An 8(a) mentor-protege joint venture was not entitled to take advantage of the special mentor-protege exception from affiliation because the joint venture agreement lacked adequate detail.

In a recent decision, the U.S. Court of Federal Claims held that the SBA had reasonably determined the joint venture to be a large business because the joint venture agreement did not sufficiently address certain requirements.  The Court’s decision should be a warning for all 8(a) mentor-protege joint ventures: details matter.

The Court’s decision in IEI-Cityside JV v. United States, No. 15-673C (2015) involved a HUD solicitation for an indefinite delivery, indefinite quantity contract seeking field assistance manager services for HUD’s single family real-estate owned properties.  The solicitation was set-aside for small businesses under NAICS code 531311 (Residential Property Managers).

IEI-Cityside was a joint venture comprised of Inspection Experts, Inc. and Cityside Management Corp.  IEI was a participant in the SBA’s 8(a) Program.  Cityside was IEI’s SBA-approved mentor.  IEI and Cityside decided to submit a proposal as a mentor-protege joint venture.

Under the SBA’s 8(a) regulations and size regulations, a joint venture comprised of an 8(a) protege and its mentor can qualify as a small business for any federal prime contract or subcontract, provided that the protege qualifies as small.  It is a powerful exception from the ordinary affiliation rules because the mentor’s size is not considered in the size analysis, as ordinarily would be the case.

There is one catch, however: in order to avail itself of the exception from affiliation, the joint venture must adopt a joint venture agreement meeting the requirements of 13 C.F.R. 124.513.  That regulation, in turn, requires that the joint venture agreement contain several specific items.

Among those items, the joint venture agreement must include provisions: (1) “[i]temizing all major equipment, facilities, and other resources to be furnished by each party to the joint venture, with a detailed schedule of cost or value of each” (13 C.F.R. 124.513(c)(6)); and (2) “[s]pecifying the responsibilities of the parties with regard to negotiation of the contract, source of labor, and contract performance, including ways that the joint venture will ensure that the joint venture and the 8(a) partner(s) to the joint venture will meet the performance of work requirements” specified in the regulation (13 C.F.R. 124.513(c)(7)).  (The regulation also includes a number of other requirements not relevant to this case).

IEI-Cityside adopted its joint venture agreement in June 2014.  With respect to equipment, resources, and facilities, the joint venture agreement stated:

6.0  Equipment.  Upon award of the contract identified in section 1.0 Purpose above, the Managing Director will purchase, in the name of the joint venture, facilities and equipment for the proper operation of this contract.

The joint venture agreement stated that IEI would perform 50 percent of the joint venture’s work and Cityside would perform the remaining 50%.  However, the joint venture agreement did not delineate specific portions of the work that either party would perform.

After executing its joint venture agreement, IEI-Cityside submitted a proposal for the HUD contract.  Following its evaluation of proposals, HUD identified IEI-Cityside as the successful offeror.

Three competitors filed size protests against IEI-Cityside.  In March 2015, the SBA Area Office issued a size determination finding IEI-Cityside to be ineligible for award of the contract.  The SBA Area Office determined that IEI-Cityside was not entitled to avail itself of the mentor-protege exception from affiliation because the joint venture agreement was insufficiently detailed.  The SBA Area Office held that the joint venture agreement did not meet the requirement under 13 C.F.R. 124.513(c)(6) for itemization of major equipment, facilities and resources.  The SBA Area Office also found that the joint venture agreement did not adequately specify the respective responsibilities of the parties with respect to contract performance.  The SBA Area Office noted that the case was similar to a recent OHA decision, Kisan-Pike, A Joint Venture, in which OHA held that a mentor and protege were not entitled to the exception from affiliation because their joint venture agreement was insufficiently detailed.

IEI-Cityside appealed to OHA, which upheld the SBA Area Office’s size determination.  IEI-Cityside then filed a protest in the Court of Federal Claims, asking the Court to overturn OHA’s decision.

IEI-Cityside argued that its joint venture agreement met the requirement regarding equipment, resources and facilities by stating that the Managing Director would purchase them.  According to IEI-Cityside, this provision meant that all equipment and resources essentially would be contributed by IEI.

The Court wrote that this contention was “not persuasive.”  The Court noted that the joint venture agreement did not state that IEI would provide the equipment, resources, and facilities; it merely stated that IEI would purchase them in the joint venture’s name.  The Court continued:

But more importantly, even assuming it were reasonable to read the agreement to mean that IEI would be supplying all equipment, facilities, and resources, IEI-Cityside does not deny that the agreement did not include the other information required by the regulation: an itemization and detailed schedule of the costs of such equipment, facilities, and resources.  Accordingly, OHA’s determination that IEI-Cityside’s agreement did not meet the requirements of 13 C.F.R. 124.513(c)(6) is clearly reasonable.

The Court then held that it was “also entirely reasonable” for OHA to conclude that the joint venture agreement did not adequately address the responsibilities of the parties with respect to the performance of work.  Rather, “the agreement stated only in very general and conclusory terms that IEI and Cityside would each perform fifty percent of the labor under the contract, and that IEI would have a right of first refusal as needed to meet the minimum work requirements set forth in the regulations.”

The Court rejected IEI-Cityside’s argument that it could not have provided the details in question because of the IDIQ nature of the contract.  The Court wrote that “the regulations do not include an exception based on the nature of the procurement involved.”  In fact, “carving out exceptions on this basis could undermine the SBA’s purposes for imposing mandatory provisions on joint venture agreements and for requiring SBA approval of such agreements: to ensure that the 8(a) (or other small business) concern is bringing sufficient value to the joint venture relationship and that the relationship is genuine.”

Additionally, although the “precise number of properties or geographic region” might not have been known when IEI-Cityside adopted its joint venture agreement, IEI-Cityside “might nevertheless have complied with [the requirement] by discussing the types of work each joint venture partner would perform, and the resources each partner would contribute, for each region awarded” to the joint venture.  In fact, the Court noted, IEI-Cityside’s own technical proposal included a great deal of detail about the work that the joint venture would perform.

The Court granted the Government’s motion for summary judgment, and rejected IEI-Cityside’s protest.

Every 8(a) mentor and protege team should take the time to read the IEI-Cityside decision.  In my experience, joint venture agreements like the one used by IEI-Cityside are not uncommon; if anything, they are the norm.  Many 8(a) joint venture agreements are lacking the sort of detail at issue in IEI-Cityside.  As this case demonstrates, when it comes to 8(a) mentor-protege joint venture agreements, details matter.  In fact, details can make the difference between a contract award and a finding of ineligibility.