GAO Defers to SBA’s Interpretation of Runway Extension Act

The Runway Extension Act has been a hot topic for federal government contractors. And as of this writing, the issue of the Act’s effectiveness hasn’t been conclusively decided—though SBA says the Act isn’t yet effective, others (including us, in various posts on this blog) have disagreed with this analysis. A recent GAO decision decided a protest based on the Runway Extension Act.

For those unfamiliar with the Act, it amended Section 3(a)(2)(C)(ii)(II) of the Small Business Act by “striking ‘3 years’ and inserting ‘5 years’.” Functionally, this amendment changed receipts-based size standards from a 3-year to a 5-year lookback calculation, without affecting the underlying mechanics of how to calculate receipts.

SBA’s position on the Act has transitioned in the past year, from maintaining that the Act did not apply to SBA to proposing a delayed implementation of the 5-year lookback period. On June 24, 2019, amidst mounting pressure from the House and Senate, SBA published its proposed rule implementing the Act. The is-it-effective/is-it-not-effective status of the new 5-year receipts calculation period has caused great confusion among small businesses.

With that in mind, a recent GAO decision addressed the application of the Runway Extension Act when it decided a bid protest challenging GSA’s failure to apply the Act under the OASIS small business solicitation. Denying the protest, GAO ultimately deferred to the SBA’s interpretation of the Runway Extension Act.

The OASIS solicitation incorporated the SBA’s rules for calculating an offeror’s size. After the SBA issued its proposed regulations to give effect to the Act in June 2019, GSA issued an amendment to the solicitation that clarified it will defer to the SBA for issues relating to size eligibility. In Amendment 4, a potential offeror asked if “the Small Business Runway Extension Act [will] apply to this solicitation?” The GSA responded that “until the SBA issues further direction, agencies will continue to use the previous standard of 3 years when determining size status.”

Two offerors—TechAnax, LLC and Rigil Corporation—filed a protest challenging GSA’s decision, arguing that the terms of the solicitation did not comply with the Runway Extension Act.

The positions of the parties highlighted the question of whether the Act was effective immediately or only after SBA issued a rulemaking on it. TechAnax argued that “the Runway Extension Act applies to all size standards issued by SBA, and that the act took effect immediately after enactment.” TechAnax cited Supreme Court authority stating that, “absent a clear direction by Congress to the contrary, a law takes effect on the date of its enactment.”

GAO side-stepped this argument and said the “Runway Extension Act does not state an effective date [and] the act did not automatically amend all existing size standards and SBA regulations.” Instead, “the Small Business Act requires the promulgation of regulations to give effect to the Runway Extension Act.”

GAO also discussed SBA’s assertion that SBA “does not consider the change in the Runway Extension Act to apply to size standards issued by SBA under 15 U.S.C. § 632(a)(2)(A)[.]” While GAO eventually deferred to SBA’s interpretation of the Act, it did not formally adopt or agree with SBA’s stance on the issues.

GAO also side-stepped this potential conflict by citing to the proposed rule where SBA “proposes to change its own size standards to provide for a 5-year averaging period for calculating annual average receipts for all receipts-based size standards.” GAO further cited SBA’s own reasons for the proposed rule: “to avoid confusion for firms arising from conflicts” in size standards issued by SBA as compared to other agencies. SBA stated that it would, however, “continue to apply the 3-year average period” until the final rule is issued, meaning that for now any “confusion for firms arising from conflicts” still exists.

This aligned with SBA’s stance that “the Small Business Act requires either that SBA conduct rulemaking to revise, modify, or establish size standards, or that size standards issued by other agencies be proposed after an opportunity for public notice and comment.” Through its deference, GAO is essentially agreeing with SBA’s position that the Runway Extension Act is ineffective, or at least inapplicable as to the SBA, until SBA issues a final rule formally adopting the Runway Extension Act.

In the end, GAO found that “[n]one of the protesters’ arguments specifically challenge the SBA’s interpretation of the Small Business Act . . . with regard to the requirement to promulgate changes to size standards or the interpretation of those standards.” GAO granted “deference to SBA’s interpretation of the Small Business Act, particularly with regard to its role in the establishment, amendment, and interpretation of small business size standards.” GAO also stated that it found “no basis to conclude that the SBA’s interpretation of the Small Business Act or its own regulations are unreasonable in such a manner that would require procuring agencies such as GSA to issue solicitations that implement a 5-year average for calculating a firm’s annual revenue in the absence of rulemaking.”

The big takeaway from this decision is that GAO deferred to SBA’s interpretation. While GAO does not have the power to order SBA to change its interpretation, it nevertheless could have recommended the agency revise its solicitation to apply the 5-year standard. Regardless, GAO, OHA, and the federal courts have either deferred to, or stayed silent on, SBA’s interpretation of the Runway Extension Act. Unless, and until OHA or a federal court determines that SBA’s interpretation is incorrect, agencies appear to have the power to apply the 3-year standard until the final rule is published and SBA formally shifts to the 5-year standard.

Stay tuned to SmallGovCon for further updates on the Runway Extension Act.

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