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August 28, 1974

DUKE CITY LUMBER CO., et al., Plaintiffs

The opinion of the court was delivered by: RICHEY



 These parties are before the Court on Cross-Motions for Summary Judgment. At issue in this suit is the legality of the 1971 small business timber set-aside program as established by the Memorandum of Understanding *fn1" between the Small Business Administration (SBA) and the United States Department of Agriculture (USDA).

 The Plaintiffs, twelve forest product manufacturing companies, who are ineligible for the program because of their size, *fn2" have asked the Court to declare the program illegal and enjoin its further implementation by the U.S. Forest Service. The Plaintiffs attack the program as an example of an agency's arbitrary and capricious rulemaking overriding considerations of statutory authority, rational decisionmaking, administrative due process, as well as the applicability of environmental statutes, national forest administration statutes and other federal laws. *fn3"

 The Defendants in this case are the Secretary of Agriculture, the Chief of the U.S. Forest Service, and the Small Business Administrator. A number of independent small forest products manufacturers and several associations have been permitted to intervene as Defendants having demonstrated that they have a direct interest in the continuation of the 1971 set-aside program.

 Upon careful consideration of the voluminous pleadings and exhibits filed in this action, as well as the able arguments of counsel, and there being no material fact in issue, the Court will grant the Defendants' Motion for Summary Judgment for the reasons set forth below.


 The 1971 set-aside program and its 1958 predecessor have their roots in the Small Business Act. 16 U.S.C. § 631 et seq. Congress considered small businesses to be the backbone of the American system of private enterprise and free competition. Finding that the nation's economic security and well-being depended upon the continued existence of small business, Congress created the Small Business Administration to assist and protect small businesses in so far as possible. In particular, the SBA was directed to work with other agencies to insure that small businesses received a "fair proportion" of the total sales of government property. 15 U.S.C. § 644(4).

 Pursuant to this directive, in 1958 the SBA and USDA established the mechanism for the first timber set-aside program. *fn4" The program was administered, however, on an ad hoc basis. The Forest Service would reserve a timber sale solely for small business competition, only if a "need" could be factually demonstrated. This proof was often difficult to establish, as any evidence submitted could be rebutted by other interested parties who would not necessarily benefit from a set-aside.

 With the decline in the number of timber purchases by small businesses *fn5" and the increase in the number of acquisitions of small concerns by large companies *fn6" (including the Plaintiffs) the SBA re-examined the set-aside program. The SBA found the 1958 set-aside program to be too ineffective to insure small business a "fair proportion" of national forest timber sales. The procedure for instituting a set-aside sale was cumbersome. *fn7" The program had no definite guidelines for determining either when a timber set-aside was necessary or the volume of timber needed to be set aside. *fn8"

 The present set-aside program modified the 1958 program in three aspects. There is an historical approach for determining "fair share", a five-year time period for determining base average shares of timber purchases, and a triggering mechanism for initiating set-asides.

 The SBA has taken the timber sales of 1966-70 and has computed the percentages of the total volume of timber sold to large and small business respectively in each market area. *fn9" This ratio, based upon a history of actual purchases, sets the framework for the SBA definition of "fair proportion" and it is used in subsequent computations. Every five years, *fn10" the base period percentages in each market area are revised to provide flexibility and reflect current sales. The Agreement, Paragraph 4a, provides, however, that the recomputed percentages cannot be reduced to more than 50% of the original base period of 1966-70.

  Every six months there is a review of the timber purchases in each market area for the previous six months. If the review shows that the small business purchases equal an accumulated net deficit of ten or more per cent than the base period percentage, a set-aside sale is triggered. Had small business purchased a volume of timber above this trigger point but below the base period percentage, there would be no set-aside sale in the following six months. Any surplus above the small business share is carried over from period to period to offset any deficit. Likewise, any deficiency less than 10 per cent is carried over from period to period until the accumulated deficit reaches 10%, at which point the set-aside program is triggered.

 The 1971 program retains the 1958 restrictions on small business' resale of timber purchased in a set-aside sale to large business. Forest Service Manual § 2431.12. *fn11" The program does permit large concerns to purchase any set-aside timber which small business fails to purchase. 36 C.F.R. § 221.8. Furthermore, under Paragraph 4b of the 1971 agreement, any such set-aside timber large business purchases is counted toward the base share of small business.

