that would lead to PBI's disqualification as a small business, certain actions were taken to alter the relationship between the two companies.
Fred J. Peterson resigned as Chairman of the Board of PBI. Ellsworth L. Peterson and Robert E. Peterson, sons of Fred J. Peterson, resigned as officers and directors of Kewaunee. Ellsworth and Robert transferred their stock in Kewaunee to their father; and Fred J. Peterson transferred 1233 shares of PBI stock to Ellsworth and Robert and the rest of his PBI stock back to the corporation. The corporation in turn distributed its shares of Kewaunee to Fred J. Peterson. Moreover, Fred J. Peterson's salary from PBI continued through August 31, 1981. These actions resulted in the following corporate structure:
Appeal of Marinette Marine Corp. & Marine Power and Equipment Co., No. 1495 (Sept. 28, 1981), at 2 (hereinafter "Decision").
In examining the corporate reorganizations, the Size Appeals Board found that the day to day control of Kewaunee was in the hands of Howard Balleine and Kenneth Trakel, two long-time Kewaunee officials, and that, while other Peterson family members had power to control PBI, neither they nor PBI had power to control Kewaunee, which was controlled by Fred J. Peterson. Decision, at 5. The Board also found that, after the reorganization, Fred J. Peterson had no power to control PBI. Id. Consequently, the two companies were not, in the Board's view, affiliates. Id.
2. The Temporary Employees.
During May and June 1981, after the Navy's solicitation of proposals but before PBI made its submission, the company dismissed approximately 80 yard workers from its employ and contacted a personnel supply agency,
Northern Technical Services (NTS) to help perform work under existing Navy contracts. These actions were taken for the express purpose of remaining a qualifying small business, that is, to maintain an average of less than 1000 employees for the preceding twelve months. It was clearly understood between PBI and NTS that this arrangement was to last only three to five months, until PBI's needs decreased. PBI maintained supervision and control over shipyard operations including those in which these employees worked, but all other incidents of employment-hiring, firing, issuance of pay checks, and withholding of social security and income taxes-was done by NTS.
On the basis of these facts and an SBA inspection of PBI's operations, the Size Appeals Board found that PBI had an average of 998 employees for the preceding twelve calendar months and that the NTS employees should not be counted as PBI employees. Decision, at 5. The Board based the latter finding on the ground that NTS, not PBI, hired, paid, and did the withholding from these employees and because NTS was a legitimate subcontractor which was not affiliated with PBI. Id. at 7.
One final undisputed fact remains. If either the NTS or the Kewaunee workers are added to the PBI total, PBI will average more than 1000 workers and will not qualify as a small business for the ARS-50 procurement.
A. The Validity of the Contract.
The government defendants argue that this Court cannot overturn the ARS-50 contract after the Contracting Officer has awarded it, even if the SBA's size determination was erroneous. To support this proposition, the government defendants rely on the opinions by the Court of Claims in Mid-West Construction, Ltd. v. United States, 181 Ct. Cl. 774, 387 F.2d 957 (Ct.Cl.1967), and Allen M. Campbell Co. v. United States, 199 Ct. Cl. 515, 467 F.2d 931 (Ct.Cl.1972). These cases are factually distinguishable from the present case and do not control the outcome here.
Mid-West Construction was decided before the decision in Scanwell Laboratories, Inc. v. Shaffer, 137 U.S. App. D.C. 371, 424 F.2d 859, 872 (D.C.Cir.1970), which established that disappointed bidders on government contracts have standing to challenge the legality of such awards. Although decided after Scanwell Laboratories, the Allen M. Campbell Co. case dealt with a situation in which a district court had set aside a contract on the ground that the successful bidder was not a small business. The district court was subsequently reversed by the Court of Appeals, 467 F.2d at 932-33. The case does not stand for the proposition that a district court may not inquire into the legality of a small business set-aside award. Indeed, the Court of Claims explicitly withheld its view on that question. Id. at 934. Rather, the Court found that, in view of the district court's erroneous determination of the small business status of the protested bidder, a valid contract had been formed, and the government was liable to the protested bidder in damages under the contract's termination clause. Id.
