In September, I blogged on the importance of ensuring that a service-disabled veteran “controls” the company if the company holds itself out as a service-disabled veteran owned business (SDVOSB). Lack of “control” is the single number one reason a SDVOSB is denied certification or loses a status protest. While the service-disabled veteran must own the company, ownership is not the same thing as control. A finding of “control” depends on a number of factors, some of which are not obvious and others of which are subjective. A case published by the Small Business Administration’s (SBA) Office of Hearings and Appeals (OHA) last week illustrates this principle.
In Benetech, LLC, OHA held that the service-disabled veteran, William Bennett, did not “control” the company for a number of reasons. Generally, in assessing a service-disabled veteran’s control over a company, SBA will look at whether the service-disabled veteran controls both the “long term decision-making” and the “day-to-day operations” of the company. In assessing “control,” SBA looks for certain things such as whether the service-disabled veteran holds the highest officer position in the company and whether the service-disabled veteran has sufficient “managerial experience” to run the company. In Benetech, OHA did not find persuasive evidence that Mr. Bennett held the highest officer position in the company. While certain corporate filings and documents contained various titles for Mr. Bennett, SBA explained that it will go behind “corporate formalities” in determining “control.” In this case, OHA noted that one of the company’s subcontractors testified that it never worked with or even saw Mr. Bennett during the period it did business with the company. In addition, the minority owner of the company had the title of CEO of the company and was the individual that signed the corporate documents and the lease for the company’s headquarters. Although not specifically mentioned in the decision, I’m sure it also did not escape SBA’s attention that the minority owner of the company was Mr. Bennett’s son.
One “corporate formality” SBA did focus on in the decision was the company’s operating agreement. Benetech is a limited liability company. A limited liability company has members and typically has an operating agreement rather than articles of incorporation or by laws. In order to demonstrate “control” in the limited liability company context, the service-disabled veteran must be named themanaging member of the company in the operating agreement. Mr. Bennett was not so named.
The Benetech decision is not unusual; rather it is consistent with a long line of cases analyzing a service-disabled veteran’s control over a SDVOSB. Other SBA OHA cases require the service-disabled veteran, as the managing member, to have the unfettered or “independent” right to bind the company or sell the company, among other things. In reviewing control, some cases look at the manner in which the service-disabled veteran is portrayed on the company’s website and in its marketing materials, including in proposals submitted to the Government. A finding of control also may be different for different industries. For example, a SBA status protest involving a construction contractor found that the service-disabled veteran did not manage the day-to-day operations of the company because the service-disabled veteran was not routinely on the project site. Thus, SBA takes a holistic approach to determining control and make seize upon a detail or combination of details that otherwise may appear innocuous to those unaware of the case law.
The good news is that most companies can avoid these traps by consulting with an attorney knowledgeable about small business contracting programs and the SDVOSB program in particular. The bad news is that companies are now forced to consult with an attorney knowledgeable about small business contracting programs and the SDVOSB program in particular before holding themselves out as a SDVOSB. SDVOSBs face serious penalties, including criminal prosecution, if they don’t. It’s true in the commercial sector as well, but the cost of attorneys is now, more than ever, a cost of doing business as a small business government contractor.
Postscript 1: There was another important issue raised in Benetech. Benetech argued that its application for verification submitted to the VA contained evidence that Mr. Bennett “controlled” the company and that the VA should have forwarded this paperwork to SBA. SBA disagreed. SBA explained that verification as an SDVOSB for VA procurements under the VA’s Veterans First Contracting Program is different from and unrelated to SBA’s determination that a company is a SDVOSB for set-asides conducted by agencies other than the VA under SBA’s SDVOSB Contracting Program. As noted in a number of decisions, the Veterans First Contracting Program applies only to the VA and has statutory authority different from SBA’s small business contracting programs, which include a preferential contracting program for SDVOSBs. Since these two programs were independent of the other, VA was under no obligation to forward Benetech’s verification paperwork to SBA.
Postscript 2: What happens now? One of the most disturbing aspects of the “control” factor is that what one OHA judge considers evidence of control another judge may dismiss as irrelevant. Thus, there are many SDVOSBs that have been denied verification or have lost protests whose principals now may be regarded as criminals. Last fall, Congress passed the Small Business Jobs Act which provides that any time a business certifies that it has a certain status or is a certain size, that certification is considered a knowing and willful certification. Accordingly, if an individual has mis certified a company’s size or status – or has been determined to have mis certified a company’s size or status – that individual is liable for significant damages and subject to criminal penalties. I had a client that was in Benetech’s position; that is, it had its appeal on an adverse status decision denied. Less than a year later, the company was notified that the Government was intending to debar the company from federal contracting, based, in part, on the adverse status decision. Specifically, the agency alleged that the contractor had mis certified its status with regard to every procurement in which it submitted an offer, before the adverse status determination by SBA. There were other lurid details, but don’t think the OHA denial is the end of the line in Benetech. There may be more bad news to come.