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STELLACOM, INC. v. UNITED STATES

February 11, 1992

STELLACOM, INC., Plaintiff,
v.
UNITED STATES OF AMERICA, et al., Defendants.



The opinion of the court was delivered by: THOMAS W. FLANNERY

 This matter comes before the Court on Plaintiff's Motion for Summary Judgment and Defendants' Motion to Dismiss or, in the Alternative, for Summary Judgment. Plaintiff Stellacom, Inc. ("Stellacom") challenges a 1989 amendment to a Small Business Administration ("SBA") regulation defining annual receipts, 13 C.F.R. § 121.402(b)(2), as being arbitrary, capricious, contrary to law, and in violation of the notice and comment requirements of the Administrative Procedure Act ("APA"). Stellacom seeks a judgment invalidating 13 C.F.R. § 121.402(b)(2) and enjoining SBA from attempting to enforce the regulation against Stellacom, as well as a judgment directing the SBA to return to its prior rule. In addition, Stellacom seeks a judgment declaring Stellacom to be an eligible offeror under a NASA television support services small business set-aside contract for which Stellacom had submitted a bid. For the following reasons, plaintiff's motion will be granted in part and denied in part, and defendants' cross-motion will be granted in part and denied in part.

 I.

 A.

 The SBA is empowered by Congress to administer a government procurement set-aside program. Under this program, government agencies contract with firms determined to be "small" within the meaning of applicable SBA rules and regulations. 15 U.S.C. § 631(a). The administrator of the SBA has the authority to promulgate regulations necessary to implement the Small Business Administration Act, 15 U.S.C. § 631, et seq., and the SBA is responsible for the promulgation of regulations that govern whether a business is to be considered "small" for purposes of receiving awards of those contracts that have been set aside for small businesses. 15 U.S.C. § 637(b)(6).

 Under SBA regulations, the size of a business concern depends upon its average annual receipts. 13 C.F.R. § 121.401, et seq. In particular, a business will qualify as "small" for purposes of SBA programs if it has less than a specified level of average annual receipts. Id. § 121.402(a). The SBA defines receipts as follows:

 Receipts is defined to include all revenue in whatever form received or accrued from whatever source, including from the sales of products or services, interests, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. However, the term "receipts" excludes proceeds from sales of capital assets and investments, proceeds from transactions between a concern and its domestic and foreign officials, proceeds from payments of notes receivable and accounts receivable, amounts collected for another by a travel agent or real estate agent, and taxes collected for remittance to a taxing authority.

 13 C.F.R. § 121.402(b)(2) (1991).

 Before 1989, the SBA did not count the client billings of an advertising agency -- the monies the agency receives from its advertising clients and pays immediately to media vendors, the ultimate providers of advertising services -- in its calculation of the agency's annual receipts. Rather, the SBA only counted the agency's gross income. Size Appeal of Allmayer, Fox & Reshkin Agency, SBA No. 8 (1961); see also Size Appeal of Morris Travel Corp., SBA No. 2228 (1985) (permitting exclusion of certain client billings of travel agents on ground that travel agent was like an advertising agent). The SBA did so because the gross income of an advertising agency does not include the full amount of these client billings; instead, it only includes the commission made on the client billing. The SBA followed this policy for nearly thirty years. In 1987, the SBA published a proposed amendment to its definition of annual receipts which would have codified its existing policy of excluding client billings of agents from the calculation of annual receipts. In pertinent part, the proposed amendment stated that "the term 'receipts' excludes . . . amounts collected as an agent for another, such as gross bookings on which a commission is earned (in which case only the commission earned would constitute revenue) . . . ." 52 Fed. Reg. 32870, 32884 (1987) (emphasis added). The SBA explained the amendment thusly:

 The definition of revenue would be clarified to exclude receipts collected as an agent for another, such as gross bookings on which a commission is earned (e.g., only the commission earned by a travel agent would constitute revenue and not the value of gross bookings).

 Id. at 32871-72.

 The final rule adopted, however, limited the exclusion for amounts collected for another to the client billings of travel agents and real estate agents. As set forth above, the final rule defined annual receipts as follows:

 Receipts is defined to include all revenue in whatever form received or accrued from whatever source, including from the sales of products or services, interests, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances. However, the term "receipts" excludes proceeds from sales of capital assets and investments, proceeds from transactions between a concern and its domestic and foreign officials, proceeds from payments of notes receivable and accounts receivable, amounts collected for another by a travel agent or real estate agent, and taxes collected for remittance to a taxing authority.

 13 C.F.R. § 121.402(b)(2) (emphasis added). The rule thus excluded advertising agents from the benefits of the prior policy.

 B.

 Stellacom, a Texas corporation, is engaged in the business of video film production and television support services. Stellacom has two affiliates: Walter Bennett Communications ("WBC"), an advertising agency, which owns 72% of Stellacom's stock; and CC&O, Inc., a wholly-owned subsidiary of WBC. Under the applicable regulation, the SBA uses the revenue of each of these affiliates to calculate Stellacom's average annual receipts for purposes of determining whether Stellacom is a "small" business. 13 C.F.R. § 121.402(a). As an advertising agency, WBC has a substantial flow of client billings. Under 13 C.F.R. § 121.402(b)(2), these client billings are counted to determine a business' average annual receipts. The calculation of Stellacom's average annual receipts for small business set-aside purposes is thus significantly higher under section 121.402(b)(2) than it would be under the SBA's prior practice of excluding the client billings of advertising agencies.

 In January 1991, the Johnson Space Center, part of the National Aeronautics and Space Administration ("NASA"), issued a Request for Proposal ("RFP") soliciting offers for television support services. The RFP was a 100% small business set-aside and was subject to Standard Industrial Classification ("SIC") Code 7819, "Services Related to Motion Picture Production." Under SIC Code 7819, a bidding firm's average annual receipts could not exceed $ 14.5 million in order to be considered "small." Stellacom submitted a proposal in response to the RFP. Stellacom self-certified that it was a small business under SBA regulations. However, Stellacom's small business size status was challenged on the basis that the receipts of its affiliates exceeded the $ 14.5 million threshold set forth in SIC Code 7819. *fn1" The SBA Regional Office determined that Stellacom did not qualify as a small business. The SBA's Office of Hearing and Appeals later affirmed the decision.

 II.

 Rule 56 of the Federal Rules of Civil Procedure provides in pertinent part:

 The [summary] judgment sought shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law.

 Fed. R. Civ. P. 56(c). In evaluating a motion for summary judgment, a court must determine "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 91 L. Ed. 2d 202 , 106 S. Ct. 2505 (1986). The moving party has the burden of demonstrating the absence of any genuine issue of material fact to be determined, and the court must credit the non-movant's evidence and draw all justifiable ...


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