SDVOSBLAW: Government Contract Law Firm - SDVOSB Law, Claims, Disputes, Protests

Our office represented the protester in CVE Protest of Valiant Construction, LLC, SBA No. CVE-110-P (April 19, 2019). We argued, among other things, that an SDVOSB Joint Venture Agreement (“JVA”) between Smith Hafeli, Inc. and Ross Construction did not comply with the applicable regulation on profit sharing. We also argued that the service-disabled Veteran had a part time job (15 hours a week) that prevented him from working full time for his SDVOSB company. The SBA Office of Hearings and Appeals (“SBA OHA”) agreed. 

The OHA judge found that the joint venture did not comply with the requirement that the SDVOSB must receive at least 51% of the profits and that the profits must be distributed in proportion to the work performed. While the joint venture agreement stated that profits “will be commensurate with work performed on the project” it failed to state how much work would actually be performed by the SDVOSB.  SBA OHA ruled that this did not comply with the regulation on profit sharing:

However, the JVA is silent as to what percentage of the work SHI actually will perform.  SHR has the burden of proof, and this it must establish that its JVA meets the requirements of both regulations, i.e. profits will be distributed in proportion to the work performed, and at least 51% of the profits must be distributed to SHI, hence requiring the SDVOSB must perform at least 51% of the work. Because the JVA fails to provide that SHI will perform at least 51% of the work, it leaves open the possibility that profits will not be distributed in proportion to work performed, and thus the JVA fails to meet all the requirements of the regulation.  I thus must conclude that SHR is not an eligible joint venture for this reason.

SBA OHA also held that the JVA was ineligible because the service-disabled Veteran did not devote full-time to his SDVOSB business during normal working hours because he work as an instructor at the Marion High School’s JROTC program for 15 hours a week. In this regard, the judge noted:

Here, Mr. Hafeli spends 15 hours a week during normal business hours, more than a third of the standard 40-hour work week, serving as a JROTC instructor. This is a substantial amount of time in the classroom during the time when SHI must be conducting its normal business I must conclude that Mr. Hafeli is not devoting full time to the business during normal business hours.  Accordingly, I must concluded that SHI is not controlled by a service-disabled veteran and SHR is not an eligible joint venture controlled by a SDVOSB.

This case illustrates that just because CVE may have approved your joint venture agreement does not mean you are in the clear. Under SBA OHA’s new CVE Protest jurisdiction, disgruntled contractors can protest a company’s SDVOSB eligibility at SBA OHA for an independent review. Attorney’s for the protester, like us in this protest, will closely examine the joint venture agreement and other corporate documents to challenge compliance. I can assure you that this review will be more vigorous than the “busy” CVE examiner’s review.  So, be careful and consult with a professional if you have any questions.

Posted in SDVOSB Protests

On April 10, 2019, the SBA Office of Hearings and Appeals (“SBA OHA”) sustained a protest against an SDVOSB joint venture between Veterans Contracting, Inc. and Trumble Construction, Inc. The joint venture was selected as the apparent awardee on a construction project at the Louis Stokes Cleveland VA Medical Center. The procurement was set aside for SDVOSBs.

SBA OHA found that the joint venture agreement does not comply with 13 C.F.R. § 125.18(b)(3). Under that rule, in order to be considered an eligible joint venture, the SDVOSB partner(s) to the joint venture must perform at least 40% of the work, and such work must consist of more than administrative or ministerial functions. Here, the joint venture agreement was silent as to what each member of the joint venture would contribute to the project. Instead, the joint venture stated that a “jointly-executed statement” would be provided to the procuring activity at a later date. However, this was never done.

The joint venture tried to fix this problem by preparing a breakdown of the work between the joint venture members, but SBA OHA ruled its too late. The joint venture agreement is examined at the time the offer is submitted and date the protest was filed. Thus, attempts to correct it afterwards do not count.

This case illustrates the need to include an addendum to a joint venture agreement that is specific to the procurement at issue.

