Newly organized concern affiliation under the SBA’s affiliation rules did not exist when the alleged former key employee of the affiliate did not exercise influence over the entire company.

In a recent decision, the SBA Office of Hearings and Appeals held that no matter the size of the alleged affiliate, a former “key employee” must have had the ability to influence the entire company in order for the newly organized concern affiliation rule to apply.

SBA OHA’s decision in Size Appeal of Metis Technology Solutions, Inc., SBA No. SIZ-5538 (2014) involved a size determination conducted in connection with Metis Technology Solutions’ application for admission to the 8(a) program.  The SBA Area Office initially found Metis to be affiliated with two large businesses.

Metis subsequently applied for recertification as a small business.  The SBA Area Office found that Metis was no longer affiliated with one of the large businesses.  However, the SBA Area Office found that Metis was still affiliated with the second large business, Booz Allen Hamilton, Inc., under the newly organized concern affiliation rule.

The SBA Area Office found that Metis’s President, Dr. Joy Calucci, was a former “key employee” of BAH within the meaning of the newly organized concern affiliation rule.  The SBA Area Office noted Dr. Colucci had been BAH’s Senior Associate and Manager of NASA Programs.  In that role, Dr. Colucci was responsible for developing and implementing BAH’s business development strategy for NASA and other public sector information technology programs, and for overseeing BAH’s business at seven NASA locations.  During her tenure at BAH, Dr. Colucci managed ten employees and was responsible for $40 million in business.

After receiving the SBA Area Office’s adverse size determination, Metis filed a size appeal with SBA OHA.  Metis primarily contended that the SBA Area Office had erred by characterizing Dr. Colucci as a former key employee of BAH.

SBA OHA explained that in order for the newly organized concern affiliation rule to apply, four conditions must be met.  Among those four conditions, “[f]ormer officers, directors, principal stockholders, managing members or key employees of one concern” must “organize a new concern.”

In Dr. Colucci’s case, there was no question that she was not a former officer, director, principal stockholder, or managing member of BAH.  The only dispute was whether she had been a “key employee” of that firm.  Under the SBA’s regulations, a “key employee” is one who has “critical influence or substantive control over the operation or management of the concern.”

SBA OHA wrote that “Dr. Colucci was not a key employee of BAH, and indeed, there is no evidence whatever to support the Area Office’s finding that she was one.”  SBA OHA continued:

Dr. Colucci was a lower level manager of a major corporation, with limited responsibilities. She was on the fifth level down of management, with literally hundreds of officials above her in the corporate hierarchy. Dr. Colucci managed only ten employees out of over 20,000. The revenues from the projects she oversaw represented approximately 0.1% of BAH’s annual revenue.

Further, SBA OHA wrote, “key employees are those who have influence or control over the operations of a concern as a whole, such as a Director of Operations.”  SBA OHA concluded, “Dr. Colucci managed only a small portion of BAH’s business. The finding that Dr. Colucci had critical influence or substantive control over BAH’s operations or management is simply ludicrous.”  SBA OHA granted Metis’s size appeal.

SBA OHA’s decision in Metis Technology Services demonstrates that the newly organized concern rule does not work differently when the alleged affiliate is a multi-billion dollar business.  No matter the size of the alleged affiliate, a person is not a former “key employee” if he or she–like Dr. Colucci–did not exercise critical influence or substantive control over the company as a whole.