631 F2d 953 Old Dominion Dairy Products Inc v. Secretary of Defense

631 F.2d 953

203 U.S.App.D.C. 371, 27 Cont.Cas.Fed. (CCH) 80,584

SECRETARY OF DEFENSE et al., Appellees.

No. 79-1821.

United States Court of Appeals,
District of Columbia Circuit.

Argued June 5, 1980.
Decided July 29, 1980.
As Amended Oct. 30, 1980.

Appeal from the Judgment of the United States District Court for the District of Columbia (D.C. Civil Action No. 79-0981).

Charles D. Ablard, Washington, D. C., forappellant.

William J. Bowman, Asst. U. S. Atty., Washington, D.C., at the time the brief was filed with whom John A. Terry, Michael W. Farrell, Asst. U. S. Attys., Carl S. Rauh, U. S. Atty., Washington, D. C., were on brief, for appellees.

Before TAMM, ROBINSON and EDWARDS, Circuit Judges.

Opinion for the court filed by Circuit Judge EDWARDS.

EDWARDS, Circuit Judge:

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This case raises significant questions concerning the manner in which a Government agency (in this case the Department of Defense) may deal with prospective Government contractors. In 1979, appellant, Old Dominion Dairy Products, Inc. (ODDPI), was denied a substantial Government contract, for which it was low bidder, pursuant to a determination by the Government agency's contracting officer that Old Dominion "lacked integrity." At approximately the same time when appellant's bid was being rejected on the first contract, ODDPI bid for a second Government contract and was once again the low bidder. However, based on the earlier determination that Old Dominion "lacked integrity," the contracting officer assigned to handle the second contract concluded that ODDPI had "knowingly and substantially overbilled the Government" in past dealings with the agency. As a consequence of this finding, the ODDPI bid on the second contract was also rejected for an alleged lack of responsibility and integrity.


Since the loss of the Government contract work threatened the very existence of the business, ODDPI immediately filed this suit in District Court upon being notified of the bid rejections. Old Dominion sought declaratory and injunctive relief on the grounds that (1) the agency's contracting officers had no rational basis for determining that Old Dominion lacked integrity, and (2) the agency's contracting officers denied Old Dominion due process of law, in violation of the Fifth Amendment, in determining that ODDPI lacked integrity without giving ODDPI notice of the charges against it or any opportunity to respond to those charges. For relief, Old Dominion sought cancellation of the two contracts awarded to other contractors, new awards of those contracts to ODDPI, and a declaration that Old Dominion did not lack integrity.


Following a three-day evidentiary hearing on the merits, the Honorable Gerhard A. Gesell, District Judge, rejected Old Dominion's claims and entered judgment for the Government. Old Dominion Dairy Products, Inc. v. Brown, 471 F.Supp. 300 (D.D.C.1979). Old Dominion then brought this appeal, again claiming that the contracting officers lacked a rational basis for their decisions and that, in any event, ODDPI had been denied due process of law.


We are mindful of the fact that Government agencies require sufficient latitude to ensure the efficient functioning of agency operations, and that the imposition of stringent due process requirements on every governmental decision could have devastating effects on the conduct of Government business. Nevertheless, we hold that when the Government effectively bars a contractor from virtually all Government work due to charges that the contractor lacks honesty or integrity, due process requires that the contractor be given notice of those charges as soon as possible and some opportunity to respond to the charges before adverse action is taken. Accordingly, we reverse and remand for further proceedings consistent with this opinion.



Old Dominion Dairy Products, Inc. is a small business owned primarily by its President, Joel M. Turner, and his family (Tr. 134).1 Old Dominion manufactures and processes dairy products in various countries throughout the world. Almost one hundred percent of the ODDPI operation is directed at obtaining Government contracts to supply dairy products to United States military bases overseas (Tr. 134).


Beginning in 1970, ODDPI performed contracts on Government bases in Taiwan, Cuba, Spain, Okinawa, Korea and Puerto Rico. App. D, exhibit 1.2 The gross sales on these contracts totalled over thirty million dollars. App. D, exhibit 1. Prior to the present controversy, no serious problems had existed in the performance of any of the ODDPI contracts. Old Dominion was regularly solicited by the Government to bid on overseas milk contracts; no claim or determination had ever before been made challenging ODDPI's responsibility or integrity as a Government contractor (Tr. 135-136).

A. The Okinawa Contract


On April 8, 1974, the Government awarded ODDPI a contract (hereinafter contract 5016) to deliver milk products on the island of Okinawa (Tr. 25). The contract had an original term of one year, with provisions for annual one-year renewals for a total of four years.3 The contract was set to finally expire on June 30, 1979.4

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In October of 1978, the Pacific Air Force (PACAF) Contracting Center on Okinawa requested an audit of ODDPI's home office in Virginia Beach, Virginia.5 An audit was conducted by the Defense Contract Audit Agency (DCAA) beginning in late January 1979 (Tr. 186). In February of 1979, the contract price analyst at the PACAF Contracting Center in Okinawa, Ms. Rita L. Wells, was sent to assist with the audit of the ODDPI home office (Tr. 186).


Following the compilation of the audit data, Ms. Wells prepared a report analyzing and evaluating the information obtained. App. F, exhibit 5, item 2. The report noted three "irregularities" in the performance of contract 5016. Each one of the alleged irregularities involved what later proved to be seriously disputed interpretations of certain complex provisions in the contract between ODDPI and the Government.6 Ms. Wells concluded that the alleged "irregularities indicate an unsatisfactory record of integrity." App. F, exhibit 5, item 2, p. 1. More specifically, Ms. Wells stated in the report that these discrepancies "show a lack of business integrity. The only reason the contractor would have for the above discrepancies would be to recoup undue monies under the contract." App. F, exhibit 5, item 2, p. 4.


In light of the impending termination of contract 5016 on June 30, 1979, in November of 1978 the PACAF Contracting Center in Okinawa solicited bids for a new contract to run for three years beginning July 1, 1979 (Tr. 138). Old Dominion was one of nine contractors solicited and, in January of 1979, ODDPI submitted an initial price proposal (Tr. 141). Two other bidders responded to the solicitation (Tr. 239). Following receipt of the initial proposals, negotiations were scheduled with each contractor. Negotiations with ODDPI were scheduled for March 19-21, 1979 (Tr. 143). Final bids were due on March 26, 1979 (Tr. 153).


