PSBCA Nos. 3916 & 3970
August 25, 1998
Appeal of
FAX-PHOTO-SHIPPING ETC.
Under Contract No. 056768-89-S-0107
PSBCA Nos. 3916 & 3970
APPEARANCE FOR APPELLANT:
J. Trivedi
APPEARANCE FOR RESPONDENT:
Elena V. Alejandre, Esq.
OPINION OF THE BOARD
Appellant, Fax-Photo-Shipping, Etc., has appealed from a decision of the contracting officer denying Appellant a rate increase in, and terminating, its contract with Respondent, United States Postal Service, to operate a Contract Postal Unit. A hearing was held in San Bernardino, California.
FINDINGS OF FACT
1. On January 12, 1987, Appellant[1] was awarded Contract No. 056768-89-S-0107[2] to operate a form of Contract Postal Unit (CPU) known as a Contract Station at the location of his business in San Bernardino, California. A CPU such as Appellant's is typically found in a retail establishment that, under contract with the Postal Service, uses part of its premises to provide postal services such as selling stamps and accepting parcels and other mail. Under the contract, the initial annual rate of payment to Appellant for operating the CPU was $13,990.[3] In the solicitation, Respondent had estimated that the first year's revenue (for Respondent) from operation of the CPU would be $75,000. (Appeal File Tabs (AF) 1, 3, 15; Transcript page (Tr.) 12).
2. Clause 4, "Length of Contract," of the Contract General Provisions provided that the term of the contract was indefinite, unless terminated in accordance with the "Termination of Contract" clause. The Termination clause provided, in part, "You or USPS may end (terminate) this contract on 60 days' written notice…." (PS Form 7369, January 1984).
3. Clause 17, "Price Adjustments," of the General Provisions provided as follows:
"You can ask for an increase in your annual rate after you have had the contract for at least 2 full years or have operated for 2 years since your last price increase. Your request must tell the contracting officer exactly why you deserve an increase. Things that could justify an increase are:
a. The benefit you are providing USPS has increased because your real revenue or the number of transactions has grown or you have made other improvements which directly benefit USPS.
b. Your cost of rent, utilities, and labor (for your employees) has increased. If you operate the CPU as part of another business, you may claim only the pro-rata share attributable to the CPU.
You should submit your request to the [Contracting Officer's Representative], who sends it with comments to the contracting officer. The contracting officer may accept your request, may negotiate with you to reach an agreement on a new annual rate, or may deny your request. If USPS accepts your request or you and USPS reach agreement on some other amount, you agree to continue the contract for 1 year after the new rate is effective. If USPS denies your request, you may continue to run the CPU at the existing annual rate or you may end the contract." (PS Form 7369, January 1984).
4. On or about January 27, 1989, Appellant wrote to the contracting officer to request an increase in the annual rate to $25,000, citing primarily increases in the revenue generated and increases in Appellant's costs for rent, utilities, labor, and surety bond premiums. Appellant also noted physical improvements that he had made to his business premises. The request was denied by the contracting officer in a letter dated March 10, 1989, at the recommendation of Respondent's Delivery/Retail Analyst, who noted that with the proposed increase, payment to Appellant would equal 36 percent of the CPU's total revenue for 1988. In the denial letter the contracting officer noted that the contract would remain in effect at the existing rate unless terminated by either party in accordance with the Termination clause. (AF 6, 8, 21).
5. In November 1989, Jim Murray, a retail specialist for Respondent was appointed contracting officer's representative (COR). As COR, Mr. Murray was generally responsible for monitoring Appellant's operations and ensuring compliance with contract terms. The COR was not authorized to take any actions that would affect the contract price and was not authorized to delegate any of his responsibilities. (Discovery Documents Tab (Disc Doc) 2; Tr. 16)
6. On or about April 3, 1990, Appellant again requested a rate increase to $25,000 per year, citing increased costs and improvements that he had made to his premises. The COR considered the request and, notwithstanding his generally favorable comments about Appellant's operation, recommended against the increase because the current rate of payment represented almost 15 percent of revenues. By letter of April 27, 1990, the contracting officer denied the requested increase. In the denial letter the contracting officer again noted that the contract would remain in effect at the existing rate unless terminated by either party in accordance with the Termination clause. (AF 8, 9; Attachment to notice of appeal PSBCA 3916).
