The SBA Area Office declined to decide a size protest. The Area Office found the challenged firm had a peculiar structure. This structure made it impossible to determine who controlled the business. OHA ruled the Area Office should’ve have pulled the trigger on a decision. The Area Office had doubts about whether the challenged firm was a valid joint venture. OHA said the Area Office should’ve resolved those doubts in favor of the protester. A challenged firm, after all, has the burden of proving its size.
Size Appeal of SysCom, Inc., RE: SNI United, LLC, SBA No. SIZ-6195
Background
The Air Force posted an RFQ for refuse and recycling services. The procurement was set aside for participants in SBA’s 8(a) Business Development Program. After reviewing proposals, the Air Force awarded the contract to SNI United, LLC. SNI was a joint venture between US Trash, an 8(a) participant, and Six Nations, Inc., a small business.
SysCom, an unsuccessful offeror filed a size protest. SysCom alleged SNI was not eligible for award because the joint venture was not controlled by the 8(a) member. The SBA Area Office issued a size determination concluding SNI was small. SNI determined that under SNI’s bylaws and joint venture agreement, US Trash was the majority owner and managing venture of SNI. Thus, the venture was controlled by the 8(a) member.
SysCom appealed the size determination to SBA’s Office of Hearings and Appeals. OHA reversed. OHA reasoned that while SNI represented itself as majority-owned and controlled by US Trash, its assertions were inconsistent with the company’s status as an LLC under Michigan law. Michigan law statutorily vests management of an LLC in all members unless a particular member is identified as manager in the company’s Articles of Organization or operating agreement. SNI’s company documents had not identified a managing member, so it was not clear who controlled the company. OHA remanded back to the Area Office to assess whether SNI’s business and ownership structure satisfied the SBA’s joint venture requirements.
On remand, the Area Office asked SNI additional questions about its corporate structure. The questions didn’t clear up the matter. SNI had drafted corporate documents without legal counsel. This had resulted in a bizarre structure: “a hybrid LLC with corporation-like-appendages.” The Area Office found the peculiarities of SNI’s structure made a decision impossible. The Area Office concluded that a decision didn’t make sense until SNI’s “sui generis business and ownership structures are found to be valid and enforceable.”
SysCom appealed again to OHA
Analysis
OHA found the Area Office should have sustained the protest. SNI’s joint venture agreement stated the company was controlled by the 8(a) member. But neither its operating agreement or articles of organization identified a manager. The joint venture agreement thus conflicted with Michigan LLC law. Under the circumstances Michigan law took precedence. SNI was not legally controlled by an 8(a) participant.
OHA also noted that under SNI’s bylaws a majority of the board was required to establish a quorum and take action. But SNI’s board only had two member.s One of these members was the President of Six Nations. Thus, Six Nations could conceivably assert negative control over the joint venture even if US Trash was the managing member.
OHA concluded by noting the Area Office shouldn’t have equivocated on a decision. While the Area Office thought the facts were unclear, it also harbored serious doubts as to whether SNI was a joint venture. The Area Office should have resolved those doubts in the protester’s favor. The concern whose size is challenged has the burden of proving it’s small.
SysCom is represented by Douglas P. Hibshman and Sean Milani-nia of Fox Rothschild LLP. SNI is represented by Terry L. Elling, Amy Fuentes, and Danielle R. Rich of Holland & Knight, LLP.
–Case summary by Craig LaChance, Senior Editor
