service disabled veteran owned

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.

 

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.

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.

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.
 

By: Edward T. DeLisle

This week the Department of Veteran’s Affairs announced that it will require all companies that wish to receive set-aside contracts as veteran-owned, or service-disabled, veteran-owned, businesses to verify their status. This announcement was made as part of the 2010 Veteran’s Benefit Act and is geared toward eliminating fraud and abuse. As reported by Government Executive.com, last month the VA began contacting companies currently listed in its contractor database, VetBiz.gov, and informed them that that they had ninety (90) days to provide the VA with business documents proving eligibility to qualify for set-aside contracts issued by, or on behalf of, the VA. The measures currently being put in place have resulted, in part, due to a GAO report issued in November of 2009, which cited numerous instances of fraud and abuse in the system.

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

By: Edward T. DeLisle & Craig Schroeder

Last year, the United States Association of Veterans in Business ("USAVETBIZ") urged Congress for a government-wide preference in contracting and set-aside programs that extended the existing preference for service-disabled veteran owned small businesses ("SDVOSB") to all veteran-owned small businesses.  While that has not happened yet, the set aside program for SDVOSBs has been recently strengthened.

On October 7, 2010, the Government Accountability Office ("GAO") issued a decision interpreting the Veterans Benefits, Health Care, and Information Technology Act of 2006, 38 U.S.C. sections 8127-8128 (Supp. III 2006) ("the Act") to require that, in certain circumstances, architect/engineer service contracts must be set aside by the Department of Veterans Affairs ("VA") for SDVOSBs.  In the Matter of Powerhouse Design Architects & Engineers, Ltd., Powerhouse, a Pittsburgh SDVOSB, protested the terms of eight Sources Sought Notices (SSN) issued by the VA for A/E services. Powerhouse asserted that the agency improperly failed to set aside these procurements for SDVOSB firms as required by the Act and its implementing regulations. The procurements were conducted pursuant to the Brooks Act, 40 U.S.C. § 1101 et seq. (Supp. III 2006), and Federal Acquisition Regulation (FAR) subpart 36.6. Consistent with the Brooks Act, the agency publicized its need for A/E services on FedBizOpps. Powerhouse challenged the terms of the SSNs, which were issued on an unrestricted basis.

In sustaining the protest, the GAO analyzed the Act and its implementing regulations. It noted that the Act provides 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). The GAO then went on to look at the regulations, which state that "the contracting officer shall set aside an acquisition for competition restricted to SDVOSB concerns upon a reasonable expectation that: (1) Offers will be received from two or more eligible SDVOSB concerns[4] and; (2) Award will be made at a reasonable price.”

The GAO found "nothing in the VA Act or the VA regulations that exempts A/E procurements from the set-aside requirement." It also found that the agency’s defenses to application of the set aside requirement meritless. Accordingly, the GAO held that "the agency [should] determine whether there is a reasonable expectation that it would receive offers from two or more eligible SDVOSB concerns and award would be made at a reasonable price. For each requirement where there is such an expectation, we recommend that the VA solicit the requirement on the basis of a competition restricted to SDVOSB concerns." Powerhouse was awarded its costs for pursuing the protest, including reasonable attorneys’ fees.

While USAVETBIZ is still seeking a veteran-wide preference, the Powerhouse decision should be considered a victory for all veterans, service-disabled or otherwise.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group.  Craig A. Schroeder is an Associate in the firm’s Federal Practice Group.