COFC Examines Small Business Size Recertification After Merger or Sale

A recent Court of Federal Claims decision examined the impact on the award to a small business when that small business is acquired, after proposal submission but before award, by a large business. In doing so, the court looked very closely at the FAR clauses incorporated into the solicitation by reference, versus those that are incorporated in full text.

The decision in HWI Gear, Inc. v. United States, No. 20-930, 2020 WL 7706975 (2020) reviewed a Defense Logistics Agency (DLA) award for the production of capacitive gloves to Mechanix Wear, LLC (Mechanix). Mechanix is a client of ours and provided approval to post this blog. The solicitation was issued as a 100 percent small business set-aside.

The contract included the language of FAR 52.219-28, Post-Award Small Business Program Rerepresentation, which stated in relevant part that a contractor who represents itself as small prior to contract award “shall rerepresent its size status . . . [w]ithin 30 days after a merger or acquisition that does not require a novation.” FAR 52.219-28(b).

Mechanix became affiliated with another business in July 2019 and sent a letter to the contracting officer stating in part that “Mechanix . . . has just changed its corporate structure from a standard Corporation to a Limited Liability Corporation.” In April 2020, DLA awarded the contract to Mechanix.

HWI filed a size protest of the award to Mechanix. Mechanix was found small, but that that determination was appealed to OHA and then sent back down to SBA for an additional determination.

The court determined that “the agency failed to comply with the solicitation requirement concerning recertification of a bidder’s status as a small business” because the agency “should have inquired as to whether Mechanix continued to qualify as a small business.” And, the agency’s “failure resulted in the agency violating its solicitation requirements.”

HWI argued that because “the solicitation specifically requested rerepresentation within thirty days of merger,” “the size status on the date of that recertification is determinative.” HWI Gear went on to argue that because “DLA took the initiative to insert th[e] clause,” the solicitation included a requirement for an offeror to “rerepresent [its] status.”

Mechanix raised the point that HWI had already made its size-related arguments in its size protest, so it should not be raising the same size issues in a bid protest, for which the court lacks jurisdiction. In addition, the title of the FAR clause applies to “Post-Award” representations, and the representation in question occurred before the award was made.

The court listened to this argument, noting that “the regulations themselves do not contain an independent requirement for an offeror to recertify, nor would FAR 52.219-28 require recertification by reference alone.” However, the court went on to make a big point of distinguishing between merely incorporating a clause by reference, versus incorporating the clause in full language. Because the agency chose to spell out FAR 52.219-28 in full, “the agency must enforce the requirement.” The court also noted that the requirement to represent its status as a small business applied in submitting an offer.

The court found that the contract’s use of FAR 52.219-28 represented a call for recertification of size status by offerors. But the FAR clause does not dictate what an agency must do in response to such a recertification. That question, though, of the proper agency response was not really addressed in the court’s decision, although the court noted that the agency “should have inquired into the reason for Mechanix’s corporate change. The government has provided no explanation as to why it failed to conduct this inquiry despite the solicitation requirement and why it made an award to a large business despite the small-business restriction.”

The court also didn’t address the fact that the agency waited to award the contract until after the initial SBA decision had been made that determined Mechanix was small. Therefore, the agency had knowledge of the acquisition of Mechanix prior to award. The timing brings into question of the purpose of the court’s decision.  Was the purpose to suggest that an agency has an obligation to investigate size-related issues it otherwise had express knowledge of prior to the award?

Ultimately, the case represents a cautionary tale about requirements to update agencies about a company’s size. However, note that SBA has recently clarified the requirement for updating a size certification after an initial offer but before award. SBA’s recent mentor-protégé consolidation regulation included a new requirement relating to size changes due to merger, sale or acquisition.

The rule (as discussed here) now provides as follows:

If the merger, sale or acquisition occurs after offer but prior to award, the offeror must recertify its size to the contracting officer prior to award. If the merger, sale or acquisition (including agreements in principal) occurs within 180 days of the date of an offer and the offeror is unable to recertify as small, it will not be eligible as a small business to receive the award of the contract. If the merger, sale or acquisition (including agreements in principal) occurs more than 180 days after the date of an offer, award can be made, but it will not count as an award to small business.

Note that, under this new rule, Mechanix would have been eligible for award because the decision established the date of affiliation for Mechanix and the entity that acquired it as July 15, 2019. This is almost a full year after Mechanix submitted its original proposal, well beyond the 180-day deadline found in the rule.

Now, SBA’s rules are clearer about what happens when there is a merger, sale or acquisition that affects small business status. Small businesses should be mindful of these rules if they are considering a restructuring of their business that will affect the company’s size. Federal contractors must also be wary of representations that they make as part of proposal to determine if there is an ongoing obligation to update an agency regarding the representation.

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