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FAR 19.101:  Joint Venture - Ostensible Subcontractor, Affiliate

Comptroller General - Key Excerpts

Identity and Eligibility of Awardee

ABJV challenges the award to CGJV on the grounds that the awardee, “CTRMG-GAPSI JV, LLC,” did not exist until an official corporate registration was filed in April 2016. As a result, the protester argues, the awardee is not the firm that submitted a proposal, but is a newly-created entity that is legally distinct and thus was not approved by the SBA for award of an 8(a) set-aside contract. Second Supp. Protest at 1-2; Protester’s Comments at 21-22. NASA responds that the differences in the awardee’s name are insignificant clerical issues, and do not indicate that there are multiple legally-distinct entities. Rather, NASA argues, the awardee is a joint venture entity that the proposal and the agency consistently identify using a single DUNS number and a single CAGE code, and thus there is no material doubt of the awardee’s identity. Contracting Officer’s Statement at 34; AR at 37-39.

Uncertainty as to the identity of an offering entity renders an offer technically unacceptable because ambiguity could result in there being no party bound to perform the obligations of the contract. Our Office will consider whether readily-available information, such as a CAGE code and DUNS number, reasonably establishes that despite differences in an offeror’s name there is a clear commitment by the same concern to the terms of its proposal and the pending contract. See Raymond Express Int’l, LLC, B-409872.3 et al., Sept. 11, 2015, 2015 CPD ¶ 265 at 6.

Since the protester’s challenge related to the SBA’s approval of CGJV for award of an SBA set-aside contract, we also requested the views of the SBA regarding whether the awardee was a different entity than the SBA had approved for award as a joint venture. The SBA expressed its view that the awardee was indeed the same entity whose 8(a) joint venture agreement the SBA had approved in 2014, but the SBA nevertheless explained that the joint venture was not, in fact, eligible for award of the HRIPS contract. SBA Brief at 1. The SBA explained that its regulations required an approved 8(a) joint venture (as here) to submit an addendum to its approved joint venture agreement, for approval by SBA, before the award of each contract to the joint venture. Id. at 2 (citing 13 C.F.R. § 124.513(a), (e)). The SBA stated that CGJV did not submit an addendum to its joint venture agreement to the SBA for approval, and thus, SBA had not reviewed an addendum as required. Accordingly, SBA explained, it would now rescind its approval of CGJV’s eligibility as being in violation of the SBA regulations, and SBA therefore recommends termination of the contract. Id. at 3.

No party meaningfully disputes the factual basis for the SBA’s position. CGJV argues that our Office should not sustain the protest, but should instead recommend that the contract be “stayed pending approval by SBA.” Intervenor’s Response to SBA at 1. Similarly, NASA objects that the protest should not be sustained on this basis, and requests our Office should hold this decision “in abeyance until SBA issues its eligibility determination” for CGJV. NASA Response to SBA at 1.

Our Office’s statutory obligation to decide protests (including, where possible, supplemental protest issues) by a written decision within 100 days of the initial protest filing precludes our adoption of the approaches requested by CGJV and NASA. We lack the ability to defer issuing a decision, or to continue supervision of the award process during any SBA review. The statute does not permit exceptions to our obligation to issue this decision by the statutory due date. See 31 U.S.C. § 3554(a).

The award of an 8(a) set-aside contract by an agency such as NASA is not directly between the contracting agency and the 8(a) program participant. Rather, section 8(a) of the Small Business Act, 15 U.S.C. § 637(a), provides that the SBA enters into a contract with the contracting agency, and the SBA then awards a subcontract to the 8(a) program participant (or as here, joint venture). As a result, although NASA and CGJV argue over the appropriate remedy, there appears to be no significant dispute that CGJV did not seek the approval for this award as required under the 8(a) program, and the SBA did not have a basis to approve the award--both of which are required by the SBA regulations as a precondition of awarding the set-aside contract to a joint venture. Accordingly, we agree with the SBA that the award to CGJV was improper, and we sustain the protest on that basis.  (Alutiiq-Banner Joint Venture B-412952, B-412952.2, B-412952.3, B-412952.4: Jul 15, 2016)
 

FedServ-RBS alleges that the Corps failed to follow the required procedures for approval of an 8(a) joint venture following FedServ-RBS’s selection as the apparent successful offeror. Protest at 1, 4; Protester’s Response to Agency’s Request for Dismissal (July 27, 2015) at 1. Specifically, FedServ-RBS contends that the Corps did not allow sufficient time for the SBA’s consideration and approval of its joint venture agreement. Protester’s Response to SBA’s Comments (Aug. 12, 2015) at 2; Protester’s Response to SBA’s Supp. Comments (Oct. 1, 2015) at 4. FedServ-RBS argues that the SBA’s regulations implicitly require sufficient time be afforded for the “fair consideration by SBA of the joint venture agreement.” Protester’s Response to SBA’s Comments (Aug. 12, 2015) at 2. For the reasons discussed below, we find no basis to sustain the protest.

(section deleted)

Here, FedServ-RBS’s alleges that the Corps misapplied regulations governing the process for approval of 8(a) joint ventures. See e.g., Protester’s Response to Agency’s Request for Dismissal (July 27, 2015) at 2 (“The violation/misapplication of the regulations governing the approval of an 8(a) joint venture is what this protest is all about.”). Accordingly, we will consider the protest.

As relevant to the protester’s argument, Section 8(a) of the Small Business Act authorizes the SBA to contract with other government agencies and to arrange for the performance of those contracts by awarding subcontracts to socially and economically disadvantaged small businesses. 15 U.S.C. § 637(a); Professional Sec. Corp., supra, at 3. In order to award through the 8(a) program, federal agencies offer requirements to the SBA, and the SBA accepts those requirements that eligible 8(a) participants can perform. 13 C.F.R. §§ 124.502, 124.503.

After a requirement has been accepted by the SBA and the agency has selected an apparent successful officer, the agency is required to submit the identity of the offeror to the SBA district office servicing that offeror for an eligibility determination. 13 C.F.R. § 124.507(b). Upon receipt of such a request, the district office must determine, within 5 working days, whether the apparent successful offeror is eligible for award. 15 C.F.R. § 124.507(b)(1). Eligibility is based on the program criteria of the 8(a) business development program and includes, for example, whether the 8(a) participant is a small business under the NAICS code assigned to the requirement. 13 C.F.R. § 124.507(b)(2). If the SBA determines that the apparent successful offeror is ineligible, the SBA will notify the procuring agency; at which time, the procuring agency may identify the next highest evaluated firm and submit that firm to the applicable SBA district office for an eligibility determination. 13 C.F.R. § 124.507(b)(3).

