that in evaluating economic disadvantage, "SBA will consider factors relating both to the applicant concern and to the individual(s) claiming disadvantaged status." § 124.106(a)(2). These factors fall into three general categories: 1) the personal financial condition of the individuals claiming disadvantaged status; 2) the financial condition of the applicant concern; and 3) the applicant concern's access to credit, capital, and markets. See id.
One basis for the SBA's decision to deny SRS SDB status was SBA's conclusion that Mohindar Sandhu is not an economically disadvantaged person. In support of this determination, the SBA found that Mr. Sandhu's wages in 1992 and 1993 were $ 395,817 and $ 411,524, respectively, and that the total fair market value of Mr. Sandhu's personal assets (including his $ 2.75 million ownership interest in SRS) was over $ 3,000,000. The SBA noted that "this scenario is not indicative of an economically disadvantaged individual." SBA Letter of March 24, 1995, to Mohindar Sandhu at 2 (hereafter "SBA Determination Letter").
With regard to the operating losses incurred by SRS and the consequent drop in value of Mr. Sandhu's ownership interest in the company, the SBA noted that "the major reason for the 1994 drop in value of your assets is...a non-recurring charge for litigation in the amount of $ 1.5 million dollars... . There is no evidence that the drop in SRS Technologies' net worth was the result of your inability to compete in the free enterprise system." Id. Thus, the SBA found that the "changed circumstances" upon which SRS based its self-certification did not provide a sufficient basis for granting SDB status to SRS.
SRS contends that SBA's analysis of Mr. Sandhu's financial condition was "rife with clear errors." Pl.'s Mem. in Supp. M. Preliminary Injunction at 20 [hereafter Pl.'s PI Mem.]. SRS further contends that under its governing regulations, the SBA was required to "measure Mr. Sandhu's personal financial condition against the owners of other, similar concerns." Id. Specifically, SRS argues that SBA should have compared SRS's position to that of one of its competitors, EER Systems. Plaintiff contends that the SBA's decision to deny SDB status to SRS while granting it to a larger and "less economically disadvantaged" company--EER Systems--was arbitrary and capricious.
Plaintiff's objections to the SBA's analysis of Mr. Sandhu's personal financial condition are without merit. SRS does not dispute that Mr. Sandhu's income was approximately $ 400,000 in both 1992 and 1993.
With respect to the fair market value of Mr. Sandhu's personal assets, however, SRS contends that the SBA improperly ascribed a value of nearly $ 3.0 million to his ownership interest in SRS, when in fact the value of Mr. Sandhu's stock "may be nothing." Pl.'s Reply Brief at 9. The administrative record is replete with references to the "fair market value" of SRS's stock and Mr. Sandhu's ownership interest. See e.g., Administrative Record ("AR"), Tab 2 at 2; AR, Tab 4 at 2. Plaintiff argues that these calculations were performed "strictly for valuing small quantities of stock in SRS's employee stock ownership plan." Id. at 9 n.5. However, this argument flies in the face of Mr. Sandhu's own submissions to the SBA, wherein he states that, at the end of Fiscal Year 1993, "the fair market value of SRS was $ 5,521,131." AR, Tab 2 at 2 (emphasis supplied). Plaintiff's contention that it was arbitrary and capricious for the SBA to use figures submitted by Mr. Sandhu himself concerning the fair market value of his ownership interest in SRS is wholly without merit.
Plaintiff's argument that the SBA's disparate treatment of SRS and EER Systems was arbitrary and capricious is similarly unfounded. First, there is simply no requirement in the regulations that the SBA compare the economic status of different companies when evaluating the economic status of the individuals who own those companies. Plaintiff's confusion on this point is revealed by the following statement: "The SBA completely ignored the fact that it found a company similar to SRS in all respects, except wealthier than SRS, to be economically disadvantaged, while SRS was not." Pl.'s Mem. in Supp. M. Sum. J. at 9. What plaintiff fails to appreciate is that the "personal financial condition" inquiry, § 124.106(a)(2)(i), does not involve any analysis of the company's financial status or comparison with other businesses. Such a comparison occurs only under the "business financial condition" inquiry, § 124.106(a)(2)(ii).
