Affiliation and Control Under SBA

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The Paycheck Protection Loan program created by the CARES Act thrust the U.S. Small Business Administration’s complicated size standards into the spotlight for many companies that never before waded into those muddy waters.  None of SBA’s rules frustrated businesses that otherwise thought they were “small” more than the rule of “affiliation”, which requires concerns, when determining size, to include the size of other entities under common control.  A recent decision by the U.S. Court of Federal Claims is a timely reminder that the concept of “affiliation”, in the context of federal procurement, extends beyond just those companies under common ownership and entities that actively direct the operations of another concern.

In Darton Innovative Techs., Inc v. United States, 2021 U.S. Claims LEXIS 636 (Fed. Cl. April 14, 2021), the U.S. Court of Federal Claims affirmed the SBA’s Office of Hearing and Appeals’ (“OHA”) decision rejecting Darton as a small business for purposes of an Air Force procurement for specialized pilot training.  The size protest, lodged by a disappointed bidder for the contract, alleged that Darton, the apparent awardee, was not small because all of its revenue for the prior three years derived from subcontracts with the same “large” business, Sonoran Technology and Professional Services, LLC.  This dependence, the protestor argued, required Darton and Sonoron to be treated as affiliates under SBA’s “identity of interest” affiliation rule.

In affirming the OHA’s finding, the Court of Federal Claims relied on SBA’s general affiliation rules, recognizing:

  • In defining “general principles of affiliation,” the SBA looks to control: “[c]oncerns and entities are affiliates of each other when one controls or has the power to control the other, or a third party or parties controls or has the power to control both. It does not matter whether control is exercised, so long as the power to control exists.” [cit.]  The SBA considers in its affiliation determination “the totality of the circumstances, and may find affiliation even though no single factor is sufficient to constitute affiliation.” [cit.]

With respect to the identify of interest affiliation rule, the Court acknowledged that an identity of interest among otherwise separate firms may exist, among other circumstances, where one firm is economically dependent on the other and further acknowledged that economic dependence is presumed where one concern derives “70% or more of its receipts from another concern over the previous three fiscal years.”  Darton, 2021 U.S. Claims LEXIS 636 at *4-5.  Though this presumption is rebuttable like, for example, where a newly formed concern has only had limited time to secure contracts and therefore appears economically dependent on one concern, Darton presented no evidence overcoming the fact that 100% of its revenue derived from Sonoran over the previous five years.  This fact, the Court reasoned, allowed Sonoran to “eliminate Darton’s entire source of revenue by cancelling its subcontract,” which gave Sonoran “control” over Darton for purposes of affiliation.  Id. at *40-44.

While the Court’s determination does not present a new rule of law, it is a timely reminder of the expansive reach of SBA’s affiliation rule.  As experienced government contractors should well know, and as commercial firms with no prior government work may have learned in connection with the Paycheck Protection Program, the concept of affiliation – insofar as SBA rules are concerned – extends beyond the familiar meaning of firms or entities under common corporate ownership.  The ability to control, whether or not exercised, in virtually any form, whether by majority or minority ownership or otherwise, is the crux of the inquiry.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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