Additionally, where the apparent successful offeror is a proposed 8(a) joint venture, SBA approval of the joint venture application is required prior award. 13 C.F.R. § 124.513(e)(1); BGI-Fiore JV, LLC, B-409520, May 29, 2014, 2014 CPD ¶ 160 at 3. The parties agree that the SBA is not required to review every joint venture application submitted by an offeror in response to a solicitation. Protest at 3; Agency’s Request for Dismissal (July 20, 2015) at 6; SBA’s Comments (Aug. 7, 2015) at 3; SBA’s Supp. Comments (Sept. 28, 2015) at 3-4. Instead, as our Office has previously explained, based on the SBA’s representations, the SBA is not obligated to review submitted 8(a) joint venture agreements until such time as the joint venture has been selected for award. Hughes Grp. Solutions, B-408781.2, Mar. 5, 2014, 2014 CPD ¶ 91 at 4; BGI-Fiore JV, supra, at 5 n.2.

Once the procuring agency notifies the SBA of the apparent successful offeror, the SBA reviews the joint venture application to ensure that the proposed 8(a) joint venture is in compliance with all program participation restrictions and regulations. Id. If the joint venture agreement is approved, the SBA accepts the contracting agency’s offer, and the agency may award the contract to the 8(a) joint venture. Id.

The SBA explains that, if the joint venture agreement is not approved, or if the SBA has not completed its review of a pending joint venture agreement within the 5 working days allotted in 13 C.F.R. § 124.507(b)(1), the district office must notify the agency that the firm is ineligible. SBA’s Comments (Aug. 7, 2015) at 3. The SBA contends that “if SBA receives a request for an 8(a) eligibility determination for a joint venture after it has been identified by the procuring agency as the apparent successful offeror, and SBA had not yet approved the joint venture agreement, then it is appropriate for SBA to find the offeror ineligible for award.” Id.

The record before us demonstrates that the Corps complied with the above regulations. The Corps submitted the subject requirement to the SBA on January 27, and it was accepted by the SBA on February 2. After the Corps identified FedServ‑RBS as the apparent successful offeror, it notified the appropriate SBA district office and requested an eligibility determination. Agency’s Notice of Apparent Successful Offeror (June 25, 2015) at 1.

With respect to the SBA’s notice of ineligibility, FedServ-RBS contends that the SBA’s notice was “erroneous” because the SBA failed to inform the Corps that its determination was made prior to full consideration of the joint venture agreement and that SBA expected the completed joint venture application on or about July 1. Protester’s Response to Agency’s Request for Dismissal (July 27, 2015) at 5; Protester’s Response to SBA’s Comments (Oct. 1, 2015) at 3. FedServ-RBS also states that the Corps possessed a duty to make “inquiries” regarding the nature of FedServ-RBS’s ineligibility and the status of its joint venture agreement. Id.

We cannot identify any provision in 13 C.F.R. § 124.507 or § 124.513 that would require the SBA to qualify for the procuring agency the details of its eligibility determination, explain the reasons for its determination, or provide the status of its review of an 8(a) joint venture agreement. FedServ-RBS identifies none. The SBA also acknowledges that its regulations impose no obligation on the SBA district office to provide such information. Conference Call (Oct. 8, 2015). Thus, we find no violation of a statute or regulation.

As discussed above, once the SBA informed the Corps that FedServ-RBS was not eligible for award, the Corps proceeded, in accordance with 13 C.F.R. § 124.507(b)(3), to identify the next highest evaluated firm and to seek SBA approval of that firm. Herein lies the crux of FedServ-RBS’s protest – that the Corps did not afford the SBA reasonable time to review the joint venture agreement before proceeding to the next offeror. Protester’s Response to SBA’s Comments (Aug. 12, 2015) at 2.

FedServ-RBS concedes, however, and the SBA and the Corps agree, that there exists no express provision of the regulations that would compel an agency to stay award of the contract until the SBA’s review is complete. Conference Call (Oct. 8, 2015). Rather, FedServ-RBS contends that such a requirement is “implicit” in the regulations. Protester’s Response to SBA’s Comments (Aug. 12, 2015) at 2. FedServ-RBS argues that the requirement in subsection 124.513(e)(1), i.e., that the SBA approve the joint venture prior to award, implies that an agency should stay award for a reasonable amount of time to permit fair consideration of the joint venture agreement. Id.; Protester’s Response to SBA’s Supp. Comments (Oct. 1, 2015) at 3.

The Corps responds that the regulations do not (and are not intended to) provide a “right” on behalf of an 8(a) participant or joint venture to require the agency to stay its award any longer than necessary for the SBA to issue its eligibility determination pursuant to 13 C.F.R. § 124.507(b)(1). Agency’s Response to SBA’s Supp. Comments (Oct. 1, 2015) at 2. The Corps further contends that agencies should not be “held hostage” by the SBA’s review of a joint venture agreement, which could entail numerous exchanges between the SBA and the joint venture and significant time. Id. at 3. Because, as discussed above, the relevant SBA regulations did not require the Corps to stay its proposed award to permit the SBA to complete its review of an 8(a) joint venture agreement, we find no basis to conclude that the agency or the SBA violated any applicable law or regulation.

Next, FedServ-RBS points out that because the SBA is not obligated to commence its review of a joint venture agreement until the joint venture has been identified as the apparent successful offeror and because the SBA’s review of a joint venture agreement often takes longer than the 5 working days allotted in 13 C.F.R. § 124.507(b)(1), the SBA’s interpretation of its regulations could effectively preclude newly‑formed joint ventures from receiving the award of a contract unless the agency is willing and able to postpone the award of the contract until completion of the SBA’s review. Protester’s Response to Agency’s Request for Dismissal (July 27, 2015) at 1; Protester’s Response to SBA’s Comments (Aug. 12, 2015) at 1; Protester’s Response to SBA’s Supp. Comments (Oct. 1, 2015) at 4. To the extent newly-formed 8(a) joint ventures may face difficulties under the SBA’s interpretation, we believe that this is a consequence of SBA’s regulations. For this reason, this is not a matter our Office will address. 4 C.F.R. § 21.5(b). (FedServ-RBS JV, LLC B-411790: Oct 26, 2015)  (pdf)


The Small Business Act gives the SBA, not our Office, the conclusive authority to determine matters of small business status for federal procurements. Bid Protest Regulations, 4 C.F.R. § 21.5(b)(1) (2014). A limited exception applies where a protester argues that the awardee’s quotation shows, on its face, that the awardee is not eligible for award as a small business; we will review the reasonableness of the contracting officer’s decision not to refer the matter to the SBA. See Hydroid LLC, B-299072, Jan. 31, 2007, 2007 CPD ¶ 20 at 3. Here, the protester has not shown that anything on the face of Logical-R’s proposal would have called into question its small business status.

As part of the mission suitability factor, the solicitation required an offeror to detail its organizational structure/partnering approach. RFP at 00144. This portion of the solicitation specifically requested a description and explanation of an offeror’s approach to teaming and subcontracting for compliance with the SBA’s ostensible subcontractor rule.[8] In this regard, an offeror was required to “[i]nclude specific details so that the Government can determine that the prime Contractor making the offer will be performing the primary and vital requirements (at least 50% of the total contract value, Core and IDIQ).” RFP at 00160. For example, an offeror had to identify who would manage the contract; the contractor that led pursuit of the contract; the degree of collaboration; how management and control policies would be implemented; and how the work would be controlled, reported, and reviewed. Id.

