Technologies Inc. v. United States49 lends further support, as the Court explained that the essence of a contract is an agreement between two or more parties that imposes legally enforceable obligations.50 In Kingdomware, the Supreme Court found that an “order” issued by the Department of Veterans Affairs against the Federal Supply Schedule was a contract with the government because it “creates contractual obligations for each party and is a ‘contract’ within the ordinary meaning of that term,” quoting Black’s Law Dictionary to define “contract” as an “‘agreement between two or more parties creating obligations that are enforceable or otherwise recognizable at law.'”51 There should be no dispute that if an agency enters into an Other Transaction whereby (1) a private entity agrees to undertake some performance, whether it be to perform research or create a prototype, and (2) the government in return agrees either to pay the private party for its performance or provide some other form of consideration— access to data or facilities, cost sharing, etc.—then that Other Transaction creates a set of mutually binding obligations that satisfies the ordinary meaning of the term “contract.”52
To the extent there is confusion with respect to the contractual nature of Other Transactions, it may be attributed to various statutory grants of OTA that are drafted to distinguish Other Transactions from procurement contracts. Some of these statutory OTA provisions generate confusion by using the general term “contract” instead of the more specific term “procurement contract,” creating the appearance that Other Transactions are being distinguished from all types of “contracts.” For example, the statute that grants TSA OTA authorizes TSA “to enter into and perform such contracts, leases, cooperative agreements, or other transactions as may be necessary.”53 Likewise, DoD’s R&D OTA provides that “each military department may enter into transactions (other than contracts, cooperative agreements, and grants).”54
If taken at face value, these provisions could be read to suggest that Other Transactions are, by statute, not contracts. But, the statutory OTA provisions distinguishing between “contracts” and “Other Transactions” are properly read as distinctions between “procurement contracts” and “Other Transactions.” As explained by former Defense Advanced Research Projects Agency (DARPA) General Counsel Richard Dunn: “In the litany of terms contract, grant, or cooperative agreement appearing together, contract almost always means procurement contract.”55 Thus, the statutory OTA provisions simply reaffirm that Other Transactions are not procurement contracts. The OTA provisions do not purport to disclaim that Other Transactions satisfy the common law standards for creating mutually binding contractual liability. To read such statutes as distinguishing Other Transactions from any type of contractual arrangement would be contrary to the statutes’ plain meaning and clear congressional intent.
The Federal Grants and Cooperative Agreements Act (FGCAA) further supports reading the term “contract” in a statutory OTA provision to mean “procurement contract.”56 The FGCAA is intended to “promote increased discipline in selecting and using procurement contracts, grant agreements, and cooperative agreements.”57 While the FGCAA carefully uses the term “procurement contract” instead of “contract,” other statutes use the general term “contract” instead of the more precise term “procurement contract,” even when citing directly to the FGCAA. For example, DoD’s statutory authorization to engage in R&D distinguishes between (1) using a “contract, cooperative agreement, or grant in accordance with [the FCGAA],” and (2) using “transactions (other than contracts, cooperative agreements, and grants).”58 By citing to the FGCAA when discussing contracts, cooperative agreements, and grants, Congress clearly intended the term “contract” to mean “procurement contract,” because the FGCAA does not speak to general contracts. The FGCAA speaks to three specific kinds of contractual agreements: procurement contracts, cooperative agreements, and grants.59 In light of the FGCAA, there is no reason to assume that Congress intended the term “contract” to mean anything other than “procurement contract” when describing Other Transactions in other statutory provisions.
Furthermore, interpreting statutory OTA provisions to mean that Other Transactions are not legally enforceable contracts would contravene fundamental rules of statutory interpretation. First, because grants and cooperative agreements are types of contractual agreements,60 then unless Congress’ use of the term “contract” is interpreted to mean “procurement contract,” the common statutory distinction among “contracts, grants, and cooperative agreements” would be meaningless, in contravention of the canon that disfavors interpretations that leave any word in a statute redundant or meaninglessless.61 Second, because Other Transactions satisfy the common law definition of contract, reading an OTA provision to mean that an Other Transaction is not a contract would alter the common law, contravening the canon of statutory interpretation that disfavors implied deviations from the common law.62 Third, and most importantly, interpreting OTA provisions to mean that Other Transactions are not legally binding contracts would run afoul of the principal rule of statutory interpretation that a “fair reading of legislation demands a fair understanding of the legislative plan.”63 Statutory grants of OTA are intended to give agencies flexibility to do business with the private sector. It is hard to imagine anything more damaging to the prospect that Other Transactions will allow agencies to successfully engage with the commercial sector than to interpret OTA to mean that the parties to an Other Transaction are left without any legally binding contractual rights. Such a result would be anathema to commercial practice, where contracts are, of course, legally binding. It would also be devastating to the inherent public interest of ensuring that companies who agree to provide goods and services to the United States in return for taxpayer dollars are held accountable to those promises.
At bottom, Congress’ casual use of the term “contract” in OTA provisions and various procurement-related statutes should not be taken as an assertion that Other Transactions are not binding contracts that impose legally enforceable mutual obligations on both parties. While a narrow reading of certain OTA provisions could be read to suggest that Other Transactions are something other than contracts, that reading is untenable in light of the larger statutory context and congressional intent. Nevertheless, given the burgeoning popularity of OTA, Congress would be well advised to more clearly distinguish between “contracts” and “procurement contracts” in the future.
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