Unpublished Disposition, 937 F.2d 613 (9th Cir. 1991)

MEMORANDUM^* 

Kitsap Newspaper Group and the Army appeal a preliminary injunction of performance under their contract for a civilian enterprise newspaper (CEN) at Fort Lewis, Washington. The plaintiffs, former publishers of the CEN, obtained the injunction in their action alleging that the Army-Kitsap contract was unlawful because the Army conducted the solicitation for it under the wrong regulation. The district court found that the plaintiffs were reasonably likely to succeed on the merits of their claim and that the balance of hardships tipped sharply in their favor.

We hold that the court erred in its preliminary assessment of the merits, for plaintiffs' case appears very weak. We also hold that the court did not properly balance the hardships because it treated Kitsap as though it were not a proper party. For these reasons, we now vacate the injunction and remand.

BACKGROUND

Tom Swarner and Ranger Publishing Company, Inc. (collectively, Ranger) publish a weekly newspaper entitled The Ranger. For almost 40 years, The Ranger served as the Fort Lewis CEN. Because it provides a communications link between a military command and its troops, a CEN receives preferential rights of distribution and access to military news and information. Ranger lost this preferred status in the fall of 1989 when the Army selected a new CEN through a competitive bidding process.¹ 

Litigation ensued immediately. On October 25, 1989, the district court entered a minute order invalidating the Army's award of the CEN contract to Robinson Publishing Corporation. This left Fort Lewis without a CEN. The Army responded rapidly, issuing a new solicitation of CEN bids on November 7. Ranger again bid unsuccessfully. The five-member selection committee unanimously selected defendant Kitsap Newspaper Group.

The timing of the new solicitation raised the question of which regulation to follow in awarding the new CEN contract: the 1986 version of Army Regulation (AR) 360-81 that was then in effect or the new version that would take effect on November 20. The Army chose to follow the 1986 version.

In August 1990, Ranger brought this action for injunctive relief against several Army defendants and Kitsap. It argued that the new contract was unlawful because it had been awarded under the wrong set of regulations. After a brief hearing at which Kitsap made no appearance, the district court entered a temporary restraining order enjoining performance under the new contract. It also calendared a preliminary injunction hearing.

Kitsap entered its appearance on the day after the TRO hearing. Although it appeared at the preliminary injunction hearing, the court made it plain that Kitsap did not belong in the case. It entered a preliminary injunction restraining "the federal defendants" from performing under their CEN contract with Kitsap.

Kitsap immediately filed this appeal and an emergency motion to stay the injunction pending appeal. A motions panel of this court granted the stay, finding that Kitsap had demonstrated a likelihood of success on the merits of its appeal and that the balance of hardships favored a stay.

The Army later filed its timely appeal. The district court then halted further proceedings on the merits by striking Ranger's motion for summary judgment and the trial scheduled for January 1991.

STANDARD OF REVIEW

We review issuance of a preliminary injunction for abuse of discretion. Doran v. Salem Inn, Inc., 422 U.S. 922, 931-32 (1975). We must reverse if the district court failed to apply the proper legal standard, abused its discretion in applying that standard, misapprehended the law in its preliminary assessment of the merits or relied upon findings of fact that were clearly erroneous. Caribbean Marine Servs. Co. v. Baldridge, 844 F.2d 668, 673 (9th Cir. 1988). A district court also commits reversible error by failing to identify, evaluate and weigh the specific countervailing injuries that the injunction may cause the defendants. Id. at 676-77.

DISCUSSION

The applicant for a preliminary injunction must show either (1) that its probable success on the merits coincides with the possibility of its irreparable injury or (2) that it raises serious questions on the merits and the balance of hardships tips sharply in its favor. Los Angeles Memorial Coliseum Comm'n v. National Football League, 634 F.2d 1197, 1201 (9th Cir. 1980). Each of these alternative tests requires at least "a minimal showing on the merits." Id. at 1203. This showing need not be as strong to satisfy the second test as it must be to satisfy the first. Caribbean Marine, 844 F.2d at 674.

An applicant for preliminary injunctive relief raises a serious question on the merits if its claim poses a substantial, difficult and doubtful question that constitutes a fair ground for litigation. Gilder v. PGA Tour, Inc., No. 89-16725, slip op. 7265, 7276 (9th Cir. June 12, 1991). Id. At an irreducible minimum, the applicant must show a fair chance of success on the merits. National Wildlife Fed'n v. Coston, 773 F.2d 1513, 1517 (9th Cir. 1985). It need not establish a probability of success. Gilder, slip op. at 7276.

Ranger contends that beginning November 20, 1989, the Army was required to complete its CEN solicitation under the 1989 version of AR 360-81. We consider whether this claim raises a serious question on the merits.

Ranger begins with a plain-meaning argument: the new regulation states that it is " [e]ffective 20 November 1989" and that it "supersedes" the 1986 one. Ranger says this unambiguously obliged the Army to switch regulatory regimes while the solicitation was underway.

