Federal Circuit: Prejudice Not Presumed Upon Finding of Agency Irrationality

Published Federal Circuit decisions in bid protests are rare and, as a result, often consequential. In its most recent such decision, System Studies & Simulation, Inc. v. U.S., the Federal Circuit reminded protesters that even where they successfully demonstrate an agency action was “irrational,” they must also make an affirmative showing of prejudice, which will not be presumed.

In May 2020, System Studies & Simulation, Inc. (“S3”) filed a bid protest at the Court of Federal Claims (“CFC”) arguing, among other things, that the Army erroneously assigned the awardee a strength for its cost proposal. CFC agreed the assigned strength was an error, but nonetheless ruled in favor of the government, holding that S3 had failed to demonstrate prejudice because even absent the error, the government had demonstrated the awardee’s proposal was “clearly superior” to S3’s proposal.

S3 appealed, arguing that when an agency acts irrationally in making an award decision—as was the case here—courts should presume prejudice to the protesting party. In making that argument, S3 relied upon language from Impresa Construzioni Geom. Domenico Garufi v. U.S. (“Garufi”), 238 F.3d 1324 (Fed. Cir. 2001), in which the Federal Circuit stated that “a bid award may be set aside if either: (1) the procurement official’s decision lacked a rational basis; or (2) the procurement procedure involved a violation of regulation or procedure” and that “[w]hen a challenge is brought on the second ground, the disappointed bidder must show “a clear and prejudicial violation of applicable statutes or regulations.” (Emphasis added). S3 argued that by tethering a showing of prejudice only to the “second ground,” Garufi instructed that prejudice was presumed upon a showing of the first ground, agency irrationality. 

A divided Federal Circuit (Judge Newman dissented without opinion) rejected this argument. The Court explained that the Administrative Procedure Act mandates that in all cases involving review of agency action as “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” “due account shall be taken of the rule of prejudicial error,” and that Garufi did not “disclaim a prejudice requirement” upon a finding that an agency’s action was irrational. The Federal Circuit further emphasized that under the APA, “the challenger of agency action generally bears the burden of showing that an error was harmful—that is, that it was prejudicial,” and to the extent there was uncertainty as to that requirement, the Court was “reject[ing] the interpretation of Garufi on which the uncertainty rests.”  

The Federal Circuit’s decision in S3 serves as an important reminder to protesters: regardless of how egregious an agency’s error may seem, prejudice resulting from such error should not be taken for granted. At every step of protest litigation at the CFC (and GAO, too)—from the filing of the initial complaint, to the briefing on the administrative record, to oral argument and any post-argument briefing—a protester’s presentation must include a clear and unequivocal articulation of prejudice.