 Despite the agreement's precise triggering mechanism, if a proposed set-aside sale would be inappropriate or work an undue hardship, the sale can be eliminated or triggered upon a different percentage deficiency. *fn12" As a final safety catch, Paragraph 6 of the Agreement permits a set-aside to be withdrawn after it has been programmed, if subsequent events indicate a set-aside sale would not be in the public interest.

 Small business purchases a major portion of its national forest timber in unrestricted sales. In fact, only five per cent of the total volume of national forest timber has been sold at set-aside sales. During the 2-1/2 years that the program has been in effect (January 1971-June 1973), the Forest Service has sold approximately 23 billion feet of sawtimber which falls within the set-aside program. Small business has purchased 11.2 billion feet. However, only 1.3 billion of the 11.2 billion feet was purchased in set-aside sales. *fn13"


 The threshold issue before the Court is the question of standing. The Plaintiffs predicate their standing on Sec. 10 of the Administrative Procedure Act. 5 U.S.C. § 702. *fn14"

 This Circuit has adopted a liberal position regarding a party's standing to challenge administrative action. E.g., Ballerina Pen Company v. Kunzig, 140 U.S. App. D.C. 98, 433 F.2d 1204 (1970), cert. dismissed 401 U.S. 950, 91 S. Ct. 1186, 28 L. Ed. 2d 234 (1971); Scanwell Laboratories, Inc. v. Shaffer, 137 U.S. App. D.C. 371, 424 F.2d 859 (1970). This position stems from a combination of the Court's experience that a person who brings an action challenging agency activity is one who most invariably has been injured either directly or indirectly by that action, and the crucial need to insure that agency action, ostensibly taken to promote the public good, is founded upon the proper basis of Congressional authority rather than mere good intention, personal insight, prejudice or predilection. Ballerina Pen Co., supra at 102, 433 F.2d at 1208-9.

 In Ballerina Pen, the Court of Appeals adopted a three-part standard to test a party's standing in challenges to administrative action. *fn15" Under it, a plaintiff has standing if she alleges (1) that the challenged action has caused or will cause the plaintiff injury in fact, so as to insure that she has a personal stake in the outcome of the controversy; (2) that the agency action was arbitrary, capricious, and in excess of statutory authority so as to injure an interest "arguably" within the zone of interests to be protected or regulated by the statute in question; and (3) that there must be no "clear and convincing" indication of a legislative intent to withhold judicial review. 140 U.S. App. D.C. at 101, 433 F.2d at 1207, citing Association of Data Processing Service Organizations v. Camp (ADPSO), 397 U.S. 150, 90 S. Ct. 827, 25 L. Ed. 2d 184 (1970); Barlow v. Collins, 397 U.S. 159, 90 S. Ct. 832, 25 L. Ed. 2d 192 (1970); Scanwell Laboratories, supra, at 381, 424 F.2d at 869, 875 n. 10, 19.

 The Plaintiffs meet the three requirements of the Ballerina Pen standard. The crux of the Plaintiffs' complaint is that the implementation of the 1971 set-aside program penalizes their natural growth, freezes, in perpetuity, their size, location and relationships within the industry at the 1966-70 level, and interferes with their prospective beneficial business relationships. The Court is of the opinion that this allegation is sufficient to meet the injury in fact requirement. Cf. Assoc. Data Proc. Ser. Org., supra; Scanwell Laboratories, supra ; Gonzalez v. Freeman, 118 U.S. App. D.C. 180, 334 F.2d 570 (1964); see also, Superior Oil Co. v. Udall, 133 U.S. App. D.C. 198, 409 F.2d 1115 (1969).

 As to the second criteria, the Plaintiffs argue that the SBA has irrevocably imposed an arbitrary market structure upon the industry -- a structure contrived without consideration of economic realities, the natural changes in the industry structure or who is the actual purchaser of the national timber. It would appear that the Plaintiffs' interest in achieving its maximum economic potential within the American system of private enterprise is "arguably" within the zone of interests sought to be protected by the Small Business Act. The Act seeks to promote a continuation of free competition. The Act attempts to realize this goal by assisting small businesses to achieve their maximum potential. The purposes of the Act would not be achieved, however, if the aid to small business consisted of a structure which undermined the vitality of other businesses within the industry. Inherent in such action are the seeds of destruction of the same free system the Act is intended to protect.

 In considering the last requirement, it is quite plain that the Small Business Act does not contain any clear and convincing provision indicating that the SBA Administrator's discretionary actions are precluded from judicial review. *fn16" Therefore, the Plaintiffs have standing to pursue this action.


