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FAR 19.303: Determining NAICS codes and size standards

Comptroller General - Key Excerpts

New Veterans Electric next argues that ACG’s proposal should have been found technically unacceptable because it did not include NAICS code 238210 in its System for Award Management (SAM) registration or its proposal, which the protester asserts shows the awardee “per se” did not possess the technical experience required by the solicitation. Protest at 5. The protester also argues that by the terms of the solicitation, ACG’s failure to certify that it met the relevant size standard for this NAICS code, renders its proposal technically unacceptable. Protest at 5; Comments at 3-4.

The Small Business Administration (SBA) establishes small business size standards on an industry-by-industry basis. Federal Acquisition Regulation (FAR) § 19.102(a)(1). The SBA identifies the size standards using NAICS codes. 13 C.F.R. § 121.201. The FAR provides that size standards are "applied" by classifying the product or service being acquired under the NAICS code that best describes it; identifying the size standard SBA established for that industry; and specifying the size standard in the solicitation so that offerors can appropriately represent themselves as large or small. FAR § 19.102(b). So long as a company meets the applicable size standard, we are aware of no statutory or regulatory requirement that it have the particular NAICS code identified in the solicitation as its primary code. High Plains Computing, Inc. d/b/a HPC Solutions, B-409736.2, Dec. 22, 2014, 2014 CPD ¶ 379 at 6-7.

We are provided no basis to conclude that the lack of a particular NAICS code means that ACG lacks the technical experience required by the solicitation. Moreover, a review of the record provides us no basis to question the agency’s evaluation of ACG’s technical proposal or its determination that the firm’s proposal was technically acceptable. Our review also shows that the protester’s second allegation--that ACG’s failure to certify that it met the relevant size standard renders the firm’s proposal technically unacceptable--is without merit.

The VA appears to acknowledge that neither ACG’s proposal nor its SAM registration affirmatively mentions NAICS code 238210. However, the agency argues that the awardee’s proposal listed other NAICS codes with size standards at or below the $15 million size standard for NAICS code 238210. Legal Memorandum at 4-5. The protester does not challenge the agency’s position that ACG listed other NAICS codes at or below the relevant size standard, but instead argues that ACG was required to certify that it was small under the specific NAICS code relevant to the solicitation. Comments at 3-4.

The record shows that ACG listed one primary NAICS code and 27 secondary NAICS codes in its SAM registry. AR, exh. 14, Responsibility Determination, at 24-25. The contracting officer explains that while he observed that ACG did not have the specified NAICS code listed in its SAM profile, he “verified that several of the NAICS codes they did have listed, including 238110, 238220, and 238990, had the same size standards as NAICS code 238210 of 15 million dollars.” Contracting Officer’s Supp. Statement at 1. Based on this, he “determined that this was sufficient evidence to support that ACG met the applicable size standard for NAICS code 238210.” Id. The protester has not provided us with any basis to question the reasonableness of the agency’s evaluation in this regard.  (Veterans Electric, LLC B-413198: Aug 26, 2016)

SRD argues that the agency should consider AGS ineligible for award because AGS did not have the correct primary NAICS code listed in its SAM record at the time it submitted its proposal. Specifically, SRD complains that, at the time AGS submitted its proposal, the primary NAICS code assigned to AGS in the System for Award Management (SAM) was 541330 (engineering services), rather than 541310 (architectural services). As explained below, we see no reason for the agency to forego award to AGS based on its primary NAICS code designation at the time proposals were submitted, given that (1) the contracting officer had a reasonable basis for concluding that AGS met the size standard required by the solicitation, and (2) AGS in fact had the desired primary code prior to award.

In connection with the first point, the SBA establishes small business size standards--expressed as either a maximum number of employees or annual receipts in millions of dollars--on an industry-by-industry basis. FAR § 19.102(a)(1). SBA identifies the size standards using NAICS codes. 13 C.F.R. § 121.201 (2016). The FAR provides that size standards are “applied” by classifying the product or service being acquired under the NAICS code that best describes it; identifying the size standard SBA established for that industry; and specifying the size standard in the solicitation so that offerors can appropriately represent themselves as large or small. FAR § 19.102(b). So long as a company meets the applicable size standard, we are aware of no statutory or regulatory requirement that it have the particular NAICS code identified in the solicitation as its primary code. High Plains Computing, Inc. d/b/a HPC Solutions, B-409736.2, Dec. 22, 2014, 2014 CPD ¶ 379 at 6-7.

Here, the record shows that the contract specialist had a reasonable basis upon which to conclude that AGS was eligible for award under the size standard associated with the solicitation. This information included affirmations from the SBA, as well as the fact that the NAICS code required for this procurement was listed on AGS’ SAM profile, albeit not as AGS’ primary code. Additionally, even to the extent that the solicitation itself went beyond the requirements of statute and regulation in imposing a requirement that the prime firm have 541310 as its primary NAICS code, there was nothing in the solicitation to indicate that this requirement could not be satisfied up to the date of award. Accordingly, based on our review of the record, we have no reason to find the agency’s selection of AGS for award unreasonable.  (SRD Architects B-412498: Feb 26, 2016)  (pdf)


The RFP, issued on September 28, 2010, as a HUBZone small business set-aside, contemplates the award of a firm fixed-price requirements contract to provide home oxygen equipment rental and services to VA beneficiaries within defined geographic areas. RFP at 1, 68. The agency first began attempting to fulfill this requirement under RFP VA‑244‑09-RP-0252, issued on August 19, 2009, as a small business set‑aside. The agency initially assigned North American Industry Classification System (NAICS) code 532291, Home Health Equipment Rental, which has a corresponding size standard of $7 million, to that procurement. The contracting officer subsequently determined that the NAICS code needed to be changed to NAICS code 339112, Surgical and Medical Instrument Manufacturing, with a size standard of 500 employees, based upon a decision by the United States Court of Federal Claims in Rotech Healthcare, Inc. v. United States, 71 Fed. Cl. 393 (2006), appeal dismissed, No. 2006-5121 (Fed. Cir. 2006). In that case, which involved two other solicitations issued by the VA for home oxygen equipment rental, the court held that the solicitations at issue were for the procurement of supplies and, thus, the non-manufacturing rule set forth in the Small Business Act, 15 U.S.C. sect. 637(a)(17), required the VA to consider whether the offerers were manufacturers of the items to be delivered. Rotech Healthcare, Inc., 71 Fed. Cl. at 430. The VA interpreted this decision as requiring the VA to evaluate non‑manufacturers of supplies using a 500‑employee size standard (such as with NAICS code 339112) instead of the $7 million size standard set forth in NAICS code 532291. Accordingly, on November 16, 2009, the VA amended the solicitation to establish NAICS code 339112 as applicable to the solicitation. Id.

Eagle Home Medical Corp., a potential offeror, filed an appeal with OHA, arguing that the contracting officer's designation of NAICS code 339112, Surgical and Medical Instrument Manufacturing, was unreasonable because this NAICS code does not best describe the principal purpose of the procurement. By decision dated December 11, 2009, OHA granted Eagle's NAICS code appeal and reversed the contracting officer's decision to assign NAICS code 339112 to this procurement. After receiving OHA's decision, the VA initially declined to comply with OHA's determination that the solicitation should be amended to change the NAICS code.

Eagle then filed a protest with our Office, arguing that the agency had violated the Small Business Act and its implementing regulations by failing to comply with OHA's final decision resolving the NAICS code appeal. GAO sustained the protest, noting that OHA was presented with substantial evidence in the form of analysis and a study that was not provided to the court in Rotech that showed that the primary purpose of the procurement was to provide home oxygen services in support of the home oxygen equipment, which OHA took into account in determining the appropriate NAICS code for the solicitation. Eagle Home Med. Corp., B-402387, Mar. 29, 2010, 2010 CPD para. 82 at 5-6. Because OHA has been granted the authority to make binding NAICS code determinations, our Office determined that the VA was required to comply with OHA's decision regarding the appropriate NAICS code for the procurement. Id. at 6. We also found Rotech distinguishable because the court was presented with a different issue--the applicability of a statutory non‑manufacturer rule. Id. at 5-6.

To comply with our Office's decision in Eagle Home Med. Corp., supra, the VA issued the RFP here.

(sections deleted)

B&B and Rotech protest the agency's failure to apply the non‑manufacturer rule to this procurement. The protesters contend that the Rotech decision issued by the Court of Federal Claims determined that that the statutory non-manufacturer rule applied to "virtually identical" solicitations for home oxygen equipment rental and services, and thus the VA must follow that decision here. Rotech Protest at 8; B&B Protest at 3. B&B further asserts that application of the non-manufacturer rule requires the agency to adopt a 500-employee standard for non-manufacturers such as itself. B&B Protest at 3. In addition, both protesters contend that, if the non-manufacturer rule is properly applied, there are not two or more HUBZone or small businesses that are eligible to compete for the contract; thus, the procurement should not be set aside for HUBZone or small business concerns. B&B Protest at 4; Rotech Protest at 10-11.

The agency contends that this solicitation differs from the solicitation considered by the Rotech court, that the non-manufacturer rule does not apply because the procurement here primarily involves services, and that the agency is properly following OHA's directive to use a $7 million size standard in this solicitation. Further, the agency contends that its market research was reasonable and shows that the agency expects to receive offers from two or more HUBZone small businesses at a fair and reasonable price. Rotech Agency Report at 2-5; B&B Agency Report at 3-5.

The SBA also submitted comments on these issues. The SBA emphasizes that it, not the GAO, has jurisdiction to determine the applicable size standard for procurements. SBA Comments on B&B Protest, Nov. 22, 2010, at 3. The SBA further contends that this protest is merely B&B's attempt to circumvent OHA's prior determination that the size standard for this procurement is $7 million, and that B&B and Rotech are other-than-small for purposes of this procurement. Id.; B&B Agency Report, Tab 5, SBA Size Determination. The SBA also contends that the Rotech decision is not relevant to this protest because the facts of this case are distinguishable in many respects. SBA Supplemental Comments on B&B Protest, Dec. 7, 2010, at 3-5. The SBA states that the Rotech decision analyzed different, much older home oxygen solicitations without the benefit of the additional analysis presented to OHA. Id. at 3. The SBA further notes that the statutory non-manufacturer rule interpreted by the Rotech court in a solicitation set-aside for small businesses is inapplicable to procurements set aside for HUBZone businesses like the one here. Id. at 2.

We agree with the agencies.

Non-Manufacturer Rule

The protesters assert that the agency's decision not to apply the statutory non‑manufacturer rule to this solicitation is inconsistent with the decision of the Court of Federal Claims in Rotech Healthcare, Inc. v. United States, supra. The statutory non-manufacturer rule is set forth in 15 U.S.C. sect. 637(a)(17)(A) and states as follows:

An otherwise responsible business concern that is in compliance with the requirements of subparagraph (B) shall not be denied the opportunity to submit and have considered its offer for any procurement contract for the supply of a product to be let pursuant to this subsection or subsection (a) of section 644 of this title solely because such concern is other than the actual manufacturer or processor of the product to be supplied under the contract.

15 U.S.C. sect. 637(a)(17)(A) (2006). Thus, by the plain language of the statute, the statutory non-manufacturer rule applies only to "contracts . . . let pursuant to" sect. 637(a) or sect. 644(a) of title 15. Id.

Section 637(a) provides the authority for agencies to conduct section 8(a) sole source procurements and section 8(a) competitive procurement set-asides. 15 U.S.C. sect. 637(a)(16) (providing for sole source awards to section 8(a) companies); 15 U.S.C. sect. 637(a)(1)(D) (providing for set-asides for section 8(a) companies in competitive procurements). Section 644(a) provides the authority for general small business set‑asides, which do not include HUBZone set-asides. See Mission Critical Solutions, B‑401057, May 4, 2009, 2009 CPD para. 93 at 3‑4 (recognizing 15 U.S.C. sect. 657a, not sect. 644(a), as the statutory provision authorizing contracts to be set aside for HUBZone business concerns); Mission Critical Solutions v. United States, No. 09–864C at 12 (Fed. Cl. Mar. 2, 2010) (same); 67 Fed. Reg. 3826, 3831 (January 28, 2002) (setting forth SBA's long-standing view that the statutory non-manufacturer rule applies only in connection with a section 8(a) or small business set aside contract, not in connection with a HUBZone procurement); 69 Fed. Reg. 29411, 29415 (May 24, 2004) (same).

Thus, the statutory non-manufacturer rule applies only to section 8(a) procurements and competitive procurements set aside for small business concerns, generally. The procurement at issue here is a HUBZone set-aside issued pursuant to sect. 31(b) of the Small Business Act (15 U.S.C. sect. 657a). Since the contract here is not awarded pursuant to 15 U.S.C. sect. 637(a) or 15 U.S.C. sect. 644(a), it is not covered by the statutory non-manufacturer rule. Because the statutory non-manufacturer rule does not apply to this solicitation, the Court of Federal Claims decision in Rotech Healthcare Inc., 71 Fed. Cl. 393 (2006) is inapplicable; that case involved solicitations that were set aside for small business. Accordingly, we deny this aspect of the protests.

