B-154978, NOVEMBER 19, 1964, 44 COMP. GEN. 292

B-154978: Nov 19, 1964

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- A PROCEDURE SIMILAR TO BIDDING PRACTICES LITIGATED AND IN WHICH THE COURTS HELD THAT BIDS NOT COMPLETE IN THEMSELVES ARE NOT BONA FIDE VALID BIDS. THE PROPOSED BIDDING PROCEDURE INTRODUCING ELEMENTS OF CHANCE AND WAGERING WHICH HAVE NO PLACE IN THE COMPETITIVE BIDDING SYSTEM DESIGNED TO GIVE ALL BIDDERS EQUAL RIGHTS. THE FOLLOWING BACKGROUND IS BRIEFLY SUMMARIZED FROM INFORMATION CONTAINED IN THE ASSISTANT SECRETARY'S LETTER: BIDS FOR THE SALE OF NATIONAL FOREST TIMBER ARE SOLICITED ON AN ADVERTISED BASIS SO AS TO PROVIDE AN OPPORTUNITY FOR ALL INTERESTED PURCHASERS TO COMPETE AND. IT IS NOT DEEMED DESIRABLE FROM THE STANDPOINT OF COMMUNITY STABILITY OR GOVERNMENT POLICY TO PUT MILL OPERATORS PRIMARILY DEPENDENT UPON GOVERNMENT TIMBER IN THE POSITION OF OFTEN HAVING TO BID AND PAY PRICES HIGHER THAN THEY CAN REALISTICALLY AFFORD.

B-154978, NOVEMBER 19, 1964, 44 COMP. GEN. 292

TIMBER SALES - BIDS - COMPETITIVE SYSTEM VARIANCES A BIDDING PROCEDURE FOR THE SALE OF NATIONAL FOREST TIMBER IN WHICH EACH BIDDER OFFERS TO PURCHASE THE TIMBER INVOLVED AT EITHER THE ADMINISTRATIVELY DETERMINED ADVERTISED PRICE OR SOME FIXED PERCENTAGE OR AMOUNT IN EXCESS OF THE NEXT HIGHEST BID--- A PROCEDURE SIMILAR TO BIDDING PRACTICES LITIGATED AND IN WHICH THE COURTS HELD THAT BIDS NOT COMPLETE IN THEMSELVES ARE NOT BONA FIDE VALID BIDS--- MAY NOT BE APPROVED FOR ADOPTION IN THE ABSENCE OF PRIOR CONGRESSIONAL SANCTION, THE PROPOSED BIDDING PROCEDURE INTRODUCING ELEMENTS OF CHANCE AND WAGERING WHICH HAVE NO PLACE IN THE COMPETITIVE BIDDING SYSTEM DESIGNED TO GIVE ALL BIDDERS EQUAL RIGHTS, TO SECURE TO THE GOVERNMENT THE BENEFITS WHICH FLOW FROM COMPETITION, TO PREVENT UNJUST FAVORITISM IN THE PURCHASE OR SALE FOR PUBLIC ACCOUNT, AND TO RAISE A BAR AGAINST COLLUSION AND FRAUD IN LETTING CONTRACTS.

TO THE SECRETARY OF AGRICULTURE, NOVEMBER 19, 1964:

BY LETTER OF SEPTEMBER 11, 1963, THE ASSISTANT SECRETARY REQUESTED ADVICE AS TO WHETHER OUR OFFICE WOULD OBJECT TO USE OF CERTAIN PROPOSED CONTRACTING PROCEDURES WITH RESPECT TO SALES OF NATIONAL FOREST TIMBER.

THE FOLLOWING BACKGROUND IS BRIEFLY SUMMARIZED FROM INFORMATION CONTAINED IN THE ASSISTANT SECRETARY'S LETTER:

BIDS FOR THE SALE OF NATIONAL FOREST TIMBER ARE SOLICITED ON AN ADVERTISED BASIS SO AS TO PROVIDE AN OPPORTUNITY FOR ALL INTERESTED PURCHASERS TO COMPETE AND, THROUGH COMPETITION OF THE MARKET PLACE, TO OBTAIN FULL VALUE FOR THE PUBLIC TIMBER. HOWEVER, IT IS NOT DEEMED DESIRABLE FROM THE STANDPOINT OF COMMUNITY STABILITY OR GOVERNMENT POLICY TO PUT MILL OPERATORS PRIMARILY DEPENDENT UPON GOVERNMENT TIMBER IN THE POSITION OF OFTEN HAVING TO BID AND PAY PRICES HIGHER THAN THEY CAN REALISTICALLY AFFORD. TO ACCOMPLISH THESE ENDS, TWO METHODS OF BIDDING HAVE BEEN UTILIZED. UNDER ONE METHOD, SEALED BIDS ARE SOLICITED AND A CONTRACT IS AWARDED TO THAT RESPONSIBLE BIDDER SUBMITTING THE HIGHEST RESPONSIVE BID. UNDER THE SECOND METHOD, THOSE RESPONSIBLE BIDDERS WHOSE BIDS MEET AN ANNOUNCED MINIMUM PRICE BECOME ENTITLED TO ENTER AN AUCTION COMPETITION AND AWARD IS MADE TO THE HIGHEST BIDDER AT THE AUCTION.

