Veterans Contracting Grp., Inc. v. United States

Decision Date11 December 2017
Docket NumberNo. 17-1188C,17-1188C
PartiesVETERANS CONTRACTING GROUP, INC., Plaintiff, v. UNITED STATES, Defendant and WILLIAMS BUILDING COMPANY, INC., Intervenor-Defendant.
CourtU.S. Claims Court

Post-award bid protest; qualification of an offeror as a service-disabled veteran-owned small business; divergent standards for eligibility in regulations of the Small Business Administration and the Department of Veterans Affairs; Auer deference

Joseph A. Whitcomb, Whitcomb, Selinsky, McAuliffe, PC, Denver, Colorado, for plaintiff. With him on the briefs was Brandon M. Selinsky, Whitecomb, Selinsky, McAuliffe, PC, Denver, Colorado.

Alison S. Vicks, Trial Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, Washington, D.C., for defendant. With her on the brief were Chad A. Readler, Acting Assistant Attorney General, Civil Division, Robert E. Kirschman, Jr., Director, and Tara K. Hogan, Assistant Director, Commercial Litigation Branch, Civil Division, United States Department of Justice, Washington D.C. Of counsel were Rita Fang, Attorney-Advisor, United States Army Corps of Engineers, and Karen Hunter, Office of General Counsel, United States Small Business Administration.

John M. Manfredonia, Manfredonia Law Offices, LLC, Cresskill, New Jersey, for intervenor-defendant.

OPINION AND ORDER1

LETTOW, Judge.

This post-award bid protest features interactions between complex and divergent regulatory frameworks, giving rise to a harsh, even perverse, result. Plaintiff, Veterans Contracting Group ("Veterans"), was verified by the United States Department of Veterans Affairs ("VA") as a service-disabled veteran-owned small business ("SDVOSB"), and subsequently received a contract award from the U.S. Army Corps of Engineers ("the Corps contract") in January 2017 that was set aside for SDVOSBs. Another bidder, intervenor-defendant, Williams Building Company ("Williams"), protested the award before the Small Business Administration ("SBA"), which ultimately determined in July 2017 via a ruling by SBA's Office of Hearings and Appeals ("OHA") that Veterans did not qualify as an SDVOSB under the SBA's rules and was therefore ineligible for the award. Williams was then awarded the contract. Shortly thereafter, the VA informed Veterans that it was being removed from the VA database for qualified SDVOSBs, based on the SBA's ruling.2

Veterans challenges OHA's decision as arbitrary, capricious, and contrary to the SBA's regulations and has moved for judgment on the administrative record. Veterans requests that the court enter a permanent injunction on its behalf, compelling SBA to reconsider Veterans' eligibility as an SDVOSB and to award Veterans the Corps contract. The government has opposed that motion and filed a cross-motion for judgment on the administrative record.

STATUTORY AND REGULATORY FRAMEWORK

"In an effort to encourage small businesses, Congress has mandated that federal agencies restrict competition for some federal contracts." Kingdomware Techs., Inc. v. United States, ___ U.S. ___, ___, 136 S. Ct. 1969, 1973 (2016). Congress particularly sought to improve the position of "small business concerns owned and controlled by socially and economically disadvantaged individuals." 15 U.S.C. § 637(d)(1). To that end, it has required "each agency to set an annual goal that presents, for that agency, the maximum practicable opportunity for contracting with small businesses, including, [relevant here,] those small business concerns owned and controlled by service-disabled veterans." Kingdomware Techs., 136 S.Ct. at 1973 (internal quotation marks omitted) (citing 15 U.S.C. § 644(g)(1)(B)); see also 38 U.S.C. § 8128(a) ("In procuring goods and services pursuant to a contracting preference under this title or any other provision of law, [VA] shall give priority to a small business concern owned and controlled by veterans . . . .").The task of promulgating regulations "set[ting] forth procedures . . . to set aside contracts for" SDVOSBs has been assigned to at least two distinct agencies, SBA and VA. See Kingdomware Techs., 136 S. Ct. at 1973 (internal quotation marks omitted); see also 15 U.S.C. § 657f (SBA); 38 U.S.C. § 8127(a), (e) (VA).

VA and SBA have established separate but overlapping regulatory frameworks for these set-asides. Compare 38 C.F.R. Part 74 (VA), with 13 C.F.R. Part 125 (SBA). Both initially relied on self-certification to determine the eligibility of bidders, but the programs have materially diverged, both in terms of the standards for eligibility and the process for confirming or rejecting qualification.

