This article was originally published by Law360 on December 16, 2015.

In the past year, the Small Business Administration has issued proposed rules that will likely result in major regulatory changes. Some of the most important changes are those relating to its mentor-protege program, and the performance of work requirements for prime contractors. The proposed rules affecting these areas have the potential to substantially alter the landscape of small business contracting in 2016.

Continue Reading Small Business Contracting May Be Very Different in 2016

It’s been an eventfulNovember wooden blocks with many-coloured pumpkins and decor against an old wood background November for the Federal Government’s VOSB/SDVOSB programs.  First, the Department of Veterans Affairs (“VA”) issued a proposed rule outlining changes that would drastically change the manner in which eligibility requirements are analyzed (you can read about it here). Now, Congress is proposing additional changes to the VOSB and SDVOSB verification process.

On November 5, 2015, Representative Mike Coffman (a member of the House Small Business Committee, frequent critic of the VA and vocal advocate for VOSB/SDVOSBs) and his co-sponsors introduced HR 3945, The Improving Opportunities for Service Disabled Veteran-Owned Small Business Act of 2015. The bill is meant “to improve contracting opportunities for certain veteran-owned small businesses.”

In a press release issued on November 6, 2015, Coffman explained the purpose of the bill, stating that it aims to reform the current VOSB/SDVOSB programs in three key ways:

  • First, the bill harmonizes the definitions of VOSB and SDVOSB. This ensures that small variations between the Small Business Act and the Vets First Program are not used to justify additional inconsistencies between the VA and [Small Business Administration (“SBA”)] programs.
  • Second, the bill requires the VA to follow SBA regulations when verifying and certifying VOSBs and SDVOSBs. This ensures consistency in the awards process between the VA and SBA. For example, a SDVOSB can qualify at one agency and not another for procurement preferences. This inconsistency often adds cost, confusion, and opens the door to fraud.
  • Third, the bill creates an appeals process for SDVOSBs to challenge an agency decision.

This is not the first time that Representative Coffman has introduced a bill aimed at reforming VOSB/SDVOSB contracting programs. Back in 2013, he introduced the Improving Opportunities for Service-Disabled Veteran-Owned Small Business Act of 2013, which sought to transfer control of all VOSB/SDVOSB status-related protests from the VA to the SBA. As we explained back in 2013, Coffman’s 2013 bill would have eliminated the current system and replaced it with a single VOSB/SDVOSB verification process. It would also have unified the definitions of “unconditional ownership” and “unconditional control.” While the VA would have retained authority for determining whether an individual is a “service-disabled veteran,” the SBA would have had the authority to rule on all other eligibility factors including size, ownership, and control.

The 2015 bill differs from the 2013 version, but the underlying motivation appears to be the same: the promotion of greater consistency between the SBA and VA SDVOSB programs, and the streamlining of the VOSB/SDVOSB verification process.

Coffman explained the issues as follows:

Currently, veteran-owned small businesses (VOSB) and service-disabled veteran-owned small businesses (SDVOSB) face incredible challenges getting certified to participate in seeking and securing federal contracts under the program’s rules. The bill I introduced today reforms, streamlines, and simplifies the current process the VA and the SBA use to be certified as eligible…

Increasing SBA’s role in the appellate process will limit confusion in how to appeal and ensure a more predictable pattern in the final decisions…[i]t will also ensure impartiality by not having VA review its own previously denied claims.

Co-Sponsor of the bill, Jeff Miller (Chairman of the House Committee on Veterans’ Affairs), agreed:

This bill will reform an excessive and redundant bureaucracy that’s making business even more complicated for the people it was meant to help. By cutting needless red tape and streamlining the verification process, we can ensure veteran business owners are properly recognized for their service, while reducing fraud and freeing up more resources for veteran support.

This bill comes on the heels of a November 4, 2015 GAO report concerning VOSB/SDVOSBs, which outlines the improvements the VA has made to its VOSB/SDOVSB verification program since 2013. The GAO report emphasizes the advantages of a pilot program, initiated by the VA in September 2015, which made certain changes to the verification process. These changes are summarized in the chart below.
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The GAO report indicates that the VA plans to “fully transition to [the] new process by April 2016. It is unclear whether the bill will affect any further changes to the new VA verification program. We willkeep you posted on any new developments.

Edward T. DeLisle is Co-Chair of the Federal Contracting Practice Group. Ed frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues and dispute resolution.

Maria L. Panichelli is an Associate in the firm’s Federal Contracting Practice Group. Her practice includes a wide variety of federal contracting and construction matters, as well as all aspects of small business procurement.