7. In September or October 1991, at Mr. Murray's request, Respondent contracted with another business, "Mail Stop," to operate a CPU at a location approximately one-half mile from Appellant's business. Mr. Murray had been contacted by several retailers in the area of the Mail Stop who expressed interest in having a contract unit nearby. He visited the area and concluded that there was a lot of growth occurring and that adding the new CPU would help alleviate the crowded conditions at the nearby post office. (Tr. 135, 328; Resp Exh 9 (FY 91 data); AF 9).
8. In September 1991, Appellant again requested a rate increase to $25,000 per year. In an evaluation dated October 28, 1991, the COR recommended against the increase. The COR based his recommendation primarily on the cost of the CPU, which he calculated at 16 percent of revenues. The COR also concluded that, with two other CPUs, including Mail Stop, in the general area, it "would not be a hardship [to Respondent]" to close Appellant's unit. By letter dated October 30, 1991, the contracting officer denied the increase request. In the denial letter the contracting officer once again noted that the contract would remain in effect at the existing rate unless terminated by either party in accordance with the Termination clause. (AF 9, 29, 31).
9. In April 1993, Gary Miller, the Postmaster of San Bernardino, was appointed COR by the contracting officer. Mr. Miller visited each of the CPUs in San Bernardino approximately once each year. However, notwithstanding his appointment as COR, Mr. Miller continued to rely heavily on Mr. Murray, who was still located in San Bernardino, to continue to perform many of the same functions that he had performed when he was the COR. (Disc Doc 1; Tr. 343, 345).
10. By a letter to Mr. Murray, dated February 27, 1995, Appellant again requested a rate increase, to an annual rate of $16,000. In a reply dated April 4, 1995, Mr. Murray reviewed Appellant's revenue figures since contract inception, and indicated that Appellant's then-current contract price was still about 10 percent of the annual revenues. Mr. Murray stated that the Postal Service had policy guidelines for CPU operation that generally called for a payment to CPU operators that did not exceed 7.5 percent of revenues.[4] Therefore, he declined to request a rate increase for Appellant and did not pass the request to the contracting officer. Although not stated in the letter, the policy referred to by Mr. Murray was not a national policy, but one adopted locally – in the Postal Service's Pacific area. (AF 34, 35, 37, 38; Tr. 28, 118, 272).
11. In October 1995, after a discussion with Appellant, Danny Jackson, the Postal Service District Manager in San Diego whose responsibility included San Bernardino, visited Appellant's location. At about the time he did so, Appellant sent or gave him a letter again requesting a rate increase -- to $20,055 per year. At about the same time, Mr. Murray sent a memorandum to Mr. Jackson which, among other topics, listed Appellant's revenues since contract award and compared his CPU with the others in San Bernardino in terms of cost as a percentage of revenue. At that time there were seven CPUs open in San Bernardino, one of which was about to be closed. Of the seven, five (including Appellant) were above the seven percent guideline[5] and two were below.[6] Two other CPUs, which had recently been closed, had been operating at 21 percent and 13 percent. The CPU that was about to be closed had been operating at 37 percent of revenues.[7] (Tr. 190; AF 39, 40).
12. In a letter dated November 7, 1995, Mr. Murray wrote to Appellant and stated that, based on Appellant's level of service, it would be necessary to reduce the annual contract rate to $10,000 as of January 1, 1996, if Appellant wanted to continue service. Mr. Murray stated that the alternative was to close the CPU operation at Appellant's location. In response, Appellant wrote to Mr. Murray and stated that he intended to appeal the matter to this Board. He did so by letter dated November 21, 1995, which letter was docketed as PSBCA No. 3916. (AF 42, 43; Notice of Appeal, PSBCA 3916).
13. In the course of processing the appeal, it came to the Board's attention that Mr. Murray, the author of the November 7, 1995 letter that had precipitated the appeal, was not a contracting officer and had no authority to either reduce Appellant's rate of compensation or close the CPU.[8] Accordingly, action on PSBCA No. 3916 was suspended on June 4, 1996, and the contracting officer was directed to consider Appellant's request for a rate increase and issue a final decision.
