Unpopulated Joint Venture Can Be “Manufacturer” For SBA Size Purposes

When a small business sells products to the government under a contract designated with a manufacturing NAICS code, the small business either must be the “manufacturer” of the products, or separately qualify under the nonmanufacturer rule. The nonmanufacturer rule, in turn, requires the prime contractor to have no more than 500 employees, whereas manufacturers may fall under larger size standards–some as big as 1,500 employees.

But what about an unpopulated joint venture that doesn’t itself manufacture any products, relying on the individual venturers to manufacture the solicited goods? Does it also have to comply with the 500-employee size standard under the nonmanufacturer rule? Or can the joint venture be deemed the “manufacturer” of the products in question?

SBA’s OHA recently confronted this issue in Lynxnet, LLC, SBA No. SIZ-5971 (Nov. 7, 2018). In the underlying solicitation, the Army sought labor, materials, and facilities to assist the Aviation and Missile Research Development, and Engineering Prototype Integration Facility. The Solicitation was set aside for 8(a) participants and assigned a 1,250 employee size standard. After a competitive bidding process, the Army awarded the contract to Defense Systems and Solutions (DSS), an SBA-approved 8(a) joint venture between Yulista Integrated Solutions, LLC (YIS), an 8(a) participant and Science and Engineering Services, LLC (SES).

Lynxnet then filed a size protest with SBA alleging various reasons why DSS was an ineligible business. But I’ll focus on just one: DSS didn’t qualify as a small business nonmanufacturer because SES exceeded the nonmanufacturer rule’s 500-employee size standard.

During the size determination, SBA’s Area Office determined that DSS–through its two venturers–would qualify as the manufacturer of the components the Army sought under the contract. Specifically, the Area Office found that DSS–through YIS and SES–would manufacture 85% of one component and 100% of another. And YIS, the 8(a) participant, would perform 90% of the joint venture’s overall manufacturing requirements. Given these facts, the Area Office concluded that DSS was the manufacturer of the required components and, therefore, subject to the solicitation’s 1,250 size standard–not the nonmanufacturer rule’s 500-employee size standard.

On appeal at OHA, Lynxnet argued that Area Office should have used the 500-employee size standard under the nonmanufacturer rule. It argued that, as an unpopulated joint venture, DSS couldn’t perform the manufacturing itself and could only resell the items produced by YIS and SES–the two venturers which comprised DSS. In essence, Lynxnet argued that the joint venture had to independently qualify as a manufacturer, separate from its venturers. And it argued that the Area Office erred by failing to consider whether DSS would manufacture the required components with its own facilities under 13 C.F.R. 121.406(b)(2).

OHA found Lynxnet’s arguments “meritless” because the work of each venturer is imputed to the joint venture itself. Thus, because the venturers, especially YIS, would manufacture the solicited components, the joint venture also qualified as the manufacturer. It explained:

All joint ventures must be unpopulated to qualify for the relevant exceptions to affiliation. 13 C.F.R. § 121.103(h). Further, the 8(a) joint venture regulations clearly contemplate that the performance by the joint venture partners will the performance of the joint venture. “The 8(a) partner(s) to the joint venture must perform at least 40% of the work performed by the joint venture.” 13 C.F.R. § 124.513(d)(2). The regulations governing mentor-protégé joint ventures also provide that the small business partner must perform “at least 40% of the work performed by the joint venture.” 13 C.F.R. § 125.8(c)(1). The regulations clearly contemplate that a joint venture will perform a contract through the work performed by its constituent joint venture partners. Indeed, an unpopulated joint venture could perform in no other way, and it is only unpopulated joint ventures which qualify to the exemptions to affiliation. Appellant’s theory would result in no small business joint venture being able to qualify as a manufacturer. There is no support for this theory either in the regulations or in OHA’s case law. The Area Office was not in error in determining DSS’s manufacturing status based upon the work to be performed by SES and YIS.

OHA also rejected the notion that DSS would not use its own facilities to perform the work. In its proposal, DSS noted that it had entered into a transition agreement with the incumbent contractor to lease and take possession of the incumbent’s manufacturing facility. On this point, too, OHA held that a contractor need not own in “fee simple absolute” its manufacturing facilities in order to comply with the requirement that it use “its own facilities” for the manufacturing work.

I conclude there is no basis for holding that the phrase in the regulation “its own facilities” requires a contractor to outright own in fee simple absolute the facilities that it will use to manufacture the product to be sold to the procuring agency. Businesses frequently rent or lease facilities in order to manufacture products. The facility used by a business is usually owned by another entity, even if the realty-owning entity has the same owners as the operating company. I conclude that, in the absence of a requirement in the solicitation, the phrase “its own facilities” in the regulation means that the contractor need only occupy and control the facilities, if not as an owner, then as a lessor or tenant. Thus, the fact the . . . facility will be leased has no bearing on the adequacy of the contractor’s manufacturing facilities.

Ultimately, OHA found that the Area Office had not committed an clear error of fact or law. Thus, it affirmed the Area Office’s size determination and denied the appeal–on all grounds raised by Lynxnet.

This case confirms that, when it comes to qualification as a manufacturer, the work of individual venturers will be imputed to the joint venture itself. Of course, in this case, it helped DSS escape the nonmanufacturer rule’s 500-employee size standard. But it also likely has implications in any instance where a individual venturer’s work is compared to the joint venture as whole (e.g., joint venture workshare requirements applicable to joint ventures under mentor-protégé agreements).