Populated or Unpopulated? Ambiguous JV Agreement Sinks 8(a) Award

An 8(a) joint venture agreement was ambiguous about whether the joint venturers intended to create a populated joint venture (which is no longer allowed) or an unpopulated joint venture–and the ambiguity cost the joint venture an 8(a) set-aside contract.

In a recent decision, the U.S. Court of Federal Claims upheld the SBA’s decision to reject a joint venture agreement that was ambiguous about whether the joint venture was populated or unpopulated.

The Court’s decision in Senter, LLC v. United States, No. 17-1752C (2018) involved a solicitation for support services at Coast Guard headquarters.  The Coast Guard issued the solicitation as an 8(a) set-aside on July 21, 2017.

Senter, LLC submitted a proposal.  Senter was a joint venture between Sylvain Analytics, Inc., an 8(a) company, and Enetereza, Inc., a non-8(a) company.  The joint venture was originally established in April 2016, presumably to compete for a different contract.

The joint venture agreement described Senter as a “populated Joint Venture limited liability company” that would be “populated with its own employees.”  The joint venture agreement referred to Senter as “populated” in various other places.

At the time, there was nothing wrong with establishing a populated joint venture–that is, a joint venture that would perform the contract with employees of its own.  For convenience, most joint ventures were unpopulated, meaning that the joint venture members performed work on the joint venture’s behalf using the members’ employees.  But the SBA regulations allowed both populated and unpopulated joint ventures.

That changed in August 2016.  In a final rule effective August 24, 2016, the SBA eliminated populated joint ventures for set-aside contracts.  Following the 2016 revision, the SBA’s regulations have required that joint ventures be unpopulated.

That takes us back to the 2017 Coast Guard solicitation.  By then, of course, the SBA’s regulations required Senter to be unpopulated.  After the Coast Guard identified Senter as the apparent successful offeror, the Coast Guard contacted the SBA to determine whether Senter was eligible to receive the contract.

The SBA determined that Senter had not (as SBA regulations require) submitted an addendum for SBA approval to pursue the Coast Guard contract.  This alone could have caused the SBA to deny Senter the contract.  But the SBA apparently was in a lenient mood, because it gave Senter the opportunity to amend the joint venture agreement anyway.  The SBA sent Senter a joint venture checklist, which required Senter to (among other things) indicate that the joint venture was unpopulated.

Senter didn’t follow the SBA’s instructions, or at least didn’t follow them well.  The addendum it submitted still identified the joint venture as “populated” and said that it would be “populated with its own employees.”  Confusingly, though, the addendum said that Sylvain would perform 51% of the work and Enetereza would perform 49%–as might be the case in an unpopulated joint venture.

After some additional back-and-forth, the SBA issued a denial letter informing Senter that it was ineligible to receive the contract.  The SBA cited “discrepancies and lack of supporting documents,” particularly regarding whether the joint venture was populated or unpopulated.

Senter ultimately filed a complaint in the Court, seeking to overturn the SBA’s determination.  Senter alleged that it “established with documentation that it was an un-populated joint venture,” and therefore the SBA erred by finding Senter ineligible for the Coast Guard contract.

The Court wrote that “the documents Senter submitted to the SBA contained a dizzying array of inconsistencies and ambiguities pertaining to its status as populated or unpopulated.”  After walking through many of these inconsistencies, the Court wrote:

Any 8(a) contractor should be aware of the general rule that it must establish its eligibility as of the date of the submission of its initial offer.  Senter was therefore in a position to know that when the SBA assessed the addendum, it would necessarily have to ensure that the agreement, as amended and revised by the addendum, met the SBA’s standards for program eligibility, including the requirement that the JV be unpopulated.

The Court denied Senter’s protest and granted the government’s motion for judgment.

The Senter case is a good reminder of something I often see in our firm’s practice–contractors tripped up when documents become outdated because of rule changes.  The SBA overhauled its joint venture regulations in 2016, and not just to eliminate populated joint ventures.  The SBA also changed the profit-splitting rules, made major changes to the SDVOSB joint venture rules, and adopted new rules for HUBZone joint ventures, among many others.

Using a “template” joint venture agreement that dates from before August 2016 is almost a surefire recipe for noncompliance.  As Senter makes clear, anyone planning to submit a proposal as a joint venture must be certain that the joint venture agreement meets current regulations.