Well, that letter you just received from the Bureau of Prisons is not from a former acquaintance. But it does ask for market data on your product line. This is both good and bad news. The bad news is that a new competitor has announced its intent to enter your market, This competitor has some $459 million in federal government sales; it employs 1,400 civilian employees and over 16,000 inmates; it operates over 100 factories in 51 federal prisons; and it enjoys an absolute preference for federal government supplies. The good news is that Federal Prison Industries is not now one of your competitors, and there is a statutory mechanism to challenge its entry. Dealing with this problem requires an understanding of Federal Prison Industries and its captive marketplace, and here is where we begin.
Federal Prison Industries is a federal corporation headquartered in the District of Columbia. It is governed by a board of six directors, four of whom represent private sector interests, appointed by the President to serve at will, and without compensation. 18 U.S.C. § 4121. Federal Prison Industries was established in 1934 to provide employment for federal inmates, and to regulate increasing competition from prison industries: in 1931 production of cotton duck from the mill in the Atlanta Penitentiary was 38 percent of the total domestic output. To deal with this problem and provide a forum for consideration of outside views, Congress established a corporation with a board of directors representing private interests.
Through Federal Prison Industries, the Bureau of Prisons carries out its statutory mandate to provide inmates “a maximum opportunity to acquire a knowledge and skill in trades and occupations which will provide them with a means of earning a livelihood upon release.” 18 U.S.C. § 4123. Inmate population has mushroomed in recent years (since 1980, total inmate population has increased more than 230 percent), and granting/withholding the opportunity to participate in the program is an essential inmate management tool. Indeed, with the abolition of parole and the reduction of available good time, prison industry is one of the few incentives available to control inmates.
There is little training that results from inmate employment: a Bureau of Prisons study reports that roughly the same proportion of Federal Prison Industries inmate employees returned to private sector employment as had been employed before incarceration. In short, the flow of in mates through Federal Prison Industries does not affect jobs.
Federal Prison Industries produces goods in five different product divisions: clothing and textiles; electronics, plastics, and optics; furniture products; metals; and graphics and services. Sales for fiscal year 1995 included $233.4 million in office and household furniture and fixtures, $34.4 million in special purpose clothing, $31.7 million in cable and wire assemblies, $15.6 million in electrical power distribution equipment, $15.4 million in bags and sacks, $10.9 million in electronic components, $8.5 million in office supplies and accessories, $7.2 million in electrical equipment, $6.6 million in personal armor, $5.8 million in stationery and forms, $5.7 million in communications security equipment, $4.9 million in printed matter, $3.3 million in men’s outerwear, $3.1 million in paint and artists brushes, $2.5 million in optical and meteorological instruments, $2.4 million in signs and advertising displays, $2.3 million in night vision equipment, and $1.7 million in safety and rescue equipment.
Over 60 percent of sales are to the Department of Defense. In 1991, Federal Prison Industries’ revenues were concentrated in five labor intensive product classes (furniture and furnishings, apparel and textile products, electronics, textile fabrics, and printing) for which its market share ranged from 10 to 60 percent. A rapid decline in the volume of federal procurements has increased Federal Prison Industries’ market share.
Federal Prison Industries has had little success in diversifying its sales: over 87 percent of Federal Prison Industries’ growth from 1987 to 1990 was in furniture and furnishings and in apparel and textile products. Attempts to diversify in creased overhead costs as a percentage of sales by 60 percent from 1983 to 1990. Much of the cost growth reflects increased product development, marketing, procurement, and quality assurance costs. Operating income compared with sales has decreased significantly: from 1984 to 1990, operating income as a percentage of sales fell from nearly 14 percent to just above 3 per cent. In 1994, operating income compared with sales was 1 percent.
Under 18 U.S.C. § 4124, Federal Prison Industries joys an absolute preference for federal acquisitions of the goods that Federal Prison Industries elects to offer. Agencies are required to purchase such goods “as meet their requirements and may be available” at prices “not to exceed current market prices.” 18 U.S.C. § 4124(a). Federal Prison Industries is required to publish a catalog of the products and services that it offers for sale. 18 U.S.C. § 4124(d).