WHERE SEALED BID PROCEDURES WITHOUT LATER AUCTION ARE UTILIZED, A MILL OPERATOR DEPENDENT ON NATIONAL FOREST TIMBER MUST BID HIGHER THAN HE THINKS ANY OTHER POSSIBLE COMPETITOR MIGHT BID. IN DOING THIS HE SHOULD, OF COURSE LIMIT HIS OFFER TO WHAT HE CAN AFFORD TO PAY. HOWEVER, IF THE TIMBER BID ON IS ESSENTIAL TO KEEPING HIS MILL OPERATING AND AVOIDING A SHUTDOWN, HE MAY BID SUBSTANTIALLY IN EXCESS OF OTHER BIDDERS AND ABOVE WHAT HE CAN REALISTICALLY AFFORD TO PAY AND ALSO ABOVE THE AMOUNT THE GOVERNMENT SHOULD REASONABLY EXPECT TO RECEIVE. SUCH A BID MAY BE BASED ON REDUCING HIS MARGIN FOR PROFIT AND RISK TO THE MARGINAL POINT OF SAFETY, BUT THERE IS ALWAYS THE RISK THAT A SIZABLE LOSS MAY OCCUR IF THE MARKET PRICE DETERIORATES. AN OFFER WHICH DOES NOT FULLY RECOGNIZE THE RISKS COULD RESULT IN A MILL SHUTDOWN AND UNEMPLOYMENT IN THE COMMUNITY INVOLVED. THE ASSISTANT SECRETARY POINTS OUT THAT WHILE THE GOVERNMENT CANNOT PREVENT INDIVIDUAL CASES OF POOR JUDGMENT, IT WOULD NOT BE IN THE PUBLIC INTEREST IN HARVESTING GOVERNMENT TIMBER TO FOLLOW A POLICY WHICH FORCED ALL DEPENDENT OPERATORS TO BID ON A "DESPERATION" BASIS.

AUCTION PROCEDURES WERE INSTITUTED PRIMARILY TO OBVIATE THE NECESSITY FOR BIDDERS TO OVEREXTEND THEMSELVES IN SITUATIONS WHERE IT WAS IMPERATIVE THAT THEY OBTAIN A PARTICULAR CONTRACT IN ORDER TO REMAIN OPERATIVE. OCCASIONALLY, IN THE HEAT OF AN ORAL AUCTION, BIDDERS HAVE SOMETIMES BID HIGHER THAN THEY PLANNED AND COULD AFFORD. HOWEVER, IN GENERAL, THE PROCEDURE HAS HELPED MILLS WHICH ARE DEPENDENT UPON NATIONAL FOREST TIMBER BY ALLOWING THEM TO OBTAIN CONTRACTS AT PRICES MORE NEARLY IN LINE WITH THOSE BID BY THEIR CLOSEST COMPETITORS. THE FAULT WITH THIS SYSTEM LIES IN THE FACT THAT OFTEN AN AUCTION DEVELOPS ONLY ONE BIDDER WHO RAISES THE MINIMAL QUALIFYING PRICE BY ONLY A NOMINAL AMOUNT THEREBY FORCING SALE OF THE TIMBER AT A PRICE LOWER THAN WOULD OTHERWISE NORMALLY BE EXPECTED TO OBTAIN.