500-Employee Size Standard

B&B contends that the agency is required to evaluate non-manufacturers using a 500‑employee size standard and not the $7 million standard required by the designated NAICS code for this solicitation. B&B Protest at 2-3. It argues that the 500-employee standard flows from the statutory non-manufacturer rule and implementing regulations, as well as a provision in the solicitation. Id. Specifically, B&B cites to FAR clause 52.212-1(a), which is included in the solicitation. That provision provides:

(a) North American Industry Classification System (NAICS) code and small business size standard. The NAICS code and small business size standard for this acquisition appear in Block 10 of the solicitation cover sheet (SF 1449). However, the small business size standard for a concern which submits an offer in its own name, but which proposes to furnish an item which it did not itself manufacture, is 500 employees.

RFP at 61. The protester asserts that the last sentence requires the agency to apply a 500-employee size standard to non-manufacturers such as B&B, even where it designates a different NAICS code with a different size standard. B&B Protest at 3.

These arguments do not provide a basis to sustain the protest.

Neither the statutory non-manufacturer rule set forth in 15 U.S.C. sect. 637(a)(17)(A), nor the regulatory non-manufacturer rule set forth at FAR sect. 19.001, provide any reference to a 500‑employee standard. Rather, the size standards are established in other regulations applicable to nonmanufacturers, which make clear that the 500-employee standard does not apply to contracts for services. FAR sect. 19.102(f); see also sect. 19.1303(d); (requirement that HUBZone non-manufacturers provide end items produced by HUBZone nonmanufacturer rule not applicable to service contracts). Whether a contract is one for services or supplies is determined by the "principle nature" of the procurement. See FAR sect. 19.102(c).

Here, OHA selected a NAICS code that reflects its view that this is a contract for services, and it expressly declined to adopt a NAICS code that would implement a 500-employee standard applicable to a supply contract. In making this determination, OHA considered the solicitation requirements, as well as substantial evidence in the form of analysis and a study, that showed that the primary purpose of the procurement here was to provide home oxygen services in support of the home oxygen requirement. As we stated in our prior decision, the VA was required to comply with the decision of OHA, which is binding on the parties. Eagle Home Med. Corp., supra, at 6; see also 13 C.F.R. sect. 121.403; FAR sect. 19.303(c)(5). To the extent that the protester now argues that the solicitation permits the application of a different size standard than the one established by OHA and requests that GAO enforce one standard over the other, we decline to do so. The SBA, not GAO, is vested with the exclusive authority to establish and approve small business size standards. 15 U.S.C. sect. 632(a)(2); 4 C.F.R. sect. 21.5(b)(1) (2011).

Set-Aside Challenge

The protesters contend that the procurement should not be set aside for HUBZone or small business contractors. Their challenge to the HUBZone set-aside is premised on the protesters' belief that there were no HUBZone or small business offerors capable of complying with the nonmanufacturer rule. Because we find that the non‑manufacturer rule does not apply to this procurement, we need not address the protesters' arguments that no HUBZone or small businesses manufacturers are available. However, we note that the record contains sufficient evidence that the agency conducted market research and concluded that four HUBZone small business firms could be expected to submit offers under the NAICS code size standard set forth in the solicitation.

The protest is denied.  (Rotech Healthcare, Inc., B-404241; B-404241.2, B&B Medical Services, Inc.; January 19, 2011)  (pdf)
 


Eagle and the SBA contend that the VA violated the Small Business Act and its implementing regulations when the agency decided to ignore the OHA’s final decision, which determined that NAICS code 532291, Home Health Equipment Rental, is the proper code for this procurement. We agree.

The Small Business Act, as amended, vests the authority to establish and approve small business size standards exclusively with the SBA. 15 U.S.C. sect. 632(a)(2) (2006). Under the Act’s implementing regulations, once the SBA has defined or approved size standards for small businesses, federal agencies generally are bound to follow the SBA’s determinations. 13 C.F.R. sect. 121.403; see also FAR sect. 19.102. The regulations state that the contracting officer should assign the NAICS code which “best describes the principal purpose of the product or service being acquired." 13 C.F.R. sect. 121.402(b). However, NAICS code designations made by authorized contracting officers may be appealed to the OHA and any formal NAICS code designations made by the OHA are binding on the parties. 13 C.F.R. sections 121.402(c), 121.403, 121.1102; FAR sect. 19.303(a), (c). In this regard, the SBA regulations governing a NAICS code appeal provide that the OHA’s decision is final and becomes effective on issuance. 13 C.F.R. sect. 134.316(b). Furthermore,

If [the] OHA’s decision is received by the contracting officer before the date offers are due, the solicitation must be amended if the contracting officer’s designation of the NAICS code is reversed.

Id. sect. 121.1103(b)(5); see also FAR sect. 19.303(c)(5).

As noted above, the OHA decision reversing the contracting officer’s NAICS code determination was received by the VA prior to the due date for receipt of proposals, but the VA decided not to amend the RFP to modify the NAICS code. The VA contends that its decision not to amend the solicitation is governed by Rotech Healthcare, Inc. v. United States, supra, a decision of the United States Court of Federal Claims discussing these types of home oxygen procurements. The VA states that the OHA decision impermissibly disregarded the applicability of the Rotech decision in which the Court found two solicitations for home oxygen and related services to be procurements primarily for supplies; thus, the agency insists, the home oxygen procurement here should be solicited under a NAICS code for supplies and not the NAICS code identified by the OHA.

In our view, the situation here is distinguishable from Rotech. The Rotech decision was limited to the question of whether the proposed awards would violate the statutory non-manufacturer rule set forth in the Small Business Act.  The court in Rotech did not address the issue of what NAICS code should apply to these types of procurements. In fact, the court specifically noted that the protester did not challenge the NAICS codes assigned to the procurements, and it noted the protester’s argument that NAICS code determinations were “irrelevant" to the issue before the court. Rotech Healthcare, Inc. v. United States, supra, at 29, 31, 35, 57. In considering whether the non-manufacturer rule applied to the two solicitations at issue, the court recognized that the procurements for home oxygen involved both supplies and services, and the court concluded that the non-manufacturer rule applies to mixed contracts and not just to contracts solely for supplies. Id. at 53. The court expressed its view that the solicitations before the court involved primarily supplies, based in part on the agency’s failure to provide any evidence or argument demonstrating the importance of the services aspect of the solicitations. Id. at 61. The court noted, also, that the SBA had not previously addressed in its decisions the issue of the applicability of the current non-manufacturing rule to these types of procurement. Id. at 49. Furthermore, the applicability of the non‑manufacturing rule to the protested solicitations had not been presented to the OHA.

In this case, a timely NAICS code appeal was filed with the OHA, and the OHA determined that the NAICS code that “best describes" this particular procurement was NAICS code 532291, Home Health Equipment Rental. OHA Decision at 5-6; 13 C.F.R. sect. 121.402(b). The OHA based its determination on reviewing the solicitation requirements in light of the NAICS code descriptions in the NAICS code manual. OHA Decision at 4-5. The OHA was also presented with substantial evidence in the form of analysis and a study (which was not provided to the court in Rotech) that showed that the primary purpose of the procurement here was to provide home oxygen services in support of the home oxygen equipment.  Id. at 3, 5. We find that the VA was required to comply with the decision of the OHA, which has been granted the authority to make binding NAICS code determinations. Moreover, given that the Rotech court was not presented with the issue of reviewing the NAICS code and did not reach that issue in its decision, we find the VA’s decision to rely on Rotech as controlling, while ignoring the decision of the OHA, to be unreasonable.

In summary, we find on this record that the OHA decision has conclusively resolved the NAICS code appeal filed by Eagle and the OHA’s decision which is applicable to this procurement, indicates that the solicitation should be amended consistent with its determination. As noted above, the VA has not advanced any countervailing reasons for why not amending the solicitation would be appropriate, other than its belief that the Rotech decision is controlling. We therefore conclude that the VA should have amended the solicitation when it received the OHA decision reversing the contracting officer’s designation of NAICS code 339112 as the proper code for this procurement, inasmuch as the OHA decision is binding upon the agency. See 13 C.F.R. sect. 121.403; sect. 121.1102.  (Eagle Home Medical Corporation, B-402387, March 29, 2010) (pdf)

Comptroller General - Listing of Decisions

For the Government For the Protester
New Veterans Electric, LLC B-413198: Aug 26, 2016 Eagle Home Medical Corporation, B-402387, March 29, 2010 (pdf)
SRD Architects B-412498: Feb 26, 2016  (pdf)  
Rotech Healthcare, Inc., B-404241; B-404241.2, B&B Medical Services, Inc.; January 19, 2011  (pdf)  

SBA Office of Hearings and Appeals - Key Excerpts

B. The Merits of the Appeal

1. Rotech

The VA here relies upon Rotech to support the CO’s NAICS code designation. The Rotech court however, specifically held that the case before it was not an untimely NAICS code appeal, and was not a challenge to that procurement’s NAICS code designations. Rotech, at 409. Rather, Rotech is a decision dealing with the nonmanufacturer rule, holding that the rule applied to the procurement in that case.

Further, Rotech is a decision by a trial level court limited to the facts before it. The holding is Rotech is based upon the Claims Court’s analysis of the solicitation before it, and cannot be binding upon the analysis of another solicitation, especially when the issue at hand is a different one. In Rotech, the question was whether the nonmanufacturer rule applied to the contracts at issue. Here, the question is the appropriate NAICS code for this procurement.
Contrary to the VA’s argument, Rotech does not control the result here. Rotech is a decision by a trial level court limited to the facts in the case before it. I conclude with my colleague in another, recent NAICS code appeal, that Rotech cannot dictate the NAICS code for any other RFP, and is not relevant to this decision. See NAICS Appeal of Eagle Home Medical Corporation, SBA No. NAICS-5099, at 5 (2009).

2. The Appropriate NAICS Code

The NAICS code designated by the CO, 339112, Surgical and Medical Instrument Manufacturing, covers:

[E]stablishments primarily engaged in manufacturing medical, surgical, ophthalmic, and veterinary instruments and apparatus (except electrotherapeutic, electromedical and irradiation apparatus). Examples of products made by these establishments are syringes, hypodermic needles, anesthesia apparatus, blood transfusion equipment, catheters, surgical clamps, and medical thermometers.

NAICS Manual at 494.

Appellants’ requested NAICS code, 532291, Home Health Equipment Rental, covers:

[E]stablishments primarily engaged in renting home-type health and invalid equipment, such as wheel chairs, hospital beds, oxygen tanks, walkers, and crutches.

NAICS Manual at 719.

An examination of the RFP establishes that this procurement requires the contractor to provide home oxygen services for VA patients. The contractor will be providing the oxygen, the tanks and the equipment necessary for the patients to receive the respiratory therapy. However, the contractor must also transport and deliver the oxygen and equipment. The contractor must install the equipment and set it up. Once installed, the contractor is responsible for periodic checks on the equipment and maintenance in accordance with manufacturer’s specifications. The contractor must train and educate the patients in the use of the equipment, and develop a system to register complaints. The contractor must provide services 24 hours a day, seven days a week. The RFP includes standards the contractor’s service must meet. Further, the RFP refers frequently to the services to be provided by the contractor, as well as the equipment to be delivered.

Further, the RFP requires the contractor to provide the services of licensed Respiratory Therapists. These therapists will perform important professional services in ensuring the proper installation and functioning of the equipment provided, and educating the patients in the equipment’s proper use. A contract which requires such a substantial amount of professional services is more properly classified as a services contract, rather than a supply contract.

Thus, it is clear that services are a very large part of this procurement. Indeed, the VA patients who will be served by this contract could not adequately receive the benefit of the oxygen and equipment without the services of the professional Respiratory Therapists and the delivery, installation, training, and maintenance the contractor will provide here.

This conclusion that the instant RFP is primarily a services procurement is supported by the BAH Study Eagle submitted. The BAH Study confirms that it is likely, depending on the location and practices of the VA medical center issuing this type of procurement, that this type of procurement could be weighted more toward services than supplies. BAH Study, at 5-6. Further, the BAH Study states that labor costs are typically the most significant cost driver in any function or activity, which supports the notion that service requirements can cost more than equipment. BAH Study, at 5. In addition, the BAH Study indicates that, consistent with Eagle’s argument, VA’s overall oxygen equipment costs are much less than its costs for repair of equipment, service visits, delivery of systems, etc. BAH Study, at 25. See NAICS Appeal of Eagle Home Medical Corporation, SBA No. NAICS-5099, at 5 (2009).

In addition, I find that the concerns raised by MCS and Greene concerning Joint Commission accreditation are well-founded. The RFP requires the contractor to have Joint Commission accreditation. However, the Joint Commission oversees hospitals and providers of health care services, not manufacturers. See http://en.wikipedia.org.wiki/Joint_Commission. Consequently, no manufacturer of equipment could meet the RFP’s requirement of Joint Commission accreditation.

The 339112 code is a manufacturing code, and it covers manufacturing of medical equipment. However, this procurement clearly includes the provision of extensive services. The contractor will not simply drop off equipment, but will perform extensive services. Indeed, without services required by this RFP, the patients could not safely and effectively operate the equipment provided. Conversely, code 532291 specifically covers the rental of home oxygen tanks, and thus appears to cover this RFP, which is for the delivery of home oxygen to VA patients.

In addition, NAICS code 339112 replaced SIC code 3841, Surgical and Medical Instruments and Apparatus. Executive Office of the President, Office of Management and Budget, North American Industry Classification System-United States (1997), at 962. SIC code 3841 had an extensive list of medical equipment whose manufacture was covered by the code. As Eagle has noted, only one of the items in this procurement, cannulas, is on that list. Executive Office of the President, Office of Management and Budget, Standard Industrial Classification Manual (1987), at 250.

