Arbitrary and Capricious Standard :: Meaning & Definition :: Legal Standard for Challenging Agency Actions

Many government contractors often try but fail to successfully argue on appeal that the Government agency acted in an arbitrary and capricious manner when evaluating and deciding which company gets the contract award. When litigating a bid protest,  it is critical to first understand what the arbitrary and capricious definition is before you decide to move forward.

Many government contractors make huge mistakes during the litigation phase and should be aware of this legal standard that can carve out the framework for how the courts make their decisions.

If an agency’s procurement actions or bid protest actions either are arbitrary and capricious, constitute an abuse of discretion, or are otherwise not in accordance with law, then their action should be set aside.  5 USC 706(2)(A). Many appellate courts also fact in the substantial evidence test where contractors often miss the level of appellate review when arguing or briefing an arbitrary decision by the contracting officer. 

What is the Arbitrary and Capricious Standard of Review?

What do courts look at? Arbitrary and capricious is a court’s standard for judicial review and appeal> It is seen frequently in government contracts appeal cases. The Court will most likely not disturb or overturn a lower court’s decision unless the decision has no reasonable basis, or if the lower court rules with no basis in fact or law or the decision is not supported by the evidence. In a bid protest, the agency’s award must be upheld unless it was arbitrary or capricious, an abuse of discretion, or otherwise not in accordance with the law.  Another way to look at the arbitrary and capricious standard for challenging agency actions is to argue and ultimately prove that the agency’s decision lacked a rational basis or was contrary to law.  See Weeks Marine, Inc. v. United States, 575 F.3d 1352 (Fed. Cir. 2009). 

Under federal procurement laws, and bid protest litigation, the Tucker Act provides this Court of Federal Claims (COFC) with subject matter jurisdiction to “render judgment on an action by an
interested party objecting to a solicitation by a Federal agency for bids or proposals for a  proposed contract or to a proposed award or the award of a contract or any alleged violation of
statute or regulation in connection with a procurement or a proposed procurement.” See 28 USC 1491(b)(1). In rendering its decision judgment, COFC “review[s] the agency’s decision pursuant
to the standards set forth in section 706 of title 5.” See  1491(b)(4). “Among the various [Administrative Procedure Act] standards of review in section 706, the proper legal test applied in bid protest cases is provided by 5 USC 706(2)(A).

Government contractors should note that a court can only set aside the agency’s decision or action if only it is ‘arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law.’” Banknote Corp. of Am., Inc. v. United States, 365 F.3d 1345, 1350–51 (Fed. Cir. 2004) (citing Advanced Data Concepts, Inc. v. United States, 216 F.3d 1054, 1057–58
(Fed. Cir. 2000)). Under this standard, “a court is not to substitute its judgment for that of the agency.” See SBA Certificate of Competency Determinations & Small Business COC Requirements.

Given the de novo review standard by an appellate court, an agency action is considered “arbitrary and capricious if the agency offers insufficient reasons for treating similar situations differently.” Nazareth Hosp. v. Sec’y of HHS, 747 F.3d 172, 179 (3d Cir. 2014). Note that although the contracting officer has wide discretion to act, the regulations do not provide individual discretion go against the grain on regulatory intent.

• Courts do not substitute their judgment for the contracting officer’s
• The court looks at the evidence in the record to see if there is any rational connection

The main reason why the trial court has limited judicial review to the record actually before the agency is to guard against courts using new evidence to “convert the ‘arbitrary and capricious standard into effectively de novo review. See Murakami v. United States, 46 Fed. Cl. 731, 735 (2000), aff’d, 398 F.3d 1342 (Fed. Cir. 2005)). See Termination for Default Government Contracts & Reprocurement Costs.