The 1934 enabling legislation continues an express limitation on prison industry: “Any industry . . . shall be operated so as not to curtail the production of any existing arsenal, navy yard, or other Government workshop.” 18 U.S.C. § 4123. The prior limitation was introduced in 1930 by Representative LaGuardia, and he explained its purpose as avoiding competition “with free labor employed in the U.S. arsenals, navy yards, and the United States mail bag repair shop, or any employee of the Government.”
Federal Acquisition Regulation (FAR) 8.602 (a), 48 C.F.R., ch. 1, requires agencies to purchase from Federal Prison Industries all of their requirements for goods listed in the Schedule of Products made in Federal Penal and Correctional Institutions. Agency decisions that goods from Federal Prison Industries meet required levels of quality may be challenged before the General Accounting Office. Hiltronics Corp., B-241450, Jan. 18, 1991, 91-1 CPD ¶ 57, at 3.
Disputes between agencies and the Bureau of Prisons about price, quality, character, or suit ability of supplies offered by Federal Prison Industries are subject to arbitration by a federal tribunal consisting of representatives from the General Accounting Office, the General Services Administration, and the Executive Office of the President. 18 U.S.C. § 4124(b). This arbitration panel has been convened on only one occasion, during the 1930’s.
Agencies may obtain clearances from Federal Prison Industries to purchase from other sources goods listed in the Schedule of Products made in Federal Penal and Correctional Institutions. FAR 8.605(a). Clearances are not normally authorized to obtain goods at prices lower than the market price set under 18 U.S.C. § 4124(a). FAR 8.605(b). Agencies need not seek clearances when “[p]ublic exigency requires immediate delivery or performance.” FAR 8.606(a).
Where goods are offered by Federal Prison Industries, agencies are not required to solicit private vendors. Concomitantly, agencies may not require Federal Prison Industries to compete for these requirements. Battery Assemblers, Inc., B-260043, May 23, 1995, 95-1 CPD ¶ 254, at 2.
The “market price” at which agencies are to obtain goods from Federal Prison Industries is set to reimburse production expenses to the Prison Industries Fund, 18 U.S.C. § 4126, from which Federal Prison Industries’ operations are financed. The “market price” is established by negotiations between agencies and Federal Prison Industries, and “any method that reliably estimates current market prices may be used.” Battery Assemblers, 95-1 CPD, at 3.
Federal Prison Industries’ operating procedures recognize that the “market price” refers to a competitive price range, that the “market price” will not necessarily be the lowest price, and that the only requirement is that the “market price” fall within the competitive range of prices for like products, in like quantities and delivery schedules. Pricing disputes between agencies and Federal Prison Industries may be referred to the appropriate Federal Prison Industries product division, or to Federal Prison Industries’ Washington office. FAR 8.604(c).
Federal Prison Industries offers “any interested party” the opportunity to comment on its business operations. 28 C.F.R. § 302.1. Federal Prison Industries provides an ombudsman to consider appeals of denials of clearances to purchase goods from other sources. Battery Assemblers, 95-1 CPD, at 3 n. 5. In fiscal year 1994, Federal Prison Industries received over $391 million in waiver requests and approved almost 90 percent of these requests. Federal Prison Industries 1994 Annual Report.
Unlike the private sector, Federal Prison Industries does not respond to market fluctuations, and instead it must expand to accommodate growth in inmate population. The expansion has had devastating impacts on the furniture, clothing, and textile manufacturers that compete with Federal Prison Industries for a declining level of federal contract awards. The Federal Prison In dustries Reform Act of 1988 was an attempt to balance these competing interests: in exchange for statutory authorization allowing Federal Prison Industries to finance expanded operations by borrowing directly from the Treasury, 18 U.S.C. § 4129(a)(1), Congress enacted mandatory requirements to be followed by Federal Prison Industries when adding a new product or significantly expanding the production of an existing product line. 134 Cong. Rec. H7439-02, Sept. 13, 1988.
These are the requirements of the Federal Prison Industries Reform Act:
(b)(1) [Federal Prison Industries shall] so operate the prison shops that no single private industry shall be forced to bear an undue burden of competition from the products of the prison workshops, and to reduce to a minimum competition with private industry or free labor.
