Does the veteran owner have control of the Service Disabled Veteran Owned Small Business(SDVOSB)? That was the key issue In the Matter of: Battalion, LLC, Appellant. This case arosefrom a Dept. of the Air Force SDVOSB set aside. The SBA's OHA decided this case pursuant to the Small Business Act of 1958. The bid protest arose when an unsuccessful offeror, Douglas P Fleming, LLC, filed a protest challenging appellant's size and status as an SDVOSB. Fleming alleged in part that the appellant's majority owner, Mr. Jason Harris, was a full-time employee of Sota Construction Services, Inc., a firm controlled by appellant's minority owner, Mr. Earnest Sota.
The appellants submitted an operating agreement, which named the veteran owner as the managing member and designated Class A members, a majority of which would constitute a quorum. Unfortunately, the operating agreement also related that the members could conduct business in the absence of the managing member. The document stated that the managing member would be elected at appellant's annual meetings, but the SBA found no evidence that the veteran under was ever so elected. While the operating agreement gave certain powers to the managing member, it required delegation of those powers from the remaining members through a formal act, which according to the SBA's findings, never happened.
In finding that the appellant did not qualify as a service disabled veteran owned small business concern (SDVO SBC), the SBA OHA determined that the non-veteran minority owner, Sota Construction Services, exercised control over the appellant in that the veteran owner was contracted as a consultant to the minority owner and derived most of his personal income from that entity. OHA also found that Sota Construction controlled the appellant by providing critical financial support by way of cheap rent and bonding assistance.
The SBA OHA found this case analagous to the decision in Matter of Marine Construction Services, LLC. In that case the veteran owner was an employee of, and dependent upon, the minority owner, which was not an SDVOSB. The OHA found that the highest officer of an SDVOSB normally is permitted to have outside employment but found the problem to be that the veteran was employed by the 49% minority owner. The OHA found that the analysis would be different had the veteran majority are been employed by an unrelated party with no involvement in the challenged firm's business.
Since the founding of the United States, our government has endeavored to support those who have defended it. A famous quote, incorrectly attributed to George Washington states that “[t]he willingness with which our young people are likely to serve in any war, no matter how justified, shall be directly proportional to how they perceive how the veterans of earlier wars were treated and appreciated by their nation.” The quote itself may not have come from President Washington, but it sums up the attitude of our country towards its veterans: continued support of our veterans is more than just basic fairness; it is necessary to our national security.
President Washington actually wrote on the subject of the American military, and what would be required to defend the United States in a “great and lasting War.” Washington wrote:
I do not mean to exclude altogether the idea of patriotism. I know it exists, and I know it has done much in the present contest. But I will venture to assert, that a great and lasting War can never be supported on this principle alone—It must be aided by a prospect of interest or some reward. For a time it may, of itself, push men to action—to bear much—to encounter difficulties; but it will not endure unassisted by interest.
George Washington to John Bannister, 2 April 1778.
Today, the Government provides President Washington’s “interest” in the form of health care, home loans, disability compensation, vocational rehabilitation, and a number of other programs, including assistance to Veteran businesses in obtaining Federal Government contracts. The “set aside” contract is a contract reserved for certain protected categories, such as Service Disabled Veteran Owned Business (SDVOSB) and Veteran Owned Small Businesses (VOSB), among others. Set- aside programs are highly-regulated in order to preserve their integrity and keep non-protected businesses from unlawfully entering competition limited to those most deserving.
One such regulation limits the ability of a protected contractor to subcontract to non-protected entities. The prime contractor must provide a majority of the services or product under the contract, unless the subcontractor is protected as well. Here is an example of conduct prohibited by 13 C.F.R. § 125.6, a regulation dealing with this kind of situation: a set-aside contract is awarded in the total amount of $1,000,000 for services. The prime contractor, an SDVOSB, subcontracts $500,001 to a non-protected subcontractor. The prime contractor is in violation of the limitation on subcontracting requirement because it has subcontracted more than 50% of the contract amount to an entity that is not considered similarly situated to an SDVOSB prime contractor.