Senior Master Sergeant Juan B. Trevino was chosen as contracting officer for the new Okinawa milk contract (Tr. 239). In order to fulfill his duty under applicable regulations to award a contract only to a contractor whom he determined to be "responsible,"7 Sergeant Trevino requested information on ODDPI's performance under the old contract from the administrative contracting officer, Mr. Fred Artibee (Tr. 241).8 On March 21, 1979, Mr. Artibee provided Sergeant Trevino with a copy of Ms. Wells' audit report (Tr. 242). Sergeant Trevino reviewed the report and concluded that Old Dominion was not dealing honestly with the Government and was "fraudulently receiving undue profits under the current contract" (Tr. 247, 249). On that same day, a determination was made that ODDPI lacked integrity within the meaning of Defense Acquisition Regulation 1-903.1 (32 C.F.R. 1-903.1) and was thus not "responsible." See App. G, exhibit 6, item 2. Although Sergeant Trevino had a number of telephone conversations with Old Dominion executives between March 21 and March 26, he did not at any point notify Old Dominion of the charges against it or indicate that the responsibility of ODDPI was in question (Tr. 253-254).


On March 26, 1979, best and final offers were submitted by ODDPI and two other contractors. Old Dominion's final proposed price was $8,746,378 (Tr. 147). On that day, Trevino placed a written determination of nonresponsibility, with supporting documents (including the audit report), in the contract file (Tr. 243; App. F). On the following day, Trevino awarded the contract to Foremost Blue Seals, a Japanese contractor, for 2,085,167,081 yen (Tr. 147, 251; App. D, exhibit 6). At the dollar/yen ratio quoted for March 28, 1979, the contract award to Foremost was for $10,122,169, or approximately $1,375,000 higher than ODDPI's best and final offer. App. D, exhibit 11.


Upon receiving notice that it had been denied the contract, Old Dominion requested a statement of reasons for the determination of nonresponsibility, a cancellation of the award to Foremost, an award of the contract to ODDPI, and removal of the determination of nonresponsibility from the contract file. App. D, exhibit 7. Sergeant Trevino responded simply that the finding of nonresponsibility was based on the lack of a "satisfactory record of integrity." He refused to cancel the award to Foremost, and stated that "since a determination of nonresponsibility is required to be maintained in the file, removal of that determination is not possible." App. D, exhibit 8.


In so doing, Sergeant Trevino admitted that, but for the determination of nonresponsibility, Old Dominion would have otherwise received the contract. Defense Acquisition Regulation 1-904.1 (32 C.F.R. 1-904.1) provides that "when a bid or offer on which an award would otherwise be made is rejected because the prospective contractor is found to be nonresponsible, a determination of nonresponsibility shall be made, signed, and placed in the file" (emphasis supplied). More importantly, the Government has never denied that, but for the determination that Old Dominion lacked integrity, ODDPI would have otherwise received the contract. No other reason has ever been suggested.

B. The Yokohama Contract


Simultaneous with the negotiations for the Okinawa contract, a similar milk contract became available for military installations in Yokohama, Japan. On December 18, 1978, the PACAF Contracting Center in Yokohama solicited bids for the supply of dairy products (Tr. 277). As with the Okinawa contract, best and final offers were due on March 26, 1979 (Tr. 278). The proposed contract was for one year beginning July 1, 1979, with four one-year renewal options (Tr. 159). The contracting officer in charge of negotiations was William P. Barrett (Tr. 160, 277).


Old Dominion was again one of three contractors to submit initial bids (Tr. 277). In anticipation of a possible award to ODDPI, Barrett sent two letters requesting performance data on Old Dominion's two existing contracts at Okinawa and Korea (Tr. 278). The report from Korea indicated that performance was "at least satisfactory;" a reference was also made to the fact that an audit was currently being conducted of Old Dominion by DCAA (Tr. 278).


On March 21, 1979, Barrett received an electronic report from Colonel Damm, Chief of the PACAF Contracting Center on Okinawa (Tr. 286-287). The report from Colonel Damm began with the following statement: "Under the provisions of DAR 1-902 a determination is hereby made that Old Dominion Dairy Products is not a responsible contractor for failing to meet the DAR 1-903.1(iv) requirement wherein a prospective contractor to be declared responsible must meet the minimum standard of having a satisfactory record of integrity." App. G, exhibit 6, item 2. Transmitted after this opening statement was a copy of Ms. Wells' report. App. G, exhibit 6, item 2.


Based on this communication, Mr. Barrett concluded that Old Dominion had "knowingly and substantially overbilled the Government" (Tr. 279). Barrett based this conclusion solely on the communication from Colonel Damm and the report of Ms. Wells (Tr. 288). At no point between March 21 and March 26 did Barrett inform ODDPI of the allegations in the report, or notify Old Dominion that its integrity was in issue (Tr. 163).


On March 26, 1979, Old Dominion submitted a best and final offer for the Yokohama contract of $1,161,388.98. App. D, exhibit 12. On that date, however, Mr. Barrett made a determination that ODDPI was a nonresponsible contractor due to a lack of a satisfactory record of integrity, and placed that determination and the March 21 report from Okinawa in the contract file. App. G. The contract was awarded to Servrite International, the next low bidder, at a price of $1,272,873.43. App. D, exhibit 13.9


As with the Okinawa contract, the record here is clear that, but for the finding of a lack of integrity, Old Dominion would have otherwise received the Yokohama contract. The Government has never suggested that any other reason motivated the award to Servrite, a substantially higher bidder.

C. The District Court Proceedings


Faced with a total loss of its primary source of business, Old Dominion filed suit in the United States District Court on April 6, 1979, seeking declaratory and injunctive relief. Old Dominion claimed that there was no basis for the finding of a lack of integrity, and that Old Dominion was therefore entitled to receive the two disputed contract awards. In addition, ODDPI alleged that the manner in which the Government rejected its two bids had denied Old Dominion due process of law. On April 11, the District Court heard and denied ODDPI's motion for a temporary restraining order. A hearing on Old Dominion's motion for a preliminary injunction was scheduled for April 30, 1979.


On the morning of April 30, Old Dominion was notified in court that it was formally suspended under Defense Acquisition Regulation 1-605 (32 C.F.R. 1-605) from bidding on contracts with the Department of Defense.10 A three-day evidentiary hearing was then conducted on ODDPI's motion. Following the presentation of evidence, the parties agreed to submit the case for final determination on the merits. On May 2, 1979, the District Court took the case under advisement.


