Under the Newly Organized Concern Rule, when filing or defending an SBA Small Business Size Protest, government contractors must be aware of the nuances and landmines awaiting them.
The newly organized concern rule consists of four required elements:
(1) the former officers, directors, principal stockholders, managing members, or key employees of one concern organize a new concern;
(2) the new concern is in the same or related industry or field of operation;
(3) the persons who organized the new concern serve as the new concern’s officers, directors, principal stockholders, managing members, or key employees; and
(4) the one concern is furnishing or will furnish the new concern with contracts, financial or technical assistance, indemnification on bid or performance bonds and/or other facilities, whether for a fee or otherwise.
Clear Line of Fracture Defense to Small Business Size Protest Under Newly Organized Concern Rule
If these four elements are met, affiliation may be rebutted in a small business size protest by demonstrating a clear line of fracture between the two concerns. The purpose of the newly organized concern rule is to prevent circumvention of the small business size standards by the creation of “spin-off” firms that appear to be small, independent businesses but are, in actuality, affiliates or extensions of large firms.
Under the newly organized concern rule, a problem arises when the new small business employs someone who was a former employee of the other company. If there is a link between the new small business employee’s duties and the former company, winning a small business size standard protest will be an uphill battle.
It is also important to know that the two competing businesses do not have to be identical but only similar. Whether your slight distinction leads you to create an argument that you actually pursue different clients may not always be prevailing in a small business size protest.
SBAOHA ruled in the case of Size Appeal of eTouch Federal Systems, LLC, SBA No. SIZ-5280, at 6 (2011) (rejecting a challenged firm’s attempt to draw “fine distinction[s] between the areas of Information Technology the two concerns operate in”, and holding that the second element of the newly organized concern rule is met because the two companies “are both involved in providing services in the field of Information Technology.”).
Another problem that can arise under the fourth element is when your levels of subcontracting with the affiliate rise to one-third of your revenues. This is also often overlooked by small businesses or their lawyers.
Approaches You Do Not Want Follow: You also do not want to approach the newly organized concern rule with an argument of not being dependent upon the other company. This fails simply because the newly organized concern rule is a separate ground for affiliation from economic dependence, and the fourth element of the newly organized concern rule does not require a showing that the contracts or assistance provided also would give rise to economic dependence.
Another important consideration under the newly organized concern rule is that the “ clear line of fracture” is looked at as the of the date of the small business size determination and not the facts afterwards. This is can be a crucial point in an SBA Size Protest. Small businesses and sometimes lawyers miss this essential point that can make or break the case.
Assessment and Defenses: When assessing the application of the newly organized concern rule, a clear line of fracture can be found when there is continuing business relationship between the two companies. You want to ensure that all levels of ties between you and the other company are severed when proposing for government contracts.
During the SBA’s investigation of a small business size protest, you must submit tax information for both companies, failure to gain access to the other firm’s documents may create an inference that leads to an adverse decision on appeal.
For additional help filing or defending an SBA small business size protest based on the newly organized concern rule, call our government small business lawyers at 1-866-601-5518.