The solicitation advised that the agency would review this information to ensure that no apparent ostensible subcontract relationship has been proposed and to verify an offeror’s eligibility for award as a small business. Id. at 00161, 167. If it appeared to the agency that an ostensible subcontract may have been proposed, the RFP notified offerors that a final determination would be made by the SBA. Id. at 00161. In this regard, the solicitation advised that the agency was “collecting this information in anticipation of the size determination by the SBA regarding any proposed final contract award.” Id.

Logical-R’s proposal, as required by the solicitation, specifically addressed the ostensible contractor rule in its proposal. In this regard, the awardee’s oral presentation slides established that Logical-R “[p]erforms 75% of the labor revenue” and its major subcontractor “[r]epresents 25% of the labor revenue, per [the parties’] teaming agreement.” AR, Tab 34, Logical-R Vol.I--Mission Suitability Oral Presentation Slides, at 00639. In its written proposal, Logical-R provided additional detail in response to the solicitation requirement, explaining as follows:

The Logical-R Joint Venture, LLC (Logical-R) leads a team composed of Logical-R as the prime and Booz Allen Hamilton (Booz Allen) as the major subcontractor. Logical-R performs the primary and vital requirements for the contract[.]

* * *

The Logical-R Joint Venture, LLC (Logical-R) manages the Financial Services Contract and the performance of the Logical-R Team as described in SOW 3.0, Administrative Management. Logical-R provides Contract Management (SOW 3.1), Task Management (SOW 3.2), and ensures adherence to Performance Standards (SOW 3.3) issued with task orders.

AR, Tab 35, Logical-R Vol. I--Mission Suitability Written Proposal, at 00693. The proposal additionally detailed that Logical-R will establish the management control and policies applicable to all personnel and performance on the contract; will control, report, and review the work--through its program manager; and will perform the more complex and costly requirements across the SOW elements. Id. at 00694. The proposal detailed that Booz Allen would “staff[] SOW 4.3 [Program analysis and Business Integration] and support[] SOW 4.2.3 [Reimbursable Agreements Management Services],” but explained that all employees are under the management control of Logical-R’s program manager. Id. Finally, the proposal made clear that Logical-R led the pursuit of the contract and managed proposal development. Id. at 00693.

The agency reviewed the proposal of Logical-R, including its ostensible subcontractor information provided as part of its mission suitability proposal. See AR, Tab 86, Individual Rating Sheets, at 01406, 01415, 01424. Based upon its review of the information submitted in the awardee’s proposals, the evaluators determined that no apparent ostensible subcontract relationship existed between Logical-R and Booz Allen. See id.; CO Statement at 12-13. The contracting officer nevertheless requested an eligibility determination from the SBA with respect to Logical-R’s ability to meet the solicitation’s small business size requirements. AR, Tab 68, NASA Letter to SBA (July 11, 2014), at 00961. In response to NASA’s request, an SBA size specialist informed the contracting officer that SBA “does not verify the size status of offerors unless there is a formal size challenge from the Contracting Officer or another offeror.” AR, Tab 70, SBA E-mail to NASA (July 15, 2014), at 01067. The SBA size specialist additionally recommended that the NASA contracting officer rely on the offeror’s self-certification of its size, unless he had adverse information or a formal size challenge. Id. Based upon Logicial-R’s proposal, the offeror’s self-certification, and the evaluator’s assessment of all relevant information, the contracting officer determined that there was no evidence that the apparent awardee was not a small business. CO Statement at 13. Thus, the contracting officer concluded that he would rely upon Logical-R’s self‑certification, as recommended by the SBA, because he did not have any reasonable basis to file a formal size challenge. Id.

First, Al-Razaq contends that the agency was required to refer the awardee to the SBA for a size determination in accordance with the terms of the solicitation.

The solicitation advised offerors that the agency was “collecting this [SBA ostensible subcontractor rule information] in anticipation of the size determination by the SBA regarding any proposed final contract award.” RFP at 00161. We do not agree with the protester that this language required the agency to reflexively refer the presumptive awardee for a size determination despite its own analysis. Rather, this portion of the solicitation was intended to notify offerors that the information was to be collected in the event a size determination was required. In this regard, the solicitation stated that the agency would perform its analysis to ensure that no apparent ostensible subcontract was proposed. Simply, the solicitation did not contain a mandate for the agency to automatically refer to the SBA--independent of the agency’s ostensible subcontractor rule analysis. Thus, it is not reasonable to conclude, as the protester does here, that even if the agency concluded that no ostenstible subcontractor issue arose, that a referral was still required.

In any event, requirements provided in the instruction section (section L) of an RFP are not the same as evaluation criteria provided in the evaluation section (section M); rather than establishing minimum evaluation standards, the instructions of section L generally provide guidance to assist offerors in preparing and organizing proposals. See All Phase Envtl., Inc., B-292919.2 et al., Feb. 4, 2004, 2004 CPD ¶ 62 at 4; JW Assocs., Inc., B-275209.3, July 22, 1997, 97-2 CPD ¶ 27 at 3-4. Even if we agreed with the protester’s interpretation of the solicitation, which we do not, the language within the solicitation’s instructions section did not create an affirmative requirement on the agency in its evaluation of the offerors’ proposals.

Next, the protester contends that the contracting officer was required to refer Logicial-R for a size status determination because the awardee’s proposal demonstrates that Logicial-R and its major subcontractor--Booz Allen--are affiliated through an ostensible subcontractor relationship.

The SBA’s regulations do not prohibit a small business from proposing to subcontract with a large business to perform portions of a contract set aside for small business concerns. Creativision, Inc., B-225829, July 24, 1987, 87-2 CPD ¶ 78. The SBA’s regulations specifically provide, however, that a small business may be considered a joint venturer affiliate of an ostensible subcontractor proposed to perform primary or vital requirements of the contract to such an extent that it may be considered to have a controlling role. 13 C.F.R. § 121.103(h)(4). This is important because the applicable size standard for a set-aside applies to the offeror and its affiliates. Id. Here, we find that while Logical-R proposes to subcontract work to its major large business subcontractor, Booz Allen, the CO reasonably determined that there is nothing in the awardee’s proposal that demonstrates that it will violate the SBA’s ostensible subcontractor rule.

