Court of Federal Claims Reverses OHA Decision finding Affiliation

calendar iconJune 2, 2020

Veterans Technology, LLC (“Vet Tech”) is a joint venture whose stock is owned 49 percent by a company named MDW and 51 percent by Defense Acquisition, Inc. (“DAI”). MDW was formed in 2012 by four individuals who were then employed by Paradigm Technologies, Inc. However, on January 30, 2011, ECS Federal, LLC (“ECS”), acquired Paradigm, but the acquisition did not close until January 1, 2012. Subsequently, Paradigm became a wholly owned subsidiary of ECS during calendar year 2012, and all Paradigm contracts were subsequently novated to ECS.

Shortly after Paradigm was acquired by ECS, the four employees informed ECS of their plans to form a new company. ECS threatened to fire them, but one of them was performing in a critical position on a government contract and the government insisted that he continue to perform on that contract. As a result, ECS awarded a subcontract to MDW to continue that effort.

On April 1, 2016, the Missile Defense Agency (“MDA”) awarded Vet Tech a contract that had been set aside for small business concerns. Five days later, a competitor for that contract filed a size protest with the SBA Area Office in Atlanta challenging the small business status of Vet Tech, because Vet Tech allegedly was affiliated with ECS, a large business under the “ostensible subcontractor rule.”

The Area Office found that because Vet Tech was a joint venture, it could only qualify for a “small business” set-aside contract if all its members were small businesses. The Area Office determined that MDW was “affiliated” with ECS, based on an “identity of interest due to economic dependency,” because MDW received more than 70 percent of its revenue from ECS. MDW was therefore other than small, because the aggregate average receipts for MDW and ECS exceeded the size standard for the procurement. Because one of Vet Tech’s members was other than small, the Area Office also found that Vet Tech exceeded the procurement’s size standard. Vet Tech filed an appeal of the Area Office’s determination with the SBA Office of Hearings and Appeals (“OHA”).

On July 20, 2016, OHA affirmed the Area Office’s size determination because, “As a matter of law, a firm that derives 70% or more of its revenue from another firm is economically dependent on that firm.” OHA, however, declined to address whether MDW was affiliated with ECS under the “newly organized concern” rule, because the finding of “economic dependence” was dispositive. Vet Tech and MDW then filed this protest with the Court.

The first issue the Court had to decide was whether it had jurisdiction to hear a challenge to an OHA decision. The Court decided that it did because it has jurisdiction “to render judgment on an action by an interested party objecting to any alleged violation of statute or regulation in connection with a procurement or a proposed procurement.” The Court held that this was broad enough to cover an OHA decision that prevented a protester from receiving an award.

The next step for the Court was to determine if the OHA decision was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. In this regard, the Court observed that the Area Office, in the first instance, has discretion to determine whether affiliation exists so that “firms . . . may be treated as one party.” In this case, the Area Office’s 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 Area Office’s findings provided no reasonable basis on which the Court could review why the Area Office decided not to exercise its discretion to find no affiliation. Even if the Area Office explained why it exercised its discretion not to find “economic dependence through contractual relationships,” the burden of proof rested on the Area Office to establish dependency by MDW on ECS. Here, the SBA completely failed to carry this burden. Consequently, the Court reversed the SBA’s decision that affiliation existed between ECS and MDW that disqualified Vet Tech from receiving the award and remanded the matter to the SBA for a new decision that considered factors outlined by the Court in its decision. (Veterans Technology, LLC and MDW Associates, LLC, v. U.S., No. 16-1489 (August 2, 2017))

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