B-147719, FEBRUARY 12, 1962, 41 COMP. GEN. 536

B-147719, FEBRUARY 12, 1962, 41 COMP. GEN. 536

BIDS - PATENTS, ETC., ITEM - INDEMNIFICATION CLAUSE PROPRIETY - GENERAL ACCOUNTING OFFICE - JURISDICTION - CONTRACTS - INVITATION CLAUSES WHERE A MILITARY PROCUREMENT INVITATION FOR AN ITEM MANUFACTURED TO SPECIFICATIONS INCLUDED THE PREDETERMINED PATENT INDEMNITY CLAUSE PRESCRIBED IN PARAGRAPH 9-103.1 OF THE ARMED SERVICES PROCUREMENT REGULATION FOR SUPPLIES WITHOUT REGARD TO WHETHER THEY ARE NORMALLY SOLD OR OFFERED FOR SALE TO THE PUBLIC RATHER THAN THE NOT PREDETERMINED PATENT INDEMNITY CLAUSE IN PARAGRAPH 9-103.2 OF ARMED SERVICES PROCUREMENT REGULATION WHICH LIMITS INDEMNIFICATION FOR INFRINGEMENT TO SUPPLIES OR COMPONENTS SOLD COMMERCIALLY, BUT THE USE OF THE ERRONEOUS CLAUSE DID NOT RESULT IN RESTRICTING COMPETITION, OR IN UNREASONABLE PRICES, OR IN PREJUDICE TO ANY OF THE BIDDERS, CANCELLATION OF THE INVITATION AND READVERTISEMENT AFTER THE BIDS HAVE BEEN OPENED WOULD NOT BE WARRANTED. ALTHOUGH THE MATTER OF REQUIRING INDEMNIFICATION FOR POSSIBLE PATENT INFRINGEMENT IN AN INVITATION IS FOR DETERMINATION BY THE PROCUREMENT AGENCIES PURSUANT TO ADMINISTRATIVELY PRESCRIBED CRITERIA, THE DETERMINATION IS SUBJECT TO REVIEW BY THE COMPTROLLER GENERAL ON THE BASIS OF THE FACTS AND CIRCUMSTANCES IN EACH CASE.

TO THE FARMERS TOOL AND SUPPLY CORPORATION, FEBRUARY 12, 1962:

REFERENCE IS MADE TO YOUR LETTER DATED NOVEMBER 30, 1961, ENCLOSING A COPY OF YOUR LETTER OF THE SAME DATE TO HEADQUARTERS, ORDNANCE WEAPONS COMMAND, ROCK ISLAND, ILLINOIS. PROTESTING AGAINST THE INCLUSION IN INVITATION FOR BIDS NO. ORD-11-199-62-41 OF THE PATENT INDEMNITY ( PREDETERMINED) CLAUSE WHICH IS SET FORTH IN PARAGRAPH 9 103.1 OF THE ARMED SERVICES PROCUREMENT REGULATION ( ASPR).

THE CITED INVITATION FOR BIDS WAS ISSUED ON OCTOBER 16, 1961, BY HEADQUARTERS, ORDNANCE WEAPONS COMMAND, ROCK ISLAND, ILLINOIS, AND CALLED FOR THE FURNISHING OF 4,150 M2 RIFLE BIPODS AND VARIOUS QUANTITIES OF REPAIR PARTS. THE INVITATION STATED THAT THE BIPODS WERE "TO BE IN ACCORDANCE WITH ALL DRAWINGS AND SPECIFICATIONS LISTED ON MASTER FILE, DRAWING D7790688, SHEETS 1 THRU 16, SHOWING REVISIONS IN EFFECT ON 21 AUGUST 1961.'

BIDS WERE OPENED ON NOVEMBER 15, 1961. AN ABSTRACT OF THE BIDS RECEIVED SHOWS THAT 21 BIDDERS RESPONDED TO THE INVITATION. THE LOW BID WAS SUBMITTED BY THE J AND D TOOL CO. OF GLENBROOK, CONNECTICUT. YOUR COMPANY SUBMITTED THE FOURTH LOW BID.