In a six-page Memorandum Opinion, the Honorable Gerhard A. Gesell entered judgment for the Government on May 14, 1979. 471 F.Supp. 300. The court noted that a contracting officer "enjoys a very wide range of discretion" in determining whether a contractor is responsible, and concluded that the audit report "provided ample basis for the rejections which were thus clearly reasonable under all the circumstances." Id. at 302-303. The court also summarily concluded that ODDPI's due process claim was "without merit."11 The court emphasized that this was particularly true in view of the initiation of proceedings under the suspension regulations which, the court noted, "will provide plaintiff with an 'opportunity to clear (its) name.' " Id. at 303.12 As a result of these conclusions, the court rejected Old Dominion's request for injunctive or declaratory relief and dismissed the complaint.


Although technically not a part of the District Court proceeding, on May 25, 1979, Old Dominion's request for a hearing under the suspension regulations was denied. Addenda to appellant's brief, item 4.13 With these facts in mind, we turn to consider appellant's claims.



Appellant's first argument on appeal is that the District Court erred in holding that the contracting officers had a rational basis for determining that Old Dominion lacked integrity. On the basis of the record presented in this case, we agree with the District Court that a reasonable basis did exist.


Appellant concedes that the standard of review with respect to decisions made by the contracting officers is very narrow. As stated in Keco Industries, Inc. v. United States, 492 F.2d 1200, 1203 (Ct.Cl.1974), the ultimate standard is "whether the Government's conduct was arbitrary and capricious toward the bidder-claimant." Concerning a determination of nonresponsibility, the court in Keco Industries specifically stated that contracting officers "have very wide discretion," and that a complaining bidder "would normally have to demonstrate bad faith or lack of any reasonable basis in order to prevail." Id. at 1205. In describing the reasonable basis test, the court elsewhere noted that, "although based on external facts and circumstances rather than a showing of animosity toward plaintiff or favoritism for a competitor, this principle is not far removed from the bad faith test; courts often equate wholly unreasonable action with conduct motivated by subjective bad faith." Id. at 1204.


In the present case, there are no grounds for overturning the careful decision of the District Court, made after hearing three full days of testimony, that a reasonable basis did exist to justify the actions of the contracting officers. Appellant has never alleged any bad faith on the part of the contracting officers. Nor can it be said that the officers acted arbitrarily. Pursuant to existing regulations, the contracting officers solicited information from military bases at which appellant was currently providing services in an effort to determine whether ODDPI would be a responsible contractor on the new contracts. Each officer determined ODDPI to be nonresponsible on the basis of a detailed audit report which raised the possibility that Old Dominion had violated the terms of an existing contract and overcharged the Government. On these facts, the District Judge properly found that the contracting officers had a reasoned basis upon which to act.



Appellant's second argument on appeal is that the District Court erred in holding that ODDPI did not have a due process right to notice of the charges of a lack of integrity and of at least a minimal opportunity to respond to those charges before being denied the Government contracts. Appellant raises a difficult and novel question of law, which must be considered in light of the interests of all parties involved.


As stated at the outset, Officer Trevino received Ms. Wells' report on March 21, 1979. On that same day, the report was transmitted to Mr. Barrett at Yokohama. During the five remaining days before the deadline for best and final offers, numerous discussions were held between the Government and Old Dominion. In none of those discussions was any reference ever made to the fact that Old Dominion had been determined to be nonresponsible for lack of integrity. No notice of any kind was ever given to Old Dominion that its responsibility was even in issue.14 Moreover, this was not a case where denial of one contract at least gave the contractor "constructive" notice of the allegations against it; appellant in this case was denied a second contract before it received any notice of the denial on the first contract.15 In the present case, a determination that Old Dominion lacked integrity was made and communicated through Government channels without ODDPI having any notice that the determination had been made. This failure of notice persisted even though negotiations and conversations were conducted between Government officials and ODDPI executives during a period of five days before adverse action was taken against ODDPI on the basis of a lack of integrity.


Appellant contends that in so acting the Government deprived ODDPI of due process of law in violation of the Fifth Amendment.16 Old Dominion does not claim to have had a "property" interest in the contract awards. Rather, appellant claims that a "liberty" interest was violated, i. e. a right to be free from stigmatizing governmental defamation having an immediate and tangible effect on its ability to do business.


In addition, appellant does not contend that due process requires a formal hearing before determination of a lack of integrity may be made. Appellant claims only a right to be notified of the allegations against its integrity, and an opportunity to immediately present, in whatever time is available, facts and arguments to persuade the contracting officer that the allegations lack merit. Appellant argues that such notice and a minimal chance to respond will at least allow it an opportunity to preserve contract awards which, but for the allegations of lack of integrity, would otherwise have been made to the contractor.17


The Government presents three arguments in opposition to appellant's due process claim. First, the Government asserts that a corporation may not possess a due process liberty right. Second, the Government claims that even if such a right may exist, appellant's allegations fall far short of demonstrating any injury to a cognizable liberty interest in this case. Finally, the Government argues that if a due process liberty right does apply to Old Dominion in this situation, the suspension regulations provide sufficient due process protection. We consider each of these contentions in turn.


A. Existence of a Corporate "Liberty" Interest


The Government's first claim, that a corporation may not possess a due process liberty interest, is without merit.18 The definition of liberty under the Fifth or Fourteenth Amendments has never been stated with exactness. Nevertheless, it is clear that the concept encompasses more than mere freedom from bodily restraint, and includes "the right of the individual to contract, to engage in any of the common occupations of life, to acquire useful knowledge, to marry, establish a home and bring up children, to worship God according to the dictates of his own conscience, and generally to enjoy those privileges long recognized at common law as essential to the orderly pursuit of happiness by free men." Meyer v. Nebraska, 262 U.S. 390, 399, 43 S.Ct. 625, 626, 67 L.Ed. 1042 (1923). Admittedly, a corporation may not be bodily seized. Nor may it marry or bring up children. But a corporation may contract and may engage in the common occupations of life, and should be afforded no lesser protection under the Constitution than an individual to engage in such pursuits.19


The Government would limit a corporation to due process rights founded on "property" interests. Appellee's brief, p. 15-16. Chief Justice Burger, however, while still a member of this court, made clear in Gonzalez v. Freeman, 334 F.2d 570 (D.C.Cir.1964), that it is not the entitlement to a Government contract which gives a Government contractor standing to challenge the procedures by which that contractor is barred from Government business. Considering the right of (among others) the "Thos. P. Gonzalez Corporation" to challenge a debarment from Government contracts on due process grounds, the Chief Justice stated:


Thus to say that there is no "right" to government contracts does not resolve the question of justiciability. Of course there is no such right ; but that cannot mean that the government can act arbitrarily, either substantively or procedurally, against a person or that such person is not entitled to challenge the processes and the evidence before he is officially declared ineligible for government contracts.