Arbitrary and Capricious Meaning

In government contracting cases, courts review agency decisions and actions to see if the agency official (usually the contracting officer) acted outside of her and or his authority. The standard contemplates some reasonable connection between the record and the ultimate decision the contracting officer came to. The agency’s decision does not have the best business judgment or show absolute correctness. Instead, the court’s test looks for a level of reason that would make some sense. Absence of a rational connection between the facts found and the choice made. Natural Resources. v. U.S., 966 F.2d 1292, 97, (9th Cir.’92). A clear error of judgment; an action not based upon consideration of relevant factors and so is arbitrary methods, capricious, an abuse of discretion or otherwise not in accordance with law or if it was taken without observance of procedure required by law. 5 USC. 706(2)(A) (1988).

Arbitrary and Capricious Meaning Court of Federal Claims: The Court of Federal Claims considers allegations that the government’s actions were “arbitrary and capricious” in bid protests and other cases involving government contracts. An action is “arbitrary and capricious” if it lacks a rational basis or explanation. Government Contract Appellate Lawyers will argue that the government failed to consider important aspects of a problem, offered an explanation for its decision that runs counter to the evidence before it, or made a clear error in judgment. To prevail, the government contractors in appellate litigation must show that the government’s actions were willful and unreasoned, and not just a dispute over the merits. The arbitrary and capricious standard is a high bar, but successful challenges do occur, particularly if there are clear errors in the decision-making process.

When considering the arbitrary and capricious meaning,  it is important to note that courts have ruled that the trial court ( in the case of an appeal from the contracting officer’s final decision) is to apply the appropriate APA standard of review, 5 USC 706, to the agency decision based on the record the agency presents to the reviewing court.” See Axiom Res. Mgmt., Inc. v. United States, 564 F.3d 1378 (Fed. Cir. 2009). See information about small business size protest requirements.

Arbitrary Definition 

What does capricious mean? –Capricious Definition

United States Supreme Court Comment on Arbitrary and Capricious Test

 Even the United States Supreme Court has commented on the arbitrary and capricious test for challenging an agency action and what type of agency action would meet the test.  Agency action will be considered capricious and arbitrary when the agency:

• “[H]as relied on factors which Congress has not intended it to consider,
• Entirely failed to consider an important aspect of the problem,
• Offered an explanation for its decision that runs counter to the evidence before [it], or
• Is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.” Nat’l Ass’n of Home Builders v. Defenders of Wildlife, 551 US 664, 658 (2007).

What is Your Burden of Proof for Arbitrary and Capricious in a Bid Protest?

In federal government contract bid protest litigation, the burden of proof for showing that an agency’s award decision had no rational basis, or is arbitrary and capricious is born by the protestor.  Courts believe that the agency and contracting officers presumably do what is right. Therefore, one should not take this test lightly. See Special Rules When Appealing SBA COC & Small Business Certificate of Competency Decisions.

Bid protest courts such as the United States Court of Appeals for the Federal Circuit, have found that  “[A] proposal that fails to conform to the material terms and conditions of the solicitation should be considered unacceptable and a contract award based on such an unacceptable proposal violates the procurement statutes and regulations.” Centech Group, Inc. v. United States, 554 F.3d 1029, 1038 (Fed. Cir. 2009).

• Getting details about what the agency did wrong is very helpful in preparing the initial filings
• When filing a court case, the appellant should make sure that the documents have clear grounds or adequate consideration by the court.
• Assessing whether the agency violated procurement law is even more potent because the contracting officer and the agency do not have the discretion to violate rules and regulations.
• Although bad faith on the government’s side is difficult to provide, the arbitrary and capricious standard of review includes the government contracting agency completely disregarding procurement law or blatantly acting in bad faith.  
• Remember that the agency would have to show a coherent and reasonable explanation of its exercise of discretion.

When the agency acts against the rules and then attempts to justify the results in court, the test may apply. See also information about agency corrective action. 

How Does Court Apply the Arbitrary and Capricious Definition under 5 USC 706 in a Bid Protest Case?

Under the arbitrary and capricious definition, when challenging an agency’s action in bid protests under 5 USC 706, the reviewing court should not substitute its judgment for the agency’s judgment, but it should review the agency’s basis for its decision to make sure it was legally permissible, reasonable, and supported by the facts of the case.