(2) Federal Prison Industries shall conduct its operations so as to produce products on an economic basis, but shall avoid capturing more than a reasonable share of the market among Federal departments, agencies, and institutions for any specific product. Federal Prison Industries shall concentrate on providing to the Federal Government only those products which permit employment of the greatest number of those inmates who are eligible to work as is reasonably possible.
(3) Federal Prison Industries shall diversify its products so that its sales are distributed among its industries as broadly as possible.
(4) Any decision by Federal Prison Industries to produce a new product or to significantly expand the production of an existing product shall be made by the board of directors of the corporation. Before the board of directors makes a final decision, the corporation shall do the following:
(A) The corporation shall prepare a detailed written analysis of the probable impact on industry and free labor of the plans for new production or expanded production. . . .
(B) The corporation shall announce in a publication designed to most effectively provide notice to potentially affected private vendors the plans to produce any new product or to significantly expand production of an existing product. . . .
(C) The corporation shall directly advise those affected trade associations that the corporation can reasonably identify the plans for new production or expanded production, and the corporation shall invite such trade associations to submit comments on those plans.
(D) . . . . . In addition, the board of directors, before making a final decision under this paragraph on a proposal, shall, upon the request of an established trade association or other interested representatives of private industry, provide a reasonable opportunity to such trade associations or other representatives to present comments directly to the board of directors on the proposal.
(5) Federal Prison Industries shall publish in the manner specified in paragraph (4)(B) the final decision of the board with respect to the production of a new product or the significant expansion of the production of an existing product.
Examination of the floor debate reveals that Congress considers these restrictions “a system of checks and balances on the borrowing authority being advocated by Federal Prison Industries to expand its operations,” and that Congress expects these restrictions to reduce the impact of Federal Prison Industries’ operations on vendors that compete with Federal Prison Industries:
Those of us in this body who are concerned about law enforcement and about the problems we have in society, wherein we are willing to send more and more people to prison, have to take this as one of the necessary concomitants. What are these people going to do? We have tried to balance off by notices, by consultations with trade associations, by deliberate limitations and percentages on certain activities, and by enabling private entrepreneurs to join with UNICOR, to join with them as joint enterprise so that both of them can survive.
134 Cong. Rec. H7439-02, Sept. 13, 1988.
“New” products are defined for purposes of the Federal Prison Industries Reform Act based on Standard Industrial Classification (SIC) codes, rather than on discrete Federal Supply Classification (FSC) codes. FSC code data is specifically established to support federal procurement functions. 41 U.S.C. § 417(b). As noted in a 1993 study conducted for Federal Prison Industries by The Brookings Institution, use of SIC code data collected by industry, rather than by product, understates market share. Federal Prison Industries’ market share for a particular piece of systems furniture is likely greater than its market share of systems furniture in general.
Federal Prison Industries has issued regulations that define “expanded” production. It is production at a new facility not offset by a corresponding reduction at another location, or as at least a 10 percent increase in capacity at an existing facility. Whether expanded production is significant, thereby triggering the safeguards of the Federal Prison Industries Reform Act, is decided based on existing market share. If market share is less than 10 percent, a 3 percent increase is allowed; if less than 15 percent, a 2 percent increase is allowed; and if less than 25 percent, a 1 percent increase is allowed. If market share is 25 percent or greater, any increase is significant.
There was a dramatic expansion in the 1980’s in Federal Prison Industries’ production of modular systems furniture, ergonomic seating, and textile products. The Federal Prison Industries Reform Act did not reduce the competitive impact on furniture and textile manufacturers because these existing product lines were not subject to the 1988 restrictions on plans for new or expanded production.
This expansion provided few opportunities for inmate employment. Federal Prison Industries purchases kits and components for resale with a markup, and little or no inmate labor is added to the end items. See, e.g., Tennessee Apparel Corp., B-253178, Sep. 21, 1993, 94-1 CPD ¶ 104, at 2 (precut cold weather camouflage trousers); DO3 Systems, Inc., B-250438, Apr. 19, 1993, 93-1 CPD ¶ 330, at 2 (panel-to-panel systems furniture components); American Seating Co., B-229915, Apr. 26, 1988, 88-1 CPD ¶ 408, at 2 n.1 (“UNICOR . . . is a value added reseller in the government office systems market using inmate labor to work the primary furniture and components obtained under contract with regular manufacturers into finished office systems . . . .”) As an example of these limited employment opportunities, consider that Federal Prison Industries’ 1989 sales of systems furniture were $28 million, but these were supported by private sector subcontract sales to Federal Prison Industries of $21 million in systems furniture parts, $4 million in systems furniture installation services, and $1 million in systems furniture space planning services.
