Cognitive Prof'l Servs. Inc. v. U.S. Small Bus. Admin.
| Decision Date | 11 May 2017 |
| Docket Number | No. 15-cv-0715 (KBJ).,15-cv-0715 (KBJ). |
| Citation | 254 F.Supp.3d 22 |
| Parties | COGNITIVE PROFESSIONAL SERVICES INC., Plaintiff, v. U.S. SMALL BUSINESS ADMINISTRATION, Defendant. |
| Court | U.S. District Court — District of Columbia |
Ralph Charles Thomas, III, Law Offices of Ralph C. Thomas III P.L.L.C., Washington, DC, for Plaintiff.
Joshua M. Kolsky, U.S. Attorney's Office for the District of Columbia, Washington, DC, for Defendant.
In March of 2014, Plaintiff Cognitive Professional Services ("CPS") applied to the U.S. Small Business Administration ("SBA") for admission to the Section 8(a) Business Development program ("Section 8(a) program" or "8(a) BD program"). (See Compl., ECF No. 1, ¶ 11.) SBA denied CPS's Section 8(a) application, citing various grounds, including the agency's conclusion that CPS was neither a small business owned and controlled by an "economically disadvantaged individual[,]" nor one that had demonstrated "the potential to successfully meet the business development objectives of the 8(a) BD program." (See Letter from Assoc. Adm'r for Bus. Dev., SBA, to Cassandra Coleman (Nov. 6, 2014) ("Final Denial Letter"), ECF No. 30–2, J.A. at 29, 33 (citing 13 C.F.R. §§ 124.104, 124.107 ).)1 The three-count complaint that CPS has filed in this Court maintains that the agency's determination that CPS failed to satisfy the eligibility criteria for admission into the Section 8(a) program was arbitrary and capricious in violation of the Administrative Procedure Act ("APA"), 5 U.S.C. §§ 701 — 06 , and was also contrary to certain provisions of the Small Business Act of 1953 ("the Act"), 15 U.S.C. §§ 631 –57s . CPS further contends that the SBA regulation that addresses the potential-for-success factor— 13 C.F.R. § 124.107 —is "itself invalid" because it does not "reflect the congressional intent of the governing statute." (Id. ¶¶ 46—47 (Count III).)
Before this Court at present are the parties' cross-motions for summary judgment. (See Pl.'s Mem. in Supp. of Mot. for Summ. J. ("Pl.'s Mem."), ECF No. 32–2; Def.'s Mem. of Law in Supp. of Def.'s Cross-Mot. for Summ. J & Opp'n to Pl.'s Mot. ("Def.'s Mem."), ECF No. 31–1.) CPS argues that it is entitled to judgment as a matter of law because both SBA's regulation governing "potential for success" and the agency's related conclusion that CPS failed to satisfy this criterion are contrary to the text and purpose of the Small Business Act. (See Pl.'s Mem. at 24—26.) CPS also contends that the record evidence did not support SBA's findings regarding CPS's potential for success, and that SBA's determination that CPS was not economically disadvantaged for Section 8(a) program purposes was based on a plainly erroneous interpretation of the agency's own rules. (See id. at 20—21, 25.) SBA's cross-motion for summary judgment rejects each of these contentions and asserts that the agency must prevail as a matter of law. (See Def.'s Mem. at 13—21.)
On March 31, 2017, this Court issued an Order in which it DENIED CPS's motion for summary judgment and GRANTED SBA's cross-motion. (See Order of Mar. 31, 2017, ECF No. 37.) This Memorandum Opinion explains the reasons for that Order. In short, and as explained fully below, CPS misreads the Small Business Act and misunderstands the nature of the Section 8(a) program, and as a result, mistakenly maintains that SBA's efforts to ensure that Section 8(a) program applicants have a track record of successful prior business performance are unlawful. To the contrary, the Small Business Act is silent regarding the particular findings that SBA must make when it denies a Section 8(a) program application, and it also does not prescribe the particular manner in which SBA must evaluate a Section 8(a) program applicant's potential for success. Noting this silence, the Court has determined that both SBA's probing potential-for-success regulation and its potential-for-success finding in the instant case are permissible and reasonable in light of the text and purpose of the Small Business Act, and therefore, the Court has concluded that neither agency act is contrary to law. This Court has also found that the record evidence and relevant regulations support SBA's determination that CPS lacked the requisite potential for success and failed to satisfy the economic disadvantage requirement.
