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SYSTEMS & APPLIED SCIS. CORP. v. SANDERS

July 30, 1982

SYSTEMS AND APPLIED SCIENCES CORPORATION, Plaintiff,
v.
JAMES C. SANDERS, et al., Defendants, COMPUTER DATA SYSTEMS, INC., Intervening Defendant; UNIFIED INDUSTRIES INCORPORATED, Plaintiff, v. JAMES C. SANDERS, et al., Defendants; REHAB GROUP, INC., et al., Plaintiffs, v. JAMES C. SANDERS, et al., Defendants



The opinion of the court was delivered by: GREEN

 Plaintiffs in these consolidated cases are all participants in the Small Business Administration's (SBA) Section 8(a) minority small business and capital ownership development program, 15 U.S.C. § 637(a), 13 C.F.R. Part 124, which have been found in size reviews under 13 C.F.R. Part 121 to be other than small, but have not been afforded a full hearing on the record in accordance with the Administrative Procedures Act, 5 U.S.C. §§ 554-557. The single issue in these cases is whether, under these circumstances, SBA may refuse to award § 8(a) contracts to plaintiffs on the basis that they have been found to be other than small.

 The section 8(a) program, originally a response to the 1967 report of the Commission on Civil Disorders, is intended to increase the level of business ownership by minorities so that they have a better opportunity to become an integral part of the free enterprise system. S.Rep. No. 1070, 95th Cong., 2d Sess. 1, reprinted in 1978 U.S. Code Cong. & Ad. News 3835, 3836. The operation of the program involves SBA contracting directly with a federal procuring agency to supply goods or services, and then subcontracting on a sole source basis to a small business owned by a socially or economically disadvantaged person. Until 1978 the program was operated under SBA's general authority to enter contracts with government agencies and arrange for their performance by letting subcontracts to small businesses. The reservation of contracts for socially or economically disadvantaged concerns was an administrative practice without specific statutory guidance. In 1978, Congress amended the Small Business Act to codify the program and correct what it perceived as its weakneses and failings. Management assistance to 8(a) firms was increased in the hope that the unacceptably low number of such firms that had as yet left the program and succeeded in the competitive market could be increased. Id., S.Rep. No. 1070 at 8, 1978 U.S. Code Cong. & Ad. News 3842. To correct perceived inequitable determinations of eligibility under the administrative program, section 8(a) itself was amended to provide objective criteria for eligibility for the program, Id., S.Rep. No. 1070 at 15, 1978 U.S. Code Cong. & Ad. News 3849; 15 U.S.C. § 637(a)(4)-(7) (Supp. IV 1980). A socially and economically disadvantaged small business concern is defined as one which is at least 51 per cent owned by one or more socially and economically disadvantaged individuals, and whose management and daily business operations are controlled by one or more such individuals. 15 U.S.C. § 637(a)(4). Socially disadvantaged individuals are defined as those who have been subject to racial or ethnic prejudice or cultural bias. 15 U.S.C. § 637(a)(5). Economically disadvantaged individuals are defined as those socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same business area who are not socially disadvantaged. 15 U.S.C. § 637(a)(6). In addition to these requirements, eligibility for the 8(a) program depends upon a finding by the Administrator that with contract, financial, technical, and management assistance, the concern can perform contracts which may be awarded, and has reasonable prospects for success in competing in the private sector. 15 U.S.C. § 637(a)(7). These eligibility determinations, with the exception of whether a group has been subject to prejudice or bias such that its members will be considered socially disadvantaged, which is to be made by the Administrator, are to be made by the Associate Administrator for Minority Small Business and Capital Development (AASMB-COD). 15 U.S.C. § 637(a)(8). Following these provisions concerning eligibility for the program is a section which deals with denial of assistance to concerns which have previously been deemed eligible. This provision lies at the heart of this dispute, and will be quoted in full.

 
Within ninety days after the effective date of this paragraph, the Administration shall publish in the Federal Register rules setting forth those conditions or circumstances pursuant to which a firm previously deemed eligible by the Administration may be denied assistance under the provisions of this subsection: Provided, that no such firm shall be denied total participation in any program conducted under the authority of this subsection without first being afforded a hearing on the record in accordance with chapter 5 of Title 5.

