Court of Federal Claims Applies a 150 Employee Size Standard to ITVAR Non-Manufacturers

February 3, 2017

By Patrick T. Rothwell

The Court of Federal Claims (“Court”) has issued a bid protest decision which stated, in apparent dicta, that a concern must satisfy a 150-employee standard under the Information Technology Value Added Resellers (“ITVAR”) exception to NAICS code 541519 as opposed to the 500-employee size standard which a concern usually must meet to qualify as a small business under the requirements of the “non-manufacturer rule” (“NMR”). York Telecom Corp. v. United States, No. 15-489 (Fed. Cl. Jan. 11, 2017). According to an SBA regulation enacted last year, the NMR applies to procurements assigned the ITVAR exception to NAICS code 541519. Small Business Size Standards: Industries with Employee Based Size Standards Not Part of Manufacturing, Wholesale Trade, or Retail Trade, 81 Fed. Reg. 4,436 (Jan. 26, 2016). Although the case involves a procurement which pre-dates the new SBA regulation, the rationale of the Court’s decision may have an effect on the ability of some ITVARs to qualify as small business non-manufacturers going forward. 

The NMR provides that a concern which is a non-manufacturer may qualify as a small business on a supply contract set aside for small businesses if it supplies the product of a small business made in the United States. According to the SBA regulation governing the NMR, a concern qualifies as a non-manufacturer if the concern: (a) does not exceed 500 employees, (b) is primarily engaged in the retail or wholesale trade and normally sells the type of item being supplied; (c) takes ownership or possession of the item(s) with its personnel, equipment or facilities in a manner consistent with industry practice; and (d) will supply the end item of a small business manufacturer or processor made in the United States, or obtains a waiver of such requirement. 13 C.F.R. § 121.406(b). 

In this case, the National Aeronautics and Space Administration (“NASA”) awarded the plaintiff a Solutions for Enterprise Wide Procurement (“SEWP V”) contract. The NAICS code assigned to the relevant SEWP V category was NAICS code 541519 under the ITVAR exception with an accompanying size standard of 150 employees. At the time that the plaintiff submitted its proposal, the NMR did not apply to procurements assigned NAICS code 541519 under the ITVAR exception, and procurements issued under the ITVAR exception were treated as service contracts.

The SEWP V solicitation also included FAR 52.212-1(a), which provide as follows:

INSTRUCTIONS TO OFFERORS - COMMERCIAL ITEMS (52.212-1) (JUL 2013)

(a) North American Industry Classification System (NAICS) code and small business size standard. The NAICS code and small business size standard for this acquisition appear in Block 10 of the solicitation cover sheet (SF 1449). However, the small business size standard for a concern which submits an offer in its own name, but which proposes to furnish an item which it did not itself manufacture, is 500 employees.

The second sentence is a reference to the size standard that has been normally viewed as the applicable size standard with respect to those concerns which seek to qualify as a small business under the NMR.

On December 16, 2013, plaintiff submitted its proposal, stating that it was a non-manufacturer which had between 150 and 500 employees. NASA awarded a SEWP V contract to plaintiff, but later informed plaintiff that the award was in error because NASA had misinterpreted plaintiff as employing 150 employees or less. The NASA contracting officer suspended plaintiff’s contract and filed a size protest against plaintiff with SBA. The SBA Area I Office issued a size determination concluding that the applicable size standard for the SEWP V contract was 150 employees or less and that plaintiff did not meet the size standard and, thus, was other than small. SBA also determined that NAICS code 541519 is a service code and that the NMR did not apply to the contract. Plaintiff then appealed the size determination to the SBA’s Office of Hearings and Appeals (“OHA”), which issued a decision affirming the size determination, holding among other things, that the inclusion of FAR 52.212-1 in the solicitation did not impose a 500-employee size standard for the procurement. 

In its post-award bid protest action, plaintiff maintained that the SEWP V solicitation provided for a 500-employee size standard for non-manufacturers notwithstanding the lower 150-employee size standard in the solicitation. The Court held that it possessed jurisdiction to hear plaintiff’s bid protest, and that plaintiff had standing to bring the protest. However, it dismissed the protest as untimely on the basis that there was a patent ambiguity in the SEWP V solicitation as to the applicable size standard (150 employees versus 500 employees) which plaintiff failed to raise with NASA before proposals were due. Blue & Gold Fleet, L.P. v. United States, 492 F.3d 1308, 1312 (Fed. Cir. 2007).

Notwithstanding the dismissal, the Court also opined in apparent dicta that even if a plaintiff could pursue its challenge of the size determination, its protest ground was unsupported by the terms of the solicitation and the statutory NMR. Here the Court interpreted FAR 52-212-1 as stating that “[w]hen read in its entirety, the Court construes the above provision to require that a non-manufacturer first meet the 500 employees or less size standard to compete for the contract and to also impose the more restrictive size standard of 150 employees or less under the NAICS code in order for the non-manufacturer to be eligible for contract award.”  In a footnote, the Court then stated that “[w]here the size standard imposed by the NAICS code is less than 500 employees−as is the case here−a non-manufacturer must satisfy the more restrictive size standard imposed by the NAICS code to be eligible for contract award. On the other hand, where the size standard for the applicable NAICS code exceeds 500 employees, a non-manufacturer would have to meet the more restrictive 500-employee size standard to be eligible for contract award.”  

The Court also explained that its interpretation of the size standard was reinforced by the Small Business Act provision establishing the NMR. In order to be in compliance with the NMR, the Small Business Act provides that a concern must, among other things, “be a small business concern under the numerical size standard for the Standard Industrial Classification Code assigned to the contract solicitation on which the offer is being made.”  15 U.S.C. § 637(a)(17). Therefore, according to the Court “the statutory non-manufacturer rule, thus, requires that an offeror seeking coverage under the rule satisfy the size standard imposed by the NAICS code for the relevant contract.”

The upshot is that, according to the Court, a non-manufacturer must not only satisfy the 500-employee size standard applicable to the NMR, but also must satisfy the size standard applicable to the solicitation, meaning that ITVAR non-manufacturers must have 150 employees or less. This finding is likely contrary to the perception of many non-manufacturers that they are only required to satisfy the 500-employee standard under the NMR. Indeed, this perception had some basis. A finding in Size Appeal of OSC Solutions, Inc., SBA No. SIZ-5253 (2011), an OHA decision cited in the Court’s opinion, states “I . . . conclude that FAR clause 52.212-1(a) merely reminds offerors that an alternate size standard applies for supply procurements when an offeror meets the requirements of the non-manufacturer rule.”  Nevertheless, in light of the recent decision of the Court, ITVAR non-manufacturers which exceed 150 employees should not assume that they may qualify as a small business if they have between 150 and 500 employees.

About the Author: Patrick Rothwell is an associate with PilieroMazza in the Government Contracts Group. He may be reached at prothwell@pilieromazza.com.

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