GAO: Trade Agreements Act Inapplicable to Small Business Set-Asides

It’s no secret that federal government contracting has the reputation of being a seemingly endless morass of regulations. In fact, the confusion frequently associated with federal contracting was on full display in a recent GAO protest that implicated the SBA’s nonmanufacturer rule, the Buy American Act, and the Trade Agreements Act. In a procurement that invited bids from both large and small businesses, a large business contractor argued that the application of certain small business contracting regulations would unfairly advantage the small business participants. GAO disagreed, and dismissed the protest because any advantage was the result of the regulations operating as intended. Sometimes it pays to be a small business.

Becton, Dickinson and Company, B-417854 (Comp. Gen. Nov. 15, 2019) involved a VA procurement for medical supplies in support of the Medical Surgical Prime Vendor 2.0 program. The objective of the Solicitation was to establish blanket purchase agreements for various medical and surgical implements.

The Solicitation was structured to leverage a tiered evaluation, which gave preference to various types of small businesses ahead of large businesses. The four applicable tiers, in descending order of preference, were as follows:

a. Service-Disabled Veteran-Owned Small Business (SDVOSB) concerns;

b. Veteran-Owned Small Business (VOSB) concerns;

c. Small Business concerns with Historically Under-utilized Business (HUB) Zone small business concerns and 8(a) participants having priority; and

d. Large business concerns.

If no award was made to the first preference category, the VA would proceed to evaluate offerors for the next preference category. For example, if no award was made to an SDVOSB concern, the VA would amend the Solicitation to remove the SDVOSB set-aside preference, then proceed to evaluate offers from the next tier. This process would be repeated for each successive tier.

Given that the Solicitation sought vendors to provide various types of medical supplies, the Solicitation incorporated the nonmanufacturer rule as well as the Buy American Act and the Trade Agreements Act. It is the interplay of these statutes and regulations that ultimately led to the protest by Becton, Dickinson.

First, the nonmanufacturer rule requires, among other things, any offeror competing for a small business set-aside that will not supply its own manufactured goods to provide end item of a domestic small business manufacturer. 13 C.F.R. § 121.406(b). The nonmanufacturer rule does have a few notable exceptions, however. For example, in the event the SBA determines there are no domestic small business producers of certain items, it may waive the domestic small business manufacturer requirement. This is to say that a small business could qualify for a small business while supplying the product of a non-domestic large business. In the case of the Medical Surgical Prime Vendor 2.0 program, a waiver of the nonmanufacturer rule applied.

Second, the Buy American Act establishes a preference for products produced in the United States with at least 50 percent of the components being domestic products. FAR 25.101(b). This preference is implemented through a price differential applied during proposal evaluations, which artificially inflates the evaluated price of non-domestic goods. Notably, the Buy American Act expressly applies to small business set-asides. Additionally, the Buy American Act may be waived where the Contracting Officer determines the supplies are not “mined, produced, or manufactured in the United States in sufficient and reasonably available commercial quantities and of a satisfactory quality.” FAR 25.103(b).

Third, the Trade Agreements Act also enforces domestic preferences, but will also allow products from specific trading partners to be provided to the government with “nondiscriminatory treatment.” FAR 25.402(a)(1). This is to say that products supplied from approved trading partners will not be subject to pricing differentials. As relevant here, however, the Trade Agreements Act does not apply to small business set-aside procurements. FAR 25.401(a)(1).

Since the Medical Surgical Prime Vendor 2.0 program procurement had a tiered evaluation structure, the solicitation incorporated each of these regulations, but would only apply certain provisions based on the type of set-aside procurement that was being evaluated.

In its protest, Becton, Dickinson raised two arguments. First it argued that the Trade Agreements Act should apply to small businesses. According to Becton, Dickinson, since the procurement was subject to a waiver for the nonmanufacturer rule, application of the Buy American Act to small businesses and Trade Agreements Act to large businesses resulted in unfair treatment because small businesses could provide the end product of any non-domestic manufacturer, whereas large businesses would be limited by the Trade Agreements Act to provide American or specific trade partner products. Second, Becton, Dickinson argued the Solicitation’s treatment of the Buy American Act and Trade Agreements Act was inconsistent with SBA nonmanufacturer rule regulations, which state that a waiver of the nonmanufacturer rule’s domestic preference does not exempt the small business concern from compliance with the Buy American Act of Trade Agreements Act.

GAO did not agree. In its decision, GAO began by noting that in order to have jurisdiction over any bid protest, the protest itself must allege facts and law that, if left uncontradicted, would establish there was a likelihood the protester would prevail in its protest. So far as GAO was concerned, neither of Becton, Dickerson’s protest grounds met this threshold.

GAO first disposed of Becton, Dickinson’s argument that the Trade Agreements Act should apply to small businesses as well as large businesses. Since the solicitation used a tiered structure where various socioeconomic set-aside categories were evaluated for award ahead of large businesses, GAO concluded it was not unreasonable for the Buy American Act to apply to the small business set-aside evaluations, and the Trade Agreements Act to apply to the large business pool, should awards be made to that pool. As GAO explained:

The FAR explicitly provides that the [Buy American Act] applies to small business set-asides and that the [Trade Agreements Act] does not apply to acquisitions set aside for small businesses. We therefore see nothing improper about the VA applying the [Buy American Act] FAR clauses, and declining to apply the [Trade Agreements Act] FAR clauses, to quotations submitted by [small businesses].

As such, this Becton, Dickinson protest ground was dismissed.

GAO next addressed Becton, Dickinson’s argument that the structure of the solicitation was contrary to SBA regulations. The regulation at issue, 13 C.F.R. § 121.406(b)(7), provides the following caveats on nonmanufacturer rule waivers:

SBA’s waiver of the nonmanufacturer rule means that the firm can supply the product of any size business without regard to the place of manufacture. However, SBA’s waiver of the nonmanufacturer rule has no effect on requirements external to the Small Business Act which involve domestic sources of supply, such as the Buy American Act or the [Trade Agreements Act.

While the SBA regulations did clarify that a nonmanufacturer rule class waiver would not similarly exempt compliance with the Buy American Act or Trade Agreements Act, GAO nevertheless concluded Becton, Dickinson had failed to raise a cognizable legal challenge because the Buy American Act provided procedures for evaluating proposals providing foreign end products. According to GAO, “we do not find it inconsistent with the regulation that [a small business] may submit foreign end products in accordance with the waiver of the nonmanufacturer rule when the [Buy American Act] and the implementing regulations provide instructions for evaluating offers that include foreign end products.” Becton, Dickison’s second protest ground was similarly dismissed by GAO.

GAO’s decision in Becton Dickinson demonstrates how small and large businesses sometimes compete under different rules. While the Buy American Act and nonmanufacturer rule were applicable to offers supplied by small businesses, the Trade Agreements Act governed proposals for large businesses. In this instance, application of the Buy American Act may have been slightly more advantageous than the Trade Agreements Act; however, according to GAO, this was not an error, but rather the proper application of various regulations. Sometimes it pays to be a small business.