SBA OHA: Tribal Companies Entitled to Broad Affiliation Exceptions

Indian tribes, their holding companies, and companies owned by those holding companies are entitled to broad exceptions from the ordinary SBA affiliation rules, according to a recent SBA Office of Hearings and Appeals size appeal decision.

SBA OHA’s decision in Size Appeal of Roundhouse PBN, LLC, SBA No. SIZ-5383 (2012), holds that the SBA cannot use non-applicable affiliation rules to circumvent the regulatory exception from affiliation between tribal companies.  In its ruling, SBA OHA also sidestepped an interesting tribal size question: did Congress truly intend for some tribal companies to be “small” for 8(a) program purposes, but “other than small” for all other government contracts?

As you can probably tell, the Roundhouse PBN case is not your run-of-the-mill SBA OHA size appeal decision, meaning a slightly longer-than-normal blog post is in order.  Let’s dive right in.

The Roundhouse PBN SBA OHA size appeal decision involved a National Guard small business set-aside solicitation for construction.  After revoking an award to another company, the National Guard notified offerors that Roundhouse PBN, LLC was the apparent successful offeror.

Roundhouse PBN is 100% owned by Tepa, LLC, a holding company.  Tepa, in turn, is owned by the Paskenta Band of Nomlaki Indians.  Tepa also owns seven other companies, including Tepa EC, LLC, Komada, LLC, and Torix General Contractors, LLC.

After receiving the National Guard’s notification, a competitor filed a SBA size protest challenging Roundhouse PBN’s small business size.  Although the SBA Area Office dismissed the competitor’s protest for technical reasons, it subsequently initiated its own size protest against Roundhouse PBN.

Perhaps not surprisingly, the SBA Area Office sustained its own size protest.  It held that Roundhouse PBN was not a small business because it was affiliated with its parent, Tepa, as well as three of its sister companies, Tepa EC, Komada, and Torix.

The SBA Area Office recognized that 13 C.F.R. § 121.103(b)(2) provides a limited exception from affiliation for Indian tribes and their subsidiaries, but noted that the exception applies only to affiliation based on common ownership by the tribe, common management by the tribe, and compensated administrative services (such as bookkeeping and payroll) between the entities.  According to the rule, affiliation can be found for “other reasons.”

The SBA Area Office found a number of “other reasons” to find Roundhouse PBN affiliated with Tepa and its sister companies.  First, based on language in Roundhouse PBN’s proposal implying that all of the Tepa subsidiaries would be at Roundhouse PBN’s disposal to perform the contract, as well as past performance references to the sister companies, the SBA Area Office determined that Roundhouse PBN, Tepa, and the three sister companies had violated the ostensible subcontractor affiliation rule.

Second, the SBA Area Office found Roundhouse PBN affiliated with Tepa EC under the identity of interest affiliation rule because both companies perform in the same line of work.  The SBA Area Office suggested that Roundhouse PBN was essentially an extension of its sister companies, bidding on contracts for which those sister companies were no longer eligible.  The SBA Area Office also noted that Tepa EC previously employed Roundhouse PBN’s general manager and past performance and that the companies operated in the same building.

Third, the SBA Area Office found Roundhouse PBN affiliated with Tepa EC based on the newly organized concern affiliation rule.  The SBA Area Office noted again that Roundhouse PBN’s general manager and four employees came from Tepa EC.  It also found that Tepa EC was furnishing Roundhouse PBN with past performance references and that the proposal referred to Tepa EC as Roundhouse PBN’s predecessor company.

Finally, the SBA Area Office found the companies affiliated under the “totality of the circumstances” because they were essentially conducting business as if they were interchangeable.

Roundhouse PBN filed a comprehensive appeal with SBA OHA, challenging each of the bases of affiliation.  Interestingly, in addition to contesting each aspect of the SBA’s size determination, Roundhouse PBN also attacked the underlying regulation, 13 C.F.R. § 121.103(b)(2) as inconsistent with the Small Business Act.  Roundhouse PBN pointed out that a provision of the Small Business Act, 15 U.S.C. § 636(j)(10)(J)(ii)(II), calls for the sizes of tribal companies like Roundhouse PBN to be determined without regard to affiliation–with no mention of a limitation based on common ownership, management and administrative services.