In 1989, Federal Prison Industries borrowed $20 million from the Treasury to finance new industrial facilities and renovate existing facilities. As of 1994, Federal Prison Industries planned to spend $23 million over a three-year period for the construction of buildings and improvements, and $16 million for purchase of machinery, equipment, and an upgraded computer system. During 1994, 13 new industrial facilities were being started. Besides these borrowings, Federal Prison Industries receives “advances on certain contracts to fund significant raw material purchases.” In fiscal year 1994, unexpended advances totalled $38 million. Federal Prison Industries 1994 Annual Report.
In 1990, Congress authorized up to $250,000 for a marketing study to help Federal Prison Industries identify alternative growth opportunities, weigh impact on the private sector, and review the need for the absolute procurement preference. This study was conducted by Deloitte & Touche, and a comprehensive report was issued in August 1991.
The study noted that Federal Prison Industries’ market share was increasing, not only because of growth, but also due to decreases in federal procurements of the products on which Federal Prison Industries relies for much of its revenue. Deloitte & Touche reported that product diversification had sharply increased overhead (costs related to product design, sales, and marketing), and that customer service and sales support had suffered because of product diversification.
Deloitte & Touche concluded that “[a]dding new product lines will increase FPI’s cost structure and impede its efforts to maintain product quality, delivery, and competitive prices,” and it noted that any requirements for specialized production equipment would result in production at no more than one or two facilities, increasing the risk that urgent delivery requirements could be jeopardized by inmate disturbances. The study recommended that Federal Prison Industries focus on its traditional labor-intensive industries instead of introducing new product lines for sale to federal agencies.
The study could not find a single new product that would provide many additional inmate employment opportunities without continuing concerns about market share and displacement of private production and employment. The study suggested that Federal Prison Industries place in creased emphasis on sales of services, and that the procurement preference be continued, and expanded to include services.
The current federal inmate population exceeds 92,000 people. Projected inmate population in calendar year 2000 is 117,000 people. Federal Prison Industries estimates that it will need to add some 4,800 inmate jobs and 21 factories to its existing base of 16,000 inmate jobs and 100 factories, and even this will not keep pace. Federal Prison Industries’ inmate employment levels have fallen from 25 percent of the inmate population in 1991 to 19 percent of the inmate population in 1994.
Federal Prison Industries is moving strongly into the federal services market. Services sales for fiscal year 1995 include some $8.1 million in Defense Department equipment repair services, $6.3 million in print and binding services, $5.5 million in mail bag repair services, $4.1 million in kit and equipment assembly services, $2.1 million in Defense Department vehicle repairs, $2.1 million in Defense Department laundry services, $1.9 million in furniture repair services, $1.2 million in data conversion, optical scanning and digitizing services, $409,000 in mail and distribution services, and $305,000 in computer repair services.
Federal Prison Industries insists on its absolute preference for federal acquisitions of the goods that Federal Prison Industries elects to offer: “The Board feels very strongly that FPI cannot exist without its mandatory source authority.” Federal Prison Industries 1994 Annual Report.
It comes as no surprise that Federal Prison Industries touts its absolute preference as “streamlining the procurement process,” i.e., “Federal agencies can purchase goods and services directly from FPI without any of the cumbersome or bureaucratic procedures associated with the Federal Procurement process, often saving both money and time.” Federal Prison Industries has established a single order processing and status inquiry center, and is setting up an electronic catalog and ordering system. Although Federal Prison Industries acknowledges that “[l]ate deliveries have tarnished FPI’s reputation with its customers,” Federal Prison Industries has now begun guaranteed 30-day deliveries of ergonomic and judicial chairs, and it plans to extend the program to other commodities. Federal Prison Industries 1994 Annual Report. In 1994, Federal Prison Industries began offering a leasing program to its federal customers.
