Metro Machine Corp. v. U.S. Small Business Admin.
| Decision Date | 26 February 2004 |
| Docket Number | No. CIV.A.2:03 CV 838.,CIV.A.2:03 CV 838. |
| Citation | 305 F.Supp.2d 614 |
| Court | U.S. District Court — Eastern District of Virginia |
| Parties | METRO MACHINE CORP., Plaintiff, v. UNITED STATES SMALL BUSINESS ADMINISTRATION, and Michael P. McCale,<SMALL><SUP>1</SUP></SMALL> in his official capacity as Associate Administrator of the HUBZone Program Defendants. |
Gary A. Bryant, Esquire, Willcox & Savage, PC, Norfolk, Terry L. Albertson, Esquire, Crowell & Moring, LLP, Washington, DC, Counsel for Plaintiff.
Michael A. Rhine, Assistant U.S. Attorney, Norfolk, Glenn P. Harris, Chief Counsel for Enforcement, U.S. Small Business Administration, Washington, DC, Counsel for Defendants.
This matter comes before the court on cross-motions for summary judgment. Plaintiff, Metro Machine Corp. ("Metro Machine"), seeks a declaration that the decision of defendants, United States Small Business Administration ("SBA") and Michael P. McHale, Associate Administrator of the HUBZone Program, to decertify Metro Machine as a qualified HUBZone small business concern was arbitrary, capricious, an abuse of discretion, or otherwise contrary to law, pursuant to 5 U.S.C. § 706(2)(A). For the reasons set forth below, Metro Machine's motion for summary judgment is DENIED. Defendants' motion for summary judgment is GRANTED.
Congress created the Historically Underutilized Business Zone ("HUBZone") program in 1997 to provide federal contracting assistance to qualified small business concerns ("SBCs") located in geographic areas that are considered "HUBZones."2 The purpose of the program is to "increase employment opportunities, economic development, and investment in areas where unemployment has historically been above national averages." 13 C.F.R. § 126.100 (2002). Small businesses that are "qualified HUBZone SBCs" are given a ten percent price evaluation preference in qualifying for federal government contracts.3 By statute, in order to be certified as a qualified HUBZone SBC, a small business must be exclusively owned and controlled by United States citizens, have its principal office located in a HUBZone, and at least 35% "of its employees" must reside in a HUBZone. 15 U.S.C.A. §§ 632(p)(3)(A) and (p)(5)(A)(i)(I)(aa) (West Supp.2003). The statute does not define who should be counted as an "employee" of the SBC.
SBA is charged with administering the HUBZone program. Title 15 U.S.C.A. § 632(p)(5)(A)(ii)(II) (West Supp.2003) provides that if any of the SBC's assertions that it qualifies for the preferred HUBZone status is "determined by [SBA] to be materially false," then the SBC shall not be awarded "qualified HUBZone SBC" status. In order to carry out its task of administering the HUBZone program, Congress provided that SBA "shall establish procedures relating to the filing, investigation, and disposition by [SBA] of any challenge to the eligibility of a small business concern to receive assistance under this section." 15 U.S.C.A. § 657a(c)(1)(A) (West Supp.2003). Further, Congress ordered that SBA "shall establish procedures" for the purpose of "verification by the [SBA] of the accuracy of any certification made or information provided to the SBA ... under section 632(p)(5) of this title." 15 U.S.C. § 657(c)(1)(B) (West Supp.2003).
SBA has promulgated regulations for purposes of administering the HUBZone program. See 13 C.F.R. § 126.100 through § 126.900. The regulations state that, to be certified as a qualified HUBZone SBC, "[a]t least 35 percent of the concern's employees must reside in a HUBZone." 13 C.F.R. § 126.200(b) (2002). The regulations provide that SBA program examiners will conduct program examinations to verify that any qualified HUBZone SBC meets the requirements set forth in § 126.200, and may examine whether the SBC meets the employee percentage requirement. 13 C.F.R. § 126.401 (2002). Further, the regulations define "employee" for purposes of qualified HUBZone SBC certification as follows:
Employee means a person (or persons) employed by a HUBZone SBC on a full-time (or full-time equivalent), permanent basis. Full-time equivalent includes employees who work 30 hours per week or more. Full-time equivalent also includes the aggregate of employees who work less than 30 hours a week, where the work hours of such employees add up to at least a 40 hour work week. The totality of the circumstances, including factors relevant for tax purposes, will determine whether persons are employees of a concern. Temporary employees, independent contractors or leased employees are not employees for these purposes.
13 C.F.R. § 126.103 (2002) (emphasis added). A qualified HUBZone SBC can have affiliates under common control "provided that the aggregate size of the concern and all its affiliates is small" as defined by SBA regulations. 13 C.F.R. § 126.204 (2002). Title 13 C.F.R. 121.101(a) provides that a business entity is "small and, thus, eligible for Government programs and preferences reserved for `small business' concerns," if that entity meets industry-specific size standards set forth in 13 C.F.R. § 121.201. Under § 121.201, a business involved in "Ship Building and Repairing" is "small" if it employs 1,000 or fewer individuals.
