Court rules against government, again, in small business parity

For the second time this year, the U.S. Court of Federal Claims has ruled that companies operating in Historically Underutilized Business Zones must have top priority among small businesses when competing for government contracts.

On Friday, the Court of Federal Claims found the Air Force violated the 1953 Small Business Act when it failed to first consider DGR Associates Inc., a HUBZone firm, before awarding a contract to an 8(a) small business. The set-aside procurement was for housing maintenance, inspection and repair services at Eielson Air Force Base in Alaska.

The ruling is the latest blow to the Justice Department and Small Business Administration as they attempt to navigate an increasingly complex regulatory issue that has divided the small business contracting community.

The Court of Federal Claims and the Government Accountability Office have determined that technical language in the Small Business Act puts HUBZone firms at the top of the small business pecking order. The Obama administration disagrees and has argued that Congress intended for there to be parity among small business programs.

In Friday's case, the Court of Federal Claims issued a permanent injunction requiring the Air Force "to terminate the unlawful contract" awarded to General Trades and Services of Waipahu, Hawaii. The Air Force must issue a new solicitation and will be required to first consider DGR, the Terrell, Texas, firm that had been the incumbent on the contract.

DGR performed the military housing maintenance services on a five-year firm fixed-price contract, which expired in 2009. After continuing for several months under a blanket purchase agreement, the Air Force notified the firm in June 2010 that it was ending the contract.

The Air Force decided under the new contract it would limit competition to companies operating in SBA's 8(a) Business Development program because the service wanted to boost its percentage of awards issued to small disadvantaged businesses, the court said. A contracting officer noted in documents that the Air Force had exceeded its HUBZone goals by more than 600 percent but missed its small disadvantaged business goal -- which includes the 8(a) program -- by 53 percent.

After the Air Force refused to reconsider its decision, DGR filed a protest with GAO. In May, the watchdog ruled in favor of the contractor.

But, the Air Force, citing recent Justice Department and Office of Management and Budget guidance, disregarded the decision, noting GAO's ruling was not binding. "Contracting officers are not to provide a priority to HUBZones," Air Force officials told agency attorneys, according to correspondence Government Executive obtained.

Facing a July 15 termination of its contract, DGR took its case to the Court of Federal Claims, whose decisions are binding. In his decision, Judge Thomas C. Wheeler said the statute was unambiguous.

"The language of the Small Business Act granting priority to the HUBZone program could not be more clear," Wheeler wrote. "By using the phrases 'notwithstanding any other provision of law . . . a contract opportunity shall be awarded on the basis of competition to qualified HUBZone small business concerns,' Congress established a priority for the HUBZone program over other competing small business programs. . . . If Congress intended something different from what it stated, Congress alone must enact an appropriate amendment."

Similar to the March 2010 Mission Critical Systems case involving an Army information technology contract, the decision came down to the words "shall" and "may." The law that governs the 8(a) and the service-disabled veteran-owned business program states, "a contracting officer may award contracts" based on limited competition. The HUBZone statute uses the word "shall."

In both cases, the Court of Federal Claims ruled that before a contract can be set-aside under the 8(a) program, the contracting officer first must determine if two or more qualified HUBZone firms will submit offers. Wheeler noted agencies that disagree with the ruling "would be better served to seek legislative relief from Congress rather than judicial relief in this Court."

Sen. Mary Landrieu, D-La., is sponsoring a two-line bill that would change the HUBZone statute from "shall" to "may." But the bill has only six co-sponsors and has not moved from Landrieu's Small Business and Entrepreneurship Committee. An identical bill has stalled in the House.

Parity advocates are holding out hope lawmakers will be able to attach the language to the upcoming Defense authorization bill. But an attempt by the Senate to add similar parity language to last year's Defense bill proved unsuccessful when a conference committee yanked the provision.

While legislation remains in doubt, the dispute does appear to be reaching a judicial conclusion. The U.S. Court of Appeals for the Federal Circuit will soon hear Justice's challenge of the Mission Critical Systems case. And, unlike the Court of Federal Claims, the appeals court's ruling has precedential effect, meaning its decision would apply to future HUBZone priority cases.

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