14. On June 18, 1996, Mr. Murray sent an electronic mail (email) message to the contracting officer requesting that Appellant's CPU be closed. The sole basis stated in the message was financial -- i.e., to meet the Pacific area's goal "to reduce or close every CPU which is not at 7% on the dollar vs revenue, unless there is justification otherwise." Mr. Murray stated that with this closure, there would be four contract units (out of eleven the year before) still in operation. In particular, Mr. Murray noted the existence of the Mail Stop CPU, which he stated was in an area of major business growth and which had, in its first year, far exceeded the revenue brought in by Appellant, and at a cost to Respondent within the desired range. (Disc Doc 6).
15. In a final decision dated June 21, 1996, the contracting officer denied Appellant's request for a rate increase. In addition, citing low revenues, the contracting officer notified Appellant that Respondent was invoking the 60-day termination provision of the contract and would close the CPU effective August 30, 1996. The contracting officer did not seriously consider granting a rate increase, since she had already decided to terminate the contract pursuant to Mr. Murray's request and, therefore, any rate increase would have been effective only during the 60-day notice period. Further, had she considered it, the contracting officer would not have granted Appellant a rate increase even absent the request to terminate. (Submittal in response to Board Order of June 4, 1996; Tr. 618, 624).
16. In a July 21, 1996 letter to Appellant, the contracting officer provided what she termed "additional information supporting the … decision to terminate…." The contracting officer recited the financial reasons contained in Mr. Murray's June 18 email message. In addition, she mentioned that Mr. Murray had visited Appellant's location on several occasions and had made suggestions to improve customer service by making minor alterations to the facility and improving housekeeping and organization of the facility, but that "significant improvements were not evident." Further, the contracting officer stated that Appellant had had a history of submitting daily financial reports containing errors. She stated that the San Bernardino accounting office had made weekly corrections to Appellant's accounting statements and notified Appellant of the corrections. The contracting officer stated that after several months, although Appellant's statements continued to reflect errors, the accounting officer stopped making corrections. The contracting officer's statements were based on conversations with Mr. Murray, and on other documents contained in the appeal file for PSBCA No. 3916, which she had received. The contracting officer would have terminated the contract as requested by Mr. Murray based on low revenues alone -- i.e., even without any indication of problems with Appellant's financial reporting or problems with the image of Appellant's facility as reported by Mr. Murray. (Attachment to Answer, PSBCA No. 3970; Tr. 40).
17. On June 22, 1996, Appellant filed a notice of appeal protesting the decision to terminate the contract. That appeal was docketed as PSBCA No. 3970.
18. In Appellant's first year of operation, the payment to him under the contract equated to 22 percent of revenues. Thereafter, Appellant's revenues improved and the percentage of revenues paid to him generally decreased, with the last three years of operation at 11 percent, 10 percent, and 11 percent, respectively. (AF 37, 39; Disc Doc 9; Tr. 592-93).
DECISION
Appellant, relying on the Price Adjustments clause (Finding 3), argues that he was entitled to an increase in his payment under the contract. He argues that he fulfilled the prerequisites required by that clause in that he has shown that revenues and transactions increased, that he made improvements to his facility, and that his costs had increased. Further, Appellant argues that Respondent's reliance on the cost-to-revenue percentage guideline was improper since the Price Adjustments clause does not mention that guideline as a factor in addressing rate increases.
Appellant contends that the contracting officer's reliance on information provided by Mr. Murray, who was not then the COR, when she was considering the rate increase was improper, inasmuch as the contract contemplates that the COR will be the person providing information to the contracting officer. Further, Appellant argues that the opinions offered by Mr. Murray to the contracting officer, particularly in the areas of Appellant's financial errors and the "image" of Appellant's premises, were based on information that was outdated. In addition, Appellant argues that he has been prejudiced by Respondent's opening of the Mail Stop CPU in close proximity to his business, which CPU brought in revenue that Appellant contends would otherwise have passed through his CPU. Finally, Appellant notes that other CPUs were allowed to operate at percentage levels above the guideline.
Appellant makes similar arguments concerning the termination of his contract, and contends that the decision to terminate the contract was the product of bad faith and abuse of discretion on the part of the contracting officer. Appellant cites as examples of bad faith or abuse of discretion the failure of the contracting officer to discuss the termination with the COR (the postmaster of San Bernardino), and the contracting officer's use of outdated information regarding the accounting and "image" problems provided by Mr. Murray. Appellant argues further that the decision to terminate his contract in June 1996 was not triggered by Appellant's financial results, but was made in retaliation for his bringing the initial appeal.
