Under the SBA’s regulations, affiliation between two companies might exist where one company derives 70% or more of its receipts from the other over the preceding three fiscal years. See 13 C.F.R. § 121.103(f)(2).
This economic dependence affiliation, as it is called, can be tricky to identify in practice—it is, after all, a rebuttable presumption of affiliation. That is, a company might be able to demonstrate that economic dependence doesn’t exist if, for example, it has only been in business for a limited amount of time and has only been awarded a limited number of contracts.
Recently, the SBA’s Office of Hearings and Appeals considered the bounds of the economic dependence affiliation rule and interpreted the three-year look-back period.
The factual gist of Oak Grove Technologies, LLC, SBA No. SIZ-6051 (April 20, 2020) is relatively straightforward. After F3EA won an award, Oak Grove filed a size protest alleging, among other things, that F3EA is affiliated with two other companies (Raptor Training Services, or RTS, and ProActive Technologies) through the economic dependence affiliation rule. Specifically, Oak Grove alleged that F3EA earned 70% or more of its receipts from contracts with these two companies over the preceding three completed fiscal years. As a result, Oak Grove believed that F3EA should have been affiliated with them, and found to be an ineligible large business.
The SBA Area Office denied Oak Grove’s size protest, saying in part that F3EA did not receive 70% of its receipts from RTS and ProActive. This conclusion, the Area Office noted, did not change whether evaluated year by year or under a 3-year average.
Oak Grove appealed this determination, arguing that the Area Office erred by limiting its analysis to the three-year calculation period. F3EA submitted its bid on December 14, 2018—meaning that the three-year calculation period was F3EA’s most recently completed fiscal years (2015, 2016, and 2017). But according to Oak Grove, this analysis failed to consider evidence of financial dependence that arose in the intervening period (in 2018, up to the date of self-certification).
On appeal, the SBA OHA denied Oak Grove’s assertion. It did so with quick reference to the SBA’s size regulations: under 13 C.F.R. § 121.404(a), the date to determine a company’s size is the date that it submits a written self-certification that it is small to the procuring activity as part of its initial offer or response that includes price. And under Section 121.103(f)(2), the period of measuring a company’s economic dependence is the three most recently completed fiscal years.
Because F3EA submitted its bid on December 14, 2018, the period of measurement was its three most recently completed fiscal years as of that date—in other words, 2015, 2016, and 2017. Neither SBA’s receipts calculation regulations nor the economic dependence regulation allow the SBA to consider information up to the date of self-certification. Thus, Oak Grove’s belief that the SBA should have considered 2018 contracts between F3EA and RTS or ProActive was wrong. The OHA denied Oak Grove’s appeal.
For companies concerned about economic dependence affiliation, Oak Grove makes clear that it’s the prior three years that matter. And though the SBA’s regulations identify 70% of receipts as the threshold to give rise to such affiliation, I tend to counsel a more cautious approach—the more a company depends on another company for its revenues (whether 70% of receipts or some lesser amount), the more likely it is that affiliation might exist.
If you have any questions about affiliation, please give me a call.