The Court of Federal Claims recently reviewed the Small Business Runway Extension Act, particularly SBA’s contention that it was not bound by the 5-year lookback period that Congress enacted for size receipt calculations. Now, SBA has issued its own rule that it will use the 5-year lookback period, at least after a two-year transition period, as discussed in our earlier posts. But there were still some cases working their way through the courts that examined how Congress implemented the Runway Extension Act and whether it applied to SBA or not. To make a long story short, the court agreed with SBA.
In Obsidian Solutions Group, LLC, No. 20-1602C (2021), the court considered a challenge that the SBA should have used a five-year lookback period for determining the size of Obsidian. The solicitation, by the Department of Energy, was for a $20.5 million size standard. SBA used a three-year lookback period and determined Obsidian was other than small. Obsidian argued that it would have been small under a five-year look back period as required under the Runway Extension Act.
SBA argued that Congress’s change to the lookback period in the Runway Extension Act only applied to federal agencies other than the SBA. As we’ve discussed before, the Runway Extension Act and the five-year lookback period could force companies with declining revenues to continue self-certifying as large considerably longer.
SBA later implemented a rule applying the five-year period, but Obsidian’s date for determining size came out before the SBA rule went into effect. SBA argued that the Runway Extension Act only changed portions of the Small Business Act that applied to agencies other than SBA. The portion of the law that Congress changed–15 U.S.C. § 632(a)(2)(C)— affects only “size standards proposed by other agencies.” In contrast, two other portions of the statute apply when the SBA is setting its own standards: 15 U.S.C. § 632(a)(2) subparagraphs (A) and (B).
The court agreed with the SBA:
The specific authority identified in subparagraph (A) and the criteria prescribed in subparagraph (B) of section 3(a)(2) of the Small Business Act provide the SBA with the authority to set size standards and guidelines for determining a business concern’s size. 15 U.S.C. § 632(a)(2)(A)-(B). Subparagraph (C), in contrast, refers to agencies that are not otherwise “specifically authorized by statute” to promulgate size standards—an authority that the SBA is specifically accorded in subparagraph (A).
Subparagraph (C) imposes additional requirements on federal agencies other than the SBA, including the requirement that they seek and obtain “approv[al] by the Administrator” of their own proposed size standards. These additional requirements suggest that Congress imposed on the SBA authority to oversee agencies not otherwise statutorily vested with the authority to set size standards and provided a means of ensuring those size standards were in keeping with the goals of the SBA Administrator.
While SBA has now adopted the five-year lookback period in the Runway Extension Act, this case confirms that SBA has greater powers than other agencies to set size standards. While it seems like Congress meant that all agencies, including SBA, use a five-year lookback period, Congress did not carefully draft its rule to apply to SBA. Nevertheless, even Congress must be careful when drafting these sorts of rules. Congress did fix this issue when it drafted the 2020 NDAA. In that document, among other things, Congress updated the small business statute to state that SBA is bound by the five-year rule, starting January 1, 2022.
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