Best Practice Tip: When a solicitation is issued, prepare an addendum to the joint venture agreement that provides a breakdown of work share well before offers are submitted.

CVE Protest of Veterans Contracting Inc., SBA No. CVE-107 (April 10, 2019)

Posted in SDVOSB Protests

On March 26, 2019, the Court of Federal Claims found that Xotech, LLC’s Operating Agreement does not comply with SDVOSB regulations regarding “control” over the company. Specifically, the company’s operating agreement included three managers. The service disabled veteran was one manager and his wife and son were the other managers. Each of them have the authority to enter into contracts, engage employees, obtain insurance, conduct litigation and borrow money. Because of this, the service disabled veteran was not in sole control of all day-to-day business decisions.

The Court was not moved by Xotech’s argument that the service disabled veteran could fire the other managers (his wife and son) if he did not approve of their decision making:

The fact that Gary Marullo can fire either or both of the Managers as the super majority Member under Section 6.10 of the Operating Agreement does not alter this result. The problem with XOtech’s removal authority argument is that authority does not undo binding decisions of either of those two managers before they are removed. As the government explains, Kathy Marullo and Joshua Marullo could vote for and sign a five-year automobile lease over Gary Marullo’s objection. While it is true that Gary Marullo as the Senior Member could remove his wife and son as Managers, XOtech still would remain bound to the lease because the Operating Agreement permits Kathy Marullo and Joshua Marullo as Managers to authorize and execute such contracts.

This decision is a reminder that the service disabled veteran must control all aspects of the day-to-day decision making of his or her company. While in this case the service disabled veteran thought it was a good idea to share this authority with his wife and son, it resulted in a loss of a contract.

Xotech, LLC v. United States, United States Court of Federal Claims, No. 18-1483C (March 26, 2019)

Posted in SDVOSB Protests

On March 25, 2019, an administrative judge at the SBA Office of Hearings and Appeals (“SBA OHA”) upheld the SDVOSB status of Veterans Medical Transcription Services, Inc. The protester argued, among other things, that this SDVOSB company shares employees, office space and other resources with a non-SDVOSB company. If true, the SBA regulations create a rebuttable presumption that the service disabled veteran does not control his company See, § 125.13(i)(4), which states that this presumption arises “[i]n circumstances where the concern [SDVOSB] shares employees, resources, equipment, or any type of services, whether by oral or written agreement with another firm in the same or similar line of business, and that firm or an owner, director, officer, or manager, or a direct relative of an owner, director, officer, or manager of that firm owns an equity interest in the concern.”

SBA OHA relied on sworn declarations from the service disabled veteran to show that his company does not share resources with another company. These sworn declarations saved the day:

According to the sworn declarations of Mr. Dortch and Mr. Rose, VMTS and Stone are not co-located; have no business relationship; and share no employees, resources, equipment, or any type of services. Section II.G, supra. Further, the three owners of VMTS includes no one who is an owner, director, officer, or manager of Stone, or a direct relative of an owner, director, officer or manager of Stone.

This case comes under SBA OHA’s new jurisdiction over CVE Protests. There are no trials. Because of that, the ability to challenge a service disabled veterans control is limited. Here, the service disabled veteran provided declarations that he controls his company. The company’s bylaws were in order as well. So, with that SBA OHA found that the SDVOSB is a legitimate concern.

Make sure your corporate documents are in order. If you face a CVE Protest, the opposing will challenge them from every angle.

Alpha4 Solutions LLC d/b/a Alpha Transcription, CVE-103 (2019)

Posted in SDVOSB Protests

In BKM Global Corporation, SBA No. Vet-270 (June 25, 2018), the service disabled veteran held the position of CEO.  On paper, another person held the position of President.  The SBA Area Office found that this violated the requirement that the service disabled Veteran must hold the highest officer position as required by 13 C.F.R. § 125.13 and therefore he does not control the SDVOSB.   The service disabled Veteran argued that the person who acted as president had resigned at the time initial offers were submitted to the Government.  The SBA Area Office did not buy this argument.

