Size Protests: Ignorance Doesn’t Excuse Failure to Respond

If you’ve ever responded to an SBA size protest, you know that the process is quite involved: SBA will require your company to provide a complete response to the protest (including production of corporate, financial, and tax records for all implicated concerns) within only a few business days. The consequences for not providing all of the requested information can be quite severe, as the SBA can presume that the responsive information would demonstrate that the concern is not a small business (through its “adverse inference” rule).

A recent OHA appeal shows the dangers of failing to adequately respond to a size protest. In Size Appeal of Perry Johnson & Associates, SBA No. SIZ-5943 (2018), the OHA affirmed the SBA’s reliance on an adverse inference and, as a result, found the protested company was not an eligible small business.

At issue in the appeal was an award to Perry Johnson by the Department of Defense Education Activity for transcription support services. The procurement was set-aside for small businesses under NAICS code 561410, which carries a $15 million size standard.

A disappointed offeror challenged Perry Johnson’s eligibility for the award, pointing to Perry Johnson’s online statement that it “had become the largest privately held transcription company in the United States with $43 million in revenues.” Its website also identified certain “affiliates” that shared the “Perry Johnson” name.

The SBA notified Perry Johnson of the protest and requested its response. Perry Johnson was specifically asked to provide its tax returns and documents relating to the “affiliated” entities identified on its website.

What happened next was somewhat of a dance: Perry Johnson would provide partial information, but omitted information it believed wasn’t relevant. The SBA would then ask for this information, and Perry Johnson would demur. Throughout, Perry Johnson exhibited a lack of understanding of the size protest process—it repeated its (mistaken) belief that companies weren’t affiliated simply because they worked in different industries (while failing to address the apparent common ownership or management or identity of interest between them).

Finally, after over a week of back-and-forth, the SBA issued a size determination that found Perry Johnson to be a large business under the assigned NAICS code. It did so by primarily relying on the adverse inference rule—even though it repeatedly told Perry Johnson that the failure to provide the requested information could result in an adverse size inference, it nonetheless failed to provide the requested information about its affiliates.

Perry Johnson appealed the size determination, arguing that the adverse inference was improper. Not only was the information requested by the SBA irrelevant, Perry Johnson argued, but it was also publicly available. Perry Johnson also doubled-down on its belief that because the affiliated entities’ businesses were unrelated to its own, it was “unwarranted” to ask for their information.

The OHA denied Perry Johnson’s appeal. Doing so, it agreed with the Area Office’s conclusion that Perry Johnson “has a fundamental misunderstanding of the size regulations.” Whether firms operate under different NAICS codes is irrelevant to affiliation—instead, affiliation is found if one party has the power to control the other (like through common ownership, common management, or identity of interest). The Area Office repeatedly tried to explain this to Perry Johnson, to the point where the OHA questioned whether the “failure to understand [was] deliberate.”

Even still, Perry Johnson did not address its relationships with these companies. So the OHA found that the Area Office correctly applied the adverse inference rule:

[Perry Johnson] was given numerous opportunities by the Area Office to provide sufficient information to properly establish its size. However, instead of providing the information the Area Office requested and allowing the Area Office the chance to determine its size, [Perry Johnson] made a conscious decision not to provide the Area Office with the information it requested, having been warned that doing so could lead to a finding that [it] is not small.

Perry Johnson therefore did not qualify as a small business under the procurement.

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So what are the takeaways from this decision? I think there are two:

First, always provide as much relevant information to the SBA as possible when responding to a size protest. This can be frustrating, as oftentimes responses can feel like you’re living “If You Give A Mouse A Cookie”—no matter what information is provided, the SBA sometimes asks for still more. But it’s helpful to keep in mind that the SBA is just doing its job. And as Perry Johnson shows, it’s always best to provide the information requested.

Second, get help from counsel experienced in responding to size protests. SBA’s regulations are complex, so your general corporate attorney might not understand the issues relating to affiliation and determining size.

Perry Johnson shows that responding to size protests is a complicated endeavor. If you have any questions about size protests, please give me a call.