Respondent takes issue with the factual premises of many of Appellant's arguments, and argues generally that Appellant has not shown entitlement to a rate increase under the contract and has not shown that the contracting officer's decision to terminate the contract on 60 days' notice was an abuse of discretion.
Having considered the entire record, we conclude that Appellant has not shown that Respondent was required to grant him an increase in his contract payment and has not provided a sufficient legal basis for overturning Respondent's decision to terminate the contract.
With respect to the payment increase, the contract language relied on, and agreed to, by Appellant specifies conditions that "could" justify an increase. It does not obligate Respondent to grant an increase, even if Appellant shows that all of the factors listed in the clause have been satisfied. The last paragraph of the clause makes it clear that it is within the discretion of the contracting officer to deny an increase, notwithstanding that all the factors have been satisfied. That discretion requires the exercise of business judgment, and the Board will not substitute its judgment for that of the contracting officer, as long as that discretion is not abused. See, e.g., Marvin Watson, PSBCA No. 3716, 96-2 BCA ¶ 28,365; Stephen Zucker, Packages Services Plus, PSBCA Nos. 3396-3398, 96-2 BCA ¶ 28,282.
From the record it is clear that the primary factor considered by the contracting officer, at the behest of Mr. Murray, was the cost to the Postal Service of having the CPU in operation, compared to the revenue generated by the CPU. The Postal Service organization of which the San Diego district (including San Bernardino) was a part had established a policy that, absent special circumstances, discouraged the operation of CPUs at which the payment to the operator exceeded approximately seven percent of the revenues brought in. Appellant has not shown that the contracting officer's decision to implement that policy by denying the rate increase was an abuse of her discretion. See, e.g., Marvin Watson, PSBCA No. 3716, 96-2 BCA ¶ 28,365. Further, as noted in the earlier rate increase denials (Findings 4, 6, 8) and as stated in the Price Adjustments clause, Appellant was not bound to continue the contract once his request for an increase was denied. If, in Appellant's business judgment, continuing the contract at the existing rate was not in his interest, he was free to exercise his own right to terminate the contract.
The factors cited by Appellant in arguing against the decision do not constitute abuses of discretion or bad faith. We see nothing improper in either the contracting officer's consultation with Mr. Murray or her failure to consult with the COR before denying the rate increase. The contracting officer is free to consult with and rely on the reports of her staff and others in making decisions under the contract. See, e.g., Nuclear Research Corp. v. United States, 814 F.2d 647, 649-50 (Fed. Cir. 1987); Pacific Architects and Engineers, Inc. v. United States, 491 F.2d 734, 744 (Ct. CL. 1974); Stephen Zucker, Packages Services Plus, PSBCA Nos. 3396-3398, 96-2 BCA ¶ 28,282. Contrary to Appellant's contention, the contract does not require that the contracting officer consult only the COR before taking action, and Mr. Murray was the person most knowledgeable of the circumstances of Appellant's CPU and the service needs of the Postal Service in San Bernardino. See Jared Paul Carson d/b/a The Roasted Coffee Bean, PSBCA No. 4006, 1998 PSBCA Lexis 21 (June 26, 1998).
Appellant devoted much of his effort at the hearing and in his briefs to challenging the validity of what were referred to as the financial errors and the "image" problem associated with Appellant's business, and we agree with Appellant that the opinions offered by Mr. Murray regarding these matters were based largely on information and observations that were outdated when the opinions were offered. However, as noted above, the decisions to deny the rate increase and to terminate the contract were based almost exclusively on financial considerations and would have been the same even without the other "problems" identified by Respondent (Findings 15, 16). Therefore, we do not agree with Appellant that he was prejudiced by the expression of Mr. Murray's opinions.
Appellant is correct that the cost-to-revenue percentage guideline adopted by the Postal Service's Pacific area was not a contract requirement. On the other hand, nothing in the contract prevented Respondent from adopting that type of guideline in an exercise of its business judgment and deciding that it would not grant increases and/or that it would terminate the contracts of those CPUs that failed to meet that guideline. Marvin Watson, PSBCA No. 3716, 96-2 BCA ¶ 28,365. In the context of the CPU contracts -- i.e., where rate increases are granted at the discretion of the contracting officer and the contracts are terminable on notice by either side -- establishing or abiding by such a guideline does not constitute an abuse of discretion.
