If you are service-disabled owner of a small business (“SDVOSB”), you may have unique contracting opportunities with the federal government. According to Executive Order 13360, at least 3% of all federal agencies’ contracting dollars must go toward businesses that are owned by service-disabled veterans.
In early June, the U.S. Court of Appeals for the Federal Circuit issued a notable opinion for those involved in government procurement. The case, Kingdomware Techs, Inc. v. United States, was on appeal from the U.S. Court of Federal Claims. Kingdomware, a small certified service-disabled veteran-owned small business, brought suit against the U.S. when the U.S. Department of Veterans Affairs (VA) procured services it needed to install an Emergency Notification Service in several of its hospitals from a vendor on the FSS, although the specific vendor was not a Veteran Owned Small Business (VOSB). The FSS (Federal Supply Schedule) is a list of vendors approved to do business for any governmental agency, and VOSBs may appear on the list. The U.S. Court of Federal Claims found against Kingdomware and the Court of Appeals agreed. The issue came down to statutory construction. Particularly important to the decision was 38 U.S.C. § 8127(c), which states:
“(d) USE OF RESTRICTED COMPETITION. – Except as provided in subsections (b) and (c), for purposes of meeting the goals under subsection (a), and in accordance with this section, a contracting officer of the [VA] shall award contracts on the basis of competition restricted to small business concerns owned and controlled by veterans if the contracting officer has a reasonable expectation that two or more small business concerns owned and controlled by veterans will submit offers and that the award can be made at a fair and reasonable price that offers best value to the United States.” [emphasis added]
Importance of a Single Word
Topics: SDVOSB Certification
What information must a joint venture agreement contain when an SDVOSB is involved?
This protest was initiated by ECS, the next lowest bidder, who alleged that KRR partners did not satisfy the criteria for being a Service-Disabled Veteran-Owned Small Business Concern (SDVO SBC). KRR responded to the protest, demonstrating a copy of its joint venture agreement. D/GC issued a determination sustaining ECS’s protest finding that ASD, which held a majority interest in KRR, was owned and controlled by a service disabled veteran and therefore qualified as an SDVO SBC. However, the D/GC took exception to the agreement, determining that it did not satisfy the requirements that a joint venture agreement “specify the responsibilities of the parties with regard to contract performance.” The agreement stated only that KRR would perform at least 15% of the contract, but did not specify the responsibilities of the individual parties with regard to how the contract would be performed.
The D/GC noted that the rule is important to prevent non-SDVO SBCs from taking advantage of the “special opportunity that SDVO SBC joint ventures allow.” On appeal, KRR contended that the D/GC’s conclusion was arbitrary and unreasonable because their agreement “contained wording nearly identical to that used in the SBA’s own sample joint venture agreements.” KRR argued further that they relied upon the sample agreements found on the SBA’s website, because they had never formed a joint venture in the past. KRR further argued that their agreement sufficiently specified the responsibilities of ASD and JE M, the members of the joint venture, but that the D/GC focused only on section 15.0 of the agreement. KRR dance that section 2.0 stated that an individual would oversee and manage the project in that section 6.0 related that JEM would furnish equipment and facilities. Another section of the document stated that ASD’s employees were afforded a right of first refusal in hiring.
Topics: Service Disabled Veteran Owned Small Business (SDV, SBA Bid Protest, Bid Protests, Government Procurement, SBA bid protest timing, bid protest attorneys, contract cancellation, government contracting, Joint Venture Agreement, government contracts attorney, government procurement law, when can I file my SBA bid protest, government accountability office, bid protest lawyer, SBA attorney, Bid Protest attorney
Does the veteran owner have control of the SDVOSB?
In the Matter of: Battalion, LLC, Appellant
This case arose from a Dept. of the Air Force SDVOSB set aside. The SBA's OHA decided this case pursuant to the Small Business Act of 1958. The bid protest arose when an unsuccessful offeror, Douglas P Fleming, LLC, filed a protest challenging appellant's size and status as an SDVOSB. Fleming alleged in part that the appellant's majority owner, Mr. Jason Harris, was a full-time employee of Sota Construction Services, Inc., a firm controlled by appellant's minority owner, Mr. Earnest Sota.
The appellants submitted an operating agreement, which named the veteran owner as the managing member and designated Class A members, a majority of which would constitute a quorum. Unfortunately, the operating agreement also related that the members could conduct business in the absence of the managing member. The document stated that the managing member would be elected at appellant's annual meetings, but the SBA found no evidence that the veteran under was ever so elected. While the operating agreement gave certain powers to the managing member, it required delegation of those powers from the remaining members through a formal act, which according to the SBA's findings, never happened.