The government's reliance on the two Court of Claims cases ignores the clear implication of the opinion by the Court of Appeals for this Circuit in Eastern Canvas Products, Inc. v. Brown, 188 U.S. App. D.C. 412, 580 F.2d 675 (D.C.Cir.1978). In that case, a disappointed bidder sought to enjoin the award of a contract on the grounds that the SBA had violated certain of its own regulations. Id. at 686-87. The District Court originally granted an injunction in that case but later lifted the injunction and granted summary judgment for the government. Id. at 677 & n.1. The Court of Appeals reversed and remanded because the district court did not consider all of the relevant issues in the case. Id. at 688. Eastern Canvas Products clearly suggests that a district court has authority to delve into the legality of contracts when the SBA's failure to follow its own regulations is alleged.
B. The Standard of Review.
Although the plaintiffs do not ask the Court to make a de novo examination of PBI's size status, they urge the Court to give no deference to the agency's decision. Relying primarily on Local 777, Democratic Union Organizing Committee, Seafarers Union of North America v. NLRB, 195 U.S. App. D.C. 280, 603 F.2d 862 (D.C.Cir.1978), the plaintiffs urge the court to substitute its judgment for that of the Board. They argue that disposition of this case involves issues of common law agency and that the Board's decision does not accord with law. This contention and the plaintiffs' analogy between this case and Local 777 must be rejected for a number of reasons.
First, the PBI situation raised a new set of facts which the SBA had never confronted before: the obtaining of temporary employees through a manpower type agency.
In Local 777, on the other hand, the NLRB had previously dealt with factual situations identical to that before it and had issued numerous inconsistent rulings on those cases. 603 F.2d at 869.
Moreover, there had been inconsistent determinations at the various agency levels in that case. See id. at 868. Here, on the other hand, the regional office and the Size Appeals Board both have ruled that PBI was a qualifying small business.
Second, the issues in this case are not issues of common law, in which the court has more expertise than the agency, but rather issues of interpretation of the SBA's regulations.
In contrast, Local 777 did involve basic issues of common law. See 603 F.2d at 872. An agency's interpretation of its own regulations is entitled to considerable deference. See Udall v. Tallman, 380 U.S. 1, 16-17, 85 S. Ct. 792, 801, 13 L. Ed. 2d 616 (1965).
Finally, Local 777 involved a statute which Congress had amended to change the definition of the term "employee." See 603 F.2d at 880. Here, on the other hand, Congress expressly refrained from interfering with the SBA's promulgation of regulations involving size status and numbers of employees for purposes of government procurements. See S.Rep.No. 1714, reprinted in (1958) U.S.Code Cong. & Ad.News 3071, 3077-78. This suggests that the Court should accord some deference to the agency's resolution of these matters.
The Court concludes, therefore, that it should not substitute its judgment for that of the SBA but should instead review this case under the arbitrary and capricious standard of 5 U.S.C. § 706(2)(A). Thus, if there is a rational basis which supports the agency's action, that action must be upheld. See generally Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416, 91 S. Ct. 814, 823-24, 28 L. Ed. 2d 136 (1971); Ethyl Corp. v. Environmental Protection Agency, 541 F.2d 1, 34 (D.C.Cir.), cert. denied, 426 U.S. 941, 96 S. Ct. 2663, 49 L. Ed. 2d 394 (1976).
C. The Merits.
There are two substantive challenges to the Board's decision: 1) that it erred in ruling that Kewaunee was not affiliated with PBI and 2) that it erred in not counting the temporary workers supplied by NTS as PBI employees.
1. The Kewaunee Affiliation.
The plaintiffs launch a three-pronged attack on the Board's finding that PBI and Kewaunee are not affiliates. They argue 1) that the Board ignored the presumption that family members have an identity of interest; 2) that the Board failed to apply the rationale set out in Maurice Construction Co., No. 115 (1964), and 3) that the Board did not apply the "clear line of fracture" test which it has applied in past cases. None of these contentions is persuasive.
SBA regulations state that companies are affiliates when
(1) one concern controls or has the power to control the other, or