(emphasis in original).20 Id. at 574. Similarly, we hold that Old Dominion is entitled to challenge the Government actions in this case on due process grounds, notwithstanding the fact that ODDPI had no "property" interest in the contract awards.21


B. Presence of Injury to a Cognizable Liberty Interest in This Case


The most difficult question presented here is whether the Government conduct injured a cognizable liberty interest in this case. We hold that it did.


Appellant claims in essence that ODDPI has a right to be free from "stigmatizing" governmental defamation having an immediate and tangible effect on its ability to do business. Appellant argues that the Government may not brand or stigmatize a contractor as "nonresponsible" due to a "lack of integrity" without granting the contractor notice of the specific charges against it so as to afford the contractor an opportunity to clear its name.


We recognize at the outset the significant effect the Government conduct had on Old Dominion in this case. A determination was made that Old Dominion "lacked integrity," and that determination was communicated through official Government channels and would likely continue to be communicated every time Old Dominion bid for a contract. As a result, ODDPI lost two substantial contracts which it otherwise would have received. This sudden loss of Government work effectively put Old Dominion out of business (Tr. 165). We again note the words of Chief Justice Burger in Gonzalez v. Freeman, 334 F.2d 570, 574 (D.C. Cir. 1964), in commenting upon the effect of debarment on a Government contractor:


We need not resort to a colorful term such as "stigma" to characterize the consequences of such governmental action, for labels may blur the issues. But we strain no concept of judicial notice to acknowledge these basic facts of economic life.


With this in mind, we turn to consider whether the governmental action in this case, carried out with absolutely no notice to the appellant, violated due process.


In Board of Regents v. Roth, 408 U.S. 564, 92 S.Ct. 2701, 33 L.Ed.2d 548 (1972), the Supreme Court considered the circumstances in which the refusal of a public university to reemploy a nontenured university instructor implicated due process "liberty" interests. The Court noted that a simple refusal to rehire, without more, did not trigger due process requirements. Based on facts of that nature in that case, the Court in Roth held that the nonrenewal of the contract of the instructor, without any type of specific notice or a hearing, did not violate due process.


The Supreme Court emphasized, however, that:


The State, in declining to rehire the respondent, did not make any charge against him that might seriously damage his standing and associations in his community. It did not base the nonrenewal of his contract on a charge, for example, that he had been guilty of dishonesty, or immorality. Had it done so, this would be a different case.


408 U.S. at 573, 92 S.Ct. at 2707 (emphasis supplied). The Court also stated that:


Similarly, there is no suggestion that the State, in declining to reemploy the respondent, imposed on him a stigma or other disability that foreclosed his freedom to take advantage of other employment opportunities. The State, for example, did not invoke any regulations to bar the respondent from all other public employment in state universities. Had it done so, this, again, would be a different case.


Id. at 573-574, 92 S.Ct. at 2707 (emphasis supplied). These concepts were recently reaffirmed by the Supreme Court in Owen v. City of Independence, Mo., 445 U.S. 622, 633 n.13, 100 S.Ct. 1398, 1406 n.13, 63 L.Ed.2d 673 (1980).


The case before us is clearly the "different case" alluded to in Roth. Old Dominion was denied the renewal of the Okinawa contract solely on the basis of Sergeant Trevino's determination that Old Dominion "lacked integrity." As stated in Roth, "where a person's good name, reputation, honor, or integrity is at stake because of what the Government is doing to him, notice and an opportunity to be heard are essential." Id. 408 U.S. at 573, 92 S.Ct. at 2707, quoting Wisconsin v. Constantineau, 400 U.S. 433, 437, 91 S.Ct. 507, 510, 27 L.Ed.2d 515 (1971) (emphasis supplied). Ms. Wells' report concluded that Old Dominion's actions under the old contract "show a lack of business integrity. The only reason the contractor would have for the above discrepancies would be to recoup undue monies under the contract." App. F, exhibit 5, item 2, p. 4. Officer Trevino concluded from this report that "Old Dominion was fraudulently receiving undue profits under the current contract" (Tr. 249).22 Officer Barrett concluded from the report that Old Dominion had "knowingly and substantially overbilled the Government" (Tr. 279). There can be no doubt that Old Dominion's good name and integrity were at stake, or that Old Dominion was in effect charged with dishonesty.


Furthermore, it cannot be disputed that the Government action in this case effectively foreclosed Old Dominion's freedom to take advantage of other Government employment opportunities, and barred ODDPI from all public employment. As illustrated by the Yokohama contract, the determination that Old Dominion lacked integrity would follow ODDPI in any attempt to procure Government work. This is particularly true in light of the Government's admission at oral argument that the case would be no different if eight contracts had been denied. As noted above, the Government action in this case had the effect of putting Old Dominion out of business (Tr. 165).


These actions were taken without any amount of due process. Despite the fact that numerous conversations were conducted between ODDPI and the Government, between the time the determination was made and the time the contracts were denied, at no point was it even mentioned that the integrity of Old Dominion was in issue. Old Dominion never received any notice of the charges against it. Needless to say, ODDPI was never afforded the slightest opportunity to respond to those charges.


We hold that the present case parallels the situation anticipated by the Supreme Court in Roth, and that a due process liberty right was violated. To rule otherwise would drain Roth of meaning, something that the Supreme Court has taken pains not to do. See Paul v. Davis, 424 U.S. 693, 709-710, 96 S.Ct. 1155, 1164, 47 L.Ed.2d 405 (1976); Bishop v. Wood, 426 U.S. 341, 347-350, 96 S.Ct. 2074, 2078-2080, 48 L.Ed.2d 684 (1976).


