A few weeks ago, we published a blog article on bid protests related to Disadvantaged Business Enterprises (“DBE”) compliance matters. (DBE Bid Protests: One Contractor’s Loss is Another’s Gain). A recent Court of Federal Claims case, Miles Construction, LLC, v. United States, highlights the potential issues certified entities and prime contractors can face in determining what constitutes a responsive bid and, more importantly, acknowledges that common sense must still be applied to business inclusion programs such as the DBE program.
In 2012, Miles Construction, LLC (“Miles”), a certified Service-Disabled Veteran-Owned Small Business (“SDVOSB”), was the apparent low responsive and responsible bidder for a solicitation set aside for SDVOSBs. The second-low bidder, however, protested the potential award to Miles contending that Miles did not meet the status requirements of a SDVOSB concern and, therefore, was ineligible for award of the project. Specifically, in its protest letter, the second low-bidder asserted that it believed Miles and a non-SDVOSB had common ownership and control of the LLC, and because Miles is required to own 51% of the ownership interests of the LLC under the SDVOSB regulations, Miles was ineligible for SDVSOB status.
After receiving the protest, the Department of Veterans Affairs (“VA”) forwarded the protest to the VA’s Office of Small and Disadvantaged Business Utilization (“OSDBU”). In turn, OSDBU requested Miles, within one week, respond to the allegations. Miles timely responded to the protester’s allegations and included supporting documentation. Nevertheless, OSDBU advised Miles that it had concluded that Mr. Slizogski, the disabled-veteran owner of Miles, did not possess unconditional ownership of the company as required by the SDVSOB regulations because provisions of the company’s Operating Agreement allegedly contained restrictions on the transfer of his ownership interest. The shareholder agreement granted the service-disabled veteran’s partner a first right of refusal if the majority owner’s shares were sold. OSDBU stated that because Miles could not demonstrate “unconditional ownership,” Miles was ineligible for not only award of the contract but OSDBU also revoked Miles’ SDVOSB status, preventing Miles from obtaining any future SDVOSB work. Miles appealed to the Court of Federal Claims, alleging that OSDBU’s decision was arbitrary and capricious and contrary to law, and Miles sought reinstatement of the contract award.
On February 7, 2013, the Court of Claims issued an order setting aside OSDBU’s decision and reinstating Miles status as a SDVSOB. The court concluded that the VA’s interpretation of its own eligibility regulations was arbitrary and capricious. Specifically, although the regulations require that the veteran-owner possesses “unconditional ownership” of the company, the requirement does not preclude standard terms that deal with future events which may or may not impact the veteran’s ownership:
In sum, the right of first refusal provision in Article XI is not presently executory, is a standard provision used in normal commercial dealings, and does not burden the veteran’s ownership interest unless he or she chooses to sell some of his or her stake. As a result, [the right of first refusal provision] does not affect the veteran’s unconditional ownership with regard to the SDVOSB regulations. The decision by OSDBU to the contrary…was arbitrary and capricious and contrary to law.
For example, the provision will not hinder the veteran-owner’s interest unless the veteran receives a bona fide offer and chooses to sell. In addition, upon a sale, the company does not automatically retain its eligibility for the SDVSOB status because it might no longer be owned by a veteran who meets all the eligibility requirements.
In addition, the Court also criticized the OSDBU’s failure to provide Miles with an adequate opportunity to respond to the allegations (i.e., due process). The Court found that the OSDBU’s expansion of the protest to encompass Miles’ general compliance with the SDVOSB regulations (which was not raised by the protester-the protester only made contentions that Mr. Slizofski’s ownership interest was a faÇade and that another company actually controls Miles) was “plainly erroneous” and “cannot be upheld.” The Court stated that “[a]n agency should not act without affording the entity whose award or projected award is protested with notice of an alleged defect and an opportunity to respond.”
The decision is silent as to the Court’s reasoning to issue an injunction directing award of the contract to Miles, but nevertheless, this opinion should be viewed as a triumph for small certified firms. As this office has reported, programs designed to promote minority and typically underrepresented groups, including the SDVOSB program, the federal Disadvantaged Business Enterprise program, and the state Minority and Woman-owned Business program, have come under recent media scrutiny aimed at individuals allegedly defrauding the programs. For example, common fraud accusations include allegations that the disadvantaged owner does not meet the economic disadvantage requirement (e.g., a personal net worth less than $1.32 million) or that the eligible person is simply a proxy for a non-disadvantaged individual. This media scrutiny has regrettably resulted in an “overcorrection” as the agencies that administer these programs seek to “clean up the purported fraud,” forcing properly certified firms to repeatedly (and at great expense) defend their certification status. This case is a clear example of such agency overcorrection. Rather than acknowledge that these small, disadvantaged firms still adhere to typical commercial practices such as the right of first refusal provision (that may allow other owners some say in how their ownership interest is treated or their company’s future), certification agencies or unsuccessful bidders attempt to exploit such technicalities to improperly decertify firms or preclude those firms from obtaining work. Thus, these minority and disadvantaged entity programs and the agencies which administer the programs end up penalizing and attacking the very businesses the programs are designed to promote.
Although this case is a small step towards reigning in such overcorrection, it is also a reminder of just how strictly the agencies interpret the complicated and detailed certification regulations, often to the detriment of firms the programs were created to foster, and to the taxpaying public that pays the price for the endless protests. While this case will hopefully have an impact on the DBE program, it is critical that firms attempting to apply for certification review their corporate documents closely to ensure that they will not unknowingly be tripped up by such technicalities.
Thank you to the Federal Construction Contracting Blog for first reporting on the case (2/19/13). The firm that authors the Blog, Cohen Seglias Pallas Greenhall & Furman PC, successfully represented Miles Construction, Inc. before the Court of Federal Claims.