Contrary to Al-Razaq’s various arguments alleging an unusual reliance upon Booz Allen and alleging that Booz Allen will perform primary and vital performance requirements here, we find that the awardee’s proposal did not provide any information that would call into question its small business status. Indeed, its proposal specifically addressed its relationship with Booz Allen and provided ample examples to explain that no violation of the ostensible subcontractor rule would occur. Moreover, the record demonstrates that the agency evaluated the information provided in Logicial-R’s proposal for compliance with the ostensible subcontractor rule and determined that there was no evidence that the apparent awardee was not a small business. Given the absence of any express exception to the ostensible subcontractor rule, and the absence of any clear evidence that Logical-R would not meet the requirement, we find that the contracting officer could rely upon the firm’s self-certification and was not required to file a challenge of the awardee’s small business size status with the SBA. See Fiber‑Lam, Inc., B‑237716.2, Apr. 3, 1990, 90-1 CPD ¶ 351 at 4.  (Al-Razaq Computing Services, B-410491, B-410491.2: Jan 7, 2015)  (pdf)

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[8] An ostensible subcontractor is a subcontractor that performs primary and vital requirements of a contract (or of an order under a multiple award schedule contract), rather than the prime contractor, or a subcontractor upon which the prime contractor is unusually reliant. 13 C.F.R. § 121.103(h)(4). A contractor and its ostensible subcontractor are treated as joint venturers, and therefore affiliates, for size determination purposes. Id.

Comptroller General - Listing of Decisions

For the Government For the Protester
FedServ-RBS JV, LLC B-411790: Oct 26, 2015  (pdf) Alutiiq-Banner Joint Venture B-412952, B-412952.2, B-412952.3, B-412952.4: Jul 15, 2016
Al-Razaq Computing Services, B-410491, B-410491.2: Jan 7, 2015  (pdf)  

Court of Federal Claims - Key Excerpts

New On January 30, 2011, ECS Federal, LLC (“ECS”), a 1,000-employee firm providing “federal customers” with “technical and management services and solutions in support of their critical needs and mission objectives” acquired Paradigm Technologies, Inc. (“Paradigm”), a privately-held corporation with 250 employees with roughly $50 million in annual revenues. AR 727, 1777. Paradigm specialized in providing “integrated business and financial management [], acquisition management, and program management support to the Department of Defense (“DOD”).” AR 727. “In order to integrate the Paradigm workforce and its contracts and subcontracts in an orderly manner, Paradigm became a wholly owned subsidiary of ECS during calendar year 2012, and all Paradigm contracts were subsequently novated to ECS.” AR 728, 2417. The acquisition of Paradigm did not close until January 1, 2012. AR 1860. On or about December 31, 2011, ECS assumed responsibility for Prime Contract HQ0147-10-D that originally was awarded to Paradigm on August 9, 2010. AR 2533–34.

On February 10, 2012, Mr. Mark Maguire, Mr. William Walker, Ms. Stephanie Jordan, and Mr. Lee Dixson formed MDW, a new firm incorporated as a limited liability company under Virginia state law. AR 1855–56, 2415. At that time, Mr. Maguire and Mr. Dixson were employed by Paradigm. AR 2413. Shortly after ECS acquired Paradigm, Mr. Maguire and Mr. Dixson advised ECS they were leaving the company. AR 2413. At that time, Mr. Maguire and Mr. Dixson were working on a Missile Defense Agency Engineering And Support Services (“MiDAESS”) Financial Management Task Order DOB-02-10, issued under Prime Contract HQ0147-10-D-0020. AR 2413, 2534. When ECS was informed about Mr. Maguire and Mr. Dixson’s plans, ECS threatened to fire them. AR 2413. “The only reason ECS did not carry out the threat is that the government lead for the MiDAESS Financial Management Task Order informed ECS leaders that Mr. Maguire [was] deemed to have critical skills and knowledge essential to the Task Order execution, and could not be removed on such short notice. Instead, ECS decided to provide MDW a subcontract to continue the critical skills support required by the Agency.” AR 2413–14.

On April 27, 2015, MDW formed a joint venture with Defense Acquisition, Inc. (“DAI”) by acquiring 49% of Vet Tech, a limited liability corporation organized under Delaware law. AR 724, 1795, 1869. The purpose of the joint venture wasto pursue Missile Defense Agency (“Missile Defense”) contracts, like the one MDW acquired from Paradigm. AR 724, 1795–96. DAI retained 51% of Vet Tech’s stock and is the joint venture’s “managing partner.” AR 724, 1773.

(sections deleted)

The Small Business Act defines a “small business” as “one which is independently owned and operated and is not dominant in its field of operation.” 15 U.S.C. § 632(a)(1). In addition, “Congress . . . gave SBA authority to ‘specify detailed definitions or standards by which a business concern may be determined to be a small business concern.” Palladian Partners, Inc., 783 F.3d 1247 (citing 15 U.S.C. § 632(a)(2)(A)); see also 15 U.S.C. § 637(b)(6) (Empowering SBA “to determine within any industry the concerns, firms, persons, corporations, partnerships, cooperatives, or other business enterprises which are to be designated small-business concerns for the purpose of effectuating the provisions of this chapter”) (emphasis added).

Therefore, although the SBA has authority to “specify detailed definitions or standards by which a business may be determined to be a small business concern,” such definitions and standards are to take into account the relevant “industry.” 15 U.S.C. § 637(b)(6).

On January 5, 1956, the SBA issued a Notice of Proposed Rulemaking “to establish the definition of small business.” 21 FED.REG. 79 (Jan. 5, 1956). Therein, “industry” was not defined, but “field of operation” was as: “sufficient in its scope to include both those enterprises which are engaged in making or marketing or are ready and able to make or market a product or similar product which is of a like nature.” Id. at 80. When the first regulations were issued on January 1, 1957, however, neither the definition of “industry” nor “field of operation” were included. Instead, the SBA took a different tact and defined “a small business for the purposes of Government procurement” as a “concern that (1) is not dominant in its field of operation and, with its affiliates, employs fewer than 500 employees, or (2) is certified by as a small business concern by [the] SBA.” See 21 FED. REG. 9709, 9710 (Dec. 7, 1956) (citing 13 C.F.R. §103.3) (emphasis added).

In 1956, “affiliate” was defined as a “business concern . . . when either directly or indirectly (1) one firm controls or has the power to control the other, or (2) a third party controls or has the power to control both. In determining whether control or the power to control exists, consideration shall be given to all appropriate factors including common ownership, common management and contractual relationships.” 21 FED. REG. 9709, 9710 (Dec. 7, 1956) (citing 13 C.F.R. § 103.2(e)). Over the last sixty-one years, however, the definition of “affiliate” has been significantly expanded, so that original one paragraph description now comprises of forty-two paragraphs or subparagraphs in the Code of Federal Regulations. See 13 C.F.R. § 121.103(a)–(d).

The relevant SBA rule in this case, as of May 2, 2016, the date Vet Tech submitted an offer to Missile Defense in response to Solicitation No. HQ 0147-15-R-0019, defines affiliation as:

“Individuals or firms that have identical or substantially identical business or economic interests (such as . . . firms that are economically dependent through contractual or other relationships) may be treated as one party with such interest aggregated.” 13 C.F.R. § 121.103(f) (emphasis added).