This conclusion is consistent with other cases handed down in this Circuit. In Rolles v. Civil Service Commission, 512 F.2d 1319 (D.C. Cir. 1975), Officer Rolles of the Air Force Reserve received an administrative reprimand which alleged that he had prepared an incorrect or false voucher and had diverted an Air Force aircraft to an Air Force base for his personal benefit. The officer was given no opportunity to respond to the charges. Yet, based on those accusations, and with "whirlwind speed," Rolles was transferred out of active military reserve status and, as a result, removed from the Civil Service. This court found such conduct "totally repugnant to due process." Id. at 1321. Since "in effect appellant was removed from his Civil Service position as a direct result of charges made by General Hoff that amounted to accusations of dishonesty," the court held that a liberty interest had been violated and that Rolles had a right to respond to the allegations and attempt to clear his name. Id. at 1325. In Mazaleski v. Treusdell, 562 F.2d 701 (D.C. Cir. 1977), this court refused to find that a due process liberty interest was implicated when a Government employee was dismissed for reasons of unsatisfactory job performance and insubordination. The court expressly stated, however, that the employee was not terminated for grounds of dishonesty, noting that dismissals in such a case have been held to affect liberty interests. Id. at 714.


In response to appellant's claim that a liberty interest was violated in this case, the Government argues that the injury to ODDPI was essentially an injury to reputation, not actionable in light of Paul v. Davis, 424 U.S. 693, 96 S.Ct. 1155, 47 L.Ed.2d 405 (1976). We find that reliance on Paul v. Davis is totally misplaced in this case.


In Davis, the Chief of Police in Louisville, Kentucky circulated to merchants a flyer containing the caption "ACTIVE SHOPLIFTERS" and five pages of mug shot photos, including that of Edward Davis. The flyer was brought to the attention of Davis' employer, who demanded an explanation. After hearing Davis' story, the employer informed Davis that he would not be fired. Nevertheless, Davis brought suit in federal district court claiming that he had been improperly stigmatized by Government action without due process of law.


The Supreme Court noted that Davis' complaint appeared to state a classic case of defamation. The Court held, however, that Davis had not been deprived of a liberty interest protected by the Fourteenth Amendment and actionable under 42 U.S.C. § 1983. As stated by the Supreme Court, "while we have in a number of our prior cases pointed out the frequently drastic effect of the 'stigma' which may result from defamation by the government in a variety of contexts, this line of cases does not establish the proposition that reputation alone, apart from some more tangible interests such as employment, is either 'liberty' or 'property' by itself sufficient to invoke the procedural protection of the Due Process Clause." 424 U.S. at 701, 96 S.Ct. at 1160 (emphasis supplied). The Court observed that any other construction of the Fourteenth Amendment "would seem almost necessarily to result in every legally cognizable injury which may have been inflicted by a state official acting under 'color of law' establishing a violation of the Fourteenth Amendment." Id. at 699, 96 S.Ct. at 1159.23


We think that the cases distinguished by the Court in Paul v. Davis are much more applicable to the present case. For instance, the Court cited United States v. Lovett, 328 U.S. 303, 66 S.Ct. 1073, 90 L.Ed. 1252 (1946), where the Supreme Court held that an Act of Congress which prohibited payment of any salary to three Government employees was an unconstitutional bill of attainder. The Court in Davis highlighted the statement in Lovett that "what is involved here is a congressional proscription of (these employees), prohibiting their ever holding a government job." 328 U.S. at 314, 66 S.Ct. at 1078; see 424 U.S. at 702, 96 S.Ct. at 1161. Similarly, the Court in Davis carefully reviewed the multiple opinions of the Justices in Joint Anti-Fascist Refugee Comm. v. McGrath, 341 U.S. 123, 71 S.Ct. 624, 95 L.Ed. 817 (1951), and concluded that "at least six of the eight Justices who participated in that case viewed any 'stigma' imposed by official action of the Attorney General of the United States, divorced from its effect on the legal status of an organization or a person, such as loss of tax exemption or loss of government employment, as an insufficient basis for invoking the Due Process Clause of the Fifth Amendment." 424 U.S. at 704-705, 96 S.Ct. at 1162 (emphasis supplied). Finally, the Court in Davis considered the case of Cafeteria Workers v. McElroy, 367 U.S. 886, 81 S.Ct. 1743, 6 L.Ed.2d 1230 (1961), where the Supreme Court held that the discharge of an employee of a Government contractor did not violate due process. The Court in Davis noted the passage of the opinion in McElroy where the Court stated: "Finally, it is to be noted that this is not a case where government action has operated to bestow a badge of disloyalty or infamy, with an attendant foreclosure from other employment opportunity." 367 U.S. at 898, 81 S.Ct. at 1750; see 424 U.S. at 705, 96 S.Ct. 1155, 1163 (emphasis supplied in Davis ). The Supreme Court in Davis summarized these cases by stating that:


(t)he Court has never held that the mere defamation of an individual, whether by branding him disloyal or otherwise, was sufficient to invoke the guarantees of procedural due process absent an accompanying loss of government employment.


424 U.S. at 706, 96 S.Ct. at 1163 (emphasis supplied).


The point need not be repeated further. Contrary to the position of the Government here, it is clear that the opinion in Paul v. Davis supports the claim of ODDPI in this case. For, as amply detailed earlier, it is precisely the "accompanying loss of government employment" and the "foreclosure from other employment opportunity" which is the injury resulting from the Government defamation complained of in this case. As a result, we hold that a liberty interest recognized by the Fifth Amendment is implicated in this case.24


C. Sufficiency of Process Made Available to Old Dominion


Finally, the Government contends that, even if Old Dominion possessed a due process liberty right in this situation, the procedures afforded to ODDPI were sufficient to satisfy the requirements of due process. It is not disputed that Old Dominion received absolutely no notice of the charges against it before the determination was made that it lacked responsibility (due to a lack of integrity) and that contracts were denied on that basis. It is also undisputed that a number of conversations were conducted between the Government and Old Dominion between the time the determination was made and the contracts lost. The Government contends, however, that the suspension proceedings initiated after the series of events in question provided Old Dominion with ample due process protection.