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Listen up, VOSBs and SDVOSBs!  Major changes are in store for the Department of Veterans Affairs’ VOSB/SDVOSB program.

On November 6, 2015, the VA issued a proposed rule, which could drastically change the way the two eligibility requirements for VOSBs and SDVOSBs are interpreted.  The VA explained the changes as follows:

This proposed rule would clarify the eligibility requirements for businesses to obtain “verified” status, add and revise definitions, reorder requirements, redefine the definition of “control”, and explain examination procedure and review processes. This proposed rule would additionally implement new changes—references to community property restrictions, “unconditional” ownership, day-to-day requirements, and full-time requirements would be removed or revised and limited in scope; an exception for majority, supermajority, unanimous, or other voting provisions for extraordinary business decisions would be added.

So what, specifically, does that mean?  Well, first of all, under the new rule, the VA would no longer require a veteran or service-disabled veteran to “unconditionally” own his or her company.  The current regulation, which requires “unconditional” ownership, has caused problems for many VOSBs/SDVOSBs; standard corporate governance provisions such as rights of first refusal, transfer upon incapacity, or transfer upon bankruptcy were often seen as placing “conditions” on ownership and, therefore, nullifying VOSBs/SDVOSB eligibility. In fact, that is exactly what happened in our case, Miles Construction, LLC v. United States.

There, our client’s SDVOSB status was improperly canceled because the VA viewed a “Right of First Refusal” in the company’s governing documents as an impermissible transfer restriction.  It took the position that this “restriction” rendered ownership “conditional.”  However, when we challenged the agency’s decision, the Court of Federal Claims disagreed.  The Court concluded that Rights of First Refusal, such as the one at issue there, fell within the ambit of “normal commercial practices” and did “not affect the veteran’s unconditional ownership.”  Thus, our client’s SDVOSB status was restored and it was placed back in the VetBiz database of verified companies.  Shortly thereafter, in accordance with the guidance provided by the Court in the Miles case, the VA changed its official policy with respect to transfer restrictions.  Now, the VA seeks to amend the regulation (38 C.F.R. § 74.3) itself.  The new regulation would be consistent with the Miles decision, and would allow for “commercially reasonable” provisions in corporate governance documents.

As the rule explains:

Section 74.3(b) would be amended to directly address the concerns of VA in balancing commercially reasonable business practices against procurement integrity. Section 74.3(b) as it is currently written is considered by many in the veteran community to be unduly burdensome.  VA considered these concerns and addressed them by proposing to limit the scope of unconditional ownership, accepting commercially reasonable conditions and excluding only those that create a significant risk of fraud, waste and abuse. . .

Thus, 38 C.F.R. § 74.3, as amended, would state:

…(b) Unconditional ownership. Ownership must not be subject to prohibited conditions which cause or potentially cause ownership benefits to go to another (other than after death or incapacity).

(1) CVE will analyze conditions on ownership on a case-by-case basis. A condition(s) which is determined to align with commercially reasonable business practices will not be considered a prohibited condition. For purposes of determining commercial reasonability CVE will consider factors, including but not limited to, general use of similar conditions by concerns within the same or similar line of business and uniform applicability of the condition(s)…

The shifting requirements concerning ownership are not the only proposed change.  The VA also proposed major changes to 38 C.F.R. § 74.4, the regulation governing “control” of an  VOSB/SDVOSB company.  Similar to the ownership changes outlined above, the VA proposes to eliminate the “unconditional” control requirement.  Instead, the proposed regulation requires that the veteran owner have “control over all decisions of the governing body, with the exception of extraordinary business decisions.”  The proposed regulation also recognizes distinctions between types of companies (e.g. Corporation, Limited Liability Corporation, Partnership), which is something brand new.  You can see all the proposed changes, which includes the above, and others, here.

The VA has stated that these changes are the agency’s attempt to find “an appropriate balance between preventing fraud in the Veterans First Contracting Program and providing a process that would make it easier for more VOSBs to become verified.”  Moreover, these changes would “protect the minority owners of firms thereby encouraging investment and participation in veteran owned businesses.”  If these changes are enacted, VOSB/SDVOSBs will have a lot more flexibility in structuring their businesses, and, presumably, it will be a lot easier to figure out where one stands in terms of satisfying eligibility criteria.

Comments to the proposed rule are due by January 5, 2016.  We will keep you posted on the status of these developments.

Edward T. DeLisle is Co-Chair of the Federal Contracting Practice Group. Ed frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues and dispute resolution.

Maria L. Panichelli is an Associate in the firm’s Federal Contracting Practice Group. Her practice includes a wide variety of federal contracting and construction matters, as well as all aspects of small business procurement.

