Miles II: Court of Federal Claims Awards Attorneys' Fees and Provides Further Guidance

By: Edward T. DeLisle & Maria L. Panichelli

Miles Construction, LLC v. United States, No. 12-597C (2013) has been a very important case for SDOVSBs and VOSBs. Our victory in Miles not only resulted in a big win for our client, but it also caused the VA to change its policy regarding transfer restrictions generally, benefitting all veteran-owned companies. Before Miles, the VA had taken the position that a right of first refusal in a VOSB/SDVOSB operating agreement prevented a veteran owner from “unconditionally owning” his or her company pursuant to 38 C.F.R. § 74.3. The Court of Federal Claims rejected this notion in Miles. It held that standard rights of first refusal constituted “normal commercial practices,” which did not hinder an SDVOSB’s ability to comply with the VA’s “unconditional ownership” requirement.   In recognition of this holding, the VA has since changed its official policy regarding transfer restrictions.   
 
For the first time, the Miles decision also confirmed the due process that veteran-owned firms can expect, and that the VA must employ, if the VA wishes to cancel a concern’s VOSB/SDVOSB status. In Miles, the VA had begun an investigation regarding Miles’ SDVOSB status because of a protest filed by a competitor. That protest alleged that Miles was not “unconditionally controlled” by a veteran owner, as required by 38 C.F.R. § 74.4. Though the VA ultimately determined that Miles was, in fact, unconditionally controlled by its service-disabled veteran owner, the VA nonetheless summarily canceled Miles’ SDVOSB status. It found that there was no “unconditional ownership" of the company. In other words, the VA cancelled Miles’ SDVOSB status based entirely on an issue that was never brought to Miles’ attention and to which Miles never had an opportunity to respond. The Court concluded that, in doing so, the VA deprived Miles of its right to due process. The Court ruled that the Administrative Procedures Act requires that VOSBs/SDVOSBs be given notice of, and an opportunity to respond to, any and all challenges to their VOSB/SDVOSB status, prior to cancellation.  
 
Miles was a game changer in the VOSB/SDVOSB world. Now, in an equally important opinion (“Miles II”), the Court of Federal Claims has held that the government must pay Miles’ attorneys’ fees in connection with the underlying litigation.  
 
The Miles II decision was issued in response to Miles’ petition for fees and costs under the Equal Access to Justice Act, otherwise known as “EAJA.” EAJA allows small businesses to recover their attorneys’ fees and costs from the government in certain situations, as long as the government’s position was not “substantially justified.” Surprisingly, a party’s underlying win on the merits does not automatically preclude a Court from finding that the government was “substantially justified.”  To the contrary, the government’s position can be considered “substantially justified” even though it is ultimately determined by the Court to be incorrect.  As the Court pointed out, the inquiry is not what the law now is, but whether the [g]overnment was substantially justified in believing what the law was. In Miles II, in support of its position that it was "substantially justified," the government offered two arguments.  
 
First, the government proffered that the VA's interpretation of 38 C.F.R. § 74.3(b) made sense given the state of the law at the time. The government stated that the VA relied upon SBA Office of Hearings and Appeals decisions, which had held that right-of-first-refusal provisions defeat “unconditional ownership” under the SBA’s SDVOSB regulations. The Court didn’t buy it.  It reasoned that the government’s position assumed that the SBA regulation to which it referred was identical to the VA’s regulation. It is not.  As the court pointed out, the SBA regulation is a “more categorical provision,” that “simply uses the term ‘unconditional ownership’ without explanation or qualification.” On the other hand, the VA’s SDVOSB ownership regulation “contains an extended explanation of ‘unconditional ownership’” that “substantially alters ‘unconditional’ to accommodate practical commercial arrangements while preventing ownership benefits from falling into the hands of non-veterans.” Therefore, the Court concluded that these two regulations were distinct and different. The government erred in treating them otherwise.  
 
The government’s second argument concerned due process. Specifically, the government argued that the VA had been “substantially justified” in the level of due process it afforded Miles, because it had no guidance concerning the level of notice it was required to give. The Court quickly dismissed this argument. It found that “subsection 555(b) of the APA is universally understood to establish the right of an interested person to participate in an on-going agency proceeding.” The court concluded, “the fundamental requirement of due process is the opportunity to be heard at a meaningful time and in a meaningful manner.” The VA should have known that Miles was entitled to timely, substantive notice, such that it could respond to any potential challenges to its SDVOSB eligibility.  
 
So, what do Miles and Miles II mean for veteran-owned companies? First, they have clarified the scope of a VOSB/SDVOSB concern’s rights in connection with the VA's cancellation procedure.  In the wake of the Miles decisions, it is clear that the VA must strictly adhere to the cancellation procedures set forth in 38 C.F.R. § 74.22. The VA must be sure to provide VOSB/SDVOSBs with timely notice of any potential issues concerning their eligibility and it must afford them a real opportunity to respond prior to cancellation. In short, they are entitled to due process. Second, the Miles II decision highlights that there are differences between the regulations governing the SBA SDVOSB program and those governing the VA SDVOSB program. After Miles, contractors and agencies alike would be wise to remember that these regulations, no matter how similarly worded, are separate and distinct; the interpretation of terms is not necessarily consistent and it need not be. While there have been several proposals concerning the consolidation of the two SDVOSB programs, it has not happened. Unless and until it does, Miles and Miles II will help veteran-owned companies protect their interests before the VA.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

American Legion Weighs In on Kingdomware and Asks Federal Circuit to Force VA to Comply with the Law

By: Edward T. DeLisle & Maria L. Panichelli

On September 11, 2013, the American Legion filed an amicus curiae brief, asking the Federal Circuit to reverse the Court of Federal Claims’ November decision in Kingdomware Technologies, Inc. v. The United States. In Kingdomware, the COFC effectively overturned an important line of Government Accountability Office (“GAO”) decisions affecting VOSBs and SDVOSBs. Those GAO cases (commonly referred to as the Aldevra cases) addressed a critically important aspect of the Veterans Benefits, Health Care, and Information Technology Act of 2006, 8 U.S.C. §§ 8127-28 (“the Act”).

That Act established “the rule of two.” It required that “a contracting officer of [the VA] shall award contracts on the basis of competition restricted to small business concerns owned and controlled by veterans if the contracting officer has a reasonable expectation that two or more small business concerns owned and controlled by veterans will submit offers and that the award can be made at a fair and reasonable price that offers best value to the United States.” 38 U.S.C. § 8127(d).

On multiple occasions, contractors Kingdomware Technologies and Aldevra brought protests before the GAO, wherein they cited the language above and argued that the VA failed to follow the requisite “rule of two.” Specifically, the contractors averred that the agency failed to perform market research to determine whether two or more VOSB/SDVOSB concerns could satisfy the requirements of numerous solicitations and/or failed to set contracts aside for such concerns when market studies indicated that two or more such companies existed. Instead, in multiple instances, the VA opted to simply select contractors from the Federal Supply Schedule (FSS). The contractors argued that doing so was a violation of the Act.

The VA looked at it differently. It argued that the Act did not require it to consider setting aside procurements for SDVOSBs or VOSBs when the FSS could be used. The VA felt that it had the discretion to meet its requirements through the FSS, regardless of any obligations imposed by the Act.

In the Aldevra line of cases, the GAO agreed with the contractors’ interpretation of the Act. However, in a surprising move, the VA refused to follow the GAO’s recommendation. In an effort to break the gridlock, Kingdomware opted to press its position in the Court of Federal Claims. Unfortunately, the COFC agreed with the VA’s interpretation and effectively rejected the GAO’s support of “Veterans First.”