Some agencies are willing to voice complaints about Federal Prison Industries: a recent Wall Street Journal article quotes a letter from a Department of Defense program manager who asked that Federal Prison Industries reduce its market share of dorm and quarters furniture due to poor quality, late deliveries, and minimal selection of products. This program manager reported that Federal Prison Industries’ products were priced almost 40 percent higher than comparable private-sector products.
Federal Prison Industries follows established “Public Involvement Procedures” when it proposes new or expanded production. To obtain market information, it first contacts parties that it knows to have an interest in these plans. Next, it completes a market study which analyses impact on private sector production. Then it announces in the Commerce Business Daily its plans and the availability of the market impact study.
Written comments are due within 45 days from the date of the Commerce Business Daily announcement. Staff responds to the comments and prepares a recommendation for the board of directors. The staff report is required to “address all comments which are timely and relevant.” Copies of the comments, staff responses, and the recommendation are furnished to all parties that have filed timely responses to the Commerce Business Daily notice. These materials are required to be furnished no less than 45 days before the date of the board meeting at which the proposal for new or expanded production will be considered.
Final submissions from private parties and requests to appear before the board to make a public statement must be submitted to Federal Prison Industries’ chief operating officer at least 15 days before the board meeting. Oral presentations are limited to 30 minutes, and while the meetings are open to the public, there are provisions to close the meeting when confidential commercial information is revealed.
The board’s decision is to be made on the market study, the staff recommendation, comments and staff responses, and oral arguments presented at the meeting. Board decisions are to be made by majority vote. In deciding whether to undertake new or expanded production, the board must decide a reasonable market share, and in doing so, must consider these factors: size of the federal and non-federal market, projected market growth, ability of the market to sustain both Federal Prison Industries and private contractors, and the number of private contractors currently meeting federal requirements. The decision, with a statement of the reasons supporting the decision, is to be published in the Commerce Business Daily within 10 days.
As of 1991, a total of 13 proposals to under take new or expanded production had been presented to the board. Decisions had been made on 11 proposals, and of these, only 2 were rejected (one for combat boots and another for oxford and safety shoes). None of the new product introductions resulted in significant additional inmate employment, and only 2 resulted in deliveries of new products. Several decisions compelled significant investments in production equipment.
Federal Prison Industries is an instrumentality of the United States. Sprouse v. Federal Prison Industries, Inc., 480 F.2d 1, 3 (5th Cir. 1973). As such, board decisions to undertake new or expanded production are subject to the Administrative Procedures Act, 5 U.S.C. §§ 701 et seq. Thompson v. Federal Prison Industries, 492 F.2d 1082, 1084 n.5 (5th Cir. 1974); Prows v. Department of Justice, 704 F. Supp. 272 (D.D.C. 1988) (issuance of “program statement” setting up inmate financial responsibility program held subject to the administrative rule-making procedures of the Administrative Procedures Act, 5 U.S.C. § 553(d)). The Administrative Procedures Act demands certain procedural niceties, i.e., notice must be given to interested parties, 5 U.S.C. § 553(b), interested parties must be allowed to participate through submission of written and/or oral presentations, and decisions must be supported by a concise general statement of the basis and purpose for the decision, 5 U.S.C. § 553(c).
Besides procedural requirements, the Administrative Procedures Act sets out a standard of review for agency action. Thus 5 U.S.C. §§ 706(2)(A), (C) provides, in pertinent part, that a reviewing court may hold unlawful and set aside agency action found “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law,” or “in excess of statutory jurisdiction, authority, or limitations.”
The “concise general statement” and other procedural requirements are preconditions to the review standards imposed under the Administrative Procedures Act. Thus even if the adequacy of an explanation is to be judged under the arbitrary or capricious standard, an explanation must be provided that shows that the major issues were considered, and that agency expertise was applied in resolving them. HLI Lordship Industries, Inc. v. Committee for Purchase from the Blind and Severely Handicapped, 791 F.2d 1136, 1140 (4th Cir. 1986).
