Watson & Associates Overturn SBA Size Determination

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In the following excerpts of the case, Watson & Associates demostrates that the SBA does make mistakes in affiliation and size protest decisions.

A full view of the case can be seen here.

Solicitation, Size Protest, and Response

On May 6, 2010, the Fleet Industrial Supply Center in Norfolk, Virginia, issued Solicitation No. N00189-10-R-0063 for Anti-Terrorism training. The Contracting Officer (CO) set the procurement aside for small business and designated North American Industry Classification System (NAICS) code 611699, All Other Miscellaneous Schools and Instruction, with a corresponding $7 million annual receipts size standard, as the appropriate code for this procurement. Argus and Black, Inc. (Appellant) submitted its initial offer on June 11, 2010. On September 9, 2010, a preaward notice was issued identifying Appellant as the apparent successful offeror. On September 14, 2010, protests were filed against Appellant by DMS International and TSO Armor and Training, Inc. (TSO), alleging that Appellant was affiliated with TigerSwan, Inc. (TSI) and TigerSwan International, Inc. (TSII).

On September 23, 2010, the Small Business Administration (SBA) Office of Government Contracting – Area III in Atlanta, Georgia (Area Office), informed Appellant of the protest, and instructed Appellant to submit a reply to the protest and a completed SBA Form 355, together with certain other information. On October 1, 2010, Appellant responded to the protest.

The Appeal

On December 3, 2010, Appellant filed the instant appeal. Appellant argues the Area Office erred in finding identity of interest based upon contractual relationships. Appellant asserts the policy behind finding firms affiliated based upon economic dependence is a concern that a small firm would be in jeopardy if it was dependent upon a single, larger firm for its income.

Appellant argues the common elements of OHA’s precedents on economic dependence are the length of the relationship between the firms, the substantial amount of revenues generated as a result of the relationship between the firms, and that there are usually multiple relationships between the firms. Appellant argues the contract here lasted for only four months, generated less than $11,000 in revenue, and that this contract is the only contract between the firms. Appellant argues that its relationship with TSI does not reach the level of economic dependence required for a finding of affiliation. Appellant further asserts that it has recently developed other sources of revenue.

Appellant further argues that a finding against it would have a “chilling effect” on start- up firms, who would be required to avoid contracting with large firms in the start-up phase of operations.

Appellant further asserts that the Area Office erred in finding Appellant had failed to establish a clear line of fracture. Appellant asserts the discrepancies in its addresses are a result of the changes in ownership. Mr. Link did not assume control of Appellant until June, 2010. Appellant asserts the Area Office erred in finding that Appellant’s website lists the 1421 East Broad Street address, that the website as well as Appellant’s License Agreement and SBA Form 355 all list the Regency Parkway, Cary, NC, address. The conflict in addresses is now resolved, and Mr. Link’s address is Appellant’s only address. Appellant argues that it has thus established a clear line of fracture with TSI.

The Merits

Under SBA’s size regulations, firms are affiliated when one firm controls, or has the power to control the other. It does not matter whether the control is exercised, so long as the power to control exists. 13 C.F.R. § 121.103(a)(1). SBA considers factors such as ownership, management, previous relationships with or ties to other firms, and contractual relationships, in determining whether affiliation exists. 13 C.F.R. § 121.103(a)(2). Affiliation may be based upon an identity of interest; firms that are economically dependent through contractual or other relationships may be found affiliated and treated as one party with the interest aggregated. 13 C.F.R. § 121.103(f). SBA determines a firm’s size as of the date it submits its initial offer, including price, in response to a solicitation. 13 C.F.R. § 121.404(a).

Further, it is simply not true that one small contract, regardless of what proportion it represents of Appellant’s revenues at the time, actually renders one firm dependent upon the other. In order to survive and prosper, Appellant must obtain a number of other contracts. If, over time, the great majority of these are with TSI or TSII, then a finding of economic dependence might be warranted. But here, where the contract by itself is not enough to sustain business operations, a finding of economic dependence based upon it is not warranted. I hold that in a case such as this, where the challenged firm has only recently begun operations either initially or after a period of dormancy, and is dependent upon its alleged affiliate for only one small contract of short duration, which by itself could sustain a business, that a finding of economic dependence is not warranted. Accordingly, I find that the Area Office erred as a matter of law in finding Appellant economically dependent upon, and thus affiliated with, TSI, based upon its contract with TSI.

The Area Office did not formally find Appellant affiliated with TSI based upon the other factors it discussed, or upon the totality of the circumstances, and with good reason. There is no common management with TSI. The various addresses that the Area Office found for Appellant are explained by the various changes in ownership the firm has undergone in the past two years. While the Searcys are listed as POCs for Appellant, it is for past performance, not for current operations. Mr. Link is Appellant’s majority shareholder, having clear ownership of 51% of the stock. Further, the Area Office explicitly found that Mr. Link has the necessary skills and experience to run the company, when it concluded that Appellant was not in violation of the ostensible subcontractor rule. The clear fracture with TSI is the sale of the majority interest in the company to Mr. Link. Since then, the only connection with TSI is the Searcys as past performance POCs. Appellant simply does not have enough connection with TSI to find the firms affiliated.

Accordingly, I find that Appellant has met its burden of establishing clear error by the Area Office in the Size Determination. Appellant is an eligible small business with other affiliates as of June 11, 2010, the date size is determined for this procurement.

IV. Conclusion Appellant has met its burden of proving that the Area Office committed clear errors of law based upon the record before it. Accordingly, this appeal is GRANTED, and the Size Determination is REVERSED. Appellant is an eligible small business for the applicable NAICS code 611699.

This is the final decision of the Small Business Administration. 13 C.F.R. § 134.316(b

Other cases that indicate the importance of an attorney in an affiliation determination include:

Size Appeal of Accent Service Co., SBA No. SIZ-5237 (May 26, 2011) (Master Subcontracting Agreement did not establish joint venture and did not establish that one firm was ostensible subcontractor of the other; the fact that contested firm often awarded subcontracts to another firm did not establish economic dependence, if anything it made the other firm dependent on contested firm) – litigated by Watson & Associates.

Size Appeal of C2 Freight Resources, Inc., SBA No. SIZ-5223 (2011) (vacates Area Office’s determination because amounts a firm collects for freight carriers as a property broker should be excluded from the calculation of its annual receipts)

Size Appeal of TLC Catering, SBA No. SIZ-5172 (2010) (reverses Area Office’s finding of violation of ostensible subcontractor rule; subcontractor made sandwiches; prime provided all other box-lunch ingredients, assembled, delivered, and served them)

Size Appeal of LOGMET, LLC, SBA No. SIZ-5155 (2010) (reverses Area Office’s size determination that firms were affiliated based on identity of interest and ostensible subcontractor rule; subcontracts did not rise to level of economic dependence; prime contractor had capacity to perform entire contract and chose to assign portion of work to subcontractor).

For immeidate help in a size appeal, contact Watson & Associates at 1-866-602-5518.