The fact that the equipment this RFP seeks to procure is not included in the list of equipment covered by this NAICS code further undercuts the CO’s designation.

I conclude that the instant RFP is not merely for manufactured medical equipment, but for the delivery of home oxygen services to VA patients. The contractor will not merely drop off oxygen and equipment, but will install it, train the patient in its use, and provide maintenance and emergency services. Accordingly, I conclude that Appellants have met their burden of establishing clear error in the CO’s designation of NAICS code 339112 for this solicitation. The appropriate NAICS code for this procurement is 532291, Home Health Equipment Rental, with a corresponding $7 million annual receipts size standard.  (Medical Comfort Systems, Inc., Eagle Home Medical Corporation, Greene Respiratory Services, Inc., American Medical Equipment Company, Appellants; Solicitation No. VA-249-10-RP-0041, Department of Veterans Affairs, ASC-VISN 9, Murfreesboro, TN; SBA No. NAICS-5106, January 5, 2010.)

SBA Office of Hearings and Appeals - Listing of Decisions

For the Government For the Protester
  Medical Comfort Systems, Inc., Eagle Home Medical Corporation, Greene Respiratory Services, Inc., American Medical Equipment Company, Appellants; Solicitation No. VA-249-10-RP-0041, Department of Veterans Affairs, ASC-VISN 9, Murfreesboro, TN; SBA No. NAICS-5106, January 5, 2010.

U. S. Court of Federal Claims - Key Excerpts

New C. ACG’s Qualification

Plaintiff argues that the Contracting Officer’s decision to award the contract to ACG lacked a rational basis or involved a violation of regulation or procedure because ACG was not qualified to perform the work required under the Solicitation. MJAR at 11. In making this argument, plaintiff asserts that ACG should not have been deemed qualified because the proper NAICS code was not included in its System for Award Management (“SAM”) registry or anywhere within its proposal. Id. The Solicitation includes NAICS code 238210 and specifies that offerors should have a size standard of $15 million. AR 4. NAICS code 238210 is not included in ACG’s SAM registry. AR 273. However, lacking a specific NAICS code will not preclude a potential offeror from receiving a procurement award. The Small Business Administration’s (“SBA”) website says the following:

Your business may have a myriad of capabilities, and the NAICS code for a given procurement opportunity may not be the same as your primary NAICS code. That will not keep you from bidding or making an offer, so long as you meet the size standard for the A. NAVFAC did not Update the Size Standard in the Solicitation for Phase Two of the Procurement. procurement and have the capacity to provide the goods or services.

AR 246; see also http://www.sba.gov/contracting/getting-started-contractor/determine-yournaics-code (accessed October 14, 2016). The NAICS code provided by ACG is 541310, which has a $7.5 million size standard. AR 136; see also 13 C.F.R. § 121.201. As such, this Court must agree with defendant’s assertion that “the agency had a reasonable basis to conclude that the awardee met the size standards required by the Solicitation.” CMJAR at 15. Furthermore, the GAO has routinely ruled that there is “no statutory or regulatory requirement for the NAICS code in a solicitation to be listed in an offeror’s [SAM predecessor database].” High Plains Computing, Inc. d/b/a HPC Solutions, B-409736.2, Dec. 22, 2014, 2014 CPD ¶ 379 at 6-7 (citing S4, Inc., B-299817, Aug. 23, 2007, CPD ¶ 164 at 8). While this Court is not bound by the decision of the GAO, that logic is persuasive. The decision to award the procurement to an offeror without the exact NAICS code listed in the Solicitation was neither arbitrary nor capricious and was not a violation of law or procedure.  (Veterans Electric, LLC v. U. S. No. 16-1113C, November 23, 2016)


The parties agree that the primary issue in this case is whether the agency revised the solicitation to use the new, $36.5 million size standard for phase two of the procurement. Orion claims that the agency’s and the SBA’s decisions were arbitrary, capricious, or not in accordance with law because those decisions were based on the application of the “outdated” $33.5 million size standard. Pl.’s MJAR 26; Pl.’s Reply 10. The operative regulation cited by both parties, 13 C.F.R. § 121.402(a), provides in relevant part that “[i]f SBA amends the size standard and it becomes effective before the date initial offers (including price) are due, the contracting officer may amend the solicitation and use the new size standard.” Orion recognizes that if the agency did not incorporate the updated size standard into the solicitation, then the original, $33.5 million size standard remained applicable. Pl.’s MJAR 19. Orion argues that by requiring offerors to certify their size status “at time of Phase Two proposal submittal,” the agency expressly or implicitly incorporated the revised, $36.5 million size standard for NAICS code 236220. Pl.’s MJAR 20; Pl.’s Reply 4.

The court agrees with the government that the agency did not expressly amend the solicitation to use the new size standard by beginning phase two of the procurement after the new size standard became effective. Amendment 6 required each offeror to certify that it was “a small business at time of Phase Two proposal submittal.” AR 202. However, Amendment 6 does not mention any change to the size standard in its purpose statement, AR 200, the description of changes being made to the solicitation, AR 201-02, or anywhere else in the amendment. In contrast, the agency expressly identified updates to other parts of the solicitation. See, e.g., AR 201 (extending the time offerors needed to provide for agency acceptance), 207 (updating liquidated damages and Buy American Act provisions). The statement in Amendment 6 to provide a size status certification was one element of a cover letter that the agency directed offerors to submit along with their phase two proposal. AR 202.10 The plain language indicates that the certification was required to ensure that the offerors who were selected for phase two in fact met the size standard identified in the RFP. The court finds no evidence in the record that the government expressly revised the size standard.

The court also agrees with the government that there is no basis for finding that the size standard was implicitly revised in Amendment 6. First, as the SBA’s OHA noted, the size standard in a solicitation cannot be changed without an express amendment to that effect. AR 2357. For example, the SBA has rejected claims that a procuring agency implicitly amended a solicitation to use a new size standard where the agency included the new size standard in instructions and questions and answers but did not formally amend the solicitation. See Dawson Tech., LLC, SBA No. SIZ-5476, at 5 (June 12, 2013) (citing Civitas Group, LLC, SBA No. SIZ-5424, at 2 n.1 (2012). The SBA’s interpretation of 13 C.F.R. § 121.402(a) is controlling on this court; Orion does not argue it is plainly erroneous or inconsistent with the regulation. See IEI-Cityside JV v. United States, 122 Fed. Cl. 750, 758 (2015) (quoting Auer v. Robbins, 519 U.S. 452, 461 (1997)). Moreover, in this case, as the OHA also noted, the agency in its e-mail to the SBA area office and in its “fax-back memo” to the SBA’s OHA stated that the agency did not intend to incorporate the new size standard into the solicitation. AR 998, 2322. In this context, the court cannot read the claimed revision into the solicitation. Cf. Alabama Aircraft Indus., Inc.-Birmingham v. United States, 586 F.3d 1372, 1376 (Fed. Cir. 2009) (finding that this court cannot “introduce new requirements outside the scope of the [solicitation]”).

For all of these reasons, the court rejects Orion’s contention that the government expressly or implicitly amended the NAICS code size standard.

B. The Agency’s Failure to Amend the Solicitation to Use the New Size Standard was not Arbitrary, Capricious, or Not in Accordance with Law.

In the alternative, Orion argues that the agency’s failure to amend the solicitation to update the size standard was arbitrary, capricious, or not in accordance with law. Pl.’s MJAR 20; Pl.’s Reply 7, 9. Orion acknowledges that 13 C.F.R. § 121.402(a) grants discretion to the agency in deciding whether to amend a solicitation to incorporate an updated size standard. Pl.’s MJAR 19. However, Orion argues that NAVFAC’s “purported decision to enforce the obsolete size standard still must be set aside” on the grounds that the agency lacked a rational basis for not incorporating the new size standard. Pl.’s MJAR 14-15; Pl.’s Reply 2-3, 7-10. Orion describes the “common sense practicality” of using current size standards and analogizes to the required use of prevailing wages under the Davis-Bacon Act, 40 U.S.C. § 3141. Pl.’s MJAR 16 (citing 29 C.F.R. 4.5(c), 4.101(b); FAR 22.1015). Orion also cites public policy considerations, such as the importance of maximizing small business participation in federal contracting. Pl.’s MJAR 17; Pl.’s Reply 7-10.

 However, the court finds that because the agency had no legal obligation to amend the solicitation to update the size standard, the agency did not need to document a rationale for not amending the solicitation. Orion’s policy arguments do not explain how the agency abused its discretion by limiting the competition to entities that met the original solicitation’s small business size standard. Orion’s citations to regulations implementing the Davis-Bacon Act only reinforce the agency’s discretion in this matter.

Moreover, the record shows that Orion could have raised this issue during the solicitation process and required the agency to make a formal decision. The solicitation provided contact information for requests for information, AR 126, 129, 202, and the agency responded to hundreds of requests for information and clarified provisions in the solicitation. See, e.g., AR 247-48 (responding to question and clarifying a solicitation provision about a site visit). Yet, Orion never asked whether the size standard had been changed. To the contrary, Orion’s submissions to the agency state that the size standard was $33.5 million. AR 711, 757. Nonetheless, to the extent Orion believed that Amendment 6 created ambiguity regarding the size standard, because the standard had changed, Orion needed to ask the agency for clarification or request an amendment to the solicitation prior to the close of the bidding process. See Blue & Gold Fleet, L.P. v. United States, 492 F.3d 1308, 1313 (Fed. Cir. 2007). Having failed to do so, Orion cannot now complain that it was uncertain as to the size standard applicable to the solicitation. Id.  (Orion Construction Corporation v. U. S., No. 15-1505C, April 1, 2016)  (pdf)


III. Neither USDA’s Nor SBA’s Decisions Were Reasonable

The size standard decisions by both agencies were flawed because the record does not show that they gave proper consideration to whether dredging constitutes the primary activity involved, which the regulations instruct is best determined by the relative value of the items of work involved.

A. The Contracting Officer’s Determination Was Irrational

The CO’s statement of facts to the SBA is the best indicator of what was in front of the agency when it made its initial size standard determination. That statement makes clear that the agency relied primarily on the overall purpose the project, “marsh creation and preservation,” in its classification of this project as best fitting under the general description of construction services found in NAICS code 237990. We note at the outset that marsh creation and preservation is the ultimate end of the project, but that phrase leaves ambiguous the presumptive means to achieve that end, which we view as the more relevant concern for this exercise in taxonomy. I.e., the work performed rather than the final outcome should be the focus of the inquiry because the contractor is concerned with what its capabilities are.

The CO contrasted the work required by the solicitation to what she considered to be more typical dredging projects. Dredging contracts, in her words, involve “pump and dump,” but the solicitation requires the contractor to manage the discharge from the dredge in such a way as to “achieve a ‘uniform’ elevation as established by the plans and specifications” within the marsh creation cells. AR 349. That, in conjunction with the other elements not found in more routine clean up dredging operations led to the conclusion that this project was something more than dredging, and thus it would be better to classify it as a general construction project. The only quantitative consideration was with regard to labor hours. The CO stated that item 7 would make up less than 40 percent of man-hours while general construction would take up the rest. That calculation assumes that the only dredging involved is embraced by item 7. 

We are not in a position to second guess the agency’s determination that dredging was not strictly required for work components other than item 7. Plaintiff may be correct that nearly all the work actually will have to be done with dredging machinery, but the record does not give us access to that determination. We assume, therefore, that the agency was reasonable in concluding that the only work item which had to be presumed to constitute dredging was item 7. The fact that there were eleven other work items, however, says nothing about the relative importance of those items. 

The regulations require an analysis of the relative weight of the components of the contract, and absent compelling reasons, the contract should be classified according to “the component which accounts for the greatest percentage of contract value.” 13 C.F.R. § 121.402(b)(2); see Red River Serv. Corp. v. United States, 60 Fed. Cl. 532, 548-49 (2004) (holding that a protestor was entitled judgment on the administrative record because the CO failed to give “primary consideration to the relative value and importance of the components of the procurement.”)  

The closest the CO came to this analysis was a look at the anticipated labor hours per work item. She attributed 40 percent to dredging from item 7, and, because this was less than the 60 percent of labor items attributed to the other work items, she was satisfied that dredging was not the primary purpose. That conclusion, taken at face value, is insufficient, however.  

The percentage of labor hours involved in a component of work is not necessarily synonymous with its contribution to overall cost. Item 7 is priced by the cubic yard of material dredged, not the man hours expended, if for no other reason, we assume, because it involves the use of heavy equipment. Items 5, 6, and 8, as further example, will be paid by linear foot of the material placed. But nowhere in the record is there any analysis of the total price of item 7 in comparison to the other work items. The agency’s failure to quantify in any meaningful way its ultimate conclusion violates the requirement of the regulation. The regulations are clear, primary consideration is to be given to the relative value of the components, i.e., what the agency will pay for each item of work. No such calculation was made.  

Plaintiff presented us with two documents at oral argument generated by the agency but not included in the administrative record. One is a letter sent to RLB after the award of the contract to another awardee prior to the GAO protest. That letter presents the cost break down of the successful awardee’s proposal. In it, item 7 constitutes nearly 75 percent of the total price. The second document is a spreadsheet, given to plaintiff at its debriefing following that initial award, which reflects the government’s internal cost estimate compared with those of RLB and the awardee. The agency estimates $13,942,600 for Marsh Creation Dredging, item 7, out of a total estimated price of $24,280,506. Item 7 thus represented 57 percent of the government’s anticipated cost.  

