The SBA’s Office of Hearings and Appeals has overturned yet another SBA 8(a) Program denial decision–at least the fifth such instance since December 2012.

As with the four previous cases, SBA OHA’s most recent 8(a) appeal decision indicates that the SBA improperly evaluated the applicant’s evidence of social disadvantage, both by misapplying the regulatory test for social disadvantage and by requiring the applicant to meet a higher standard of proof than called for by law.

SBA OHA’s decision in Gearhart Construction Services, SBA No. BDPE-473 (2013) involved an 8(a) application filed in April 2011 by Gearhart Construction Services.  The company sought admission to the program on the grounds that its owner, David Gearhart, was socially and economically disadvantaged.  The company’s application stated that Mr. Gearhart’s social disadvantage stemmed from his status as a Native American.

In 2011, the SBA denied Gearhart’s application.  The SBA apparently determined that Mr. Gearhart had not proven that he was a Native American, and had not shown that he had experienced social disadvantage.  Gearhart requested reconsideration, and in August 2012, the SBA issued a final determination letter again stating that Mr. Gearhart had not proven his Native American status or social disadvantage.  Gearhart then appealed to SBA OHA.

That is when this case gets a little strange.  In response to Gearhart’s appeal, “the SBA acknowledged that Mr. Gearhart held himself out to be and was recognized by others to be a Native American.”  In my mind, that acknowledgment should have ended the appeal because under the SBA’s regulations, Native Americans are presumed socially disadvantaged and need not establish their individual social disadvantage unless there is credible evidence in the record overcoming the presumption (which is rarely, if ever, the case).

Nevertheless, SBA OHA proceeded to evaluate the SBA’s analysis of Gearhart’s application under the preponderance standard–and found the SBA’s analysis lacking.

SBA OHA first noted that the SBA faulted Gearhart for “failing to prove instances of ‘chronic and substantial bias/prejudice.””  However, “[i]t is not chronic and substantial bias that is at issue” in an 8(a) application, “but rather chronic and substantial social disadvantage.”  SBA OHA continued, “[t]his is not a minor grammatical slip.  A relatively benign act may have a profound effect.”  SBA OHA concluded, “[b]y analyzing the act instead of the outcome, the Agency seeks an answer to the wrong question, and in doing so consistently undervalues the weight of Petitioner’s evidence.”

SBA OHA also determined that the SBA had improperly held Gearhart to a higher standard of proof than the “preponderance of the evidence” standard called for in the 8(a) program regulations.  SBA OHA noted that the denial letter stated that Gearhart had failed to “conclusively demonstrate” that certain incidents of alleged biased treatment occurred due to Mr. Gearhart’s status as a Native American.  However, “[e]vidence does not need to be conclusive to meet the preponderance standard, it must only be more probable than not.”

SBA OHA granted Gearhart’s appeal and remanded the case to the SBA for further consideration.  The SBA is to provide a new determination no later than April 8, 2013.

The Gearhart Construction Services case left me scratching my head a little.  After all, if everyone ultimately agreed that Mr. Gearhart was, in fact, a Native American, there should have been no need to consider whether Gearhart’s application met the preponderance of the evidence standard for proving social disadvantage.

My best guess is that SBA OHA saw another chance to send a message to the SBA regarding the SBA’s evaluation of social disadvantage for individuals who (unlike Mr. Gearhart) are not presumed to be socially disadvantaged.  In recent months, it has become abundantly clear that SBA OHA is none too pleased with how the SBA evaluates social disadvantage in these cases.  The question now is whether the SBA is listening.