Finally, as to those actions that Appellant considered to be directed at him -- i.e., the opening of the Mail Stop CPU in close proximity and allowing some CPUs to continue operating although they failed to meet the percentage guideline -- the record does not support Appellant's suggestion that he was unfairly harmed by those actions. Initially, we note that the contract did not give Appellant the exclusive rights to any area. In addition, the record indicates that the Mail Stop CPU was opened because of the request of several local business people and because Respondent's personnel believed that the area immediately around that location was undergoing significant growth and would otherwise further overcrowd the Del Rosa Post Office. The record does not support the suggestion that the new CPU was opened in an attempt to harm Appellant by reducing the patronage at his CPU. As to the fact that some operating CPUs did not meet the percentage guideline, Appellant has not shown that such exceptions were intended to, or actually did, harm his CPU business. Further, the record indicates that those CPUs generally were subject to special circumstances -- e.g., they were in underserved areas, or had only recently been opened. Accordingly, Appellant has not shown that Respondent's motivation in these actions was to harm his business in any way.
As to the decision to terminate Appellant's contract, the record indicates that the primary motivation for that action was financial. While the timing of the termination could suggest retaliation for Appellant's initiating the appeal before the Board, the record supports Respondent's contention that retaliation was not the motivation.[9] During the fiscal year in which Appellant's CPU was closed, approximately 30 CPUs were closed in the San Diego district, including most of the other CPUs in San Bernardino, for essentially the same reason -- i.e., failure to meet the percentage guideline. While it may have been the Board's direction to issue a final decision that prompted Respondent to examine the continued operation of Appellant's CPU (Finding 13), the record does not indicate that the reason for termination was other than the reason set out in the final decision -- i.e., low revenues compared to the contract price. As mentioned above, the areas of major concern to Appellant (financial errors and "image") were mentioned only in the follow-up letter and did not play a significant part in the decision to terminate. Therefore, we need not address the effect, if any, of the fact that much of the information related to those two issues was outdated.
We have also considered Appellant's other arguments and find them without merit. Accordingly, we conclude that Appellant has not shown that Respondent's exercise of its termination right under the contract and the denial of his rate increase request were improper.
The appeals are denied.
David I. Brochstein
Administrative Judge
Vice Chairman
I concur:
James A. Cohen
Administrative Judge
Chairman
I concur:
Norman D. Menegat
Administrative Judge
Board Member
[1] The contract was awarded to "J. Trivedi, Quality One Hour Photo." Therefore, Mr. Trivedi will be referred to as the Appellant for the purposes of this Opinion. The business operated by Mr. Trivedi was known by three different names during the course of the contract -- Quality One Hour Photo, Fast Photo, and Fax-Photo-Shipping Etc. (AF 1, 6).
[2] At the time of award, the contract bore a different number. The number was changed to the captioned contract number by a 1988 contract amendment (AF 6)
[3] In June 1988, the parties agreed to reduce the annual rate to $13,253 to compensate for a reduction in the hours of operation of the CPU (AF 6).
[4] The guideline has been variously described as 7 percent or 7.5 percent. However, the difference is not significant to the resolution of this appeal. (See, e.g., AF 37, 39).
[5] 9, 10, 12, 14 and 37 percent.
[7] By the end of fiscal year 1996, one other CPU (the one that had been operating at 14 percent) was closed and one CPU (that had been operating at 12 percent) had agreed to a rate reduction that brought its operating percentage down to approximately 9.5. In that fiscal year, approximately 30 CPUs, principally those with payments that were a high percentage of revenues, were closed in the area managed by the San Diego district office, of which San Bernardino was a part. Some CPUs that were operating at high percentages were allowed to remain open where special circumstances existed -- e.g., where the area being served had no other postal facilities conveniently available. (Disc Doc 9; Tr. 278-83, 514).
[8] Neither action had actually been taken by that date (Tr. 79).
[9] Since Appellant has not shown that the termination was motivated by a desire to retaliate for Appellant's filing an appeal, we need not and do not decide whether retaliation, if proven, would make any difference in the outcome of this appeal.