The record is not entirely clear when the government’s internal cost estimate was generated and whether the CO had it in front of her at the time of her initial determination. It is important to remember, however, that the initial contract award was cancelled after a protest at GAO. The agency issued a new solicitation after correcting defects presented at GAO. Thus, at the time of the re-solicitation, the agency knew it anticipated 57 percent of cost would be attributable to item 7, and it knew that a prior awardee for the same work had priced the dredging component at nearly 75 percent of the total cost.  

These materials were thus part of the contract record in front of the agency and should have been included in the administrative record. We deem them included. In light of this knowledge, it was irrational and not consistent with the regulations for the CO to have not reconsidered the applicable size standard and to not have done a more meaningful quantitative analysis. Although we cannot make this determination for the agency, as we instructed in our order of September 23, 2014, if item 7 is the most valuable item, primary consideration must be given to it in determining if the exception applies. See Red River Serv. Corp., 60 Fed. Cl. at 548-49.  

B. The SBA Decision on Appeal Failed to Consider the Relative Value of the Components of Work Like the USDA before it, OHA’s decision on appeal is devoid of any quantitative analysis of the relevant cost or importance of the work items. Rather than confront the appellants’ arguments squarely regarding the value of the dredging work, the OHA judge rested his conclusion on his reading of the various tasks required and the overall purpose of the project. He did not consider whether the CO properly determined the relative value of the components nor did he even consider the admittedly incorrect labor hour break down presented to him by the agency. Instead, he simply concluded, “Thus, I hold that in order for this exception to apply, the services procured have to be Dredging or Surface Cleanup Activities in nature. Merely because a solicitation involves dredging work does not justify the use of the exception.” AR 449. The first sentence is confusing because it leaves no room for a comparative analysis. The second sentence is correct but begs the question, “how much of the work is dredging?”.  

For aught that appears, OHA seems to have treated as controlling the fact that there are a number of work items, and arguably only one of them was dredging. The judge recognized that dredging “activities account for a large portion of the services sought” but found that unconvincing because “the Project requires a substantial amount of other types of work in addition to dredging.” AR 450. That simplistic and imprecise reasoning is too flabby to meet the regulatory requirements. No consideration of the relative value of the work items or which was the most representative component was undertaken. We must therefore set the SBA OHA decision aside as irrational and contrary to the applicable law.   (RLB Contracting Inc. v. U. S., No. 14-651C, October 3, 2014)  (pdf)


The Plaintiff’s complaint contains four separate counts. The first count is that the VA failed to issue the Solicitation in compliance with two LOS rules regarding the source of supplies and the use of subcontractors. The second count is that the VA failed to issue the Solicitation in compliance with the statutory nonmanufacturer rule, which requires that a business concern “represent that it will supply the product of a domestic small business manufacturer” unless a waiver is granted. Compl. at 101-102. The third count is that the VA failed to require sufficient information to support a small-business set-aside. The fourth and final count is that the VA failed to issue the Solicitation under the proper NAICS code. Compl. at 115.

(sections deleted)

III. Discussion

a. The Statutory Nonmanufacturer Rule applies to the Solicitation regardless of the NAICS code because it calls for the provision of supplies.

Central to this case is whether the NMR applies to the instant Solicitation. Rotech believes that the current Solicitation will lead to a situation where the winning bidder or bidders are in violation of the NMR because they will be unable to provide the product of a domestic small business. The Government argues that the NMR is inapplicable in this case because the NMR only applies to contracts for supplies and that the instant Solicitation, by virtue of its chosen NAICS code 532291, is a contract for services. Def.’s Mot. J. Admin. R. at 29. The statutory nonmanufacturer rule, 15 U.S.C. § 637(a)(17), is part of the Small Business Act, and the provision that is pertinent to this dispute allows a small business to bid on a contract even though it will not itself supply the product to be procured as long as it “represent[s] that it will supply the product of a domestic small business manufacturer or processor, unless a waiver of such requirement is granted.” 15 U.S.C. § 637(a)(17). “The clear purpose of the non-manufacturer rule is ‘to prevent brokerage-type arrangements whereby small “front” organizations are set up to bid [on] government contracts but furnish the supplies of a large concern.’ The rules serves, in other words, ‘to prevent dealers from acting as mere conduits for the products of large manufacturers on small business set-aside procurements.’” Rotech v. United States, 71 Fed. Cl. 393, 412 (Fed. Cl. 2006)  [see below].

Although NAICS code 532291 is titled “Home Health Equipment Rental,” the parties are in agreement that the structure of the NAICS code system places this code under the category of services. Status Conference September 4, 2014. Rotech, however, believes that because the procurement calls for the provision of health equipment, it is also a contract for the supply of products (regardless of the NAICS code), making the contract subject to the NMR.

Whether the NMR applies to a contract that includes both services and the provision of supplies, despite the NAICS code classification of the contract as one for services, has previously been considered by the Court of Federal Claims in a nearly identical controversy to the one now before this Court. In Rotech v. United States, 71 Fed. Cl. 393 (Fed. Cl. 2006), the court considered the applicability of the NMR to a service contract that also involved the procurement of home oxygen supplies. At the onset, it is important to acknowledge that the Government is correct in stating that “the court’s decision in Rotech is not precedential . . . .” Def.’s Mot. J. Admin. R. at 33. Nevertheless, the Rotech decision may be cited as persuasive authority by this Court, as conceded by the Government (“the Rotech decision is at best persuasive.”) Def.’s Reply at 12. Indeed, for the reasons discussed infra, this Court finds the 2006 Rotech decision to be articulate, thoughtful, and well-reasoned such that there is no reason for this Court to reach a different conclusion on such a similar set of facts.

Rotech concerned a pre-award bid protest by the plaintiff Rotech challenging the award of home oxygen equipment contracts to two competitor companies by the VA. Rotech, 71 Fed. Cl. at 395. At issue were two separate Request for Proposals (“RFP”): RFP 583, which concerned the provision of home oxygen equipment for Veterans Integrated Service Network 11 and issued under the same NAICS code as in this case, namely, 532291 (“Home Health Equipment Rental”), id., and RFP 247, a similar but smaller contract for the supply of home oxygen equipment to beneficiaries in and around Augusta, Georgia and issued under NAICS code 621610, a service code titled “Home Health Care Services,” id. at 399. As is the case in the instant case, both RFPs were issued as small business set-asides, although the two RFPs in Rotech each featured a cascading tier system which allowed for the possibility of full and open competition should certain criteria not be met during the bidding process. The plaintiff argued that the VA’s decision to award the RFPs as small business set-asides was arbitrary and capricious because although the winning bidders were both small businesses, they intended to fulfill their contracts by supplying the product of a large business, in violation of the NMR. Id. at 395. The VA contended that the NMR was inapplicable to those RFP’s because the rule “applies only to contracts for the supply of manufactured products alone, and not to contracts like these, which call for the supply of both manufactured products and services.” Id. at 411.

In holding that the NMR applies to service-coded contracts that also involved the provision of supplies, the Rotech court looked at the plain statutory language of the statutory nonmanufacturer rule, focusing on the word “any.” (“An otherwise responsible business concern that is in compliance with the requirements of subparagraph (B) shall not be denied the opportunity to submit and have considered its offer for any procurement contract for the supply of a product . . . .”). 15 U.S.C. § 637(a)(17)(A) (emphasis added). The Rotech Court noted that its “first task is to determine whether Congress has spoken on the precise issue contested by the parties, by examining the text of the statutory nonmanufacturer rule.” 71 Fed. Cl. at 418. In interpreting the text of the NMR, the court held that:

The court cannot, however, ignore Congress' clear choice of the word "any" as the only adjective describing the phrase "procurement contract for the supply of a product." 15 U.S.C. § 637(a)(17)(A) (emphasis added). By opting not to use further modifying terms, such as "primarily," "principally," or "entirely," Congress declined to limit, in any way, the specific types of "procurement contract[s] for the supply of a product" to which the restriction should apply. Indeed, the broad scope of the language used in § 637(a)(17) is even clearer when it is compared with the terms used in another federal procurement statute, the Service Contract Act of 1965 (the Service Contract Act), 41 U.S.C. §§ 351-58 (2000). That statute applies to "every contract . . . the principal purpose of which is to furnish services . . . ." Id. § 351 (emphasis added). Its counterpart, the Walsh-Healy Public Contracts Act, 41 U.S.C. § 35 et seq. (2000), applies to contracts for which the principal purpose is not the furnishing of services, but instead, "the manufacture or furnishing of materials, supplies, articles, or equipment . . . ." Id. § 35. As the language of the Service Contract Act makes clear, Congress can, and does, sometimes include in its language limiting terms which carefully define a statute's scope. See and compare Murakami, 398 F.3d at 1352 (stating that if Congress intended a statute to be more narrow than its plain language suggested, it "could have used stricter language in crafting the Act") (citing Doyon, Ltd. v. United States, 214 F.3d 1309, 1316 (Fed. Cir. 2000)). Congress' refusal to do so here is clear and unambiguous, and must be respected.

Rotech, 71 Fed. Cl. at 420. Succinctly put, “that language clearly and unambiguously provides that the nonmanufacturer rule applies to all supply contracts, whether they implicate some level of services or not. No legislative intent sufficient to overcome that plain reading of the statute exists here.” Id. at 421. The court then analyzed the contents of both RFPs to determine whether they were for services or supplies and concluded that while each RFP included both supply and service elements, “the value of the contracts is mostly, if not entirely, attributable to the portion which calls for the supply of manufactured products.” Id. at 430. Thus, it was found that, regardless of the assigned NAICS code, the contracts were for supplies and thus the NMR was applicable. Id.

However, after the 2006 Rotech holding, in 2011, the Small Business Administration (“SBA”) promulgated 13 C.F.R. § 121.406, addressing the problem of mixed service and supply contracts. In sum, the regulation states that the NMR does not apply to contracts that have been assigned a service NAICS code (as in this case). Indeed, the regulation states that if a contract classified as a service contract has a supply component, the NMR does not apply to the supply component.8 Thus, the Government argues that despite any holding in Rotech concerning the applicability of the NMR to mixed contracts issued under NAICS service codes, the SBA’s subsequent promulgation of 13 C.F.R. § 121.406(b)(3) overrules such a holding. Def.’s Mot. J. Admin. R. at 35-36. In opposition, Rotech believes that the new regulations promulgated by the SBA are irrelevant because the Rotech court has already concluded the statutory language of the NMR is plain and unambiguous in its meaning. Pl.’s Mot. J. Admin. R. at 16. The Court is in agreement with Rotech on this issue. Since the Court of Federal Claims has already held that it is a plain and unambiguous statutory requirement that the NMR be applied to all contracts involving the provision of supplies, regardless of the NAICS code, this Court is not required to defer to subsequent agency regulation that is contrary to the statute.

In Chevron, U.S.A. Inc. v. NRDC, 467 U.S. 837 (1984), the United States Supreme Court held that “ambiguities in statutes within an agency's jurisdiction to administer are delegations of authority to the agency to fill the statutory gap in reasonable fashion.” Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 981 (2005) (citing Chevron, 467 U.S. at 865-866). This delegation of authority is commonly referred to as Chevron deference, referring to the deference that courts should pay to an agency’s determination in resolving ambiguities in a statute. However, as the Supreme Court later noted in Brand X Internet, “A court's prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion. This principle follows from Chevron itself.” Brand X Internet, 545 U.S. at 982. Thus, in order for a prior judicial opinion to trump a regulation promulgated by an agency regarding statutory construction, that judicial opinion must have held that the language of the statute was unambiguous. Such is the case here.

Nevertheless, to further bolster this point, Judge Bush examined the history of the statutory NMR, noting that “nothing in the legislative history of the Small Business Act indicates that Congress intended to create an exception to the nonmanufacturer rule like the one suggested by the government. In fact, the unique history of the rule, in its statutory and regulatory forms, indicates just the opposite.” Rotech, 71 Fed. Cl. at 420. As the court notes, at the time the statutory NMR was passed by Congress, its regulatory counterpart had existed for a number of years and had been interpreted by SBA-OHA decisions to apply only to contracts solely for the supply of manufactured goods. Id. at 421. By enacting the statutory NMR with language indicating that it should apply to any contract for supplies, Congress clearly evinced its intent to have the statute apply to all contracts involving the procurement of supplies and not just those contracts for supplies alone.

As the Rotech opinion clearly states, Judge Bush found the statutory NMR to be unambiguous in its application to contracts for the procurement of any supplies. Following the Brand X Internet standard set out by the Supreme Court, Rotech found that the unambiguous terms of the statutory NMR left no room for agency discretion on the matter. Thus, it is irrelevant to the controversy at hand that in 2011, five years after the Rotech decision, the SBA promulgated 13 C.F.R. § 121.406 in an attempt to narrow the scope of the statutory NMR. By its unambiguous language and clear use of the word “any” instead of more narrow language, Congress left no room for the SBA to change the scope of the statutory NMR.

b. The Solicitation is for a contract that includes supplies.

