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AMEX SYS. v. CARDENAS

July 22, 1981

AMEX SYSTEMS, INC., et al., Plaintiffs,
v.
Michael CARDENAS, Administrator, Small Business Administration, Defendant



The opinion of the court was delivered by: GREEN

MEMORANDUM OPINION

This action is brought by seven companies that participate in the program established by Section 2(8)(a) of the Small Business Act, 15 U.S.C. § 637(a), for small businesses owned by socially and economically disadvantaged individuals. *fn1" After the plaintiffs moved for a preliminary injunction, and prior to the hearing on that motion, with the consent of all parties, the proceedings were converted to a final action on the merits of plaintiffs' complaint, which seeks injunctive and declaratory relief from certain allegedly unlawful actions taken by the defendant, Michael Cardenas, Administrator of the Small Business Administration ("the Administrator" and "SBA"), the government agency charged with operating the Section 2(8)(a) program.

 An understanding of procedures in the Section 2(8)(a) program is important to a full resolution of this dispute. The program is open to "small businesses" as defined by Section 2(3) of the Act, 15 U.S.C. § 632, and accompanying regulations which contain size standards for businesses and a procedure for determining whether an entity qualifies as a small business. See 13 C.F.R. §§ 121.3-4 .3-6. These small business entities additionally must be socially and economically disadvantaged as determined by SBA. Once so found, a business is eligible to subcontract with SBA, which has contracted with other procuring government agencies participating in a project under Section 2(8)(a).

 A participant in the 2(8)(a) program may be removed "for good cause," under 13 C.F.R. § 124.1-1(e). The applicable regulations establish twenty-six examples of good cause, the first being, "(i) failure of a section 2(8)(a) business concern to continue to meet the standards of eligibility set forth in these regulations." Other examples of good cause include inadequate performance of contract obligations, violation of SBA regulations, and convictions for criminal acts.

 The Section 2(8)(a) program is focused at aiding minority owned businesses to become competitive. Central to this ideal is that after a period of participation in the program, a business should develop into a viable entity, with the capacity to survive the fierce competition in the American marketplace. Thus, businesses are expected, at some point consistent with their own projected growth, to "graduate" from the 2(8)(a) program into the normal market for government and, of course, other contracts.

 With this goal in mind, the Small Business Act requires entities to submit business plans "with specific business targets, objectives, and goals for correcting the impairment of such concern's ability to compete ...." 15 U.S.C. § 636(j)(10)(A)(i). *fn2" Prior to the enactment of Public Law No. 96-481, these business plans did not need to include any fixed or projected date for graduation from the § 2(8)(a) program. *fn3" The new Act, however, mandated that the SBA promulgate regulations within one hundred and twenty days from the effective date of the Act (October 21, 1980) regarding the submission of business plans, including a graduation date mutually agreed upon by the 2(8)(a) participant and the SBA. The statute required that the period of graduation be fixed by the concern and the SBA no later than eighteen months after the Act took effect. Congress thereby directed explicitly that the SBA and participating firms in the 2(8)(a) program establish a timetable for the companies' departure from the 2(8)(a) program to the normal market. In addition, the amendments prohibited the SBA from altering size standards until March 31, 1981.

 At this point, the issue becomes complicated by SBA's failure to carry through the congressional mandate. The proposed regulations directed by Congress, due in February, 1981, were not published in the Federal Register until June 1, after the institution of this action. The proposed rules will be open for public comment until July 31, 1981. The regulations set out procedures for the SBA and participants in Section 2(8)(a) to negotiate program graduation dates for the companies.

 Against the background of this statutory and regulatory scheme, on May 1, 1981, the Administrator directed that Regional Administrators "immediately initiate" reviews of certain Section 2(8)(a) participants to determine whether they were in fact "small businesses" and thus entitled to participate in the Section 2(8)(a) program. Noting that such reviews, called size determinations, were to be handled routinely, the Administrator indicated that "(termination) or completion proceedings of those firms found large will be initiated immediately." Attached to the memorandum is a list, categorized by region, of over forty companies eligible to take part in the Section 2(8)(a) program. Simultaneously issued with the May 1 memorandum to the Regional Administrators, was a press release, entitled "SBA Announces New Tough Policies for 2(8)(a) Program," and a list of the fifty largest companies participating in the program.

 Plaintiffs maintain that the May 1 action by the Administrator violates the Administrative Procedure Act's notice and comment requirements because it was actually the promulgation of a new rule concerning SBA enforcement of size standards. Pointing to the congressional directive in Pub.L. No. 96-481 that the SBA and the 2(8)(a) participants negotiate over graduation plans, plaintiffs argue that the May 1 action is an unlawful attempt to circumvent the graduation procedures. Noting that their appearance on the size review list jeopardizes their ability to receive any further contracts, plaintiffs contend that in effect, the Administrator on May 1 debarred them from participation in the 2(8)(a) program. Finally, the plaintiffs are concerned that agencies which now hold options on their services will not invoke those options if the companies face termination from the 2(8)(a) program.

 Defendant counters that the Administrator's action was not an exercise of illegal rulemaking, but rather was the issuance of a general policy statement specifically exempt from the notice and comment requirements of the Administrative Procedure Act. Pub.L. No. 96-481, the government suggests, in no way curtails the Administrator's discretion to ensure that the size standards for participation in the 2(8)(a) program are met. Such size determinations, the defendant proffers, do not debar any company from 2(8)(a) participation, and they are advisory only; the Administrator must decide to institute termination proceedings after any adverse decision as to a participant's size.

 Initially, the Administrator's May 1 directive does not rise to the level of a rule. Rather, it was administrative action taken in accord with and under the direction of congressional and regulatory dictates. 15 U.S.C. § 634(b)(11) empowers the Administrator to

 
make such investigations as he deems necessary to determine whether a recipient to or participant in any assistance under this chapter or any other person has engaged or is about to engage in any acts or practices which constitute or will constitute a violation of any provision of this chapter, or of any rule or regulation under this chapter, or of any order issued under this chapter.

 Arguing that the May 1 action is not a general policy statement, the plaintiffs maintain that the Administrator should have published an advance notice in the Federal Register about his new efforts to patrol the 2(8)(a) program with size reviews and permitted plaintiffs to offer comments. The Court of Appeals has set out a standard to govern the determination when an administrative action is an effort at rulemaking subject to the Administrative Procedure ...


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