As few as two common outside investments can result in a presumption of identity of interest, and therefore likely affiliation, according to a recent decision by the Small Business Administration Office of Hearings and Appeals.
OHA’s decision in W. Harris, Government Services Contractor, Inc., SBA No. SIZ-5717 (Mar. 7, 2016), lends some clarity to the SBA’s identity of interest affiliation rule, which provides that businesses or firms are affiliated when they have identical or substantially identical business interests. Although it brings the rule more into focus, the decision in W. Harris could prove troublesome to some small business owners, who may have assumed that a handful of common outside investments would not result in affiliation.
W. Harris involved a procurement issued as a SDVOSB set-aside by the U.S. Department of Defense, Defense Commissary Agency (DeCA) for shelf-stocking services at Davis-Mothan Air Force Base in Arizona. W. Harris, Government Services Contractor, Inc., was awarded the contract. An unsuccessful bidder, LaMain Crescent Joint Venture, LLC, filed a size protest shortly thereafter alleging W. Harris was affiliated with several other companies and therefore was not an eligible small business.
The SBA Area Office determined that Wesley E. Harris owned 100% of W. Harris. Mr. Harris and Robert Raynor each owned half of a business called TKN West, LLC. They also together owned a company called Outpost Investments # 302, Inc. (Mr. Raynor owned 55% and Mr. Harris owned 45%). Mr. Harris and Mr. Raynor thus had two common investments and no other ties, i.e., they were not related or otherwise economically dependent on each other.
The SBA Area Office nonetheless found an identity of interest between Mr. Raynor and Mr. Harris because of their two common investments. As a result of the identity of interest, the SBA Area Office determined that W. Harris was affiliated with Outpost Investments #302, and ineligible for award of the DeCA contract.
W. Harris appealed the decision to OHA, giving OHA the opportunity to shed some light on what has been an unclear area of the law. The rule in question is 13 C.F.R. § 121.103(f), which states that affiliation may arise among “individuals or firms with common investments,” without explaining further when such affiliation arises.
The question asked by many was how many common investments did it take to establish an identity of interest? In recent cases, OHA had held that one common investment and three common investments did not result in shared identity of interest, but that eight common investments did. Based on this precedent, one might have assumed that two common investments would be insufficient to find an identity of interest between Mr. Harris and Mr. Raynor
But citing last year’s decision in Tenax Aerospace, LLC, SBA No. SIZ-5701 (Dec. 23, 2015), which explained that the common investments “must be substantial, either in number of individual investments, or in total value” OHA held that the Area Office reasonably determined that Mr. Harris and Mr. Raynor shared an identity of interest. OHA said that the common investments were substantial in number to Mr. Harris because they were two of the seven businesses he owned and had substantial value (he had argued they equaled less than 12% of his other companies’ values). OHA said that they were also substantial to Mr. Raynor because he controlled “just three other companies” besides the two shared with Mr. Harris. OHA upheld the SBA Area Office’s size determination.
The most important takeaway from W. Harris is, of course, that as few as two common investments may result in an identity of interest. Beyond that critical point, however, W. Harris does not provide business owners with much guidance when it comes to structuring their investments. Rather than an objective analysis (e.g., three common investments are “substantial” but two are not), OHA engaged in a subjective analysis in which the question was whether, from the individual perspectives of Mr. Harris and Mr. Raynor, the common investments would be considered substantial. For business owners trying to avoid affiliation, this subjective approach may make it difficult to understand which common investments are permissible–and which cross the line.