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 canceled 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.