Second, to the extent plaintiff is simply arguing that it is unfair to treat SRS and EER Systems differently, this argument fails as well. The mere fact that EER systems is larger than SRS does not necessarily mean that the personal financial condition of its owner or owners is superior to Mr. Sandhu's. Plaintiff offers no facts which demonstrate that any of EER Systems' owners are in fact better off, financially, than Mr. Sandhu. Accordingly, there is no basis to conclude that the SBA's decision to grant SDB status to EER Systems, while denying it to SRS, was arbitrary, capricious or otherwise unfair.
B. Use of Mr. Sandhu's Personal Financial Condition as a Dispositive Factor
According to plaintiff, the SBA improperly concluded that Mr. Sandhu's nondisadvantaged status was itself sufficient to preclude his company from being an SDB. As set forth above, the regulations state that in "determining the degree of credit and capital opportunities of a socially disadvantaged individual, SBA will consider factors relating both to the applicant concern and to the individuals claiming disadvantaged status." 13 C.F.R. § 124.106(a)(2). The regulations explain that these factors fall into the following three general categories: 1) personal financial condition of the individuals claiming disadvantaged status; 2) business financial condition; and 3) the business's access to credit and capital. Id. According to plaintiff, the language in § 124.106(a)(2) stating that the SBA "will consider factors relating both to the applicant concern and to the individual claiming disadvantaged status" is mandatory, and it is impermissible for the SBA to examine only one of the three categories set forth above when making its SDB determination.
Although one may search in vain through plaintiff's filings for an explanation of just how these factors should be applied, plaintiff's position appears to be that the SBA must examine each factor and then weigh them all together. According to plaintiff, the SBA may not base its decision upon an analysis of one factor only. Thus, if Mr. Sandhu had submitted information concerning his personal financial condition which demonstrated that he was a billionaire, it would have been improper, according to plaintiff's view, for the SBA to end its inquiry there. Plaintiff would presumably argue that, no matter how wealthy the owner is, a company's "business financial condition" or "access to credit and capital" (the two remaining factors which plaintiff contends the SBA must always consider) could be sufficiently impaired as to warrant SDB status.
Obviously, this is not the law. The regulations specifically state that "this program is not intended to assist concerns owned and controlled by socially disadvantaged individuals who have accumulated substantial wealth...or who have not experienced or have overcome impediments to obtaining access to financing, markets and resources." 13 C.F.R. § 124.106(a)(1)(ii) (emphasis supplied). In Autek Systems Corp. v. United States, 835 F. Supp. 13, 15 (D.D.C. 1993); aff'd, 42 F.3d 712 (D.C. Cir. 1994), Judge Oberdorfer held that "SBA did not abuse its discretion by considering [the owner's] income as the dispositive factor" in analyzing the plaintiff company's economic status.
The regulations are quite clear that to qualify as an SDB, a company must be owned by socially and economically disadvantaged individuals. See Adarand Constructors, Inc. v. Pena, 132 L. Ed. 2d 158, 115 S. Ct. 2097, 2129 (1995) (Stevens, J., dissenting) (noting that set-aside programs "exclude members of minority races who are not, in fact, socially or economically disadvantaged"). In sum, SBA's conclusion that Mr. Sandhu's non-economically disadvantaged status alone precluded SRS from being an SDB was neither arbitrary nor capricious, nor otherwise improper.
C. SBA's Findings with Regard to Outstanding Stock Options
As an alternative basis for its denial of SDB status, the SBA found that the existence of certain stock options meant that SRS "may not be at least fifty-one percent unconditionally owned by a socially and economically disadvantaged individual(s)." SBA Determination Letter at 3. The SBA found that if all existing stock options were exercised by nondisadvantaged persons, "the persons upon whom eligibility is based would own just under fifty-one percent of the firm." According to plaintiff, however, Mr. Sandhu and his son Peter hold the right to exercise most of the stock options. Thus, even if all of the stock options available to persons other than Mr. Sandhu and his son were exercised, Peter and Mr. Sandhu would still own over 51% of SRS. Defendants contend that SRS failed to place this clarifying information before the initial reviewer and that SBA regulations permitted the exclusion of any additional evidence during the administrative appeal process.
