     OPFKE   OF THE ATTORNEY   GENERAL.   STATE OF TEX.kI

    JOHN      CORNYN




                                                  December    15.2000



Mr. Jim Muse                                                 Opinion No. JC-03 16
Executive Director
General Services Commission                                  Re: Whether “reverse auctions” constitute a
1711 San Jacinto Street                                      permissible method of competitive bidding by
Austin, Texas 7871 l-3047                                    state agencies (RQ-0257-JC)


Dear Mr. Muse:

         You have asked this office whether the General Services Commission (“GSC”), in a pilot
procurement program using electronic commerce technology instituted pursuant to chapter 2177 of
the Government Code, may conduct competitive bidding by means of a procedure called a “reverse
auction.” We conclude that, because the so-called “reverse auction” is as you put it “an electronic
process in which pricing is shared among the participants, “’ it does not constitute a sealed bid
method and is not permissible under current Texas law. Specific statutory authorization would be
required before GSC could participate in such a process.

        As you explain the basis ofyour question, “GSC has recently been given authority to conduct
a pilot procurement program, using electronic commerce technology.            One of the optional
components that electronic purchasing systems offer is a process known as ‘reverse auctions.“’
Request Letter, supra note 1, at 2.

         As you point out, “reverse auctions” are not defined in Texas law. Indeed, our research has
revealed no case law in the United States regarding them, nor have we been referred to any.
Nevertheless, as we understand it, the reverse auction procedure is fairly simple. Vendors are pre-
qualified to participate in the event, and then “are awarded a contract, in which [they] agree to the
reverse auctioning process and procedures.” See id. After the vendors are trained in using an on-line
bid system, the auction is held on a secured web site to which only the vendors, GSC, and the
company staging the event have access. See id. at 3. Vendors bid against each other, sending the
price for the goods or services down rather than up (hence the phrase “reverse auction”) until a set
time. At the expiration of the auction, “[tlhe offeror of the last bid (lowest) amount would be
eligible to receive an award or purchase order, if otherwise determined to be responsible and in
compliance with specifications.” Id.




        lLetter from Jim Muse, Executive Director, General Services Commission,to Honorable JohnComyn, Texas
Attorney General at 3 (July 10, 2000) (on tile with Opinion Committee) [hereinafterRequest Letter].
Mr. Jim Muse - Page 2                              (X-0316)




         Your concern is that the auction process requires the sharing of pricing information among
the competing vendors. Any vendor’s behavior in the auction depends upon its possession of some
information concerning its competitor’s bids. As we understand it, at a minimum a vendor must
know that one of its competitors has offered a lower bid before it will bid again. Such an auction
is markedly different, then, from the sealed bid method which generally characterizes competitive
bidding.

         As you note, the statute authorizing GSC to conduct the pilot procurement program states
that “[tlhe requirements of this section      are in addition to the requirements of other law relating
to the solicitation ofbids, proposals, or expressions of interest for a procurement by the commission
or another state agency.      This section         [does] not affect any other law that requires the
commission       or another state agency to award a procurement through competitive bidding,
competitive sealed proposals, or another method.” TEX. GOV’TCODEANN.             5 2177.002(h) (Vernon
2000). Moreover, GSC is directed, with regard to a variety of electronic methods of submitting bids
which cannot be “sealed” in a physical sense, to “adopt rules to ensure the identification, security,
and confidentiality” of such bids. Id. 5 2156.005(b).

         A brief submitted on behalf of a commercial enterprise which organizes “reverse auctions”
argues that because each bidder in the auction is awarded a contract in which it agrees to be bound
by the results of the auction, “[tlhe contracts are actually awarded at the end of the first of the two
steps using a multiple contract award model. The second step-the reverse auction-merely          allows
the contract holders to lower their price after they have a signed contract in hand to get orders under
the contract.“2 Accordingly, the brief argues that the auction may be regarded as a “multiple award
contract procedure,” a method ofprocurement permitted under section 2 155.062 ofthe Government
Code.