• A court may set aside an agency decision that was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 USC 706(2)(A).
• At the end of the day, for a contractor to prevail it has to be able to show that the agency made a decision without reasonable grounds.
• All agency decisions must be justified and within its discretion. See urgent and compelling situations.

The scope of review under the “arbitrary and capricious” definition is very narrow and a reviewing court is not to substitute its judgment for that of the agency. However, a contracting agency must still examine the relevant data and articulate a satisfactory explanation for its action.  This is especially true when a contracting officer makes a final decision in a Contract Disputes Act claim or decides which contractor to make an award to.

• When courts review a case under the capricious and arbitrary test for challenging an agency action,  it must consider whether the decision was based on a consideration of the relevant factors and whether there was a clear error of judgment. In some cases, the appellate court may use the substantial evidence test.
• The arbitrary and capricious test for challenging agency actions is hard to meet because it is so deferential.  All the reviewing court must find is a reasonable basis for the agency’s action.  This can be met by the agency showing they acted with rational reasoning and considered relevant facts. See also FAR Construction Delay Claims & FAR Changes Clause.

What Mistakes to Avoid When Appealing a Government Contracts Case Based on Arbitrary and Capricious Actions?

To successfully appeal a case based on arbitrary and capricious government actions, Government Contract Appellate Lawyers must avoid several key mistakes:

1) Failure to show a clear error of judgment: The government’s actions must be shown to be illogical or implausible, not just a debatable choice between two reasonable options. The appellants must demonstrate that the decision had no rational basis or explanation.

2) Reliance on unsupported personal opinions: The appeal cannot be based purely on the appellant’s subjective opinions or preferences. Solid evidence and data must back up assertions of arbitrary or capricious behavior.

3) Lack of standing or jurisdiction: If the appellant does not have proper standing to challenge the government’s actions or if the court does not have jurisdiction to hear the specific claim, the appeal will be dismissed regardless of merits. Appellants must show how they were directly and negatively affected by the arbitrary actions.

4) Not proposing an alternative: To demonstrate that an action was arbitrary, the appellant must show that a reasonable alternative was available and not considered. Simply objecting to the action taken is not sufficient; a viable alternative path must be presented.

By avoiding these common missteps, Government Contract Appellate Lawyers can maximize the chances of a court finding that the government’s actions were indeed arbitrary and capricious, thereby justifying overturning or reversing the decision. With strong evidence, legal standing, and a reasonable alternative path, appellants have a solid basis to challenge capricious agency behavior.

Can a Lower Trial Court Simply Supplement the Administrative Record?

Generally no. The administrative record is the meat and potatoes of deciding a case and ruling whether the agency’s actions were arbitrary and capricious. The court should not on its own supplement the record so as to get a decision one way or another.  See Axiom Res. Mgmt., Inc. v. United States, 564 F.3d 1374, 1378 (Fed. Cir. 2009).

The purpose of limiting judicial review to the record actually before the agency is to guard against courts using new evidence to “convert the ‘arbitrary and capricious’ standard into effectively de novo review.” Id. at 1380 (quoting Murakami v. United States, 46 Fed. Cl. 731, 735 (2000), aff’d, 398 F.3d 1342 (Fed. Cir. 2005)).

• An appellate judge makes a decision based upon the record before him or her, the testimony and evidence presented.

Are there Examples of Cases where Agency Action Rose to the Arbitrary and Capricious Test? 

Yes.  One particular case where the Court of Federal Claims found the agency’s action to meet the arbitrary and capricious test was when the agency included a 15-year fixed pricing schedule in the solicitation, but the Court noted this violated customary commercial practices.  CW Gov’t Travel Inc. v. United States, 99 Fed. Cl. 666 (2011). See 13 CFR 125.6 Understanding Rules of Prime Contractor’s Limitations on Subcontracting FAR 52.219 14

Does Your Case Meet the Legal Requirement to Overcome Arbitrary and Capricious Scrutiny?

For information on government agencies using arbitrary definition methods and capricious standards for challenging agency action under 5 USC 706 in a bid protest or administrative law case, call our Bid Protest Lawyers at 1-866-601-5518 for a free initial consultation.