TO MEET THE PROBLEM OF LACK OF BIDDING ABOVE THE MINIMUM ACCEPTABLE PRICES ON AUCTION AND TO PROVIDE OPERATORS WITH A BASIS FOR BIDDING REASONABLE AMOUNTS UNDER SEALED BIDS, THE ASSISTANT SECRETARY PROPOSES A NEW COMBINATION BIDDING PROCEDURE. ADVERTISED MINIMUM PRICES, BY SPECIES, WOULD BE STATED IN THE BID INVITATION, AND BIDDERS WOULD BE REQUESTED TO SUBMIT SEALED BIDS AT HIGHEST PRICES THEY WOULD BE WILLING TO PAY IN THE FACE OF OTHER OFFERS, WITH THE UNDERSTANDING THAT AWARDS WOULD BE MADE ON THE FOLLOWING BASIS:

1. IF ONLY ONE ACCEPTABLE BID WAS RECEIVED, THE SALE WOULD BE MADE AT THE MINIMUM ADVERTISED PRICE.

2. IF TWO OR MORE ACCEPTABLE BIDS WERE RECEIVED, THE AWARD WOULD BE MADE TO THE ONE INDICATING THE HIGHEST PRICE LIMIT ON HIS BID. THE PRICES IN THE AWARD TO HIM WOULD BE THOSE INSERTED IN THE NEXT HIGHEST BID PLUS A FIXED AMOUNT STATED IN THE INVITATION. WHAT THE FIXED AMOUNT SHOULD BE IS CURRENTLY UNDER STUDY. IT MIGHT BE A SPECIFIC DOLLAR AMOUNT, FOR EXAMPLE, $100.00, A FIXED AMOUNT PER MBF FOR EACH SPECIES OF TIMBER, A PERCENTAGE OF THE MINIMUM ADVERTISED PRICES OR A FIGURE DEVELOPED FROM SOME OTHER BASIS.

IT IS THIS PROCEDURE WHICH WE ARE REQUESTED TO CONSIDER. OUR CONSIDERATION OF THE PROCEDURE IS PREMISED UPON THE CONCLUSION THAT THE AUTHORITY UNDER WHICH NATIONAL FOREST TIMBER IS SOLD REQUIRES, WITH MINOR EXCEPTIONS, THAT THE SALES MUST BE MADE PURSUANT TO COMPETITIVE BID PROCEDURES. 37 COMP. GEN. 293, 294.

THE PROPOSED PROCEDURE IS NOVEL TO US AND WE HAVE NOT FOUND ANY CASES IN WHICH THE IDENTICAL MATTER WAS CONSIDERED. UNDER THE PROPOSAL EACH BIDDER IS OFFERING TO PURCHASE THE TIMBER INVOLVED AT EITHER THE ADMINISTRATIVELY DETERMINED PRICE OR SOME FIXED PERCENTAGE OR AMOUNT IN EXCESS OF THE BID NEXT HIGHEST TO HIS. BUT WHILE THE PRECISE PROCEDURE IS NOVEL SIMILAR BIDDING PRACTICES HAVE BEEN LITIGATED AND THE COURTS HAVE UNIFORMLY HELD THAT BIDS NOT COMPLETE IN THEMSELVES ARE NOT BONA FIDE VALID BIDS. CASEY V. INDEPENDENCE COUNTY, 159 S.W. 24 (1913), A BANK PROPOSED TO PAY THE COUNTY INTERESTAT A RATE "ONE-QUARTER OF 1 PERCENT" HIGHER THAN ANY OTHER BID. THE COURT, CITING THE CASE OF WEBSTER, ET AL. V. FRENCH, ET AL., 11 I11. 254, STATED THAT:

* * * A PROPOSAL TO BE RECOGNIZED AS A BID MUST CONTAIN A DISTINCT PROPOSITION, WHICH CAN BE ACTED UPON TAKEN ALONE AND WITHOUT REFERENCE TO ANYTHING OUT OF ITSELF. * * * IF THIS FORM OF BIDDING IS ALLOWED, ONE MAN, BY OFFERING A NOMINAL SUM ABOVE ALL OTHERS, MIGHT APPROPRIATE TO HIS OWN ADVANTAGE THE JUDGMENT OF OTHERS WHO MIGHT HAVE GONE TO GREAT TROUBLE AND EXPENSE TO FORM A CORRECT OPINION, WHEN THE INTENTION WAS TO GIVE EACH BIDDER THE BENEFIT ONLY OF HIS OWN JUDGMENT. THE COURT FURTHER SAID THAT THE EFFECT OF IT WOULD BE TO DRIVE AWAY ALL PRUDENT AND REASONABLE MEN AND DESTROY ALL FAIR COMPETITION IN THE BIDDING * * *.

SEE ALSO WEST CARROL NATIONAL BANK OF OAK GROVE V. WEST PARISH SCHOOL BOARD, ET AL., 136 S).2D 699 (1962); HOLLIDAY V. HIGBEE, 172 F.2D 316 (1949); AND TRUMP V. MASON, 190 F.SUPP. 887 (1961).

