The SBA 8(a) mentor-protege affiliation “shield” does not prevent a mentor and protege from being affiliated under the so-called ostensible subcontractor rule, according to a recent decision of the SBA Office of Hearings and Appeals.

In Size Appeal of InGenesis, Inc., SBA No. SIZ-5436 (2013), SBA OHA held that the broad exception from affiliation for 8(a) proteges and their mentors does not prevent the SBA from deeming the companies affiliated under the ostensible subcontractor rule.

The InGenesis SBA OHA size appeal decision involved a Department of Homeland Security 8(a) set-aside solicitation for medical staffing and support services.  The solicitation stated that offerors could use subcontractors, but that no joint ventures were permitted.

InGenesis, Inc., an 8(a) participant, submitted a proposal.  InGenesis proposed to perform 51% of the contract itself, and subcontract the remaining 49% to its SBA-approved mentor, STG International, Inc.  STG was the incumbent under the predecessor contract for the same services.

After reviewing proposals, DHS announced that InGenesis was the awardee.  An unsuccessful competitor, Distinctive Spectrum Joint Venture 8(a), LLC filed a SBA size protest, alleging in part that InGenesis and STG were affiliated under the ostensible subcontractor rule.

The SBA Area Office subsequently issued a size determination finding that InGenesis was not an eligible small business, based on ostensible subcontractor affiliation.  Although the SBA Area Office recognized that the SBA affiliation rules allow for an exception in the case of an 8(a) mentor-protege joint venture, the SBA Area Office held that the exception does not apply to a prime/subcontractor team like the one formed by InGenesis and STG.

InGenesis filed a SBA OHA size appeal, making a number of arguments.

With respect to the mentor-protege issues, InGenesis first argued that when the ostensible subcontractor rule is violated, the SBA should treat the parties as joint venturers.  In turn, joint ventures between 8(a) proteges and their mentors are exempted from affiliation–meaning that even if InGenesis and STG had violated the ostensible subcontractor rule, the resulting “joint venture” was exempt from affiliation.

In addition, InGenesis argued that the subcontract agreement was a form of permitted mentor-protege “assistance.”  Under the SBA’s regulations, mentor-protege assistance may not be used to find affiliation between the mentor and protege.

SBA OHA disagreed with InGenesis’s mentor-protege arguments.

SBA OHA first noted that the SBA affiliation regulations apply the exception to affiliation only to formal joint ventures compliant with 13 C.F.R. § 124.513(c).  “All parties here agree that [InGenesis’s] proposal was not structured as a formal joint venture, and does not comport with 13 C.F.R. § 124.513(c),” SBA OHA wrote.  SBA OHA concluded that it was “apparent” that InGenesis and STG “do not have a formal SBA-approved joint venture that would qualify” for the exception from affiliation.

SBA OHA also rejected the argument that the subcontract between InGenesis and STG constituted “assistance” within the meaning of the SBA’s rules.  The regulations “refer to assistance provided by a mentor to a protege under an approved mentor-protege agreement,” SBA OHA wrote.  “Thus, the rules are not intended to apply in the reverse situation, where a protege provides subcontracts or other assistance to its mentor.”  In this case, because InGenesis, the protege, was the prime contractor, the subcontract did not qualify as mentor-protege assistance.

Fortunately for InGenesis and STG, even after rejecting the 8(a) mentor-protege arguments, SBA OHA found that the companies had not violated the ostensible subcontractor rule.  SBA OHA’s ruling on those issues also contains some interesting nuggets, and I will follow up with a second blog post discussing them.

The InGenesis, Inc. SBA OHA decision comes on the heels of several SBA OHA cases issued last year–including one involving InGenesis and STG–in which SBA OHA broadly interpreted the protections afforded by 8(a) mentor-protege agreements.  The InGenesis, Inc. case illustrates that although 8(a) mentor-protege affiliation protections are broad, they are not absolute.  Although it did not ultimately occur in this case, an 8(a) protege and its mentor may be found to violate the ostensible subcontractor rule, notwithstanding their 8(a) mentor-protege agreement.