 The real bone of contention in this suit is the Administrator's decision to change the 1958 program. *fn17" The Plaintiffs take umbrage with the implementation scheme of the 1971 program because it effectively protects the existence of small timber businesses at the expense of Plaintiffs increasing quasi-monopoly of the industry. *fn18" It is apparent from the factual record in this case that the policy of the Act motivated if not mandated the change in the program.

 The Small Business Act clearly grants the Administrator wide discretion to effectuate the purposes of the Act. 15 U.S.C. § 634. This fact the Plaintiffs do not contest. Rather, they argue that the Administrator's substantive decision in this matter was arbitrary, capricious, and beyond the scope of his statutory authority.

  The scope of this Court's review in the instant case has been delimited by the standard set forth in Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 28 L. Ed. 2d 136, 91 S. Ct. 814 (1971). This Court must examine whether the administrative decision was based upon a consideration of the relevant facts and law, and determine whether there has been a clear error of judgment. It is not the Court's duty to weigh the alternatives available to the Administrator and to determine which is the more reasonable. Ray Baillie Trash Hauling, Inc. v. Kleppe, 477 F.2d 696, 703-4 (5th Cir. 1973); see, Allen M. Campbell Co., Gen. Con., Inc., v. Lloyd Wood Construction Co., 446 F.2d 261, 265 (5th Cir. 1971).

 The Plaintiffs argue that the Administrator's decision has no rational basis on two counts. First, they claim there was no "proven need" for a uniform, objective triggering apparatus. Second, they allege the computations and formula upon which the program rests are an irrational determination of the statutory "fair proportion".

 As a matter of clarification, it should be stated that small business' "need" is not a factor which the Administrator must take into consideration. The "need" has already been established by the Act.

 The Plaintiffs' other points regarding the basis of the Administrator's decision consist of unsupported allegations. They offer no evidence contradicting the Administrator's factual determination that small businesses were on the decline at the expense of large business' significant growth. (See a discussion of the Administrator's findings, supra, at 366-367.) The Plaintiffs, furthermore, have made no showing that the Administrator's choice of 1971 program was a clear error of judgment in light of other alternatives. *fn19"

 The Administrator adopted the 1971 program after examining the historical position of small business within the timber industry and the problems inherent in the 1958 set-aside program and after listening to the suggestions of members of the industry and weighing the proposed alternatives. The program appears to be the reasonable, precise yet flexible, means of insuring that small businesses receive a "fair proportion" of government timber sales. The ratio of timber sales which the program seeks to preserve is based upon the competitive history within the industry. Small business is guaranteed no more than an opportunity to bid on that proportion of the market which it has purchased in the past.

 The Plaintiffs' tangential argument regarding possible Congressional limitations upon the Administrator's admittedly wide discretion is without merit. The Plaintiffs maintain that there is a strong inference that Congress does not approve of a set-aside scheme of the type of the 1971 program. To support this inference the Plaintiffs argue that Congress defeated a Resolution *fn20" which would have brought to the floor of the House a Bill *fn21" containing a subsection legislating mandatory set-asides similar to the Administrator's 1971 program. *fn22" The Plaintiffs also point to the Bill's accompanying report which contains a clause saying the 1958 set-asides were satisfactory. *fn23" Any conceivable limitation of the Administrator's discretion which could be inferred from this tenuous evidence is rebutted by other Congressional statements which unequivocably lauds the 1971 timber set-aside program. *fn24"

 Based upon the evidence in the record, the Court can only conclude that the Administrator acted within the scope of his statutory duty, in a rational manner, after full consideration of the relevant factors.


 One of this Court's long-standing concerns has been the enforcement of the Administrative Procedure Act's procedural rulemaking provisions. 5 U.S.C. § 553. The Court's concern is embedded in the belief that administrative agencies have a fundamental responsibility to insure that any rules and regulations which affect the day-to-day existence of our citizens be conceived in an atmosphere immune from prejudice. Upon examination of the facts in this case, however, the Court fails to see how the Plaintiffs can seriously complain that they were prejudiced because the agency did not comply literally with the notice and hearing requirements under Section 4 of the Administrative Procedure Act. 5 U.S.C. § 553.