We reject this construction of the new regulation. " [A]dministrative rules will not be construed to have retroactive effect unless their language requires this result." Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 208 (1988). Applying the new regulation to an ongoing procurement would have given it a measure of retroactive effect. As the regulation is silent concerning transition cases, it should not be construed to require retroactive application.

Ranger next says it is "settled law that a process begun under an administrative regulation must be conducted in conformity with changes made to the regulation that occur before the end of the process." Neither of the cases it cites supports such a broad proposition.

In Thorpe v. Housing Auth., 393 U.S. 268 (1969), the Court simply applied the "general rule ... that an appellate court must apply the law in effect at the time it renders its decision." Id. at 281. The Court acknowledged, but did not explore, the existence of exceptions to this rule. Id. at 282. The case settles nothing about how to implement a regulatory change occurring midway through a competitive procurement process.

Neither does Ranger's other case, Chilcott v. Orr, 747 F.2d 29 (1st Cir. 1984). The regulatory change in Chilcott occurred well before the commencement of the discharge procedure it affected.

A true case of administrative change during an ongoing process is NLRB v. Chicago Marine Containers, Inc., 745 F.2d 493 (7th Cir. 1984). The Seventh Circuit thought it "appropriate to allow the agency to decide in the first instance whether to give the [intervening policy] change retroactive effect." Id. Although not bound by the agency's determination of retroactivity, id. at 499, the court deferred to its determination that the new rule should apply retroactively, finding "no reason to apply it prospectively only." Id. at 500.

Here, the Army determined that the new regulation should not be given retroactive effect. Given the timing of the solicitation, which was determined by events beyond the Army's control, it had only two choices: either conduct the entire procurement under the old regulation or begin using the new regulation midway through the process.

The Army's election of the first option appears eminently reasonable. It was embarking on a competitive procurement process that might attract many bidders. An interim change might have caused confusion and exposed it to charges of unfairness by bidders who prepared their submissions in reliance upon the old regulation. Cf. Lear Siegler, Inc. v. Lehman, 842 F.2d 1102, 1112-13 (9th Cir. 1988) (disappointed bidder challenged contract award by claiming that Navy changed the rules after opening the bids), withdrawn in other part upon reh'g en banc, 893 F.2d 205 (9th Cir. 1989) (per curiam). Fort Lewis personnel were advised by the proponent of the new regulation to use the old one, because this would be consistent with previous practices. We do not think that Ranger has even a fair chance of prevailing on its effective-date argument if this case is heard on the merits.

B. Must Ranger Show Prejudice?

The inapplicability of the 1989 regulation does not eliminate each of Ranger's arguments on the merits. Ranger argues that the Army violated its own regulation by negotiating with two bidders. The language relevant to this argument is substantially similar in the old and new regulations.

The Army argues that to succeed on the merits, Ranger will have to show that a regulatory violation caused it prejudice. See, e.g., Smith & Wesson v. United States, 782 F.2d 1074, 1078 (1st Cir. 1986) (bidder must show either that Army's procurement decision had no rational basis or that it involved a clear and prejudicial violation of statutes or regulations). Ranger disagrees with the Army's view of its burden, arguing that the CEN procurement process is unique and that the usual federal acquisition regulations do not control.

Ranger's latter proposition is correct. The general federal procurement statute specifically excludes the Army. See 41 U.S.C. § 252(a) (1) (1988). Procurement provisions that do apply to the Army, such as the Armed Services Procurement Act and the Federal Acquisition Regulations, extend only to procurements accomplished with appropriated funds. See 10 U.S.C. § 2303 (1988); 48 C.F.R. Sec. 2.101 (1990) (definition of acquisition); see also City and County of San Francisco v. United States, 615 F.2d 498, 504-04 (9th Cir. 1980) (private company's lease of naval shipyard was not covered by Armed Services Procurement Regulations where it did not obligate appropriated funds). No appropriated funds may be expended to publish a CEN. 32 C.F.R. Part 297, App. B, p A. (1990).

Ranger would have us treat the inapplicability of these procurement provisions as a springboard over any necessity to show prejudice. It argues that " [a] bidder has a right to expect that the Army will follow the stated procedures ... [because t]here is nothing else to control the process if AR 360-81 is not enforced except the Army's unfettered discretion."

This logic is rebutted by Ranger's own complaint. The complaint asserts, we think correctly, that federal jurisdiction is proper under the APA provision for judicial review, 5 U.S.C. § 702 (1988). Judicial review under the APA is sufficiently searching to check the Army's discretion. See id. Sec. 706 (a reviewing court must set aside agency action it finds arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law).

The APA requires reviewing courts to take "due account ... of the rule of prejudicial error." Id. Sec. 706. Under this rule, we reverse an agency's action for procedural errors only when these are substantial and cause prejudice. Kolek v. Engen, 869 F.2d 1281, 1286 (9th Cir. 1989).

C. Does Ranger Have a Fair Chance of Success on the Merits?

Having made a preliminary assessment of Ranger's case on the merits, we conclude that Ranger will have great difficulty in proving that the Army violated its regulation by negotiating with two bidders. This claim depends on an interpretation of AR 360-81 that is unlikely to be sustained.

