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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. State, Dept. of Administration v. Bachner Company, Inc. (09/14/2007) sp-6162

State, Dept. of Administration v. Bachner Company, Inc. (09/14/2007) sp-6162, 167 P3d 58

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DUNCAN, in his official capacity as )
(former) Commissioner thereof, )
) Supreme Court No. S- 12187
Petitioner, )
) Superior Court No.
v. ) 4FA-02-2674 CI
Respondents. ) No. 6162 - September 14, 2007
          Appeal  from the Superior Court of the  State
          of    Alaska,   Fourth   Judicial   District,
          Fairbanks, Winston S. Burbank, Judge Pro Tem.

          Appearances:  Marjorie L.  Vandor,  Assistant
          Attorney   General,  and  David  W.  M rquez,
          Attorney  General,  Juneau,  for  Petitioner.
          John   J.   Burns,  Borgeson  &  Burns,   PC,
          Fairbanks, for Respondents.

          Before:    Fabe,  Chief  Justice,   Matthews,
          Eastaugh, Bryner, and Carpeneti, Justices.

          CARPENETI, Justice.

          We  are  asked  to  determine whether a  Department  of
Administration hearing officer erred when he selected the  remedy
for  a  defective procurement process.  Several  months  after  a
procurement  contract  for a long term  lease  was  awarded,  the
hearing officer concluded that three separate irregularities  had
occurred   during   the  proposal  evaluation   process.    After
conducting   an  analysis  under  AS  36.30.585(b),  the   Alaska
provision  governing  remedies  for  errors  committed   in   the
procurement  process, the hearing officer awarded  the  aggrieved
bidders  their proposal preparation costs but declined  to  order
rescoring  of  the proposals or cancellation of the  lease.   The
commissioner adopted the hearing officers decision  as  his  own.
The  superior court reversed the commissioner, holding  that  the
hearing officer had erred in weighing the factors set out  in  AS
36.30.585(b).   Because  the  hearing  officers  decision  has  a
reasonable  basis  in  law  and fact, we  affirm  it.   Moreover,
because  the  hearing officers analysis regarding the appropriate
remedy was both thorough and thoughtful, we adopt that portion of
the decision, which is set out in the Appendix..
     A.   Facts
          The  facts in this case are not disputed.  In  December
2001  the  Department  of  Administration,  Division  of  General
Services  (the  department), circulated a request  for  proposals
(RFP) soliciting bids for the lease of roughly 24,000 square feet
of  office and storage space in Fairbanks.  The space was  to  be
used  by the Department of Transportation.  The lease was  for  a
term  of  twenty  years,  with ten additional  two-year  renewals
exercisable by the department.
          Among  the  companies  submitting responsive  proposals
were  Bachner  Company,  Inc.,  Bowers  Investment  Company,  and
McKinley Development.  Bachner and Bowers both proposed to  lease
existing buildings, while McKinley offered to construct and lease
a  new  building.  A five-member special committee evaluated  the
proposals.   In  February 2002 the procurement officer  issued  a
notice  of  intent to award the contract to McKinley,  which  had
received the highest scores during the evaluation process.
     B.   Proceedings
          In  early  March 2002 Bachner and Bowers filed separate
bid protests,1 both of which focused on technical irregularities.
The procurement officer denied both protests and declined to stay
the  award  of the contract to McKinley.  On March 26, 2002,  the
procurement   officer  awarded  the  contract  to  McKinley   and
requested  that  it begin preparing for the lease.   Bachner  and
Bowers  separately appealed the denials of their bid protests  in
April 2002 to the commissioner of the department.
          Allegations  surfaced  in the  companies  appeals  that
there  had been improprieties in the scoring process by   members
of  the  proposal evaluation committee.  Hearing  Officer  Andrew
Hemenway  heard  testimony  regarding  these  and  other  alleged
improprieties in the evaluation process.
          Hearing  Officer Hemenway issued a twenty-page decision
in  October  2002,  which the commissioner adopted  as  his  own.
Hearing  Officer  Hemenway  found  that  misconduct  during   the
procurement process had resulted in serious deficienc[ies].   One
member  of the evaluation committee had artificially lowered  his
          scores for Bachner to counteract what he perceived as [another
evaluators] favoritism for that offeror.  The committee  did  not
apply  the  present value formula in a manner consistent  with  a
reasonably  prudent offerors understanding of the RFP because  it
failed  to factor in anticipated increases in the consumer  price
index.2   Additionally, there was an appearance that factors  not
listed in the RFP were considered by several evaluators.
          Hearing  Officer  Hemenway  identified  three  possible
