SBA’s size protest rules contain a stick to force companies to respond to SBA as part of size determination. That stick is called the adverse inference rule. The adverse inference rule says that, if SBA requests specific information and a protested company refuses to provide it, SBA may assume that the missing information would show that the company is not a small business. In a recent decision, SBA’s Office of Hearings and Appeals (OHA) upheld the use of the adverse inference.
In Portacool, LLC, SBA No. SIZ-6251 (October 24, 2023), Defense Logistics Agency (DLA) conducted a small business set-aside procurement for for evaporative coolers. DLA assigned North American Industry Classification System (NAICS) code 333415, Air Conditioning and Warm Air Heating Equipment and Commercial and Industrial Refrigeration Equipment Manufacturing, with a corresponding size standard of 1,250 employees. Portacool (or Appellant) was the apparent awardee and its size was protested by Portable Air Group, LLC (PAG or protester).
The protest alleged that Portacool was acquired in April 2012 by a large business and is no longer small. As part of the standard response to a size protest, a protested company receives a letter from the SBA informing it that it has to provide a “response to each of the allegations in the protest”, as well as provide certain relevant documents and completed Form 355. The Form 355 provides basic information about ownership and management of the protested concern and potential affiliates.
Among the items requested by SBA were:
- “A copy of organizational documents (i.e., Articles of Organization and Operating Agreement or Bylaws) for [Appellant] and all potential affiliates”;
- “If [Appellant] is not the manufacturer [of the evaporative coolers], an explanation of [Appellant’s] compliance with each of the four elements of the manufacturer rule in 13 CFR 121.406(b) is required”;
- “Completed employee calculation worksheet for [Appellant] and all of the potential affiliates, each affiliate will need to prepare a [worksheet].”
Portacool received an extension to its response due date. After some back and forth with the SBA, the SBA wrote:
Although Appellant had already indicated that it is 100% owned by [Company 1], Appellant must disclose “who owns [Company 1] and up the chain until individuals are provided.”
The SBA Area Office determined that Portacool was not small. “The Area Office found that Appellant did not adequately respond to the Area Office’s requests for information posed on July 19, 2023, August 7, 2023, and August 14, 2023, and therefore drew an adverse inference that the missing information would have shown that Appellant is not small.” Among other things, the Area Office noted that “Appellant claimed that it is 100% owned by [Company 1]” but “Appellant did not disclose the owners of [Company 1] nor identify other potential affiliates.”
Overall, the Area Office found that Portacool’s responses “lacked the necessary detail for the Area Office to determine ‘who ultimately owned and controlled’ Appellant” and failed to address various potential affiliates and their employee counts. Portacool appealed the size determination, arguing it had provided all relevant information to show it was small.
Adverse Inference
Under SBA size protest rules, protested companies must respond to SBA questions, provide a Form 355, and has the burden to establish it is small. In particular:
If a concern whose size status is at issue fails to submit a completed SBA Form 355, responses to the allegations of the protest, or other requested information within the time allowed by SBA, or if it submits incomplete information, SBA may presume that disclosure of the information required by the form or other missing information would demonstrate that the concern is other than a small business. A concern whose size status is at issue must furnish information about its alleged affiliates to SBA, despite any third party claims of privacy or confidentiality, because SBA will not disclose information obtained in the course of a size determination except as permitted by Federal law.
13 C.F.R. § 121.1008(d).
Under OHA’s test, SBA may impose an adverse inference based on three factors:
“(1) the information sought by the area office is relevant to an issue in the size determination;
(2) there is a level of connection between the entity being protested and the entity the area office is seeking information from; and
(3) the area office’s request for information was specific.”
In this case, OHA confirmed that the Area Office properly imposed the adverse inference penalty. First, the Protester “raised a specific and credible protest allegation, i.e., that Appellant is not small because Appellant was acquired in April 2012 by” another company–and SBA asked questions related to this protest allegation. However, Portacool did not adequately respond because it “failed to disclose specific information about other concerns that may be owned or controlled by” Portacool, its parent companies, or the individual owner of the parent companies. Portacool provided no information about the size of potential affiliates. Portacool, in its Form 355, had indicated it had an affiliate, but then tried to disclaim affiliation on appeal. OHA rejected this request.
Conclusion
Ultimately, OHA rejected this appeal. This case shows how important it is to fill out the Form 355 carefully upon the initial submission to SBA. It is very hard to walk back what is submitted in the initial version of documents sent to SBA. It is also very important to make responses to size protest allegations and requests for information that are both responsive and timely. Federal contractors must be careful in how they respond to an SBA size protest. Some things cannot be fixed on appeal.
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