Administrative Procedures Act review may only be obtained in a federal district court, and its scope is limited. The remedy sought is an essential part of the court’s jurisdiction. The cause of action must invoke the court’s authority to grant a declaratory judgment, or to impose equitable and extraordinary relief by way of mandamus or injunction. New Mexico v. Regan, 745 F.2d 1318, 1321-23 (10th Cir. 1984), cert. denied sub nom. New Mexico v. Baker, 471 U.S. 1065 (1985); when the principal purpose of the action is to obtain money damages, there is no jurisdiction in the district court. Portsmouth Redevelopment & Housing Authority v. Pierce, 706 F.2d 471, 474-75 (4th Cir.), cert. denied, 464 U.S. 960 (1983); Owens v. Department of Justice, 527 F. Supp. 373, 375 (N.D. Ind. 1981).
Agency action must concern a violation of private interests protected or regulated by statute. Western Shoshone Business Council v. Babbitt, 1 F.3d 1052, 1055-56 (10th Cir. 1993). There need be no indication of congressional purpose to benefit private interests, and a right of review is deemed to be granted if private interests are not inconsistent with the implicit purposes of the statute. CC Distributors, Inc. v. United States, 883 F.2d 146, 152-53 (D.C. Cir. 1989) (DoD Appropriations Act restrictions). Also proper for review are agency actions that transgress regulations imposing mandatory requirements for agency decisions. Doe v. Schachter, 804 F. Supp. 53, 62-64 (N.D. Cal. 1992) (DoD Security Clearance Directive 5220.6). Agency decisions subject to review under the Administrative Procedures Act must be supported with a contemporaneous explanation of the reasons for the decision. Saratoga Development Corp. v. United States, 21 F.3d 445, 456 (D.C. Cir. 1994) (in this case, a final staff analysis pre pared for the Pennsylvania Avenue Development Corporation’s board of directors was held to be a sufficient explanation).
Administrative Procedures Act review focuses on violation(s) of applicable statutes and regulations and compliance with procedural requirements. It demands that agency decisions be neither arbitrary nor irrational. Newport News Shipbuilding and Dry Dock Co. v. General Dynamics Corp., 960 F.2d 386, 392 (4th Cir. 1992). Agencies must present a coherent and reasonable, contemporaneous explanation of their decisions, and proof that the decision lacks a reasonable basis establishes arbitrary and capricious action. Latecoere International v. Department of the Navy, 19 F.3d 1342, 1356 (11th Cir. 1994). Agency decisions are deemed arbitrary and capricious if the agency has relied on factors that statute or regulation does not intend to be considered, if the agency has entirely failed to consider important aspects of the problem, if the agency offers an explanation for its decision that runs counter to the record, or if the agency’s explanation is so implausible that it cannot be ascribed to a difference in view or the product of agency expertise. Harvard Interiors Manufacturing Co. v. United States, 798 F. Supp. 565, 569 (E.D. Mo. 1992), citing Motor Vehicles Manufacturers Assoc. v. State Farm Mutual, 463 U.S. 29, 43 (1983).
Thus for decisions to undertake new or expanded production, the Federal Prison Industries Reform Act requires that the contemporaneous record before the board show that the decision will not force a single private concern to bear an undue burden, that new or expanded production can be conducted on an economic basis, that new or expanded production will require labor-intensive operations, that the decision will not result in capturing more than a reasonable share of the market for any specific product, that new or expanded production is sufficiently diverse from other products of Federal Prison Industries, and that new or expanded production will not curtail production at existing arsenals or navy yards. Federal Prison Industries’ Public Involvement Procedures require that the board decide a reasonable market share for new or expanded production, and that any decision to undertake new or expanded production balance the interests of Federal Prison Industries with those of private producers.
Decisions to undertake new or expanded production must be made on the record before the board, and this is to consist of a detailed written analysis of the probable impact of the decision, staff recommendations, public comments and staff responses, and oral arguments presented to the board. Such decisions must be preceded by public notice and an opportunity to comment, including the opportunity to present comments directly to the board. Decisions to undertake new or expanded production are to be made only by majority vote of the board. Decisions are to be published with a contemporaneous statement of supporting reasons.
McGregor Printing Corp. v. Kemp, 20 F.3d 1188 (D.C. Cir. 1994), a case that concerns a decision to add tabulating machine paper to the list of commodities that agencies must purchase from nonprofit entities employing blind or other severely disabled persons, offers a paradigm for challenges to like decisions by Federal Prison Industries. Under the Javits-Wagner-O’Day Act, 41 U.S.C. § 47(a)(1), nonprofit entities employing blind or other severely disabled persons enjoy yet another absolute preference for federal acquisitions, and this preference includes both goods and services.