remedies: (1) confirmation of the award to McKinley coupled  with
an award of proposal preparation costs to Bachner and Bowers; (2)
remand  for  rescoring  without  the  one  evaluators  improperly
adjusted  scores; and (3) cancellation of the lease and  issuance
of  a  new  RFP.   He analyzed the facts of the  case  using  the
factors set out in AS 36.30.585(b)3 to determine which remedy was
most   appropriate.    He  concluded  that  [o]n   balance,   the
appropriate remedy would appear to be an award of the full  costs
incurred  in  connection  with [Bachners  and  Bowerss]  proposal
          Bachner  and Bowers appealed to the superior  court  in
November 2002, arguing that the hearing officer erred by  failing
to  order  cancellation  or rescoring  in  addition  to  awarding
proposal  preparation  costs.  The  superior  court  agreed.   It
reasoned  that case law makes clear that preserving the integrity
of  the procurement system has priority over other factors listed
in  AS  36.30.585(b).  Because Hearing Officer Hemenway  did  not
give  priority to this factor in his analysis, the superior court
reversed and remanded for reconsideration of what remedy was most
appropriate.  We granted the departments petition for  review  of
the superior courts decision.
            When the superior court acts as an intermediate court
of appeal from an administrative decision, we directly review the
agency  decision.4  When an administrative agencys interpretation
of  a  statute involves agency expertise or the determination  of
fundamental  policies  within the agencys statutory  function  we
apply  the  rational  basis  standard  of  review.5   Under  this
standard,  we  will  determine whether the  agencys  decision  is
supported by the facts and has a reasonable basis in law, even if
we may not agree with the agencys ultimate determination.6
          Because   the   parties  agree  that   three   separate
irregularities  occurred in this case, the  sole  issue  we  must
decide  is  whether  the  hearing officer  chose  an  appropriate
remedy.   The department argues that the hearing officer properly
applied  AS 36.30.585(b) and acted within his discretion when  he
decided  to  confirm  the  lease and award  the  companies  their
proposal preparation costs.  Bachner and Bowers disagree, arguing
that  the hearing officer erred by failing to give priority to  a
specific statutory factor.
          Deciding  what  remedy is appropriate  is  a  difficult
endeavor  where,  as  here, a defect in the  bidding  process  is
discovered   after   the  innocent  winning  bidder   has   begun
preparation  for  or  performance  of  a  contract.   Under  such
circumstances equity can be done to disappointed bidders only  at
          the expense of inequity to the winning bidder.7 Hearing Officer
Hemenways  decision undertook a thorough analysis of what  remedy
was  appropriate in this case.  He carefully analyzed  the  facts
using the various factors listed in AS 36.30.585(b) and evaluated
the  benefits  and  drawbacks of each of the remedies  available.
Because Hearing Officer Hemenways analysis was both legally sound
and  factually  supported,  we affirm  the  remedy  he  selected.
Because  of  the thoroughness of his analysis of what remedy  was
appropriate  in this case, we take the further step  of  adopting
that  portion  of  his  decision.  The relevant  portion  of  his
analysis  is  included in the Appendix, but we first address  two
issues raised by Bachner and Bowers in their briefing.
     A.   The Hearing Officer Correctly Applied AS 36.30.585(b).
          Bachner  and Bowers argue that Hearing Officer Hemenway
misapplied AS 36.30.585(b) when he did not give extra  weight  to
the   factor  that  addresses  harm  to  the  integrity  of   the
procurement system.  They are incorrect.
          Alaska  Statute 36.30.585(b) grants the hearing officer
a  substantial amount of discretion to determine how to remedy  a
documented  impropriety  in  the procurement  process.   Where  a
protest  is sustained, the procurement official is instructed  to
implement  an  appropriate  remedy  after  considering  the   six
specified factors.8  The statute itself does not require that any
one  factor be given greater weight than others and, contrary  to
Bachner and Bowerss assertions, case law does not hold otherwise.
Previous  procurement cases stress the need  to  ensure  an  even
playing  field  for all bidders during the bidding process,9  but
this emphasis does not require that any factor in AS 36.30.585(b)
be  given more weight than others when determining an appropriate
remedy.   By carefully considering each statutory factor  without
giving  determinative weight to any single one,  Hearing  Officer
Hemenway correctly applied AS 36.30.585(b).
     B.   The  Hearing Officer Did Not Err in Concluding that the
          Department Would Incur Substantial Costs if the Lease Were
          Bachner and Bowers also argue that the record does  not
support the hearing officers conclusion that cancellation of  the
