A recent decision from the Federal Circuit clarified whether the Court of Federal Claims (“COFC”) has jurisdiction to review the selection of North American Industry Classification System (“NAICS”) codes and reminded small business contractors of the need to exhaust administrative remedies—including intervening in protests at the Small Business Administration (“SBA”) Office of Hearings and Appeals (“OHA”)—before challenging a NAICS code designation in court.
Palladian Partners, Inc. v. Unites States, No. 2014-5125 (Fed. Cir. Apr. 22, 2015), involved a pre-award bid protest of a contract to coordinate and facilitate activities within the National Institutes of Health’s Centers of Excellence in Pain Education. The agency initially issued the solicitation as a small business set-aside under a NAICS code that limited offerors to small business with 500 employees or fewer.
A potential offeror appealed the NAICS code to OHA and, following standard practice, the Contracting Officer amended the solicitation to notify potentially-interested parties of the appeal. OHA granted the appeal and ordered the agency to change to a different NAICS code. Then, before the close of the solicitation, Palladian Partners, Inc. (“Palladian”) appealed the new NAICS code designation to OHA. The new NAICS code rendered Palladian ineligible to compete, and the company argued for a different code. OHA dismissed Palladian’s appeal under the doctrine of issue preclusion, stating that Palladian was “barred from relitigating issues already decided” in the earlier NAICS appeal. OHA explained that if Palladian had wanted to challenge the NAICS code, it should have intervened in the first appeal.
While Palladian’s OHA appeal was pending, the company filed a protest at the COFC, arguing that the newly assigned NAICS code did not best describe the statement of work. The COFC agreed, finding that the Contracting Officer “blindly accept[ed] the NAICS code chosen” by OHA and failed to exercise his discretion to determine the proper code for the solicitation. The COFC sustained the protest and remanded the case to the agency to make a proper NAICS code selection. The government appealed and argued that (1) the COFC does not have authority to reverse or vacate an OHA NAICS code decision and (2) the COFC should have dismissed Palladian’s protest for failure to exhaust administrative remedies.
The Federal Circuit first addressed the question of jurisdiction. The Court looked to the Tucker Act, which provides the COFC with bid protest jurisdiction, and determined that OHA’s NACIS code determination and the subsequent amendment to the solicitation were actions “in connection with a proposed procurement.” Although the COFC had previously held that it had jurisdiction to review size determinations, NAICS code designations, and eligibility for SBA programs, Palladian Partners is the first case in which the Federal Circuit has addressed the COFC’s authority to reverse or vacate an OHA decision.
The Court then turned to the issue of exhaustion. SBA’s regulations state that the OHA appeal must be exhausted before a party can seek judicial review of a NAICS code. The COFC had rejected the Government’s argument that Palladian was required to participate in the first NAICS appeal, reasoning that it would be burdensome to require small businesses to intervene in every NAICS code challenge.
The Federal Circuit did not share this concern. Instead, they found that the SBA’s regulations clearly required any interested person to intervene in an OHA appeal and limited judicial review of OHA decisions to parties who had participated in the OHA proceeding. The Court noted that Palladian was not arguing for the initial NAICS code—meaning it could not argue that it failed to intervene because it believed the agency would represent its interests.
The Federal Circuit also rejected Palladian’s argument that its failure to exhaust the administrative remedies at OHA should be excused because OHA had the opportunity and obligation to consider all potentially applicable NAICS codes during the first appeal. The Court distinguished the facts presented from the cases in which courts have declined to apply the exhaustion doctrine and observed that there was no indication that OHA considered the NAICS code Palladian sought during the appeal.
The Federal Circuit seldom addresses issues specific to small business contractors. Palladian Partners is notable in that respect and for its holdings. The law is now clear that contractors must intervene in an OHA appeal if they want to challenge a NAICS code designation down the road. And, the Federal Circuit confirmed that parties to an OHA appeal who disagree with OHA’s decision can seek review at the COFC. Palladian Partners is a decision of which small businesses should be aware.