Please join us on NoveNVSBE logomber 18th and 19th for Maria Panichelli’s three seminars at the 2015 National Veterans Small Business Engagement in Pittsburgh, PA. To view the dates and times of Maria’s seminars, and to register, visit the NVSBE website.

The topics of Maria’s presentations include:

FAR 101: An Introduction to Doing Business with the Federal Government

The United States Government is the world’s largest buyer of products and services. However, these purchases are governed by a very special set of rules and regulations. If you want to become a successful government contractor, you have to be intimately familiar with these governing rules and regulations, and the ways in which they affect the procurement process. In this session, Maria will provide an overview of the FAR, with a particular focus on how the FAR impacts the source selection process. She will walk you through the procurement process, from solicitation to award, explaining the most common types of contracts used by the government, the various methods of procurement, and – most importantly – how the government will evaluate your bid/offer.

The Fundamentals of Government Contracting: Debriefing and Protests

Today’s federal contracting marketplace is extremely competitive. Nowhere is the competition stronger than in the Veteran-Owned Small Business (VOSB) and Service-Disabled Veteran-Owned Small Business (SDVOSB) arena, where many solicitations ultimately involve bid, size or status/eligibility protests. Understanding protests and the procedures relating to protests can make the difference between getting the contract and getting left out of the race altogether. In this session, Maria will cover all aspects of the protest process. This session will also teach you strategies on how to defend against such a protest.

Building a Compliant Team: VOSB/SDVOSB Teaming Arrangements, Joint Ventures, and Mentor-Protégé Relationships

Whether you are a small business looking to expand your capabilities, or a large business looking for access to set-aside contracts, teaming greatly expands your federal contracting opportunities. In this session, Maria will discuss teaming in detail, covering the benefits of teaming, the proper procedures for forming an enforceable teaming agreement, important clauses you should include in your agreement, as well as common pitfalls you should avoid. Maria will also discuss other partnering strategies, including joint ventures and mentor-protégé relationships.

Maria L. Panichelli is an Associate in the firm’s Federal Contracting Practice Group. Her practice includes a wide variety of federal contracting and construction matters, as well as all aspects of small business procurement.

The SBA is on a roll!  It seems that ringing in the new year has invigorated the agency, prompting it to act on the various outstanding directives set forth in the National Defense Authorization Act for Fiscal Year 2013 (“NDAA”).

Game_Changer

Last Thursday, the agency issued its long-awaited proposed rule on the expansion of the Mentor-Protégé Program.  There were also proposed changes impacting the 8(a), HUBZone, and other small business programs. We gave you a sneak preview of that rule here, the day before it was issued.  In addition to those proposed mentor-protégé changes, the SBA also recently rolled out a second proposed rule ,which included various changes to the small business regulations. Over the next several weeks, we will provide you with our take on various aspects of these two proposed rules. For purposes of this article, though, we’re going to focus on the changes to the affiliation regulations set forth in the December 29, 2014 proposed rule.  These proposed changes would fundamentally alter the SBA’s analysis regarding the “ostensible subcontractor” rule, economic dependence, and “identify of interest” affiliation.

The rule proposes that a small business would be exempt from ostensible subcontractor affiliation where it subcontracts with a “similarly situated entity.”  In fact, the rule proposes a complete overhaul of contractor performance requirements set forth in 13 C.F.R § 125.6.  Rather than mandate the percentage of work a prime must perform, the revised 125.6(a) limits how much work a prime can subcontract to other contractors, a subtle but important distinction.  Subcontracts issued to “similarly situated entities” are not counted toward the subcontracting limit. For example, under the proposed rule, an 8(a) contractor performing a general construction contract cannot subcontract more than 85% of the contract work to non-8(a) entities.  Similarly, a SDVOSB prime contractor cannot subcontract more than 75% of a specialty construction contract to non-SDVOSB concerns. In these examples, the required 15% or 25% of the work would have to be performed by either the prime itself, or by the prime in combination with a “similarly situated entity” – i.e. a concern that is eligible for the same small business program as the prime.  Strangely enough, the language of the revised regulation does not require any of the work to be self-performed by the prime, so long as the requisite percentage is performed by a combination of the prime and entities that are “similarly situated.”  Consistent with this concept, the proposed revision to §125.6(b) creates an exception to ostensible subcontractor affiliation for prime contractors who subcontract in this manner.  The revised rule would ensure that a prime that subcontracts a majority of its work will not be “affiliated” with its subcontractors, so long as its subcontractors are “similarly situated.”