disputed  lease  would  result  in  significant  costs   to   the
department.  We cannot agree.
          Under  the  principles  set forth  in  the  Restatement
(Second)  of Contracts (1981), if the department were  to  cancel
the  lease it would be liable to McKinley for at least the  costs
McKinley  incurred  preparing for the  lease.10   The  department
specifically  requested that McKinley proceed in  preparation  of
the lease in March 2002, and the record shows that McKinley began
construction  of the roughly 24,000 square foot building  in  May
2002.   McKinley necessarily incurred substantial costs  when  it
commenced construction of such a large building, Hearing  Officer
Hemenways   conclusion   regarding  the   financial   impact   of
cancellation on the department was not in error.
          For  these  reasons  and  those  discussed  in  Hearing
          Officer Hemenways attached decision, we AFFIRM the commissioners
decision  to  remedy the defective procurement by confirming  the
contract to McKinley and awarding full proposal preparation costs
to  Bachner  and Bowers.  To the extent that the superior  courts
decision  conflicts  with the hearing officers  decision,  it  is
In the Matter of:
DGS RFP No. 2002-2500-2984
Dept. of Admin. Case Nos. 02.06/.07
                      RECOMMENDED DECISION
          These  consolidated protest appeals concern  a  Request
for  Proposal  (RFP)  for  a real estate  lease,  issued  by  the
[Division] of General Services (DGS).
     . . . .
E.   Remedy
          The  potential remedies in this case appear to be:  (1)
confirm the lease award to McKinley and award Bachner and  Bowers
their   proposal  preparation  costs;  (2)  remand  to  DGS   for
rescoring,  applying  a  reasonable Consumer  Price  Index  (CPI)
adjustment and omitting Mr. Weeds scores, and award the lease  to
the  highest  rated offeror; or (3) cancel the  solicitation  and
issue a new RFP.
          Alaska   Statute   36.30.585(b)   provides   that    in
determining  an appropriate remedy, the procurement officer  must
consider:  (1)  the seriousness of the procurement  deficiencies;
(2) the degree of prejudice to other interested parties or to the
integrity  of the procurement system; (3) the good faith  of  the
parties;  (4)  the  extent  to which  the  procurement  has  been
accomplished;  (5) costs to the agency and other impacts  on  the
agency  of  a  proposed  remedy;  and  (6)  the  urgency  of  the
procurement to the welfare of the state.
          (1)  Seriousness of the procurement deficiency.
          In  this case, an evaluator improperly adjusted scores.
This   is  a  serious  deficiency  in  the  procurement  process.
Nonetheless,  it  is  not  a deficiency  requiring  cancellation,
because the impropriety was limited to one evaluator.  Typically,
the  remedy  for  such  misconduct is to  rescore  the  proposals
omitting the scores by the evaluator whose conduct was improper.
          In addition, the price evaluation did not comply with a
reasonable  reading  of  the  RFP.   This,  too,  is  a   serious
procurement  deficiency.   The  standard  remedy   for   such   a
deficiency  is  to  rescore the proposals  applying  the  correct
interpretation of the RFP.
          This    factor    supports   rescoring   rather    than
cancellation.  However DGS should have the option of cancellation
(because  it  did  not  intend to utilize a  CPI  adjustment)  if
rescoring   is   deemed  appropriate  in   light   of   all   the
          (2)  Degree  of prejudice to McKinley and integrity  of
          the procurement system.
          Either  rescoring  or  cancellation  would  result   in
substantial   prejudice  to  McKinley.   Rescoring,   under   any
reasonable  CPI  adjustment, would result  in  award  to  another
offeror,  and cancellation could also result in award to another.
McKinley  has incurred substantial construction costs, and  award
to  another party would leave McKinley liable for those costs and
would  result  in the loss of the profits anticipated  under  the
lease.   McKinley is not responsible for the deficiencies in  the
solicitation  and is not responsible for the delay in  the  final
administrative decision on the protests.
          Bachner  argues  that  McKinley  is  not  substantially
prejudiced  because  it  can recover any damages  incurred  as  a
result of rescoring or cancellation of the solicitation by  legal
action  against the State of Alaska.  However, that McKinley  may
have a legal remedy does not mean that those outcomes are without
prejudice  to  it.  It is unlikely that any damages recovered  by
McKinley  would entirely compensate it for its losses: the  State
may  have defenses to any legal claims asserted;12 damages  would
not  include  all  costs incurred in pursing a  remedy,  may  not
include  the indirect impacts of cancellation, and would  in  any
event  come only after a significant delay.  While the  prejudice
to McKinley may be reduced by the availability of a legal remedy,
it  is  not  eliminated.   From the standpoint  of  prejudice  to