 Overlooking for the moment that matters relating to government contracts and property are specifically exempted from the notice and hearing requirements of Section 4, *fn25" the facts indicate that the Plaintiffs not only had actual notice of the proposed change, *fn26" but they also attended several industry-wide meetings at which the proposed program was discussed in depth. *fn27" Furthermore, the Plaintiffs' representatives met privately with agency officials, *fn28" and submitted an in-depth analysis of the program. *fn29" As a result of this industry input, the SBA-USDA received and considered many suggested alternatives. Some were adopted. For example, a triggering procedure was incorporated, supplanting an automatic set-aside procedure which had been previously proposed. *fn30" In light of these facts, the Court is compelled to find that the Plaintiffs were neither prejudiced nor denied due process. They had sufficient opportunity to participate in the development of the 1971 program. The Plaintiffs can not now claim, in spite of their active participation, that they were prejudiced because the Defendants failed to comply with the formalistic requirements of Section 553. See, United States v. Elof Hansson, Inc., 48 C.C.P.A. 91, 296 F.2d 779 (C.C.Pa. 1960); see also, Florida Citrus Comm. v. United States, 144 F. Supp. 517, 521 (N.D. Fla. 1956).

 Nevertheless, the fact remains that Section 553(a) specifically exempts an agency when making rules regarding public property *fn31" or contracts. When the government is dealing with these matters, Congress affords the government complete discretion to decide what, if any, public rulemaking procedures it should adopt and follow. *fn32" The Senate Committee on the Judiciary, in its report on this exception to the APA stated:


"The exception of proprietary matters is included because the principal consideration in most such cases relate to mechanics and interpretation of policy and it is deemed wise to encourage and facilitate the issuance of rules by dispensing with all mandatory procedural requirements . . ." *fn33"

 This statement succinctly characterizes the program in issue. The program merely establishes the mechanics through which the SBA has implemented its interpretation of the declared policy of the Small Business Act. Therefore, due to the type of program in question, the SBA was not obligated to give the Plaintiffs either formal notice or a hearing. *fn34"


 On November 7, 1973 the Court permitted the Plaintiffs to amend their complaint to include a violation of the National Environmental Policy Act of 1969 (NEPA). *fn35" 42 U.S.C. § 4321 et seq. The Plaintiffs contend that the set-aside program is a major federal action *fn36" which "may" have damaging impacts upon the environment in that it may cause the waste of timber resources and possible air and water pollution. *fn37" Therefore, the Plaintiffs maintain, the Defendants have violated NEPA in failing to file an environmental impact statement as required by Section 4332(C).

 NEPA requires each federal agency to file an environmental impact statement if it determines a contemplated program constitutes a major federal action significantly affecting the quality of the human environment. 42 U.S.C. § 4332(C). Each agency, then, must make the initial determination regarding the size and effect of the contemplated program upon the environment. The Forest Service decided the set-aside program was not a major federal action affecting the quality of the environment, and, therefore, did not require an environmental impact statement. They did not, however, articulate the reasons for this conclusion until two years after the implementation of the program. *fn38"

 The Court is now presented with the question of whether the agency's threshold decision was arbitrary, capricious or otherwise clearly erroneous. In its review of the agency's decision, the Court is obligated to consider the substantive decision on the merits to see if it is in accord with NEPA's requirements. E.g., Environmental Defense Fund v. Froehlke, 473 F.2d 346, 4 E.R.C. 1829 (8th Cir. 1972); Environmental Defense Fund, Inc. v. Corps of Engineers of the United States Army, 470 F.2d 289, 4 E.R.C. 1721 (8th Cir., 1972); Committee for Nuclear Responsibility v. Seaborg, 149 U.S. App. D.C. 380, 463 F.2d 783, [3 E.R.C. 1126] (1971); Mowry v. Central Electric Power, 5 E.R.C. 1978 (D.S.C. Nos. 72-1469 and 73-35, August 1, 1973). The Court's review, however, is a limited one for the purpose of determining whether the agency reached its decision after full, good faith consideration of the environmental factors under the standards set forth in §§ 101 and 102 of NEPA; and whether the actual balance of costs and benefits struck by the agency according to these standards was arbitrary or clearly gave insufficient weight to environmental factors. E.D.F. v. Froehlke, supra at 353.