The second major change to affiliation is the adoption of a bright line test based on economic dependence. Pursuant to the proposed rule (to be inserted at 13 CFR 121.103(f)(2)), if a concern derives 70% or more of its revenue from another company over a fiscal year, the SBA will presume that the concern is economically dependent on that company, and, therefore, that the two businesses are affiliated.  It is not entirely clear from the language of the rule itself whether this will be considered a rebuttable presumption.  But an SBA representative who spoke about the proposed rule last week at the National 8(a) Association’s Winter Conference indicated that it would be rebuttable.

The third major affiliation change set forth in the proposed rule relates to “identity of interest” affiliation under 13 CFR 121.103(f).  In its current form, the regulation provides that:

Affiliation may arise among two or more persons with an identity of interest. Individuals or firms that have identical or substantially identical business or economic interests (such as family members, individuals or firms with common investments, or firms that are economically dependent through contractual or other relationships) may be treated as one party with such interests aggregated. Where SBA determines that such interests should be aggregated, an individual or firm may rebut that determination with evidence showing that the interests deemed to be one are in fact separate.

However, the current rule does not identify what types of family members are subject to the presumption identified in the rule.  The proposed rule would clarify this.  The revised regulation would state, in relevant part:

Firms owned or controlled by married couples, parties to a civil union, parents and children, and siblings are presumed to be affiliated with each other if they conduct business with each other, such as subcontracts or joint ventures or share or provide loans, resources, equipment, locations or employees with one another. This presumption may be overcome by showing a clear line of fracture between the concerns. Other types of familial relationships are not grounds for affiliation on family relationships.

This will certainly make it easier for contractors to tell if they are venturing into dangerous territory when doing business with a family member.

It is very important to keep in mind that these are just proposed changes.  The final rule may vary, so pay attention.  Comments to the rule are due February 27, 2015.  We will keep you posted on the status of the final rule.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Ed frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues and dispute resolution.

Maria L. Panichelli is an Associate in the firm’s Federal Contracting Practice Group. Her practice includes a wide variety of federal contracting and construction matters, as well as all aspects of small business procurement.

You probably already know about set-aside programs offered by the Small Business Administration (SBA) and the Department of Veterans Affairs (VA), but did you know that provisions in your corporate governance documents could ruin your eligibility for those programs? Ed DeLisle and Maria Panichelli’s new article for Onvia covers critical corporate governance provisions that could potentially destroy your status under the VA’s new guidelines. “Three Provision Pitfalls in Small Business Corporate Governance Documents” contains critical information and the most problematic governance provisions for Service-Disabled, Veteran-Owned and Veteran-Owned Small Businesses (SDVOSB/ VOSB) including definitional clauses or clauses dealing with authority, supermajority provisions and involuntary transfer provisions as well as limitations on transfer provisions. Learn more in the full article below:

The federal government offers a multitude of programs designed to assist small businesses. The Small Business Administration (SBA) is certainly at the forefront of such programs, but it is not the only agency. The Department of Veterans’ Affairs’ (VA) has created a very popular program of its own for Service-Disabled, Veteran-Owned and Veteran-Owned Small Businesses (SDVOSB/ VOSB). Many contractors generally know about the benefits of participating in these programs. Some may even know about the applicable eligibility requirements. But what many contractors don’t know is that provisions in their corporate governance documents could destroy their eligibility for such programs. This article seeks to educate contractors about the three most common provisions affecting small business program eligibility.

The federal government’s Small Business Programs – the SBA’s 8(a)HUBZone,
VOSB/SDVOSB and WOSB/EDWOSB Programs, as well as the VA’s VOSB/SDVOSB Program – share certain eligibility requirements. Specifically, in addition to the threshold requirement of being a “small” business, each program requires at least 51% “unconditional ownership,” as well as “unconditional control,” of that business by particular individuals. For example, a veteran or service-disabled veteran has to unconditionally own at least 51% of a company and unconditionally control that company in order for that company to be considered a VOSB or SDVOSB, respectively. Similarly, a woman or an economically disadvantaged woman needs to unconditionally own and control a business if that business wishes to be considered an eligible WOSB or EDWOSB.