The COFC concluded that “the 2006 Act must be construed in light of its goal-setting provisions and thus the statute is at best ambiguous as to whether it mandates a preference for SDVOSBs and VOSBs for all VA procurements.” Although the Act uses the phrase “shall award” in one place, the Court reasoned that this phrase “must be read in connection with the other terms in the 2006 Act.” The Court found that those other terms demonstrated that the Act was “goal-setting in nature.” As such, it did not require the VA to consider setting aside procurements for SDVOSBs or VOSBs. Based on this reading of the Act, the COFC held that the VA had broad discretion with regard to set-aside procurements and, therefore, that the agency was not required to consider setting aside the procurement at issue. Kingdomware appealed to the Federal Circuit, which is where the matter presently sits.

In filing its amicus brief, the American Legion has joined the fight against the VA. In the brief, the American Legion argues that the Act was specifically passed to increase the number of contracts set-aside for VOSBs and SDVOSBs. As such, Congress’ use of the word “shall” was entirely deliberate. The selected language was intended to force the VA to follow the “rule of two.” The American Legion’s brief cites to an earlier Federal Circuit decision, which stated that: “the word ‘shall’ is not ambiguous. . . ‘shall is mandatory language,’ and ‘nothing in the language of the statute states or suggests that the word shall does not mean exactly what it says.’ ” The amicus brief goes on to state that “[b]y awarding contracts to nonveteran businesses…the VA diverts up to nearly $3 billion per year in government contracts away from veteran-owned small businesses.” The American Legion argues that this result is unacceptable and calls on the Federal Circuit to reverse the COFC ruling.

It is difficult to argue with the American Legion’s position. By using the word “shall” in the Act, Congress made its intent clear. The Act was designed to place veterans and service-disabled veterans ahead of all others for contracting purposes. There is nothing ambiguous about that proposition and the statutory language supports such a conclusion. The fact that the VA refuses to make awards to those it is designed to serve, despite the clear intent of the Act, is mind-boggling. Let’s hope the Federal Circuit agrees.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

VA Will Maintain Control Over VOSB/SDVOSB Status Protests....For Now

By: Edward T. DeLisle & Maria L. Panichelli

On September 30, 2013, the Department of Veterans’ Affairs (VA) issued an interim final rule, announcing that it would maintain authority over VOSB/SDVOSB status protests made in connection with the agency’s “Vets First” contracting program (the “Program”). Back in 2009, when the Program was created, the VA and the Small Business Administration (SBA) were tasked with forming an interagency agreement concerning the scope of each agency’s authority over Vets First protests. Since then, the VA has addressed all protests relating to the ownership and control of VOSBs and SDVOSBs, while the SBA has addressed all protests relating to size. The September 30, 2013 rule did not disturb this division of responsibilities.

However, this rule may soon be superseded by the passage of a new law. On July 31, 2013, Representative Mike Coffman (R-CO), a member of the House Small Business Committee and a frequent critic of the VA, introduced a bill referred to as the Improving Opportunities for Service-Disabled Veteran-Owned Small Business Act of 2013. If it passes, the bill will transfer control and administration of virtually all protests relating to the Vets First Program to the SBA.

As many contractors know, the SBA has its own VOSB/SDVOSB program. That program allows concerns to self-certify as VOSBs or SDVOSBs; once a concern has self-certified, it is eligible to compete for VOSB/SDVOSB set-aside procurements advertised by any agency other than the VA. However, if a concern also wants to compete for VA VOSB/SDVOSB set-aside contracts, it must first be verified by the VA.

Not surprisingly, this dual system has led to much confusion and uncertainty. Identically worded, or nearly identically worded, regulations have been interpreted differently by the agencies and by the Courts, providing contractors with inconsistent direction on how to establish “unconditional ownership” and “unconditional control”. Moreover, because of the different interpretations of these important terms, under the current system, a concern may be eligible for purposes of the SBA program, but denied verification under the VA program, or vice versa. For these reasons, most businesses find the current system frustrating and inefficient.

Coffman’s bill would eliminate the current system and replace it with a single VOSB/SDVOSB verification process. It would also unify the definitions of “unconditional ownership” and “unconditional control,” providing contractors with a clearer idea of what qualifies as a VOSB or SDVOSB concern. While the VA would retain authority for determining whether an individual is a “service-disabled veteran,” the SBA would have the authority to rule on all other eligibility factors including size, ownership, and control. Proponents of the bill believe that it will simplify things for the SBA and VA and, most importantly, the veteran business community.

Combining the systems would also save money. The VA is currently spending approximately $33 million a year on a verification program that, in effect, is duplicating the SBA’s efforts. A merger of the VOSB/SDVOSB verification systems could also, eventually, lead to the creation of a single, consolidated verification process covering all of the SBA’s small business programs. In other words, a concern would be able to submit one package to the SBA and become simultaneously verified for all of the small business programs for which the concern qualifies. This would constitute a major improvement over the current system.

So what does this mean for you? If the bill passes, VOSB/SDVOSB verification might get a lot simpler. It also means that it will be increasingly important to get your applications right, the first time around. We will keep you posted on the progress of the bill.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.
 

Department of Defense May Get its Own "Vets First" Program

By: Edward T. DeLisle & Maria L. Panichelli

Many of you are already familiar with the Department of Veterans Affairs’ Vets First Program. That program, created in 2006 through the enactment of the Veterans Benefits, Health Care and Information Technology Act of 2006, allows the VA to set-aside certain contracts for SDVOSB and VOSB concerns. The intent of the VA’s Vets First program is “to increase contracting opportunities for small business concerns owned and controlled by veterans with service-connected disabilities.” This goal is accomplished by favoring SDVOSB and VOSB companies over other disadvantaged groups when the VA sets aside a procurement for small business. In its first seven years, the program has resulted in tens of millions of dollars in contracts for SDVOSB and VOSB companies.

Clearly recognizing the many benefits of the VA’s program, Congress is looking to expand it. On June 14, 2013, Rep. Michael Fitzpatrick (R- Penn.) introduced, and the House unanimously passed, an amendment to the National Defense Authorization Act of 2013. If enacted, this amendment would require the Department of Defense to perform a study analyzing the potential benefits of adopting its own “Vets First” Program. The amendment directs DoD to work with the SBA and the VA for purposes of developing a report detailing “the impacts of Department of Defense contracting with [VOSBs and SDVOSBs] on veteran entrepreneurship and veteran unemployment,” among other things. First, however, the bill must gain Senate approval. SDVOSB contracting has received much attention over the last several years, so it will be interesting to see what happens in the Senate. We will keep you posted on the progress of the amendment.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.
 

Is My Teaming Agreement Enforceable?

By: Edward T. DeLisle & Maria L. Panichelli

Teaming Agreements in the world of federal procurement are commonplace.  They are formally encouraged by the government at FAR part 9.602 (wherein it states that “Contractor team arrangements may be desirable from both a Government and industry standpoint in order to…complement [contractor]’s capabilities; and [o]ffer the Government the best combination of performance, cost, and delivery…”) and can be critically important to small, and small disadvantaged, business concerns in winning small business set-aside contracts of all types.  Very often a government agency will consider the collective strength of a team’s credentials in awarding such contracts, particularly if the procurement is of the larger variety.  But what if a government agency awards a contract based on a teaming agreement, and you and your teammate cannot then reach accord on a subcontract agreement?  Can you sue to enforce the teaming agreement?  A recent decision from Virginia provides some guidance.

Cyberlock Consulting, Inc. v. Information Experts, Inc. was truly a tale of two agreements.  The plaintiff, Cyberlock Consulting, Inc. (“Cyberlock”), entered into two separate and distinct teaming agreements with the defendant, Information Experts (“IE”).  In both cases, IE was the prospective prime contractor.  In the first agreement, the parties very clearly set forth their intent to be bound to each other.  The language was clear.  Reinforcing that intent, the agreement had appended to it a very detailed breakdown of the scope of work to be completed by each party in the event of award.  Also attached was a formal subcontract agreement.  The teaming agreement clearly stated that, if IE was awarded the prime contract, IE would, “within five (5) business days from date of award...enter into the subcontract attached to this Agreement.”  Lastly, the first teaming agreement identified a number of bases that could result in its termination.  None of those bases included the failure to agree upon the terms of a subcontract agreement. 