 The Forest Service's environmental report has analyzed each factor the agency is required to examine in drafting an impact statement. See Forest Service Manual, Section 8411. The Court has considered both this report and the Plaintiffs' lengthy analysis of the environmental factors and is compelled to conclude that the 1971 set-aside program is neither a major federal action nor one that significantly affects the quality of the human environment. The agency's decision gave good faith consideration to the environmental factors and came to a reasonable conclusion. The 1971 set-aside program is merely a technical change in the earlier set-aside program. It does not change either the manner or volume of timber harvested each year. Nor does it suspend the Forest Service's strict environmental and harvesting regulations for any bidder, large or small. The program simply guarantees small concerns a continued opportunity to bid on the national forests. The question is not whether the tree will fall, but who will fell it.


 As final points, the Plaintiffs contend that the timber set-aside program violates the 5th Amendment, the Employment Act of 1946, the Economic Stabilization Act Amendments of 1971 and certain statutory provisions relating to the administration of the national forests. The Court also finds these objections to be without merit.

 Examining first the Plaintiffs' charge regarding a violation of the 5th Amendment, the Court finds the Plaintiffs have not been deprived of property without just compensation. The Plaintiffs have no vested proprietary right in the government's contracts or property. Gonzalez v. Freeman, 118 U.S.App.D.C. 180, 184, 334 F.2d 570, 574 (1964). The "right" the Plaintiffs do have under the Fifth Amendment is the right to due process. This means that in the event of arbitrary, capricious or illegal administrative action affecting one's opportunity to bid on the contracts or property, the party who can show an injury due to allegedly illegal action can bring a suit to set it aside. Scanwell Laboratories, Inc., v. Shaffer, 137 U.S. App. D.C. 371, 424 F.2d 859 (1970). In the instant case, the Court has found that the SBA administrator acted within the bounds of his statutory authority and has devised this program to implement his statutory duty with the Plaintiffs' full participation.

 As to the other federal statutes the set-aside program is alleged to have violated, suffice it to say that the Plaintiffs' allegations have no basis in fact, have no basis in law or are not relevant. Despite the two and one half years the program has been in operation, the Plaintiffs have been unable to produce any evidence that the program defeats the policies of maximum employment or maximum economic productivity as declared in the Employment Act of 1946, 15 U.S.C. § 1021, and the Economic Stabilization Act Amendments of 1971, 15 U.S.C. § 1026(a), respectively. To the contrary, the timber set-aside program appears quite consistent with these national policies in that it is part of the aid to small business which Congress has declared will preserve the freedom of competition basic to the economic well-being and security of this country. *fn39"

 Nor has the Plaintiff been able to offer any proof of violations of the statutes governing the administration of the national forests. The statutes which the Plaintiffs claim have been violated are irrelevant to the establishment of timber set-aside sales. Instead, they pertain to forest technology and agriculture. *fn40" In any event, there has been no showing, other than Plaintiffs' allegations, that the set-aside program contradicts the general, overall purpose of these statutes -- the efficient administration and management of the national forests. The program does not increase the volume of timber harvested. Nor does it relieve any timber bidder from complying with the environmental and harvesting regulations imposed by each contract irrespective of the size of the bidder.


 At the expense of being repetitive, the Court finds the 1971 set-aside program pertains solely to the opportunity to submit bids on a certain percentage of national forest timber when, and only when, the timber purchases of small forest products manufacturers has declined more than ten per cent of their historic share of the timber market. The program is small business' bulwark against their shut out from bidding on government timber. It does not reduce large business' historical share of the timber market nor does it increase that of small concerns. It does not increase the volume of logs cut, nor does it cast past harvesting and environmental regulations to the wind. The Defendants have acted within the scope of their authority and have developed, with the Plaintiffs' assistance, a reasonable program to effectuate the Defendants' statutory responsibilities. Since the program is reasonable in substance and in its adoption, the Court will pay due deference to the agencies' expertise in this area. Thus, for the reasons stated above, the Court will grant the Defendants' Motion for Summary Judgment and deny the Plaintiffs' Motion for Summary Judgment. An Order of even date will be entered in accordance with this Opinion.


 DATED August 28, 1974


 Upon consideration of the Parties' Cross-Motions for Summary Judgment and the respective memoranda filed in support thereof, the arguments of counsel and in accordance with the Court's Memorandum Opinion of even date herewith, it is this 28th day of August, 1974,

 ORDERED, that the Plaintiffs' Motion for Summary Judgment be and the same is hereby denied; and it is

 FURTHER ORDERED, that the Defendants' Motion for Summary Judgment be and the same is hereby granted;

 Charles R. Richey United States District Judge

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