The non-manufacturer rule applies only when a set-aside solicitation is designated with a manufacturing NAICS code, right? Not anymore.
A recent Court of Federal Claims case effectively invalidated SBA’s regulations that limit the application of the non-manufacturer rule to procurements for supplies. Instead, the Court held, the Small Business Act requires that the non-manufacturer rule apply any time that the Government buys manufactured products–regardless of the NAICS code assigned to the procurement.
The Court’s decision in Rotech Healthcare Inc., v. The United States, No. 14-502C (2014) involved a VA procurement for home oxygen supplies and related services to be provided to veterans and their beneficiaries. The solicitation stated that “the contractor must ‘furnish, install and service oxygen equipment to dispense oxygen and supplies.'” The equipment to be procured by the contractor included a wide variety of items, including stationary and portable oxygen systems, valves, medically compressed air, cylinders and containers, compressors, portable suction machines, ventilators, and consumable supplies such as humidifiers, distilled water, oxygen tubing, face masks, circuits, and related safety devices.
The VA issued the solicitation as a small business set-aside. The VA designated the solicitation with NAICS code (Home Health Equipment). NAICS code 532291 is not a manufactured goods NAICS code.
Rotech Healthcare, Inc. filed a pre-award bid protest with the Court. Rotech contended that, notwithstanding the lack of a manufacturing NAICS code, offerors under the solicitation were required to comply with the non-manufacturer rule. Rotech argued that the solicitation was flawed because it did not provide any mechanism for the VA to determine whether offerors were in compliance with the non-manufacturer rule.
The non-manufacturer rule is established in the Small Business Act. The the statutory non-manufacturer rule states that a small business may submit a bid on a solicitation for the procurement of manufactured products or other supplies it did not manufacture as long as, among other things, the business “represent[s] that it will supply the product of a domestic small business manufacturer or processor, unless a waiver of such requirement is granted.” The statute does not limit the application of the rule to procurements designated with certain NAICS codes.
The SBA has primary authority for interpreting the non-manufacturer rule and adopting regulations to implement the statutory requirements. In 2006, the SBA adopted a a regulation specifying that the non-manufacturer rule “applies only to procurements that have been assigned a manufacturing or supply NAICS code.” According to the regulation, the NMR “does not apply to contracts that have been assigned a service, construction, or specialty trade NAICS code.” Further, the rule “applies only to the supply component of a requirement classified as a manufacturing or supply contract.” Therefore, “[i]f a requirement is classified as a service contract, but also has a supply component, the [NMR] does not apply to the supply component of the contract.”
In this case, Rotech argued that the SBA’s regulation was invalid because it was contrary to the Small Business Act, as well as a prior Court decision. The Court agreed with Rotech, holding that it is a “plain and unambiguous statutory requirement that the NMR be applied to all contracts involving the provision of supplies, regardless of the NAICS code.” Because the SBA’s regulation contradicts the plain language of the statute, the Court refused to defer to the SBA’s interpretation. The Court ruled in Rotech’s favor.
For contractors who bid on procurements involving a mix of products and services, the Rotech Healthcare case is very important to understand. Under the SBA’s regulation, if a procurement is not designated with a manufacturing NAICS code, a small business need not worry about supplying the end products of a domestic small business or satisfying the other components of the non-manufacturer rule. But the Court’s decision effectively invalidates the SBA’s regulation, requiring small contractors to comply with the non-manufacturer rule for all set-asides–regardless of the NAICS code. Small businesses stand forewarned.