IN YOUR LETTER TO HEADQUARTERS, ORDNANCE WEAPONS COMMAND, YOU STATE THAT BOTH THE BIPOD AND THE SPARE PARTS ARE MANUFACTURED COMPLETELY IN ACCORDANCE WITH GOVERNMENT SPECIFICATIONS AND THAT NEITHER THE BIPOD NOR THE SPARE PARTS ARE ITEMS WHICH HAVE BEEN OR ARE OFFERED FOR SALE TO THE PUBLIC IN THE COMMERCIAL OPEN MARKET. YOU CONTEND THAT THE INCLUSION OF THE PATENT INDEMNITY (PREDETERMINED) CLAUSE (IN SPECIAL PROVISION 12 ON PAGE 9 OF THE INVITATION) VIOLATES THE ARMED SERVICES PROCUREMENT REGULATION SINCE PARAGRAPH 9-103 THEREOF STATES THAT A PATENT INDEMNITY CLAUSE SHALL NOT BE USED IN CONTRACTS WHERE THE CONTRACT IS FOR SUPPLIES WHICH CLEARLY ARE NOT OR HAVE NOT BEEN SOLD OR OFFERED FOR SALE TO THE PUBLIC IN THE COMMERCIAL OPEN MARKET. YOU STATE FURTHER THAT:

* * * IT IS UNFAIR TO THE GOVERNMENT BECAUSE IT UNDOUBTEDLY RESULTS IN HIGHER COSTS TO THE GOVERNMENT THAN ARE ABSOLUTELY NECESSARY. THIS COMPANY, FOR EXAMPLE, IN MAKING BIDS, ALWAYS TAKES INTO ACCOUNT THE POSSIBILITY THAT IT MIGHT BE LIABLE FOR PATENT VIOLATION. UNDOUBTEDLY, OTHER DEFENSE CONTRACTORS ALSO TAKE THIS INTO ACCOUNT AND INCLUDE AMOUNTS IN THEIR BIDS FOR SUCH CONTINGENCIES. IT IS ALSO POSSIBLE THAT SOME CONTRACTORS MAY NOT BID AT ALL, DUE TO THE FACT THAT IN THE LIMITED TIME ALLOWED FOR BIDDING, NO ONE HAS TIME TO REALLY CHECK INTO THE POSSIBILITY THAT THE GOVERNMENT IN DRAFTING ITS OWN SPECIFICATIONS HAS VIOLATED SOMEONE ELSE'S PATENT RIGHTS. WE FEEL STRONGLY THAT IT IS TO THE GOVERNMENT'S INTEREST TO INSURE THAT THE PATENT INDEMNITY CLAUSE SHOULD ONLY BE USED WHERE IT IS PERMITTED BY THE REGULATIONS.

AND, FINALLY, YOU RECOMMENDED THAT ALL BIDS UNDER THE INVITATION SHOULD BE REJECTED, THE INVITATION CANCELED, AND THE PROCUREMENT, AFTER BEING APPROPRIATELY MODIFIED, SHOULD THEN BE RESUBMITTED UNDER ADVERTISING OR NEGOTIATION IN THE DISCRETION OF THE PROCURING AGENCY.

PARAGRAPH 9-103, ASPR, PROVIDES, IN PERTINENT PART, AS FOLLOWS:

IN ORDER THAT THE GOVERNMENT MAY BE REIMBURSED FOR LIABILITY FOR PATENT INFRINGEMENT ARISING OUT OF OR RESULTING FROM THE PERFORMANCE OF CONSTRUCTION CONTRACTS OR CONTRACTS FOR SUPPLIES WHICH NORMALLY ARE OR HAVE BEEN SOLD OR OFFERED FOR SALE TO THE PUBLIC IN THE COMMERCIAL OPEN MARKET, OR WHICH ARE THE SAME AS SUCH SUPPLIES WITH A RELATIVELY MINOR MODIFICATION THEREOF, CLAUSES PROVIDING FOR INDEMNIFICATION OF THE GOVERNMENT ARE TO BE INCLUDED IN SUCH CONTRACTS IN ACCORDANCE WITH THE INSTRUCTIONS PRECEDING THE CLAUSES SET FORTH BELOW. A PATENT INDEMNITY CLAUSE SHALL NOT BE USED IN CONTRACTS UNDER THE FOLLOWING CIRCUMSTANCES:

(I) WHERE THE CONTRACT IS FOR SUPPLIES WHICH CLEARLY ARE NOT OR HAVE

NOT BEEN SOLD OR OFFERED FOR SALE TO THE PUBLIC IN THE COMMERCIAL

OPEN MARKET. HOWEVER, EVEN IN THE FOREGOING INSTANCE, A PATENT

INDEMNITY CLAUSE MAY BE INCLUDED WHERE (A) IN THE CASE OF CONTRACTS

TO BE AWARDED BY FORMAL ADVERTISING IT IS DESIRED TO OBTAIN AN

INDEMNITY AS TO COMPONENTS AND SPARE PARTS SO SOLD OR OFFERED FOR

SALE, IN WHICH CASE THE CLAUSE IN 9-103.2 MAY BE USED * * *.

PARAGRAPH 9-103.1 (A), ASPR, PROVIDES ESSENTIALLY THAT, EXCEPT AS PROHIBITED BY PARAGRAPH 9-103, THE PATENT INDEMNITY (PREDETERMINED) CLAUSE SHALL BE INCLUDED IN FORMALLY ADVERTISED CONTRACTS FOR SUPPLIES WHEN IT HAS BEEN DETERMINED IN ADVANCE OF ISSUING THE INVITATION FOR BIDS THAT THE SUPPLIES NORMALLY ARE OR HAVE BEEN SOLD OR OFFERED FOR SALE BY ANY SUPPLIER TO THE PUBLIC IN THE COMMERCIAL OPEN MARKET. PARAGRAPH 9-103.2 PROVIDES ESSENTIALLY THAT EXCEPT AS PROHIBITED BY 9 103 THE PATENT INDEMNITY (NOT PREDETERMINED) CLAUSE IS APPROPRIATE IN FORMALLY ADVERTISED CONTRACTS FOR SUPPLIES OR COMPONENT PARTS THEREOF WHEN IT IS NOT DETERMINED IN ADVANCE OF ISSUING THE INVITATION FOR BIDS THAT SUCH SUPPLIES OR COMPONENT PARTS NORMALLY ARE OR HAVE BEEN SOLD OR OFFERED FOR SALE BY ANY SUPPLIER TO THE PUBLIC IN THE COMMERCIAL OPEN MARKET.

A REPORT FROM THE CONTRACTING OFFICER SUBMITTED AS AN ENCLOSURE TO AN ADMINISTRATIVE REPORT DATED JANUARY 19, 1962, FROM THE DEPARTMENT OF THE ARMY, SETS FORTH THE FOLLOWING FACTS WITH RESPECT TO THE INCLUSION OF THE PATENT INDEMNITY (PREDETERMINED) CLAUSE IN THE INVITATION FOR BIDS:

AT THE TIME THE INVITATION IN QUESTION WAS TO BE ISSUED, THE VARIOUS PROVISIONS OF THE ASPR REFERRED TO ABOVE WERE CONSIDERED AND APPLIED IN THE LIGHT OF THE PROCUREMENT PACKAGE AS A WHOLE. IT WAS DETERMINED THAT CERTAIN COMPONENTS OF THE BIPOD FELL INTO THE CLASSIFICATION OF BEING SOLD AND OFFERED FOR SALE TO THE PUBLIC IN THE COMMERCIAL OPEN MARKET. THESE COMPONENTS WERE AS FOLLOWS:

CHART

ORDNANCE

PART NO. DESCRIPTION COMMERCIAL SOURCE 7791103 SCREW, SELF LOCKING HEXAGON THE NYLOK CORPORATION

HEAD WITH NYLON PELLET 611 INDUSTRIAL AVE.

INSERT. THIS IS A PATENTED PARAMUS, NEW JERSEY

ITEM. 7790824 SPRING, HELICAL, COMPRESSION CONTINENTAL SPRING CO.

HARTFORD, CONNECTICUT MS 16562 PIN, SPRING, TUBULAR, ELASTIC STOP NUT CORP.

SLOTTED UNION, NEW JERSEY MS 24665 PIN, COTTER

HUBBARD SPRING COMPANY

PONTIAC, MICHIGAN MS 39086 PIN, SPRING, TUBULAR, C. E. M. COMPANY

COILED, HEAVY DUTY. DANIELSON, CONNECTICUT

ACCORDINGLY, INDEMNITY BEING DESIRED IN RELATION TO THE ABOVE COMPONENTS, THE CLAUSE IN ASPR 9-103.2 WAS APPROPRIATE FOR USE UNDER THE AUTHORITY OF EXCEPTION (A) OF ASPR 9-103 (I).