In support of this position, the Government points to Horne Brothers, Inc. v. Laird, 463 F.2d 1268 (D.C. Cir. 1972). In that case, this court held that before the Government may suspend a Government contractor from all bidding, "fundamental fairness" requires that the bidder be given specific notice of the charges against him and, in the usual case, an opportunity to respond to those charges. 463 F.2d at 1271. The court added, however, that "we may accept a temporary suspension for a short period, not to exceed one month, without any provision for according such opportunity to the contractor." Id. at 1270. Similarly, in Gonzalez v. Freeman, 334 F.2d 570 (D.C. Cir. 1964), this court noted that "conceivably a summary debarment, in the nature of a temporary suspension, might be warranted for a reasonable period pending investigation;" otherwise "considerations of basic fairness require administrative regulations establishing standards for debarment and procedures which will include notice of specific charges, opportunity to present evidence and to cross-examine adverse witnesses, all culminating in administrative findings and conclusions based upon the record so made." 334 F.2d at 578-579.


It is plain that Horne Brothers and Gonzalez do not validate the Government conduct in this case. First of all, both of those cases dealt with formal Government action, and allowed a short period of delay for the imposition of procedures otherwise required. In Horne Brothers, the contractor had been formally suspended; in Gonzalez, the contractor had been formally debarred. In the present case no comparable decisive Government action was taken, although contracts were denied. Such denials could have continued indefinitely with absolutely no recourse for the contractor. In such a case, the Government cannot invoke suspension procedures after-the-fact and claim that those procedures are adequate. The injury complained of in this case is the loss of contracts before Old Dominion was ever suspended, not the loss of contracts after suspension but before suspension procedures were able to be implemented.


In addition, it is clear that in the present case subsequent procedures were inadequate to satisfy the requirements of due process. The suspension regulations do not provide for specific notice of the charges against the contractor.25 A hearing may or may not occur.26 In the present case, the record contains no information concerning the notice ultimately given to Old Dominion. It is clear, however, that a hearing has never been given, despite the fact that over one year has passed since Old Dominion was formally suspended. Addenda to appellant's brief, item 4.27 The suspension proceedings, whether adequate or not in their own right, clearly provided no relief for the deprivations in this case.


We need not consider whether due process is satisfied in the situation where it is impossible for some reason for the Government to give notice to the contractor before adverse action is taken on a determination that the contractor lacks integrity, and subsequent notice with an opportunity to respond is in fact promptly given to the contractor. That is clearly not this case. Accordingly, we hold that subsequent procedures did not satisfy the requirements of due process in this case, and that a liberty right of Old Dominion was therefore violated.28



We turn finally to the question of what process is due. It is by now axiomatic that a determination that a due process liberty or property right has been violated does not determine the amount or type of process that is constitutionally required. As stated in Morrissey v. Brewer, 408 U.S. 471, 481, 92 S.Ct. 2593, 2600, 33 L.Ed.2d 484 (1972), "it has been said so often by this Court and others as not to require citation of authority that due process is flexible and calls for such procedural protections as the particular situation demands." More precisely, to identify the specific dictates of due process, three distinct factors must be considered: "First, the private interest that will be affected by the official action; second, the risk of an erroneous deprivation of such interest through the procedure used, and the probable value, if any, of additional or substitute procedural safeguards; and finally, the Government's interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirements would entail." Mathews v. Eldridge, 424 U.S. 319, 335, 96 S.Ct. 893, 903, 47 L.Ed.2d 18 (1976).


It is not necessary to repeat again the importance of the interest at stake in this case. As previously recognized by this court in Horne Brothers, supra, and Gonzalez, supra, the very economic life of the contractor may be in jeopardy. See 463 F.2d at 1271; 334 F.2d at 574. The likely extensive and adverse effect of the Government action in this case on Old Dominion has been documented throughout this opinion.


At the same time, however, this court recognizes the need of agencies to be free to conduct Government business effectively and efficiently; we also recognize the potentially crippling effect that might result from the imposition of stringent due process requirements with respect to all agency actions adverse to unsuccessful bidders on Government contracts. If every governmental decision required a full blown hearing involving all parties affected, the conduct of Government business would be greatly impaired.


Perhaps recognizing the potentially overwhelming burden that would be placed upon the Government if stringent due process requirements were imposed in this case, appellant has never requested or claimed the right to a formal hearing. In its reply brief, Old Dominion merely asserts the right "to be notified of the allegations against its integrity, to present immediately in whatever time was available, facts and arguments to persuade the Contracting Officer that the allegations were without merit, and thereby have the opportunity to preserve the awards which, absent the allegations, would have been made to it." Appellant's reply brief, p. 7.


We agree with appellant that due process in this case includes the right to be notified of the specific charges concerning the contractor's alleged lack of integrity, so as to afford the contractor the opportunity to respond to and attempt to persuade the contracting officer, in whatever time is available, that the allegations are without merit. This requirement to give notice will impose absolutely no burden on the Government. Since a determination that a contractor lacks integrity may not be made without reference to specific charges or allegations, it will impose no burden on the Government to notify the contractor of those charges. In so doing, the contractor will at least have the opportunity to explain its actions before adverse action is taken. In this way, a simple misunderstanding or mistake may be clarified before significant injury is done to both the Government and the contractor.29


We do not suggest that the Government was required to afford the contractor any type of a formal hearing.30 Government scheduling need not be delayed while the contractor puts on evidence. We simply hold that when a determination is made that a contractor lacks integrity and the Government has not acted to invoke formal suspension or disbarment procedures, notice of the charges must be given to the contractor as soon as possible so that the contractor may utilize whatever opportunities are available to present its side of the story before adverse action is taken. This minimal requirement will not burden the Government and, indeed, is in the interest of both parties.31


The present case amply illustrates the insignificant burden such notice will place on the Government, as well as the potential value it may have to the parties. On March 21, a determination was made that Old Dominion lacked integrity. On that same day, that determination and accompanying reasons were wired to the contracting officer on Yokohama. There is no reason why that same report could not have been wired to Old Dominion; the effort required to do so would have been minimal. During the period between March 21 and March 26, numerous conversations were conducted between the Government and ODDPI. During those conversations, Old Dominion could have presented its side of the story and perhaps reestablished its good name and integrity.


We therefore hold that Old Dominion had a right to receive notice of the charges against its integrity before the Government denied ODDPI multiple contracts on that basis. Since Old Dominion did not receive that notice and an opportunity to respond, it is entitled to relief.



In a case such as the present one, it is difficult several months after the occurrence giving rise to litigation to fashion relief. Often past events cannot be reconstructed and, as a result, the injury complained of cannot be adequately corrected. Unfortunately, in this case, the injury was easier to avoid than it is to correct.


