When the SBA Area Office reviews a SBA size protest against a SBA-approved 8(a) joint venture, the SBA Area Office must confine itself strictly to size issues. According to a recent decision of the SBA Office of Hearings and Appeals, in conducting its review of a SBA size protest, the SBA Area Office cannot examine whether the joint venture complies with the 8(a) program’s regulations.
Although the distinction between size and 8(a) issues may sound like a technicality, it can make the difference between a sustained SBA size protest and an unsuccessful one. As a result, this SBA OHA decision provides an extra layer of protection to SBA-approved 8(a) joint ventures–any makes filing a successful SBA size protest against an approved 8(a) joint venture that much more difficult.
SBA OHA’s decision in Size Appeal of Carntribe-Clement 8AJV #1, SBA No. SIZ-5357 (2012), involved an SBA-approved joint venture between Carntribe, LLC, an 8(a) program participant, and The Clement Group, which was Carntribe’s mentor. Craig Clement owned 70% of The Clement Group. He also owned a 40% minority interest in Carntribe. The remaining 60% of Carntribe was owned by Brian Carnahan, who served as the company’s president.
After the SBA approved the 8(a) joint venture between the companies, the Army named the joint venture as one of the apparent successful offerors on a multiple-award construction contract. A competitor subsequently filed a SBA size protest, alleging that Carntribe and Clement were affiliated, notwithstanding their 8(a) mentor-protege relationship.
The SBA Area Office agreed with the protester. It noted that in 2008, a 40% interest in Carntribe had been transferred to Mr. Clement. Although the transfer had been approved by the SBA’s 8(a) program office, the SBA Area Office determined that the SBA regulations at 13 C.F.R. § 124.520(d)(2) and 13 C.F.R. § 124.105(h)(2) should have limited Mr. Clement to a 30% interest.
In addition, after examining Carntribe’s operating agreement, the SBA Area Office determined that Mr. Clement, as minority owner, could prevent dissolution of the company and prevent new members from joining the company. The SBA found that these provisions allowed Mr. Clement to exercise improper negative control over Carntribe, contrary to 13 C.F.R. § 124.106(c), which requires that one or more disadvantaged individuals (in Carntribe’s case, Mr. Carnahan), have control over “all decisions” of the company. The SBA Area Office held that the companies were affiliated and that, as a result, the joint venture was not a small business.
On appeal, SBA OHA disagreed, and reversed the decision of the SBA Area Office. It wrote: “[T]he Area Office in this case clearly erred in reviewing Carntribe’s compliance with 13 C.F.R. § 124.106(c), or other provisions of Part 124.” SBA OHA continued, “an area office has no jurisdiction to examine whether or not an 8(a) BD participant has complied with substantive 8(a) BD provisions in 13 C.F.R. Part 124. Nor is an area office authorized to overrule approval on such matters by the Office of Business Development.” SBA OHA wrote that if the SBA Area Office had doubts about Carntribe’s compliance with the 8(a) program regulations, it should have referred the matter to the Office of Business Development (the 8(a) office) rather than ruling on the matter itself.
SBA OHA also held that the SBA Area Office erred by finding that Mr. Clement exercised improper negative control over Carntribe. SBA OHA wrote that for purposes of 8(a) program eligibility, 13 C.F.R. § 124.106(c) requires disadvantaged individuals to have control over “all” of a company’s decisions. However, “[w]ithin the context of size regulations . . . OHA applies a very different legal standard in analyzing negative control.”
SBA OHA explained that for size purposes, “[n]egative control exists if a minority owner can block ordinary actions essential to operating the company. On the other hand, the power to veto unusual or “extraordinary” actions may be designed to protect the interests of the minority investor and therefore do not pose issues of negative control.”
SBA OHA found that the admission of new members and dissolution of the company were “extraordinary” measures, and that Mr. Clement’s ability to veto these actions did not constitute negative control for size purposes. SBA OHA concluded that the SBA Area Office should have confined itself to determining whether improper negative control existed under the size regulations, rather than applying the stricter standard found under the 8(a) program regulations.
SBA OHA’s size appeal decision in Carntribe-Clement 8AJV #1 makes clear that when the SBA has approved an 8(a) joint venture, the SBA Area Office cannot re-examine 8(a) eligibility issues in the context of a SBA size protest review. With 8(a) eligibility issues off the table, 8(a) joint ventures may find it easier to survive the SBA size protest process–and their competitors may find it more difficult to prevail in SBA size protests.