Because the statutory NMR applies, unambiguously, to all supply contracts, the next step of the Court’s inquiry is to determine whether the instant Solicitation is for a contract that includes supplies, in spite of its assigned NAICS service code. In Rotech, the court stated the standard thusly:

[T]he court rejects the contention that the NAICS codes chosen for these procurements are dispositive of whether they are ones for supplies or services. The code chosen by an agency's contracting officer is certainly one item of evidence which may be examined by the court in determining the nature of a particular procurement, and thus, whether it is subject to the nonmanufacturer rule. There is no support, however, for the contention that the label assigned to a procurement in fact determines the nature of the contract to be awarded thereunder.

71 Fed. Cl. at 429-430. In that case, as in the case before this Court, the court was presented with a solicitation for home oxygen supplies and services issued under NAICS code 532291. After examining the two RFP’s and comparing the value of the services and supplies required, the court concluded that the majority of the value of the contract was driven by the supply component, and thus the RFPs offered contracts for supplies, placing them squarely within the ambit of the statutory nonmanufacturer rule. Id. at 430. Thus, not only did the contract include supplies but the supply component also predominated.

Although the RFPs at issue in Rotech are not identical to the instant Solicitation, the Court finds them to be sufficiently similar such that the instant Solicitation can fairly be considered a contract for supplies. In Rotech, the court noted that “the majority of the line items listed in RFPs 583 and 247 are for manufactured products to be provided to VA patients. Only a handful relate to the provision of services. And, while it may be true that some costs are associated with the provision of those services, but simply are not billed separately, there is no evidence on this record to establish the relative size of those costs, or to show that they are anything more than ‘incidental.’” Rotech, 71 Fed. Cl. at 428.

Specifically, of the fifteen line items listed in RFP 583, fourteen identified manufactured goods. In the instant VISN 19 solicitation, the base year for the Fort Harrison VA Medical Center contains 23 line items, 14 of which are fairly described as calling for the procurement of supplies.10 Pl.’s Mot. J. Admin. R. at 6-7. While the supply-to-service line item ratio of the instant VISN 19 solicitation may not be as overwhelming at first glance as that of RFP 583, an examination of the line items show that, as in Rotech, the majority of the value of the contract will be derived from the supply of manufactured goods. Among the many service line items are:

• CLIN 0001 (Rental of Concentrator System, to have an estimated monthly quantity of 2100)
• CLIN 0006 (Rental of Portable Gaseous System, to have an estimated monthly quantity of 1200)
• CLIN 0019 (Portable Gaseous Contents, to have an estimated monthly quantity of 7800)
• CLIN 0020 (Portable Liquid Contents, to have an estimated monthly quantity of 6600).

AR at 422-425.

Conversely, the nine line items identified as services (CLINs 0001A, 0005A, 0010A, 0011A, 0013, 0014, 0015, 0016, and 0017) have a combined estimated monthly quantity of 223, with several line items having an estimated quantity of 0. Id. Looking at the comparison between supplies and services, it is fair to say that the majority of the value of the VISN 19 Solicitation is derived from the supplies to be provided rather than the services. Although the Government tries to differentiate the structure of the solicitation in Rotech (14 of 15 CLINs for supplies) from the instant solicitation (14 of 23 CLINs for supplies), this structure is heavily influenced by the Government’s decision to provide some patients with equipment already owned by the VA (CLINs 0014, 0015, 0016, and 0017). In those instances, a contractor is simply required to deliver and set up equipment already owned by the VA rather than procure a brand new device. However, looking at the actual numbers reveals that, for the base year in Fort Harrison, only 12 total devices owned by the VA will be provided for those four CLINs.

Even more telling is a comparison between CLIN 0001 and CLIN 0001A. Line item 0001 is for the rental of new concentrator systems procured by the contractor along with the delivery, set-up, and maintenance of such devices and calls for an estimated monthly quantity of 2100. Line item 0001A calls for the set-up and maintenance of VA owned concentrator systems in a monthly quantity of only 100. Although the Court has not been provided with any evidence of total estimated costs for each of these line items, the large and obvious difference in supplies to services leads this Court to believe that the vast majority of the value for the VISN 19 solicitation is tied to supplies rather than services. Thus, even though only 14 of the 23 CLINs call for supplies, the Court has no doubt that those 14 CLINs account for the large majority of the value of the contract compared to the 9 CLINs that call for a relatively small amount of services. The Government contends that although the majority of the line items contain a supply element, Rotech overlooks the significant service component attached to them. Def.’s Mot J. Admin. R. at 23. The significance of the service component is, however, irrelevant to the application of the NMR under the holding in Rotech as long as there is a supply component.

The Government’s argument that the VISN 19 solicitation is one for services rather than supplies because unlike the RFPs in Rotech, the instant solicitation calls for the contractor to rent out the home oxygen equipment rather than sell it to the VA is on firmer ground because a contract without a supply component would not fall under the NMR. Def.’s Mot. J. Admin. R. at 29 (“The principal purpose of this solicitation is not to obtain manufactured oxygen tanks because the government is not taking ownership of a manufactured product. The tanks belong to the offeror, not the Government. Instead, the solicitation involves the rental of such items and the services required to operate them.”) However, as Rotech correctly notes, “the NAICS rules make no distinctions regarding whether rental versus ownership determines the applicable NAICS code or even the principle purpose” and that “the NMR applies to ‘any procurement contract for the supply of a product . . . .’” Pl.’s Reply at 24. This position is sensible, because regardless of whether the VA is taking ownership of a product, home oxygen systems are still being provided to VA recipients, and a contractor must still find a way to acquire the necessary supplies in order to provide them. As Rotech correctly notes, multiple CLINs in the Rotech contract called for the provision of rented equipment and those were treated identically to CLINs calling for the purchase of new supplies. Pl.’s Mot. J. Admin. R. at 18. The entire purpose of the NMR is to ensure that when a small business contractor needs to acquire supplies it does not itself produce, it gets them from another small business concern. Whether renting the supplies or selling them, the small business contractor must still acquire them from another entity, and the NMR governs that transaction.

c. The NAICS code of Rotech’s current contract is not dispositive.

The Government is at pains to prove that the proper NAICS code was used in order to have the Court conclude that the contracts were service contracts. However, as this Court has already stated (in agreement with the Rotech court), the NAICS code does not determine whether a contract is one for supplies or for services for purposes of the application of the NMR, although it is certainly relevant evidence.

For example, the Government argues that since this court decided Rotech, the SBA-OHA and the GAO have issued several decisions regarding the selection of NAICS codes which help distinguish Rotech and explain why it is inapplicable to the instant case. Def.’s Mot. J. Admin. R. at 17-22. Furthermore, the Government contends that the proper NAICS code was used because Rotech, the incumbent contractor for VISN 19 since 2003, was awarded the VISN 19 contract, among many other contracts, under NAICS code 532291. Def.’s Mot. J. Admin R. at 27. The Government argues that it “stands to reason Rotech believes that the contract they have been performing for the last 6 years was properly constituted under the correct NAICS code” and that “[t]he only difference is that the current procurement is a small business set aside whereas the previous contract was unrestricted.” Id.

Although the issue of the proper NAICS code does not affect the Court’s decision regarding the application of the NMR, suffice it to say that code 532291 (Home Health Equipment Rental) seems more in line with the contracts in the solicitation than Rotech’s proffer, which is code 339112 (Surgical and Medical Instrument Manufacturing). Thus, the Court is not persuaded by Rotech’s fourth count that the VA used the wrong NAICS code. That said, the NAICS code is non-determinative as to whether a contract truly is one for supplies or services – that question must be answered by looking to the terms of the contract.

d. The issues raised in counts 1 and 3 are moot based on the Court’s finding that the NMR governs.

Regarding the issues raised in Count 1 (concerning various LOS rules) and Count 3 (concerning 48 C.F.R. § 19.502-2(b)(1)) the Court finds that those issues are presently moot. The VA acted in a manner that was contrary to law when it issued the VISN 19 solicitation without including the requirements of the NMR. Because the Solicitation fails for that reason, it is unnecessary for the Court to go into other potential shortcomings at this juncture.  (Rotech Healthcare Inc. v. U. S., No. 14-502C, September 19, 2014)  (pdf)


The primary issue in this case is whether (SBA’s Office of Hearings and Appeals) OHA’s decision that the CO’s designation of NAICS Code 541712 was improper and that NAICS Code 541513 was the appropriate designation, was arbitrary, capricious, or contrary to law.

Selection of the applicable NAICS code is governed by 13 C.F.R. § 121.402(b), which provides in pertinent part:

The procuring agency contracting officer, or authorized representative, designates the proper NAICS code and size standard in a solicitation, selecting the NAICS code which best describes the principal purpose of the product or service being acquired. Primary consideration is given to the industry descriptions in the NAICS United States Manual, the product or service description in the solicitation and any attachments to it, the relative value and importance of the components of the procurement making up the end item being procured, and the function of the goods or services being purchased. A procurement is usually classified according to the component which accounts for the greatest percentage of contract value.

13 C.F.R. § 121.402(b).

The NAICS Manual description of NAICS Code 541712 provides that this industry comprises “establishments primarily engaged in conducting research and experimental development (except biotechnology research and experimental development) in the physical, engineering, and life sciences, such as agriculture, electronics, environmental, biology, botany, computers, chemistry, food, fisheries, forests, geology, health, mathematics, medicine, oceanography, pharmacy, physics, veterinary and other allied subjects.” NAICS Manual; AR Tab 83 at 3249. The reference in the SBA’s regulations concerning NAICS Code 541712, however, provides that: “‘Research and Development’ means laboratory or other physical research and development. It does not include economic, educational, engineering, operations, systems, or other nonphysical research; or computer programming, data processing, commercial and/or medical laboratory testing.” 13 C.F.R. § 121.201 n.11(a).

The standard of review the OHA must apply in an NAICS code appeal is whether the CO’s NAICS code designation was based on “clear error of fact or law,” a showing for which the “appellant has the burden of proof, by a preponderance of the evidence.” 13 C.F.R. § 134.314. The OHA judge applied this standard, and came to the conclusion that the CO erred in assigning NAICS Code 541712 to the Solicitation. AR Tab 83 at 3249-3251. In Arcata’s January 4, 2013 Motion For Judgment On The Administrative Record and January 25, 2013 Response, however, it offered several arguments that OHA’s finding was arbitrary and capricious.

In reviewing whether the OHA’s decision was arbitrary and capricious, the court must determine whether OHA’s decision “examine[d] the relevant data and articulate[d] a satisfactory explanation for its action including a ‘rational connection between the facts found and the choice made.’” Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983) (quoting Burlington Truck Lines v. United States, 371 U.S. 156, 168 (1962)).

In this case, OHA reviewed the Solicitation and the PWS, the CO’s April 19, 2012 Memorandum defending his choice of NAICS Code 541712, the arguments of Delphi, the CO, and another prospective offeror, applicable OHA case law, and SBA regulations, in arriving at a reasoned explanation for his decision that the CO’s designation of NAICS Code 541712 was a “clear error of fact or law.” AR Tab 83 at 3251. OHA determined that the Solicitation did not anticipate the creation of new processes or products, which OHA precedent has considered an essential element of research and development. AR Tab 83 at 3250 (citing NAICS Appeal of Dayton T. Brown, Inc., SBA No. NAICS-5164, at 5-6 (“[P]rocurements classified under NAICS code 541712 must be for research and development, and thus must look to creating new processes or products.”); NAICS Appeal of Dynamac Corp., SBA No. NAICS-5025, at 8 (“While many of [the] tasks [identified in the solicitation] require scientific experience/expertise, they do not require the development of a new or improved product, which is the predicate of a research and development contract.”)). Nor did it anticipate that the contractor would perform “work that is an integral part of [NASA’s] research and development,” or “directly or independently perform research and development tasks.” AR Tab 83 at 3250-51. In addition, OHA found that the principal services required by the Solicitation were “engineering, operations, and computer support services,” activities that largely are excluded from the definition of “research and development” set forth in 13 C.F.R. § 121.201 n.11(a). AR Tab 83 at 3250 (citing NAICS Appeal of Advanced Sys. Tech., Inc., SBA No. NAICS-4774, at 20 (2006) (“[The] exclusion of operations research, systems research, and other nonphysical research, as well as computer programming and data processing, excludes the work required under this solicitation from being classified as research and development.”)).

For these reasons, the court has determined that OHA’s decision, concluding that the CO “clearly erred in classifying the acquisition under NAICS code 541712” (AR Tab 83 at 3249), was rational and not arbitrary and capricious. Moreover, “[e]ven if the court would have reached a different conclusion, the court may not reverse. The court may not substitute its judgment for that of the OHA judge.” Eagle Design, 57 Fed. Cl. at 274 (citing Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 416 (1971)).

(sections deleted)

Arcata’s primary argument is that OHA’s decision to substitute NAICS Code 541513 as the NAICS designation for the Solicitation lacked a rational basis. First, Arcata asserts that OHA’s decision was unsupported by the record, as it summarily discounted the CO’s conclusion that research and development was the primary work contemplated by the Solicitation. In doing so, Arcata asserts, OHA failed to give deference to the CO’s justifications for selecting NAICS Code 541712. As discussed above, the court has determined that OHA’s decision that NAICS Code 541712 was improper was not arbitrary and capricious. Moreover, OHA, having rationally determined that the CO “erred in assigning NAICS code 541712,” then properly considered the appropriateness of the NAICS code advanced by Delphi’s appeal. AR Tab 83 at 3251; see also Ceres, 52 Fed. Cl. at 35 (“The [OHA], in deciding an NAICS appeal, considers not only those NAICS codes advocated by the CO and the protestor, but also considers ‘any other . . . [NAICS] code it deems, sua sponte, arguably is appropriate for the solicitation.’” (quoting Information Ventures, Inc., SBA No. 4294, 1998 WL 128528 (1998)).