Both the old and new regulations permit the Army to negotiate to obtain "the best possible service and product" when only one bidder responds. See AR 360-81, p 3-27d(8) (1986); AR 360-81, p 2-27d(12) (1989). Neither regulation expressly prohibits negotiations in other cases. The record shows that the Army has interpreted its regulations as permitting negotiations in multiple-bidder situations and has conducted itself accordingly.²  The language of the old and new regulations, the usual deference to an agency's interpretations of its own regulations and the de novo standard of review for questions of law all make it unlikely that a court would accept Ranger's reading.³ 

Consistent with its premise that the 1989 regulation applies, the preliminary injunction order identifies three violations⁴  of the new regulation: (1) the appointment of the selection committee; (2) the use of the contract form from the 1986 regulation; and (3) the evaluation of bids under the 1986 regulation's procedures. Even were Ranger to prevail on its argument that the new regulation should apply, we do not think it has a fair chance of showing any prejudice from these violations.

The first violation involves the composition of the selection committee. A base legal officer and a contracting officer were appointed as voting members. Under the 1989 regulation, such officials are to serve as nonvoting advisors. AR 360-81, p 2-27d(4) (1989).

At best for Ranger, the first violation could have affected only two of the committee's five votes. The new regulation requires a five-member committee, id. p 2-27d(3), and all five members voted for Kitsap. Replacing the legal and contracting officers with voting members who favored Ranger would not have changed the committee's choice.

The second violation stemmed from using the sample contract form appended to the old regulation rather than the new regulation's sample. Swarner's own declaration shows the absence of prejudice. He said he understood "that any contract entered would be amended to conform to changes made in Army regulations. Since AR 360-81 was about to be changed, effective November 20, 1989, I understood that I would be bound by those changes." The record also shows that the Army attempted to provide bidders with a sample contract incorporating the changes and gave them the opportunity to call other needed changes to its attention.

The premise of the third violation is that the 1989 regulation's seven specific criteria for reviewing bids were not used.⁵  See AR 360-81, p 2-27d(11) (1989). The record shows that the Army's practice has been to evaluate bids using internally-devised source selection plans. The plan used here listed criteria substantially similar to those in the new regulation.⁶  Ranger may disagree with the committee's evaluation of these criteria, but it makes no serious argument that the committee did not fulfill its charter of weighing "the relative advantages of each service offered by each bidder." See AR 360-81, p 2-27d(11) (h) (1990). Without such an argument, Ranger stands little chance of showing prejudice.

We hold that Ranger has failed to show a sufficient chance of success on the merits to meet the irreducible minimum requirement for a preliminary injunction.

Two errors in the district court's balancing of the hardships constitute independent grounds for reversal.

First, in balancing the hardships as the second alternative test for an injunction requires, the district court must specifically identify the harms that a preliminary injunction might cause the defendants and weigh these harms against the plaintiff's threatened injury. Caribbean Marine, 844 F.2d at 676. The court here did neither. Its order recites that the balance of hardships tips sharply in Ranger's favor but it fails to discuss the hardships of any party. This conclusory treatment constitutes reversible error. Id. at 676-77.

Second, Kitsap argues that the preliminary injunction should be vacated because the district court erroneously refused to treat it as a proper party. Citing Lomayaktewa v. Hathaway, 520 F.2d 1324 (9th Cir. 1975), cert. denied sub nom. Susenkewa v. Kleppe, 425 U.S. 903 (1976), our motions panel agreed that this premise of the district court was erroneous. We reaffirm the panel's ruling. "No procedural principle is more deeply imbedded in the common law than that, in an action to set aside a lease or a contract, all parties who may be affected by the determination of the action are indispensable." Lomayaktewa, 520 F.2d at 1325. The district court erred by not treating Kitsap as a proper party.

This erroneous premise permeated the court's analysis, prompting it to disregard any hardship to Kitsap. It could not properly balance the hardships without considering those of Kitsap. Ranger tries to camouflage this error by arguing, based upon the temporary restraining order, that the district court properly balanced the harms, including those of Kitsap.

Ignoring the question whether a proper balancing at the TRO stage would obviate the need for a proper balancing at the preliminary injunction stage, we find no support for Ranger's argument. Kitsap neither appeared at any hearing nor filed anything with the district court before entry of the TRO. Ranger's theory is flatly contradicted by the court's statement, during the preliminary injunction hearing, that it was not considering Kitsap's hardships.

Because Ranger's case appears so weak on the merits, we feel no responsibility to offer further guidance about the proper balance. Even if we agreed that a proper balance of the hardships would favor Ranger, an injunction could not issue because Ranger has failed to make a minimal showing on the merits.

CONCLUSION

Ranger has failed to raise any serious question on the merits. The district court erred by concluding otherwise. The court also erred in its balancing of the hardships. It neither articulated its analysis nor considered the hardships of an indispensable party to the action.

Because Ranger does not qualify for preliminary injunctive relief, we must vacate the injunction. This closes the question of preliminary injunctive relief but leaves Ranger free to pursue a judgment on the merits. We remand so that it may do so.

Preliminary injunction VACATED; case REMANDED.