Court of Federal Claims Smacks Down the VA’s OSDBU Not Once, But Twice!
February 22, 2013
The Court of Federal Claims recently issued two decisions reinstating veteran-owned small businesses (“VOSBs”) in the Department of Veterans Affairs’ (“VA’s”) Veterans First Contracting Program, after they were held ineligible by the VA’s Office of Small and Disadvantaged Business Utilization (“OSDBU”). See KWV, Inc. v. United States, No. 12-882C (Fed. Cl. Jan. 25, 2013) and Miles Construction, LLC v. United States, No. 12-597C (Fed. Cl. Feb. 14, 2013). To qualify as a VOSB a business must be, among other things, “unconditionally owned and controlled by one or more eligible veterans.” The VA had been interpreting these terms to prohibit common commercial terms regarding succession planning and common sense management. That is until Judge Lettow took the VA’s OSDBU to the woodshed, finding not only that the OSBDU misinterpreted the relevant regulations, but also that it failed to give basic due process to veteran-owned companies in revoking their VOSB status.
In KWV, Inc., the VOSB in question had previously been found qualified for the program after undergoing a lengthy and searching review by the VA’s Center for Veterans Enterprise, which is responsible for verifying VOSBs. That status, however, was subsequently challenged by a losing bidder in an agency level protest. After reviewing the protest, the VA’s OSDBU concluded that the company was not eligible based on its finding that the veteran owner did not “control” the company as required by the VA’s regulations because he split his time between Florida and Rhode Island, where the company was based.
In its decision, the court was highly critical of the OSDBU’s review process, finding it lacking in both scope and thoroughness. The court similarly took issue with the OSDBU’s conclusion that the veteran owner could not effectively exercise control because he lived half the year in Florida. According to the court, the OSDBU “never even purports to determine [the veteran owner’s] actual level of involvement in the control of KWV” and instead applied a bright line rule requiring owners of construction companies to be physically present to exercise control. The court, however, was persuaded that the owner could effectively exercise control because most projects were performed in the six months when the owner was in Rhode Island, the owner was able to stay in year-round communication through email and phone and he would travel back to Rhode Island as needed. The court thus granted the company a preliminary injunction requiring the VA to reinstate the company as a qualified VOSB.
The second case, Miles Construction, also arose out of a protest filed by a disappointed bidder. The OSDBU disagreed with the protestor’s allegation that the VOSB was not controlled by a veteran, but ultimately determined the company was ineligible based on the OSDBU’s self-initiated analysis of the veteran’s ownership rights (an issue not raised by the protestor). Specifically, OSDBU concluded that the veteran owner lacked “unconditional ownership” because the operating agreement gave the company, or the other members, the right of first refusal to purchase a member’s shares in the event he or she decided to sell.
The court rejected the government’s contention that the relevant regulation (38 C.F.R. § 74.3) prohibited conditions of any sort as it expressly allows certain commercial financial pledges of ownership and transfers of ownership in the event of death or incapacity. Instead, the court concluded that a standard right of first refusal was a “normal commercial practice” that did not hinder a veteran owner’s interest. Specifically, the court held that the clause did not create an “executory contract” as it did “not necessarily burden either party with unperformed obligations that would constitute a material breach if not performed.”
Finally, the court held that the OSDBU’s decision was invalid because it failed to afford the company an opportunity to respond to the issue of whether the first refusal clause undermined the unconditional ownership of the veteran owner. The court found that even when an agency is conducting informal adjudication, the agency must afford a party with the right to respond to allegations. Thus, although OSDBU gave the company an opportunity to respond to the protest grounds, the company had no opportunity to respond to the OSDBU’s self-initiated “unconditional ownership” examination. The court therefore ordered the company reinstated in the VOSB program and ordered the VA to consider its offer in connection with the solicitation.
Jeffry Cook is the attorney responsible for the content of this article.