In finding that the appellant did not qualify as a service disabled veteran owned small business concern (SDVO SBC), the SBA OHA determined that the non-veteran minority owner, Sota Construction Services, exercised control over the appellant in that the veteran owner was contracted as a consultant to the minority owner and derived most of his personal income from that entity. OHA also found that Sota Construction controlled the appellant by providing critical financial support by way of cheap rent and bonding assistance.
Topics: SDVOSB Certification, Service Disabled Veteran Owned Small Business (SDV, Bid Protests, Government Procurement, veteran owned business, bid protest attorneys, SDVOSB challenge, center for verification and eligibility, SDVOSB Status protest, SDVOSB attorney, service disabled veteran owned business, CVE denial, veteran control, SDVOSB bid-protest, service disabled veteran owned small business, veteran owner control, CVE certification, SDVOSB denial, bid protest lawyer, SDVOSB
SDVOSB Status Protest Case Study: Matter of MJL enterprises
Many of my clients express worry about an SBA SDVOSB status protest in the event they are awarded a contract before their CVE certification is complete. This recent ruling from the SBA OHA sheds some light on that issue.
Topics: SDVOSB Certification, Service Disabled Veteran Owned Small Business (SDV, Bid Protests, Government Procurement, veteran owned business, SBA protests, SDVOSB challenge, center for verification and eligibility, SDVOSB attorney, service disabled veteran owned business, government contracting, SDVOSB status denial, CVE denial, veteran control, government contracts attorney, CVE status denial, veteran owner control, CVE certification, bid protest lawyer, SDVOSB, Bid Protest attorney, SDVOSB status
The US Court of Federal Claims Rules that SDVOSB Status Can Survive Veteran Owner's Death
On November 26, 2013, the US Court of Federal Claims heard an appeal from a the son of a veteran business owner after a contracting officer working for the defendant, the United States Environmental Protection Agency, issued a "determination of non-responsibility," proposed a debarment, and finally canceled the solicitation. neie_inc._v._united_states
The case begins with a solicitation that was issued on April 15, 2009, as an SDVOSB set-aside. NEIE submitted a proposal in May 2009 and at that time, the company was wholly owned by a service-disabled Veteran. The contract was eventually awarded to another company, which was subsequently found by the SBA to be "other than small." In June 2011, more than two years after NEIE had submitted its proposal for the SDVOSB set-aside contract, its Veteran owner, James Coleson died and ownership transferred to his son. Finally, on January 18, 2012, the EPA awarded the 118 million dollar contract to NEIE. This, of course, gave rise to a protest from the disappointed bidder, Guardian, which protested amongst other things SDVOSB status, because its veteran owner had died in the nearly three year wait for the contract to be awarded.
Topics: SDVOSB Certification, Service Disabled Veteran Owned Small Business (SDV, Bid Protests, Appellate Law, Debarment, Government Procurement, finding of non-responsibility, veteran owned business, bid protest attorneys, SBA protests, SDVOSB lawyer, SDVOSB challenge, center for verification and eligibility, contract cancellation, SDVOSB attorney, service disabled veteran owned business, CVE denial, veteran control, SDVOSB bid-protest, service disabled veteran owned small business, CVE status denial, veteran owner dies, veteran owner control, CVE certification, bid protest lawyer, SDVOSB, Bid Protest attorney, SDVOSB status
Was Your SDVOSB Status Denial Due to Quorum Language in Your Bylaws?
