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OHA Remands Size Determination Because Area Office Failed to Provide Due Process to Protested Concern


Koprince Law LLC

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SBA’s Office of Hearing and Appeals (OHA) recently said that the SBA Area Office should have informed the protested concern of the issues its adverse size determination focused on before ruling against the concern’s size eligibility on that basis. In addition to its lesson on due process, OHA also took this opportunity to distinguish totality of the circumstances affiliation (the basis on which the Area Office found affiliation here) from ostensible subcontractor affiliation (the basis for affiliation alleged in the size protest). OHA vacated and remanded the Area Office’s decision.

OHA’s decision in C2 Alaska, LLC, SBA No. SIZ-6149, 2022 (Apr. 19, 2022), concerned a Securities and Exchange Commission (SEC) Request for Proposals for the Integrated Professional Acquisition Support Services 2.0 (iPASS 2.0) acquisition, seeking “resources, management, and oversight to appropriately acquire and retain professional contractor personnel with skills essential to provide support services in the SEC’s mission accomplishment.” The solicitation was 100% set aside for 8(a) Program participants under NAICS code 541611 (Administrative Management and General Management Consulting Services) with a corresponding size standard of $16.5 million. The SEC awarded an IDIQ contract under the solicitation to C2 Alaska, LLC (C2 or Appellant).

The iPASS 2.0 contract was the successor acquisition to the iPASS Pilot contract for similar services, which was performed by Chenega Healthcare Services, LLC (CHS), the incumbent contractor. CHS and the C2 are both wholly-owned subsidiaries of the Alaskan Native Corporation (ANC), Chenega Corporation.

Notably, SBA’s affiliation regulations stipulate that sister companies owned and controlled by the same ANC cannot be affiliated with each other: (1) through common ownership or common management; and (2) “based upon the performance of common administrative services” (i.e. bookkeeping, payroll, recruiting, HR support, etc.), as long as adequate payment is provided for such services. But the rules add that such concerns may still be found affiliated on alternate grounds, provided this common administrative services exception does not apply.

After the award of iPASS 2.0, a size protest alleged that C2 was affiliated with its subcontractor–its sister company and the incumbent, CHS–under SBA’s ostensible subcontractor rule (found in SBA’s affiliation regulations). SBA defines the term ostensible subcontractor as a subcontractor that “performs primary and vital requirements of a contract, or of an order, or is a subcontractor upon which the prime contractor is unusually reliant.” And in analyzing this, SBA will consider “[a]ll aspects of the relationship between the prime and subcontractor[.]” This may include proposal terms, any agreements between the prime and subcontractor, and whether the subcontractor is an incumbent contractor now too large to bid on the current work. Where SBA finds a prime contractor has an ostensible subcontractor, it deems the two parties affiliates for the specific procurement at issue and add their sizes together in determining whether the prime is considered small under the solicitation’s size standard.

The protest here argued that both bases of ostensible contractor affiliation were met. It said CHS would perform the primary and vital requirements, which it listed as “the recruitment, retention and administration of geographically dispersed professional staff to support SEC operations.” And the protest said that C2 would also be unduly reliant upon CHS and its “ample experience supporting iPASS staffing.” The protest alleged that each of the four of the key factors SBA says are suggestive of unusual reliance were present here, as well.

The Area Office directed C2 to respond to allegations regarding: its own relevant experience; the identities and sizes of its subcontractors; the division of work and of specific tasks; the anticipated workforce source; and what each party would provide as far as equipment, facilities, required licenses, etc. It also asked for the C2’s organizational documents, tax returns, proposal for the iPASS 2.0 solicitation, and any applicable subcontracts or teaming agreements. Later on, the Area Office requested more information on Appellant’s proposed staffing for the iPASS 2.0 contract and its history of business dealings with CHS on the incumbent contract.

The Area Office size determination found that C2 was other-than-small for the iPASS 2.0 contract. But interestingly, the Area Office found that the Appellant would self-perform at least 51% of the work, in line with the limitations on subcontracting; only subcontract 25% to CHS; perform the primary and vital work itself; and not be unduly reliant on CHS (as the Area Office said some of the four key factors were not met). As such, the Area Office found no ostensible subcontractor affiliation.

Instead, the size determination explained that the Area Office had found C2 affiliated with CHS under the totality of the circumstances. For those unfamiliar, this is the SBA affiliation rule that permits the SBA to “find affiliation even though no single factor is sufficient to constitute affiliation[,]” after it considers the totality of the circumstances surrounding the potential affiliates’ relationship.

Perhaps one of the most interesting parts of this decision, in my humble opinion, is that the Area Office found the C2 and CHS affiliated, under the totality of the circumstances, for the iPASS 2.0 procurement only (note: it is typically used as a basis of general affiliation rather than contract-specific affiliation). Thus, it aggregated the Appellant’s average annual receipts with CHS’s. And because those combined receipts exceeded iPASS 2.0’s $16.5 million size standard, the Appellant was found ineligible for the iPASS 2.0 award.

In reaching its decision, the Area Office focused on three connections between the C2 and CHS, finding: (1) that C2 and CHS shared at least one key employee; (2) that C2 may not control employee assignments for iPASS 2.0; and (3) that C2 and CHS shared facilities and a computer system. And it found that their relationship did not qualify for the “common administrative services” exception.

C2 appealed. First, C2 said that the Area Office erred in finding totality of the circumstances affiliation “without notifying Appellant of the change in focus in the investigation, thereby denying Appellant due process[,]” adding that the protest alleged ostensible subcontractor affiliation, and such was not found here. But the Area Office’s stance was that “totality of circumstances is an extension examination of the ostensible subcontractor rule analysis.”