As previously discussed, selection of NAICS codes is governed by 13 C.F.R. § 121.402(b). This regulation provides that, in selecting a code, primary consideration is given to

the industry descriptions in the NAICS United States Manual, the product or service description in the solicitation and any attachments to it, the relative value and importance of the components of the procurement making up the end item being procured and the function of the goods or services being purchased.

13 C.F.R. § 121.402(b). NAICS Code 541513, titled “Computer Facilities Management Services,” provides:

This U.S. industry comprises establishments primarily engaged in providing on-site management and operation of clients’ computer systems and/or data processing facilities. Establishments providing computer systems or data processing facilities support services are included in this industry.

NAICS Manual.

Having found that the PWS divided the tasks required by the Solicitation into “three major categories: mission support services, operations and maintenance, and systems engineering” and reviewed the tasks falling into these categories, OHA then concluded that the services described by NAICS Code 541513 fit “a large portion” of the services required by the Solicitation, “particularly the ‘mission support services’ and ‘operations and maintenance’ portions of the PWS.” AR Tab 83 at 3243, 3251. OHA clearly recognized that, “[w]hile there is no single NAICS code that applies to the full range of services being acquired under this contract, applicable regulations instruct that the CO should select the code ‘which accounts for the greatest percentage of contract value.’” AR Tab 83 at 3251. The CO, in his response to Delphi’s NAICS code appeal, had determined that NAICS Code 541712 comprised the single largest percentage of contract value for the predecessor contract, but his analysis also determined that NAICS Code 541513 “is attributed to approximately 15% of the overall proposed effort.” AR Tab 48 at 1667; see also AR Tab 83 at 3245. Having determined that NAICS Code 541712 was not an appropriate designation for the Solicitation, OHA then determined that NAICS Code 541513 and other related information technology work, could reasonably be grouped together, to “constitute[] the bulk of the anticipated work.” AR Tab 83 at 3251.

The court has reviewed the Solicitation, the PWS, and OHA’s decision rejecting the designation of NAICS Code 541712, and has determined that OHA’s decision regarding NAICS Code 541513 was well reasoned and rational. The court also has determined that OHA’s decision was not arbitrary and capricious. Several major portions of the PWS, as OHA noted, anticipate tasks involving operating, implementing, and maintaining various systems at NASA that reasonably can be described as “management and operation of . . . computer systems and/or data processing facilities” under NAICS Code 541513. See, e.g., AR Tab 69 at 2652-66 (including, inter alia, PWS § 3.2 “Operations, Maintenance, and Repair Requirements,” § 3.2.4 “Systems Operations and Maintenance Plan,” § 3.2.5 “Facility Management,” § 4.1 “Mission Support Services” (including tasks described as operations and “system maintenance” for various NASA Dryden systems, as well as “computer systems operations”), and § 4.2 “Operations and Maintenance” (including tasks described as IT support services, “system administration and related system management services” for NASA Dryden’s data center, security control centers, and various other labs, centers and systems at NASA)). Although it is true that NAICS Code 541513 does not cover every aspect of the Solicitation, such as the design and training requirements of the PWS, the selected NAICS code “need not be a perfect fit to every facet of the performance work statement.” InGenesis, 104 Fed. Cl. at 52. Moreover, the fact that NAICS Code 541513 constituted the second highest percentage of contract value under the CO’s analysis (AR Tab 48 at 1667), supports the conclusion that OHA’s decision in rejecting the applicability of NAICS Code 541712, was not contrary to law, arbitrary, nor capricious.

Arcata also argues that NAICS Code 541513 is not appropriate because the Solicitation envisions off-site work. Arcata’s examples of off-site work, however, with one exception,2 show only a possibility of such work with respect to limited tasks defined in the Solicitation. AR Tab 69 at 2648 (“[S]ome WBS elements may require work at other sites. In such cases, the contractor shall arrange and coordinate all travel required to accomplish the requirements.”) (emphasis added); AR Tab 69 at 2649 (section 2.6 of the PWS, entitled “ON-SITE/OFF SITE CONTRACTOR EFFORT,” providing that “travel may be required to support off-site operations,” and that “the contractor shall also perform one-time-only requirements, such as a study or system development, where it may be appropriate to use off-site resources and other than Government-furnished equipment.”). Otherwise, the Solicitation contemplated a broad range of operations, engineering, systems, and computer support services to be performed on-site, as discussed above.

For these reasons, the court has determined that Arcata failed to establish that OHA’s decision that the applicable NAICS Code was 541513 was unlawful, irrational, or arbitrary and capricious.  (Arcata Associates Inc. v U. S., No. 12-846C, April 3, 2013)  (pdf)


Plaintiff advances three arguments in its motion for judgment on the administrative record: (1) selection of NAICS code 621111 rendered the solicitation unduly restrictive of competition, (2) the Army’s selection of code 621111 instead of code 622110 was arbitrary, capricious, and lacked a rational basis, and (3) the SBA OHA’s decision to affirm the contracting officer was likewise arbitrary, capricious, or otherwise contrary to law. In response, defendant argues that the contracting officer’s code designation was rational because NAICS code 621111 best describes the services being solicited. For the same reasons, defendant argues that SBA OHA’s decision to affirm the contracting officer’s NAICS code designation was reasonable.

Plaintiff’s motion for judgment on the administrative record relies heavily on [protester's corporate president] Ms. Edwards’s declaration and its supporting documentation. Before we can examine the merits of plaintiff’s substantive arguments, therefore, we must first decide whether we may consider the information contained within her declaration and its attached exhibits.

I. Ms. Edwards’s declaration is not needed to allow effective judicial review.

Because of the level of deference accorded to agency action, we typically review the administrative record already in existence, “not some new record made initially by the reviewing court.” Camp v. Pitts, 411 U.S. 138, 142 (1973). As the Federal Circuit has noted, we must consider the propriety of “‘the agency decision based on the record the agency presents to the reviewing court.’” Axiom Res. Mgmt., Inc. v. United States, 564 F.3d 1374, 1380 (Fed. Cir. 2009) (quoting Fla. Power & Light Co. v. Lorion, 470 U.S. 729, 743-44 (1985)). While this rule is not absolute, the administrative record should be supplemented only in limited cases in which “the omission of extrarecord evidence precludes effective judicial review.” Id.

Ms. Edwards is experienced in providing medical staffing, and she makes the following points. The instant solicitation is a “follow-on” contract to a prior solicitation for physician services, W81K04-08-R-0022. Decl. ¶ 4. The prior solicitation was classified with NAICS Code 621111 giving it a small business revenue limit, as amended, of $10 million. Decl. ¶ 5. Ingenesis Arora Staffing, LLC, a joint venture in which plaintiff is a partner, no longer qualifies under the 621111 small business set aside limit, but it does qualify under the set aside allowed by 622110. Decl. ¶¶ 7-8, 13-14. With regard to the prior solicitation, Ms. Edwards asserts that the “task orders issued by defendant have been primarily for the services of Psychiatrists.” Decl. ¶ 15. Specifically, she notes that “[o]ut of a total full time employees (FTE) of thirty-five, twenty [approximately 57%] have been Psychiatrists.” Decl. ¶ 15. In terms of dollar value provided, she notes that mental health services account for sixty-four percent of the total. Decl. ¶ 15.

She also states that, “It has been my experience that federal agencies commonly use NAICS Code 622110 when soliciting for medical staffing.” Decl. ¶ 17. According to Ms. Edwards, based on reviewing the FedBizOpps website, since the prior solicitation was issued, federal agencies have issued at least forty-seven solicitations under NAICS code 622110 for medical staff to augment existing medical centers. Decl. ¶ 18. She asserts that, based on her review of federal agency staffing, most positions to be furnished are ones that provide inpatient or mental health services. Decl. ¶ 20. Based on plaintiff’s current contracts with defendant, she asserts that “eighty-four percent of the physicians we have furnished are providing inpatient and/or mental health services.” Decl. ¶ 23. Finally, she notes that, concurrent with the instant solicitation, defendant also issued the solicitation for ancillary services using NAICS code 622110. Plaintiff argues that the above information is needed to demonstrate the extent to which psychiatric care will be required and that the services being procured are primarily inpatient in nature.

(sections deleted)

The gist of plaintiff’s submission is that Ms. Edwards would have picked a different code, based on her own experience in contracting with the government for medical services. There are a number of difficulties with entertaining this collateral attack on the solicitation. The most basic is that it presumes we conduct a de novo review of the contracting officer’s work. No doubt every bidder would like to kibitz the contracting officer’s handling of the procurement, offering additional information to consider, challenging the government’s assessment of how much work of certain types could be anticipated, or suggesting what the government really needs. But the question is not whether more information might have been available, or what someone else might have done, but whether the “additional evidence [is] necessary,” Axiom, F.3d at 1380, for the court to conduct its very limited review. The court in Axiom cautioned in particular against unnecessarily expanding review beyond the administrative record in existence and thereby “using new evidence to convert the arbitrary and capricious standard into effectively de novo review.” Id. (internal quotations omitted).

A bid protest is not an opportunity to second-guess the agency’s determinations of what it needs. And we specifically have been reluctant to consult prior solicitations in determining whether the decisions in a disputed solicitation were arbitrary or capricious. See NEQ, LLC v. United States, 86 Fed. Cl. 592, 594 (2009). Moreover, neither the extent of inpatient versus outpatient treatment nor the extent of psychiatric services is ultimately dispositive. We are prepared to assume that the Army wants psychiatrists and anticipates the furnishing of significant inpatient treatment. That much appears of record and is sufficient to frame plaintiff’s claims. Anything further would convert this into a de novo review.

II. The selection of NAICS Code 621111 was not arbitrary, capricious, or otherwise not in accord with the law

Plaintiff argues that the contracting officer erred in selecting NAICS code 621111 and that SBA OHA erred in affirming that code selection. The arguments are similar on both fronts and have the following common denominator: NAICS code 621111 does not capture the principal purpose of the solicitation because the Army is seeking psychiatric services and inpatient care providers. We disagree.

A. Soliciting psychiatric services does not preclude using code 621111

The parties agree that the contracting officer must select only one NAICS code for this contract. The fact that there does not exist one code that perfectly captures all elements of the work statement is unfortunate but simply a fact of life in small business contracting. It is understood that the role of the contracting officer is simply to “select the NAICS code which best describes the principal purpose of the product or service being acquired.” Ceres, 52 Fed. Cl. at 25 (citing 13 C.F.R. § 121.402(b)); see also 48 C.F.R. § 19.303(a) (2011). Primary consideration is given to:

The industry descriptions in the NAICS United States Manual, the product or service description in the solicitation and any attachments to it, the relative value and importance of the components of the procurement making up the end item being procured, and the function of the goods or services being purchased.

13 C.F.R. § 121.402(b).

The beginning point in code selection, therefore, is the principal purpose of the work being contracted. Defendant argues and plaintiff has to concede that the Army is looking for physicians in a wide range of specialties (including psychiatry) to work in government facilities. It may also be useful to highlight what the Army is not looking for: physical facilities, hospitals, phlebotomists, cafeterias, janitorial services, emergency rooms, etc. In this solicitation, it is looking for doctors, and nothing else.

It is understandable, therefore, that the following code appeared to be a good fit:

This U.S. industry comprises establishments of health practitioners having the degree of M.D. (Doctor of medicine) or D.O. (Doctor of osteopathy) primarily engaged in the independent practice of general or specialized medicine (except psychiatry or psychoanalysis) or surgery. These practitioners operate private or group practices in their own offices (e.g., centers, clinics) or in the facilities of others, such as hospitals or HMO medical centers.

This is, of course, NAICS code 621111, the code under which plaintiff currently provides these services and the code selected by the contracting officer and affirmed by SBA OHA.

Plaintiff’s first argument against this code is that it specifically does not include psychiatric services, which are classified separately under code 621112, “Offices of Physicians, Mental Health Specialists.” The contracting officer noted that under the instant solicitation, approximately [ ]% to [ ]% of the total physician labor required would constitute psychiatric services. AR 514. Plaintiff suggests that volume could be higher, but it has to concede that Code 621112 cannot be appropriate because, by including only psychiatric services, it excludes all non-psychiatric services. The contracting officer could pick only one code, so he understandably picked the most generalized physician-specific code, 621111. Plaintiff has not argued that the NAICS code selected would preclude the Army from seeking psychiatric services. If it did, then plaintiff could not supply psychiatrists under the current contract–a position that plaintiff clearly does not take.

The purpose of the NAICS code determination is not to find a perfect fit, only a fit that describes the principal purpose of the services being acquired. The principal purpose of this solicitation was to procure physicians across various specialties and to have them work in existing government facilities; code 621111 fully aligns with that purpose.

B. Any inpatient versus outpatient distinction is not sufficient to render the selection of code 621111 arbitrary or capricious.