         As the briefnotes, the term “multiple award contract” is not defined in the Government Code.
Nor has our research disclosed any definition for the term in Texas case law. The General Services
Commission, by rule, defines the multiple award contract procedure as “[a] purchasing procedure
by which the commission establishes one or more levels of quality and performance and makes more
than one award at each level.” 1 TEX. ADMIN. CODE 5 113.2(24) (2000) (emphasis added).
Particularly in light of that rule, the construction the brief offers appears a strained one. The ultimate
contract for goods or services would not, after all, be awarded to every participant in the auction, but
solely to the lowest bidder, assuming such bidder would have met all other necessary qualifications.

         The brief farther argues that the “reverse auction” procedure ensures the identification,
security, and confidentiality of electronic bids. In particular, it asserts that “[clonfidentiality is
maintained as to the source of each online bid-the real time system does not identify bidders to their
competitors, only the amount of the lowering prices.” Akin, Gump Brief, supra note 2, at 6.



        ‘Brief from NanetteK. Baird, Akin, Gump, Strauss,Hauer & Feld, L.L.P., Attorneys at Law, to Honorable
JohnComyn, Texas Attorney Generalat2-3 (Aug. 23,200O) (on tile with Opinion Committee) [hereinafterAkin, Gump
BIiefJ.
Mr. Jim Muse     - Page 3                         (JC-0316)




However, this argument fails to note that the statutory language does not require GSC to ensure the
confidentiality of the bidder, but the confidentiality of the bid. See 'RX. G&T CODE ANN. 5
2156.005(b) (Vernon 2000). To the extent that participants have information of any sort regarding
other bids, those bids cannot be said to be confidential; and absent some amount of such knowledge,
as we have noted before, the auction cannot proceed.

         In our view, the situation presented by this request is analogous to that presented by Attorney
General Opinion MW-440. In that case, one of your predecessors asked this office whether GSC
might “employ the competitive sealed proposal method as an alternative to competitive sealed
bidding.” Tex. Att’y Gen. Op. No. MW-440 (1982 ) at 1. We replied in the negative, finding that
this proposal “closely resemble[d] the suggested statutory provisions” of the Model Procurement
Code, and noting that “[t]he suggested code has not been adopted by the Texas Legislature               .”
Id. at 3. We relied upon the case of Niles v. Harris County Fresh Water Supply Dist. No. IA, 336
S.W.2d 637 (Tex. Civ. App.-Waco 1960, writ ref d), which held that “compliance with [the
competitive bidding statute] is mandatory.” Niles, 336 S.W.2d. at 638; Tex. Att’y Gen. Op. No.
MW-440 (1982) at 3-4. The Texas Legislature, persuaded of the value of the competitive sealed
proposal method, thereafter specifically amended the state’s procurement laws to allow for it. See
TEX. GOV’T CODE ANN. 5s 2156.121-.127 (Vernon 2000) (chapter 2156, subchapter C).


        Competitive    bidding statues are, as we have noted, mandatory. See Niles, 336 S. W.2d at 638;
accord Richmond Printing v. Port of Houston Auth., 996 S.W.2d 220, 224 (Tex. App.-Houston
[14th Dist.] 1999, no pet.). Moreover, “[wlhen a governmental entity enters into a contract that
violates or fails to conform with the Constitution or a statute of the state, the governmental entity
is not liable in contract.” Richmond Printing, 996 S.W.2d at 224. Therefore, ifwe are correct that
the so-called “reverse auction” procedure does not fall within the definition of competitive bidding,
a contract resulting from such a procedure would be invalid. See id. Consequently, should you
decide that engaging in such a purchasing method would be advantageous for the State of Texas, we
believe GSC should seek specific statutory authority to do so from the Texas Legislature.
Mr. Jim Muse - Page 4                         (~~-0316)




                                      SUMMARY

                        So-called “reverse auctions” do not constitute competitive
               bidding for the purposes of chapters 2155, 2156, and 2157 of the
               Government Code. The General Services Commission may not
               purchase goods and services through “reverse auctions” without
               specific statutory authority to do so.




                                            Attorney General of Texas


ANDY TAYLOR
First Assistant Attorney General

CLARK KENT ERVIN
Deputy Attorney General - General Counsel

SUSAN D. GUSKY
Chair, Opinion Committee

James E. Tourtelott
Assistant Attorney General - Opinion Committee