Figuring out who must have ownership and control of the concern is the easy part: Definition sections of the applicable regulations are found here: 13 C.F.R. §§§ 124.01124.03 and 124.04  for 8(a) businesses; 13 C.F.R. § 126.200 for HUBZone concerns; 13 C.F.R. Part 125  for the SBA VOSB/SDVOSB program; 38 C.F.R. § 74.2 for the VA VOSB/SDVOSB program; and 13 C.F.R. §§ 127.102 and 127.200 for the WOSB/EDWOSB program. The difficult part is figuring out how the definitions are defined: How must these individuals own and control the company? The regulations tell us that ownership and control must be unconditional. But what does unconditional really mean? Said a different way, under what circumstances do these agencies consider ownership or control to be conditional? That is where trouble often lurks. Many times, a finding of conditional ownership or control is based on a provision or requirement found in a company’s operating agreement, shareholder’s agreement or by-laws. Several of the most problematic provisions are discussed below.

1) Definitional Clauses or Clauses Dealing with Authority

Corporate governance documents almost always contain a provision outlining who the members or owners are, or defining who will manage the entity. While these provisions are not problematic per se, they can cause issues when roles are not clearly defined or authority appears to be shared.

Example
The powers of the Company shall be exercised by or under the authority of, and the business and affairs of the Company shall be managed under the direction of, one or more managers. The Manager(s) shall be: Jane Doe, John Doe and Yogi Berra.

The problem with this clause is that it gives the impression that all three of these individuals have equal decision-making authority. What if Mr. Berra is the majority owner, and the service-disabled veteran upon whom the company’s SDVOSB eligibility depends? This provision, as written, would seem to indicate that he does not have ultimate authority over the company but, rather, shares control with the other two managers. Even if the corporate governance document otherwise demonstrates that Yogi is the 66% owner, or specifies that no decision can be made by the company without Yogi’s approval, the SBA and VA could very well question whether unconditional control exists based upon this clause. For that reason, it often makes more sense to name only the majority owner(s), upon whom eligibility depends, as managers or managing members. The remaining individuals can be given other titles.

2) Supermajority Provisions

As the name indicates, supermajority provisions are provisions that require an ownership vote of more than a simple majority to effectuate material change.

Example
Removal of Members: Members may be removed from the LLC by an affirmative vote of more the 66% of the LLC members.

The problem with these types of provisions is that they can divest a majority owner of his or her power to unconditionally control the company. Consider the following example: Bob, a service disabled veteran, owns 51% of Bob’s Electric Company, LLC and has applied for SDVOSB verification through the VA. The operating agreement contains a supermajority provision which requires at least a 2/3 vote to remove a member. Because Bob owns only 51%, he cannot, without the consent of other members, effectuate this change. In other words, Bob does not have unfettered authority to remove another member on his own. Therefore, in the eyes of the VA, Bob does not unconditionally control his company and Bob’s Electric is not a legitimate SDVOSB. For this reason, supermajority provisions should be avoided if a business wishes to participate in the Small Business Programs. The sole exception is if the majority owner owns more than is required under the supermajority provision (using the example above, this would mean Bob owned 67% or more) and therefore, could effectuate change without the consent of the minority owners.

3) Involuntary Transfer Provisions and Limitations on Transfer Provisions

Involuntary transfer provisions encompass an array of provisions, each of which operates to divest an owner of his or her ownership interest without consent. Common examples include a transfer upon insolvency or bankruptcy, a transfer upon criminal conviction or a transfer upon incapacity or death.

Example
Transfer Upon Insolvency:
 Upon the insolvency of any member, that member must transfer his or her shares to the other member at a price determined by [document pricing provisions].

Similarly, limitations on transfer provisions prevent a member or shareholder from freely transferring his or her ownership interest. Some examples include provisions that provide for a right of first refusal (i.e., a requirement that the selling or transferring member/shareholder must offer to sell his or her interests to other members/shareholders before any other individual or entity) or provisions that require consent of other members before a sale of ownership interest can be made.

Example
Restrictions on Transfer:
 No Member shall sell, assign, pledge, give or otherwise transfer or encumber in any manner or by any means whatsoever, any interest in a Membership Interest whether now owned or hereafter acquired without having obtained the prior written consent of all of the members of the Company.

The SBA and VA commonly view provisions like this as placing “conditions” on ownership. In the agencies’ view, if an owner can be divested of its ownership without his or her consent, or if an owner does not have unfettered freedom to sell his or her ownership interest, that owner does unconditionally own the company. That said, in a 2013 case litigated by our firm, the Court of Federal Claims ruled that in certain cases, rights of first refusal are permissible, and do not render an owner’s control as conditional. However, it is important to keep in mind that the COFC’s decision in that case addressed VA regulations that pertain to SDVOSBs under that program only. It is not entirely clear if the SBA’s similarly-worded regulations would be interpreted in the same way. For this reason, and just to be safe, it is probably a better idea to exclude these types of provisions altogether.