Metro Machine's main business is overhauling and repairing ships for the United States Navy. It is headquartered in Norfolk, Virginia, and has shipyards in Norfolk, Philadelphia, and Erie, Pennsylvania. Metro Machine became interested in the HUBZone program in 2002. However, it recognized at that time that it did not meet the HUBZone requirement that 35% of its employees reside in a HUBZone ("the 35% requirement").
In order to meet the 35% requirement, Metro Machine transferred 182 non-management employees to a dormant, wholly-owned subsidiary, Metro On-Call, that had been created for other reasons in 1998. Of those 182 employees, 171 of them did not reside in a HUBZone. At the time Metro Machine transferred the employees, it entered into an agreement with Metro On-Call guaranteeing that the transferred employees would be available at all times to work on Metro Machine's projects. Further, Metro Machine revised a collective bargaining agreement with its union to ensure that employees transferred to Metro On-Call would not lose any of the rights that they would have had under that agreement. The employees transferred to Metro On-Call perform the same work, in the same locations, and under the same supervisors as they did before the transfer. After the transfer of employees to Metro On-Call, the remaining Metro Machine workforce met the 35% requirement.
Metro Machine applied for certification to the HUBZone Program in May, 2002, but did not disclose at that time the recent transfer of employees to Metro On-Call. SBA certified Metro Machine as a HUBZone SBC on July 12, 2002. On August 28, 2002, Edward Correia ("Correia"), an attorney for Norshipco, one of Metro Machine's competitors, wrote a letter to SBA raising questions about Metro Machine's eligibility for the HUBZone program. Correia contended that Metro Machine did not meet the 35% requirement, and provided SBA with a number of documents, including a copy of the agreement between Metro On-Call and the local union, Boilermakers Local 1999. (Joint App Tab 4.) The agreement, dated May 31, 2002, provides that
it is mutually agreed the creation of METRO ON-CALL, and the movement of current bargaining unit employees into this wholly-owned subsidy [sic] of METRO MACHINE CORPORATION will have no adverse affect [sic] on current terms and conditions of employment, including, but not limited to: Seniority, Layoff and Recall, Discipline, Shop Assignments, and Pension Payments.
(Id. (commas added).)
Pursuant to 13 C.F.R. § 126.401, SBA initiated an investigation into Metro Machine's eligibility for qualified HUBZone SBC status. In response to an SBA request for information regarding Metro On-Call, Metro Machine provided a "Metro On-Call Record of Action in Writing," which specifically provides that Metro On-Call is being capitalized and organized as a subcontractor of Metro Machine "in connection with [Metro Machine's] applying to the [SBA] to qualify as a HUBZone contractor," with the purpose of providing Metro Machine with "certain skilled labor functions at Metro [Machine]'s Norfolk Shipyard." (Joint App. Tab 15.)
By letter dated July 14, 2003, SBA notified Metro Machine of its proposal to decertify Metro Machine from the HUBZone program on the basis that Metro Machine did not meet the 35% requirement. The proposed decertification letter advised Metro Machine that SBA was relying on 13 C.F.R. § 126.103, the agency regulation which provides that in determining who is an "employee" under the HUBZone regulations, SBA may consider the "totality of the circumstances." (Joint App. Tab 32.) The letter further advised that this totality of the circumstances test involved some or all of eleven factors.4 (Id.) Though the letter did not make reference to any other agency document, the same eleven factors were originally set forth by SBA in "Policy Statement No. 1," which was promulgated in 1986 to assist SBA program examiners in determining under 13 C.F.R. § 121.106(a) who an "employee" of a company is for purposes of deciding whether the business is "small" as defined by 13 C.F.R. § 121.106(b). 51 Fed.Reg. 6099 (Feb. 20, 1986).5
In response, Metro Machine acknowledged that the company had transferred the 182 employees to Metro On-Call "[i]n order to meet the HUBZone requirements." (Joint App. Tab 33.)6 Metro Machine stated that there were no factual disputes, but argued that SBA did not have the legal authority to decertify Metro Machine on the basis that it proposed. (Id.) Metro Machine's argument was based on 13 C.F.R. § 126.204, which states that qualified HUBZone SBCs may have affiliates, so long as the aggregate size of the...
To continue reading
Request your trial
-
Solutions v. The United States
...small businesses located in economically disadvantaged or distressed areas." Id. at 42; seealso Metro Machine Corp. v. United States Small Bus. Admin., 305 F.Supp2d 614, 616 (E.D. Va. 2004). As the court in Aeolus noted, [T]he SBA is charged with administering the HUBZone program. Indeed, "......