WE RECOGNIZE THAT THE CITED CASES CAN BE DISTINGUISHED FROM THE PROPOSED PROCEDURE IN THAT THE CASES INVOLVE SITUATIONS WHERE ONE BIDDER SEEKS TO DERIVE A UNIQUE BENEFIT FOR HIMSELF BY THE NATURE OF HIS BID WHEREAS ALL BIDDERS WILL BE ON AN EQUAL FOOTING UNDER THE PROPOSAL. NEVERTHELESS, WE BELIEVE THAT THE SAME EVIL DISCUSSED IN THE QUOTED PORTION IS INHERENT IN A SYSTEM WHERE ALL BIDDERS ARE REQUESTED TO BID WITH THE KNOWLEDGE THAT THEY WILL NOT BE REQUIRED TO CONTRACT AT THE PRICE THEY OFFER. THE ONLY DIFFERENCE WOULD BE THAT INSTEAD OF FINDING IT ADVANTAGEOUS TO OFFER A SUM NOMINALLY ABOVE ALL OTHERS, THE BIDDER'S ADVANTAGE WOULD BE IN OFFERING SIGNIFICANTLY HIGHER PRICES TO ASSURE THE HIGHEST BID. IT IS TRUE THAT THE RISK OF SEVERAL BIDDERS ENGAGING IN THIS PRACTICE MIGHT SERVE AS A CURB. BUT THIS DOES NOT CURE THE DEFECT. FOR THE DEFECT LIES IN THE INTRODUCTION OF SUCH ELEMENTS OF CHANCE AND WAGERING WHICH WE BELIEVE HAVE NO PLACE IN THE COMPETITIVE BIDDING SYSTEM.

CERTAINLY CHANCE ALSO PLAYS A PART UNDER SEALED BIDDING PROCEDURES. THERE EACH BIDDER IS FACED WITH THE PROBLEM OF "GUESSING" WHAT OTHER BIDDERS WILL OFFER. HOWEVER, EACH BIDDER DETERMINES FOR HIMSELF THE PRICES AT WHICH HE IS WILLING TO CONTRACT. AND HE STATES IN SUBMITTING HIS BID THAT THE PRICE OFFERED IS THE PRICE FOR WHICH HE IS BARGAINING. THE ONLY CHANCE INVOLVED IS WHETHER THE BIDDER IS OVER OR UNDERESTIMATING HIS COMPETITION. IN ONE EVENT HE WILL BE PAYING A PRICE GREATER THAN WAS NECESSARY TO OBTAIN HIS CONTRACT; IN THE OTHER EVENT HE, OF COURSE, WILL NOT OBTAIN A CONTRACT. BUT IT IS THIS VERY ELEMENT WHICH THE SEALED BID PROCEDURE RELIES UPON TO ASSURE REAL AND FAIR COMPETITION.

THE PROCEDURE WE ARE ASKED TO CONSIDER GOES CONSIDERABLY BEYOND WHAT MAY BE REASONABLY CONSIDERED TO BE FAIR RISKS. IN THE BEST OF CIRCUMSTANCES EACH BIDDER WOULD COMPUTE HIS BID EXACTLY AS THOUGH HE WERE ENGAGING IN A TRADITIONAL SEALED BID SALE. THE PROPOSED PROCEDURE WOULD THEN OPERATE TO RESCUE AN OVEREXTENDED HIGH BIDDER FROM AN UNPROFITABLE PURCHASE. THIS IS THE DESIGNED PURPOSE OF THE PROCEDURE. BUT IN MANY CASES THE PROCEDURE WOULD RESULT IN A PERFECTLY SOUND AND REASONABLE BID PRICE BEING REJECTED. WHERE THERE IS NO OVEREXTENSION IN THE HIGH BID PRICE, THE BIDDER'S GAIN IS THE GOVERNMENT'S LOSS AND THERE IS NO OVERALL PUBLIC POLICY BEING SUBSERVED.

APPARENTLY, IT IS BELIEVED THAT COMPETITION WILL ACT AS AN AUTOMATIC CORRECTIVE FORCE AND THAT BIDDERS WILL MAKE ALLOWANCES FOR WHAT THEY MIGHT EXPECT OTHERS TO DO UNDER THE SYSTEM. HOWEVER, AS SOON AS BIDS ARE SUBMITTED ON ANY BASIS OTHER THAN WHAT THE BIDDER REALISTICALLY BELIEVES HE CAN AFFORD, MORE PROBLEMS WILL PERFORCE BE CREATED THAN CURED. BIDDERS WOULD SOON LEARN THAT THEIR REALISTIC BIDS MAY NOT BE SUFFICIENT TO GARNER THEM A CONTRACT AND THAT IF THEY RECEIVE THE AWARD IT WILL BE BASED ON THE NEXT HIGH BIDDER'S PRICES. FROM THERE THE BIDDING PROCESS WOULD NECESSARILY DEVELOP INTO A "POKER" GAME WHOSE OBJECT WOULD BE TO GUESS HOW UNREALISTICALLY HIGH OTHER BIDDERS' PRICES MIGHT BE. IN OUR OPINION, SUCH A SITUATION WOULD INCREASE THE TEMPTATION FOR COLLUSIVE BIDDING PRACTICES.

