Last month, the Small Business Administration's (SBA) Office of Hearing and Appeals (OHA) issued a decision in the Matter of Strategic Alliance Solutions, finding that a provision in a mentor-protégé joint venture (JV) agreement requiring mutual consent of the venturers to initiate and settle litigation did not violate the SBA's regulations requiring that the small business venturer have control of the day-to-day management and administration of contract performance. This ruling is noteworthy because it reverses OHA's previous decision in this matter and clarifies what decisions OHA considers to be part of corporate governance — and therefore ones that can require mutual consent of both venturers.

Background

On June 8, 2022, the Department of Defense (DOD) Missile Defense Agency (MDA) awarded a contract set-aside for Service-Disabled Veteran-Owned Small Business Concerns (SDVO SBCs) to Strategic Alliance Solutions, LLC (Strategic Alliance), a JV comprised of a SDVO SBC and its SBA-approved mentor. A week later, an unsuccessful offeror filed a protest challenging Strategic Alliance's status as a SDVO SBC on the basis that its JV agreement did not comply with the applicable regulations at 13 C.F.R. § 125.18(b)(2), including the requirement that the small business exercise day-to-day control over the joint venture.¹  

On July 29, 2022, SBA's Office of Government Contracting and Business Development (DD/GC) sustained the protest and an appeal to OHA followed. Then, in a September 22, 2022, decision, OHA found that the JV agreement failed to comply with the regulations because it required mutual consent of the venturers to initiate and settle litigation which gave the non-SDVO SBC venturer impermissible negative control beyond extraordinary circumstances. 

On October 20, 2022, Strategic Alliance filed a bid protest in the U.S. Court of Federal Claims (COFC) challenging OHA's September 22, 2022, decision. The COFC remanded the matter to OHA for a new decision.

Summary of Decision

On remand, OHA determined that its previous decision was in error and held that the inclusion of a requirement for "unanimous consent of the venturers for decisions on litigation concerning the contracts the joint venture is pursuing does not deprive [the SDVO SBC] of its control of day-to-day management and administration of contract performance." Notably, SBA's Office of General Counsel (OGC) filed a comment on remand expressing its opinion that "initiating or settling contract litigation are activities that fall outside the field of daily management and administration of contract performance." The SBA OGC also pointed out that the SBA amended the regulations at 13 C.F.R. § 125.18(b)(2)(ii) in 2020 to expand the ability of a non-SDVO SBC partner to participate in "commercially customary decisions unrelated to contractual performance."  

In reaching its holding, OHA explained that its previous September 2022 decision had relied on decisions issued prior to the 2020 amendments to 13 CFR § 125.18(b)(2)(ii), and the issue before it was therefore whether Strategic Alliance had offered an argument "substantial enough" to determine that the additional language in the regulation "warrant[ed] a different interpretation." OHA determined that it did, finding that litigation regarding the JV's contracts was not part of the day-to-day management of contract performance, but was instead part of corporate governance and therefore an area where consent of the non-SDVO SBC venturer could be required. OHA reasoned that litigation could have "results which might impair the interests of the venturers, and thus it is not inappropriate that [the non-SDVO SBC venturer] have the right to approve contract litigation."

Takeaways

OHA's ruling clarifies that under SBA's 2020 amendments to its JV regulations, non-small business venturers are allowed to participate in the decision whether to initiate or settle litigation. It also more broadly clarifies that while the small business venturer must control contract administration and performance, it is permissible to require the consent of the non-small business venturer in corporate governance and general business decisions, "as is customary for participants in a joint venture to do." This guidance will assist joint venturers in drafting their joint venture agreements. 

Despite this ruling, there is still uncertainty about how OHA will apply the 2020 amendments to other types of JV decisions. Because SBA may find a JV ineligible for a set-aside award if its JV agreement fails to comply with the applicable SBA regulations, small businesses and their potential joint venture partners should keep a close eye on future OHA decisions.

We will continue to monitor and report on SBA OHA decisions. In the meantime, if you have any questions, please contact one of the Miller & Chevalier attorneys listed below:

Jason N. Workmaster, jworkmaster@milchev.com, 202-626-5893

Elizabeth J. Cappiello*

*Former Miller & Chevalier attorney

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¹ The regulations require that the small business in an SDVO SBC JV be: "responsible for controlling the day-to-day management and administration of the contractual performance of the joint venture, but other partners to the joint venture may participate in all corporate government activities and decisions of the joint venture as is commercially customary." 13 C.F.R. § 125.18(b)(2)(ii)(A) (now 13 C.F.R. § 128.402(c)(2)(ii)). In deciding whether a JV has complied with the regulations, OHA considers whether the JV agreement designated the SDVO SBC as the managing venturer and granted it "the authority to control the day-to-day management and administration of the contract without the possibility of negative control." See Strategic Alliance, SBA No. VET-278, at *13 (2023). Negative control exists when a minority member can block the actions of the JV's management or the majority member. OHA, however, has found that giving a minority member the ability to block certain "extraordinary actions" does not create negative control. See id.; see also Strategic Alliance, SBA No. VET-277, at *11 (2022).

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