Navy rejects Raytheon protest on Aegis upgrades

WASHINGTON (Reuters) - Raytheon Co (RTN.N) did not demonstrate that it could meet the U.S. Navy's requirements for modernization of the Aegis combat system built by Lockheed Martin Corp (LMT.N) and relied instead on a "speculative promise" to team up with Lockheed, the Navy said in a 71-page response to a protest filed by Raytheon in September.

A spokesman for Lockheed said Raytheon had not approached his company about any teaming agreement.

Raytheon filed a protest with the Government Accountability Office (GAO), arguing that the Navy's decision to award sole-source contracts to Lockheed for the lucrative modernization work was flawed and violated the most basic U.S. competition laws. GAO is due to rule on the case by December 31.

The Navy rejected Raytheon's arguments in a strongly worded motion to dismiss filed October 22 with the GAO, the nonpartisan congressional agency which rules on federal contract disputes. A heavily redacted version was obtained by Reuters.

"The Navy properly determined that only Lockheed Martin Maritime Systems and Sensors is capable of performing its requirements because Raytheon Integrated Defense Systems failed to respond adequately to the Navy's requests for information regarding its ability to meet the government's requirements," the Navy said in the response.

Awarding the contract to another source would have resulted in "unacceptable delay" of 18 to 24 months, and substantial duplication of cost, the Navy said.

It said it provided detailed information about its requirements in a May pre-solicitation notice and two July letters, which gave Raytheon a fair chance to establish its capabilities.

"Raytheon IDS squandered that opportunity, however, choosing instead to disregard the Navy's request for further information, and renewing its speculative promise to assemble a national team" that was to include Lockheed Martin and General Dynamics (GD.N), the only other company that had expressed interest in the Aegis upgrade work.

The Navy said Raytheon had offered no evidence that it had negotiated agreements with the other companies, and it had no reason to believe that Lockheed, the sole developer and integrator of the Aegis system, would agree to such a deal.

Spokesman Craig Quigley said Lockheed was not approached about forming a national team. He said existing laws allowed the military services to make sole source awards to avoid disruptions, added cost and delays.

The Navy also said a team including Lockheed, Raytheon and General Dynamics would be "fundamentally anti-competitive."

But such a move would not be without precedent.

When Raytheon won a contract to develop the combat system for the new DDG-1000 destroyer, the Navy ordered it to give Lockheed a share of the work, and Lockheed ultimately wound up with about a 40 percent share of the work.

Raytheon has said the Navy repeatedly assured industry that it would open the Aegis modernization work to competition, but then suddenly decided to let Lockheed remain the sole source contractor for this substantial portion of the work.

The Navy said it had little choice, given a tight timetable for installing the upgraded equipment and software on board its DDG-51 destroyers. It said it still planned to open the next phase of the modernization program to competition.

The Navy also rejected Raytheon's argument that the Navy had refused to provide additional Aegis software and technical data to potential offerors, saying it could have given Raytheon millions of lines of source code if it had asked for the data.

Raytheon is also battling to revive the DDG-1000 destroyer, for which it is building the combat system, after the Navy decided in July to truncate the program and switch back to the DDG-51 destroyers, which come with Lockheed's Aegis system.

Pentagon chief arms buyer John Young recently said he also had questions about the decision and more analytical work needed to be done before it was finalized.

(Reporting by Andrea Shalal-Esa, editing by Matthew Lewis)