Second, C2 said the Area Office erred in finding affiliation based on the three connections identified, because: (a) the underlying facts were wrong; and (b) there was no explanation about how the connections enabled either entity to control the other. The Appellant said the Area Office: never asked about shared employees; misinterpreted the Appellant’s responses to other staffing questions; incorrectly assumed the Appellant would not control hiring decisions; and erred in finding that CHS and the Appellant would share facilities and a contract-specific computer system, without even inquiring about lease agreements or other office arrangements. The Appellant submitted new exhibits with its appeal, arguing there was good cause for OHA to consider them, since it “was not given the opportunity to respond or provide evidence regarding the three findings upon which the Size Determination is based.”

OHA began its analysis by establishing its standard of review, explaining, “OHA will disturb an area office’s size determination only if, after reviewing the record, the administrative judge has a definite and firm conviction that the area office erred in making its key finding of fact or law.”

OHA based its final remand decision on two main findings: (1) the Area Office did not provide sufficient notice of the change in focus of the size investigation; and (2) that the Area Office did not articulate a valid basis for affiliation under the totality of the circumstances.

Regarding its first finding, OHA noted that the protest only alleged ostensible subcontractor affiliation, which the Area Office had investigated but rejected. But the Area Office failed to inform the C2 that it was “examining affiliation through the totality of the circumstances[]” and clearly did not “raise any of the three associated factual issues[]” to the Appellant, either. OHA explained:

OHA has long held that, although SBA area offices are empowered to explore new issues beyond those set forth in a size protest, due process requires that the challenged concern must be given notice of the new issues and an opportunity to respond . . . Here, because Appellant was not provided notice of the change in focus of the size investigation, remand of this case is warranted.

OHA also addressed the protester’s (and Area Office’s) arguments responding to the appeal: (1) that the protest referenced the affiliation rule concerning exceptions for ANCs; and (2) that “the totality of the circumstances is a theory of affiliation related to, or encompassed within, an ostensible subcontractor allegation.” But OHA found these points unpersuasive and took the opportunity to distinguish the two types of affiliation at issue in this appeal.

OHA acknowledged that the protest made such references but said, “this regulation is not an independent ground for affiliation but rather an exception to affiliation for concerns owned and controlled by Indian Tribes or ANCs.” OHA explained that the protest “did not attempt to argue that Appellant and CHS could be affiliated due to noncompliance with” the exceptions–but instead, cited to that section to contend that the ANC-based exception to affiliation was not absolute (i.e. that the Appellant and CHS could be still affiliated under the ostensible subcontractor rule, even though they were both wholly-owned subsidiaries of the same ANC). And as such, this was “not sufficient to give Appellant notice that it might be found affiliated with CHS on grounds other than the ostensible subcontractor rule.”

Then, OHA said, although SBA’s affiliation regulations say an Area Office will consider “[a]ll aspects of the relationship between the prime and subcontractor” in an ostensible subcontractor analysis, OHA’s precedent clearly establishes that the ostensible subcontractor rule and the totality of the circumstances are considered “fundamentally different theories of affiliation.” OHA explained:

[The] totality of the circumstances is not an applicable ground of affiliation under an ostensible subcontractor analysis. A totality of the circumstances analysis rests on whether numerous factors taken together establish that a business concern has the power to control another, not whether it can control a particular contract. Conversely, an ostensible subcontractor analysis is contract specific and is a completely different form of determining affiliation.

Accordingly, because the size protest here was solely based on the ostensible subcontractor rule, the “Appellant would not reasonably have understood that the Area Office also would be reviewing the totality of the circumstances.” And even if C2 had been aware, OHA added, “it is not clear that Appellant could have prepared a meaningful response to this issue, without more detailed information as to the Area Office’s particular concerns[,]” because the Area Office did not notify the Appellant of the three specific factual issues it focused on.

Even though the Appellant had provided the Area Office with some information on staffing, key personnel, etc., in response to the ostensible subcontractor allegations, the “Appellant would not have known that such information might be repurposed to find Appellant affiliated with CHS on other, unrelated grounds.” As such, OHA could not conclude that the C2 was given “proper notice of, and a fair opportunity to address, the Area Office’s concerns.”

After coming to this conclusion on the due process issue, OHA said, remand was further warranted because the size determination failed to articulate valid grounds for affiliation under totality of the circumstances affiliation. OHA explained:

OHA has repeatedly held that “in order to find affiliation through the totality of the circumstances, ‘an area office must find facts and explain why those facts caused it to determine one concern had the power to control the other.”’ An area office thus “cannot merely list connections between the firms, it must explain how those connections could lead one firm to control the other.”

Here, OHA found, although the Area Office identified three aspects of the C2’s and CHS’s relationship it found supportive of totality of the circumstances affiliation, it failed to explain how these three connections enabled CHS to control C2, or vice versa–as required by OHA precedent.

In the end, OHA granted the appeal, vacated the size determination, and remanded the matter to the Area Office for further review.

This decision could be a very important one for small businesses facing affiliation allegations. Sometimes, it seems Area Offices blur the lines between the various bases for affiliation and between general affiliation and contract-specific affiliation–often using totality of the circumstances affiliation as a wide-reaching catch-all. While SBA’s affiliation regulations serve a valuable purpose in the small business federal contracting world, decisions like this one provide useful guidelines for contractors and crucial boundaries for the SBA Area Offices.

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The post OHA Remands Size Determination Because Area Office Failed to Provide Due Process to Protested Concern first appeared on SmallGovCon - Government Contracts Law Blog.

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