SBA OHA: Contractors Must Be Permitted To Contest Affiliation

If you have ever gotten a traffic ticket, you know the ticket typically presents you with two options: send in your fine (essentially admitting guilt), or appear in court and contest the ticket.  The second option is available because in our democracy, a citizen accused of wrongdoing–even a minor traffic infraction–has the right to contest the charges.

The same is true when it comes to SBA size protests.  According to a recent decision by the SBA Office of Hearings and Appeals, a contractor cannot be found affiliated with another company unless the contractor is given the opportunity to respond to the particular basis of affiliation at issue.

SBA OHA’s decision in Size Appeal of Magnum Opus Technologies, Inc., SBA No. SIZ-5372 (2012) involved an Army solicitation for health care provider services.  Magnum Opus Technologies, Inc. submitted an offer.

Magnum Opus was a graduate of the 8(a) program.  While in the 8(a) program, Magnum Opus participated in a mentor-protege relationship with Sterling Medical Associates, Inc.  Together, the two companies won ten contracts as joint venturers.  The last award occurred in 2007.

After Magnum Opus was named the apparent successful offeror, a competitor filed a SBA size protest.  The competitor alleged that Magnum Opus was affiliated with Sterling by virtue of common management and under the newly organized concern rule.  The SBA Area Office forwarded the SBA size protest to Magnum Opus, which responded to the allegations of affiliation under the common management and newly organized concern rules.

After receiving Magnum Opus’s response, the SBA Area Office found that Magnum Opus and Sterling had violated the so-called “three in two” rule, which states that a joint venture can be awarded no more than three contracts over a two-year period.  According to the SBA Area Office, because Magnum Opus and Sterling had violated the three-in-two rule, they were not entitled to the protection of the mentor-protege “shield” from affiliation.  The SBA Area Office issued a size determination finding Magnum Opus and Sterling affiliated.

Magnum Opus filed a SBA size appeal with SBA OHA, alleging in part that it was unfair and improper for the SBA Area Office to find affiliation on the basis of a violation of the “three in two” rule.  Magnum Opus argued that it had never been notified that the three-in-two rule was at issue or given an opportunity to explain why it should not be considered affiliated with Sterling under the rule.

SBA OHA agreed with Magnum Opus.  SBA OHA noted that “SBA regulation permits area offices to investigate issues beyond those specifically raised by a protester.”  However, “before finding a concern other than small on grounds not found in a protest, an area office must provide notice to the protested concern of any change in focus and request a response.”  SBA OHA explained that, “such precautions are essential to ensure that protested concerns may craft a response [to new issues] that protects their interests and, thus, to afford protested concerns due process.”

In this case, because Magnum Opus had never been notified that the three-in-two rule was at issue or given an opportunity to respond to the SBA Area Office’s concerns, the SBA Area Office was not entitled to find Magnum Opus affiliated with Sterling.  SBA OHA vacated the Area Office’s size determination and remanded the case for further proceedings.

The Magnum Opus Technologies SBA size appeal decision demonstrates that fair play is as essential in the SBA size protest process as in any other legal setting.  Before a small business can be found affiliated with another company, it must be notified of the bases of affiliation at issue, and given the opportunity to respond.

The Magnum Opus Technologies decision is also notable for SBA OHA’s holding regarding the three-in-two rule.  Stay tuned: I will discuss that aspect of the case in a post tomorrow.

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