The Area Office (“AO”) has discretion to apply the adverse inference rule once the Small Business Administration (“SBA”) has received a size protest or a request for a formal small business size determination. How to Avoid the Adverse Inference Rule in SBA Size Determinations 13 CFR 121.1008(d); 13 CFR 121.1009(d).  The rule will likely be applied if the protestor fails to offer the necessary and required documentation to the AO.

The rule will likely be applied if the protestor fails to offer the necessary and required documentation to the AO.

SBA Form 355 – Small Business Administration Adverse Definition

SBA regulations provide that: If a concern whose size status is at issue fails to submit a completed SBA Form 355, responses to the allegations of the protest, or other requested information within the time allowed by SBA, or if it submits incomplete information, SBA may presume that disclosure of the information required by the form or other missing information would demonstrate that the concern is other than a small business. This is reviewed as a negative inference. A concern whose size status is at issue must furnish information about its alleged affiliates to SBA, despite any third party claims of privacy or confidentiality, because SBA will not disclose information obtained in the course of a size determination except as permitted by Federal law.

Under the adverse inference rule, a concern whose size status is at issue must furnish information about its alleged affiliates to SBA, despite any third party claims of privacy or confidentiality, because SBA will not disclose information obtained in the course of a size determination except as permitted by Federal law.

Under the legal definition, a concern whose size status is at issue must furnish information about its alleged affiliates to SBA, despite any third party claims of privacy or confidentiality, because SBA will not disclose information obtained in the course of a size determination except as permitted by Federal law.

The failure to produce required information further permits the presumption that if the applicant were to give the requested information, whether it be an SBA Form 355, response to protest allegations, or specific information, then the applicant would have been found to be something other than a small business.  If the applicant fails or refuses to provide the requested information within a specified time period, then the SBA can also assume that “disclosure would be contrary to the interests of the party failing to make a disclosure.”

Adverse Inference Rule Test

The AO makes the initial determination; the determination can be appealed to the Office of Hearings & Appeals (“OHA”).  OHA has established a 3-part test to assess whether the adverse inference definition was appropriately applied by the AO:

  • Requested information must be relevant,
    • The information must logically relate to an issue in the size determination
  • Must be a level of connection between the protested concern and the concern about which the information is requested, and
  • The request for information must be specific.

Size Appeal of USA Jet Airliners, Inc., SIZ-4919 (2008).

If all three requirements are met, then SBA size protest decisions can properly draw an adverse inference unless the protestor produces the requested information in the SBA Form 355.

How to avoid a Negative Inference 

Provide the Information Requested by the AO

In a recent size protest, the AO requested tax returns and other financial statements for all 27 companies the protestor was found to be affiliated with.  The applicant provided this information for only four companies, and thus the AO applied the rule.  On appeal, the Office of Hearings & Appeals (“OHA”) found all three elements were met and affirmed.  Size Appeal of Elite Const. Mgmt. (2014).

When the SBA expressly asks for information or document, provide it or you will be at risk. See Size Appeal of Excellus, LLC, SBA No. SIZ-5999 (2019)

Similarly, in another recent size determination, the AO told the applicant that an SBA Form 355 was required.  The AO even went a step further to say that if the form was not submitted, then the AO would infer that the applicant was not a small business under the rule.  Size Appeal of Rich Chicks, LLC (2014).

An applicant cannot escape the rule simply by claiming that the requested information is not available.

When Adverse Inference Rule May be Inappropriate

OHA has recognized that an adverse determination should be overturned when the request for information was not clearly communicated to or received by the challenged firm/applicant. 

In Size Appeal of DefTec Corp., the appellant was able to prove that, based on its communications with the AO, it was unaware that the AO still expected information and therefore the rule was improperly applied.

If you are aware, however, that the AO has requested other information, you must comply and provide this information in the SBA Form 355 or attempt to disprove one of the three elements required for the test.

To overcome the legal definition, the protestor cannot remedy its failure on appeal unless there is a showing of good cause for the failure.  Rather, the protestor must prove the AO committed an error in the size determination.

It is important to know what information you must provide when seeking a size determination, specifically when seeking to be classified as a small business for purposes of government contracts.  8(a) small businesses receive advantages to compete in the government contract marketplace.

Speak to an Attorney & Get a Free Initial Consultation

Find out about the SBA’s Termination From the 8(a) Program.

To avoid the adverse inference rule in your 8(a) Certification application, please call to speak with any of our SBA Size Protest Lawyers at 1-866-601-5518 for a free consultation.