The second teaming agreement, which pertained to a different solicitation, stood in stark contrast to the first.  The second teaming agreement identified only a generic “percentage of work” to be completed by each party.  The attention to detail, and the explicit assignment of specific, discrete tasks, which was evident in the first teaming agreement, was conspicuously absent in the second.  Moreover, the parties did not attach a draft subcontract to the second teaming agreement, as they did with the first agreement.  In addition, the second teaming agreement contained language providing for a number of situations that could result in termination of the relationship, including the “failure of the parties to reach agreement on a subcontract after a reasonable period of good faith negotiations.” 

While I find it a little odd that Cyberlock would agree to terms that were so drastically different than those contained in the first teaming agreement, I’m sure there were reasons that it did so.  Perhaps there was insufficient time to fully negotiate the second teaming agreement and Cyberlock simply trusted IE, especially after successfully negotiating the first agreement.  Whatever the reason, it would come back to haunt Cyberlock later.  Let’s consider what happened.

After entering into the first teaming agreement, the government agency awarded IE a prime contract; IE and Cyberlock quickly executed the subcontract agreement attached to the teaming agreement.  No problem.  The problems arose in connection with the second teaming agreement.  Although IE received the prime contract in connection with the second solicitation as well, after negotiating for a month, IE and Cyberlock were unable to agree on a subcontract agreement.  Cyberlock was NOT happy and sued IE.

It was up to a judge to determine whether the second teaming agreement was enforceable.  It was Cyberlock’s position that it had a deal with IE.  If IE was awarded a contract by the government, Cyberlock was entitled to a share of the work, in this case 49%.  IE saw it differently.  IE argued that the parties did not have an agreement at all.  All they really did was “agree to negotiate later.”  Such agreements, according to IE, were not enforceable.  The judge agreed with IE.

Citing to Virginia law, the judge concluded that the second teaming agreement simply was not definitive enough to qualify as an enforceable agreement.  The problem was that the parties left too many details up in the air, and subject to too many conditions, if IE were able to secure the prime contract.  Most disturbing, the court went on to state the following:  “Indeed, calling an agreement something other than a contract or a subcontract, such as a teaming agreement or a letter of intent, implies ‘that the parties intended it to be a nonbinding expression in contemplation of a future contract.’“  Wow...what is one to take from a statement like that?  The FAR specifically refers to, and encourages, teaming agreements.  How does that position comport with this court’s view?

While I think that the court went a hair too far in making that last statement, it does draw attention to something that is often taken for granted:  the assumption that the document that you’re signing is enforceable.  It’s actually something that you need to consider when it comes to teaming because, if successful, the parties do expect a second agreement, a subcontract (which, incidentally, is where all the money is) to follow their teaming agreement.  That said, it’s not an issue that arises very often in my practice.  Why?  Well, I think because, very often where teaming takes place, the parties have a distinct need for each other.  If, for example, a procurement is set aside for small disadvantaged businesses, such as 8(a) concerns or SDVOSBs, the small disadvantaged business may need a large business concern’s experience, or manpower, or bonding capacity to help it.  On the flip side, the large business concern needs the small business concern for it would not have access to this set-aside work at all without the small business.  It is assumed that things will work out just fine if an award is made.  Let this opinion be a lesson that you really do need to consider the terms of your teaming agreement and, moreover, consider the possibility that things could go wrong.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

The VA Makes Major Policy Change Concerning Transfer Restrictions, Provides Expedited Reconsideration for Companies Denied SDVOSB Eligibility

By: Edward T. DeLisle & Maria L. Panichelli

Following recent congressional testimony, as well as a newsletter published by the Department of Veterans Affairs’ (“VA”) Center for Veterans’ Enterprise (“CVE”) last month,  it would appear that the Miles decision (discussed in detail here and here) has forced an important change in VA policy regarding transfer restrictions. 

Prior to the Miles opinion, the VA had taken the position that any restriction on a service-disabled veteran owner’s right to transfer his or her ownership interest rendered ownership conditional.  As the regulations require "unconditional ownership" by a service-disabled veteran to be considered a legitimate SDVOSB concern, the VA reasoned that the presence of transfer restrictions embedded within formation documents eliminated an entity from eligibility.  That was then. 

In Miles, the Court of Federal Claims ruled that transfer restrictions did not necessarily render a service disabled vet’s ownership “conditional."  The provision Miles required the company's service-disabled veteran owner to offer minority shareholders the right to purchase the veteran’s shares prior to a sale to a third party.  The VA argued that this provision denied the service-disabled veteran “unconditional” ownership and prevented Miles from being SDVOSB-verified.   In overruling the VA’s decision, the Court of Federal Claims concluded that provisions such as the “right of first refusal” provision in Miles’ shareholders agreement fell within the ambit of “normal commercial practice;" it did “not affect the veteran’s unconditional ownership.”  In short, the Court found that transfer restrictions do not render control conditional, as long as those restrictions are commercially reasonable. 

In apparent recognition of this holding, the VA has changed its official policy regarding transfer restrictions.  As referenced by the VA's Executive Director of Small and Disadvantaged Business Utilization, Mr. Thomas Leney, in his congressional testimony (check around the 1:05-1:10 mark), the VA's position now is that “transfer restrictions on ownership that are part of normal commercial dealings, such as the right of first refusal, do not materially affect the ability of the veteran to unconditionally own or control the business.”  He went on to state that “the VA will no longer interpret the current regulation to mean that such restrictions constitute a reason for denying eligibility.”  This policy shift is reflected in a Verification Assistance Brief entitled Transfer Restrictions, found on the VA’s website, and is highlighted in a newsletter published by CVE on May 3, 2013.

Unfortunately, the VA has determined that this change in policy will not be applied retroactively to companies who were denied SDVOSB eligibility prior to March 1, 2013.  

However, these entities are not completely out of luck.  For applicants that received denial letters before March 1, 2013, where the sole basis for denying SDVOSB verification was the existence of transfer restrictions, those applicants can request reconsideration without waiting the six months typically required to reapply pursuant to 38 C.F.R. 74.14.  Moreover, the VA has promised that these previously-denied companies will receive “priority” processing, and should have a determination within thirty business days (as long as they have previously undergone a full review and no changes have occurred within the company).

If your company was previously denied SDVOSB verification based upon a problem with transfer restrictions, and you wish to take advantage of the priority reconsideration process, send an email to vacorecons@va.gov, with the following subject line: TRANSFER RESTRICTION PRIORITY, with your company name and DUNS number.  If you have any questions, you can also send me an email and I will try to assist you.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

OSDBU Seeks Guidance on Revisions to Verification Guidelines

By: Edward T. DeLisle & Maria L. Panichelli

On May 13, 2013, the Department of Veterans Affairs’ (“the VA”) Office of Small Disadvantaged Business (“OSDBU”) published an advanced notice of proposed rulemaking, asking the public for guidance on how best to revise its verification regulations. Better late than never.

Since the verification program's inception, it has been hampered by issues and problems. The hope was that the verification process would address concerns regarding fraud, and create a system that assured that those attaining verified status were entitled to recognition. Instead, service-disabled veterans have been largely frustrated by the system. Well, if you are a service-disabled veteran with an opinion on how to make the system better, you are being given your chance to make your opinions known.

The recent announcement stated that the OSBDU plans to revise the regulations governing the VA’s veteran-owned small business (“VOSB”) and service-disabled veteran-owned small business (“SDVOSB”) programs in order to “provide greater clarity, to streamline the program, and to encourage more VOSBs to apply for verification.” The OSDBU is specifically seeking comment from the public on the following eight (8) topics:

 

  1. What could be changed to improve the clarity of the regulations? Where might bright lines be drawn to more clearly indicate compliance with the regulations and reduce potential for misinterpretation? Where might the addition of bright line tests create unintended consequences?
     
