Are You a Small Business Concerned About Affiliation? You Better Check Your Relationships for Negative Control

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It sounds like the kind of power exercised by a malevolent cult leader, but “negative control” has its own meaning when it comes to small businesses. A small business is affiliated with the companies it controls and the revenues from those companies must be included in the small business’s size calculation. A small business can control a business through “negative control,” which means that it has the power to block the actions of another business. Here, the small business was only a minority partner of a joint venture, but the court found that even as a minority partner, it had the power to block some of the venture’s actions and this was sufficient for finding of affiliation through negative control.

Swift & Staley, Inc. v. United States, COFC No. 21-1279

Background

The Department of Energy issued an RFP set aside from small businesses with a size standard of $41.5 million in annual receipts. The agency selected Swift & Staley, Inc. for the award. An unsuccessful offeror, Akima Intra-Data, LLC filed a size protest, alleging Swift was a partner in a joint venture called Portsmouth Mission Alliance (PMA). Akima contended Swift had to include a proportionate share of PMA’s receipts in its annual receipts. The SBA sustained the protest, finding that Swift had to include PMA’s receipts and that as a result it was not a small business. The SBA’s Office of Hearing and Appeals affirmed.

Swift filed suit with the Court of Federal Claims challenging the OHA’s decision. The court reversed OHA finding that PMA was a populated joint venture and thus no longer recognized as a joint venture under SBA’s regulations. As a result, Swift did not need to include its share of PMA’s receipts when calculating its size. The court, however, remanded to OHA, to determine whether there were other grounds that may require Swift to assume a proportionate share of receipts.

On remand, OHA determined that Swift was affiliated with PMA through negative control; it had the power to block action of the joint venture. Swift filed suit with the Court of Federal Claims, once again objecting to the OHA decision.

Legal Analysis

  • OHA Properly Considered Negative Control Issue – Swift argued that in considering the negative control issue, OHA violated 13 C.F.R. § 134.316(c), which prohibits OHA from deciding an issue first raised on appeal. Swift claimed that OHA had raised the negative control matter on appeal sua sponte and that it had been raised before the SBA Area Office. The court rejected this argument, finding that Swift itself had raised the negative control issue before the Area Office. OHA had not raised the issue for the first time on appeal.
  • Court Agreed with Negative Control Finding – The court further found that OHA had properly determined that Swift was affiliated with PMA through negative control. Negative control occurs when a minority owner can prevent a quorum or otherwise block an action. Here, Swift had the power to, among other things, block PMA from commencing litigation, leasing property, or pledge an encumbrance of property. This was sufficient for control. PMA was an affiliate of Swift and the joint ventures had to be included in Swift’s size calculation.

Swift is represented by Richard Paul Rector of DLA Piper US LLP. The intervenor, Akima, is represented by Stephen Philip Ramaley of Miles & Stockbridge PC. The government is represented by Evan Wisser of the Department of Justice.

COFC - Swift & Staley