Adverse Inference, the Wrong Way to Lose a Size Protest

An adverse inference is a penalty that the Small Business Administration (SBA) can enforce as part of a size protest. During a size protest determination, SBA will ask the protested company lots of questions. Sometimes, a protester will not answer those questions, either on purpose or due to oversight. Depending on the circumstances, SBA can apply an adverse inference if a protested company fails to respond to questions. If SBA applies an adverse inference, that means that the SBA Area Office will determine that the information that was not provided would prove that the company is not a small business. A recent decision reminds us about this penalty. If you are in a similar situation, reach out to a firm like ours to help think of a way to respond to SBA.

In Size Appeal of: Sanford Fed., Inc. Appellant, SBA No. SIZ-6261, 2024 (Jan. 16, 2024), a contractor faced a size protest concerning a VA solicitation for boiler plant safety device testing under North American Industry Classification System (NAICS) code 238290, Other Building Equipment Contractors, and a size standard of $22 million.

A protester filed a size protest against Sanford Federal, Inc. (Sanford) who was the proposed awardee. During the size protest, the SBA Area Office reached out to Sanford and asked them to provide financial information and a Form 355 (the SBA standard form for size determinations). Sanford failed to respond to multiple emails from SBA advising them of the size protest.

As a result, the SBA found that Sanford did not qualify as small for the procurement, based on an adverse inference. SBA’s standard for adverse inference requires that three prongs be met:

“(1) the requested information be relevant to an issue in the size determination;”

“(2) there be a level of connection between the protested concern and the firm from which the information was requested;”

“(3) the request for information be specific.”

After the size determination was issued, Sanford appealed. Sanford argued that the protest did not make sense and was non-specific, basically arguing that the protest referred to contracts in 2023 that would not provide any money to Sanford until well after the period for review. As a side note, a receipts-based size standard looks back five years to calculate the average receipts for a company. 13 C.F.R. § 121.104(c)(1).

The judge, at SBA’s Office of Hearings and Appeals (OHA), actually agreed that the protest did not appear to be on target and was nonspecific. However, that didn’t matter because Sanford did not respond to the size protest at all. OHA said that the Area Office properly applied the adverse inference rule, holding that Sanford, “could have requested that the Area Office dismiss the protest as nonspecific, or could have produced information showing that [Sanford] was small over the years 2018-2022.” But Sanford, “raised no such arguments to the Area Office, however, and its claim that the protest was nonspecific is therefore not properly before OHA on appeal.”

Because Sanford “did not respond to the protest and did not produce a completed SBA Form 355 and other requested documents . . . [t]he Area Office therefore appropriately drew an adverse inference.”

This is a sobering result for all small business federal contractors. If a federal contractor bids on a small business set-aside, it opens up that company to a potential size protest. Don’t respond to the size protest–and you could risk losing an award based on a protest that might not have any actual merit.

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