Verified SDVOSB Found Ineligible For Navy SDVOSB Set-Aside

Despite its VA VetBiz verification, a small business was recently found ineligible for a Navy SDVOSB set-aside, in a decision issued by the SBA’s Office of Hearings and Appeals.

The SBA’s decision stands as a warning that SDVOSB verification does not guarantee SDVOSB eligibility–especially when an eligibility protest arises under a non-VA procurement.

SBA OHA’s decision in Reese Services, Inc., SBA No. VET-231 (2013) involved a Navy SDVOSB set-aside for the removal and replacement of asbestos duct work.  After evaluating competitive proposals, the Navy announced that Reese Services, Inc. was the apparent successful offeror.

An unsuccessful competitor filed an eligibility protest, challenging Reese’s status as a SDVOSB.  The protester alleged that Reese was not controlled by a service-disabled veteran.  Because the protest arose under a non-VA procurement, the protest was referred to the SBA’s Office of Government Contracting, not the VA OSDBU.

The SBA determined that Reese was 51% owned by Christopher Reese, a service-disabled veteran.  Mr. Reese also served as the company’s president, its highest officer.  The remaining 49% was owned by Mr. Goel, who is not a service-disabled veteran.  Mr. Goel served as the company’s vice president, treasurer and secretary.  Reese’s board of directors consisted of two members: Mr. Reese and Mr. Goel.

Examining Reese’s bylaws, the SBA noted that the bylaws specified that a “majority” of the company’s directors were required to constitute a quorum.  “Accordingly, as one of [Reese’s] two directors, Mr. Goel could block a quorum,” the SBA stated.   Although the SBA’s SDVOSB regulations say nothing about quorums, the SBA cited an 8(a) Program regulation, which provides that a non-disadvantaged individual may be found to control a company where the non-disadvantaged individual has the power to “block a quorum.”  The Area Office determined that Mr. Reese did not unconditionally control Reese and found the company ineligible for the Navy contract.

Reese appealed to SBA OHA.  Reese complained, in part, that the SBA had erred by applying the 8(a) Program regulation to a SDVOSB eligibility case.  Reese also alleged that the SBA’s determination was erroneous because it contradicted with the VA’s determination that Reese was an eligible SDVOSB, as evidenced by Reese’s VetBiz verification.

SBA OHA rejected both arguments.  Citing prior cases, SBA OHA wrote that “SBA may apply the regulations and case law from the 8(a) program to analyze the issue of control in SDVO SBC programs.”  Accordingly, it was proper for the SBA to consider the 8(a) quorum regulation in analyzing Reese’s bylaws.

Turning to Reese’s VetBiz verification, SBA OHA wrote, “under current law, VA determinations of SDVO SBC eligibility are binding only with respect to VA procurements.  For non VA procurements, SBA conducts its own review of SDVO SBC eligibility under 13 C.F.R. part 125.”   SBA OHA concluded, “the fact that [Reese] was found eligible under VA’s review does not establish that [Reese] also meets the requirements set forth in 13 C.F.R. part 125, or preclude the [SBA] from reaching a different conclusion.”  SBA OHA denied Reese’s appeal.

The Reese Services case is a good example of the regulatory mess that the Government’s SDVOSB programs have become.  As the case demonstrates, a small business like Reese may spend months trying to obtain its VetBiz verification, only to find that most procuring agencies do not recognize the verification.  To make matters worse, SDVOSBs self-certifying on non-VA procurements cannot rely solely on the SBA’s SDVOSB regulations to determine their eligibility; they must also familiarize themselves with the far more complex requirements under the 8(a) Program, just in case the SBA decides to apply a particular 8(a) Program regulation in their case.

Perhaps one day Congress will clean up the SDVOSB regulatory mess.  Until then, if you are a SDVOSB, Reese Services is just one more reason to be very, very careful out there.

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