Service-Disabled Veteran-Owned Small Businesses (SDVOSBs) are often protested concerning their eligibility in the small-business program. The VA generally has a great deal of discretion as to the factors it considers in determining eligibility. But can the VA rule a company ineligible as an SDVOSB without any notice or opportunity to address a specific reason for ineligibility? A recent case in the Court of Federal Claims, AmBuild Company, LLC v. United States, No. 14-786C (Oct. 10, 2014), provided an answer to this question.
AmBuild was the apparent lowest-cost bidder on a VA solicitation set-aside for SDVOSBs. The second lowest bidder, Welch Construction Inc., filed a protest challenging AmBuild's SDVOSB status. Welch alleged that AmBuild was not controlled by a service-disabled veteran due to common ownership or management with other firms and did not meet the size requirements for a SDVOSB. The protest was considered by both the SBA and the VA Center for Verification and Evaluation (CVE), and each rejected Welch’s contentions.
However, despite rejecting Welch's protest grounds, the CVE did not dismiss the protest. Rather, on its own initiative, the CVE investigated an additional issue related to ownership that had not been raised previously by either Welch or the Contracting Officer. Upon examination of AmBuild's Operating Agreement, the CVE determined that the SDVOSB owner of AmBuild was not an unconditional owner as required by the SDVOSB regulations. Based on this, the CVE sustained the protest and determined AmBuild to be ineligible to compete as an SDVOSB.
AmBuild was not aware that the CVE was investigating this additional issue until it received the CVE's Final Determination declaring AmBuild ineligible for award. AmBuild appealed the CVE's decision to the Executive Director of VA's Office of Small and Disadvantaged Business Utilization (OSDBU) which denied the appeal. AmBuild then filed suit in the Court of Federal Claims, alleging: (1) the VA's disqualification violated procedural due process; and (2) the VA's determination that AmBuild was not an eligible SDVOSB was arbitrary and capricious.
The Court first addressed CVE's failure to notify AmBuild of the investigation into the ownership issue CVE that led to AmBuild's disqualification. The government argued its discretion to consider the "totality of the circumstances" in determining SDVOSB eligibility allowed the VA to consider matters not raised in the initial protest. This argument was soundly rejected by the Court.
The Court determined that administrative due process required the VA to provide adequate notice to AmBuild of the CVE's self-initiated investigation, and provide AmBuild an adequate opportunity to respond to the matter. The VA failed on both fronts, leading the Court to side with AmBuild. Ultimately, the Court concluded that by failing to provide notice of or an opportunity to respond to the specific issue being considered in determining AmBuild's SDVOSB status, the VA contravened the minimal requirements for an informal adjudication such as a status protest.
The Court also examined the substantive decision to disqualify AmBuild as a SDVOSB. The CVE and OSDBU placed particular emphasis on language in AmBuild's operating agreement which provided for the involuntary withdrawal of the SDVOSB owner upon the occurrence of certain events, i.e., bankruptcy, insolvency, transfer of interest through a court order or operation of law. The CVE and OSDBU determined that this language violated the SDVOSB ownership requirements because the "Involuntary Withdrawal" provisions create a potential situation that could cause AmBuild's ownership interest to go to a non-SDVOSB.
The Court disagreed with the CVE and OSDBU's interpretation of these provisions. The Court acknowledged that the VA's SDVOSB ownership regulations set forth prohibited arrangements that would cause ownership benefits to vest in non-veterans. However, the Court pointed out that there are exceptions in the regulations for normal commercial arrangements. Clauses regarding bankruptcy, receivership and transfer by a court or operation of the law are considered normal commercial arrangements, and thus the Court determined that the CVE unreasonably determined that the clauses affected the unconditional nature of ownership within the meaning of the regulation.
Ultimately, the Court determined that the VA failed both procedurally and substantively, and ruled in AmBuild's favor. The Court issued an order requiring the VA to restore AmBuild as an approved and certified SDVOSB, and consider it for award in the protested procurement.
Overall, if the CVE questions a SDVOSB's eligibility as part of a protest, the CVE must give the SDVOSB notice and the opportunity to respond. Moreover, "normal commercial practices" such as the involuntary withdrawal provisions in the AmBuild operating agreement are not considered a violation of the unconditional ownership regulations.
Read more about the AmBuild Decision.
For more Government Contracts information, visit www.BassBerryGovCon.com.