This preference is administered by the Committee for Purchase from People who are Blind and Severely Disabled, 41 U.S.C. § 46. The Committee is responsible for establishing and maintaining a Procurement List of goods and services that the Committee has decided are suitable for purchase. FAR 8.703.
Regulations issued by the Committee set out factors to be considered when adding a product or service to the Procurement List. Specifically, there must be a potential for the proposed addition to generate employment for blind or disabled persons, the nonprofit entity must show that it can meet quality standards and delivery schedules, and the Committee must find the absence of a “severe economic impact” on current contractors for the specific goods or services, considering whether the current contractors have been continuous suppliers and are therefore more dependent on the revenues from such sales. 41 C.F.R. § 51-2.4(a). The Committee must establish a fair market price for the goods and services on the Procurement List. 41 C.F.R. § 51-2.7.
McGregor Printing responded to a public notice that the Committee was proposing to add tabulating machine paper to the Procurement List. In its response, McGregor Printing pointed out that its sales of tabulating machine paper enabled economies of scale on other paper products sold to federal agencies, that prices for these other paper products would necessarily be increased, and that the industry generally was suffering from over-capacity. McGregor Printing detailed the high capital costs necessary to enter the forms business, and it questioned the ability to employ many blind or disabled people, given the need for quick and precise work, and dangerous production equipment. McGregor Printing, 20 F.3d at 1192-93.
The Committee adopted a staff analysis recommending the addition of tabulating machine paper. The staff analysis concluded that nonprofit entities employing blind or disabled people could produce conforming goods according to agency delivery schedules, but it offered no detailed analysis of the concerns voiced by McGregor Printing.
On appellate review under the Administrative Procedures Act, the Committee’s decision with its supporting staff analysis was declared unlawful and vacated. Id., at 1196. The McGregor Printing court found no support for the conclusory findings in the staff analysis, and it rejected reliance on general experience with production by blind or disabled people in the face of “serious questions raised by an experienced manufacturer.” Id., at 1195. As to the Committee’s unsupported conclusion that nonprofit entities could deliver tabulating machine paper at a fair market price, the McGregor Printing court announced that “[t]his gives everything but the why.” Id., at 1196.
Federal Prison Industries’ lack of success with product diversification, coupled with an increasing market share that results from decreasing federal procurements, rather than from any sort of competitive success, suggests that there are few proposals for new or expanded production that can pass muster under the Federal Prison Industries Reform Act. This is confirmed in the Deloitte & Touche study.
Global economic competition has already resulted in the export to offshore facilities of much of the very sort of labor-intensive production that might be suitable for prison labor. Decreasing federal procurements, particularly defense procurements, have resulted in substantial over-capacity, a point considered in Newport News, 960 F.2d, at 387-88 (budgetary cutbacks in the Seawolf nuclear submarine construction program). Onshore production requirements that remain result from the vagaries of the Trade Agreements Act of 1979, 19 U.S.C. § 2518(4)(B), and these compel either substantial investments in tooling or production equipment, HQ 556924, Jan. 12, 1993 (1993 WL 103614 (Customs) (mounting imported electronic components and integrated circuits on imported printed circuit boards using programmed automatic insertion and chip place ment machines, where chips’ and components’ leads are cut and clinched, results in substantial transformation into a domestic product), else the use of highly-skilled assembly labor, HQ 734-966, Oct. 18, 1993, 1993 WL 528698 (Customs) (domestic assembly of foreign-made video display terminal components coupled with highly skilled electrical and electronic testing adjustment and alignment procedures held to constitute substantial transformation).
Global trade and reduced threats to national security have already substantially reduced labor-intensive federal procurement opportunities. Those that remain should not be diverted to prison industry, an enterprise with little purpose other than as an inmate management tool. Deloitte & Touche has said that Federal Prison Industries should focus on its traditional labor-intensive industries. One such industry that comes immediately to mind is producing very small rocks from very large rocks.
— Peter Kilcullen
Copyright © 1996 Kilcullen, Wilson & Kilcullen. All rights reserved.