Newly organized concern affiliation under the SBA’s affiliation rules did not exist when the alleged former key employee of the affiliate did not exercise influence over the entire company.
In a recent decision, the SBA Office of Hearings and Appeals held that no matter the size of the alleged affiliate, a former “key employee” must have had the ability to influence the entire company in order for the newly organized concern affiliation rule to apply.
Avoiding affiliation under the SBA’s ostensible subcontractor rule can be difficult, especially since the ostensible subcontractor rule itself, 13 C.F.R. § 121.103(h)(4), does not provide many examples of the factors that may cause ostensible subcontractor affiliation.
A recent decision of the SBA Office of Hearings and Appeals, Size Appeal of InGenesis, Inc., SBA No. SIZ-5436 (2013), demonstrates that even when a proposed subcontractor will play a major role in the procurement, ostensible subcontractor affiliation may be avoided if the parties carefully structure their relationship.
You would think a company as large as Northrop Grumman would know how to avoid ostensible subcontractor affiliation with a small prime, wouldn’t you?
You’d be wrong. In a recent SBA Office of Hearings and Appeals decision, a Northrop Grumman entity entered into a teaming arrangement with a small prime, in which all three key employees identified in the proposal were employed by the large subcontractor. The result: ostensible subcontractor affiliation.
How easy would be for you to obtain resumes and signed letters of intent from your competitor’s employees?
If you answered “not very,” you’re not alone. A small business contractor, Maritime Institute Inc., recently protested the terms of a Navy solicitation, complaining that the solicitation unreasonably forced Maritime to obtain resumes and signed commitment letters from prospective employees, including any incumbent personnel Maritime intended to hire. According to the GAO, however, the Navy’s requirement was perfectly reasonable–notwithstanding any competitive advantage to the incumbent.
The SBA’s newly organized concern affiliation rule is designed to prevent former officers, directors, principal stockholders or “key employees” of a large business from evading the SBA size rules by spinning off a new company.
But who is a “key employee” for purposes of the newly organized concern affiliation rule? As demonstrated in a recent SBA Office of Hearings and Appeals decision, the mere fact that an employee has the word “manager” in his or her title does not necessarily make that person a key employee under the newly organized concern rule.