United States: SBA Sneaks In Rule On Recertification

The Small Business Administration (SBA) issued a Direct Final Rule on March 26, 2018 that appears to address a specific holding of SBA's Office of Hearings and Appeals (OHA) related to small business recertification rules. In the recently issued Analytic Strategies, Inc., SBA No. VET-268, decision, OHA held that a service-disabled veteran-owned small business concern (SDVO SBC) that recertifies its status pursuant to an acquisition or merger remains eligible for set-aside task orders under an indefinite delivery, indefinite quantity contract (IDIQ), unless the contracting officer specifically requires recertification in connection with a specific task order. This holding affirmed the widely understood interpretation of the regulations. SBA opposed this interpretation of the rule in Analytic Strategies. For more information on this case, see our earlier blog post on Analytic Strategies.

What Is the Change?

In March 2018, SBA announced what it terms as a "technical correction" under a Direct Final Rule that may be an attempt to cast doubt on the Analytic Strategies decision. This new rule, however, may prove too much as it would apply to many of the small business programs administered by SBA and not just SDVO SBCs. On the other hand, if SBA's goal was to make contractors that have recertified their status ineligible for future set aside task orders, it is not clear this rule does it. For example, in the case of SDVO SBCs, 13 C.F.R. § 125.18(e)(1) currently explains that SDVO SBCs that recertify as having changed their status will be eligible as an SDVO SBC for each order issued against the contract, unless a contracting officer requests a new SDVO SBC certification in connection with a specific order. The recertification exception is the only exception to this rule:

A concern that represents itself and qualifies as an SDVO SBC at the time of initial offer (or other formal response to a solicitation), which includes price, including a Multiple Award Contract, is considered an SDVO SBC throughout the life of that contract. This means that if an SDVO SBC is qualified at the time of initial offer for a Multiple Award Contract, then it will be considered an SDVO SBC for each order issued against the contract, unless a contracting officer requests a new SDVO SBC certification in connection with a specific order. Where a concern later fails to qualify as an SDVO SBC, the procuring agency may exercise options and still count the award as an award to an SDVO SBC. However, the following exceptions apply:

13 C.F.R. § 125.18(e)(1). The three instances where the procuring agency can no longer claim credit are novation, merger/acquisition, or after a size protest. Id. The new SBA rule will change the final sentence of this regulation to read: "However, the following exceptions apply to this paragraph (e)(1)." (emphasis added). Apparently, this change is an attempt to show that the three credit exceptions apply to the entirety of paragraph (e)(1) (including eligibility) instead of only the penultimate sentence regarding SDVO SBC credit. While OHA's decision in Analytic Strategies. relied in part on the placement of the three exceptions after the sentence involving credit, OHA also observed that the 13 C.F.R. § 125.30(g)(2) specifically addresses eligibility when discussing the effect of status determinations. If SBA's Director of Government Contracting determines a concern is ineligible for the SDVO SBC procurement following a status protest, the contracting officer is required to terminate the award or decline to exercise an option. OHA contrasts this clause with the remedy in 13 C.F.R. § 125.18(e)(1), which is a "prohibition on counting the award of options or orders toward the procuring agency's socioeconomic goals in certain circumstances." Analytic Strategies, Inc., SBA No. VET-268 at 17.

Is this Really a "Technical Correction"?

SBA labelled this new rule as a "technical correction" under a Direct Final Rule. Direct Final Rules are used when an agency decides that a proposed rule is unnecessary because it would only relate to routine or uncontroversial matters. If adverse comments are not submitted by the due date, the rule will automatically go into effect. Here, comments were due on April 25, 2018 and the rule is scheduled to go into effect on May 25, 2018.

If it interprets this change broadly, the SBA's characterization of this potentially substantive rule change as a mere technical correction leaves it vulnerable to legal challenge. Reversing a binding OHA interpretation is certainly a substantive change. In a similar situation, the Department of Veterans Affairs (VA) attempted to publish a direct final rule in the Federal Register that eliminated veterans' hearing rights before the Board of Veterans' Appeals, abrogating the United States Court of Appeals for Veterans Claims' holding in Bryant v. Shinseki, 23 Vet. App. 488 (Vet. App. 2010). The National Organization of Veterans' Advocates, Inc. challenged the rule as a violation of the Administrative Procedure Act, 5 U.S.C. § 553, which requires notice and comment for substantive rule changes. See Nat'l Org. of Veterans Advocates, Inc. v. Sec'y of Veterans Affairs, 725 F.3d 1312, 1314 (Fed. Cir. 2013). The Federal Circuit found that the rule was improperly promulgated and therefore invalid and void ab initio. Nat'l Org. of Veterans Advocates, Inc. v. Sec'y of Veterans Affairs, 710 F.3d 1328, 1332 (Fed. Cir. 2013). By skipping the mandatory notice and comment period required under the Administrative Procedure Act for substantive rule changes, the SBA may have created a path for a future challenger to prevail on this procedural argument.

When Does it Apply?

SBA's characterization of this substantive rule change as a mere technical correction may also evidence an intent to apply the rule retroactively. See, e.g., Orr v. Hawk, 156 F.3d 651, 654 (6th Cir. 1998) ("A rule clarifying an unsettled or confusing area of the law "does not change the law, but restates what the law according to the agency is and has always been...."). Contractors that have re-certified (or are considering a transaction that would require recertification) and companies that may be subject to 13 C.F.R. §§ 125.18(e)(1), 121.404(g), 126.601(h), and 127.503(h)(1) should consult counsel on the effects of this rule change. Similarly, agencies that thought they had a large pool of contractors under their small business IDIQs that were eligible to bid for set aside task orders may wake up on May 25, 2018 to find that pool has suddenly become much smaller.

It does not appear that any negative comments were received before the deadline, so this rule will go into effect on May 25, 2018.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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