  2. It has been suggested that VA should develop a list that would clearly delineate what constitutes ownership and control and what constitutes lack of control or ownership. Should a list like this be included in the rule, and if so, what should be on the list?
     
  3. Are there changes to VA's regulations that could be made to reduce the economic impact on VOSBs?
     
  4. Are there changes to VA Form 0877 (the application) that could streamline the process?
     
  5. What verification process improvements could help to increase efficiency and reduce burden for VOSBs?
     
  6. What additional training tools or assistance might be offered to create more clarity for stakeholders and help them more efficiently and effectively navigate the verification regulations?
     
  7. What documents, records, or other materials could the Office for the Center for Veterans Enterprise use to distinguish legitimate VOSBs/SDVOSBs from businesses that fraudulently seek contracts from the Government?
     
  8. Would a special Hotline to report suspected ineligible VOSBs/SDVOSBs help the Government ensure that contracts are awarded to legitimate VOSBs/SDVOSBs.

Although the VA identified these eight topics for discussion, do not feel limited by this list. The OSDBU has emphasized that it is open to hearing any and all comments relating to the improvement of the process. As such, this is a rare opportunity to sound off in a very public way and make an impact on the processes that govern the verification program. We strongly urge you to make your voice heard!

Written comments should be submitted through www.Regulations.gov by mail or hand-delivery to Director, Regulation Policy and Management (02REG), Department of Veterans Affairs, 810 Vermont Ave. NW., Room 1068, Washington, DC 20420. Comments can also be faxed to (202) 273-9026. Comments should indicate that they are submitted in response to “RIN 2900-AO63—VA Veteran-Owned Small Business (VOSB) Verification Guidelines.” The comment period ends on July 12, 2013.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

 

Miles Construction, LLC v. United States, No. 12-597C (Feb. 14, 2013), A Primer on Due Process

By Edward T. DeLisle and Maria Panichelli

Back in February, we provided readers with an overview of a case that we litigated at the end of last year, Miles Construction, LLC v. United States, No. 12-597C (Feb. 14, 2013). The major focal point of the decision was the court’s ruling that “a standard right of first refusal is a ‘normal commercial practice,’” which does not hinder an SDVOSB’s ability to comply with the VA’s “unconditional ownership” requirement. Before Miles, it was the VA’s position that a right of first refusal in an SDVOSB operating agreement prevented a veteran owner from “unconditionally owning” his or her company, rendering the company ineligible for verified status. So if, for example, you were a service-disabled veteran, who owned 51% of your company, but had in your operating agreement a provision that you were required to offer your minority shareholders the right to buy your shares at or above a price offered by a third party, you could not be verified by the VA. Sounds a little silly, right? Well, as set forth in Miles, the court thought it was silly as well.

This was a major victory for SDVOSBs, which ushered in a change in VA policy on transfer restrictions, generally. The VA has removed information from its website indicating that rights of first refusal, and other transfer restrictions, are impermissible barriers to verification. The VA has also publically acknowledged its about face on the issue. (See Testimony of Mr. Tom Leney, Executive Director of Veterans and Small Business Programs, March 19, 2013.) Despite all of the publicity on transfer restrictions, however, there are other aspects of the Miles decision that are just as disserving of discussion. The importance of due process is one of those issues.

In Miles, the Plaintiff, Miles Construction LLC, was a SDVOSB that had been previously verified by the VA. A few months after being verified, Miles submitted a bid on a VA solicitation set-aside for SDVOSB concerns. Miles was awarded the contract and a disappointed bidder filed an agency protest, 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. Miles was notified of the protest and asked to “respond directly to the allegations made in the status protest.” Miles promptly responded and addressed each of the allegations. The VA 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.

Miles, of course, protested the decision. On the issue of process, Miles’ position was twofold. First, it argued that the VA violated 48 C.F.R. § 819.307 in rendering its decision. Under that regulation, the VA, through its Office of Small and Disadvantaged Business Utilization (OSDBU) “shall decide protests on service-disabled veteran-owned small business status whether raised by the contracting officer or an offeror.”  It goes on to state that “[a]ll protests must be in writing and must state all specific grounds for the protest.” Miles’ interpretation of this regulation was that either a contracting officer or a disappointed offeror could advance an eligibility protest and that protest would have to be specific and in writing. The point is to provide the VA with something substantive to consider, which can then be read, understood and responded to by the person being protested. While the court deferred to OSDBU on the ability to look beyond information contained in a protest (despite the wording of the regulation), it had a problem with not providing the party being protested with notice and an opportunity to be heard.

Citing to the Administrative Procedures Act, the court stated that where an agency performs an investigatory function, as OSDBU did here, an interested party (like Miles) must be given notice of what’s happening such that he or she is permitted to meaningfully participate in the 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 SDVOSB program. Simply put, you cannot do that. It’s a procedural due process problem, which Miles argued as part of its protest. You cannot issue what amounts to a death sentence without first allowing the accused a chance to defend herself. To that end, the court stated that “an interpretation of 48 C.F.R. § 819.307(c) that does not allow this basic procedural due process is plainly erroneous and cannot be upheld.”

Going forward, this ruling should mean less surprise and more process from the VA. This is a welcome change and another positive, yet less publicized, aspect of the Miles decision.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

SBA Provides Veteran Owners an Opportunity to Discuss Concerns about SDVOSB Programs

By: Edward T. DeLisle & Maria L. Panichelli

Next week, the Small Business Administration (“SBA”) is giving SDVOSBs a rare opportunity to voice their concerns about government small business programs -- publicly, and directly to the SBA itself.

Yes, you read that correctly. The SBA recently announced that it will host a meeting of the Interagency Task Force on Veterans Small Business Development (“the Task Force”). The Task Force has been charged with various responsibilities in connection with SDVOSB programs. Its most recent focus has been the coordination of administrative and regulatory activities, and the development of proposals, related to several focus areas: (1) access to training, counseling and capital; (2) effective federal contracting verification; and (3) improved federal support. The upcoming meeting is meant to address not only these topics, but also various issues relating to agency efforts to improve business development opportunities for SDVOSBs. Also on the agenda: A discussion about ways in which the government can better meet its small business contracting goals.

The SBA has stated that the meeting will be open to the public, and that time will be set aside for public comment and presentations. This meeting will give service-disabled veteran small business owners a chance to speak out publicly about issues of concern and, based upon our experience, there is plenty to talk about.

The meeting will be held on May 10, 2013, starting at 9 a.m. and running through noon. The meeting will be held at the SBA’s Washington, D.C. District Office, located at 740 15th St., NW, Suite 300. Those planning to attend should provide advance notice by emailing vetstaskforce@sba.gov.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

Is the VA Violating the Small Business Act?

By: Edward T. DeLisle & Maria L. Panichelli

It’s not all that surprising when contactors question the Department of Veterans Affairs’ authority, especially those who are denied SDVOSB verification.  It’s a little surprising, however, when members of Congress do it.  Late last month, two congressmen explicitly challenged the VA’s management structure, which could have an impact on how the verification process operates in the future.
 

On March 28, 2013, Reps. Richard Hanna (R-N.Y.) and Mike Coffman (R-Colo.) penned a letter to VA Secretary Eric Shinseki, arguing that the VA had violated the Small Business Act by allowing the director of the department's Office of Small and Disadvantaged Business Utilization (OSDBU), Tom Leney, to also serve as director of the VA’s Center for Veteran’s Affairs (“CVE”).  In theory, the CVE and the OSDBU are meant to carry out very different functions within the VA.  The CVE is charged with the verification of SDVOSB entities – a responsibility delegated to the CVE by the Secretary of the VA under 38 U.S.C. 8127.  In that role it is supposed to serve as an “auditor” for the agency; its job is to police the verification process.  The OSDBU, on the other hand, is meant to serve as an advocate for SDVOSB entities, facilitating their participation in the program.
 

