SRS TECHNOLOGIES v. US, Civ. A. No. 95-0801 (RCL).

• Decision Date: 18 July 1995
• Docket Number: Civ. A. No. 95-0801 (RCL).
• Citation: 894 F. Supp. 8
• Parties: SRS TECHNOLOGIES, Plaintiff, v. UNITED STATES of America, et al., Defendants.
• Court: U.S. District Court — District of Columbia

894 F. Supp. 8

SRS TECHNOLOGIES, Plaintiff, v. UNITED STATES of America, et al., Defendants.

Civ. A. No. 95-0801 (RCL).

United States District Court, District of Columbia.

July 18, 1995.

Alan M. Grayson, McLean, VA, for plaintiff.

Robert L. Shapiro, U.S. Attorney's Office, Washington, DC, for defendant.

Keith L. Baker, Eckert, Seamans, Cherin & Melott, Washington, DC, for intervenor-defendant.

MEMORANDUM OPINION

LAMBERTH, District Judge.

This case involves an appeal from the Small Business Administration's ("SBA") determination that plaintiff SRS Technologies ("SRS") is not a "small disadvantaged business concern" ("SDB") for purposes of participating in government set-aside programs. Plaintiff contends that in reviewing plaintiff's SDB status, the SBA failed to follow its own regulations, willfully relied upon inaccurate information, and otherwise acted in an arbitrary and capricious manner, in violation of the Administrative Procedure Act, 5 U.S.C. §§ 701, et seq. Now before the court are plaintiff's motion for preliminary injunction and the parties' cross motions for summary judgment. Intervenor IMS Services, Inc. ("IMS"), has also filed a motion for summary judgment seeking to have the SBA's determination upheld. For the reasons set forth below, the plaintiff's motions will be denied, and summary judgment will be entered in favor of the defendants.

I. Introduction

The precise series of events leading to the present action is rather complex. The legal issue presented for review, however, is not. A brief description of the facts will suffice.

In June of 1993, the Navy issued a Solicitation for telecommunications support services at the Naval Air Warfare Center at Point Mugu, California. The Solicitation provided that the procurement was a set-aside for SDB concerns, and that the award of the contract would be made to the technically acceptable offeror with the lowest evaluated cost to the Navy. On May 4, 1994, the Navy awarded the contract to intervenor IMS. Plaintiff protested this award to the General Accounting Office ("GAO"). In September of 1994, the GAO sustained SRS's protest, and the Navy reopened the procurement. In the second round of bidding, the Navy found that SRS was the lowest-priced, technically qualified offeror.

While these events were unfolding, however, plaintiff's status as an SDB had been successfully challenged in connection with a different military procurement. As a result of this challenge, the SBA determined that SRS was not entitled to SDB status, and this decision was upheld by the SBA on administrative appeal. SRS then filed suit in this court challenging, inter alia, the SBA's determination of SRS's SDB status. On January 24, 1994, this court issued a Memorandum Opinion which held, in part, that the SBA's resolution of SRS's SDB status was not improper under the APA. SRS Technologies v. United States, 843 F.Supp. 740, 745-46 (D.D.C.1994) (Lamberth, J.).

SBA's regulations permit a company which the SBA has found not to be an SDB to "self-certify" itself as an SDB if the company believes that changed circumstances render it eligible for SDB status once again. During 1993 and 1994, SRS experienced losses which diminished the value of the company. As a result of these "changed circumstances," SRS self-certified itself as an SDB in connection with the Point Mugu procurement.

The contracting officer for the Navy protested SRS's SDB eligibility to the SBA's Office of Program Eligibility on December 6, 1994. In mid-February of 1995, IMS filed its own protest of SRS's SDB status. Following SRS's submission of over 1000 documents in support of its purported SDB status, the SBA concluded, on March 24, 1995, that SRS was not an SDB. Specifically, the SBA found that 1) Mohindar Sandhu, the president and primary owner of SRS, was not an "economically disadvantaged" person;¹ and 2) due to the existence of certain outstanding stock options, it could not be said that SRS was "at least 51 per centum owned by one or more socially and economically disadvantaged individuals" as required SBA regulations. 13 C.F.R. § 124.602(l)(2). Either finding would be sufficient by itself to preclude SRS from being an SDB.

SRS appealed this decision to the SBA's Associate Administrator for Minority Enterprise Development, who upheld the decision. SRS then filed the instant suit, seeking review of the SBA's determination under the APA. SRS challenges four particular aspects of the SBA's decision: 1) the determination that Mohindar Sandhu and his two children, Peter Sandhu and Patricia Marshall, are not economically disadvantaged persons; 2) the use of Mohindar Sandhu's nondisadvantaged status as a dispositive factor in denying SRS SDB status; 3) the conclusion that, even if Mr. Sandhu and his children were socially and economically disadvantaged, the existence of certain stock options would preclude a finding that SRS is at least fifty-one percent owned by socially and economically disadvantaged individuals; and 4) the SBA's failure to forward a copy of IMS's protest to SRS.