According to the Center for Verification and Eligibility (CVE) website, the number one reason for SDVOSB status denial is quorum language in a company's bylaws that gives passive control to non-veteran board members. This is a function, in this author's opinion, of a misreading of the law. SDVOSB status denial letters will often cite 38 CFR 74.4(f)(2) for the proposition that quorum language in a company's bylaws cannot allow for passive control by not Veteran board members. However, the CVE's reasoning is legally flawed, because 38 CFR § 74.4(f)(1)(ii) states:
CVE will deem veterans or service-disabled veterans to control the board of directors where:
A single veteran owns at least 51 percent of all voting stock of an applicant or participant, the individual is on the board of directors and no super majority voting requirements exist for shareholders to approve corporation actions. Where supermajority voting requirements are provided for in the concern's articles of incorporation, its by-laws, or by State law, the veteran must own at least the percent of the voting stock needed to overcome any such supermajority voting requirements;
The section of the regulation often cited for VOSB or SDVOSB status denial comes from (f)(2) of the same paragraph, which states:
Where an applicant or participant does not meet the requirements set forth in paragraph (f)(1) of this section, the veteran(s) upon whom eligibility is based must control the board of directors through actual numbers of voting directors or, where permitted by state law, through weighted voting (e.g., in a concern having a two-person board of directors where one individual on the board is a veteran and one is not, the veteran vote must be weighted—worth more than one vote—in order for the concern to be eligible for VetBiz VIP Verification). Where a concern seeks to comply with this paragraph:
In KWV, Inc. v. United States, a disappointed bidder filed a pre-award bid protest of the CVE's denial of their SDVOSB status. In that case, the US Court of Federal Claims found the CVE’s reliance on the Veteran applicant’s residency alone was “arbitrary and capricious” and not in accordance with VA’s regulations. KWV, Inc. v. United States, 111 Fed. Cl. 119, 127 (Fed. Cl. 2013). In deciding in the Veteran’s favor, the Court indicated that “there [was] nothing in the administrative record to suggest that [the Veteran] was not exercising sufficient control over [the company]” and “the government has not provided a coherent and reasonable explanation of its exercise of discretion…nor articulated a rational connection between the facts found and the choice made” Id., see also Impresa Construzioni Geom. Domenico Garufi, 238 F.3d at 1333 (quoting Latecoere Int'l, Inc. v. United States Dep't of the Navy, 19 F.3d 1342, 1356 (11th Cir. 1994)); Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983) (quoting Burlington Truck Lines v. United States, 371 U.S. 156, 168, 83 S.Ct. 239, 9 L.Ed.2d 207 (1962))(internal quotations removed).
Court finds CVE SDVOSB denial for implausibility insufficient
The U.S. Court of Federal Claims remanded an OSDBU determination in CS-360 v. U.S. Dep’t of Veteran Affairs, where the cited reason for denying certification was the posited “implausibility” that a non-veteran participant would make capital contributions without “control.” The Court ruled “To the extent the CVE intends to suggest that investment generally must be accompanied by some level of control over a company's affairs, it must explain why it believes that to be the case and indicate how it applies to CS360. CS-360, LLC v. U.S. Dep't of Veteran Affairs, 846 F. Supp. 2d 171, 191 (D.D.C. 2012) The Court has already found that this cursory statement fails to provide a sufficiently reasoned explanation. To the extent the CVE intended to rely upon some other “underlying implausibility,” it has failed to identify it with sufficient particularity to permit this Court to exercise its function of judicial review. CS-360, LLC v. U.S. Dep't of Veteran Affairs, 846 F. Supp. 2d 171, 189 (D.D.C. 2012)
If CVE denies your SDVOSB status, submitting "request for reconsideration" to the director of the Center for Verification and Evaluation is the next step. Many times the reasons for your SDVOSB status was denied may not make sense. You have operated in good faith and gone to great pains to make sure your company satisfies the CVE's posted requirements. However, quorum language in your bylaws or the fact that you live in a community property state and are married can lead to your applications denial. Many people have argued in vain that the application process is unnecessarily complicated and does more to hurt deserving veterans than prevent fraudulent certifications, but for now, this is the system we are stuck with.
Regarding CVE certification, 38 CFR 74.3 (b) states:
(b) Ownership must be unconditional. Ownership by one or more veterans or service-disabled veterans must be unconditional ownership. Ownership must not be subject to conditions precedent, conditions subsequent, executory agreements, voting trusts, restrictions on assignments of voting rights, or other arrangements causing or potentially causing ownership benefits to go to another (other than after death or incapacity). The pledge or encumbrance of stock or other ownership interest as collateral, including seller-financed transactions, does not affect the unconditional nature of ownership if the terms follow normal commercial practices and the owner retains control absent violations of the terms. In particular, CVE will evaluate ownership according to the following criteria for specific types of small business concerns. http://www.va.gov/osdbu/docs/38CFR74.pdf
Control is the thing the Center for Verification and Evaluation (CVE) cares about the most in making a CVE certification decision. Quorum restrictions written into bylaws were the number one reason for CVE certification denial in September 2013. http://www.va.gov/osdbu/verification/statistics.asp#denial. This is because some boilerplate quorum language requires a majority of directors or shareholders be present for voting, rather than a majority of shares. The CVE has interpreted this language to mean the veteran owner may not have control if additional shareholders do not show up to vote.