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Use of Most Favored Customer Clause Enjoined

The Court of Federal Claims enjoined a solicitation for regional food distribution services because a most favored customer clause was an unreasonable, arbitrary, and capricious requirement. Following an unsuccessful protest before the Government Accountability Office ( 26 CGEN ¶113,411), the pre-award protesters renewed their challenge to the terms of the solicitation, contending its departures from customary commercial practices, particularly the calculation of distribution and delivered prices and the MFC clause, were unreasonable and arbitrary. The MFC clause provided that "[f]or all items, the contractor warrants, on a continuing basis throughout the period of performance, that its delivered price under this contract is equal to or lower than its delivered price to its commercial customer accounts."

Substantial Departure

Although the court agreed with the GAO that many of the protesters' arguments were simple disagreements with the government's decision to depart from the industry's commercial pricing customs, it determined the MFC clause "pervade[d] all aspects of pricing under the [s]olicitation" and amounted to "an arbitrary and capricious requirement foisted on potential offerors." The clause represented a "substantial departure" from industry standards because it was not restricted to similarly situated customers and warranted the government would receive the lowest price a distributor offered to any customer anywhere in the world, regardless of any naturally occurring regional price differences. The clause also required distributors to "pass along" the benefit of pricing agreements between suppliers and other customers, even though the distributors were not privy to the agreements or authorized to extend the price. Compliance with this requirement was a practical impossibility and "penalize[d] distributors for acting as the middlemen between two separate contracting parties --which is the primary purpose of all food-service distributors." The court concluded the MFC clause was unreasonable and "patently disconnected" from the government's objective of seeking increased pricing transparency to reduce fraud and avoid excessive pass-through charges. It also noted the offerors' failure to submit conforming proposals for up to $18 million in business "sen[t] a signal ... that things [were] more than amiss." ( U.S. Foodservice, Inc., et al. v. U.S., FedCl, 55 CCF ¶79,682)

(The news featured above is a selection from the news covered in the Government Contracts Report Letter, which is published weekly and distributed to subscribers of the Government Contracts Reporter. )

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