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5 min read

LS3, LLC Size Determination Appeal Dismissed as Moot

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In May 2023, the SBA Office of Government Contracting made two significant Size Determinations, Nos. 6-2023-020 and 6-2023-021, concerning the small business status of LS3, LLC. Challenging these determinations, LS3, LLC filed an appeal, asserting that they were clearly erroneous and requested either a reversal or remand. However, the Office of Hearings and Appeals (OHA) dismissed the appeal on the grounds of mootness.

Background on the Solicitation and Protest

On May 6, 2022, the U.S. Navy issued Solicitation No. N6893620R0120, seeking engineering services in China Lake, California. This solicitation is specifically set aside for Service-Disabled Veteran-Owned Small Businesses (SDVOSB). The designated NAICS Code for this opportunity is 541330, with a size standard of $41.5 million in annual receipts.

Initially, the proposal deadline was set for June 16, 2022. However, it was later extended. New Directions Technologies, Inc. (NDTI) and Synectic Solutions, Inc. (SCI) both submitted their proposals for consideration.

On March 28, 2023, the Navy announced that NDTI is the apparent successful offeror. However, on April 2, 2023, SCI filed a size protest, alleging that NDTI does not meet the criteria to be considered a small business and is therefore ineligible for the procurement. In response, on April 4, 2023, NDTI filed a combined size and SDVOSB protest, claiming that they are not a small business and are not eligible as an SDVOSB for this particular procurement.

Overview of the Size Determinations

On May 8, 2023, the Area Office issued two Size Determinations (Nos. 06-2023-20 and 06-2023-21), which determined that the Appellant was not eligible as a small business for the procurement in question. LS3 is a mentor-protégé joint venture (JV) between Lukayva, Inc. (Lukayva) and Systems Applications and Technologies, Inc. (SATI). The Joint Venture Agreement (JVA) designated Lukayva as the Managing Venturer, with SATI as the other venturer.

According to the JVA, the purpose of the JV is to bid on the Solicitation issued by the Naval Air Warfare Center. Additionally, the LS3 Joint Venture Operating Agreement (JVOA) states that the Management Committee, with Lukayva as the Managing Member, will oversee the business affairs of LS3. The Project Manager, appointed by the Managing Member, is responsible for implementing the policy decisions made by the Management Committee.

During the review of affiliation allegations against the Appellant, the Area Office found these claims to be without merit. However, they also determined that the Appellant's JVA did not establish a clear separation between the protégé and mentor, thereby disqualifying the Appellant as a small business concern for this particular procurement.

LS3's Appeal and Arguments

LS3 filed an appeal against the size determinations on May 23, 2023. They argued that the Area Office lacked jurisdiction to conduct a size determination in this case. The Area Office found LS3 to be other than small because they did not meet all the requirements for an SDVOSB joint venture. LS3 argued that only OHA (Office of Hearings and Appeals) could assess the compliance of an SDVOSB joint venture agreement in the context of an SDVOSB protest.

LS3 disputed the Area Office's conclusion that Mr. VanDerWerff could not serve as Responsible Manager due to his employment with both Lukayva and SATI. They asserted that the Area Office misapplied the applicable regulation and disregarded the facts before them. LS3 contended that SBA (Small Business Administration) had to apply the regulation as written and that there was no specific provision in the regulation that Mr. VanDerWerff's dual employment violated. They argued that the Area Office relied on its traditional interpretation of SBA's regulations instead of considering the plain language of the regulation.

LS3 maintained that they complied with the regulation because Mr. VanDerWerff had always been a Lukayva employee. They referred to Mr. VanDerWerff's Declaration, which stated that he was a SATI employee and the sole owner of Lukayva but had no ownership interest in SATI and planned to resign from SATI upon contract award and the resolution of any related protests. They pointed out that the regulation did not require the Responsible Manager to be an employee of the SDVOSB Venturer if there was a letter of intent committing to employment with the SDVOSB.

LS3 argued that Mr. VanDerWerff's present and continuing employment with Lukayva fulfilled the requirements of the regulation. They emphasized that the difference in terminology between "Project Manager" and "Responsible Manager" in LS3's JVA was deemed irrelevant when the duties aligned with the regulation's requirements. LS3 criticized the Area Office for assuming that Mr. VanDerWerff would remain a SATI employee throughout contract performance, which was an error of fact contradicted by his Declaration.

Lastly, LS3 alleged that the Area Office abused its authority by disregarding Mr. VanDerWerff's Declaration and relying on speculation. They claimed that this constituted an error of fact on the part of the Area Office. These arguments formed the basis of LS3's appeal against the size determinations.

NDTI's Response

NDTI argued that the Area Office had jurisdiction to review the Appellant's Joint Venture Agreement (JVA) and assess its conformity with 13 C.F.R. § 125.18(b)(2) regarding size determination. The Area Office's authority in size protests includes determining whether an SDVOSB joint venture met the small business requirements outlined in 13 C.F.R. § 125.18(b)(2).

NDTI claimed that the LS3's JVA was noncompliant because the Responsible Manager, Mr. VanDerWerff, was employed by both the mentor and the SDVOSB. This arrangement violated the regulation, which explicitly prohibited the Responsible Manager from simultaneous employment with the mentor and the protégé.

NDTI argued that any error made by the Area Office in assessing Mr. VanDerWerff's employment status was irrelevant, as the regulation unequivocally prohibited him from working for both companies. The crux of the matter was that the JVA had to adhere to the regulations, regardless of any oversight or harmless errors made during the review process.

Concurrent Proceeding, Analysis and Conclusion

On August 9, 2023, the OHA issued a protest against New Directions Technology, Inc., filed by a Veteran-Owned Small Business Concern (VSBC) in a concurrent proceeding. In its decision, the OHA determined that the appellant's joint venture operating agreement and joint venture agreement did not comply with the regulation outlined in 13 C.F.R. § 125.18(b)(2)(ii). The key issue was that the non-SDV (Service-Disabled Veteran) venturer had significant control over the management of the firm, which rendered the joint venture ineligible for the procurement. LS3 was found to be ineligible as an SDVOSB for this particular procurement.

The decision reached by the OHA is specific to this joint venture and solicitation. However, it does not impact the eligibility of Lukayva as an SDVOSB. Consequently, the appeal was dismissed as moot, with the OHA's decision serving as the final ruling from the Small Business Administration.

 


 

Learn More About Size and Status Protests in our Free eBook

​As the value of government contracts increases, so does the likelihood your company, as the winning bidder, will face a size and standard protest from a disappointed bidder.

Defending a size and standard protest is at best annoying and, at worst, truly concerning.  However, there are several things that can be done to protect your business well before a protest is filed, and few more in the unfortunate event you face a size and standard protest.​ 

We invite you to read our free eBook on Size Protests, "A Summary of Size and Status Protests," and learn more about:

  • Avoiding Small Business Association (SBA) Adverse Outcomes​
  • Small Business Association (SBA)​ Issues Proposed Rule Change​
  • Size Status Protest Dismissal Sustained by Office of Hearings and Appeals (​OHA)​
  • HUBZone Program Needs Policing​​
  • Changes Ahead for the Small Business Association (SBA)​ HUBZone Program​
  • Small Business Association (SBA) and The Federal Acquisition Regulatory (FAR) Council's Lack of Rule Making Confusing
  • Small Business Association (SBA)​ Protest Regarding Two Classes of Stock​
  • United States Court of Federal Claims (CoFC) Overturns Center for Verification and Evaluation's​ (CVE) Revocation of Service-Disabled Veteran-Owned Small Business​ (SDVOSB) Status​
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