Question. Can Contractor
be disqualified from bidding for a contract to supply replacement parts
were the specifications are written such that there is only one viable
supplier?
Answer. YES.
The only acceptable bidder’s (“AB”) products bore a
trademark and thus could be marketed as “genuine,” where Contractor’s
could not. Having legally obtained the right to use the trademark, no
one could question AB had the right to reap the benefits of its bargain,
even if it meant AB had a competitive advantage in the marketplace over
other products that may be identical, or even superior, to its own.
There is an inherent rationality to the city’s decision to rely on the
presumed suitability of the genuine replacement parts “GRPs” sold by AB.
Hence, the decision to disqualify Contractor had a rational basis.
Contractor can be deemed a non-responsive bidder based on the
determination that the replacement parts Contractor supplied for these
engines were not “genuine” replacement parts (GRPs). Similarly AB may be
categorized as not only a supplier of GRPs but also as the original
equipment manufacturer of the engines. As a result of these
determinations, AB emerges from the competitive bidding process as the
only viable supplier of GRPs for the engines at issue.
It should be noted that the particular kind of engine at issue here is
no longer in production. According to Contractor, production of these
engines ceased in 1988. At about the same time, AB purchased certain
intellectual property and marketing rights relative to the engines from
the original manufacturer including design specifications and schematics
for various engines and replacement parts, as well as the trademark and
the right to market its replacement parts with the trademark.
Contractor is in the business of servicing the engines and sells its own
replacement parts for them. Although Contractor does not market its
parts as “genuine” replacement parts, Contractor claims that it actually
uses many of the same manufacturers as AB to produce its parts and that
the technical specifications and tolerances for its parts are virtually
identical to those sold by AB. The similarity between the companies’
replacement parts is claimed to be a result of several factors including
the fact that the specifications for many engine parts are well known
within the industry (or in the “public domain” as Contractor puts it)
and that the current design of many parts are different from the
original design specifications as a result of improvements and
modifications that have been made to the engines over time.
The City has apparently been purchasing replacement parts for its
engines from Contractor on an interim “purchase order” basis. More
recently, the City decided to abandon the competitive bidding process
entirely and enter into a “single-source contract” for replacement parts
with AB.
The City argues, and Contractor does not seriously dispute, that there
were good reasons to require that contract applicants in the competitive
bidding process be suppliers of genuine replacement parts, as opposed
to so-called “or equal parts.” These engines are not easily or
inexpensively replaced. In order to “ensure the safe, trouble free
operation” of these engines, the City rationally determined that it
would use only genuine replacement parts which presumably can be relied
upon to meet the original equipment manufacturer’s tolerances and
specifications. This constitutes a rational basis for the preliminary
determination by the City that a successful bidder for the subject
contract should be one who supplied GRPs for the City’s engines.
The more central dispute in this case, however, concerns the rationality
of the two related determinations by the City that Contractor was not a
supplier of GRPs and that AB was. The resolution of this dispute
ultimately determines whether Contractor can compete to supply
replacement parts for the engines on an equal footing with AB.
The thrust of Contractor’s argument is not that it should have been
deemed a supplier of GRP’s but rather that, in light of the similarities
between AB’s and Contractor’s replacement parts businesses, the
determination that only AB was a supplier of GRPs was arbitrary and
capricious. Thus, Contractor reasons, AB is no more a supplier of GRPs
than Contractor is and their respective bids should have been considered
as equals.
Additionally, Contractor asserts that the designation of AB as the
original equipment manufacturer (OEM) of the engines — which lies at the
core of AB’s ability to market its replacement parts as genuine parts —
was also arbitrary and capricious considering that AB has never
actually manufactured an engine. In Contractor’s view, AB’s only claim
to OEM status arises from its purchase of the trademark and other
intellectual property during the 1980’s after the engines went out of
production. Thus, according to Contractor, AB’s designation as OEM and
the related designation as a supplier of GRPs which flows from it is the
result of a legal fiction.
While the Contractor’s replacement parts may be functionally identical
to those supplied by AB, even if that assertion were found to be true,
there still remains a rational basis upon which to conclude that the
replacement parts marketed by AB are “genuine” parts while the parts
sold by Contractor are not. Therefore the decision to disqualify
Contractor from the competitive bidding process and the concomitant
decision to classify AB as the original equipment manufacturer and a
provider of GRPs had a rational basis.
