The case of Superior Optical Labs, Inc. (Superior) v. United States focuses on the control of a Service-Disabled Veteran Owned Small Business (SDVOSB) and how that control, or more precisely, lack of control, can disqualify an SDVOSB with 69% service-disabled veteran ownership from a solicitation set aside for SDVOSBs. This particular Solicitation was set aside entirely for an SDVOSB to provide prescription eyeglasses and related services through the Veterans Integrated Services Network (VISN). Superior was awarded the contract, which was then protested by PDS Consultants, Inc. (PDS) challenged the SDVOSB eligibility of Superior. In the end, OHA held that Superior did not qualify as a SDVOSB for purposes of the procurement due to a lack of control as required by SBA rules. PDS then challenged OHA’s decision at the Court of Federal Claims.
Because this is a case at the Court of Federal Claims, there is a substantial amount of background for those who need it. If you are already well-versed in SDVOSB requirements, the next two paragraphs will be easy reading for you.
Background
Under SDVOSB rules, 13 C.F.R. § 125.12 requires any small business claiming to be owned by a service-disabled veteran to meet specific criteria in order to be eligible for an award of an SDVOSB set aside contract. The SDVOSB must be “at least 51% unconditionally and directly owned by one or more service-disabled veterans.” The management and daily business operations of an SDVOSB must be controlled by one or more service-disabled veterans. 13 C.F.R. § 125.13(a).
It’s not enough that a business be primarily owned by a service-disabled veteran, the service-disabled veteran must also control the business to qualify, and the Department of Veterans Affairs (VA) Center for Verification and Evaluation (CVE) looks beyond the primary relationships to determine that control. The management and daily business operations, including both long-term decisions and day-to-day management, must be controlled and conducted by one or more service-disabled veterans. 13 C.F.R. § 125.13(a). The service-disabled veteran will not be found to have control of the concern if the concern has a business relationship “with non-service-disabled veteran individuals or entities which cause such dependence that the applicant or concern cannot exercise independent business judgment without great economic risk,” 13 C.F.R. § 125.13(i)(7). Notably, this same general requirement applies to all of the various socio-economic statuses recognized by the SBA.
Superior was 69% owned by a service-disabled veteran when it submitted its proposal for the solicitation. Superior’s President and CEO owned 51% of the company and two additional service-disabled veterans each owned a 9% interest in Superior. At all times relevant, Superior’s President owned and controlled more than 50% of the company. Superior was certified by the Department of Veterans Affairs (VA) Center for Verification and Evaluation (CVE) in April 2018. The VA issued this Solicitation in August 2020, Superior submitted its offer in September 2020, and the VA awarded it to Superior in October 2020. This all seems to be in line with the requirements, correct? Not so fast!
PDS Consultants, Inc. (PDS) came along and filed a protest on the basis that Superior was controlled by, and shared resources with, Essilor of America, Inc. (Essilor). Additionally, PDS claimed Superior received “critical financial support from Essilor” and that Superior was required to use Essilor products. PDS alleged that this control came from a Services and Supply Agreement (the Agreement) between Superior and Essilor that was executed on November 1, 2017, when Superior’s current President and CEO obtained a controlling interest in the company.
Under the Agreement, Superior was required to purchase from Essilor, in the course of contract performance, the majority of the volume of lenses, frames, contact lenses, and consumables if such products were offered by Essilor. Superior was required to submit monthly reports to Essilor to verify compliance. If a contract with VISN or another VA contract restricted purchasing from Essilor, Superior was required to purchase the maximum volume from Essilor without jeopardizing Superior’s SDVOSB status. Superior was required to use Essilor’s pricing, and Superior was required to notify Essilor in writing and receive Essilor’s approval prior to bidding if Superior planned to bid on a fixed-price government contract.
The agreement further obligated Superior to obtain Essilor’s written approval to assign any part of the agreement or to make any change in control of the Superior. The agreement stated, with respect to change in control, that Essilor had to give written approval for a “(i) ‘change in possession, directly
or indirectly, of the power to direct or cause the directing of the management or policies of
Superior,’ (ii) any sale or transfer of 50 percent or more of Superior’s assets, (iii) any sale or transfer of 50 percent or more of Superior’s stock, (iv) any merger resulting in a change of ownership of 50 percent or more, and (v) any change of Superior’s SDVOSB status.”
One could imagine a subcontractor potentially putting a similar type of provision in a subcontract. But OHA found, and the court agreed, that this “went beyond the five “extraordinary circumstances’ in
which the SBA will not find that a lack of control exists even though a service-disabled veteran
does not have unilateral power and authority to make decisions.”
The agreement was effective from November 1, 2017, to October 31, 2027, unless shorted in accordance with the terms of the agreement. Superior and Essilor executed a Termination Agreement on October 20, 2020, with a retroactive effective date of January 29, 2018, the date upon which Superior and Essilor had made a verbal agreement to terminate the agreement (Oral Agreement).
Superior’s response to the protest included the argument that Superior’s President and CEO (its President) had, at all times relevant, been both the majority shareholder and controlling director of Superior. Superior also claimed Essilor did not have a controlling interest in Superior since 2017 and that the business relationship between Superior and Essilor did not give Essilor any control of Superior. Further, Superior argued the agreement was not in effect because it had been terminated by the oral agreement in January 2018. Finally, Superior claimed “that the agreement was drafted so as not to jeopardize Superior’s status as a SDVOSB and had never been enforced.”
Unfortunately for Superior, OHA found that Superior was not controlled by its President on the September 2020 date it submitted its offer for the solicitation, nor on the October date PDS filed its protest, the two relevant dates identified by OHA. Due to the terms of the agreement which required a written agreement for termination, the Termination Agreement was not found to take effect until the October 20, 2020, date. As such, the agreement was still in effect and the need for Superior to receive Essilor’s written approval prior to changes in control was found to “plainly interfere with [Superior’s President]’s ability to make all business decisions and exercise complete control over Superior” as required per SBA rules. The minimum purchase terms and conditions requiring Essilor’s approval prior to bidding further interfered.
Following the finding by OHA, VA cancelled the VISN 8 contract with Superior in accordance with 13 C.F.R. § 134.1007(j)(2). The United States Court of Federal Claims, upon review of the case, determined OHA’s finding that Superior was not eligible for award at the time of the procurement was correct, and that VA acted rationally when it cancelled the VISN 8 contract. The court has a deferential ability to review, and will only disturb an SBA ruling when it didn’t consider key facts, ignored evidence or is just plain implausible.
There are two important takeaways from this example. First, know all the terms of any contracts you enter into. It is likely Superior would have never been in this situation had it executed a written termination agreement, as required in its contract terms. And second, be wary of other entities where there is any possibility of finding the other party has control, and do not make bids at a time when control may be deemed in the hands of any entity that is not of a similar socio-economic status. These kind of “change in control” provisions are quite common in commercial agreements. So, for SDVOSB or other companies under SBA’s WOSB or 8(a) programs, it’s important to review any agreement for potential impact on control over the company.
Questions about this post? Or need help with a government contracting legal issue? Email us or give us a call at 785-200-8919.
Looking for the latest government contracting legal news? Sign up here for our free monthly newsletter, and follow us on LinkedIn, Twitter and Facebook.