Conclusion

The provisions identified here are not the only provisions that can cause eligibility issues — but contractors who learn to avoid these three common pitfalls will be way ahead of the game! Of course, the advice in this article represents general guidelines only and each company must assess for itself how best to draft its corporate governance documents. Drafting an operating agreement, shareholders agreement or by-laws that simultaneously address all of the company’s needs, balance the interests of the various owners, and comply with all relevant SBA and VA regulations can be a daunting task. If contractors have any questions about how to draft the best corporate governance documents for their company, the best course of action is to contact a legal professional to assist.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Ed frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues and dispute resolution.

Maria L. Panichelli is an Associate in the firm’s Federal Contracting Practice Group. Her practice includes a wide variety of federal contracting and construction matters, as well as all aspects of small business procurement.

My firm is a big supporter of the National 8(a) Association and a proud sponsor of its Winter Conference, which is taking place right now in Orlando, Florida. I just left a presentation given by the SBA and several other SBA experts and found out that the SBA will finally issue its new proposed regulations governing the Mentor-Protege Program.

breaking news

The proposed regulations follow the Jobs Act of 2010 and the National Defense Authorization Act of 2013, where Congress asked the SBA to expand the Program to firms other than 8(a) companies. There has been much speculation over the last several years regarding what this overhaul would look like. Well, we’re about to find out. Here are some highlights that I learned today:

First, the SBA is going to create two distinct and different Mentor-Protege Programs, one for 8(a) companies and one for other small businesses. The one designed for other small businesses will be geared to servicing SDVOSBs, HUBZone companies, WOSBs and small businesses, generally. Mentors will still have to demonstrate good financial health, among other things, to qualify as a mentor, but there were indications during today’s presentation that the new regulations would better define the meaning of “good financial health.” For Protégés, it appears as if the proposed regulations will make it easier to qualify. If you are a participant in any of the small business programs covered by the proposed regulation, you can be a protege.

The most important aspect to the proposed rule may be the following: all companies who become Mentor and Protege through the revamped program will be able to take advantage of the exclusion from affiliation. Many speculated that this exclusion might remain with the 8(a) Mentor-Protege Program and not extend to those newly covered by the revised regulations. That does not appear to be the case. All companies will benefit from the exclusion.

There are many more changes coming as part of the proposed rules. Once they are issued on Thursday, we will share our thoughts with you.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Ed frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues and dispute resolution.

Join partners Michael Payne and Ed DeLisle at the 2015 National 8(a) Association Winter Conference in Orlando, Florida for their presentation, “How to Effectively Team on a Federal Project.” In this discussion, Michael and Ed will explore the importance of well-crafted teaming agreements and how they are viewed by courts of various jurisdictions. They will also explore the practical implications of negotiating terms from both the prime and subcontractor perspectives, as well as cover the nuts and bolts of executing teaming arrangements on federal projects. For more information, or to register, please visit the National 8(a) Association website.

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Cohen Seglias is a proud sponsor of the 2015 National 8(a) Association Winter Conference, which focuses on the federal, legal and business updates that impact the ever-changing world of federal contracting. This year’s conference will be held in conjunction with the TRIAD Winter Meeting, bringing over 85 additional Small Business Liaison Officers to the National 8(a) conference attendees.

With more than 500 companies and key government stakeholders represented, this is an event you can’t afford to miss!

Michael H. Payne is the Chairman of the firm’s Federal Contracting Practice Group and, together with other experienced members of the group, frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues, and dispute resolution.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Ed frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues and dispute resolution.

Several months ago, we told you about Ambuild Company v. LLC v. U.S., a very important case pending before the Court of Federal Claims (“COFC”).  The AmBuild case was of particular interest to our firm because it concerned the interpretation of a Department of Veterans’ Affairs (“VA”) regulation, which the VA revised following an adverse ruling in our case, Miles Construction, LLC v. United States.  AmBuild was of particular interest to SDVOSBs because of its potential impact on their due process rights in the context of status protests. Gavel and book

Well, the COFC issued its opinion.  The decision is a major victory for veteran-owned businesses, wherein the Court rejects the VA’s attempt to circumvent the ruling in Miles, and reaffirms that the VA cannot cancel a concern’s SDVOSB status without first allowing it an opportunity to respond to potential eligibility issues.