The point of determining whether the members of a joint venture are economically dependent on another business concern, however, is to prevent a business that is “dominant in a field of operation” from being able to obtain a preference under the Small Business Act. See 15 U.S.C. § 632(a)(1). But, without defining the “industry” or “field of operation,” i.e., the relevant geographic and product market, dominance cannot be ascertained. See, e.g., Fed. Trade Comm’n and U.S. Dep’t of Justice Horizontal Merger Guidelines (Aug. 19, 2010) at 7–15. In this case, simply stating that MDW is in the field of the “Department of Defense Advisory and Assistance Service Industry” (AR 2594, MDW’s definition) or the field of “strategic planning and finance management,” “cost estimating and analysis,” “earned value management,” “accounting,” and “informational support and integration” (AR 2598, 2623, SBA Area Office’s definition) provides no parameters for a fact finder to ascertain any reliable information relevant to whether a business concern actually is “dominant in the field of operation.” AR 2623. A more robust economic analysis is required. Id.

The SBA’s “affiliation rule” also categorically decrees that: “individuals or firms that have identical or substantially identical businesses,” regardless of any other distinguishing features, ipso facto “may be treated as one party[.]” 13 C.F.R. § 121.103(f) (emphasis added.) To be sure, federal courts are obligated to afford an agency’s rule deference, but deference is not required when the rule, as here, affords an agency absolute discretion, without any apparent substantive constraints. See Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 414–15 (1971) (holding that a federal agency’s decision is entitled to a presumption of regularity, but “that presumption is not to shield [the agency’s] action from a thorough, probing, in-depth review”).

The United States Court of Appeals for the Federal Circuit has held that the United States Court of Federal Claims has jurisdiction to adjudicate alleged violations of statute or regulation “in connection with any stage of the federal contracting acquisition process.” Distributed Sols., 539 F.3d at 1346 (emphasis added). Whether the court has jurisdiction to adjudicate whether the SBA’s “affiliate rule” violates the APA in the context of a bid protest, has not been considered by the United States Court of Federal Claims or our appellate court. The court, however, does not need to reach that issue today, because the SBA Area Office’s May 2, 2016 findings were superficial, confusing, and likely incorrect, i.e., arbitrary and capricious. See generally Ralph C. Nash and John Cibinic, “Small Business Programs: Controlled Chaos?” 19 No. 1 NASH & CIBINIC REPORT ¶ 3 (Jan. 2005) (commenting on “the chaotic rules that . . . implement the small business initiatives of the Government”).

SBA’s “General Principles of Affiliation” provide that:

Concerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists.

13 C.F.R. § 121.103(a)(1).

Under this principle, however, only DAI has the power to control Vet Tech by virtue of ownership of 51% of Vet Tech’s stock. See 13 C.F.R. § 103(c)(1). MDW does not since it is a minority shareholder. But, the SBA also considers, not only stock ownership and management, but “previous relationships with or ties to another concern,10 and contractual relationships, in determining whether affiliations exists.” 13 C.F.R. § 121.103(a)(2) (emphasis added). The “contractual relationships” phrase provides at least some context to the scope of the “affiliation,” but in attempting to be more specific, reverts to generalities. See 13 C.F.R. § 121.103(f) (describing affiliation based on “identical or substantially identical business or economic interests”). Of course, most firms have “substantially identical business or economic interests,” in that they are in business to make a profit. Therefore, this standard is meaningless. As to whether two (or more) firms have a “substantially identical business or economic interests” through “contractual or other relationships[,]” the SBA Area Office, in the first instance, has discretion to determine whether affiliation exists so that “firms . . . may be treated as one party.” 13 C.F.R. § 121.103(f) (emphasis added).

In this case, the SBA Area Office’s May 2, 2016 findings did not discuss why it decided not to exercise its discretion to find that no “economic dependence” existed between MDW and ECS. As such, the SBA Area Office’s May 2, 2016 findings provided no reasonable basis on which the court can review why the SBA Area Office’s decided not to exercise its decision to find no affiliation. See Impresa Construzioni Geom. Domenico Garufi v. United States, 238 F.3d 1324, 1332–33 (Fed. Cir. 2001) (observing that the reviewing court’s function is to determine whether “the contracting agency provided a coherent and reasonable explanation of its exercise of discretion”) (internal quotation marks and citations omitted).

Assuming, however, that SBA Area Office explained why it exercised its discretion not to find “economic depend[ence] through contractual relationships,” nevertheless the burden of proof rests on the SBA Area Office to establish dependency. See 13 C.F.R. § 121.102(b) (“As part of its review of a size standard, the SBA will investigate if any concern . . . would be dominant in the industry.”) (emphasis added).

In this case, the SBA Area Office found that

Missile Defense awarded ECS three task orders. MDW has served as a subcontractor on all three task orders. The first Task Order DOB-02-10 was awarded to MDW on August 1, 2012. The second and third Task Orders DOB-07- 12 and DOB-02-13 respectively were awarded to MDW on February 28, 2013. The subcontractor agreement is between the prime contractor, Paradigm and MDW for the period of 7/20/12–9/7/2015 and signed [on] July 20, 2012.

AR 2628.

The record reflects that Missile Defense awarded Paradigm—not ECS—Prime Contract HQ 0147-10-D-0020 and Task Order DOB-02-10. AR 2533. On December 31, 2011, ECS acquired Paradigm. AR 2533. And, on August 1, 2012, Missile Defense “directed” ECS to enter into a subcontract with MDW under Task Order DOB-02-10. AR 2533. Thereafter, ECS was awarded two subcontracts under Task Orders DOB-07-12 and DOB-02-13. AR 2535.

But, the SBA Area Office’s May 2, 2016 decision failed to consider that “ECS did not award subcontracts to MDW. . . to provide revenues or financial assistance[.]” AR 2737. Instead, ECS awarded the first subcontract to MDW on August 1, 2012, in direct response to intervention by Missile Defense requiring that Mr. Maguire continue work on Task Order DOB-02-10, despite the fact that he was leaving the employ of ECS to form a separate and independent company. AR 2727–28. Therefore, it was Missile Defense that established the first contractual relationship or “affiliation” between ECS and MDW.

In addition, the SBA Area Office’s May 2, 2016 findings do not reflect whether MDW’s subcontract work for ECS on Task Orders DOB-07-12 or DOB-02-13 also was required by Missile Defense. But,

[u]nder the ID/IQ rules, once a subcontractor was on a team, that subcontractor could not be on any other teams without approval of the government and the prime. Since MDW Associates was added to the existing ECS Federal (Paradigm) contract to support Task Order DOB-02-10, MDW Associates became a Team Member by their addition to the ID/IQ contract for Task Order DOB-02-10. Since they were now a subcontractor Team Member, MDW Associates was included in the DOB- 07-12 and DOB-02-13 proposals based on their skills and qualifications.

AR 2535 (emphasis added).