McKinley, confirmation of the award is preferable.
          With  respect  to  the  integrity  of  the  procurement
process,   however,   cancellation  is  the   preferred   remedy.
Impropriety  on  the part of one evaluator is not necessarily  in
itself ground for cancellation.  However, in this case there were
apparent  defects  in  the procurement entirely  apart  from  the
actual  impropriety on the part of one evaluator.  These apparent
defects included: (1) patent ambiguity with respect to use of the
present value analysis; (2) latent ambiguity with respect to  CPI
adjustments;  and  (3) the appearance that inappropriate  factors
were  considered  by the evaluators (proximity  to  existing  DOT
facility and past performance of offerors).  Given the nature  of
the   actual   and  apparent  defects,  cancellation   would   be
          Taken  together,  in light of the substantial  risk  of
prejudice  to  McKinley, and the harm to  the  integrity  of  the
procurement  process, cancellation should be avoided  if  another
suitable remedy is available.
          (3)  Good faith.
          Impropriety  on  the  part  of  one  evaluator  is  not
equivalent to bad faith on the part of DGS.  Nonetheless,  it  is
sufficient to establish a breach of the implied contract of  fair
and  honest  consideration.  Clearly, an award of  the  costs  of
proposal  preparation is appropriate, but this  factor  does  not
support cancellation.
          (4)  The extent the procurement has been accomplished.
          Because procurement was not stayed, the procurement was
completed before the protest appeal was filed.  No lease has been
executed  as  yet,  but  McKinley has  commenced  performance  in
          conformity with its proposal by substantially completing
construction of the new building that DGS expressed an intent  to
          Because   the   procurement  has  been  completed   and
substantial   performance  has  begun,   this   factor   supports
confirmation  of  the notice of award rather  than  rescoring  or
          (5)  Costs  to  the agency and other agency impacts  of
               the proposed remedy.
          The  potential  costs to the agency in  the  event  the
solicitation  is  cancelled or rescored are significant.   It  is
only  reasonable  to  anticipate  that  if  the  solicitation  is
cancelled,   the  State  will  be  liable  for   the   costs   of
construction.  In addition, there is a substantial risk that  the
State  would  be  liable  for additional damages,  such  as  lost
profits.   On  the  other  hand, if  the  award  to  McKinley  is
sustained, the State would likely not be liable to either Bachner
or Bowers for any damages beyond the limits of AS 36.30.585.
          Bachner  argues that the costs to the State are  likely
to be equaled or exceeded by cost savings resulting from an award
to  a  lower  cost  offeror.  However, even if the  out-of-pocket
costs over time are the same, the State would incur a substantial
negative impact because the lower cost facility was, according to
all  evaluators, also a less desirable facility.  The  effect  is
that  the  State would pay a higher cost (Bachner or  Bowers  bid
price plus damages to McKinley) for a lower rated facility.   For
this  reason, this factor weighs in favor of confirmation of  the
existing award rather than cancellation or rescoring.
          (6)  Urgency of the procurement.
          There  does  not appear to be any urgency in  acquiring
the  space at issue, since the existing landlord has indicated  a
willingness  to  extend  the  lease  indefinitely.   This  factor
supports cancellation and resolicitation.
          (7)  Other Factors.
          . . . .
          Another  circumstance  that  should  be  considered  in
fashioning a remedy is the substantial costs incurred by  Bachner
and  Bowers in pursing their administrative remedy.  The  failure
to  provide full and fair compensation to protestors for  out-of-
pocket  costs incurred in a solicitation in which there is actual
impropriety could have adverse impacts on the procurement process
generally by insulating procurement decisions from administrative
review  and creating the perception that the procurement  process
is unfair.
          In   light   of  the  serious  deficiencies   in   this
procurement, cancellation and resolicitation are the  appropriate
remedies  unless  other factors outweigh that  factor.   In  this
case,  the  potential costs and other impacts on  the  State  are
substantial,  and  McKinley would be substantially  and  unfairly
prejudiced  by  cancellation  or  rescoring.   On  balance,   the
appropriate remedy would appear to be an award of the full  costs
incurred in connection with proposal preparation.  Accordingly, I
recommend  that the protest appeal be sustained, that the  notice
of  intent  to award to McKinley be confirmed, and  that  DGS  be
directed  to  compensate Bachner in the amount  of  $50,000,  and
Bowers in the amount of $30,000 for proposal preparation costs.