HOWEVER, IN INTERPRETING THE WORD "SUPPLIES" AS CONTAINED IN THE ASPR IT WAS CONSIDERED THAT THE WORD APPROPRIATELY EXTENDED TO THE END ITEM AND SPARE PARTS IN THEIR DELIVERED CONDITION TO THE GOVERNMENT WHICH INCLUDED SPECIAL PREPARATION, PACKAGING, AND PACKING FOR OVERSEAS SHIPMENT OR EXTENDED STORAGE. IT IS REQUIRED THAT THE END ITEMS HAVE A PRESERVATIVE APPLIED PRIOR TO WRAPPING USING A PRESERVATIVE TYPE P-9 (MIL-L644) SUCH AS SUPPLIED BY STANDARD OIL COMPANY AND THAT THE ITEM BE WRAPPED IN A WATERPROOF, GREASE-PROOF, MOLDABLE, SELF-ADHERING COVERING SUCH AS THAT SUPPLIED BY ORCHARD PAPER COMPANY, ST. LOUIS, MISSOURI. THESE SUPPLIES WERE DETERMINED TO BE NORMALLY SOLD TO THE PUBLIC IN THE COMMERCIAL OPEN MARKET AND, ACCORDINGLY, THE USE OF THE PREDETERMINED PATENT INDEMNITY CLAUSE ( ASPR 9-103.1) WAS APPROPRIATE.

INASMUCH AS A SITUATION PRESENTED ITSELF IN WHICH EITHER OF THE TWO PATENT INDEMNITY CLAUSES COULD BE USED, AND SINCE NO SIGNIFICANT DIFFERENCE IN THE LEGAL EFFECT OF THE TWO CLAUSES COULD BE DISCERNED, IT WAS DECIDED THAT THE PREDETERMINED PATENT INDEMNITY CLAUSE WOULD BE INCLUDED IN THE INVITATION FOR BIDS.

EVEN IF THE INCLUSION OF THE CLAUSE WERE TO BE CONSIDERED INAPPROPRIATE, THE VALIDITY OF THE BIDDER'S ARGUMENTS IN SUPPORT OF THE PROTEST ARE SERIOUSLY QUESTIONED. THIS ITEM HAS BEEN PROCURED BY FORMAL ADVERTISING TWICE PREVIOUSLY AND IN BOTH INSTANCES THE INVITATION CONTAINED THE CLAUSE NOW BEING QUESTIONED. IN THE FIRST PROCUREMENT 25 BIDS WERE RECEIVED AND FARMERS TOOL AND SUPPLY WAS THE LOW, RESPONSIVE, RESPONSIBLE BIDDER AND WAS AWARDED THE CONTRACT. IN THE SECOND INSTANCE FARMERS TOOL WAS SECOND LOW BIDDER OUT OF 10 AND DID NOT RECEIVE THE CONTRACT. IN THE PRESENT INSTANCE FARMERS TOOL IS FOURTH LOW OUT OF 21. DURING THIS PERIOD EXTENDING FROM MID-1960 TO THE OPENING OF BIDS IN THIS INSTANCE ON 15 NOVEMBER 1961, FARMERS TOOL AND SUPPLY CORPORATION TOOK NO OBJECTION TO THE INCLUSION OF THE CLAUSE IN QUESTION.

TO ALLOW FARMERS TOOL AND SUPPLY CORPORATION TO PREVAIL IN ITS RATHER BELATED PROTEST ON THE BASIS OF SOMETHING WHICH CANNOT BE CONSIDERED TO BE AN ERROR, IF AN ERROR IT BE, OF A TECHNICAL NATURE AND OF MINOR (IF ANY) SIGNIFICANCE IN RELATION TO THE COMPETITION OBTAINED AND THE REASONABLE PRICES OFFERED, WOULD BE MANIFESTLY UNFAIR TO THE BIDDERS OFFERING PRICES LOWER THAN THOSE OF FARMERS TOOL AND SUPPLY CORPORATION. IT HAS BEEN REPEATEDLY HELD THAT INVITATIONS FOR BIDS SHOULD NOT BE CANCELLED AND READVERTISED AFTER PRICES HAVE BEEN REVEALED EXCEPT FOR THE MOST COGENT OF REASONS. IT IS THE OPINION OF THE UNDERSIGNED CONTRACTING OFFICER THAT SUCH COGENT REASONS DO NOT EXIST AND IT IS HIS RECOMMENDATION THAT THE PROTEST IN THIS CASE SHOULD BE DENIED.

