One of the most challenging experiences as a service disabled veteran-owned small business (SDVOSB business) is to defend against the status of your company in a bid protest. There are several legal issues that can arise during and an SDVOSB litigation case. Many of them have reached as far as appeals to the U.S. Court of Appeals for the Federal Circuit.
The takeaway is that when it comes to SDVOSB set aside contracts, your competition will often challenge the company’s status in the program. The burden of proof will be up to you, as the protested company, to show that it is in compliance with SDVOSB rules.
SDVOSB Legislative Background
The US Congress has a mandate that federal contracting agencies restrict competition for various federal contracts. See Kingdomware Techs., Inc. v. United States, 136 S. Ct. 1969, 1973 (2016). As a result, the Small Business Act requires many federal government agencies to set aside contracts for award to certain designated categories such as Service-disabled-veteran-owned small businesses (“SDVOSB”) See also 15 USC. 644(g)(1)(B).
Having an approved SDOVSB certification status allows certified small businesses to bid and compete for government contracts with less competition. However, a common problem during SDVOSB status bid protest litigation is that the protestor alleges that qualifying SDVO does not own and control the business in accordance with the regulations. See also 15 USC 632(q)(2), 637(d)(3)(E).
When responding to a bid protest resulting from an SDVOSB set aside contract, you will have to show that one or more SDVs must
• Control the company’s long-term decision making as required by the rules. See, 13 CFR 125.13(a);
• Conduct the company’s day-to-day management and administration of business operations, id.;
• Hold the highest officer position in the company, id. § 125.13(b);
• Serve as managing members of the business. See 13 CFR 125.13(d);
• Have “control over all decisions of the limited liability company (LLC),” id.; and
• “meet all supermajority voting requirements,” See also 13 CFR 125.13(f).
A central dispute in an SDVOSB status protest is whether the qualifying owner actually controls…all decisions of the day-to-day operations. As SDVOSB lawyers, we often find that intervenors (protested firm) often try to make the argument during appeals and bid protest litigation that he or she does make the final decisions. However, the problem is usually that the corporate documents may say something else.
• Corporate documents must be able to withstand challenges under SDVOSB rules.
• SDVOSB agreements must not delegate final decisions to non-SDVO members
SDVOSB Business Status Challenges: Are You Majority Owner of the Company?
Another common dispute after award of an SDVOSB set aside contract is whether the owner has sufficient managerial experience in the firm’s area of business or industry. There is somewhat of a balance when it comes to having managerial experience and having many years of actual experience.
The SDVOSB rules and regulations do not have a specific amount of years of management experience that you must have. Other requirements can include management degrees in addition to years of experience. When responding to an SDVOSB protest, you must provide sufficient evidence to rebut the protestor’s allegations.
For example, in the Matter of SDVE, LLC, SBA No. VET-281 (2019). SBA Office of Hearings and Appeals (SBA OHA) upheld the SBA’s decision that the small business firm was not an eligible SDVOSB because in response to the bid protest it did not present evidence that the qualifying SDVOSB had managerial experience in the firm’s area of business and also did not provide evidence that the SDV was actually the majority owner of the firm.
SDVOSB Certification Status and Operating Agreements
As stated earlier, your business documents, such as operating agreements and partnership agreements must undisputably show that the owner has the final say and ultimate decision making authority of the business.
The SDVOSB’s Operating Agreement cannot designate decision making authority to other managers in a way that the owner cannot veto or override the minority partners’ decisions. For example, when the SDVOSB certified company is also a family-owned company, the SDVO should not pass on the decision making authority in the operating agreement to the spouse of children (who are not qualified as an SDV). See XOTech, LLC v. United States, No. 2019-1743 (Feb. 26, 2020) (affirmed prior CoFC decision that firm was not eligible SDVOBC because the service disabled veteran did not control all decisions by the company)
- All SDV must have full and complete authority, power and discretion to manage and control the business, affairs and properties of the company without exception.
