SBA OHA Case Reminds Us That Familial Relationships Can Impact Small Business Size Status

On February 13, 2017, the SBA Office of Hearings and Appeals (OHA) issued a decision in the matter of: Size Appeal of Prosol Associates, LLC, Appellant. Appellant was named the apparent awardee of a contract for IT training with the marine Corps Systems Command (MCSC).  In response, an unsuccessful offeror filed a size protest alleging affiliation with ProSol, LLC (Prosol) based on an identity of interest, the newly organized concern rule, and totality of the circumstances.  This appeal arose out of the SBA Area Office's size determination that Appellant was not a small business under the applicable $15 million size standard due to its affiliation with ProSol based on identity of interest (based on familial relationship between father and son).

Background Facts

• Michael E. Dean (ME) is Appellant's sole shareholder and CEO.
• Michael J. Dean (MJ) is the father of Michael E. Dean and the sole owner of ProSol.
• ME acquired Appellant in 2008 but from 2002 - 2010 held a variety of positions at ProSol (thus, there was a period of 2 years where he was employed by ProSol and Appellant).
• Appellant subleases office space from ProSol at market rates (note that Appellant's office space can only be accessed through space occupied by ProSol); Appellant and ProSol therefore have the same business address.
• Appellant and ProSol, although they do not have the same primary NAICS code, so have 13 common NAICS codes as listed on their SAM profiles.
• Since 2008, Appellant has been a subcontractor to ProSol and receives, on average, 16% of its revenues from such subcontracts from ProSol.
• ProSol was listed as Appellant's subcontractor on the proposal for the contract at issue in this case.

Legal Analysis and Applicable Standard

• SBA regulation 13 CFR 121.103(f) creates a rebuttable presumption that family members have identical interests and must be treated as one person, unless the family members are estranged or not involved with each other's business transactions.
• The presumption created by 13 CFR 121.103(f) can be rebutted if the challenged firm is able to show there is a clear line of fracture among the family members.
  
• "Factors that may be pertinent in examining a clear line of fracture include whether the firms share officers, employees, facilities, or equipment; whether the firms have different customers and lines of business; whether there is financial assistance, loans, or significant subcontracting between the firms; and whether the family members participate in multiple businesses together."  
• Note however, that a minimal amount of business or economic activity between two concerns does not prevent a finding of clear fracture.  

SBA OHA Decision
In upholding the SBA Area Office's size determination finding that Appellant and ProSol were affiliated such that Appellant's revenues exceeded the applicable size standard, OHA found the following to be relevant:

• Subcontracts from ProSol accounting for 16% of Appellant's revenues is not considered a minimal amount, but rather represents a significant portion of Appellant's Revenues.
• The fact that the two firms share office space and that ProSol was listed as a subcontractor to Appellant on the contract at issue.
• Since the two firms have 13 common NAICS codes listed in their SAM profiles, they cannot be said to be in completely different lines of business.
• ME never achieved a clear fracture from his father's business interests since ME worked at ProSol and continued to work there for a period of 2 years after ME had acquired Appellant.  

Lessons Learned

• One firm does not necessarily have to exercise actual or total control over the other firm for there to be affiliation; rather, the existence of the relationship itself is enough to create a presumption that the family members have identical interests.
• If the presumption applies, it is always the burden of the challenged firm to rebut the presumption by showing a clear line of fracture.  
• This presumption applies not only in the context of contract award, but it also applies with respect to eligibility for small business contracting programs like the 8(a) Business Development program, the HUBZone program, WOSB and SDVOSB programs.  

Many firms that we consult with don't have a good understanding of the significance of familial relationships and how they can have a big impact on various aspects of federal contracting.  This case is a good reminder that identity of interest should be a serious concern for small businesses.  Although the Appellant in this case was unsuccessful, this case nonetheless provides a roadmap for other firms in the same or a similar situation in terms of steps they might take to create a clear line of fracture.   For more information on identity of interest and affiliation, please contact us at:  info@holomuaconsulting.com.