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.
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.
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).
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.