The second argument plaintiff offers with the use of code 621111 is that in the NAICS taxonomy scheme, code 621111 falls underneath the umbrella of subsector 621, “Ambulatory Health Care Services,” which states that providers in this subsector, “do not usually provide inpatient services.” NAICS 621, 2007 WL 6902771 (NAICS). We could question the logic of characterizing physicians such as neurosurgeons, practitioners of emergency medicine, radiologists, anesthesiologists, gastroenterologists, general surgeons, and plastic surgeons as not “usually provid[ing] inpatient services,” but that anomaly is inherent in the NAICS code structure itself and not created by the contracting officer. Indeed, in its briefing and in reliance on Ms. Edwards’s declaration, plaintiff states that “[a]s part of the incumbent contract, 79% of the physicians provided to the Army by plaintiff perform inpatient services,” and that “less than one-third of the value of the [incumbent contract] consists of services that fit within the ambulatory sector 621.” Pl.’s Mot. J. 23.

We decline to permit this generalized and not directly controlling introductory language to trump the more particularized and directly controlling language of NAICS code 621111 itself. The chosen code contains no limitations on whether the physicians do primarily inpatient or outpatient work. This no doubt suited the Army well, given the fact that all of the work would be done in its own hospitals and clinics. The distinction would therefore be immaterial.

In any event, while subsector 621 provides that ambulatory health care providers do not usually provide inpatient services, this does not mean that such providers are precluded from providing inpatient services. We agree with SBA OHA’s observation that in some solicitations, potentially “‘no one designation can be a perfect fit.’” AR 537 (quoting NAICS Appeal of AllSource Global Mgmt. LLC, SBA No. NAICS-5292, at 7 (2011)).

C. The failure to use NAICS code 621110 was not arbitrary or capricious

Plaintiff contends that the contracting officer overlooked a more logical NAICS code, 621110, which was used in the companion “Ancillary Services” solicitation. This code has two virtues, at least from plaintiff’s perspective. The most salient is that it has a much higher small business threshold, $34,500,000, under which plaintiff fits. The second is that, as the government concedes, 621110 is written so broadly that it could theoretically cover all the physician services the government wants, including psychiatrists. We repeat the description:

This industry comprises establishments known and licensed as general medical and surgical hospitals primarily engaged in providing diagnostic and medical treatment (both surgical and nonsurgical) to inpatients with any of a wide variety of medical conditions. These establishments maintain inpatient beds and provide patients with food services that meet their nutritional requirements. These hospitals have an organized staff of physicians and other medical staff to provide patient care services. These establishments usually provide other services, such as outpatient services, anatomical pathology services, diagnostic X-ray services, clinical laboratory services, operating room services for a variety of procedures, and pharmacy services.

NAICS 622110, 2007 WL 6902817 (NAICS). The code thus includes physicians generally, along with a wide array of associated facilities and services, including the furnishing of hospitals themselves.

The agency rejected this code as insufficiently focused on the primary purpose of this particular solicitation, however, which was physicians. The question that the contracting officer faced was this: should I pick a code that is much more narrowly tailored to what the Army wants, namely a broad array of physicians, despite the fact that it excludes psychiatrists, or should I use a much broader code that includes physicians, but includes virtually everything else associated with general purpose hospitals?

The contracting officer chose the former, and thus the question before us is not what the court would have chosen, but whether the contracting officer’s choice was arbitrary or capricious. We think it plainly was not. Casting a net wide enough to include bidders capable of furnishing fully operational hospitals with all allied services seems far in excess of the only thing the agency wanted: portable doctors. This is particularly true in view of our prior conclusions that the nominal exclusion of psychiatrists and the general characterizations of the ambulatory care subsector were not problematic.

D. The contracting officer’s NAICS code designation did not otherwise violate applicable statutes or regulations.

Plaintiff also advances generalized arguments based on the requirement for full and open competition requirements under the Competition in Contracting Act (“CICA”), 10 U.S.C. § 2305 (2006). Under CICA, the government must procure goods and services in such a way as to “achieve full and open competition.” Id. § 2305(a)(1)(A)(I). Specifically, plaintiff argues that, due to the size limitations, competition is unduly restricted because plaintiff cannot submit a proposal. These arguments are unconvincing. CICA expressly allows the government to favor small businesses to further the policies of the Small Business Act, 15 U.S.C. §§ 638, 644. 10 U.S.C. § 2304(b)(2). Moreover, Federal Acquisition Regulation 6.203 specifically allows “contracting officers [to] set aside solicitations to allow only such [small] business concerns to compete.” 48 C.F.R. § 6.203(a). Indeed, “[n]o separate justification or determination and findings is required under this part to set aside a contract action for small business concerns.” Id. § 6.203(b). It is not up to the court to decide how small is too small.

In sum, the selected code captures the principal purpose of the contract. It need not be a perfect fit to every facet of the performance work statement. The solicitation sought the services of physicians in a wide-range of specialties who can practice in military treatment facilities. That is the exact essence of code 621111. Thus, the contracting officer’s selection of code 621111 and the SBA OHA’s affirmation of that code were not arbitrary, capricious, or otherwise not in accord with the law.  (InGenesis, Inc., v. U. S., No. 11-754, March 23, 2012) (pdf)


B. The Non-Manufacturer Rule

Rotech’s principal contention is that the VA’s decision to award small business set-aside contracts to Mitchell and FCC under RFP 583 is arbitrary, capricious, an abuse of discretion, and contrary to law. Rotech argues, specifically, that the VA erred when it decided to award the contracts to Mitchell and FCC without determining their compliance with the Small Business Act’s nonmanufacturer rule. Rotech argues that because the value of the contracts to be awarded is derived principally from the supply of home oxygen products, any offeror which seeks to qualify under the terms of the solicitation must comply with that provision of the Act, by supplying home oxygen equipment manufactured by a small business. Plaintiff asserts that neither Mitchell nor FCC intends to do so, and thus, they are ineligible for small business awards in the context of these procurements. Rotech asks the court to permanently enjoin any small business setaside awards to Mitchell or FCC, and to order the VA to apply the nonmanufacturer rule to the contested procurements or to conduct a resolicitation which complies with the rule. In response, defendant admits that the VA made no findings on whether Mitchell or FCC will comply with the non-manufacturer rule. The government contends that such findings are not necessary, however, because the rule does not apply to RFPs 583 and 247. The United States insists that the non-manufacturer rule applies only to contracts for the supply of manufactured products alone, and not to contracts like these, which call for the supply of both manufactured products and services. Indeed, the VA took that position early in this dispute, as demonstrated by a written statement from the CO for RFP 583:

The proposed contracts for home oxygen services are service contracts. The nonmanufacturer rule is not applicable to this procurement. It is not solely for manufactured products (oxygen), but also requires the contractor to perform a significant number of services. The Small Business Administration’s Office of Hearings and Appeals has held that the nonmanufacturer rule applies to procurements solely for manufactured products, and not to procurements which include services.

AR at 478. Based on this interpretation of the non-manufacturer rule, defendant argues that its conduct here was proper, and should be allowed to proceed.

There is no question that Rotech’s protest is centered on the Small Business Act of 1958, 15 U.S.C. §§ 631-51 (2000). The United States Congress first created the Act in 1953 to “aid, counsel, assist, and protect . . . the interests of smallbusiness concerns in order to preserve free competitive enterprise [and] to insure that a fair proportion of the total purchases and contracts or subcontracts for property and services for the Government . . . be placed with small-business enterprises.” Flexfab, L.L.C. v. United States, 424 F.3d 1254, 1256 (Fed. Cir. 2005) (citing 15 U.S.C. § 631(a)); see also Contract Mgmt., Inc. v. Rumsfeld, 434 F.3d 1145, 1147 (9th Cir. 2006); 134 Cong. Rec. E3597-03 (daily ed. Oct. 12, 1988) (statement of Rep. Aspen). To that end, the Act “directs federal agencies to reserve some government contracts for small businesses,” Columbian Rope Co. v. Sec’y of Army, 142 F.3d 1313, 1315 (D.C. Cir. 1998), with a “‘Government-wide goal for participation by small business concerns . . . [of] not less than 23 percent of the total value of all prime contracts for each fiscal year.’” Contract Management, 434 F.3d at 1147 (quoting 15 U.S.C. § 644(g)(1)). A business is considered a “small business concern” under the Act only if it is “independently owned and operated” and “not dominant in its field of operation.” Columbian Rope, 142 F.3d at 1315 (quoting 15 U.S.C. § 632(a)(1)). The task of establishing criteria to determine whether individual companies qualify as small businesses, and applying those criteria in individual cases, has been delegated by Congress to the SBA. Id. (citing 15 U.S.C. §§ 632(a)(2)(A), 637(b)(6)). Federal agencies work together with the SBA to establish small business set-asides for contract solicitations. Contract Management, 434 F.3d at 1147 (citing 15 U.S.C. § 644(a)).

The Small Business Act imposes a number of requirements which businesses must satisfy if they wish to claim a small business preference in government procurements. Most important to this lawsuit is the Act’s requirement “that nonmanufacturer recipients of small business set-aside[] . . . contracts for manufactured products . . . provide the product of domestic small manufacturers or processors on small business set-asides . . . – the so-called ‘nonmanufacturer rule.’” 35 No. 37 Gov’t Contractor 598 (Sept. 29, 1993). The clear purpose of the non-manufacturer rule is “to prevent brokerage-type arrangements whereby small ‘front’ organizations are set up to bid [on] government contracts, but furnish the supplies of a large concern.” Size Appeal of BNF Mfg. Corp., SBA No. 633 (1973). The rule serves, in other words, “to prevent dealers from acting as mere conduits for the products of large manufacturers on small business set-aside procurements.” Size Appeal of Fire-Tec, SBA No. 1262 (1979); see also Size Appeal of Nuclear Research Corp., SBA No. 2828 (1988). The non-manufacturer rule began as a regulation created by the SBA as a part of its effort to promote small business in the United States. See Small Business Size Standards, 49 Fed. Reg. 27925 (July 9, 1984) (citing 13 C.F.R. § 121.5(b)(2) (1984)). In 1988, however, during a major overhaul of the terms of the Small Business Act, Congress codified the rule as a separate section of the statute itself. See Business Opportunity Development Reform Act of 1988, Pub. L. No. 100-656, 102 Stat. 3853 (1988); 15 U.S.C. § 637(a)(17) (1988). In this lawsuit, the parties disagree on both the scope of the statutory non-manufacturer rule and the nature of RFPs 583 and 247. Both of those issues affect whether the awards to Mitchell and FCC fall within the statute’s purview. Accordingly, this protest presents questions of both statutory and contractual interpretation.

1. Interpretation of the Statute-To What Does it Apply?

(sections deleted)

Here, the central question presented is whether the statutory nonmanufacturer rule applies to the contracts offered by RFPs 583 and 247. The starting point in answering that question is, of course, the statutory language. Barnhart, 534 U.S. at 450. The statutory rule, found at 15 U.S.C. § 637(a)(17), provides, in relevant part, as follows:

(A) An otherwise responsible business concern that is in compliance with the requirements of subparagraph (B) shall not be denied the opportunity to submit and have considered its offer for any procurement contract for the supply of a product to let pursuant to this subsection or subsection (a) of section 644 of this title solely because such concern is other than the actual manufacturer or processor of the product to be supplied under the contract.

(B) To be in compliance with the requirements referred to in subparagraph (A), such a business concern shall –

(i) be primarily engaged in the wholesale or retail trade;

(ii) be a small business concern under the numerical size standard for the Standard Industrial Classification Code assigned to the contract solicitation on which the offer is being made;

(iii) be a regular dealer, as defined pursuant to section 35(a) of Title 41 (popularly referred to as the Walsh-Healey Public Contracts Act), in the product to be offered the Government or be specifically exempted from such section by section 636(j)(13)(c) of this title; and

(iv) represent that it will supply the product of a domestic small business manufacturer or processor, unless a waiver of such requirement is granted - -

(I) by the Administrator, after reviewing a
determination by the contracting officer that no small business manufacturer or processor can reasonably be expected to offer a product meeting the specifications (including period for performance) required of an offeror by the solicitation; or

(II) by the Administrator for a product (or class of products), after determining that no small business manufacturer or processor is available to participate in the Federal procurement market.

15 U.S.C. § 637(a)(17).

(Pages deleted)

In the court’s view, the regulatory history underlying SBA’s version of the non-manufacturer rule supports the interpretation of the statute which is urged by Rotech. To show that mixed-purpose contracts are outside the rule’s purview, defendant relies on the agency’s statement in 1984 that the rule applied in cases of “a contract other than a construction or service contract,” and on its 1995 statement that the rule applies to a “procurement of manufactured or processed products.” Def.’s Resp. at 3 (citing Small Business Size Standards, 49 Fed. Reg. 27925 (July 9, 1984); Small Business Size Regulations; Non-Manufacturer Rule, 60 Fed. Reg. 27924 (May 16, 1995)). Notably absent from either of those statements, however, is use of the word “solely” or “principally,” or any other term which would narrow the range of supply contracts within the regulation’s scope. Similarly, the text of prior versions of the regulation state that the rule does not apply to “construction or service contracts,” but none speaks to the issue of mixed-purpose contracts, or provides that a manufacturing contract which involves an incidental amount of services is to be treated as an exempt service contract. See id.; compare 48 C.F.R. § 52.219-6(c). Further, and most importantly, the current version of the nonmanufacturer regulation, which followed the enactment of the non-manufacturer statute, completely removed the exception for “construction or service contract[s]” from its language. See 13 C.F.R. § 121.406.

