by Sarah Schauerte
In a classic case reminding us not to count our chickens before they hatch, a joint venture under the Small Business Administration’s (SBA) 8(a) Business Development (BD) program lost a size determination protest because it submitted a proposal a mere two days before receiving the SBA’s official stamp of approval (Lukos-VATC JV, LLC, Appellant, SBA No. SIZ-5532, February 6, 2014).
Rules exist for a reason, and I understand why this determination was reached, but talk about a technicality…
This size determination involved a joint venture between two companies: Lukos, LLC (Lukos) and Visual Awareness Technologies and Consulting, Inc. (VATC). Lukos is a participant in the SBA’s 8(a) program, and the two companies executed a mentor-protege agreement where VATC agreed to act as Lukos’ mentor. If the SBA were to approve the mentor-protege relationship, this meant the companies could joint venture as a “small” business for government contracts because such arrangements are an exception to the SBA’s rules on affiliation. (Generally, even if a business is small, if it has affiliates, the receipts/number of employees of its affiliates are also counted to determine whether the business still qualifies as “small.”).
The Lukos-VATC joint venture submitted its mentor-protege application and supporting documentation to the SBA on March 18, 2013. While waiting for approval, the U.S. Special Operations Command issued an 8(a) BD set-aside solicitation seeking training and exercise support services.
It had already been waiting three months for approval, and the joint venture wanted to pursue this opportunity. It contacted the SBA on June 10, 2013 to check on the status of its application. It was told by an SBA business operations specialist that it had been approved. Hurrah! The joint venture raced to get its proposal submitted by June 17th, 2013, and lo and behold, it was the successful offeror.
But what’s this? A size protest by an unsuccessful offeror? “Oh no,” says the Lukos-VATC joint venture. “We’re in an SBA-approved mentor-protege relationship. We fall under the exception to affiliation so we’re still ‘small.'”
“Nope,” says the SBA Area Office. It found the two separate companies affiliated, and not qualifying under the mentor-protege exception to affiliation, because the SBA had not approved the mentor-protege agreement until June 19, 2013…two days after the joint venture submitted its proposal.
In upholding this decision on appeal, the SBA Office of Hearings and Appeals (OHA) noted that there are several recognized exceptions to the rules on affiliation. One of these is joint ventures formed by 8(a) BD program mentor and protege firms. However, since the paperwork did not go through until June 19, that meant that until that time, the two companies were considered to be affiliated. Under the SBA’s rules, affiliates’ receipts are counted together when making a size determination (which is based on size at the time of the offer), and together, the two businesses were not “small.”
The Lukos-VATC joint venture tried to argue an estoppel theory – that it relied on the representations of an SBA employee. However, this argument failed for two reasons: 1) because that employee did not have the authority to approve the application; and 2) because estoppel is very, very hard to prove – a business have to show “affirmative misconduct” or “intentional misbehavior” by a government official. In this case, while very unfortunate that the Lukos-VATC joint venture was given incorrect information, the specialist’s acts didn’t rise to the level to estop the SBA from applying its regulations to find the two companies affiliated as of the time of the contract offer.
In the end, the Lukos-VATC joint venture walked away empty-handed, despite having what looked to be a very strong start to its mentor-protege relationship.
This is a hard, infuriating lesson, but it reinforces an old axiom in government contracting: always get the official word, and get it in writing.
If you’re interested in learning more about the SBA’s 8(a) BD mentor-protege program, click here.
Did you find this article informative? If so, sign up for my weekly blog on small business (and veterans) issues at: https://legalmeetspractical.com. Remember to click the link sent to your email to activate your subscription!
This case was appealed in Federal Claims court stating that the ruling by OHA was capricious and arbitrary. How do you think that will play out?
In general, the standard to win on appeal in this type of case is a decision was “arbitrary and capricious.” It’s a much higher standard than the “preponderance of the evidence” required in civil claims, and the government gets a lot of deference. Also, promissory estoppel is hard theory to win on – if you look at the case law, the success rate for contractors is pretty grim. We’ll see…
I’ll update when there’s a development on this – thanks for the heads up on the appeal.