Another 8(a) Appeal Upheld: Is The 8(a) Evaluation Process Fundamentally Flawed?

For the fourth time since December, and second time involving a woman-owned business, the SBA Office of Hearings and Appeals has held that the SBA misevaluated an 8(a) applicant on the “social disadvantage” requirement.

In the most recent case, Black Horse Group, LLC, SBA No. BDPE-468 (2013), SBA OHA again found that the SBA committed multiple errors in its 8(a) evaluation, including holding the applicant to an impermissible high standard of proof, failing to consider all evidence in the record, and drawing erroneous conclusions from the evidence it did consider.

Following on the heels of recent SBA OHA 8(a) appeal decisions involving a disabled veteran, a physically disabled man, and a woman business owner, it is fair to ask: is the SBA’s 8(a) social disadvantage evaluation process fundamentally flawed?

The Black Horse Group decision involved the July 20, 2011 8(a) application of Black Horse Group, LLC.  The company’s application stated that its owner, Mary Warren, had experienced chronic and substantial gender bias as a female in the engineering and general construction industry.  Ms. Warren submitted a detailed statement setting forth specific examples of the bias she had suffered, as well as supporting documentation.

On December 13, 2011, the SBA issued an Initial Determination Letter denying Black Horse admission into the 8(a) program.  The Initial Determination Letter stated that Black Horse had failed to provide “the quality and quantity of evidence necessary” to demonstrate Ms. Warren’s social disadvantage.

Black Horse filed a request for reconsideration on January 25, 2012.  Black Horse included additional materials supporting Ms. Warren’s claim of social disadvantage.  However, on June 29, 2012, the SBA issued a Second Determination Letter, again finding that Black Horse was ineligible.  Black Horse then filed an appeal with SBA OHA.

SBA OHA concluded that the SBA had made four fundamental mistakes in evaluating Black Horse’s 8(a) application.

First, SBA OHA determined that the SBA had failed to properly apply the appropriate standard of proof, known as the “preponderance of the evidence” standard.  Under that standard, “if the petitioner’s claims are slightly more likely than not, the preponderance burden has been met.”

Rather than correctly applying the appropriate standard of proof, SBA OHA found that the SBA had applied a “heightened burden of proof,” more akin to a higher legal standard of proof known as “clear and convincing.”  For example, SBA OHA noted that Ms. Warren had alleged that, due to gender bias, she had been unable to find a job as an engineer upon her graduation in 1989.  Despite the fact that there was no contrary evidence in the record, the SBA failed to accept Ms. Warren’s statement as true, “fail[ing] to provide an explanation for why it found this statement not credible.”

Similarly, the SBA rejected Ms. Warren’s claims that a former superior, Colonel Steele, had undermined her leadership by interacting only with a lower-ranking male officer.  By rejecting Ms. Warren’s allegation that Colonel Steele’s actions were motivated by gender bias, the SBA “seeks definitive proof that Colonel Steele’s actions were the result of gender bias, which is indicative of a clear and convincing standard.”

The second major flaw in the SBA’s evaluation was the misapplication of the requirement that an 8(a) applicant demonstrate chronic and substantial social disadvantage as a result of bias.  Contrary to the requirement in the regulations, “the SBA repeatedly states that [Black Horse] has failed to demonstrate ‘chronic and substantial gender bias.’”  However, “the regulations require a showing of chronic and substantial social disadvantage to which [Ms. Warren's] gender has contributed; not chronic and substantial gender bias.

Third, the SBA erred by drawing conclusions contrary to the evidence in the record.  For example, the SBA stated in its Second Determination Letter that Ms. Warren claimed to have been delayed in her entry to college.  In fact, Black Horse’s application said no such thing; rather, Ms. Warren stated that her college career had been unnecessarily extended due to the effects of gender bias.

SBA OHA also held that the SBA had erred by concluding that Ms. Warren had not experienced gender bias because she received good grades in college.  However, “the fact that Ms. Warren successfully obtained her degree does not mean that her roach to achieving success was not fraught with roadblocks and discouraging advice.”

Noting these and other questionable conclusions, SBA OHA wrote, “[i]t appears that either the [SBA] did not thoroughly or properly review [Ms. Warren's] updated PES and supporting documents prior to issuing its Second Determination Letter, or the [SBA] chose to disregard or misconstrue the facts contained therein.  Neither is acceptable.”

Finally, SBA OHA concluded that the SBA had erred by ignoring at least six pieces of evidence submitted by Ms. Warren in support of her application.  “This was error, as finding must be set forth for every material issue relating to each eligibility factor with specific reasons for each finding.”

SBA OHA granted Black Horse’s appeal and remanded the matter to the SBA for further consideration.  It ordered the SBA to issue a new determination of Black Horse’s eligibility by March 22, 2013.

The Black Horse case, together with the three other recent SBA OHA decisions, suggests a troubling pattern in the SBA’s evaluation of social disadvantage.  Similar themes arise in these four cases: holding 8(a) applicants to an impermissible standard of proof, rejecting the applicant’s statements with little or no explanation, coming to conclusions at odds with the evidence in the record, and so on.

In my mind, four cases in four months is more than an aberration.  It indicates that the SBA’s evaluation of social disadvantage may be fundamentally flawed–a game rigged against 8(a) applicants, despite the favorable “preponderance of the evidence” standard established in the regulations.

I hope that SBA OHA will continue to push the SBA to evaluate social disadvantage fairly and in accordance with the regulations.  And I hope that the SBA will take this string of adverse 8(a) appeal decisions to heart and fix the problems in its 8(a) evaluation process–the sooner the better.

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