The SBA Office of Hearings and Appeals (“SBA OHA”) ruled that an SDVOSB was not unduly reliant on a non-SDVOSB subcontractor under a contract to provide the VA in home oxygen and ventilator services to veterans. SBA OHA looked at whether the SDVOSB will comply with the limitations on subcontracting requirements. If yes, then the SDVOSB would not be unduly reliant on its subcontractor based on SBA regulation 13 C.F.R. § 125.18(f)(2):

SBA will find that a prime SDVO contractor is performing the primary and vital requirements of a contract or order and is not unduly reliant on one or more non-similarly situated subcontract[or]s where the prime contractor can demonstrate that it, together with any similarly situated entity, will meet the limitations on subcontracting provisions set forth in § 125.6.

SBA OHA looked at the SDVOSB’s proposal and teaming agreement and found that they indicated that the limitations ion subcontracting would be complied with. Specifically, since it was a services contract, at least 50% of the contract services must be performed by the SDVOSB.

CVE Protest of Veterans Care Medical Equipment, LLC, SBA No. CVE-241-P (August 29, 2022)

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On July 21, 2021, the VA Center for Verification and Evaluation (CVE) cancelled a contractor’s verification status because it did not report a change in ownership within 30 days of its occurrence. As a result, the contractor had to wait six (6) months before reapplying for verification.

The contractor appealed CVE’s cancellation of its verification. The SBA Office of Hearings and Appeals (SBA OHA) upheld CVE’s cancellation as proper. SBA OHA noted that the VA regulation requires notification of ownership change within 30 days and does not permit a contractor to cure this defect after CVE discovered it. As a result, the contractor had to wait 6-months before reapplying for verification.

The VA regulations on SDVOSBs provide that:

A participant may remain eligible after a change in its ownership or business structure, so long as one or more veterans own and control it after the change. The participant must file an updated VA Form 0877 and supporting documentation identifying the new veteran owners or the new business interest within 30 days of the change .

Because the contactor failed to submit a Form 0877 to report the ownership change, OHA held that the VA CVE properly cancelled its SDVOSB status:

To be an eligible SDVOSB, a concern must be owned and controlled by a service-disabled veteran. 13 C.F.R. § 125.11. A concern must file a VA Form 0877 identifying its owners/stockholders as part of the application process. 38 C.F.R. § 74.12. A change in a concern’s ownership must be documented with a new VA Form 0877, identifying the new owners within 30 days of the change. 38 C.F.R. § 74.3(b)(1) (emphasis supplied).

In the Matter of: Warrior Service Company, LLC, SBA CVE 214-A (December 9, 2021)

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Alog Corporation was awarded a contract with the Air Force. The solicitation was set aside for SDVOSBs. An SDVOSB status protest followed. Alog Corporation lost the protest and the contract because its stock transfer agreement violated the SDVOSB’s unconditional ownership requirement. Namely, the service disabled veteran must unconditionally own his interest in the company. The SBA Office of Hearings and Appeals described unconditional ownership as:

The service-disabled veteran’s ownership of the challenged concern must be unlimited, with no restrictions whatever on their ownership, or their ability to dispose of their shares in any way they choose. The exceptions are agreements dealing with the death or incapacity of a shareholder, and the pledge of stock as collateral if the terms follow normal commercial practices.

In this case, the Stock Transfer Agreement stripped the service disabled veteran of unconditional ownership because he could only sell his shares to employees of the company. And to make matters worse he had to sell his shares by a certain date (i.e. forced sale). These restrictions clearly violated the unconditional ownership requirement to be an eligible SDVOSB.

Lesson Learned: Retain a lawyer who understands SDVOSB rules when drafting a stock transfer agreement, bylaws or an operating agreement. While certain terms make commercial sense, they may not pass muster under the SBA regulations governing SDVOSBs.

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On February 26, 2020, the United States Court of Appeals for the Federal Circuit ruled that XOtech does not qualify as an SDVOSB. XOtech, LLC, . v, United States, Docket No. 2019-1743 The LLC was manager managed. There were three managers and only one was a service disabled veteran. A majority vote of the managers was required to make certain business decisions. The Court ruled that this meant the service disabled veteran lacked control over the LLC.

The Court rejected XOtech’s argument that the service disabled veteran had control because he could remove a manager at will. The Court found that this was not enough since the service disabled veteran could not undo a vote of a managers after he was removed.

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Effective December 30, 2019,  for contracts awarded by the Department of Veterans Affairs (“VA”), a protest can be filed when a CVE verified prime contractor is unusually reliant on a subcontractor who is not verified by CVE or where this subcontractor will perform the primary and vital requirements of the contract.  134 C.F.R. 134.1003 Note that it does not matter whether the subcontractor is a small business.

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On June 11, 2019, the SBA Office of Hearings and Appeals dismissed a Service Disabled Veteran Owned Small Business (“SDVOSB”) status protest as untimely. In the Matter of Fairwater Associates, SBA No. Vet-280 (June 11, 2019) 

To be timely, an SDVOSB status protest must be filed within 5 business days after the contracting officer provides notification of the apparent awardee.  13 C.F.R. § 125.28(d)(1) Any protest submitted after that is untimely, unless the protest is from the SBA or the Contracting Officer. 13 C.F.R. § 125.28(d)(3)

On April 1, 2019, the Department of Energy (“DOE”) notified Fairwater that L.E. Peabody was the apparent awardee. Fairwater ask for a debriefing on April 4, 2019. The DOE provided a debrief on April 9, 2019. Fairwater filed a SDVOSB protest on April 11, 2019, but it was too late. The fact that Fairwater received a debriefing did not extend the 5-day period to file an SDVOSB protest.

Lesson Learned: Always file an SDVOSB type protest within 5 business days after you are told who is going to get the award. Do not wait to file until after a debriefing. It could be too late by then.

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On October 17, 2018, the Court of Appeals  for the Federal Circuit ruled that the VA’s “Rule of Two” applies to all goods and services procured by the VA, even items that are otherwise required to be procured from a nonprofit agency for the blind or significantly disabled under the Javits-Wagner-O’Day Act (“JWOD”).  Under JWOD, a 15 member body appointed by the President, including one representative from the VA, creates a list of products and services that are produced by non-profit entities that are operated in the interest of, or employ, individuals who are blind or significantly disabled.  JWOD generally requires that federal agencies must purchase products on this list from designated nonprofits.

The Court of Appeals for the Federal Circuit affirmed a lower court ruling that the Rule of Two under the Veterans First Contracting Program governs, even for products that are on the JWOD list:

Thus, where a product or service is on the List and ordinarily would result in the contract being awarded to a nonprofit qualified under the JWOD, the VBA unambiguously demands that priority be given to veteran-owned small businesses. While we are mindful of Appellants’ policy arguments, we must give effect to the policy choices made by Congress . We find that by passing the VBA, Congress increased employment  opportunities for veteran-owned businesses in a narrow category of circumstances, while leaving intact significant mechanisms to protect such opportunities for the disabled.

PDS Consultants, Inc. v. United States, Court of Appeals for the Federal Circuit (October 17, 2018)

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