A. VA Program

Congress authorized the VA to set aside certain contracts for "small business concerns owned and controlled by veterans with service-connected disabilities," through the Veterans Benefits, Health Care, and Information Technology Act of 2006 ("Veterans Benefits Act"), Pub. L. No. 109-461, tit V, 120 Stat. 3403, 3425 (codified in relevant part at 38 U.S.C. §§ 8127-28). See 38 U.S.C. § 8127(a), (e). The Act and, a fortiori, the regulations it authorizes apply only to VA procurements. See Angelica Textile Servs., Inc. v. United States, 95 Fed.Cl. 208, 222 (2010) ("The [VA] is responsible for implementing the Veterans Benefits Act; indeed, it is the only federal department or agency to which the Act's requirements apply."); see also 48 C.F.R. § 819.7002 (explaining that the VA's implementing regulations apply only to "VA contracting activities and to its prime contractors" and "to any government entity that has a contract . . . or other arrangement with VA to acquire goods and services for VA") (emphasis added).

VA implemented the Veterans Benefits Act through the "Veterans First Contracting Program," established in 2007. See AmBuild Co. v. United States, 119 Fed. Cl. 10, 19 (2014). "At the Program's commencement, SDVOSB . . . entities were permitted to self-certify . . . for registration in the VetBiz VIP database." Id. But the authorizing statute was subsequently amended, requiring the Secretary of Veterans Affairs to maintain the database and certify contracting entities through the VA's Center for Verification and Evaluation ("CVE"). Id. (citing 38 U.S.C. § 8127(e), (f)); see also 48 C.F.R. § 804.1102. A business must be included on the VA's VIP database to qualify as an eligible SDVOSB for a contract award. See 38 U.S.C. § 8127(e), (f); 48 C.F.R. § 804.1102. The CVE now certifies participating entities and maintains such certification by performing examinations that "review . . . a[t] a minimum . . . all documents supporting the application, as described in [38 C.F.R.] § 74.12." See 38 C.F.R. § 74.20(b). These "examination[s] may be conducted on a random, unannounced basis, or upon receipt of specific and credible information alleging that a participant no longer meets eligibility requirements." Id. § 74.20(a).

"When CVE believes that a participant's verified status should be cancelled prior to the expiration of its eligibility term," CVE notifies the small business concern and allows 30 days for the concern to respond. See 38 C.F.R. § 74.22(a)-(b). Upon a determination that cancellation is warranted, the director of the CVE will issue a reasoned notice of cancellation, and the concern will be removed from the VetBiz VIP Database. See id. § 74.22(c)-(d). The concern then has a right to appeal the determination to the Office of Small and Disadvantaged Business Utilizationand Center for Veterans Enterprise "within 30 days of receipt of [the] cancellation decision" or to "re-apply after it has met all eligibility criteria." Id. § 74.22(c), (e).

To qualify for CVE certification as an SDVOSB, "[a] small business concern must be unconditionally owned and controlled by one or more eligible . . . service-disabled veterans." 38 C.F.R. 74.2(a) (emphasis added). When the small business concern is a corporation, "at least 51 percent of each class of voting stock outstanding and 51 percent of the aggregate of all stock outstanding must be unconditionally owned by one or more . . . service-disabled veteran." Id. § 74.3(b)(3). VA has defined unconditional ownership:

Ownership must not be subject to conditions precedent, conditions subsequent, executory agreements, voting trusts, restrictions on assignments of voting rights, or other arrangements causing or potentially causing ownership benefits to go to another (other than after death or incapacity). The pledge or encumbrance of stock or other ownership interest as collateral, including seller-financed transactions, does not affect the unconditional nature of ownership if the terms follow normal commercial practices and the owner retains control absent violations of the terms.

Id. § 74.3(b) (emphasis added). As to control of a SDVOSB, the veteran must have "both the day-to-day management and long-term decision-making authority." Id. § 74.4(a). More specifically, he or she is required to have "both the strategic policy setting exercised by boards of directors and the day-to-day management and administration of business operations." Id. § 74.4(b). "Control is not the same as ownership, although both may reside in the same person." Id.

This court previously interpreted and applied these regulations in Miles Constr., LLC, v. United States, 108 Fed. Cl. 792 (2013), and AmBuild, 119 Fed. Cl. 10. In Miles, the VA had removed Miles Construction from the VIP database because there was a restriction on the service-disabled veteran's ownership interest, allegedly rendering his ownership conditional. 108 Fed. Cl. at 800-01. The company's Operating Agreement granted a right of first refusal to "the company, or the remaining members of the company if the company declines . . . to purchase a member's shares, should he or she decide to sell." Id. at 801. The government asserted that that provision of the Operating Agreement was an executory agreement that violated 38 C.F.R. § 74.3(b) "because it prevent[ed the]...

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