In their letter, the Congressmen explained that Section 15(k) of the Small Business Act, which created the position of OSDBU for every federal agency, specifically requires that the director of the OSDBU “carry out exclusively the duties enumerated in this Act, and shall, while the Director, not hold any other title, position, or responsibility, except as necessary to carry out responsibilities under [Section 15].”  Given this definition, the Congressmen opined that Mr. Leney’s service as both the director of the OSBDU and head of the CVE presented a problem.  As they coined it, the dual role constitutes an “inherent conflict,” given “the advocacy role assigned to the OSDBU and the auditing function now associated with CVE."
 

This is not the first time this issue has been raised.  On March 19, 2013, Mr. Leney was questioned about his dual role during a joint subcommittee meeting.  At that hearing, Mr. Leney testified that he did not feel that he was in a position of conflict.  His explanation: “I personally do not have any issue with a conflict of interest because we are helping vets."  Apparently, members of the legislature were not convinced.  Congressmen Hanna (the chairman of the Small Business Committee's Contracting and Workforce Subcommittee) and Coffman (the chairman of the Veterans' Affairs Committee's Oversight and Investigations Subcommittee) were certainly not swayed.  In their subsequent letter, they specifically directed VA Secretary Shinseki to document how the department intends to achieve compliance with the Small Business Act.  Implicit in such a direction, of course, is the idea that the current structure is not compliant and, therefore, illegal.
 

To date, VA officials have not commented on the letter, but it is generally assumed that the VA will have to formally respond at some point soon.
 

The VA does appear to have a problem here and the problem is not going away.  When two subcommittee chairmen send a letter to follow up on an issue raised during hearing, they are expecting an answer.  Whatever the response, the real issue for SDVOSBs, and prospective SDVOSBs, is what does it all mean for them?  I hope it means that the VA uses this as an opportunity to address some of the administrative issues at CVE that have generated so much frustration amongst veterans.  While most veterans understand and appreciate the need to “police” the verification system, I have heard way too many stories from veterans who feel victimized by that system.  We will keep our eye on this one as it could result in a real shake-up at the VA.      

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

Remote Control

By: Edward T. DeLisle & Maria L. Panichelli

In today’s world, it is not at all uncommon for employees, or even owners of companies, to “telecommute” or “work remotely” from time to time. It's one of the many great things that technological advancement has provided. In fact, many say that it's too easy to stay connected to the office, making it impossible ever really get away. As I walk down Market Street in Philadelphia every day, I see person after person glued to their phone, checking messages and responding to email incessantly (present company included). In fact, I'm on a flight to Phoenix at this very moment writing this article, which I will email to my assistant and have posted for all of you to read. It's incredibly easy to work from anywhere at any time. Until recently, however, the Veterans Administration did not subscribe to this theory. It interpreted its regulations to mean that a service-disabled veteran could not manage his or her business remotely. A few weeks ago, the Court of Federal Claims issued an opinion that changed all that. KWV, Inc. v. United States, No. 12-882C (2013) should provide much more flexibility to service-disabled veterans in our ever-changing world.

KWV involved a Rhode-Island based service-disabled veteran-owned business (“SDVOSB”) that was owned and managed by a Korean War veteran with more than thirty years of construction experience. KWV was awarded a contract set-aside for SDVOSBs by the VA, and drew an agency protest from a disgruntled competitor, Alares LLC (“Alares”). Alares challenged KWV’s SDVOSB status, arguing that the service-disabled veteran did not actually “control” the company within the meaning of 38 C.F.R. § 74.4 because he lived in Florida for part of the year. Alares claimed that the veteran's sons, both of whom worked for the company in Rhode Island, actually controlled the company.

The VA's Office of Small and Disadvantaged Business Utilization (“OSDBU”) agreed with Alares; it found that, because the service-disabled veteran resided in Florida for a portion of the year, he could not maintain sufficient control over the day-to-day management of KWV. The OSDBU therefore held that KWV was ineligible for the contract, and revoked KWV’s SDVOSB status, rendering it unable to bid on future SDVOSB set-aside contracts issued by the VA. KWV then appealed this decision to the United States Court of Federal Claims, seeking injunctive relief, and got it.

The Court found that the service-disabled veteran's decision to live in Florida for part of the year did not preclude him from “controlling” KWV within the meaning of 38 C.F.R. § 74.4. Judge Lettow (the same judge that presided over the Miles case, a case that we won on behalf of an SDVOSB, and wrote about last month) stressed that the veteran “employs various electronic means to keep track of the day-to-day business of KWV," which was revealed during the proceeding. The court concluded that this was an acceptable means of controlling KWV's operations, per the requirements of 38 C.F.R. § 74.4.

Based upon this finding, the Court issued a preliminary injunction, setting aside the VA's decision to sustain the protest. The Court also ordered the VA to restore KWV’s SDVOSB eligibility.

This case represents a very important development for SDVOSB owners. The VA must now recognize that “control” under 38 C.F.R. § 74.4 is not dependent upon an owner’s physical presence at an office or site. Rather, service-disabled veterans can remotely manage the day-to-day affairs of their SDVOSBs, provided that they fulfill the other prerequisites regarding “control.” This is great news for SDVOSB owners, who, like many of us, must manage our affairs far from afar sometimes...even at 37,000 feet. 

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

The SDVOSB Verification Process is Changing

By: Edward T. DeLisle

Since 2010, when the VA instituted its process to verify service-disabled, veteran-owned small businesses, we have received call after call from companies that have been denied verification. Denial, of course, can have a devastating effect. Without receiving verified status, a company cannot qualify for contracts set-aside by the VA for SDVOSB companies. Many times, when we receive these calls and then review the basis for denial, all we can do is shake our collective heads in disbelief. A simple phone call would have very likely paved the way to verified status. Instead, the company is stuck with attempting to fix the problem through the reconsideration process, which is uncertain and never quick, and must consider the distinct possibility that it will have to wait six (6) months from a final decision to reapply. This has raised the ire of many a veteran. Well, for those veterans who have advocated for change, help appears to be around the corner.

On Tuesday afternoon, Business Wire reported that on May 1, 2013, the VA will begin providing SDVOSB applicants the opportunity to correct “minor deficiencies” found in their documentation prior to a denial being issued. The idea is to add an element of common sense to the process and avoid denying applicants who really do deserve verification. The new process will work as follows:

Firms determined to have problematic issues that are easily corrected will be contacted by the Center for Veterans Enterprise and informed of CVE’s preliminary findings. The applicant will then have 48 hours to respond, indicating a willingness to correct the issues and provide revised documentation addressing the preliminary findings. As part of this new process, the applicant will be referred to verification-assistance counselors to enhance the probability that any deficiencies are overcome.

This is great news for our veterans and it is our understanding that other changes may be in the works. As we hear about what the VA intends to introduce, we will pass along that information to you.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group.

Cohen Seglias Wins Big Case for Service-Disabled Veteran-Owned Small Businesses

By: Edward T. DeLisle

For many Veterans and Service-Disabled Veterans attempting to do business with the Department of Veterans Affairs, the hope outlined in the Veterans Benefits, Health Care, and Information Technology Act of 2006 (the “Act”) has largely been elusive.  The Act called for the VA to give “priority to [] small business concern[s] owned and controlled by veterans” when soliciting work.  As the program developed, it was left to the VA to devise a system to verify companies as veteran owned small businesses (“VOSBs”) and service-disabled veteran owned small businesses (“SDVOSBs”), the latter of which were to receive first priority in contracting opportunities with the VA.  The verification system that took root in 2010 has frustrated many a veteran, as it has prevented legitimate companies from obtaining verified status and resulted in many others to lose their status.  In an important decision published last week, which we argued, the Court of Federal Claims has attempted to right the ship.

