The SBA’s strict SDVOSB ownership rules can produce “draconian and perverse” results, but are nonetheless legal, according to a federal judge.
In a recent decision, the U.S. Court of Federal Claims condemned the SBA’s SDVOSB unconditional ownership requirements, while holding that the SBA was within its legal rights to impose those requirements on the company in question.
The Court’s decision emphasizes the important differences between the SBA and VA SDVOSB programs because the Court held that although the company in question didn’t qualify as an SDVOSB under the SBA’s strict rules, it was eligible for VA SDVOSB verification under the VA’s separate eligibility rules.
The Court’s decision in Veterans Contracting Group, Inc. v.
After opening bids, the Corps announced that Veterans Contracting Group, Inc. was the lowest bidder. An unsuccessful competitor subsequently filed a protest challenging
DoD procurements fall under the SBA’s SDVOSB regulations, not the VA’s separate rules. (As I’ve discussed various times on this blog, and will again here, the government currently runs two separate SDVOSB programs: one by SBA; the other by VA). The protest was referred to the SBA’s Director of Government Contracting for resolution.
The SBA determined that Ronald Montano, a service-disabled veteran, owned a 51% interest in
The SBA then evaluated
When the SBA issues an adverse SDVOSB decision, the SBA forwards its findings to the VA Center for Verification and Evaluation. After receiving the SBA’s findings, the VA CVE decertified
The Court and OHA reached different conclusions.
As my colleague Shane McCall wrote in this post, the Court concluded that the VA should not have removed
The Court cited with approval two cases dealing with the VA’s SDVOSB regulations, AmBuild Co., LLC v.
Things turned out far differently at OHA. As I wrote in a September post, OHA held that the restrictions in
That brings us to the Court’s recent SDVOSB decision, which involved
The Court began by writing that “[t]his post-award bid protest features interactions between complex and divergent regulatory frameworks, giving rise to a harsh, even perverse, result.” The Court then walked through the statutory and regulatory framework, explaining in detail that the government operates two SDVOSB programs, each with its own eligibility rules. The Court noted that Congress has directed the SBA and VA to work together to consolidate their SDVOSB requirements, but to date, “[n]o such implementing regulations have been promulgated.”
In this case, the Court said,
This argument didn’t sway the Court, which concluded that the SBA could have looked to its 8(a) and WOSB regulations for guidance in interpreting the SDVOSB “unconditional ownership” requirement, but that the SBA’s “choice not to do so has some basis in the regulations.” The Court pointed out that the SBA’s
The Court concluded:
SBA’s omission of a definition of unconditional ownership n the [SDVOSB] program produces draconian and perverse results in a case such as this one. Nevertheless, without at least some indicia of SBA’s intent or inadvertence regarding that omission, the court cannot remake the regulations in reliance on SBA’s actions in the closely related contexts of the 8(a) and WOSB programs. Therefore, OHA’s decision stands and [VCG] is ineligible to participate in SBA’s [SDVOSB] program, even though it is eligible to participate in VA’s correlative program.
The Court granted the government’s motion for judgment on the administrative record.
For SDVOSB advocates, the Court’s decision is very disappointing, although certainly understandable. The Court’s role isn’t to make public policy, but to decide whether an agency is rationally applying the law. Here, the Court was obviously very frustrated with how the SBA has chosen to interpret “unconditional ownership” in its SDVOSB regulations, but even a “draconian and perverse” rule isn’t necessarily illegal.
The Court rightly pinned the blame on the SBA. For years, OHA has interpreted “unconditional ownership” very strictly, but the SBA’s
Think about that for a second. Not to be morbid, but this circumstance will only arise when Mr. Montano is dead. At that point, unless ownership of the company passes to another service-disabled veteran, the company wouldn’t be an SDVOSB anymore anyway.
So how, exactly, does a provision regarding what happens when Mr. Montano
The purpose of the SBA’s rules is to ensure that service-disabled veterans own, control and benefit from the set-aside program. That’s a noble goal: as a policy matter, no one wants pass-throughs or “rent-a-vets.” The requirement for “unconditional ownership” sounds like a good way to implement this policy, and applied well, it can be. For example, if
But cases like Veterans Contracting Group show that the SBA has taken things too far. There’s no good policy reason to prohibit ordinary commercial and estate planning provisions like those at issue in this case. To the contrary, unnecessarily strict rules like these simply discourage non-veterans from investing in
On this point, Veterans Contracting Group is a stark example of the divergence in the SBA and VA SDVOSB regulations. In my experience, many (perhaps most!) veterans think that VA verification applies
The Court’s decision shows that the same company, operating under the same paperwork, can be a VA-verified SDVOSB, but ineligible for non-VA SDVOSB contracts. No doubt, many VA-verified SDVOSBs have documents with commercially reasonable restrictions much like those at issue in Veterans Contracting Group. If those companies plan to bid non-VA jobs, they better take a careful second look at those VA-approved corporate documents before submitting their next non-VA proposal.
Fortunately, change is on the way. Sometime in 2018, the SBA and VA ought to unveil their proposed regulation to consolidate the SDVOSB eligibility requirements. Once that regulation takes effect, the problem of the two programs’ divergence will at least be solved–although it may be 2019 before that happens.
But Veterans Contracting Group shows that consolidating the two SDVOSB regulations, while undoubtedly a good thing, isn’t enough. The substance of the rules need to change, also, to protect service-disabled veterans while accommodating ordinary commercial and estate planning restrictions like the ones in
SBA, if you’re reading, here’s a good rule of thumb: when a federal judge calls your rules “draconian and perverse,” it’s a wise idea to strongly consider changing those rules. Here’s hoping the upcoming consolidated regulation does that.
This content originally appeared on SmallGovCon.
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