There is nothing in the record to guarantee that Old Dominion would have received the Okinawa and Yokohama contracts had it received the notice to which it was entitled. There are accordingly no grounds at this point to vacate the awards of those contracts to other contractors and grant them to ODDPI, as Old Dominion requests. However, Old Dominion did have a right to receive notice of the allegations against it, so as to have an opportunity to answer those allegations before adverse action was taken. Although the Okinawa and Yokohama contracts are no longer in issue, appellant retains the right to receive that opportunity. Whether due process has ever been granted to Old Dominion is unclear.


As discussed above, the suspension proceedings that were belatedly implemented against Old Dominion were insufficient to extinguish ODDPI's constitutional rights. Nevertheless, those proceedings may by now have afforded Old Dominion the only remedy to which it is entitled at this late date. However, we are unable to reach any conclusion on this point because we are unaware of the events that have transpired since the time when the decision was rendered by the District Court. Given these circumstances, we reverse the decision of the District Court, and remand this case to that court with instructions to determine whether the suspension proceedings, or any other proceedings, have served to cure the constitutional defect and have given appellant an opportunity to clear its name and reestablish its integrity. If such cure has not yet occurred, we instruct the District Court to reconsider the case in light of this opinion and to devise an appropriate remedy.


Reversed and remanded for further proceedings consistent with this opinion.


So ordered.


"Tr." refers to the transcript of the proceedings before Judge Gesell of the District Court, held April 30 through May 2, 1979


"App." references are to the joint appendix submitted by the parties. Items within the joint appendix are designated by lettered tabs


A dispute arose as to whether the contract provided for four one-year renewals, or a total contract life of four years. The Government attempted to renew the contract for the fifth year, and ODDPI performed under protest. The resolution of this dispute was pending before the Armed Services Board of Contract Appeals at the time of the trial before Judge Gesell (Tr. 137)


Over this period, the contract was administered by six different contracting officers (Tr. 28). Under the first four contracting officers, all contract disputes were settled at the contracting officer level. However, following the appointment of the fifth contracting officer in April of 1977, five disputes arose under the contract. These disputes were pending before the Armed Services Board of Contract Appeals at the time of the trial before Judge Gesell (Tr. 31)


The audit apparently originated because Old Dominion claimed to be in a "loss position" on the Okinawa contract (Tr. 185). In response to this claim, the PACAF Contracting Center on Okinawa reviewed the financial records of ODDPI's plant on Okinawa. Because of the findings on this review, the Contracting Center requested an audit of the home office (Tr. 185)


Ms. Wells made three findings: (1) a discrepancy existed between the price adjustment claims made by ODDPI (under a provision of the contract designed to compensate ODDPI for fluctuations in raw material prices) and actual production formulas used, resulting in extra money paid to ODDPI through substitution of cheaper ingredients; (2) ODDPI had substituted used wire milk cases for the new cases contemplated by the contract; and (3) ODDPI had misrepresented price quotations for vegetable fat by quoting the price of one manufacturer but actually purchasing products from another manufacturer at a generally lower price. App. F, item 2. Old Dominion introduced substantial testimony at trial in support of these actions. For instance, evidence was introduced that the contract allowed for adjustment in the contract price due to fluctuation in the market prices of certain goods, without explicitly requiring that a specified amount of those goods be used (Tr. 36-43). Concerning the wire crates, although used wire cases were apparently "rented" to the Government at new milk case prices, that same amount was credited to the Government when the cases were returned (Tr. 55-57). Finally concerning the price quotations, evidence was submitted that the contract clearly did not require ODDPI to purchase products at the price quoted; price quotations for vegetable fat were not "invoice" prices (Tr. 39, 116-123). Although the District Court did not resolve any of these issues of contract interpretation, and neither do we, it appears that the foundation of Ms. Wells' report was that Old Dominion had advantageously used a poorly drawn or ambiguous contract


Defense Acquisition Regulation (DAR) 1-904.1 (32 C.F.R. 1-904.1 (1979)) states that "no purchase shall be made from, and no contract shall be awarded to, any person or firm unless the contracting officer first makes an affirmative determination that the prospective contractor is responsible within the meaning of 1-902."


Sergeant Trevino requested similar information with respect to the other two contractors submitting initial proposals (Tr. 242)


The contract to Servrite was thus approximately $111,000 higher than Old Dominion's final offer


The suspension regulations provide that the contractor must be given notice of the suspension, which must include a description "in general terms" of the nature of the irregularities giving rise to the suspension (DAR 1-605.3). A suspension is effective for 12 months, but may be continued for an additional 6 months at the request of the Department of Justice (DAR 1-605.2). Although a request for a hearing may be made (DAR 1-605.3), that request may be denied if a hearing would "adversely affect possible civil or criminal prosecution." (DAR 1-605.2). If the request for a hearing is denied, however, any information or argument in opposition to the suspension may be presented in person, in writing, or through representation (DAR 1-605.2)


The court cited that portion of Board of Regents v. Roth, 408 U.S. 564, 576-578, 92 S.Ct. 2701, 2708-2709, 33 L.Ed.2d 548 (1972), wherein the Supreme Court held that a nontenured public university professor did not possess a "property" interest in re-employment sufficient to require university officials to give him a hearing when the university declined to renew his contract of employment


The District Court noted that any attack on the sufficiency of the suspension proceedings was "most certainly premature." 471 F.Supp. at 303


The Government admits that after the decision of the District Court, ODDPI's request for a hearing was denied. Appellee's brief, fn. 18. The Government does note that at the time the hearing was denied, ODDPI was notified of its right to present any information or argument in opposition to the suspension in person, in writing, or through representation. See addenda to appellant's brief, item 4


Old Dominion was of course aware of the fact that an audit had been conducted on the books of the company (Tr. 165). The record does not disclose, however, that they had been notified of the reason for the audit or informed of its results


We therefore need not address the situation in which the contractor had in fact received constructive notice of the actual charges against him before communication of an agency determination that the contractor lacked integrity


The Fifth Amendment provides in pertinent part that no person shall "be deprived of life, liberty, or property, without due process of law." U.S.Const. Amend. V


Appellant renewed in oral argument a claim that it had made in the District Court that the Government conduct in this case amounted to a de facto debarment of ODDPI from all Government business. In support of this claim, appellant cited for the first time in rebuttal in oral argument Myers & Myers, Inc. v. United States Postal Service, 527 F.2d 1252 (2d Cir. 1975) and Art-Metal-USA, Inc. v. Solomon, 473 F.Supp. 1 (D.D.C.1978)

Comparing the facts of the present case with the facts in Myers & Myers and Art-Metal, it is clear that appellant's claim of de facto debarment is not frivolous. This is particularly true in light of the Government's assertion in oral argument that this case would be no different if ODDPI had been denied eight successive contracts instead of just two.

