Now here’s one you don’t see every day. In a recent size appeal decision, the SBA Office of Hearings and Appeals upheld the SBA’s determination that the contractor was affiliated with the government of Puerto Rico.
In Size Appeal of Industria Lechera de Puerto Rico, Inc., SBA No. SIZ-5533 (2014), SBA OHA held that the contractor’s relationship with the Puerto Rican government rendered the contractor, in essence, a quasi-governmental entity, not an independent small business.
The Industria Lechera de Puerto Rico size appeal involved a USDA procurement for evaporated milk. After receiving an offer from Industria Lechera de Puerto Rico, the USDA sought a Certificate of Competency from the SBA. The SBA COC review led to a formal SBA size protest against ILPR.
The SBA Area Office determined that ILPR was a wholly-owned subsidiary of the Fondo para el Fomento de la Industria Lechera, or FFIL. Accordingly, the SBA Area Office concluded that FFIL controlled or had the power to control ILPR.
The SBA Area Office then analyzed FFIL. It determined that FFIL is a fund created by the Puerto Rican legislature in 1957 to promote the production, sale, processing and consumption of milk in Puerto Rico. FFIL is managed by a nine-member Administrative Board appointed by the Secretary of Agriculture of Puerto Rico. A Puerto Rican government official, the Milk Industry Regulation Administrator, serves as the Chairman of the Administrative Board.
The SBA Area Office concluded that the government of Puerto Rico had the power to control FFIL, and through FFIL, the power to control ILPR. The SBA Area Office found that ILPR was affiliated with the government of Puerto Rico, and therefore not a small business.
ILPR filed a size appeal with SBA OHA. ILPR argued that it was not controlled by the Puerto Rican government. ILPR contended, in part, that according to opinions of the Puerto Rican Attorney General, FFIL is not a governmental entity. ILPR also pointed out that FFIL is funded by assessments imposed upon milk producers, not directly by the Puerto Rican government.
SBA OHA wrote that “it is immaterial that FFIL is not recognized as a formal branch or agency of the Puerto Rican government, and that FFIL does not receive funding directly from the Puerto Rican government.” SBA OHA noted that FFIL was created by a legislative act and that “the organization, operation, and management of FFIL are specified by law . . ..” Additionally, “although FFIL derives its funding from contributions paid by milk producers, those contributions are not voluntary but rather are imposed upon milk producers by statute.” SBA OHA concluded:
On these facts, then, the Area Office could reasonably conclude that FFIL is not an independent private organization, but rather is a quasi-governmental entity created, controlled, and managed by the Puerto Rican government, and funded through government-mandated assessments. Pursuant to the Small Business Act, a concern must be “independently owned and operated,” in addition to being small, in order to qualify as a small business. Thus, because the Puerto Rican government controls FFIL, and FFIL in turn controls Appellant, the Area Office properly concluded that Appellant is not a small business.
The Industria Lechera de Puerto Rico case is unusual, but offers a good reminder that (absent a statutory or regulatory exception), an entity controlled by a government is not an independently owned an operated small business for purposes of the SBA’s size and affiliation rules.