But, the SBA Office of Hearings and Appeals directed the SBA Area Office to take a second look, holding that the individual’s resignation as President did not have to be in writing under the company’s bylaws, SBA regulations or Wyoming corporate law. As such, the SBA Area Office did not point to any evidence in the record that contradicted the SDVOSB’s claim that service disabled Veteran was the only officer as of the date of self-certification and that as CEO he was responsible for all aspects of  day-to-day operations.

This SDVOSB dodged the bullet this time. As a general rule, do not designate a non-service disabled Veteran as President.  Your are only asking for trouble if you do.

Posted in SDVOSB Protests

The Court of Federal Claims released an opinion today, Veterans Contracting Group, Inc. v. United States and Williams Building Company, Inc. No. 17-1188C (December 20, 2017),  in which Judge Lettow held that the a right of first refusal provision in a shareholder agreement rendered an SDVOSB ineligible to receive a contract from the U.S. Army Corps of Engineers. Our office represented the Intervenor.

Unlike the VA’s SDVOSB regulations, the SBA SDVOSB regulations do not include a definition of “unconditional ownership.”  Thus, for the last eleven years, the SBA Office of Hearings and Appeals (“OHA”) has looked to the dictionary definition of “unconditional” when determining whether a service disabled Veteran maintains unconditional ownership interest in his company.  Often referred to as the “Wexford standard,” OHA has consistently ruled that “unconditional ownership” means that the service disabled Veteran must have “an absolute right to do anything they want with their ownership interest or stock, whenever they want.”  Wexford Group International, Inc., SBA No. SDV-105 (2006)  Thus, a provision requiring a service disabled Veteran to sell his shares back to the company upon his death or incompetency means that he does not have unconditional ownership under the Wexford Standard.

Veterans Contracting Group argued that the Wexford standard is no longer good law given the Court’s decisions in AmBuild and Miles.  In these cases, the Court found that the right of first refusal is acceptable under the VA SDVOSB regulations because they are “not presently executory” and considered “a standard provision used in normal commercial dealings.” However, the Court noted that the Ambuild and Miles cases are irrelevant “to bid protests concerning solicitations from the U.S. Army Corps of Engineers or other non-VA agencies.”

Instead, the Court deferred to OHA’s ruling below, finding that the right of first refusal rendered the SDVOSB ineligible under the SBA’s SDVOSB regulations.  The Court did so even though, in the judge’s opinion it “produces a draconian and perverse result.”  Ultimately, the Court acknowledged that it “cannot remake the regulations”  and must afford deference to the SBA’s interpretation of their own regulations.

Given this decision, SDVOSBs that want to bid on Non-VA SDVOSB set-aside procurements should revisit their corporate documents to ensure that a right of first refusal is removed to avoid being deemed ineligible.  As an aside, the Court noted that Congress has recognized the difference between the VA and SBA SDVOSB regulations and “has sought to consolidate and reconcile them via amendments to their authorizing statutes,” citing Section 1832 of the 2017 National Defense Authorization Act.   However, the VA and SBA have yet to do so.  Given the Court’s decision in this case, the VA and SBA should get to it asap.

Update – SBA has since revised it regulations so that right of first refusal is permissible.

Posted in SDVOSB Protests

On May 30, 2017, the Court of Federal Claims ruled in PDS Consultants, Inc. v. United States, et al., No. 16-1063C (May 30, 2017) that the VA set-aside preference for VOSBs and SDVOSBs under the “Rule of Two” trumps the government-wide set-aside preference under the AbilityOne Program for nonprofit agencies that employ the blind and disabled.  The Court found that “the preference for veterans is the VA’s first priority” and that “if the Rule of Two analysis does not demonstrate that there are two qualified veteran-owned small businesses willing to perform the contract, the VA is then required to use the AbilityOne List as a mandatory source.”

Posted in SDVOSB Protests