COFC Wades into “Freaky Friday” Litigation to Decide GovCon Equivalent of Hot Dog/Sandwich Debate: Is Litigating Contract Claims Part of Day-to-Day Contract Performance?

Nicoleta Ionescu | Shuttestock

A losing bidder claimed a joint venture awardee wasn’t eligible for an SDVOSB set aside. OHA initially agreed, finding the awardee’s JV agreement gave the non-managing member a role in litigation decisions and thus control over the JV’s day-to-day operations. The awardee filed suit in the COFC. The court remanded back to OHA. On further reflection, OHA reversed itself, finding litigation is not part of the day-to-day operations of a contractor. The parties went back to COFC. The court noted the parties’ roles were now reversed—the awardee was now the defendant and the losing bidder was the plaintiff—like the characters in the seminal Disney film “Freaky Friday.” In any event, the court concurred with OHA’s reconsidered decision. Litigation is not part of day-to-day contract performance. A contractor is not performing when it files a claim.

Defense Integrated Solutions, LLC v. United Sates, COFC No. 23-64C


The Missile Defense Agency (MDA) issued a solicitation for advisory and assistance services. The procurement was set aside for SDVOSB’s. Six offerors submitted proposals. MDA awarded selected Strategic Alliance Solutions (SAS) for award. SAS was an SBA-approved mentor-protégé joint venture.

An unsuccessful offeror, Defense Integrated Solutions (DIS), filed a protest with SBA. DIS alleged SAS’s joint venture agreement didn’t comply with the SBA’s regulations. SBA agreed, finding the JV agreement gave the mentor partner negative control over the joint venture.

SAS appealed to SBA’s Office of Hearings and Appeals. OHA affirmed the SBA’s decision. Under 13 C.F.R. § 125.18(b)(2), the managing venture must be responsible for controlling day-to-day contract performance. OHA reasoned that litigation is part of the day-to-day contract performance. SAS’s joint venture agreement required unanimous consent of both partners before the venture could initiate litigation.. Thus, SAS’s joint venture agreement, improperly gave control over day-to-day operations to a non-managing member.

SAS filed suit in the Court of Federal Claims, challenging the OHA decision. The court remanded the matter to OHA to reconsider whether requiring unanimous consent for litigation really results in negative control.

Upon reconsidering, OHA reversed itself. OHA decided litigation is really not part of the day-to-day to contract performance. SAS was, in fact, eligible for award.

DIS filed suit with the COFC. DIS alleged OHA got it wrong; initiation of litigation impacts day-to-day operations.


Plain Meaning of 13 C.F.R § 125.18(b)(2)

In an SDVOB mentor-protégé joint venture, the joint venture must comply with 13 C.F.R. § 125.18(b)(2). To comply, the small business member must be the managing member that controls day-to-day contract performance. DIS argued that initiating claims and litigation was related to contract performance. Because SAS’s joint venture required unanimous consent for litigation decisions, DIS reasoned, the non-managing member could disrupt day-to-day operations, so the venture was not fully controlled by its managing member.

The court found DIS was reading the regulation too broadly. DIS’s argument relied on the words “related to.” To be sure, initiating claims and litigation may be related to contract performance, but the words “related to” are not in the regulation. Rather, the regulation simply refers to day-to-day contract performance, not broadly to things related to contract performance.

The court therefore read “contract performance” strictly. Contract performance means meeting the contract’s statement of work. A contractor does not engage in contract performance when it files a claim or initiates litigation. SAS’s non-managing partner may have had role in litigation decision, but that did not give it control over day-to-day operations.

Participate in Corporate Governance

DIS contended if initiating litigation is not part of day-to-day performance, then it’s corporate governance decision. Under 13 C.F.R. § 125.18(b)(2), a non-managing member may participate in corporate governance. But, DIS reasoned, this participation is limited; ultimately, the managing member must have final word on governance decisions. SAS’s JV agreement gave the non-managing member a veto over litigation decisions, thereby permitting too much participation in governance decisions.

The court rejected DIS’s interpretation of “participate.” DIS conflated participating with control and interpreted the word in way that would render 13 C.F.R. § 125.18(b)(2) meaningless. If DIS were correct, then a non-managing could do little more than register disagreement with the managing members. That could not be the case. Otherwise the regulation would not have made a distinction between day-to-day operations and governance decisions. SBA clearly thought a non-managing member could not participate in day-to-day operations but could participate in governance decisions. SAS’s JV agreement, which allowed the non-managing to participate in litigation decisions—which are governance decisions—complied with the regulation.

Deference to SBA

The court further noted even if DIS’s arguments had merit, it would merely make 13 C.F.R. § 125.18(b)(2) ambiguous. Indeed, DIS itself conceded the regulation was ambiguous. If the statute was ambiguous, then the court would defer to SBA’s—the promulgating agency’s—interpretation. Here, SBA, through OHA, had determined litigation is not part of day-to-day contract performance. That interpretation was reasonable. The court didn’t need to second guess it.

DIS is represented by Matthew T. Schoonover, John M. Mattox II, and Timothy J. Laughlin of Schoonover & Moriarty as well as Emily J. Chancey, Joshua B. Duvall, and Nicholas P. Greer of Maynard Cooper & Gale, P.C. The intervenor, SAS, is represented by Meghan F. Leemon, Jonathan T. Williams, Katherine B. Burrows, Peter B. Ford, and Eric A. Valle of PilieroMazza PLCC. The government is represented by Bryan M. Byrd, Brian M. Boynton, Patricia M. McCarthy, and William J. Grimaldi of the Department of Justice.

–Case summary by Craig LaChance, Senior Editor