The Small Business Administration (SBA) and the Department of Veterans Affairs (VA) finalized new regulations, effective October 1, 2018, that govern eligibility to obtain contracts that are set aside for veteran-owned small business and service-disabled veteran-owned small business (collectively, “(SD)VOSB”). The regulatory changes are intended to improve coordination between the VA’s “Vets First” program, which covers (SD)VOSB set-asides issued by the VA, and the SBA’s program, which covers (SD)VOSB set-asides issued by all other government agencies.

Continue Reading SBA and VA Publish Final Revisions to Regulations That Govern Set-Asides for VOSBs and SDVOSBs

Hand with megaphoneHello from Nashville, Tennessee! I’m currently at the National 8(a) Association’s Winter Conference and had the privilege of participating in a great panel discussion with some of the leading small business scholars and practitioners in the country. It was truly a great experience. Since I’m here and it’s fresh on my mind, I thought I’d share something that all SDVOSBs should know: Your world is about to change.

Continue Reading National 8(a) Winter Conference – Changes Coming for SDVOSBs

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

Law icons seamless pattern in flat design style.

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

On November 6, 2015, the VA issued a proposed rule, which could drastically change the way the two eligibility requirements for VOSBs and SDVOSBs are interpreted.  The VA explained the changes as follows:  Continue Reading VA Proposes Changes to VOSB/SDVOSB Regulations, Aims for Consistency with COFC Ruling in Cohen Seglias’ Miles Construction Case

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

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

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

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

1) Definitional Clauses or Clauses Dealing with Authority

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

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

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

2) Supermajority Provisions

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

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

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

3) Involuntary Transfer Provisions and Limitations on Transfer Provisions

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

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

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

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

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

Conclusion

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

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

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

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

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

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

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

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

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

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

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

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

Yogi Berra

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

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

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

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

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

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

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

Previously published in VetLikeMe.

 

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.

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.

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.