Government contracts are indeed valuable, and the temptation to skirt these sorts of limitations is strong. During the past decade, large corporations have begun to approach SDVOSBs and VOSBs with a common scheme: The Veteran business submits an offer on a valuable set-aside contract; and, pursuant to applicable laws and regulations, the Veteran business includes a provision that its subcontractor will do only 49% of the work. However, in reality, the Veteran business will only do a small portion of the work, and the large corporation takes over. The Veteran business becomes a “storefront” for the large corporation. With the large corporation’s economies of scale, vendor networks, and ability to work under lower profit margins, the large corporation helps the prime contractor get the award, cheating out the rest of the competition.
What should an SDVOSB do if a large corporation approaches with this kind of scheme? Consider the following. First, under FAR 9.406–2(b)(1)(i), the SDVOSB may be subject to debarment for willful violation of the terms of a Government contract or subcontract. Second, the SDVOSB may be subject to criminal penalties under 15 U.S.C. 645(d), which include a fine up to the greater of $500,000 or the dollar amount that the SDVOSB spends on subcontractors.
What should an SDVOSB do when it believes a competitor won a contract under these circumstances? Consider contacting legal counsel at Whitcomb, Selinsky, P.C. for assistance with a post-award protest. Grounds for protest in this kind of scenario include flawed best value decision, flawed responsibility determination, flawed cost evaluation, and others. Our attorneys have been successful in helping a number of clients successfully handle these kinds of matters. Call our Denver office at (303) 534-1958 or complete our online form today.
In KWV, Inc. v. United States, a disappointed bidder filed a pre-award bid protest of the CVE's denial of their SDVOSB status. In that case, the US Court of Federal Claims found the CVE’s reliance on the Veteran applicant’s residency alone was “arbitrary and capricious” and not in accordance with VA’s regulations.
KWV, Inc. v. United States, 111 Fed. Cl. 119, 127 (Fed. Cl. 2013). In deciding in the Veteran’s favor, the Court indicated that “there [was] nothing in the administrative record to suggest that [the Veteran] was not exercising sufficient control over [the company]” and “the government has not provided a coherent and reasonable explanation of its exercise of discretion…nor articulated a rational connection between the facts found and the choice made” Id., see also Impresa Construzioni Geom. Domenico Garufi, 238 F.3d at 1333 (quoting Latecoere Int'l, Inc. v. United States Dep't of the Navy, 19 F.3d 1342, 1356 (11th Cir. 1994)); Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983) (quoting Burlington Truck Lines v. United States, 371 U.S. 156, 168, 83 S.Ct. 239, 9 L.Ed.2d 207 (1962)) (internal quotations removed).
The U.S. Court of Federal Claims remanded an OSDBU determination in CS-360 v. U.S. Dep’t of Veteran Affairs, where the cited reason for denying certification was the posited “implausibility” that a non-veteran participant would make capital contributions without “control.” The Court ruled “To the extent the CVE intends to suggest that investment generally must be accompanied by some level of control over a company's affairs, it must explain why it believes that to be the case and indicate how it applies to CS360. CS-360, LLC v. U.S. Dep't of Veteran Affairs, 846 F. Supp. 2d 171, 191 (D.D.C. 2012) The Court has already found that this cursory statement fails to provide a sufficiently reasoned explanation. To the extent the CVE intended to rely upon some other “underlying implausibility,” it has failed to identify it with sufficient particularity to permit this Court to exercise its function of judicial review. CS-360, LLC v. U.S. Dep't of Veteran Affairs, 846 F. Supp. 2d 171, 189 (D.D.C. 2012)
The lesson to be learned from these two cases is that there is value is persevering and having your CVE SDVOSB denial reviewed by the Federal Claims court, which has jurisdiction in these matters. Of course, finding a good lawyer to represent you will be important. We hope that you will think of us at Whitcomb, Selinsky if you are faced with contesting a CVE SDVOSB denial in federal court.