Therefore, if Missile Defense required MDW to enter into a subcontracting relationship with ECS, and subsequently approved of such continuing subcontracting work, it would be unjust to disqualify Vet Tech from future government contracting opportunities. See Argus & Black, SBA No. SIZ-5204, 2011 WL 1168302 (Feb. 22, 2011), at * 6 (declining to find economic dependence when “a mechanical application of the rule . . . would be an injustice”). The SBA Area Office’s May 2, 2016 decision discussed none of these “important [if not dispositive] aspects of the problem.” State Farm Mutual Ins. Co., 463 U.S. 29, 43 (1983); see also Overton Park, 401 U.S. at 416 (holding that the reviewing court must determine whether the agency considered all the relevant facts and whether there has been an error of judgment);

Finally, the SBA Area Office’s findings did not acknowledge numerous representations made by MDW that it was not dependent on ECS, because MDW had the requisite experience and background independently to perform work on Missile Defense Contract No. HQ0147-16-C-0028; a backlog of other non-ECS pending business; modest revenue needs; no debt; and 51.5% of the revenue previously received from ECS was from subcontracts subject to open competition with other firms. AR 1778–79, 1782–84, 2393, 2413, 2416, 2599. Therefore, the SBA OHA’s July 20, 2016 decision, affirming the SBA Area Office’s May 2, 2016 findings, was arbitrary and capricious. See Princeton Vanguard, LLC v. Frito-Lay North America, Inc., 786 F.3d 960, 970 (Fed. Cir. 2015) (“[S]ubstantial evidence review ‘requires an examination of the record as a whole, taking into account both the evidence that justifies and detracts from an agency’s opinion.’ Our review under that standard ‘can only take place when the agency explains its decisions with sufficient precision, including the underlying factfindings and the agency’s rationale.’”) (citations omitted); see also Seminole Elec. Coop. v. Fed. Energy Regulatory Comm’n, No. 15-1450, 2017 WL 2818640, at *3 (D.C. Cir. 2017) (“To satisfy [the Administrative Procedure Act’s ‘arbitrary and capricious’] standard, [the agency] must ‘demonstrate that it has made a reasoned decision based upon substantial evidence in the record, and the path of its reasoning must be clear.’”) (citation omitted).

CONCLUSION.

For these reasons, Plaintiffs’ December 21, 2016 Motion For Judgment On The Administrative Record is granted. The Government’s February 9, 2017 Cross-Motion To Dismiss is granted, insofar as MDW does not have standing in this case. The Government’ February 9, 2017 Motion For Judgment On The Administrative Record, is denied.

The SBA OHA’s July 20, 2016 decision affirming the May 2, 2016 SBA Area Office findings is reversed, vacated, and remanded for sixty days to the SBA OHA, at 409 3rd Street, S.W., Washington, D.C., 20416, to instruct the SBA’s Area Office at 233 Peachtree Street, Suite 1900, Atlanta, Georgia, 30303, to conduct a new size determination specifically to ascertain whether the actions of DOD and/or Missile Defense were the cause of MDW entering into a subcontracting relationship with ECS, as well as to consider evidence proffered by MDW that, at no time, was MDW economically dependent on ECS. See RCFC 52.2(a).  (Veterans Technology, LLC and MDW Associates, LLC v. U. S. No. 16-1489, August 2, 2017)


In this case, IEI-Cityside objects to the SBA’s determination that IEI and Cityside are affiliated, and that, therefore, IEI-Cityside does not qualify as a small business for the purposes of the HUD procurement. IEI-Cityside claims that the SBA violated its own regulations in rendering its size determination. Accordingly, this case involves an allegation that there has been a violation of a statute or regulation in connection with a procurement within the meaning of 28 U.S.C. § 1491(b)(1). See Palladian Partners, Inc. v. United States, 783 F.3d 1243, 1254 (Fed. Cir. 2015) (recognizing CFC’s jurisdiction over challenges to OHA’s NAICS determination in connection with a procurement).

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The SBA concluded that the joint venture agreement between IEI and Cityside did not meet the requirements of 13 C.F.R. § 124.513 (c)(6), (c)(7) or (d) and that therefore the joint venture did not qualify for the exception to affiliation set forth in 13 C.F.R. § 121.103(h)(3)(iii).

See also 13 C.F.R. § 124.520(d)(1)(ii) (“In order to receive the exclusion from affiliation for both 8(a) and non-8(a) procurements, the joint venture must meet the requirements set forth in § 124.513(c).”). This conclusion—which concerns matters that are squarely within the scope of the SBA’s discretion and expertise—was plainly reasonable and consistent with the regulations.

Section 124.513(c)(6) required that IEI-Cityside’s joint venture agreement contain a provision “[i]temizing all major equipment, facilities, and other resources to be furnished by each party to the joint venture, with a detailed schedule of cost or value of each.” With respect to this requirement, IEI’s joint venture agreement stated that “[u]pon award of the contract identified in section 1.0 Purpose, above, the Managing Director will purchase, in the name of the joint venture, facilities and equipment for the proper operation of this contract.” AR 1315. According to plaintiff, this clause satisfied the criterion set forth in 13 C.F.R. § 124.513 (c)(6) by providing that “all equipment and resources essentially would be contributed or ‘furnished’ by IEI, the Managing Director.” Pl.’s Br. 10.

This contention is not persuasive. First, the joint venture agreement does not state that IEI will furnish all equipment, facilities and resources; instead, it states that IEI, as managing director, will purchase such materials “in the name of the joint venture.” But more importantly, even assuming it were reasonable to read the agreement to mean that IEI would be supplying all equipment, facilities, and resources, IEI-Cityside does not deny that the agreement did not include the other information required by the regulation: an itemization and detailed schedule of the costs of such equipment, facilities, and resources. Accordingly, OHA’s determination that IEI-Cityside’s agreement did not meet the requirements of 13 C.F.R. § 124.513(c)(6) is clearly reasonable.

Similarly, the OHA’s conclusion that IEI Cityside’s joint venture agreement did not comply with 13 C.F.R. § 124.513(c)(7) was also entirely reasonable. That regulation required that IEI-Cityside’s joint venture agreement to contain a provision “[s]pecifying the responsibilities of the parties with regard to negotiation of the contract, source of labor, and contract performance, including ways that the parties to the joint venture will ensure that the joint venture and the 8(a) partner(s) to the joint venture will meet the performance of work requirements set forth in paragraph (d) of this section” (which delineates the percentage of work that each joint venture partner must complete in the course of contract performance).

The IEI-Cityside joint venture agreement did not contain any of this specific information, with the exception of stating that IEI’s President would negotiate the contract. Beyond that, as set forth above, the agreement stated only in very general and conclusory terms that IEI and Cityside would each perform fifty percent of the labor under the contract, and that IEI would have a right of first refusal as needed to meet the minimum work requirements set forth in the regulations. OHA reasonably concluded that these general statements were inadequate to meet regulatory requirements because the agreement “does not designate specific tasks or responsibilities to IEI and Cityside and fails to explain how [IEI-Cityside] will fulfill the performance of work requirements of 13 C.F.R. § 124.513(d).” AR 5075.

Notwithstanding the foregoing, IEI-Cityside argues that at the time it entered the agreement it could not have provided greater specificity with respect to facilities, equipment and other resources, or as to the allocation of the parties’ responsibilities with respect to contract performance. It contends that “[n]o specific ‘itemization’ of the equipment and facilities was possible at the time of proposal submission” because of the IDIQ nature of the procurement and because it did not know the geographic regions to which it would be assigned. Pl.’s Br. 10, 14; see Pl.’s Reply 6-11. Indeed, it argues, “the very language of the Solicitation itself provides for lengthy transition, during which the contract awardee is charged with the responsibility of furnishing the materials and facilities necessary for contract performance.” Pl.’s Reply 8.