As those of you that follow this blog know, Miles involved the cancellation of our client’s SDVOSB status.  The cancellation stemmed from a protest lodged by a competitor.  However, the VA’s basis for cancellation was something that was never raised in that competitor’s protest.   Rather, the cancellation was based upon a new issue that the VA brought up on its own when deciding the protest, which Miles knew nothing about prior to cancellation.  When Miles protested the cancelation of its status, the COFC found that the VA had violated Miles’ due process rights.  The Court reasoned that an agency performing an investigatory function must provide the investigated party with notice, and afford that party an opportunity to meaningfully participate in the investigation.  The Court said: “an interpretation of 48 C.F.R. § 819.307(c) [the regulation pertaining to SDVOSB/VOSB eligibility protests] that does not allow this basic procedural due process is plainly erroneous and cannot be upheld.”

Following the Miles decision, the VA revised its regulations.  The amended version of 48 C.F.R. § 819.307 (which went into effect on September 30, 2013) added language that gave the VA the ability to determine the status of a protested concern based upon “a totality of the circumstances.”  (48 C.F.R. 819.307(e)).  In AmBuild, the VA relied on this language, arguing that it allowed the VA to consider facts or issues not specifically raised by the protesting party when reviewing a concern’s SDVOSB status.  In effect, the VA argued that “totality of the circumstances” meant that it could review any potential issue affecting a concern’s eligibility under the SDVOSB Program, whether or not it was raised as part of a protest.

In the AmBuild decision, the COFC squarely rejected the VA’s argument.  The Court again emphasized the importance of a protested party’s due process rights, and the necessity of giving a protested party a chance to respond to any allegations affecting its status.  It stated that: “The requirements of due process rest at the core of our nation’s Constitution and governmental institutions and are ingrained in our national traditions. . .”  As a result, “[b]efore adverse action is to be taken by an agency, the individual immediately concerned should be apprised not only of the contemplated action with sufficient precision to permit his preparation to resist, but, before final action, he should be apprised of the evidence and contentions brought forward against him so that he may meet them.”  Accordingly, the Court reasoned that the VA’s “strained construction” of 48 C.F.R. § 819.307 “would convert [the VA’s] scope of review into a general license to act on a protest without giving notice of issues not raised by the protesting party or contracting officer but rather generated sua sponte by [the VA]. The requirements of procedural due process cannot be so easily cast aside.”  The Court concluded that the 2013 amendment to 48 C.F.R. § 819.307 may be interpreted to establish a scope of review only – not to abrogate the requirements of procedural due process.  Thus, going forward, the “totality of the circumstances” language in 48  C.F.R. § 819.307(e) must be read to include only those issues to which the protested party was afforded an opportunity to respond.   That is, the VA may consider the totality of the information available relating to a protested concern’s eligibility for the SDVOSB Program, but only within the context of the issues raised in the protest itself.  The Court ruled that AmBuild was entitled to reinstatement to the VetBiz database, that it must be considered for the award of the contract at issue in the protest, and that AmBuild was entitled to its costs of suit.

This is a major victory for VOSB/SDVOSBs.  AmBuild reaffirms that the VA cannot cancel a concern’s VOSB/SDVOSB status without explicitly notifying that concern of any and all potential issues concerning its eligibility status, giving that concern an opportunity to provide a meaningful response, and allowing that concern to participate in the investigatory process.  It will be interesting to see if the VA attempts to amend its regulations again to circumvent the ramifications of this decision.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Ed frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues and dispute resolution.

Maria L. Panichelli is an Associate in the firm’s Federal Contracting Practice Group.

As a child growing up just outside of New York City, I was a big New York Yankees fan. My grandfather used to love telling me stories about how far Mickey Mantle could hit a ball and what a tremendous pitcher Whitey Ford was, not just for his time, but for all time. And then there was Yogi Berra. My grandfather loved Yogi Berra. He loved Yogi as much for his colorful nature, as he did for his catching prowess. His absolute favorite Berra quote was “It’s like déjà vu all over again.” It happens to be my favorite as well (although “The future ain’t what it used to be” is a very close second) and it immediately came to mind as I recently reviewed the initial pleadings in Ambuild Company, LLC v. The United States Department of Veteran’s Affairs, Court of Federal Claims, Civil Action No. 14-786C.

Yogi Berra

Back in February of 2013, the Court of Federal Claims issued its ruling in Miles Construction, LLC v. United States, No. 12-597C (February 14, 2013). Miles was a case that I litigated on behalf of a service-disabled veteran-owned company that nearly lost a contractual opportunity, along with its SDVOSB status, following a protest. The facts were as follows: Miles Construction was a SDVOSB that had been previously verified by the VA. A few months after being verified, Miles submitted a bid on a solicitation set-aside for SDVOSB concerns. A disappointed bidder filed an agency protest with the VA, challenging Miles’ eligibility. Specifically, the protestor alleged that Miles’ service-disabled veteran owner did not “unconditionally control” the company, as required by 38 C.F.R. § 74.4. OSDBU notified Miles of the protest, asking it to “respond directly to the allegations made in the status protest.” Miles promptly responded and addressed each of the allegations. OSDBU accepted Miles’ position regarding each of the allegations lodged by the protesting party, yet sustained the protest anyway. Why? Not because of issues relating to “unconditional control,” but, rather, based upon an alleged failure of the service-disabled veteran to exhibit “unconditional ownership” over Miles, something never brought to Miles’ attention. Miles lost both the contract and its verified status based upon this decision.

