Ordinarily, a company isn’t affiliated with the affiliates of its affiliates.
That sentence may sound a little silly, but it encapsulates an important principle about the breadth of the SBA’s affiliation rules. As demonstrated in a recent SBA Office of Hearings and Appeals decision, the SBA doesn’t apply its rules to create “chain affiliation.”
Before we get to the case itself, a simple example might be helpful. Let’s say two companies–Company A and Company B–are affiliated under the common management rule because the same individual is the highest officer of both companies. Let’s also assume that Company B receives almost all of its revenues from Company C, creating affiliation between Companies B and C under the economic dependence rule. Companies A and C have no direct connections.
Is Company A affiliated with Company C–the affiliate of its affiliate? It’s an important question. For many small businesses, adding “chain affiliates” like Company C could push them over relevant size standards.
OHA’s recent decision in Size Appeal of WisEngineering, LLC, SBA No. SIZ-5908 (2018) provides some answers. The WisEngineering case involved an Army solicitation for logistics support services. The solicitation was issued as a small business set-aside.
After evaluating competitive proposals, the Contracting Officer announced that Barbaricum, LLC was the apparent successful offeror. WisEngineering, LLC, an unsuccessful competitor, filed a size protest. WisEngineering alleged that Barbaricum was affiliated with various entities.
The SBA Area Office determined that Barbaricum was affiliated with Woodside O’Brien, LLC, a venture capital firm, under the SBA’s common ownership and identity of interest rules. However, affiliation with Woodside did not push Barbaricum over the solicitation’s $20.5 million size standard.
Woodside held an interest in several entities collectively referred to as the “Portfolio Companies.” However, Barbaricum did not have any significant relationship with the Portfolio Companies. The SBA Area Office held that Barbaricum was not affiliated with the Portfolio Companies and issued a size determination finding Barbaricum to be an eligible small business.
WisEngineering filed a size appeal with OHA. WisEngineering argued, in part, that the Area Office erred by failing to find Barbaricum affiliated with the Portfolio Companies.
OHA wrote that “the record does not support the conclusion that Woodside is affiliated with the Portfolio Companies.” However, “even if Woodside were affiliated with the Portfolio Companies, this would not establish that Barbaricum and the Portfolio Companies are also affiliated.”
Citing previous size appeal decisions, OHA wrote that it “has repeatedly rejected such ‘chain affiliation’ allegations, and has made clear that a challenged firm is not affiliated with the affiliates of its affiliate in the absence of any common ownership or control between the challenged firm and affiliate.” Here, WisEngineering “points to no evidence that Barbaricum, or its owners, hold any interest in, or have any power to control, the Portfolio Companies, or that any of the Portfolio Companies have any such ownership or control over Barbaricum.” Thus, “the Area Office correctly found that Barbaricum is not affiliated with the Portfolio Companies.”
OHA denied the size appeal.
As the WisEngineering case demonstrates, a company isn’t affiliated with the affiliates of the company’s affiliates, absent common ownership or control between the firms themselves. And in my view, that’s the right policy. In many cases, chain affiliation would result in companies being affiliated with entities with whom they have no connections, and potentially no reason to believe that they are affiliated.