Miles Construction, LLC v. United States, No. 12-597C (2013) involved a construction contract set aside for SDVOSBs.  Our client, Miles, a verified SDVOSB, was the prospective awardee.  A competitor protested the award, raising issues of control by the minority shareholder of Miles, a non-service disabled company.  While the VA decided that the issues raised by the protestor had no merit, it nonetheless upheld the protest following an independent review of Miles’ governing documents.  According to the VA, three provisions of Miles’ operating agreement violated the VA’s verification regulations.  The most important provision involved a “right of first refusal.” That provision required the service-disabled veteran to offer the minority shareholders of Miles the right to purchase the veteran’s shares prior to any sale.  The VA took the position that such a provision denied the service-disabled veteran unconditional ownership, a prerequisite to verification.  On that basis, not only did the VA sustain the protest, eliminating Miles from competition, but it also removed Miles from its verified list of SDVOSB companies.  Miles would not be eligible for any further contracts set aside for such concerns.  Following our challenge of this decision on behalf of Miles, the court saw it differently.

The court determined that the VA’s interpretation of its own regulations was arbitrary and capricious.  While the regulations did, in fact, require “unconditional ownership” by the service-disabled veteran, that requirement did not preclude standard “right of first refusal” language.  The court concluded that such provisions fall within the ambit of “normal commercial practice” and do “not affect the veteran’s unconditional ownership.”  Further, the court found that Miles was not provided with an adequate opportunity to respond to the allegations that led to the VA sustaining the protest.  On this point, the court opined 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.”  Calling such a position lacking in “basic procedural due process,” the Court held that the VA’s decision to sustain the protest was “plainly erroneous.”

Miles is a major victory for veterans and service-disabled veterans, who have been stung by a lack of common sense and fair play at the hands of the very agency that is supposed to be there to assist them.  Many have questioned the VA’s position on “rights of first refusal,” including members of Congress.  Now, a court has ruled that such provisions in an SDVOSB’s operating agreement cannot, in and of themselves, prevent one from being verified by the VA.  The ruling makes practical sense and is certainly consistent with the governing regulations.  As the decision is extremely important to SDVOSBs, expect to see further comment from us in the days and weeks to come.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group.

Supermajority Requirements Render Business Concern Ineligible for Participation in the SDVO Program

By: Edward T. DeLisle & Maria L. Panichelli

SDVOSB Appeal of Rush-Link One Joint Venture, SBA No. VET-228 (2012), a recent Small Business Administration Office of Hearings and Appeals (“OHA”) decision that we discussed previously, demonstrates how a company’s internal corporate structure can impact that company’s eligibility to participate in the Service-Disabled Veteran Owned (“SDVO”) small business program.

SDVOSB Appeal of Rush-Link One concerned a joint-venture, Rush-Link One, which was 51%-owned by Link Contracting, Inc. (Link), a purported SDVO small business concern. Mr. George Carpenter, a service-disabled veteran, owned 55% of Link. Following the award of a SDVOSB set-aside contract to Rush-Link One, a competitor challenged the joint-venture’s eligibility for the SDVO program.

Pursuant to 13 C.F.R. § 125.10(a), a small business concern may qualify as an eligible SDVO only if the management and daily business operations of that concern are “controlled” by one or more service-disabled veterans. The regulations define “control” differently, depending upon the type of corporate structure employed. In the case of a partnership, one or more service-disabled veterans must serve as general partners, with control over all partnership decisions. 13 C.F.R. § 125.10(c). A limited liability company (LLC) is “controlled” by a service-disabled veteran only if one or more service-disabled veterans serve as managing members, with control over all decisions of the LLC. 13 C.F.R. § 125.10(d). In the case of a corporation, such as Link, the service-disabled veteran must prove that he or she has “control” over the corporation’s Board of Directors, thereby allowing him or her to make all major decisions on the company’s behalf. 13 C.F.R. § 125.10(e). Service-disabled veterans control the Board of Directors when either: (1) one or more service-disabled veterans own at least 51% of all voting stock of the concern, are on the Board of Directors and have the percentage of voting stock necessary to overcome any super majority voting requirements; or (2) service-disabled veterans comprise the majority of voting directors through actual numbers or, where permitted by state law, through weighted voting. 13 C.F.R. § 125.10(e).

Applying the above in Rush-Link One, the OHA concluded that the supermajority requirements in Link’s shareholders’ agreement abrogated the service-disabled veteran owner’s “control” of the corporation under 13 C.F.R. § 125.10, and rendered the concern and, therefore, the joint-venture, ineligible for participation in the SDVOSB program. The OHA found that, although Link was 55% owned by a service-disabled veteran, its shareholders executed a formal shareholders' agreement which stated that “[e]xcept as otherwise provided herein or in [Link’s] bylaws, all decisions of the Shareholders shall be made by a majority vote. “Majority vote” was defined as one in which “seventy percent (70%) of the issued shares of the Corporation vote to pass the issue or matter.” The same paragraph of the shareholders' agreement indicated that “[t]his provision shall supersede any contrary provision of [Link’s] bylaws or Articles of Incorporation (as they stand now or may subsequently be amended).” Accordingly, the OHA found that Mr. Carpenter’s 55% ownership of Link was insufficient to overcome the supermajority requirement set forth in the shareholders’ agreement, and, consequently, that he did not “control” Link’s board of directors or Link as a whole. Therefore, OHA concluded that Link was not a SDVOSB, and that Rush-Link one was not an eligible SDVOSB joint-venture.

Let this case serve as a reminder that internal corporate governance is critically important to SDVOSB eligibility. In our practice, it represents the single, most frequently cited basis for the loss or denial of SDVOSB status.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.

SBA Relies on 8(a) Regulations to Deny SDVO Eligibility Due to Minority-Owner Loans

By: Edward T. DeLisle & Maria L. Panichelli

In a recent opinion, SDVOSB Appeal of Rush-Link One Joint Venture, SBA No. VET-228 (2012), the United States Small Business Administration (“SBA”) Office of Hearings and Appeals (“OHA”) used two 8(a) program regulations, namely 13 C.F.R. § 124.106(g) and 13 C.F.R. § 124.3, to determine whether a joint-venture met the eligibility requirements for the Service-Disabled Veteran Owned (SDVO) Small Business Program. Specifically, the OHA found that the joint-venture was not eligible for participation in the program; certain loans from minority owners imposed impermissible restrictions on the service-disabled veteran/majority-owner’s ownership.

Rush-Link One Joint-Venture (“Rush-Link”) was a joint-venture between Link Contracting, Inc. (Link), which held a 51% interest in the joint-venture, and Rush Construction, Inc. (Rush). Following the award of a SDVO set-aside contract to Rush-Link, a competitor challenged the joint-venture’s eligibility for the SDVO program.

For a small business concern to qualify as an eligible SDVO, a service-disabled veteran must directly and unconditionally “own” at least 51% of the firm. 13 C.F.R. § 125.9. The service-disabled veteran also must “control” both the long-term decision-making and the day-today management of the firm. 13 C.F.R. § 125.10(a). For a joint-venture to be SDVO-eligible, the joint-venture agreement must contain a provision designating an SDVO participant as the managing venturer, and designating an employee of the managing venturer as the project manager. 13 C.F.R. § 125.15(b)(2)(ii).

Applying these provisions to Rush-Link, the SBA Director for Government Contracting (“DGC”) concluded that Mr. George A. Carpenter, the president and 55%-owner of Link, was a service-disabled veteran. However, he found that Carpenter did not “own” Link within the meaning of the SDVO Program regulations, based on the existence of several promissory notes that divested Carpenter of certain ownership rights. More specifically, the terms of these promissory notes – given to three minority-owners of Link in exchange for critical loans provided to the company – restricted Carpenter’s ability to transfer his interest or receive dividends or distributions. Therefore, in reliance upon 13 C.F.R. § 124.106(g), which states that a person “controls” a company if he or she “provides critical financing” to the company or exercises control “through loan arrangements,” the DGC concluded that Carpenter’s ownership was impermissibly restricted by the promissory notes. The DGC reached this conclusion, even though 13 C.F.R. § 124.106(g) is an 8(a) regulation intended to govern small-disadvantaged businesses, and is not part of the regulations governing the SDVO program.