IT HAS BEEN HELD IN NUMEROUS DECISIONS BY THIS OFFICE AND THE COURTS THAT THE REQUIREMENT FOR COMPETITIVE BIDDING IN TRANSACTING GOVERNMENT BUSINESS IS DESIGNED TO GIVE ALL PERSONS EQUAL RIGHT TO COMPETE FOR THAT BUSINESS, TO SECURE TO THE GOVERNMENT THE BENEFITS WHICH FLOW FROM COMPETITION, TO PREVENT UNJUST FAVORITISM BY AN OFFICER OF THE GOVERNMENT IN MAKING PURCHASES (OR SALES) ON PUBLIC ACCOUNT, AND TO RAISE A BAR AGAINST COLLUSION AND FRAUD IN LETTING CONTRACTS. SEE 5 COMP. GEN. 712, 713; 18 ID. 117, 118; 641, 643; 21 ID. 56, 58; 25 ID. 859, 860; AND VARIOUS CASES CITED IN THOSE DECISIONS, PARTICULARLY UNITED STATES V. PURCELL ENVELOPE CO., 249 U.S. 313, 318, WHERE THE SUPREME COURT OBSERVED THAT BY COMPLIANCE WITH THE COMPETITIVE BIDDING STATUTE,"* * * THE GOVERNMENT IS GIVEN THE BENEFIT OF THE COMPETITION OF THE MARKET AND EACH BIDDER IS GIVEN THE CHANCE FOR A BARGAIN.' ADMITTEDLY, THESE STATEMENTS WERE MADE IN CONTEXTS DIFFERENT FROM WHAT WE ARE HERE CONSIDERING. IN EACH CASE THERE WAS INVOLVED THE QUESTION OF SOME DEPARTURE FROM THE DICTATES OF THE COMPETITIVE BID PROCEDURE USED, WHEREAS HERE, IT IS THE VERY COMPLIANCE WITH THE PROCEDURES PROPOSED WHICH RAISES QUESTION. HOWEVER THE RECITED UNDERLYING PRINCIPLES SUPPORTING THE REQUIREMENT FOR COMPETITIVE BID PROCEDURES MUST BE CONSIDERED IN REACHING A CONCLUSION AS TO THE PROPRIETY OF ANY CONTEMPLATED BIDDING SYSTEM. FOR THE REASONS STATED ABOVE, WE DO NOT BELIEVE THAT THE PROPOSED PROCEDURES ADEQUATELY SECURE TO THE GOVERNMENT THE BENEFITS WHICH FLOW FROM COMPETITION, AND, AS STATED, WE BELIEVE THAT THE PROCEDURES UNDULY LEND THEMSELVES TO AN INCENTIVE FOR COLLUSIVE BIDDING. MOREOVER, WE DO NOT PERCEIVE ANY ADVANTAGES WHICH WOULD REASONABLY BE SAID TO ACCRUE UNDER THE PROPOSED SYSTEM SUFFICIENT TO OVERCOME THESE OBJECTIONS AND THE OBJECTION LYING IN THE DEPARTURE FROM OTHER BIDDING CONCEPTS INHERENT IN THE TRADITIONAL SEALED BID PROCEDURES. FINALLY, IT DOES NOT APPEAR APPROPRIATE TO UTILIZE A BIDDING SYSTEM TO ACCOMPLISH THE PURPOSE INTENDED HERE. THE SYSTEM IN THAT IT IS DESIGNED TO BE OF MOST BENEFIT TO ONE CLASS OF BIDDER--- THE DESPERATE BIDDER WHO IS APT TO OVEREXTEND HIMSELF--- IS MANIFESTLY UNFAIR TO THOSE BIDDERS WHO RESPOND WITH REASONABLE PRICES.

ACCORDINGLY, WE WOULD NOT BE WARRANTED IN APPROVING ADOPTION OF THE PROPOSED SYSTEM OF BIDDING IN THE ABSENCE OF PRIOR CONGRESSIONAL SANCTION.