After a participant in the SBA’s 8(a) Program graduates, can its mentor-protégé agreement be reapproved for another full year?  Surprisingly, the answer may be “yes.”  At least, this is what happened in the Armed Services Board of Contract Appeals’ decision in HMRTECH2 LLC, ASBCA No. 56829 (2009).  However, subsequent rule changes indicate that the benefits of any such post-graduation re-approval will be limited to contracts obtained prior to graduation.

In HMRTECH2, an 8(a) participant graduated from the program on April 9.  About two weeks after the company graduated, the SBA reapproved its existing mentor-protégé agreement.

Despite the re-approval, the Air Force determined that an 8(a) mentor-protégé joint venture consisting of the graduated firm and its mentor was no longer eligible to receive additional task orders on a contract the joint venture had won before the 8(a) firm graduated.  The joint venture appealed to the ASBCA, arguing that the Air Force’s decision was improper.

The ASBCA agreed with the joint venture and sustained its appeal.  Based on a long line of prior authority, it held that task and delivery orders are not new contracts, and, as a general matter, a firm need not independently qualify as small or 8(a) for a task order, so long as it qualified for the underlying contract.  In addition, although the contract itself allowed the Air Force to cease making task order awards to the joint venture if the SBA discontinued its approval of the mentor-protégé agreement, the SBA had re-approved the agreement.  The Air Force’s decision was improper and the joint venture should not have been precluded from receiving task orders.

One interesting question the ASBCA did not delve into was whether the SBA properly re-approved a mentor-protégé agreement between a graduated 8(a) firm and its mentor.  In my view, the SBA’s decision was questionable.  The applicable regulation appears to limit protégés to active 8(a) participants, stating: “only firms that are in good standing in the 8(a) BD program . . . may qualify as a protégé.”  13 C.F.R. 124.520(c)(2).   The SBA may have interpreted the rule as applying only to initial eligibility as a protégé, rather than re-approval, but it is not clear that the rule was intended to be read this way.

In fact, after the re-approval decision, the SBA adopted a new regulation clarifying that mentor-protégé benefits generally end when the protégé leaves the 8(a) program.  The new rule states that “once a protégé firm graduates from or otherwise leaves the 8(a) BD program, it will not be eligible for any further benefits from its mentor protégé relationship.”  13 C.F.R. 124.520(d)(1)(iii).  However, the rule states that if a mentor-protégé joint venture won contracts prior to graduation, “the joint venture continues to qualify as small for previously awarded contracts . . ..”

The SBA’s clarification is important because neither the regulation on the mentor-protégé exemption from affiliation nor the regulation dealing with the mentor-protégé joint venture exception from size standards states that the protégé must be an active 8(a) participant.  Both regulations simply call for the benefits to flow to 8(a) mentors and protégés.

Without this clarification, HMRRECH2 could be read as an invitation for 8(a) firms to attempt to maintain their mentor-protégé benefits long after graduation.  As it stands, though, it appears that the SBA has closed any loophole.  Except for contracts awarded prior to graduation, the benefits of the mentor-protégé relationship end when the 8(a) firm graduates.