On appeal, Link cited 13 C.F.R. § 124.3, another 8(a) regulation, for the proposition that “ordinary” loans following “normal commercial practices” should not be the basis for finding that a small business owner does not control his or her company. The OHA acknowledged this was correct, but concluded that the loans in question here were “commercially irregular” because the holders of the promissory notes were not banks or other commercial lenders, but minority owners of the company itself. Based on this conclusion, the OHA determined that the promissory notes impermissibly restricted Carpenter’s ownership, and that Link was therefore not an eligible SDVO business. The necessary result of such a finding was that the joint-venture between Link and Rush (which is not itself a SDVO business) was also ineligible for the SDVO program pursuant to 13 C.F.R. § 125.15(b)(2)(ii).

Oddly, neither the DGC nor the OHA addressed the propriety of using 8(a) regulations to determine eligibility under the SDVO program. Therefore, going forward, participants in all the various SBA small business set-aside programs should be aware, not only that loans that result in restrictions on ownership rights might invalidate “ownership” for the purposes of eligibility, but also that regulations may be utilized and interpreted across programs to determine a business’ eligibility.

In addition to the above, SDVOSB Appeal of Rush-Link One Joint Venture, SBA No. VET-228 (2012) provided some interesting insights concerning how a company’s internal corporate structure might affect the “control” requirements relating to SDVO eligibility under 13 C.F.R. § 125.10(a). Stay tuned for an update on what an SDVO should and should not include in its corporate governance documents.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group. Maria L. Panichelli is an Associate in the firm’s Federal Practice Group.
 

VA's Ambiguous Solicitation Leads to Successful Protest

By: Edward T. DeLisle

Over the last several years, the scrutiny over federal small business programs has grown. That scrutiny has led to changes in policy and legislation designed to curb potential fraud in the procurement process. Because these changes have been implemented in such a short period of time, however, it is not unusual for the government to issue solicitations for small business set-aside contracts that are confusing, or even contradictory. In Commandeer Construction Company, Inc., B-405771, December 29, 2011, that is precisely what occurred resulting in a successful protest.

Commandeer Construction involved a solicitation that was set aside for Service-Disabled, Veteran-Owned Small Businesses (SDVOSBs), a program that has experienced much change in recent years. In 2006, the VA was given the authority to restrict competition to SDVOSBs as part of the Veterans Benefits, Health Care, and Information Act (the "Act"). 38 U.S.C. 8127(d). As the GAO explained in Commandeer Construction, pursuant to the Act, an SDVOSB set-aside contract may only be issued to entities listed in a database of veteran-owned small businesses maintained by the VA. The VA has chosen to use what it has termed its "Vendor Information Pages" ("VIP"), which can be found at www.vetbiz.gov, as its official listing of veteran-owned and service-disabled, veteran-owned concerns.

Subsequent to issuance of the Act, the VA issued VAAR 804.1102, which states that all VOSB and SDVOSB entities must be listed in its VIP database by January 1, 2012 in order to be eligible for set-aside contracts for such entities. By December 31, 2011, all VOSB and SDVOSB entities must not only be listed, but must also be "verified," in order to receive new contract awards under the Veteran's First program, a program operated exclusively by the VA. While firms were once permitted to self-certify their status as VOSBs and SDVOSBs, as part of Veterans Benefits Act of 2010, the VA instituted a more rigorous qualification process. Consistent with this new review procedure, which was designed to weed out fraud, the VA's "Center for Veterans Enterprise" ("CVE") was given the authority to render eligibility determinations for these programs. If a firm wished to obtain a set-aside contract as a VOSB or a SDVOSB entity, it would have to be verified by CVE.

In an effort to assist in the transition from a self-certifying system to one requiring government approval, the VA issued what it called its "Memorandum from VA Acting Associate Deputy Assistant Secretary for Procurement Policy, Systems Oversight and Accompanying Class Deviation from VA Acquisition Regulation" (the "Memorandum"). The Memorandum referenced what the VA described as a "class deviation." Based upon this class deviation, any "apparently successful offeror" that had not already been verified by CVE, could become verified on an expedited basis, and obtain an award of a VOSB or SDVOSB set-aside contract, provided CVE approved its status. Later, the VA clarified its position regarding who may qualify for a “class deviation,” taking the position that a company was not eligible for “either award or Fast Track Verification," unless it was visible in the VA’s VIP database. Commandeer Construction addressed the interplay between the class deviation identified in the Memorandum and the VA’s attempt to subsequently clarify what it meant.

In Commandeer Construction, the VA issued an IFB for a construction contract that was set aside for eligible SDVOSB firms. The solicitation stated that the award would be made to an SDVOSB firm that had “been verified for ownership and control and [was] so listed in the [VIP] database.” The IFB also included the “class deviation” language referenced above. What was not included as part of the IFB, however, was the Memorandum (and accompanying deviation), or the clarification made to the deviation, which was issued after the fact.

On August 8, 2011, the protesting party, Commandeer Construction, submitted an application to the CVE for approval as an SDVOSB. Thereafter, on August 30, 2011, Commandeer submitted its bid. As its bid was the lowest of those submitted, Commandeer was in line for an award. As it was not listed in the VIP database, however, the contract specialist for the VA intended to contact Commandeer for purposes of explaining the process of obtaining expedited verification.

Prior to contacting Commandeer, the VA contract specialist apparently learned of the clarification for the first time and discussed its meaning and significance with other VA officials. Based upon these discussions, the VA contract specialist decided that Commandeer was ineligible for award and informed it of such by letter dated August 31, 2011. At the time, CVE had not rendered a final decision on Commandeer’s SDVOSB eligibility.

Commandeer protested VA’s decision, taking the position that rejecting its bid was improper based upon the expedited review procedures outlined in the solicitation. The VA countered that the deviation clause, upon which Commandeer relied for potential eligibility, was never meant to apply to entities that were absent from the VIP database. According to the VA, the deviation clause was merely an effort to provide assistance to those firms that had already self-certified, but had not yet been CVE verified under the new review procedures. Commandeer Construction at 4.

The GAO based its decision on a strict reading of the solicitation. The deviation clause in the solicitation specifically stated that “the apparent successful offeror” would be given an opportunity to have its SDVOSB status reviewed on an expedited basis, if it was not “currently listed as verified” in the VIP database. While the VA may not have intended for the deviation to apply to firms not already listed in its VIP database, the GAO concluded that the solicitation itself did not provide that qualification. As such, Commandeer’s understanding that it could qualify for award pursuant to the expedited review procedure was reasonable. Based upon this finding, the GAO recommended that the VA complete its review of Commandeer’s verification documents and, if found to be eligible for SDVOSB status, award it the contract.

As the government continues to alter its approach in exercising control over small business programs, mistakes, such as those in Commandeer Contracting, will happen. Contractors must exercise care in reviewing and responding to any solicitation. If, during the course of the review process, an ambiguity is discovered, bring it to the attention of the contract specialist, contracting officer, or source selection authority immediately. Doing so will benefit all bidders and quite possibly prevent a pre-bid protest. For those ambiguities that are not readily detectible, and are only revealed at the time of contract award, be prepared to discuss your concerns with an attorney familiar with such issues right away, as a protest is likely your only source of recourse. For those participating in the government’s various small business programs, the fast-paced nature of regulatory change has opened these programs up to issues such as those presented in Commandeer Contracting. Bid and beware.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group.
 

