Appeal of a COFC decision finding that a company was not eligible to compete as a service-disabled veteran-owned small business is affirmed. The business had converted from a member-managed to a manager-managed LLC and added managers who were not service-disabled veterans. The court held that because (1) only one manager was a service-disabled veteran after the management change, and (2) a majority vote of managers was now required for any management decision, the company was no longer controlled by a service-disabled veteran. Because it was not controlled by a service-disabled veteran, the company no longer qualified as an SDVOSB.
XOtech was a limited liability company was originally organized by Gary Marullo, a service-disabled veteran, as a member-managed LLC. Marullo was on the only member. Later, XOtech’s amended it operating agreement to change it from a member-managed company into a manager-managed company. The company added Marullo’s wife and his son, who were not service-disabled veterans, as additional managers. Under this new manager-managed arrangement, each manager had equal voting power, and a majority vote of managers was required to make to make all management decisions.
After it had converted to a manager-managed LLC, XOtech was awarded an SDVOSB set aside contract to provide logistical support to the Army. A disappointed bidder protested the award with the Small Business Administration, contending that XOtech was ineligible to compete as an SDVOSB. The SBA determined that XOtech was not an eligible SDVOSB because it was not controlled by a service-disabled veteran. The SBA’s Office of Hearing and Appeals affirmed. XOtech protested with the COFC contesting the SBA decision, but the court denied the protest, finding that because all the company’s decisions were not controlled by a service-disabled veteran, it was not an SDVOSB. XOtech appealed to the Federal Circuit.
For an LLC to be eligible as an SDVOSB, a service-disabled veteran must own a majority of and control the company. To control an LLC, the service-disabled veteran must, among other things, have control over all decisions of the LLC.
Here, the court found, Marullo, the service-disabled veteran, did not control the decisions of the LLC. XOtech’s operating agreement vested management authority in three managers who had equal voting power, and every management decision required a majority vote. Since Marullo was the only service-disabled veteran, the vote of at least one person who was not a service-disabled veteran was required for every decision. If any portion of an LLC’s decision making requires the vote of an individual who is not a service-disabled veteran, the company is not controlled by a service-disabled veteran.
XOtech argued that Marullo still effectively controlled the company because he owned a 90% membership interest and thus had the authority to remove any members that disagreed with him. But the court did not find this compelling. Until Marullo actually removed another manager, all management decisions still required the vote of at least one person who was not a service-disabled veteran. Marullo could not preempt the other managers from making decisions, and he could not undo decision after the managers have been removed.
XOtech also argued that the conversion to a manager-managed structure was not really a big deal because the ability of non-service-disabled veterans to bind the company was no different from an employee to whom decision-making authority had been delegated. The court, however, didn’t buy it. The ability of an employee to make decisions results from a delegation of management authority. For XOtech, the source of delegated authority was XOtech’s management structure, which Marullo did not control.
XOtech is represented by William T. Welch of Welch & Learned. The government is represented by Eric Laufgraben, Joseph H. Hunt, Allison Kidd-Miller, and Robert Edward Kirschman, Jr. of the U.S. Department of Justice as well Beverly E. Hazelwood of the Small Business Administration and Wayne T. Branom, III of the U.S. Army Legal Services Agency
