SDVOSB Program: VA Must Pay Attorneys’ Fees in Ownership Transfer Case

The U.S. Court of Federal Claims has ordered the VA to pay attorneys’ fees to Miles Construction, LLC stemming from the Court’s February decision that the company’s  “right of first refusal” provision did not render it ineligible for the VA’s SDVOSB program.

In ordering the VA to pay attorneys’ fees, the Court held that the VA’s defense of its broad interpretation of “unconditional ownership” was not substantially justified–but also suggested that the Court might not reach the same result under the SBA’s SDVOSB rules.

The Court’s decision in Miles Construction, LLC v. United States, No. 12-597C (2013) involved Miles Construction’s request for reimbursement of its attorneys’ fees under the Equal Access to Justice Act.   Under EAJA, a qualifying small business may recover its attorneys’ fees for prevailing in litigation against the government, but only if  the government’s litigation position was not “substantially justified.”

Opposing the request for attorneys’ fees, the VA argued, in part, that it had been “substantially justified” in taking the position that the SDVOSB program’s “unconditional ownership” requirement prohibited right-of-first-refusal provisions.  The VA primarily relied upon SBA Office of Hearings and Appeals decisions holding that right-of-first-refusal provisions defeat “unconditional ownership” under the SBA’s SDVOSB regulations.

The Court disagreed.  It pointed out that the SBA’s SDVOSB ownership regulation “simply uses the term ‘unconditional ownership’ without explanation or qualification.”  In contrast, the VA’s SDVOSB ownership regulation “contains an extended explanation of ‘unconditional ownership'” that “substantially alters ‘unconditional’ to accommodate practical commercial arrangements while preventing ownership benefits from falling into the hands of non-veterans.”

The Court wrote that in evaluating Miles Construction’s operating agreement, the VA “made no effort to delineate the relative scope of VA’s regulation as contrasted to SBA’s rule.”  In short, the VA’s decision disqualifying Miles Construction “was premised upon decisions applying an inapplicable regulation and failed to take any account of the nuanced provisions of VA’s own rule.”  The Court held that the VA’s position had not been “substantially justified,” and ordered the VA to pay Miles $44,651.78 in attorneys’ fees and expenses.

At least with respect to the VA’s SDVOSB program, the Court’s decision is welcome news–and not just for Miles Construction.  By ordering the award of attorneys’ fees, the Court sent a clear signal that the original Miles Construction decision was not a close case.  Perhaps the Court’s position will encourage the VA CVE to broadly accept right-of-first refusal provisions and other “practical commercial arrangements” in SDVOSB operating agreements and bylaws.

By the same token, the Court’s discussion of the differences between the SBA’s and VA’s respective SDVOSB ownership regulations suggests that the Court may not believe that right-of-first-refusal provisions comply with the SBA’s requirements.  In other words, a company like Miles Construction could be an eligible SDVOSB under the VA’s rules, but still be at risk of ineligibility for non-VA SDVOSB contracts.

I’ve said it many times before, and I will say it again: it makes no sense for the federal government to have two SDVOSB programs with two different sets of rules.  But unless and until Congress steps in, right-of-first-refusal and similar provisions may pass muster with the VA–but may nevertheless run afoul of the SBA’s SDVOSB rules.

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