There is absolutely no question that contracts for services are not subject to the non-manufacturer rule. Defendant has presented more than adequate support for that proposition, citing legislative and regulatory history and provisions of the Code of Federal Regulations to that effect. The next inferential leap in defendant’s argument, however, that any service aspect of a contract, no matter how minute, exempts a contract from that rule, is unsupported, save a handful of questionable agency decisions. It is true that the SBA has examined the non-manufacturer rule and has interpreted it to apply only to contracts solely for the supply of a product. At other times, however, it has arrived at an opposite conclusion. Compare Arizona Medical Supply, SBA No. 1295 (1979) with Empire Home Medical, SBA No. 4291 (1998). More importantly, the plain language of the statutory nonmanufacturer rule, which is yet to be interpreted explicitly by an agency or court, utilizes exceptionally broad wording. See 15 U.S.C. § 637(a)(17). By its plain and ordinary meaning, that statute applies to all manufacturing contracts, whether accompanied by an ancillary request for services or not. Id. And again, nothing in the scant legislative history behind the Act demonstrates congressional intent to attribute a meaning to the statute which is different than the one espoused by its clear language.

Finally, there is no question that, if the VA’s interpretation of the nonmanufacturer rule is allowed to stand, it will significantly undermine the Small Business Act’s primary goal–to promote the participation of small businesses in federal government contracting. Again, the non-manufacturer rule was “designed to ensure that small businesses actually perform a significant part of the work required by government contracts that they win.” Colombian Rope, 142 F.3d at 1315. Here, however, it is impossible to overlook the reality that, if Mitchell and FCC receive small business awards under RFPs 583 and 247, they will “act[] as mere conduits for the products of large manufacturers on small business set-aside procurements.” See Size Appeal of Fire-Tec, SBA No. 1262 (1979); see also Size Appeal of Nuclear Research Corp., SBA No. 2828 (1988). This is exactly the sort of arrangement which the non-manufacturer rule was created to prevent. It is true that Mitchell and FCC will benefit marginally from those awards, by earning profits associated with the resale of home oxygen equipment to the VA. However, their participation will undercut the intended, and much greater benefit which would be enjoyed by a small business chosen to supply that equipment to the VA directly.

For all of these reasons, the court concludes that the statutory nonmanufacturer rule does, in fact, apply to contracts for the supply of manufactured items which also require the provision of some services. It follows, then, that the rule applies to the contracts offered via RFPs 583 and 247. Accordingly, the VA’s decision to award work under those solicitations, without examining each offeror’s intent to comply with the rule, was arbitrary and capricious. In an abundance of caution, however, the court will go on to consider the second prong of the parties’ dispute. Assuming that contracts which call for a significant number of services are exempt from the non-manufacturer rule, Rotech and the United States also disagree on whether RFPs 583 and 247 fall within that exception.

2. Interpretation of the Solicitations - Contracts for Supplies, Services, or Both?

(sections deleted)

The second issue central to this protest is whether RFPs 583 and 247 offer contracts for supplies only, or contracts for both supplies and services. Rotech argues that, even if the non-manufacturer statute is narrow, and applies only to contracts solely for the provision of manufactured goods, RFPs 583 and 247 nevertheless fall within its scope. Plaintiff argues that the services required under the proposed contracts are so slight in comparison to the manufactured goods required thereunder that they are de minimus. Rotech claims, therefore, that the contested RFPs may be characterized as offering contracts solely for manufactured goods, to which the rule undoubtedly applies. Defendant disagrees, arguing that the procurements require a significant number of services, and thus fall outside the statute’s purview. These arguments make it clear that, even assuming defendant’s interpretation of the rule to be correct, the United States must also establish that these RFPs actually offer mixed-purpose contracts necessarily classified as service contracts instead of supply contracts in order to prevail in this protest. Accordingly, the government’s contentions regarding the nature of RFPs 583 and 247 are critical to its claim that the VA’s conduct was proper.

As the briefing summarized above makes clear, the parties agree that RFPs 583 and 247 include some terms which describe supplies, and others which describe services. They disagree, however, on the significance of the “service” clauses, and whether they are prevalent enough to remove the RFPs from the scope of the non-manufacturer rule. A comparison of the terms disputed here with others previously examined by SBA and the courts is helpful to assess their import. Both parties cite to one of the earliest administrative decisions on point, John R. Bermingham, which dealt with this issue in some detail. In John R. Bermingham, the challenged solicitation called for “a combination of work which could be classified as ‘service’ and ‘supply.’” SBA No. 1889 (1984). Specifically, it required “Class ‘B’ Overhaul [which] include[d] restorations, parts, replacement and adjustments required to restore the dimensions and clearances to within the tolerances specified in the applicable technical manuals, [d]rawings and plans.” Id. On review, the SBA noted that several clauses of the solicitation indicated that the contract being offered was one for supplies. For example, the document identified the manufacturer, the dealer, and the place of performance. On the other hand, the solicitation also included language applicable only to service contracts. The “General Provisions” section stated “DAR REQUIRED CLAUSES FOR FIRS FIXED PRICE SERVICE CONTRACTS.” In addition, the procurement had been assigned Standard Industries Classification Code 7699, titled “Repair Shops and Related Services not Elsewhere Classified.” After considering these terms, the SBA determined that the contract was one for services, because the awardee would not provide new supplies to the agency, but instead would only refurbish existing ones. Id. (“Bermingham would be providing a service to the Department of the Navy by accomplishing the overhaul of Leslie Regulators/Controllers. Leslie would be supplying to Bermingham the end item, the overhauled regulator or controllers . . . and not a new item. It is therefore, found that this solicitation is a ‘Service’ contract . . . .”).

Here, as in John R. Bermingham, the terms of the RFPs appear to conflict with one another, because they include some terms which apply to supply contracts, and others which apply to service contracts. These RFPs are different, however, because both undoubtedly call for the provision of new home oxygen equipment. Part III of RFP 583, titled “Scope of Contract and Statement of Work,” provides that “[a]ll equipment is to be current state-of-art model and all supplies are to be new.” AR at 327. Clearly, these are not contracts for refurbishment which can be classified as “services” contracts under the reasoning of John R. Bermingham. Accordingly, that decision provides little guidance here.

(sections deleted)

In the court’s view, the situation presented here most resembles that reviewed in Arizona Medical Supply, SBA No. 1295 (1979). There, as here, the solicitation required the proposed awardee to sell new medical equipment to the procuring agency, and to deliver, retrieve, maintain, and store all such equipment, old and new. Id. In considering whether the procurement was one for services or supplies, the SBA noted carefully that “[t]he only separate charge identified on the solicitation other than for sale of the equipment is for pickup and delivery.” It also emphasized that, according to the agency’s contracting officer, “the great proportion of the value was [to be] for the equipment . . . .” Id. The SBA concluded that because most of the value of the procurement related to the supply of equipment, and the comparative value of the services was incidental, the procurement was “primarily for the sale of prosthetic equipment.” Id. The same is true here. As plaintiff has underscored repeatedly, the majority of the line items listed in RFPs 583 and 247 are for manufactured products to be provided to VA patients. Only a handful relate to the provision of services. And, while it may be true that some costs are associated with the provision of those services, but simply are not billed separately, there is no evidence on this record to establish the relative size of those costs, or to show that they are anything more than “incidental.” The court appreciates the United States’ argument that the cost of servicing each item of manufactured equipment represents a portion of each item’s total sale price. There is no evidence, however, to quantify that claim. On this record, the “services” portions of the contracts offered under RFPs 583 and 247 are slight in comparison to the supply portions. For that reason, the court cannot conclude that these solicitations truly offer mixed-purpose contracts which would disqualify the disputed procurements from being classified as supply contracts.

At this juncture, it is appropriate to note that the SBA’s approach in Arizona Medical Supply – a comparison of the dollar value of the supply versus services portions of a contract – is echoed in other areas of the law. A parallel can be drawn, for example, between this method of analysis and the SBA regulation which describes the method for determining the size standard applicable to a federal government procurement. Title 13 of the Code of Federal Regulations, section 121.402, provides that size standards are typically assigned to procurements “according to the component which accounts for the greatest percentage of contract value.” Id. § 121.402(b); see and compare Advanced Sys. Int’l, Inc., SBA No. 3448 (1991) (concluding that a solicitation for training manuals to be used by the military to instruct personnel on use of equipment was a supply contract, because 75 to 80 percent of the value of the contract related to tangible deliverables, whereas 20 to 25 percent was attributable to ancillary services). Similarly, a number of courts have been called on to determine whether a contract is subject to the Service Contract Act or the Walsh-Healy Act, based on whether its “principal purpose” is the furnishing of services though the use of service employees. To do so, the courts undertake a case by case examination of the terms of the contract, and of the work required thereunder, to determine the source of the majority of the contract’s value. See, e.g., Ober United Travel Agency, Inc. v. United States Dep’t of Labor, 135 F.3d 822 (D.C. Cir. 1998) (holding that government travel management contracts were service contracts subject to the Service Contract Act, rather than supply contracts, because their principal purpose was to procure assistance in booking travel, but they did not actually obligate the government to purchase any products); Donovan, 757 F.2d at 345 (deferring to Secretary of Labor’s determination that contracts for sale of timber were supply contracts, despite ancillary services which were to be performed in order to harvest timber); see also McLucas, 364 F. Supp. at 771. A similar approach can even be found in state law jurisprudence focused on the application of the Uniform Commercial Code to “non-divisible mixed (goods and services) contracts.” Bonebrake v. Cox, 499 F.2d 951, 960 (8th Cir. 1974) (internal quotations omitted); Conopco, Inc. v. McCreadie, 826 F. Supp. 855, 867-68 (D.N.J. 1993) (“In considering whether the U.C.C. will apply to a mixed goods and services contract, the court must determine whether goods or services predominate.”).

Inasmuch as this common sense approach to classification appears in relevant SBA decisions, the federal regulations, and elsewhere in state and federal law, the court concludes that it should govern this analysis as well. Applying that test to the facts of this case, it is clear that RFPs 583 and 247 include only an incidental amount of services. The VA’s own estimate of proposal costs related to RFP 583 indicates that the single service requirement listed in the schedule, Item 0014, will account for [] of the entire cost of the procurement in all of the areas in which small business set-aside awards are planned. See AR at 2020-26. The cost of supplies is vastly larger. In Area B, for example, the equipment and supplies will cost the government approximately []. Id. at 2021. In Area C, they will cost approximately []. Id. at 2022. In Area F, they will cost approximately [], and in Area G, they will cost approximately []. Id. at 2025-26. Based on these figures, it is clear that RFP 583 offers contracts which are almost entirely, if not exclusively, for supplies, to which the non-manufacturer rule undoubtedly applies. There is no reason to conclude that the outcome regarding RFP 247 will differ in any significant way.

In addition, the court rejects the contention that the NAICS codes chosen for these procurements are dispositive of whether they are ones for supplies or services. The code chosen by an agency’s contracting officer is certainly one item of evidence which may be examined by the court in determining the nature of a particular procurement, and thus, whether it is subject to the non-manufacturer rule. There is no support, however, for the contention that the label assigned to a procurement in fact determines the nature of the contract to be awarded thereunder. The United States appears to argue that because the NAICS codes assigned to RFPs 583 and 247 are ones used to describe service contracts, and because the regulations required the VA’s contracting officers to choose codes which accurately represented the nature of the proposed contracts, it follows that the contracts are undoubtedly ones for services. Unfortunately, that logic fails to account for the very real possibility that an NAICS code could be assigned in error. That possibility is especially relevant here, where the plain language of RFPs 583 and 247 appears to contradict the CO’s choice. Again, the solicitations themselves show that the value of the contracts is mostly, if not entirely, attributable to the portion which calls for the supply of manufactured products.

For these reasons, the court concludes that RFPs 583 and 247 offer contracts for supplies. There is no question, then, that the statutory non-manufacturer rule, found at 15 U.S.C. § 637(a)(17), applies to them. Accordingly, the VA’s decision to award small business set-aside contracts under RFP 583 to Mitchell and FCC, without considering whether those offerors would provide items manufactured by small businesses, was erroneous. The VA’s stated intent to award work under RFP 247 without considering compliance with the non-manufacturer rule is likewise contrary to law. On this record, the court agrees with plaintiff that Rotech was prejudiced by this error in the procurement process, and that but for the error, Rotech would have had a substantial chance to win these awards.  (Rotech Healthcare Inc. v. U. S., No. 06-303C, July 24, 2006) (pdf)

U. S. Court of Federal Claims - Listing of Decisions

For the Government For the Protester
New Veterans Electric, LLC v. U. S. No. 16-1113C, November 23, 2016 RLB Contracting Inc. v. U. S., No. 14-651C, October 3, 2014  (pdf)
Orion Construction Corporation v. U. S., No. 15-1505C, April 1, 2016  (pdf) Rotech Healthcare Inc. v. U. S., No. 14-502C, September 19, 2014  (pdf)
Arcata Associates Inc. v U. S., No. 12-846C, April 3, 2013  (pdf) Rotech Healthcare Inc. v. U. S., No. 06-303C, July 24, 2006 (pdf)
InGenesis, Inc., v. U. S., No. 11-754, March 23, 2012) (pdf)  
Eagle Design and Mgmt., Inc., v. U. S., No. 02-1326C, December 13, 2002 (pdf)  
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