For the third time in as many months, the SBA Office of Hearings and Appeals has ruled that the SBA erroneously evaluated an 8(a) applicant’s evidence of social disadvantage.
In Innovet, Inc., SBA No. BDPE-466 (2013), SBA OHA held that the SBA’s evaluation of a disabled veteran’s 8(a) application was flawed because the SBA relied on broad, conclusory statements, failed to consider all of the veteran’s evidence of social disadvantage, and made conclusions contrary to the evidence in the record.
The Innovet case is part of a heartening trend of recent SBA OHA decisions holding that 8(a) evaluations must be fair, reasonable and thorough. The case also highlights that the SBA continues to make flawed analyses of social disadvantage, potentially preventing some eligible companies from obtaining 8(a) certification.
The Innovet SBA OHA decision involved the 8(a) application of Innovet, Inc. In its application, Innovet contended that the company’s owner, Charles McCarty, was socially disadvantaged due to his service-connected disabilities.
Innovet indicated that Mr. McCarty suffered physical injuries as a result of a hand grenade explosion, as well as PTSD. The application included numerous specific examples of the bias Mr. McCarty alleged to have experienced as a result of his disabilities, as well as letters submitted by several other third parties attesting to the bias experienced by Mr. McCarty.
On January 19, 2012, the SBA sent Innovet a letter denying Innovet’s application. The letter stated that Innovet had “not provided the quality and quantity of evidence necessary” to demonstrate social disadvantage. However, the initial denial letter did not specify what “quality and quantity” of evidence would be necessary to demonstrate social disadvantage.
On March 1, 2012, the SBA received Innovet’s request for reconsideration, which included additional materials supporting Innovet’s claim that Mr. McCarty was socially disadvantaged. But on April 5, 2012, the SBA issued a second determination letter, again denying Innovet’s 8(a) application.
The second denial letter began with the same conclusion as the first–namely, that Innovet had “not provided the quality and quantity of evidence necessary” to demonstrate social disadvantage. After receiving the second denial letter, Innovet filed an 8(a) appeal with SBA OHA.
SBA OHA agreed with Innovet that the SBA’s evaluation of Mr. McCarty’s social disadvantage was flawed. SBA OHA found that the SBA had committed three critical errors in its evaluation.
First, SBA OHA held that the SBA had failed to provide “adequate notice of the facts and reasons for denying” Innovet’s application. The “broad, sweeping statements” in the denial letters “failed to describe what ‘quality and quantity of evidence’ would have been sufficient to meet the standard.”
SBA OHA noted that the SBA made “conclusory statements” rejecting a number of Mr. McCarty’s alleged incidents of bias. For instance, in response to specific incidents of bias recounted by Mr. McCarty, the SBA made statements such as “this claim lacks adequate details,” “no specific details were provided” or “this claim . . . is not clear.” However, the SBA “failed to provide insight . . . on what type of details might be adequate or specific enough to help the Agency make a proper determination.”
Second, SBA OHA held that the denial letters did not show that the SBA considered all of Innovet’s evidence. In the second denial letter, the SBA failed to address at least seven specific pieces of evidence presented by Innovet to support the claim of social disadvantage.
The SBA’s failure to address these issues left SBA OHA “with no means of determining whether they were even considered in making the determination to deny [Innovet's] application let alone whether the SBA’s conclusions with regard to [the related] claims were arbitrary, capricious, or contrary to law.” Quoting a prior 8(a) appeal decision, SBA OHA wrote, “[t]he Agency is not free to pick and choose what claims deserve its attention; it must provide reasoned analysis for them all.”
Finally, and perhaps most troubling, SBA OHA found that “the SBA cited facts in its second Determination Letter that were contrary to the evidence in the record.” For example, the SBA concluded that Mr. McCarty was not selected for a particular position because he was not available 40 hours per week–even though Innovet’s application specifically stated that Mr. McCarty was available 40 hours per week.
SBA OHA cited four other instances in which the SBA’s conclusions appeared to directly contradict the evidence in the record. SBA OHA wrote that overall, it “finds these conclusions deeply troublesome.” SBA OHA continued, “[i]t appears that either the Agency did not properly review [Innovet's] updated PES and supporting documents prior to issuing its second Determination Letter, or the Agency chose to disregard or misconstrue the facts contained therein. Neither explanation is acceptable.”
SBA OHA granted Innovet’s appeal and remanded the case to the SBA for further consideration of Innovet’s 8(a) application.
For 8(a) applicants, the Innovet case is both heartening and discouraging. The good news is that SBA OHA is sticking by its guns, and refusing to allow the SBA to deny 8(a) applicants on the basis of vague, conclusory or factually erroneous determinations.
The bad news, of course, is that the SBA has made fundamental flaws in evaluating social disadvantage in at least three recent cases. There is no way to know how many other recent cases have involved such mistakes, but never resulted in published SBA OHA decisions–either because the SBA settled the case before the appeal was decided, or because the 8(a) applicant gave up without filing a SBA OHA appeal.
I sincerely hope that the Innovet decision, together with the recent Striker Electric and Strategygen decisions, will lead the SBA to reevaluate how it is evaluating social disadvantage, and fix the apparent flaws in its evaluation process. In the meantime, rejected 8(a) applicants may continue to find that SBA OHA appeals are necessary.