Companies controlled by a father and son, respectively, were affiliated under the SBA’s affiliation rules because there was no clear fracture of the family members’ business relationships.

In a recent size appeal decision, the SBA Office of Hearings and Appeals held that a son’s company was affiliated with a company owned by his father because the son had worked for many years at the father’s company, the son’s company leased office space from the father’s company, and the two companies engaged in significant amounts of subcontracting.

OHA’s decision in ProSol Associates, LLC, SBA No. SIZ-5813 (2017) involved a Marine Corps solicitation seeking a contractor to provide IT training.  The solicitation was issued as a small business set-aside under NAICS code 611430 (Professional and Management Development Training), with a corresponding $15 million size standard.

After evaluating competitive proposals, the Contracting Officer notified offerors that ProSol Associates, LLC (“PSA”) was the apparent awardee.  After receiving the notice, an unsuccessful competitor filed an SBA size protest.  The competitor alleged that PSA was affiliated with ProSol, LLC under various SBA affiliation rules.

The SBA Area Office determined that Michael E. Dean was PSA’s sole shareholder and CEO.  His father, Michael J. Dean, was the sole owner of ProSol.  Michael E. Dean worked for ProSol from 2002 to 2010 in a number of positions.  In 2008, while Michael E. Dean was still a ProSol employee, he founded PSA.

The SBA Area Office determined that PSA subleased office space from ProSol.  Additionally, subcontracts from ProSol had represented approximately 16% of PSA’s revenues since 2009, and represented 29% of PSA’s revenues in Fiscal Year 2015–the year in which the Marine Corps proposal was submitted.  PSA intended to award a subcontract to ProSol under the Marine Corps solicitation.

The SBA Area Office found that Michael E. Dean and Michael J. Dean were presumed to have an identity of interest under the SBA’s affiliation regulations.  Although the presumption of affiliation based on an identity of interest can be rebutted by showing a clear fracture, there was no clear fracture between PSA and ProSol because of the lease and continuous subcontracting relationships.  The SBA Area Office issued a size determination finding PSA to be affiliated with ProSol.  The affiliation caused PSA to be ineligible for the Marine Corps contract.

PSA filed a size appeal with SBA OHA.  PSA alleged that the SBA Area Office had misapplied the affiliation rules.  PSA argued, in part, that the business relationships between PSA and ProSol were sufficiently minimal to establish a clear fracture.

OHA wrote that it “has extensive case precedent” interpreting the identity of interest affiliation rule “as creating a rebuttable presumption that close family members have identical interests and must be treated as one person.”  Citing a 2014 size appeal decision, OHA wrote that “[w]hen one concern is owned and controlled by a father, and the other owned and controlled by a son, the two concerns are presumed to be affiliated by an identity of interest.”

OHA reiterated that “[a] challenged concern may rebut the presumption of identity of interest if it is able to show ‘a clear line of fracture among the family members.'”  A clear line of fracture exists when the family members “have no business relationship or involvement with each other’s business concerns, or the family members are estranged.”  Additionally, “a minimal amount of business or economic activity between two concerns does not prevent a finding of clear fracture.”

After revisiting the various relationships between PSA and ProSol, OHA wrote “[t]he facts here thus support the Area Office’s conclusion that Michael E. Dean cannot be said to have made a break with his father’s business interests, and thus has not achieved a clear fracture.”  Rather, “he has continuously been involved with ProSol to a significant extent, from the time be became [PSA’s] principal until the present.”  OHA concluded: “[t]he burden is on [PSA] to establish that Mr. Dean has made a clear fracture, and he has failed to meet that burden.”  OHA denied PSA’s size appeal, and affirmed the SBA Area Office’s decision.

The so-called “family relationships” affiliation rule isn’t necessarily intuitive.  After all, it can apply–as it did in ProSol Associates–even when the two firms share no owners or officers.  But as ProSol Associates demonstrates, companies controlled by close family members (like a father and son) can be affiliated when the family members do business together, even without shared ownership or management.