II. Analysis

Summary judgment is appropriate when there is "no genuine issue as to any material fact and ... the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). When reviewing agency action under the APA, the reviewing court should presume the agency action to be valid and should not substitute its own judgment for that of the agency. Motor & Equipment Mfrs. Assoc. v. EPA, 627 F.2d 1095, 1105 (D.C.Cir.1979), cert. denied 446 U.S. 952, 100 S.Ct. 2917, 64 L.Ed.2d 808 (1980). So long as the agency offers a reasoned basis for its decision, its action is not arbitrary and capricious. Id. at 1106.

A. Economic Disadvantage

The regulations determining eligibility for participation in the SBA's small disadvantaged business set-aside program are set forth in Title 13, Part 124, of the Code of Federal Regulations. As defined in the SBA's regulations, a "Small Disadvantaged Business Concern" must be "at least 51 per centum owned by one or more socially and economically disadvantaged individuals as defined by §§ 124.105 and 124.106, title 13, CFR." 13 C.F.R. § 124.602(l)(2).² Section 124.106, in turn, states that "economically disadvantaged individuals are 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 or similar line of business who are not socially disadvantaged...." 13 C.F.R. § 124.106(a)(1)(i).³ The regulations state that in evaluating economic disadvantage, "SBA will consider factors relating both to the applicant concern and to the individual(s) claiming disadvantaged status." § 124.106(a)(2). These factors fall into three general categories: 1) the personal financial condition of the individuals claiming disadvantaged status; 2) the financial condition of the applicant concern; and 3) the applicant concern's access to credit, capital, and markets. See id.

One basis for the SBA's decision to deny SRS SDB status was SBA's conclusion that Mohindar Sandhu is not an economically disadvantaged person. In support of this determination, the SBA found that Mr. Sandhu's wages in 1992 and 1993 were $395,817 and $411,524, respectively, and that the total fair market value of Mr. Sandhu's personal assets (including his $2.75 million ownership interest in SRS) was over $3,000,000. The SBA noted that "this scenario is not indicative of an economically disadvantaged individual." SBA Letter of March 24, 1995, to Mohindar Sandhu at 2 (hereafter "SBA Determination Letter").

With regard to the operating losses incurred by SRS and the consequent drop in value of Mr. Sandhu's ownership interest in the company, the SBA noted that "the major reason for the 1994 drop in value of your assets is ... a non-recurring charge for litigation in the amount of $1.5 million dollars.... There is no evidence that the drop in SRS Technologies' net worth was the result of your inability to compete in the free enterprise system." Id. Thus, the SBA found that the "changed circumstances" upon which SRS based its self-certification did not provide a sufficient basis for granting SDB status to SRS.

SRS contends that SBA's analysis of Mr. Sandhu's financial condition was "rife with clear errors." Pl.'s Mem. in Supp.M.Preliminary Injunction at 20 hereafter Pl.'s PI Mem.. SRS further contends that under its governing regulations, the SBA was required to "measure Mr. Sandhu's personal financial condition against the owners of other, similar concerns." Id. Specifically, SRS argues that SBA should have compared SRS's position to that of one of its competitors, EER Systems. Plaintiff contends that the SBA's decision to deny SDB status to SRS while granting it to a larger and "less economically disadvantaged" company — EER Systems — was arbitrary and capricious.

Plaintiff's objections to the SBA's analysis of Mr. Sandhu's personal financial condition are without merit. SRS does not dispute that Mr. Sandhu's income was approximately $400,000 in both 1992 and 1993.⁴ With respect to the fair market value of Mr. Sandhu's personal assets, however, SRS contends that the SBA improperly ascribed a value of nearly $3.0 million to his ownership interest in SRS, when in fact the value of Mr. Sandhu's stock "may be nothing." Pl.'s Reply Brief at 9. The administrative record is replete with references to the "fair market value" of SRS's stock and Mr. Sandhu's ownership interest. See e.g., Administrative Record ("AR"), Tab 2 at 2; AR, Tab 4 at 2. Plaintiff argues that these calculations were performed "strictly for valuing small quantities of stock in SRS's employee stock ownership plan." Id. at 9 n. 5. However, this argument flies in the face of Mr. Sandhu's own submissions to the SBA, wherein he states that, at the end of Fiscal Year 1993, "the fair market value of SRS was $5,521,131." AR, Tab 2 at 2 (emphasis...