The SBA’s conclusion that IEI-Cityside’s “impossibility” argument was unavailing was reasonable for two independent reasons. First, as OHA observed, the regulations do not include an exception based on the nature of the procurement involved. See 13 C.F.R. § 124.513(c); Kisan-Pike, 2014 WL 6904349, at *9 (noting that the applicable regulations do not authorize an exception for situations where a joint venture may have difficulty providing detailed information). Indeed, carving out exceptions on this basis could undermine the SBA’s purposes for imposing mandatory provisions on joint venture agreements and for requiring SBA approval of such agreements: to ensure that the 8(a) (or other small business) concern is bringing sufficient value to the joint venture relationship and that the relationship is genuine. See 13 C.F.R. § 124.513(a)(2) (providing that a “joint venture agreement is permissible only where an 8(a) concern lacks the necessary capacity to perform the contract on its own, and the agreement is fair and equitable and will be of substantial benefit to the 8(a) concern,” but cautioning that “where SBA concludes that an 8(a) concern brings very little to the joint venture relationship in terms of resources and expertise other than its 8(a) status, SBA will not approve the joint venture arrangement”); see also 76 Fed. Reg. 8222 (“Receiving an exclusion from affiliation for any non-8(a) contract is a substantial benefit that only SBA-approved mentor/protégé relationships can receive. The intent behind the exclusion generally is to promote business development assistance to protégé firms from their mentors. Without [the requirements of section (c)], the entire small business contract could otherwise be performed by an otherwise large business.”).

Second, and in any event, as OHA discerned, the fact that this matter involves an IDIQ contract and that IEI-Cityside did not know the geographic region to which it might be assigned did not preclude IEI-Cityside from providing more specificity regarding the equipment, facilities, and other resources that each party would contribute, or adequate information about allocations of responsibility. The “indefinite” aspect of this procurement was the number of properties that the contractor would manage. As OHA observed, notwithstanding this uncertainty about the number of properties or the geographic region for which the award would be made, IEI-Cityside “might nevertheless have complied with 13 C.F.R. § 124.513(c) and (d) by discussing the types of work each joint venture partner would perform, and the resources each partner would contribute, for each region awarded to Appellant.” AR 5075.

Indeed, the record in this matter reveals that IEI-Cityside could readily have provided additional specificity in its agreement. According to the administrative record, both IEI and Cityside are incumbent HUD contractors with experience in performing field service management contracts. AR 383. IEI-Cityside emphasized in the past performance portion of its proposal that it is comprised of “two experienced HUD FSM contractors” and noted the tens of thousands of HUD properties its member entities have managed across multiple states. Id. IEI-Cityside also stated that “[a]s current FSM contractors, both Cityside and IEI have the infrastructure and personnel that can be assigned to the joint venture to perform the services required in areas 1D, 4D, 5D, 1P, 3P, 4P, 5P.” Id. IEI-Cityside elaborated that “IEI currently has an active pool of subcontractors in area 1P. Cityside currently maintains a pool of subcontractors in area[s] 1P, 3P, 4P and 5P.” Id. IEI-Cityside then went on to explain its plans for acquiring additional infrastructure based on its extensive experience, culminating in its assertion that “[i]f it is awarded the FSM 3.8 contract IEI-Cityside JV will be ready to perform from day one and will not require a lengthy transition period.” AR 383; But cf. Pl.’s Br. 11, 14 (claiming that the transition period establishes impossibility of complying with regulations). Given these representations, and each of the joint partners’ experience, IEI-Cityside necessarily would have had a much greater appreciation of what each partner would be contributing in terms of equipment, facilities, labor and other resources at the time it entered its agreement.

IEI-Cityside’s impossibility claims are also contradicted by its technical proposal, in which IEI-Cityside asserted that “the Firm has existing fully staffed and equipped offices located within the Denver and Philadelphia HOC geographic area” aswell as overarching computer systems for the contracts. AR 358. The technical proposal also included a lengthy “Property Management Work Flow,” complete with detailed charts and narratives that specified the types of work that IEI-Cityside would perform if it were awarded the contracts. AR 360-77. IEI-Cityside claimed that its pre-existing resources and coverage “will allow the Firm to provide timely and efficient services to HUD from day one.” AR 360.

In addition, in submitting the joint venture agreement to the SBA district office in Nebraska, IEI-Cityside provided additional information on a form checklist—not included in the agreement itself—stating that it had existing personnel, equipment, and “facilities already in use that will be used for this contract with several other offices ready to perform the contract.” AR 1323. IEI-Cityside also provided “[a] breakdown of work tasks to be performed by each joint venturer.” See AR 1326.

The record, in short, demonstrates that IEI-Cityside was capable of providing specifics that it did not include in the agreement. OHA fully considered this record, as well as IEI-Cityside’s arguments. OHA’s interpretation of SBA’s regulations and the application of those regulations to the specific circumstances of this case is entitled to substantial deference. OHA provided a reasoned and logical explanation for why the Area Office determination did not constitute clear error. Accordingly, the SBA’s decision that the joint venture agreement failed to meet the requirements of 13 C.F.R. § 124.513(c) and (d) was neither arbitrary, capricious, nor contrary to law.  (Inspection Experts, Inc. and Cityside Management Corp., No. 15-673C, August 25, 2015)  (pdf)

Court of Federal Claims - Listing of Decisions

For the Government For the Protester
Inspection Experts, Inc. and Cityside Management Corp., No. 15-673C, August 25, 2015  (pdf) New Veterans Technology, LLC and MDW Associates, LLC v. U. S. No. 16-1489, August 2, 2017

Court of Appeals for the Federal Circuit - Key Excerpts

Here, Tinton Falls argues that the SBA-OHA lacked a rational basis for determining that the primary and vital requirements of the solicitation were the management and coordination of a package of lodging and transportation services. Contracting officers are entitled to exercise discretion upon a broad range of issues confronting them in the procurement process. Id. at 1286 (internal quotation omitted). For that reason, procurement decisions invoke a highly deferential rational basis review. Id. (internal quotation omitted). Under this standard, we must sustain an agency' s action unless the challenger can prove the agency entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or [issued a decision that] is so implausible that [the decision] could not be ascribed to a difference in view or the product of agency expertise. Ala. Aircraft Indus., Inc. Birmingham v. United States, 586 F.3d 1372, 1375 (Fed. Cir. 2009) (quoting Motor Vehicle Mfrs. Assn of the U.S., Inc. v. State Farm Mut. Auto Ins. Co., 463 U.S. 29, 43 (1983)).