The court need not resolve the question of whether the SBA's treatment of this issue was arbitrary and capricious. As set forth above, Mr. Sandhu's nondisadvantaged status precludes SRS from being an SDB. Nevertheless, the court appreciates plaintiff's consternation. From the parties' briefs, it appears that the SBA failed to clarify the status of SRS's outstanding stock options when it could easily have done so and also refused to consider any additional information in the course of SRS's administrative appeal, despite SRS's proffers. While it is possible that this conduct did not technically violate any of the applicable regulations, it does smack of a certain bureaucratic high-handedness.
D. SBA's Failure to Forward IMS's Protest to SRS
SBA's regulations provide that when the SBA receives a protest challenging the disadvantaged status of a company, SBA shall forward a copy of the protest to that company. See § 124.608(b). While both the Navy and IMS protested SRS's SDB status, SRS only received a copy of the Navy's protest. SRS was never forwarded a copy of IMS's protest. According to plaintiff, "when the SBA made its determination that SRS did not qualify as an SDB, it had and it used the information provided in IMS's protest. This Star Chamber proceeding is a clear violation of the SBA's own regulations and, more importantly, a violation of SRS's constitutional rights." Pl.'s PI Mem. at 12-13. The SBA contends that it did not have, and therefore did not consider, IMS's protest when it reviewed SRS's eligibility status.
The court finds that whether or not SBA considered IMS's protest, SRS was not prejudiced by its failure to receive a copy of IMS's protest. The SBA's determination that SRS was not entitled to SDB status was based on its finding 1) that Mohindar Sandhu and his children were not economically disadvantaged individuals; and 2) that because of certain stock options, SRS might not be at least fifty-one percent owned by nondisadvantaged individuals. IMS's protest, by contrast, challenged SRS's SDB status on the grounds that
1) SRS was not a small business because its affiliation with a proposed subcontractor made SRS a joint venture in violation of 13 C.R.R. § 121.402; and 2) SRS was not a disadvantaged business based upon its contractual relationship with this proposed subcontractor, because that subcontractor would have control over SRS in violation of 13 C.F.R. § 124.104(d)(6).
Intervenor's Opp. at 8. SBA's resolution of SRS's SDB status had nothing whatever to do with the issues raised in IMS's protest. Accordingly, there is simply no reason to believe that SRS was in any way prejudiced by not receiving a copy of IMS's protest.
Mohindar Sandhu is the primary owner of SRS Technologies. Mr. Sandhu's salary during each of the past two years was close to $ 400,000, and the value of his assets, including his ownership interest in SRS, exceeds $ 3 million. One of the criteria for SDB status is that a company must be fifty-one percent owned by an individual or individuals who are socially and economically disadvantaged. On the basis of information submitted by Mr. Sandhu himself, the SBA properly found that Mr. Sandhu was not an economically disadvantaged person. Mr. Sandhu's nondisadvantaged status alone is sufficient to disqualify SRS from being an SDB. Accordingly, the court finds that there is no basis to disturb the SBA's determination of SRS's status. A separate Order shall issue this date.
Royce C. Lamberth
United States District Judge
For the reasons set forth in the accompanying memorandum opinion, it is hereby
ORDERED that plaintiff's motion for an Order requesting a decision from the United States General Accounting Office is DENIED; and it is further
ORDERED that plaintiff's motion for summary judgment is DENIED; and it is further
ORDERED that the defendants' and intervenor IMS's motions for summary judgment are GRANTED; and it is further
ORDERED that judgment is hereby entered in favor of all defendants and this case is hereby dismissed; and it is further
ORDERED that plaintiff's motion for preliminary injunction is DENIED, as moot.
Royce C. Lamberth
United States District Judge