WHERE PATENTED INVENTIONS MAY BE INVOLVED IN A PROCUREMENT THERE ARE SEVERAL FACTORS FOR CONSIDERATION IN DETERMINING THE ADVISABILITY OF REQUIRING INDEMNIFICATION FOR POSSIBLE PATENT INFRINGEMENTS. THE USE OF INDEMNIFICATION CLAUSES IS NOT COVERED BY STATUTE. WE HAVE HELD THAT THIS MATTER IS ONE FOR DETERMINATION BY THE ADMINISTRATIVELY PRESCRIBED CRITERIA AND ARE SUBJECT TO REVIEW BY OUR OFFICE ON THE BASIS OF THE FACTS AND CIRCUMSTANCES OF EACH CASE PRESENTED.

AS REPORTED BY THE CONTRACTING OFFICER CERTAIN COMPONENTS OF THE M2 RIFLE BIPOD HAVE BEEN SOLD OR OFFERED FOR SALE TO THE PUBLIC IN THE COMMERCIAL OPEN MARKET. UNDER PARAGRAPH 9-103 (I) ASPR THE CLAUSE SET FORTH IN 9- 103.2 "MAY BE USED" IN SUCH CIRCUMSTANCES. THE QUESTION BEFORE OUR OFFICE, THEREFORE, IS NOT WHETHER THE PROCURING AGENCY IS PROHIBITED FROM USING ANY PATENT INDEMNITY CLAUSE BUT WHETHER THE USE OF THE PREDETERMINED CLAUSE SET FORTH IN 9-103.1 ASPR, INSTEAD OF THE NOT PREDETERMINED CLAUSE SET FORTH IN 9-103.2 ASPR, IS FATAL TO THE INVITATION FOR BIDS.

AN EXAMINATION OF THE TWO CLAUSES INDICATES THAT THE CLAUSE IN 9 103.2 HAS A MORE LIMITED SCOPE THAN THE ONE APPEARING IN 9-103.1. THE CLAUSE IN 9-103.2 IS LIMITED BY ITS TERMS TO INDEMNIFICATION FOR INFRINGEMENT ARISING OUT OF THE MANUFACTURE OR DELIVERY OF SUPPLIES OR COMPONENT PARTS WHICH NORMALLY ARE OR HAVE BEEN SOLD OR OFFERED FOR SALE TO THE PUBLIC IN THE COMMERCIAL OPEN MARKET WHEREAS THE CLAUSE IN 9-103.1 REQUIRES INDEMNIFICATION FOR INFRINGEMENT WITHOUT REGARD TO WHETHER THE SUPPLIES ARE NORMALLY SOLD OR HAVE BEEN OFFERED FOR SALE TO THE PUBLIC IN THE COMMERCIAL OPEN MARKET.