- If the Court of Federal Claims or OHA interprets the business documents differently, you can potentially lose out of many SDVOSB certification set asides.
SDVOSB Mentor Protégé and SDVOSB Joint Venture Agreements 13 CFR 125.18 (b)(2)
Another problem that arises in SDVOSB status protests is that the court may find that the joint venture agreement between the SDVOSB and the Mentor did not comply with the rules set forth in 13 CFR 125.18 (b)(2).
What if the VA or SBA has already approved the mentor protégé agreement? This can be an argument. However, it is highly possible that OHA, Court of Federal Claims or U.S. Court of Appeals for the Federal Circuit could find the record warrants a decision against you.
- Many companies get a second review of their documents when bidding on government contracts.
- When you have an SDVOSB mentor protégé agreement and joint venture agreement, under 13 CFR 125.18 the mentor cannot have veto power over the day to day business operations. See VET Appeal of Seventh Dimension, LLC , SBA No. VET-6057 (2020)
SVOSB Certification and Business Licenses and Certifications Bid Protest Challenges. 13 CFR 125.13
A very common issue that arises in an SDVSOB status bid protest is that the SDVOSB member does not have a state license or some other state certification requirement. The protestor would then argue that because some other person or company has the required license or certificate, the SDV is not in control of the business.
However, there is hope. The regulation also shows that absent a business license, state license or certification, the SDV can also have managerial and supervisory control over the individuals that hold the state-required operational license or certificate. See CVE Appeal of Barry Capital Projects, Inc., SBA No. CVE-106-A (2019).
13 CFR 125.12 and 13 CFR 125.13 specifically requires that for your company to be considered an eligible SDVOSB, it must be a small business that is unconditionally owned and controlled by one or more service-disabled veterans. See also CVE Protest of Alpha4 Solutions, LLC d/b/a Alpha Transcription, SBA No. CVE-103-P (2019); CVE Protest of Blue Cord Design and Constr., LLC, SBA No. CVE-100-P (2018).
The correct legal analysis in SDVOSB certification bid protest litigation to OHA or COFC is whether the SDV controls the subject concern. The Court focuses on whether the SDV possesses the licenses required to maintain the business, and if not, whether the SDV has control over those who do.
The SDOSB business manager “need not have the technical expertise or possess the required license to be found to control the concern if the
he or she can demonstrate that he or she has the ultimate managerial and supervisory control over those who possess the required licenses or technical expertise.” 13 CFR 125.13(b).
SDVOSB rules allow for a rebuttable presumption that a non-SDV controls or has the power to control a concern when “a critical license is held by a non-service-disabled individual.” 13 CFR 125.13(i)(6).
- A critical license is any license normally required of firms, usually by state law, in the field or in the industry, despite the need for a license on a specific contract.
SDVOSB Teaming Arrangements
Other issues that can arise if your small business size status is challenged, include the contents of SDVOSB teaming arrangements. Not only can this impact your SDVOSB status but it can also cause a violation of SBA size standards.
SBVOSB teaming arrangements leading to affiliation and a violation of size standard regulations can cause an SBA size determination to not be in your favor. As a result you not only can lose your ability to be in the SDVOSB program, but you can also be disqualified from bidding on future contracts under the designated NAICS code. This is an area where an SDVOSB certification lawyer can help.
SDVOSB Rules Regarding Similarly Situated Small Businesses and Limitations on Subcontracting
The last, but not least, area of dispute in SDVOSB certification litigation is whether your company as the prime contractor has issued a subcontract to a similarly situated small business. SVOSB rules allow for your company to issue subcontracts to similarly situated small businesses without the penalty of affiliation. However, you must still company with the limitations on subcontracting rules.
To minimize the chance of losing your SDVOSB set aside contract, call Watson & Associates’ government contract lawyers for help in defending CVE protest and size protests. Call toll-free at 1-866-601-5518.