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.