Congress enacted the Small Business Act of 1953 in order to encourage and develop the "capacity of small business" in America, and thereby promote national "economic well-being" and "security[.]" 15 U.S.C. § 631(a). The Act tasks the Small Business Administration with effectuating the statute's purposes and provisions, see id. § 633(a); per the statute, SBA administers "a preferential contracting program for socially and economically disadvantaged small businesses," which is called the Section 8(a) Business Development program, Desa Grp., Inc. v. U.S. SBA , 190 F.Supp.3d 61, 63 (D.D.C. 2016) ; see also 15 U.S.C. § 637(a)(1).
Through the Section 8(a) program—which is specifically designed to combat the pervasive effects of discrimination that have historically prevented small, minority-owned businesses from competing on equal footing in the mainstream business economy, see DynaLantic Corp. v. U.S. Dep't of Def. , 885 F.Supp.2d 237, 253—57 (D.D.C. 2012) ; see also Rothe Dev., Inc. v. Dep't of Def. , 107 F.Supp.3d 183, 188 (D.D.C. 2015), aff'd , 836 F.3d 57 (D.C. Cir. 2016), petition for cert. filed , (U.S. April 13, 2017) (No. 16–1239)—eligible participants are provided with "technological, financial, and practical assistance, as well as support through preferential awards of government contracts." DynaLantic Corp , 885 F.Supp.2d at 243. "[A]dmission to the program is highly desirable" because "the SBA may award a subcontract to an 8(a) program participant on a sole source, i.e., noncompetitive, basis," Larry Grant Constr. v. Mills , 956 F.Supp.2d 93, 93–94 (D.D.C. 2013) (citations omitted), and also because "[p]rogram participants are eligible to receive management and technical assistance provided through SBA's private sector service providers, including (i) counseling and training in the operation of small business and business development; (ii) assistance in developing comprehensive business plans; and (iii) assistance obtaining equity and debt financing[,]" DynaLantic Corp . , 885 F.Supp.2d at 245 ; see also 15 U.S.C. § 636(j)(10)(A) ; 13 C.F.R. § 124.404. Significantly, however, the remedial assistance that the Section 8(a) program offers is available only to those small and minority-owned businesses that are able to satisfy certain criteria set forth in the Act and in SBA regulations.2
As a general matter, in order to qualify for the Section 8(a) program, an applicant must be "[1] a small business which is [2] unconditionally owned and controlled by one or more [3] socially and economically disadvantaged individuals who are of good character and citizens of and residing in the United States, and which [4] demonstrates potential for success." 13 C.F.R. § 124.101 ; see also 15 U.S.C. § 637(a)(4)(A), (a)(4)(B), (a)(5), (a)(6)(A), (a)(7)(A). To determine whether a business is considered "small," the agency assigns an industry code to each applicant (there are codes associated with all types economic activity, broken down into "twenty broad sectors"), and then uses a table in the regulations to identify the applicant's corresponding "size standard[.]" Id. § 121.101; see also id. § 124.102(a)(1); id. § 121.201 (). The ownership and control requirements are satisfied when a business is "51 percent unconditionally and directly owned" by one or more socially and economically disadvantaged individuals, id. § 124.105, and when one or more disadvantaged individuals conduct the business's "management and daily business operations [,]" id. § 124.106. See also 15 U.S.C. § 637(a)(4)(A), (a)(4)(B).3 The final two eligibility requirements—"social and economic disadvantage" and "potential for success"—comprise the bulk of the Court's forthcoming analysis, and thus warrant more detailed explanations.
Section 637(a)(6)(A) of Title 15 of the U.S. Code defines "[e]conomically disadvantaged individuals" as "socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same business area who are not socially disadvantaged." 15 U.S.C. § 637(a)(6)(A) ; accord 13 C.F.R. § 124.104(a). As previously noted, it is undisputed that CPS is led by a socially disadvantaged individual (see supra n. 3); consequently, the economic disadvantage criterion is what is at issue here. In order to determine whether a socially disadvantaged individual has experienced "diminished capital and credit opportunities," SBA's regulations provide that the agency will examine the individual's "income for the past three years ..., personal net worth, and the fair market value of all assets, whether encumbered or not." 13 C.F.R. § 124.104(c). An individual who exceeds any of the applicable thresholds for personal income, net worth, or total assets "will generally be deemed ... not economically disadvantaged." Id.
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