 15 U.S.C. § 637(a)(9). The regulations implementing § 637(a)(9), codified at 13 C.F.R. Part 124, provide that a business may leave the program either by completion, that is when the concern has achieved the goals set forth in its business plan and has attained demonstrated ability to compete in the market place without assistance under the 8(a) program, 13 C.F.R. 124.1-1(d); or by termination prior to completion for a variety of causes, including failure to continue to meet the eligibility standards for the program, repeated inadequate performance of contracts, violations of SBA regulations and reporting requirements, failure to reasonably pursue competitive and commercial business, and criminal convictions. 13 C.F.R. 124.1-1(e). In either case a hearing on the record is provided at the option of the firm. The procedures for adjudicative proceedings to be used in effecting the completion or termination of a section 8(a) business concern are set out in detail at 13 C.F.R. 124.10.

 The Small Business Act was further amended in 1980 to, among other things, require that a fixed graduation date be set in the business plan of each concern participating in the 8(a) program. P.L. 96-481, 15 U.S.C. § 636(j)(10)(A)(i). The statute provides that these determinations, called fixed program participation terms (FPPTs), shall not be considered a denial of total participation for the purposes of section 637(a)(9), that is, they do not require an APA hearing.

 In May 1981, SBA directed that regional administrators initate Part 121 reviews of a list of 50 of the largest 8(a) participants to determine whether they were in fact still small, and therefore meeting the eligibility requirements of the program. Termination or completion proceedings were to be instituted against those firms found large. Unlike termination or completion proceedings under 13 C.F.R. Part 124, which are pertinent only to the 8(a) program, size determinations under Part 121 apply to all small businesses. For the purpose of 8(a) contracts, the size standards for Government procurement apply. 13 C.F.R. 121.3-8. All parties agree that 8(a) concerns are subject to the Section 121 size standards and size review procedures applicable to all small businesses, with the exception that plaintiffs and SBA argue that an extra layer of review is to be accorded 8(a) firms. Size determinations are made by the regional director, and may be appealed to the Size Appeals Board. 13 C.F.R. § 121.3-4, 3-6. All plaintiffs here have been found other than small either by their regional directors, or at both the regional and Size Appeals Board levels, but have not been accorded an APA hearing on the record.

 SBA's stance concerning companies in plaintiffs' position is that they are still full participants in the 8(a) program until officially terminated after being provided the option of a hearing on the record. Such firms are eligible for contracts, although SBA retains the discretion in regard to these and all 8(a) firms as to whether to award any particular contract to any concern. Size may play a role in this discretion. For example, SBA might decide to give the contract to a smaller 8(a) firm which needs the support more than a larger one, or in accordance with a plan to wean a relatively successful concern from the 8(a) program, SBA may decide that it has already supplied enough contract support to that firm for the year. Until June of this year, SBA practiced this policy, and plaintiffs remained eligible, and in some cases received, new 8(a) contracts even after their adverse size determinations. On June 16, 1982 the General Accounting Office (GAO) rendered a decision concerning the protest of the award of a contract to plaintiff Systems and Applied Sciences Corporation (SASC). In the Matter of Computer Data Systems, Inc., File B-205521. The GAO found that although SASC was entitled to a hearing on the record prior to termination from the 8(a) program due to size, it should not receive the contract which was the subject of the protest, and should be suspended from further 8(a) contracting unless the adverse size determination were formally reversed. In response to this decision, which SBA felt constrained to follow, despite its continuing contrary position, all regional directors and procuring agencies were notified by SBA that 8(a) concerns which had been the subject of adverse size determinations should not be considered for further contracts.

 Plaintiff SASC brought the first of these actions. On July 1, 1982 this Court entered a temporary restraining order requiring SBA to treat plaintiff as a full participant in the 8(a) program unless and until the procedures required by 13 C.F.R. Part 124 for completion or termination were completed. At that time, the Court had before it two parties with essentially the same legal position, except as to the propriety of SBA's actions to comply with the GAO decision. Subsequently, two parties with an adverse legal position to both plaintiff and SBA sought to intervene. Computer Data Systems, Inc. (CDSI), the protestant in the GAO decision, was granted intervention as a party defendant as of right. Planning Research Corporation, (PRC), the incumbent contractor on the contract which was the subject of the GAO decision, was granted status as amicus curiae. Plaintiffs in the other two consolidated cases, although in basic agreement with plaintiff SASC's legal position, have filed additional papers to expound their reasoning. All parties agreed that all pleadings, however denominated, would be considered arguments on the merits, and a final hearing on the merits was held July 16, 1982.