We challenged OSDBU’s decision in a proceeding before the Court of Federal Claims and ultimately prevailed. Miles was reinstated as a verified SDVOSB and was later awarded the contract at issue in the case. One of the more important aspects of that decision pertained to due process. Citing to the Administrative Procedures Act, the court stated that where an agency performs an investigatory function, as OSDBU did in Miles, an interested party (like Miles) must be given notice of what’s happening so that it can meaningfully participate in that process. That did not happen. Miles was not given an opportunity to address the “unconditional ownership” issues that led to its immediate dismissal from the VA’s SDVOSB program. The court concluded that an agency cannot proceed in such a manner. It cannot issue what amounts to a death sentence without first allowing the accused a chance to defend itself. The court said it best: “an interpretation of 48 C.F.R. § 819.307(c) [the regulation pertaining to SDVOSB/VOSB eligibility protests] that does not allow this basic procedural due process is plainly erroneous and cannot be upheld.” That sounds about as straight forward as it gets, but not so fast. Let’s consider Ambuild, which was filed last month.

Ambuild Company, LLC was the apparent low bidder on a construction project at a VA Medical Center in Syracuse, New York. The second lowest bidder protested, challenging Ambuild’s SDVOSB eligibility. It alleged that Ambuild was affiliated with another company from which it was obtaining impermissible financial assistance. Both the SBA (strictly on issues relating to size) and the VA investigated the allegations and Ambuild was given the opportunity to respond. Ambuild did respond. Shortly thereafter, the SBA issued its decision. It found that there was no affiliation between Ambuild and the other company identified in the protest, meaning that Ambuild was, in fact, small. About a month later, the VA issued its decision. While it rejected each of the allegations lodged by the protesting party, it upheld the protest anyway. It did so based upon an independent review of Ambuild’s Operating Agreement and an ownership issue that it found as part of that review. Ambuild was unaware of this issue and, as such, did not address issues of ownership as part of its response to the protest. The VA’s finding left Ambuild ineligible for award and resulted in its removal from the CVE database as a verified SDVOSB company. Sound familiar?

Despite the Miles decision, the VA believes that its position in Ambuild is justified. You see, following Miles, the VA revised its regulations. Ambuild has characterized that change as follows:

“They VA [] relies on an amendment to 48 C.F.R. § 819.307, which went into effect September 30, 2013, apparently in direct response to this Court’s decision in Miles I. In an effort to circumvent the due-process protections mandated in Miles I, this amendment gives the CVE the ability to ‘determine the SDVOSB or VOSB status of the protested concern based upon a totality of the circumstances…’ 48 C.F.R. § 819.307(e). According to the VA, this language permits the CVE to ‘consider facts or issues not specifically raised by the protesting party that impact the SDVOSB/VOSB status…’ 78 FR 59861-01, Rules and Regulations of the Department of Veteran’s Affairs, by Robert C. McFetridge, September 25, 2013. Under this interpretation, and as evidenced by the OSDBU Decision, a protest against a SDVOSB for any reason permits the VA to conduct a full-blown compliance review examining every potential status issue, each and every time a protest is filed.”

In other words, the VA attempted to address some of the issues raised in Miles by revising the regulations governing eligibility protests. In this regard, it seems clear that the VA would like to conduct a “full-blown compliance review” in each case where such a protest is filed. While this, in and of itself, may not be objectionable, it is unclear how the VA will address the issue of due process. The Miles case was quite clear that procedural due process, that is, the right to meaningfully respond to an agency inquiry that could result in the loss of something legally tangible, must be afforded. Based upon an initial review of the facts in Ambuild, the protested party was not given the process to which it was entitled. Moreover, it appears that if due process was, in fact, given to Ambuild, it could have allayed the VA’s concerns. It’s still early and more facts could emerge, but this certainly does appear to be déjà vu all over again.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Ed frequently advises contractors on federal contracting matters including bid protests, claims and appeals, procurement issues, small business issues and dispute resolution.

Previously published in VetLikeMe.