                                        Andrew M. Hemenway
                                        Hearing Officer

     1     The  other companies that submitted proposals did  not
file bid protests and are not parties to this case.

     2     The stated price of each bid proposal was adjusted  by
applying  a  specified formula in order to  reduce  each  bidders
total price to a present value figure.

     3    AS 36.30.585(b) provides:

          In  determining  an appropriate  remedy,  the
          procurement   officer  shall   consider   the
          circumstances surrounding the solicitation or
          procurement including the seriousness of  the
          procurement  deficiencies,  the   degree   of
          prejudice to other interested parties  or  to
          the  integrity of the procurement system, the
          good  faith  of the parties, the  extent  the
          procurement has been accomplished,  costs  to
          the agency and other impacts on the agency of
          a  proposed  remedy, and the urgency  of  the
          procurement to the welfare of the state.
     4     Gunderson v. Univ. of Alaska, Fairbanks, 922 P.2d 229,
233 (Alaska 1996).

     5    Id. (quoting Pub. Employees Local 71 v. State, 775 P.2d
1062, 1063 (Alaska 1989)).

     6    Tesoro Alaska Petroleum Co. v. Kenai Pipe Line Co., 746
P.2d 896, 903 (Alaska 1987).

     7    Delta Data Sys. Corp. v. Webster, 744 F.2d 197, 206 n.5
(D.C. Cir. 1984).

     8    AS 36.30.585(a)-(b), set out in full, supra n.3.

     9     See  Dick Fischer Dev. No. 2, Inc. v. Dept  of Admin.,
838  P.2d 263, 267 (Alaska 1992) (ex parte communication  between
former  commissioner and one-time agent of winning bidder created
appearance  of  impropriety  sufficient  to  support  the  States
decision to cancel the project); McBirney & Assocs. v. State, 753
P.2d  1132,  1138 (Alaska 1988) (suggestions made by  one  bidder
outside  the  purview of other bidders and the public constituted
impropriety that warranted cancellation of procurement contract).

     10    Restatement (Second) of Contracts  349 (1981) provides
in  relevant  part: [T]he injured party has a  right  to  damages
based  on his reliance interest, including expenditures  made  in
preparation for performance or in performance . . . .

     11     As  reprinted in this Appendix, the hearing  officers
decision  has been redacted to delete extraneous discussion.  The
original  labeling of the hearing officers section  headings  has
been retained, but footnotes and pages have been renumbered.   We
have edited the decision to conform to our technical rules.
     12     If the solicitation is cancelled before the lease  is
executed, McKinley arguably is not entitled to any award for lost
profits.   There  is caselaw supporting the conclusion  that  any
acceptance by the State prior to final resolution of a protest is
conditional and subject to a condition subsequent.  See State  v.
Johnson,  779  P.2d 778, 782 (Alaska 1989); Dick Fisher Dev.  No.
2, Inc. v. Dept of Admin., 778 P.2d 1153, 1155 (Alaska 1989).

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