However, in adding this provision to the regulations, the SBA limited its application to the 8(a) program, and adopted a less comprehensive tribal affiliation exception, for affiliation based on common ownership, management, and administrative services, for all other government contracting purposes.  According to Roundhouse PBN, watering down the affiliation exception in this manner was contrary to Congress’s intent and nonsensical, as it would cause many tribal companies to have differing sizes–“small” for 8(a) purposes, where all types of affiliation are exempt, and “other than small” for all other purposes.  Thus, under the current regulations, a tribal company like Roundhouse could, for instance, be an eligible small business to join the 8(a) program or receive an 8(a) contract award, but would be an ineligible large business under the same NAICS code to join the HUBZone program or receive a small business set-aside contract.

SBA OHA granted Roundhouse PBN’s size appeal, agreeing with Roundhouse PBN that the SBA Area Office had erred with respect to each of the types of affiliation at issue.

With respect to the ostensible subcontractor rule, SBA OHA held that the SBA Area Office had erred because “there is no indication that Tepa or the sister companies are subcontractors to Appellant on this procurement.”  Indeed, SBA OHA noted that “Tepa itself is a holding company that does not directly perform federal contracts.”  SBA OHA also held that relying on Tepa’s employees and the corporate experience of the sister companies was not a basis for finding affiliation because such reliance is part and parcel of common ownership and management, which is protected from affiliation under 13 C.F.R. § 121.103(b)(2).

SBA OHA also rejected the SBA Area Office’s finding under the newly organized concern rule.  SBA OHA found that Tepa–not Tepa EC–employed all of the employees in question, shifting them between companies as needed.  Thus, the employees in question were never former Tepa EC employees, as required to find affiliation under the rule.  SBA OHA also held that none of the other newly organized concern factors applied.

SBA OHA found that the companies were not affiliated under the identity of interest rule.  SBA OHA wrote, “concerns owned by the same Indian tribe will always share economic interests based on their common management and ownership.”  However, under 13 C.F.R. § 121.103(b)(2), common ownership and management cannot be used to find affiliation between tribal companies.  In addition, SBA OHA held that the “mere fact that companies operate in similar lines of work, or in close proximity to one another, does not give rise to affiliation . . ..”

Finally, SBA OHA rejected the SBA Area Office’s finding of affiliation under the totality of the circumstances.  It held that the SBA Area Office “cited no other considerations, unrelated to common ownership and management” that demonstrated affiliation.

Because SBA OHA ruled in Roundhouse PBN’s favor with respect to each of the bases of affiliation in the SBA Area Office’s size determination, it did not reach the interesting question of whether the Small Business Act calls for an even broader exception from affiliation than that found in 13 C.F.R. § 121.103(b).

SBA OHA’s decision in Roundhouse PBN should be of great interest to tribal companies and their competitors.  In Roundhouse PBN, SBA OHA determined that the tribal exceptions from affiliation under 13 C.F.R. § 121.103(b)(2) are to be applied broadly.  The decision suggests that although “other factors” may still lead to affiliation between tribal companies, those other factors must be unrelated to common ownership and management–if such a thing is possible.

Because SBA OHA has so broadly applied 13 C.F.R. § 121.103(b)(2), perhaps it will never need to reach the question of whether the Small Business Act requires a broader exception from affiliation for tribal companies, both within and without the 8(a) program.  I, for one, do not see the sense in allowing a tribal company to be small for 8(a) purposes but holding it to another standard for all other government contracting purposes–particularly when the purpose of the 8(a) program is to develop companies to compete successfully for non-8(a) work.  But this question of whether a tribal company truly has “two sizes” will have to wait for another day, and another SBA OHA appeal–if it is ever considered at all.

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