IT HAS LONG BEEN RECOGNIZED IN CONNECTION WITH THE AWARD OF GOVERNMENT CONTRACTS THAT NO BIDDER HAS AN ABSOLUTE RIGHT TO PUBLIC BUSINESS BUT, RATHER, THAT THE PUBLIC INTEREST IS FOR PRIMARY CONSIDERATION IN MAKING AN AWARD. FURTHER, IT HAS CONSISTENTLY BEEN HELD THAT AN INVITATION FOR BIDS DOES NOT IMPORT ANY OBLIGATION TO ACCEPT ANY OF THE BIDS RECEIVED AND, CONSEQUENTLY, A PUBLIC OFFICER ACTING FOR THE GENERAL WELFARE IS NOT BOUND TO ACCEPT A BID WHERE HE DETERMINES THAT THE PUBLIC INTEREST WOULD BEST BE SERVED BY A REJECTION OF ALL BIDS AND A READVERTISEMENT OF THE NEEDS OF THE GOVERNMENT. SEE O-BRIEN V. CARNEY, 6 F.1SUPP. 761; SCOTT V. UNITED STATES, 44 CT.1CL. 524; COLORADO PAVING CO. V. MURPHY, 78 F. 28. THUS, WE HAVE DETERMINED THAT ALL BIDS MAY BE REJECTED WHERE THE SPECIFICATIONS ARE RESTRICTIVE (33 COMP. GEN. 524) OR WHERE SOME SUBSTANTIAL BENEFIT WOULD THEREBY INURE TO THE UNITED STATES (33 COMP. GEN. 441). HOWEVER, IT MUST BE RECOGNIZED THAT, CONTRARY TO THE PURPOSES FOR WHICH THE PUBLIC PROCUREMENT STATUTES WERE ENACTED, THE REJECTION OF ALL BIDS--- WITHOUT ABANDONMENT OF THE PROPOSED PROCUREMENT--- IS A SERIOUS MATTER AND TENDS TO DISCOURAGE COMPETITION BECAUSE IT RESULTS IN MAKING ALL BIDS PUBLIC WITHOUT AWARD, WHICH IS CONTRARY TO THE INTERESTS OF THE LOW BIDDER AND BECAUSE REJECTION OF ALL BIDS MEANS THAT BIDDERS HAVE EXPENDED MANPOWER AND MONEY ON THE PREPARATION OF THEIR BIDS WITHOUT ANY POSSIBILITY OF ACCEPTANCE. THEREFORE, THE AUTHORITY TO REJECT ALL BIDS MUST BE EXERCISED WITH CARE AND ONLY UPON A BONA FIDE DETERMINATION THAT THE PUBLIC INTEREST WOULD THEREBY BE SERVED. 37 COMP. GEN. 12; ID 760; 39 ID. 563. IN THE PRESENT CASE THE CONTRACTING OFFICER HAS INDICATED THAT FAIR COMPETITION WAS OBTAINED AND REASONABLE PRICES WERE RECEIVED IN RESPONSE TO THE INVITATION FOR BIDS CONTAINING THE PATENT INDEMNITY (PREDETERMINED) CLAUSE. YOUR PROTEST IS BASED ON THE PROPOSITION THAT NO PATENT INDEMNITY CLAUSE OF ANY KIND WAS PERMISSIBLE IN THE INVITATION AND BECAUSE SUCH A CLAUSE WAS INCLUDED BID PRICES WERE HIGHER THAN NECESSARY ON THE ASSUMPTION THAT BIDDERS INCLUDE AMOUNTS IN THEIR BIDS FOR THE CONTINGENCY THAT A PATENT INFRINGEMENT MIGHT RESULT IN FURNISHING THE SUPPLIES CALLED FOR BY THE INVITATION. WHILE WE DO NOT DENY THAT YOUR ASSUMPTION IS A REASONABLE ONE, WE DO NOT FEEL THAT THE ERROR MADE BY THE CONTRACTING OFFICER BY INSERTING THE PREDETERMINED CLAUSE, INSTEAD OF THE NOT PREDETERMINED CLAUSE, IN THE INVITATION IS OF SUCH A SERIOUS NATURE, OR THAT BIDDERS HAVE BEEN SO PREJUDICED BY REASON OF THE ERROR, AS TO WARRANT CANCELLATION OF THE INVITATION. CLEARLY, ASPR PERMITS USE OF THE NOT PREDETERMINED CLAUSE IN THE CASE BEFORE US. OBVIOUSLY, SUCH INCLUSION MIGHT REASONABLY BE EXPECTED TO CAUSE BIDDERS TO SUBMIT HIGHER PRICES, BUT HOW MUCH MORE PRICES WERE INCREASED, IF AT ALL, BY THE USE OF THE PREDETERMINED CLAUSE INSTEAD OF THE NOT PREDETERMINED IS A MATTER OF SPECULATION AND CONJECTURE.

WE DO NOT BELIEVE UNDER THE CIRCUMSTANCES OUTLINED THAT THE BEST INTERESTS OF THE GOVERNMENT REQUIRE CANCELLATION OF THE INVITATION AND A READVERTISEMENT.