SBA OHA Case: No Economic Dependence Affiliation for ANC Subsidiary and Large Business

On July 10, 2015, the SBA's Office of Hearings and Appeals (OHA) issued a decision in the matter of Size Appeal of: Olgoonik Solutions, LLC, SBA No. SIZ-5669.  This appeal resulted from a size determination issued by the SBA Area Office as part of Olgoonik Solutions, LLC's (Olgoonik Solutions) 8(a) Business Development Program application that Olgoonik Solutions was other than small due to affiliation with Stanley Convergent Security Solutions, Inc. (Stanley)

Summary of Relevant Facts:

• Olgoonik Solutions was organized in 2012 but did not begin operations until July 2013.
• Olgoonik Solutions is a wholly-owned subsidiary of Olgoonik Development, LLC (ODL), which is in turn  a wholly-owned subsidiary of Olgoonik Corporation (OC), an Alaska Native Corporation (ANC).
• Early 2015 - Olgoonik submits its application to SBA for the 8(a) BD Program.
• 6/3/15 - SBA Area Office issued a size determination concluding that Olgoonik Solutions is not a small business due to its affiliation with Stanley (no common management or ownership).  
• While the Area Office recognized that based on exemptions to affiliation available to ANCs and ANC-owned companies, Olgoonik was not affiliated with its parent companies ODL and OC, the Area Office nonetheless determined Olgoonik to be affiliated with Stanley based on economic dependence.
• In particular, the Area Office found economic dependence based on the fact that Olgoonik Solutions derived more than 70% of its revenues from Stanley (through subcontracts Olgoonik Solutions held with Stanley).

Applicable Legal Standard:

• Pursuant to 13 CFR 121.103(f), affiliation may arise when firms are economically dependent through contractual or other relationships.
• OHA has repeatedly held that a firm is economically dependent upon another if it derives 70% or more of its revenue from that firm.  OHA has also recognized this to be true where no other ties exist and also the economic dependence can be based on findings from a single fiscal year.
• However, OHA has also recognized a narrow exception to the 70% rule for relatively new businesses, stating that "here the challenged firm has only recently begun operations either initially or after a period of dormancy, and is dependent upon its alleged affiliate for only one small contract of short duration, which by itself could [not] sustain a business, that a finding of economic dependence is not warranted."

OHA Analysis and Decision:

In sustaining Olgoonik Solutions' protest and ultimately finding Olgoonik to be a small business (and therefore not affiliated with Stanley), OHA considered the following:

• Olgoonik Solutions had worked diligently to generate business with firms other than Stanley.  In particular, Olgoonik submitted to SBA a list of 59 business development meetings held as well as evidence that their efforts had recently begun to turn into actual opportunities (they had just been awarded 2 new subcontracts with firms other than Stanley).
• Olgoonik Solutions was viable without its revenues from Stanley because they were able to rely heavily on its ANC parent companies.
• "Based on this record, I must agree with [Olgoonik Solutions] that the Area Office erred in determining [Olgoonik Solutions] is economically dependent upon Stanley ... [Olgoonik Solutions] is a relatively new business and the revenues it received from its alleged affiliate are not sufficient to sustain business operations.  Thus, a mechanical application of the 70% rule would be unjust, as it penalizes new concerns that have only had the opportunity to work with one company."

Proposed Rule and Impact of this Decision:

As many of you know, the SBA issued a Proposed Rule on December 29, 2014, which included a change to 13 CFR 12.103(f) regarding affiliation.  In particular, the proposed change clarifies that if one firm derives 70% or more of its revenue from another firm over the previous fiscal year, SBA will presume that the one firm is economically dependent on the other.  The Proposed Rule also states in its comments, however, that the presumption is rebuttable, "such as when a firm is new or a start-up and has only received a few contracts or subcontracts."  We believe that this OHA decision is encouraging because it is indicative of OHA's willingness to continue to take into consideration a number of factors in making the economic dependence determination.

For NHO-owned firms, please be advised that for 8(a) BD Program purposes (application and contract awards), the economic dependence rule does not apply as between the NHO and its for-profit companies nor does it apply between the NHO's for-profit companies, provided they are all under the same NHO.  Pursuant to regulations and SBA guidance issued by the SBA's Associate General Counsel for Procurement Law, there is only one situation where an NHO and its for-profit companies can be affiliated and that is if one or more of the entity-owned business concerns have obtained, or are likely to obtain, an substantial unfair competitive advantage within an industry category.  SBA has interpreted "unfair competitive advantage" to be on a national level, not a local level.   

If you have any questions about this decision or affiliation in general, please feel free to contact us at: (808) 369-9710 or info@holomuaconsulting.com.