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DANI ENTERPRISES v. UNITED STATES SBA

February 26, 1991

DANI ENTERPRISES, INC., C. PATRICK KENNEDY, NORRELL SERVICES, INC., Plaintiffs,
v.
UNITED STATES SMALL BUSINESS ADMINISTRATION, et al., Defendants



The opinion of the court was delivered by: SPORKIN

 STANLEY SPORKIN, UNITED STATES DISTRICT JUDGE

 Plaintiffs Dani Enterprises, Inc. ("Dani"), C. Patrick Kennedy ("Kennedy"), and Norrell Services, Inc. ("Norrell"), brought this complaint for declaratory and injunctive relief against the Small Business Administration ("SBA"). Dani and Kennedy are franchisees of Norrell, and all are companies which provide temporary-help services to businesses, industry and government. Plaintiffs have moved for a preliminary injunction restraining defendant from enforcing a November 26, 1990 final determination by the SBA Office of Hearings and Appeals ("OHA") that Dani and Kennedy are other than small businesses, pursuant to SBA's regulations, 13 C.F.R. Part 121, and the SBA Act, 15 U.S.C. § 632(a). Defendant has opposed the motion for preliminary injunction.

 This Court has before it the administrative record and other affidavits and has heard oral argument. Because both plaintiffs and defendants agree that all relevant information is currently before the Court, a decision on this motion as well as summary judgment on the merits of the underlying complaint will be consolidated under Rule 65(a)(2) of the Federal Rules of Civil Procedure, as requested by the parties.

 Background

 Norrell is a Georgia corporation which has developed a national reputation for its system of providing to business, industry and government temporary personnel to perform certain jobs and services. In some areas of the country, Norrell's system is implemented and marketed through offices owned and managed by Norrell, while in other areas, Norrell has licensed franchisees which use the Norrell system, name and trademarks. Dani and Kennedy are both Norrell franchisees.

 SBA is an administrative agency charged with the responsibility for making determinations about whether a business constitutes a "small-business concern" pursuant to 15 U.S.C. § 632(a). The Administrator of SBA is responsible for making detailed definitions of "small business concerns" and making whatever rules are necessary to carry out the SBA's determinations.

 Dani submitted a blanket purchase agreement application to the Naval Supply Center, in Norfolk, Virginia, on March 1, 1990. The Center then requested a formal size determination with respect to Dani from the Philadelphia Regional Office of the SBA, because the application was limited to small businesses. On June 29, 1990, after reviewing Dani's submissions, the Regional SBA Office found that Dani was not a small business.

 A parallel chain of events was set off when Kennedy submitted a bid to the Department of the Navy, Naval Underwater Systems Center in New London, Connecticut, to provide temporary-help services. This contract was set aside exclusively for small businesses. The Naval Center announced its intention to award the contract to Kennedy, but an unsuccessful bidder filed a size protest, prompting the SBA's Region I Office to investigate. The Region I Office issued a formal determination on July 12, 1990, that Kennedy was not a small business.

 Both Dani and Kennedy appealed the SBA's size determination to the OHA. On August 9, 1990, the two appeals were consolidated before the OHA. On September 18, 1990, the OHA issued its original decision, and on November 26, 1990, after a series of procedural difficulties, the OHA issued its final decision that Dani and Kennedy were not small businesses. *fn1"

 The OHA upheld the SBA's finding of "common management" control. The OHA ruled that SBA's determination that the franchisees were "affiliates" of Norrell rather than independent entities were correct based on the restraints provided for in the franchise agreement. This determination prevents Dani and Kennedy from bidding on government contracts which are set aside for small businesses. Plaintiffs now ask this Court to enjoin enforcement of that decision.

 Discussion :

 In order to succeed on the preliminary injunction motion and on the merits of the underlying claim, plaintiffs must show that the challenged SBA decisions were "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," as required under the Administrative Procedure Act, ("APA") 5 U.S.C. § 706(2)(A). *fn2" Plaintiffs make two arguments in an effort to meet the APA test. They argue first, that the SBA's decision was inconsistent with its own regulations, and second, that the decisions was not supported by the factual record. The SBA contends that its decision was completely in accordance with the law as well as the facts.

 The primary SBA regulation at issue in this case is 13 C.F.R. § 121.401(m) (1990), which sets forth specific tests and criteria for determining whether an "affiliation," or control, exists between a franchisee and a franchisor such that the franchisee cannot be considered a small business. § 121.401(m) provides:

 
Affiliation under franchise and license agreements. In determining whether the franchisor controls or has the power to control and, therefore, is affiliated with the franchisee, the restraints, relating to standardized quality, advertising, accounting format and other provisions, imposed on a franchisee by its franchise agreement shall generally not be considered, provided that the franchisee has the right to profit from its efforts and bears the risk of loss commensurate with ownership. Alternatively, even though a franchisee may not be controlled by the franchisor by virtue of such provisions in the franchise agreement, control and, thus, affiliation could arise through other means, such as common ownership, common management or excessive restrictions upon the sale of the franchise interest.

 (Emphasis added.) The first point of contention in this case is whether, under § 121, the SBA's decision to look to the franchise agreement for a determination of ...


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