 To summarize the positions of the parties, plaintiffs and SBA argue that 8(a) concerns remain full participants in the program until termination or completion pursuant to the procedures provided at 13 C.F.R. 124 or until the expiration of their fixed terms. Defendant-intervenor and amicus argue that plaintiffs, as businesses which have been found to be other than small, do not qualify for any assistance under the 8(a) program, for which status as a small business is a prerequisite. According to their analysis, 15 U.S.C. § 637(a)(9) providing for a hearing on the record prior to denial of assistance applies only to the determinations concerning social and economic disadvantage outlined in § 637(a), which are eligibility factors peculiar to the 8(a) program. Questions concerning size are to be decided by the same procedures as are applicable to non-8(a) concerns provided at 13 C.F.R. 121. In accordance with those regulations, a concern found to be other than small in a formal determination by the regional director is immediately ineligible for any assistance under the Small Business Act or Small Business Investment Act of 1958 under the relevant size standard. 13 C.F.R. § 121.3-4(d). The regulations also provide that decisions of the Size Appeals Board shall be "final." 13 C.F.R. § 121.3-6(a). Defendant-intervenor and amicus argue that SBA has exceeded its authority in promulgating the regulation at 13 C.F.R. § 121.3-17, which provides that in the case of 8(a) firms, "size determinations under Part 121 on initial entry into the 8(a) program or on program completion or termination are advisory to the ASMSB-COD; and/or to the Administrative Law Judge in 8(a) proceedings under Part 124," because the regulation as currently interpreted allows continued 8(a) contract support to firms found other than small under the Part 121 procedures. Alternatively, defendant-intervenor and amicus urge the conclusion reached by GAO, that although plaintiffs are entitled to a hearing on the record on the issue of size before they can be completely excluded from the program, they may not be awarded contracts after an adverse size determination under Part 121. Under this theory, 13 C.F.R. § 121.3-17 means that the Associate Administrator retains discretion, and a hearing on the record is available, only upon, as the regulation states, initial entry or program completion or termination, and not with regard to the denial of particular contracts because of an adverse size determination. In this situation, it is argued, plaintiffs have not been denied total participation in the 8(a) program without a hearing in violation of § 637(a)(9), because they can still receive technical assistance under the program, perform existing contracts and options thereon, and remain eligible for contracts whose size standard they do not exceed. *fn1" If their adverse size determinations are ultimately reversed, they will resume eligibility for contracts in the category for which they were found other than small.

 Unfortunately, Congress has not made its intent regarding the question presented here explicit, which appears to have resulted in a somewhat self-contradictory stance on the part of SBA. On the one hand it asserts that 8(a) participants must meet the size standards applicable to all concerns under the Small Business Act set forth in Part 121. On the other hand, SBA has taken the position that size determinations under part 121 are only advisory to the AAMSB-COD, and that it need not institute termination proceedings against a firm subject to an adverse size determination at all if factors other than size counsel that the concern should remain in the program. See Defendant's Motion for Summary Judgment at 4-5; In the Matter of Computer Data Systems, Inc. -- Reconsideration, File B-204421.3, B-205521.4 at 3 (July 26, 1982); Cal Western Packaging Corp. v. Collins, Civil Action No. 80-2548 (D.D.C., Defendant's Memo in Response to the Court's Order of July 28, 1981 at 3-6, filed September 28, 1981; Letter from Donald W. Farrell, Associate General Counsel, SBA, to Charles Kratzer, Office of General Counsel, GAO Re: Computer Data Systems, Inc. B-205521, dated March 15, 1982 and filed March 23, 1982). Further, while size determinations by regional directors are effective immediately, and decisions of the Size Appeals Board are final with regard to non-8(a) small businesses, 8(a) concerns are afforded additional procedural safeguards, during the pendency of which they remain eligible for contract assistance. Judging by the example of plaintiff SASC, whose petition for reconsideration of the Size Appeals Board was pending for ten months, and for whom an administrative hearing has not yet been scheduled, the interim time pending final determination can be substantial.

 Neither the statutory language nor the legislative history resolves explicitly whether § 637(a)(9) was meant to apply to size determinations. However, without any indication in the legislative history whatsoever that it was not intended to apply to size determinations, we cannot interpret its broad language, providing that "no such firm shall be denied total participation in any program conducted under the authority of this subsection without first being afforded a hearing on the record . . .", to exclude any considerations of program eligibility, including size. *fn2" Moreover, there is language in the legislative history supporting this view. The Conference Report to the 1978 bill which enacted § 637(a)(9) states:

 H.R. Rep. No. 1714, 95th Cong., 2d Sess. 23, reprinted in 1978 U.S. Code Cong. & Ad. News 3897, 3884. (Emphasis added). The Senate's understanding of the program was reflected in its ...


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