On July 28, 2016, the SBA Office of Hearings and Appeals (OHA) issued a decision in the matter of: Size Appeal of: The Emergence Group. This appeal arose out of The Emergence Group's (Appellant) size protest of Olgoonik Federal, LLC (OF), the awardee of a contract for professional, administrative and support services with the Department of State.
In general, and according to SBA regulations, affiliation exists when one business has the power to control another or when a third party (or parties) controls or has the power to control both businesses. Control may arise through ownership, management, or other relationships or interactions between the parties. 13 CFR 121.103 provides the general bases upon which affiliation may be found. For example affiliation may be found based on:
- Common ownership or management
- Identity of interest
- Newly organized concern
- Joint ventures
- Ostensible subcontractor
- Franchise and license agreements
As many readers know, 13 CFR 121.103(b) as well as the specific regulations pertaining to entity-owned firms provide for very broad exceptions to the general affiliation rules for entity-owned firms. For example, affiliation generally will not be found between a Tribe/ANC/NHO and its subsidiaries or between the subsidiaries themselves based on common ownership or management. There is also an exception to affiliation when an entity (or entities) provides common administrative services to its sister companies, but we can discuss that more detail in a later post.
Of relevance to this particular situation is the unfair competitive advantage exception. Although the specific regulation quoted below applies to NHOs, there is an identical provision for Tribally-owned and ANC-owned companies. 13 CFR 124.110 pertaining to NHOs provides, in pertinent part:
"SBA will determine the concern's size independently, without regard to its affiliation with the Native Hawaiian Organization or any other business enterprise owned by the Native Hawaiian Organization, unless the Administrator determines that one or more such concerns owned by the Native Hawaiian Organization have obtained, or are likely to obtain, a substantial unfair competitive advantage within an industry category."
SBA's July 28, 2016 Final Rule Addresses Substantial Unfair Competitive Advantage
As part of the most recent SBA regulatory changes, SBA sought to clarify how "substantial unfair competitive advantage" is determined. Although SBA's office of general counsel has long taken the position that "substantial unfair competitive advantage" is based on a national basis rather than on a local basis, they took the opportunity to document this in regulation. The following language has therefore been added to the regulations for each of the entity-owned categories:
"In determining whether an NHO-owned concern has obtained, or is likely to obtain, a substantial unfair competitive advantage within an industry category, SBA will examine the firm's participation in the relevant six digit NAICS code nationally. (1) SBA will consider the firm's percentage share of the national market and other relevant factors to determine whether the firm is dominant in a specific six-digit NAICS code with a particular size standard. (2) SBA does not contemplate a finding of affiliation where an NHO-owned concern appears to have obtained an unfair competitive advantage in a local market, but remains competitive, but not dominant, on a national basis."
As mentioned, Appellant in this case argued that OF should not be considered a small business due to its relationship with the Olgoonik family of companies and the fact that OF has obtained or is likely to obtain a substantial unfair competitive advantage within the applicable NAICS Code.
OHA's decision in this case was very straightforward. They declined to render a decision in this case based on the fact that OHA does not have jurisdiction to consider whether a company has obtained or is likely to obtain a substantial unfair competitive advantage; rather OHA stated that the regulation is explicit that the only person that has authority to make that determination is the SBA Administrator and OHA has not received delegation from the Administrator in that regard. The lesson learned here is that the exceptions to affiliation for entity-owned firms remains strong and only the SBA Administrator has the authority to determine substantial unfair competitive advantage (unless or until such time as the Administrator delegates that authority).