(sections deleted)

Proceeding to the merits, at issue here is a narrow challenge to the Claims Court's determination that DMC's relationships with its subcontracted hotels did not violate the ostensible contractor rule, and thus did not disqualify DMC as a small business concern under the solicitation and preclude award of the contract to DMC. Congress has given SBA the exclusive authority to establish definitions and standards for determining whether an entity qualifies as a small business concern for purposes of federal law. 15 U.S.C. § 632(a)(2)(A). Determinations under SBA' s regulations are binding on federal procurement officers. 15 U.S.C. § 637(b)(6).

When an agency issues a solicitation for a small business set-aside contract, it must select an NAICS code for that contract, which best describes the principal purpose of the product or service being acquired. 13 C.F.R. § 121.402(a) (b). Each NAICS code is associated with a number of employees or amount of annual receipts, both of which limit the size of a business that can qualify as a small business for purposes of the contract. 13 C.F.R. § 121.201. Pertinent to the inquiry here are the regulations relating to affiliated businesses. Even if a business falls within the employee and annual receipt limits of the applicable NAICS code, it may fail to qualify as a small business for purposes of the contract if it is affiliated with other entities. A business is affiliated with another business when one controls or has the power to control the other. 13 C.F.R. § 121.103(a)(1). In determining affiliation, SBA considers factors such as ownership, common management, previous relationships with or ties to another concern, contractual relationships, and joint ventures between entities. 13 C.F.R. § 121.103(a)(2), (c) (h). Businesses are treated as joint venturers and therefore affiliates when a subcontractor performs primary and vital requirements of a contract . . . or [is] a subcontractor upon which the prime contractor is unusually reliant. 13 C.F.R. § 121.103(h)(4). This is referred to as the ostensible subcontractor rule. See id. ( A contractor and its ostensible subcontractor are treated as joint venturers.).  

When an agency issues a solicitation for a small business set-aside contract, it must select an NAICS code for that contract, which best describes the principal purpose of the product or service being acquired. 13 C.F.R. § 121.402(a) (b). Each NAICS code is associated with a number of employees or amount of annual receipts, both of which limit the size of a business that can qualify as a small business for purposes of the contract. 13 C.F.R. § 121.201. Pertinent to the inquiry here are the regulations relating to affiliated businesses. Even if a business falls within the employee and annual receipt limits of the applicable NAICS code, it may fail to qualify as a small business for purposes of the contract if it is affiliated with other entities. A business is affiliated with another business when one controls or has the power to control the other. 13 C.F.R. § 121.103(a)(1). In determining affiliation, SBA considers factors such as ownership, common management, previous relationships with or ties to another concern, contractual relationships, and joint ventures between entities. 13 C.F.R. § 121.103(a)(2), (c) (h). Businesses are treated as joint venturers and therefore affiliates when a subcontractor performs primary and vital requirements of a contract . . . or [is] a subcontractor upon which the prime contractor is unusually reliant. 13 C.F.R. § 121.103(h)(4). This is referred to as the ostensible subcontractor rule. See id. (A contractor and its ostensible subcontractor are treated as joint venturers.).

Here, Tinton Falls does not allege that DMC will be unusually reliant on a subcontractor in order to perform the contract. Rather, as discussed above, Tinton Falls challenges only the SBA-OHA s determination that the primary and vital requirements of the solicitation are a coordinated package of hotel and transportation services. Tinton Falls contends that the primary and vital requirement of the solicitation is the provision of lodging services itself, and does not include the management and coordination of lodging and transportation services to meet MSC s needs. According to Tinton Falls, the solicitation does not require bidders to provide a management plan or detail how subcontractors will be managed. Rather, much of the statement of work in the solicitation is devoted to criteria relating to minimum requirements for hotels. See J.A. 248 51, 253 55. Tinton Falls cites to the chosen NAICS code to support its position that lodging services are the primary purpose of the solicitation. Specifically, Tinton Falls notes that the MSC contracting officer chose NAICS code 721110 ( Hotels (except Casino Hotels) ), rather than the other NAICS codes that appear to describe management services, such as NAICS codes 541611 ( Administrative Management & General Management Consulting Services ) and 561990 ( All Other Support Services ). Tinton Falls concludes that the SBAOHA lacked a rational basis for its determination that management and coordination of the lodging and transportation services is the primary and vital requirement of the contract.

Tinton Falls contends that when the primary and vital requirements of the solicitation are properly defined as lodging services, DMC s relationships with its subcontracted hotels violate the ostensible contractor rule. The SBA-OHA estimated that the cost of hotel rooms accounts for about 80% of the contract value. J.A. 3551. DMC does not own any hotels and intends to subcontract the provision of these hotel rooms to several different hotels. J.A. 3550. And because at least the primary hotel subcontracted by DMC does not qualify as a small business for purposes of the solicitation, J.A. 3452, Tinton Falls concludes that DMC cannot be considered a small business concern for purposes of the solicitation because, pursuant to 13 C.F.R. § 121.103(h), it is a joint venturer with, and an affiliate of, the subcontracted hotels.

We disagree with Tinton Falls that the SBA-OHA lacked a rational basis for determining the primary and vital requirements of the solicitation. Contrary to Tinton Falls characterization, the solicitation requires more than simply a fixed block of hotel rooms for a certain period of time; rather, the contractor must be able to secure an unpredictable and widely-varying number of acceptable hotel rooms on short notice. For example, the solicitation estimates that MSC will require around 65 hotel rooms per night, but warns that in the past, MSC s needs have fluctuated between 25 and 120 rooms per night. J.A. 248. And while the contractor is required to ensure a sufficient number of single rooms are available at all times to meet the Government s needs, MSC will pay only for the number of rooms each night used to house CIVMARs attending training. J.A. 248 49. Further, the contractor is expected to make every effort to provide rooms within one hour of CIVMAR arrivals. Id. And MSC is not required to provide advance notice of its daily room requirements to the contractor. Id. Thus, even though no management and coordination tasks are expressly identified, there is no question that the solicitation requires management and coordination to supply a potentially large and varying number of hotel rooms with little or no notice.

Tinton Falls also minimizes the requirement that the contractor must provide all transportation to and from the hotels and the MSC Training Center. J.A. 250. The number of trips required by MSC is based on CIVMAR training class schedules, which can vary. Id. And as with the lodging services, MSC will pay only for the actual number of trips provided between the hotels and the training center. J.A. 251. In addition, the contractor must provide various other services relating to the lodging and transportation of CIVMARs, such as ensuring that all CIVMARs check in each night and maintaining logs of all passengers who use the provided transportation services. Id. Further, the contractor is required to be the single point of contact for the MSC, and must be available to be contacted by the MSC at all times. J.A. 247. DMC intends to allocate two of its employees to perform the majority of the labor associated with these management and coordination tasks. J.A. 3549.  (Tinton Falls Lodging Realty, LLC v. U. S. and DMC Management Services, LLC, No. 2014-5140, September 2, 2015)  (pdf)

Court of Appeals for the Federal Circuit - Listing of Decisions

For the Government For the Protester
Tinton Falls Lodging Realty, LLC v. U. S. and DMC Management Services, LLC, No. 2014-5140, September 2, 2015  (pdf)  
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