We think that the question of whether or not there was a de facto debarment is inappropriate for consideration in this case. Presumably, if we were to find a de facto debarment, it would be for the purpose of considering whether the procedures surrounding the actions giving rise to the de facto debarment were in compliance with governing debarment regulations and, if so, whether those regulations satisfied minimum constitutional requirements. However, appellant has neither briefed nor argued in this court either of those two issues. Indeed, appellant has consistently asserted that the belated institution of suspension proceedings did not affect its claim that it had a right to notice before a determination of nonresponsibility for lack of integrity was made and the denial of the two contract awards was effectuated. Therefore, we are constrained to limit our focus to the issues originally submitted to the court on this appeal.


The Government did not raise or pursue the matter in oral argument. Nevertheless, we briefly address the issue here


The Supreme Court established long ago that, while a corporation was not a "citizen" within the meaning of the privileges and immunities clause, "a corporation is a 'person' within the meaning of the equal protection and due process of law clauses." Grosjean v. American Press Co., 297 U.S. 233, 244, 56 S.Ct. 444, 447, 80 L.Ed. 660 (1936). In so doing, the Court rejected an argument that "the liberty guaranteed by the Fourteenth Amendment against deprivation without due process of law is the liberty of natural not of artificial persons." See First National Bank of Boston v. Bellotti, 435 U.S. 765, 780 n.16, 98 S.Ct. 1407, 1418, n.16, 55 L.Ed.2d 707 (1978) (emphasis in original)


Similarly, in Southern Mutual Help Ass'n, Inc. v. Califano, 574 F.2d 518 (D.C. Cir. 1977), the court found that a nonprofit">nonprofit organization had standing to contest a denial by the Department of Health, Education and Welfare (HEW) to renew a grant to the organization, because of the injury to the organization's reputation and ability to receive future grants which would result from the fact that HEW had refused to renew the grant. The court never reached the question whether the organization was actually entitled to a hearing on due process grounds, since it held that a hearing was required under HEW regulations


Appellant notes that the protected "liberty" interests of a corporation may be somewhat different in scope than those of a natural person. Reply brief, p. 5. The important question is thus whether a liberty interest is implicated in this case, the question to which we now turn


There is also evidence in the transcript that Trevino took the report as evidence that Old Dominion "would deliberately not deal honestly" with the Government (Tr. 247)


For instance, every defamation by a state official acting under "color of law" would be actionable under federal law. Similarly, "since it is surely far more clear from the language of the Fourteenth Amendment that 'life' is protected against state deprivation than it is that reputation is protected against state injury, it would be difficult to see why the survivors of an innocent bystander mistakenly shot by a policeman or negligently killed by a sheriff driving a government vehicle, would not have claims equally cognizable under § 1983." 424 U.S. at 698, 96 S.Ct. at 1159. Thus it is clear that what most influenced the Court in Davis was the fear of creating a comprehensive body of federal tort law based on the actions of state officials


Although the Government has never attempted to suggest otherwise, we note that there is no problem of a lack of publication of the damaging characterization as was present in Bishop v. Wood, 426 U.S. 341, 96 S.Ct. 2074, 48 L.Ed.2d 684 (1976). In the present case, the determination that Old Dominion lacked integrity had already been communicated through Government channels and would undoubtedly have been recommunicated every time ODDPI bid on a subsequent contract. On this point, it is appropriate to note a statement by the Seventh Circuit in a similar case: "The Commission points out that its findings will not be made public and are made available to the various agencies only on a need to know basis. However, the federal government is composed of many different agencies and departments, all of which could obtain the information under various circumstances. In effect, Larry has been stigmatized throughout the entire federal government. He is deprived of the opportunity to work in any capacity for any branch of the government." Larry v. Lawler, 605 F.2d 954, 958 (7th Cir. 1978)


Defense Acquisition Regulations 1-605.3 (32 C.F.R. 1-605.3) provides that notice of suspension shall state that "the suspension is based on adequate evidence that the firm or individual has committed irregularities of a serious nature in business dealings with the Government, or that the suspension is based on irregularities which seriously reflect on the propriety of further dealings of the firm or individual with the Government, together with a description of the nature of those irregularities, in general terms, without disclosing the Government's evidence."


See note 10, supra


It appears that the District Court was very likely misled into believing that a hearing would be granted to appellant in this case. As stated at page 5 of Judge Gesell's Memorandum Opinion, "the military has now initiated proceedings under its suspension regulations, which proceedings will provide plaintiff with an 'opportunity to clear (its) name,' see DAR § 1-605.2(a)(1) & (2); Arnett v. Kennedy, 416 U.S. 134, 156-58, 171 n. 6, 94 S.Ct. 1633, 1645-46, 1652, n. 6, 40 L.Ed.2d 15 (1974)." 471 F.Supp. at 303


The Government also suggested for the first time in oral argument that ODDPI could have received relief in administrative proceedings before the Government Accounting Office (GAO). The Government has never previously raised this as an option; there is absolutely nothing in the record describing such proceedings and affording us an opportunity to determine whether they are adequate. As such, we express no opinion as to the sufficiency of any proceedings available before GAO


It must be remembered that in the present case, the Government lost at least $1,375,000 on the Okinawa contract, and $111,000 on the Yokohama contract, as a result of the rejection of Old Dominion's bids


Nor do we mean to suggest that some form of hearing may not be required upon actual or de facto suspension. These issues are not present in this case, and we do not address them. See note 17, supra


The Government repeatedly emphasizes that the procurement regulations impose upon the contractor the burden of affirmatively demonstrating its responsibility. DAR 1-902 (32 C.F.R. 1-902). As appellant points out, however, there was never any indication in this case that ODDPI's integrity was in issue. Old Dominion had performed milk contracts for more than 10 years with no contests as to its integrity (Tr. 135-136). Old Dominion had been regularly solicited to bid and invited to negotiate on Government contracts, negotiations which, according to the regulations, are only to be conducted with "responsible" bidders. DAR 3-805.1. We hold that in such a case due process does not relieve the Government of its duty of informing the contractor that its integrity is in question