Senate Bill Introduced to Combat SBA Fraud

By: Edward T. DeLisle

Senator Olympia Snowe, R-Maine, introduced a bipartisan bill on Thursday that is designed to combat fraud and abuse in the world of small business contracting. As we have reported, the General Accounting Office (GAO) has issued a number of reports over the last several years detailing the existence of fraud in the HUBZone, Service-Disabled, Veteran-Owned Small Business (SDVOSB) and 8(a) programs. These reports have generated much discussion about the need to revamp the system and, in certain circumstances, talk has led to action. The implementation of the current SDVOSB verification system is but one example of the government’s response to the current state of affairs. S. 633, entitled the “Small Business Contracting Fraud Prevention Act of 2011” (Fraud Prevention Act), is designed to take the government’s ability to respond to fraud and abuse in small business contracting to a new level.

As reported by Law360, the Fraud Prevention Act contains three key provisions:

     1. It calls for the development of an oversight structure within the Small Business Administration (SBA) that would allow for better enforcement of the rules governing small business contracting;

     2. It would allow for an increase in criminal prosecutions, suspensions and debarments for those who violate the rules; and

     3. It would require the SBA to issue annual reports to Congress regarding those who are suspended, debarred or referred to the Department of Justice for prosecution.

S. 633 is yet another step to close the loopholes that have developed in the federal government’s small business contracting system. We will track this legislation and report any further developments.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group.

Past Performance Reporting Overseas: Does it Happen?

By: Edward T. DeLisle

For those who regularly read our blog, you know that we have followed the government’s recent concern about fraud and abuse in the federal procurement process.  The GAO has issued reports that recite such abuse relative to the 8(a), HUBZone and SDVOSB programs.  As those reports indicate, companies have been awarded set-aside contracts through those programs, but were not qualified to receive them.  In certain circumstances, the apparent fraud was so blatant that the hubris, which certainly existed to think such abuses would go unnoticed, puts Charlie Sheen to shame.  Yet, as the GAO reports state, even when the abuses were uncovered, many of these contractors continued to receive government awards.  It appears that some contractors performing work overseas in places like Iraq and Afghanistan may also be receiving awards that they do not deserve.

As reported by Govexec.com, government agencies responsible for overseas contracts are not properly recording past performance history in the CPAR and PPIR electronic databases.  The biggest offenders appear to be the State Department, the Department of Defense and the U.S. Agency for International Development (USAID).  Based upon information supplied to the Commission on Wartime Contracting, congressionally mandated to investigate overseas contracting activities, these agencies have failed to properly report past performance history in up to 90% of the contingency contracts they have issued.  While the failure to report this information is problematic for many reasons, it certainly exposes the government to contractors who are less than ideal for important government contracts.  This is especially an issue as it relates to contractors in line for suspension or debarment.  As former Connecticut Congressman Christopher Shays, who is the chairman of the Commission, stated: “[I]f suspensions and debarments are impeded by bureaucratic decisions or inertia, then companies that have committed fraud may continue receiving taxpayer funds.  In either case, untrustworthy contractors can continue profiting from government work, responsible businesses may be denied opportunities, and costs to taxpayers can climb.”

Over the years, the government has increasingly relied upon “best value” procurement to let contracts.  Past performance is almost always an important factor in determining “best value.” In fact, in most cases, it is the most important factor.  If federal agencies intend to continue issuing contracts in this fashion, a practice that is highly questionable for the purchase of certain services, such as construction, then they must make it a point to create a system that allows those deserving of awards to receive them. In the case of small business set aside contracts, the government has started to slowly move in this direction.  The VA, for example, is now vetting those contractors on its on-line SDVOSB registry to verify eligibility.  If this function is performed correctly, it will greatly enhance the probability that contracts will be let to those who deserve them. With respect to past performance history, there is a system in place.  Federal agencies simply need to use it.  Hopefully, the findings exposed by the Commission on Wartime Contracting make this a reality.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group.

New VA Veteran-Owned Small Business Verification Guidelines

A Final Rule governing Service Disabled Veteran-Owned small Business Concerns (“SDVOSB”) was published in the Federal Register on February 8, 2010. This law requires the Department of Veterans Affairs (“VA”) to verify ownership and control of veteran-owned small businesses, including service-disabled veteran-owned small businesses. The final rule also defines the eligibility requirements for businesses to obtain “verified'' status, explains examination procedures, and establishes records retention and review processes.

As reported by Jason Miller, the Executive Director of Federal News Radio in an article published in the SDVOSB Blog, Veteran-Owned and Service Disabled Veteran-Owned Small Businesses must have only one business in the federal contract set-aside program and work in that business full time. The article, entitled “VA Sets Rules for Set-Aside Program,” also emphasizes that “The net effect of this change is that a company that is closely held by veterans would qualify regardless of the size of the employee stock ownership program,” and “Alternatively, a firm that is not closely held by veterans will find it much more difficult to qualify for the Verification Program.”

Veteran-Owned and Service Disabled Veteran-Owned Small Businesses must re-certify annually to the VA that they meet the requirements to obtain set-aside contracts from agencies. The rule comes after the Government Accountability Office told the House Veterans Affairs Committee in December that the service-disabled veteran-owned business program is vulnerable to fraud and abuse. Anyone who seeks to use the services of a disabled veteran, or of an existing SDVOSB, to circumvent the letter and spirit of this program would be well advised to recognize that SDVOSB concerns are under close scrutiny because of the reported abuses.

Michael Payne is a Partner and is the Chairman of the firm's Federal Practice Group.
 

Fraud, Abuse and the Service-Disabled Veteran-Owned Small Business Program

By: Edward T. DeLisle

In recent testimony provided to the House of Representative’s Committee on Small Business, a disturbing fact was revealed: millions of dollars earmarked for Service-Disabled Veteran-Owned Businesses (“SDVOSBs”) have been paid to companies that do not qualify for the program. Compounding the problem is the fact that insufficient fraud-prevention programs exist to effectively combat such abuses. This was the conclusion reached by United States Government Accountability Office (the “GAO”) following a case study that included an investigation of ten (10) companies claiming SDVOSB eligibility.

In 2008 alone, $6.5 billion in federal contracts were awarded to companies that self-certified themselves as SDVOSBs. While this figure only represents 1.5% of all government contracts paid in that fiscal year, it is still a very large number. If the federal government ever attains its mandated goal of 3%, many more billions will become available to qualified SDVOSBs. Given the paucity of work in the private sector over the course of the last eighteen (18) months, many companies are attempting to tap into this potential source of revenue. As the GAO pointed out, however, a number of these companies have misrepresented their credentials, effectively taking contracts away from those that truly qualify to receive them.

The companies identified in the GAO case study received approximately $100 million in SDVOSB contracts, and over $300 million in additional 8(a), HUBZone and other non-SDVOSB contracts through the federal government. Certainly, none of these monies should have been paid to the companies in question. Notwithstanding the same, because there are no requirements to terminate contracts when a firm is deemed ineligible, in certain circumstances, companies were permitted to continue performing, despite the government’s determination that the firm did not qualify as an SDVOSB. Many more were not debarred from receiving federal contracts, even though the transgressions noted were obvious and seemingly blatant.

The GAO did note that Department of Veteran’s Affairs (the “VA”) has taken steps to address this problem by introducing an SDVOSB validation process. That process includes confirming an owner’s status as a disabled veteran, as well as his or her control over day-to-day operations. The problem, however, is that the VA’s certification and validation process is not a government-wide system. It is limited to those contracts issued directly by the VA. Because many other federal agencies issue contracts that are earmarked for SDVOSBs, there are considerable gaps in the SDVOSB program.

If your company is an SDVOSB, or if you are interested in forming a company that qualifies for participation in the program, it is very important for you to comply with applicable SBA and procurement regulations. The fierce competition for federal government contracts exposes many companies to size status protests which, if successful, can cause an SDVOSB to lose an award. Our Federal Contracting Practice Group is available to assist you with these important compliance issues.

Edward T. DeLisle is a Partner in the firm and is a member of the firm’s Federal Contract Practice Group. He is extensively involved in the representation of construction contractors on small business issues.