Earlier this month the Solicitor General, on behalf of the Department of Housing and Urban Development (“HUD”), filed a petition asking the Supreme Court to review a March 2014 Federal Circuit decision holding that HUD cannot use cooperative agreements—and instead must use procurement contracts—to administer funds under Section 8 of the United States Housing Act of 1937. The petition is United States v. CMS Contract Management Services (No. 14-781).

Under Section 8, HUD maintains annual contribution contracts (“ACC”) with state and local public housing agencies (“PHA”) to administer $9 billion of federal housing assistance every year to low-income families. In 2011, HUD recompeted the ACCs nationwide, which triggered almost 70 protests in the Government Accountability Office (“GAO”) by PHAs that did not receive new ACCs. In response, HUD withdrew the protested ACC awards (which covered 42 states), and in 2012 announced a new competition for the ACCs, now explicitly characterized as cooperative agreements whose “purpose” was to assist state and local governments “in addressing the shortage of affordable housing.” A flurry of pre-award protests in the GAO followed, in which certain PHPs argued that HUD was not permitted to treat the ACCs as cooperative agreements, and instead needed to treat them as procurement contracts (subject to standard procurement regulations prohibiting certain allegedly anticompetitive terms of the ACC competition). The GAO agreed with the PHPs, but HUD opted not to follow the GAO’s recommendation. Undeterred, the PHPs brought their protest to the Court of Federal Claims, which sided with HUD. On appeal, the Federal Circuit reversed, coming to the same conclusion as the GAO that the ACCs needed to be treated as procurement contracts.

Under the Federal Grant and Cooperative Agreement Act of 1977 (“FGCAA”), cooperative agreements may be used when “the principal purpose of the relationship is to transfer a thing of value to the State[ or] local government . . . to carry out a public purpose of support or stimulation authorized by a law of the United States,” and “substantial involvement is expected between the executive agency and the State[ or] local government . . . when carrying out the activity contemplated in the agreement.” By contrast, procurement contracts must be used when “the principal purpose of the instrument is to acquire . . . property or services for the direct benefit or use of the United States Government.” Procurement contracts are subject to the Competition in Contracting Act of 1984 (“CICA”) and the Federal Acquisition Regulation (“FAR”), making them more regulated and inflexible than cooperative agreements.

In this case, the Federal Circuit found it improper for HUD to treat the ACCs as cooperative agreements for three main reasons. First, the court determined that the ACCs’ “primary purpose” was to “support HUD’s staff and provide assistance to HUD with the oversight and monitoring of Section 8 housing assistance,” not to help PHAs address the shortage of affordable housing in their states. Second, the court concluded that the Section 8 funds provided to PHAs were not “thing[s] of value” under the FGCAA, as the money must be passed through to landlords or used to cover PHAs’ operating expenses. Finally, the court emphasized that PHAs are merely “intermediar[ies]” rather than direct beneficiaries of HUD assistance.

HUD now has asked the Supreme Court to review the Federal Circuit’s decision, urging that it be reversed. HUD asserts that the Federal Circuit erred in its ultimate conclusion as well as the three premises underlying it—and particularly in “second-guessing HUD’s determination” regarding the primary purpose of the ACCs. HUD also claims that, if allowed to stand, the Federal Circuit’s decision would not only hamstring its ability to manage its Section 8 project-based program, but also negatively impact its tenant-based program and “jeopardize the validity of other federal programs that use cooperative agreements to achieve important government objectives.” If the decision is affirmed, according to HUD, it would be the first time in the almost 40-year history of the Section 8 program that it would be found subject to CICA and the FAR.

The impact of the Federal Circuit decision—and the Supreme Court’s potential review of that decision—beyond HUD programs is unclear. It is possible that other courts will invalidate the use of cooperative agreements in other programs, and other agencies may become wary about using cooperative agreements for fear of a challenge to their use. As HUD pointed out in its petition, however, the Court of Federal Claims already has used the Federal Circuit’s decision to strike down the Department of the Interior’s use of cooperative agreements to administer the National Wildlife Refuge System. (The Department of the Interior is currently appealing that decision to the Federal Circuit.) HUD’s petition has not yet been listed for conference, and the respondent-PHPs’ response is due on March 6, 2015.

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Photo of Kayleigh Scalzo Kayleigh Scalzo

Kayleigh Scalzo represents government contractors in high-stakes litigation matters with the government and other private parties. She has litigated bid protests in a wide variety of forums, including the Government Accountability Office, U.S. Court of Federal Claims, U.S. Court of Appeals for the…

Kayleigh Scalzo represents government contractors in high-stakes litigation matters with the government and other private parties. She has litigated bid protests in a wide variety of forums, including the Government Accountability Office, U.S. Court of Federal Claims, U.S. Court of Appeals for the Federal Circuit, FAA Office of Dispute Resolution for Acquisition, Port Authority of New York and New Jersey, federal and state agencies, and state courts. She is also a co-head of the firm’s Claims, Disputes, and Other Litigation Affinity Group within the Government Contracts practice.

Kayleigh has particular experience navigating state and local procurement matters at both ends of the contract lifecycle, including bid protests and termination matters. In recent years, she has advised and represented clients in connection with procurements in Alaska, Arizona, California, the District of Columbia, Illinois, Indiana, Kansas, New Jersey, New York, Pennsylvania, Tennessee, Texas, and Virginia.

Kayleigh is a frequent speaker on bid protest issues, including the unique challenges of protests in state and local jurisdictions.