Government Contracts Monitor

Mentor/Protege Agreements – When Does Yours Expire; More Traps for the Unwary!

March 14, 2016

Mentor-Protege Agreements (MPAs) are a hot topic right now, as we near the Small Business Administration (SBA)’s anticipated issuance of new regulations on a possible “universal” Mentor-Protege program that would extend SBA’s current 8(a) Mentor-Protege (M/P) rules (13 C.F.R. §124.520), to other socio-economic programs. However, as we have discussed from time-to-time, the rules governing SBA’s 8(a) MPAs can be tricky, and require careful attention, particularly as to timing, so as to avoid a number of traps for the unwary. A recent decision by SBA’s Office of Hearings & Appeals (OHA) highlights one of these traps – specifically, the need for SBA to affirmatively approve the extension of a MPA so as to avoid the same expiring and the parties being unable to continue enjoying benefits thereunder, including the affiliation exception for 8(a) M/P joint ventures (JVs).

By way of background, one of the advantages of the 8(a) M/P program is that the 8(a) protégé can joint venture with its mentor, and compete as a small business for any government prime contract or subcontract. 13 C.F.R. § 520(d)(1). As you may know, joint venturers presently are generally deemed by SBA to be affiliated, such that their revenues or employees must be aggregated for size determination purposes. However, SBA’s regulations provide an exception from these affiliation rules for 8(a) M/P JVs. Companies availing themselves of these advantages enter into two separate agreements – (1) the MPA, and (2) a JV Agreement (JVA). Each of these agreements has to be separately approved by SBA. The MPA must be effective as of proposal submission for the JV to qualify for the affiliation exception, while the JVA must be approved prior to an 8(a) award to the JVA.

The problem is that each of these two agreements has its own rules and requirements, and they do not overlap. This makes it easy for small businesses to overlook the details or get confused, and SBA’s processes and rules do not always help. The key point, as to the MPA, is that the MPA is valid for only one year from the date of SBA’s approval. SBA must affirmatively renew or extend its approval for the MPA to continue. SBA’s regulations expressly state that “SBA will review the mentor-protégé relationship annually to determine whether to approve its continuation for another year.” 13 C.F.R. § 124.520(e)(4). While this language is less than a model of clarity, SBA’s standard MPA approval letter is very explicit. Such letter generally states that “This agreement shall expire after one year, unless SBA approves an extension.” (Emphasis added.) Thus, if the parties do nothing, the MPA (or at least SBA’s approval thereof) will expire by its own terms, regardless of anything else. SBA’s standard MPA approval letter goes on to tell the parties explicitly what they need to do, and by when. Specifically, the letter states that “[t]he protege must request continuation of the agreement from its servicing district office, in writing, at least 60 days prior to the expiration date of the agreement.”

This language is pretty clear. The problem, however, is that, in the excitement of getting the MPA approval, the parties often don’t focus on the fine print. Moreover, it is easy to get distracted by the needed JVA and JV proposal preparation efforts. It may be months before SBA approves the JVA and the parties actually start getting new work. Meanwhile, of course, the clock is ticking, and the initial one-year MPA approval period running. The situation is further complicated by SBA’s internal processes, which favor reviewing the parties’ progress under the approved MPA as part of the 8(a)’s annual review. However, such review period may not align with the MPA renewal timing.

A number of these factors came together recently in the Size Appeal of North Star Magnus Pacific Joint Venture, SBA No. SIZ-5715, decided Feb. 17, 2016. North Star, an approved 8(a), entered into a MPA with its large business mentor, Magnus Pacific Corp. The MPA provided that the “Term of the Agreement” would be “at least one year,” and [c]ontinuation of the Agreement is contingent upon SBA review of the proposed Protege's report on the Mentor/Protege relationship as part of the [] annual review of the firm’s business plan pursuant to 13 C.F.R. § 124.403.” SBA approved the MPA on July 5, 2014. SBA’s approval letter incorporated the above-discussed standard SBA language. On Monday, July 6, 2015, North Star and Magnus Pacific amended the MPA to continue the M/P relationship for an additional year, and submitted such to SBA. On September 23, 2015, North Star submitted its 8(a) Annual Review and updated business plan, addressing the M/P relationship and including a “Mentor-Protege Worksheet.” The District Office approved the updated annual business plan on September 28, 2015. On October 30, 2015, the District Office informed North Star that SBA approved the “request to extend the [MPA] for one year through July 4, 2016” – one year from the original July 5, 2015 original approval expiration.

In the meantime, the JV had submitted a new proposal to the U.S. Army Corps of Engineers on July 17, 2015, self-certifying as small. In the course of subsequently examining the JV’s size, the Area Office determined that the MPA had expired, and was no longer in effect as of the July 17^th proposal submission, The Area Office determined that the affiliation exception therefore was inapplicable, and the JV was other than small. The JV naturally appealed this determination, and raised a panoply of arguments to OHA, including that the MPA did not contain a set expiration date, and was contingent upon the annual review results that would not take place until well after July 5^th. The JV further argued that the Area Office exceeded its authority, and that 8(a) program issues are reserved to the Acting Administrator for Business Development (AA/BD).

OHA denied the appeal. First, OHA cited the plain language of SBA’s MPA approval letter, and sustained, as reasonable, the Area Office’s interpretation that such meant that the MPA expired on July 5^th, absent a prior approved extension. Second, OHA stated that this was consistent with Section 124.520(e)(4), which OHA construed as providing that “SBA’s approval of the agreement expires after one year, unless renewed.” Third, OHA stated that the venturers’ July 6^th Amendment extending the MPA evidenced their understanding that the MPA would lapse absent an extension. Fourth, OHA stated that the September 2015 annual review and SBA’s 10/30/15 approval letter were irrelevant, as both occurred after the July 17^th proposal submission. Fifth, OHA stated that determining whether the MPA was in effect as of the date for determining size was well within the Area Office’s competence, and did not involve determining compliance with the 8(a) program regulations. OHA therefore affirmed the determination that the JV was other than small.

The bottom line is that M/P parties need to (1) write (2) the cognizant District Office (3) more than 60 days in advance of a MPA’s annual anniversary date (4) to request any desired renewal or extension of the MPA. Such request should remind SBA of the actual renewal date, and include (1) an executed MPA amendment subject to SBA’s approval, (2) supporting documentation as to the parties’ respective activities under, and the benefits to the 8(a) participant of, the MPA, and (3) let SBA know as to any pending bids that might be adversely impacted by a late approval. Do not wait, as the venturers did here, until after the MPA has expired to seek an extension, unless you are willing to forego bidding for whatever time it takes to get approval. Look right now at any MPA approval letter(s) you may have, note SBA’s approval date, and calendar suspense dates to remind you to timely seek any desired extension of the MPA in ample time before the MPA expires.