Small Business Must Have “Unequivocal Control” of the Joint Venture to Meet Set-Aside Eligibility Requirements

The Small Business Administration (SBA) allows certain joint ventures between small and large firms to qualify for small business set-aside procurements.  To qualify, the joint venture agreement (“JVA”) between the firms must include a number of specific provisions required by regulation.  Most importantly, the small business must control the joint venture (“JV”) as the “managing venturer” and perform at least 40% of the JV’s work.

In Seventh Dimension, LLC, SBA No. VET-6057 (2020), the SBA’s Office of Hearings and Appeals (“OHA”) held that a JV was ineligible for award because its JVA did not give the small business “unequivocal control” of the JV.  Seventh Dimension is yet another stark reminder from OHA that the failure to comply with JVA requirements can have devastating consequences for a JV’s eligibility to compete in a set-aside procurement.

A company’s size status is determined based upon the facts and highly-specific JVA terms in place at the time of proposal submission.  As a result, legitimate small businesses can find themselves losing important contracts because their JVA does not comply with the SBA’s strict requirements.  In our experience, fatal paperwork errors could easily be avoided by getting competent counsel to review (and help draft) JVAs prior to proposal submission.

Large Business Retains Veto Power to Control the Joint Venture

Seventh Dimension involved an Army procurement for training support services set aside for Service-Disabled Veteran-Owned Small Business Concerns (“SDVO SBCs”).  Advanced Computer Learning Corporation (“ACLC”), an SDVO SBC, and General Dynamics Information Technology (“GDIT”) entered into a Mentor-Protégé Agreement (“MPA”) to support ACLC’s growth in the area of training and education support services.

The parties subsequently executed a JVA to create Aquila Alliance LLC (“Aquila”).  The JVA designated ACLC as the managing member of Aquila, while GDIT was designated as a member.

The JVA established a Members’ Committee comprised of two representatives from ACLC and one representative from GDIT. The Members’ Committee was responsible for managing the JV and controlling the performance of its contracts.

The JVA specified that certain actions would require the unanimous consent of the Members’ Committee.  These actions included final approval and submission of proposals, entry into contracts, modification of contracts, and approval of the JV’s annual budget. GDIT could use its seat on the Members’ Committee to veto any of the actions which required unanimous consent.

After the Army announced that Aquila was selected for award, two firms protested Aquila’s eligibility including Seventh Dimension LLC.  The SBA’s Area Office denied the protests and found that Aquila met the JVA requirements for SDVO SBC eligibility under 13 C.F.R. § 125.18(b).

That regulation states that the JVA “must contain a provision…[d]esignating an SDVO SBC as the managing venturer of the joint venture.”  13 C.F.R. § 125.18(b)(2)(ii).  The Area Office concluded that Aquila satisfied this requirement because ACLC was designated as the managing venturer and had two of the three positions on the Members’ Committee.

Seventh Dimension appealed the Area Office’s decision on a number of grounds, including on the basis that Aquila’s JVA failed to comply with 13 C.F.R. § 125.18(b)(2)(ii).  Citing prior OHA cases, Seventh Dimension argued that Aquila did not meet the requirement because GDIT retained veto power over multiple decisions of the JV which required unanimous consent.  See Hana-JV, SBA No. VET-227 (2012); SOF Assocs.-JV, SBA No. VET-234 (2013).

OHA agreed and held that GDIT had “negative control” of Aquila through its veto power over essential business functions including competition for and performance of contracts.  OHA rejected Aquila’s contention that GDIT’s veto power only extended to “extraordinary corporate actions.”  In OHA’s view, GDIT had veto power “over the ordinary actions essential to the running of the company.”  As a result, Aquila failed to comply with 13 C.F.R. § 125.18(b)(2)(ii) and was deemed ineligible for award.

Joint Venture Agreements Require Careful Preparation to Obtain Size Eligibility Benefits

The decision in Seventh Dimension is at least the third time this year that OHA has found a JV ineligible for an SDVO SBC set-aside for failing to comply with the JVA requirements under 13 C.F.R. § 125.18(b).  See KTS Solutions, Inc., SBA No. CVE-146-P (2020); (JVA failed to itemize equipment to be used in performance of the contract and failed to specify the responsibilities of the parties with respect to the negotiation of the contract, source of labor, and contract performance);  CVE Protest of U.S. Dep’t of Veterans Affairs, SBA No. CVE-148-P (2020) (same).

Although the recent cases cited above concern the eligibility of JVs for SDVO SBC set-aside procurements, similar JVA requirements apply to set-aside procurements for other types of small businesses.  See 13 C.F.R. § 125.8.  These decisions underscore the need for contractors to be very careful and diligent in their preparation of JVAs if they want to obtain the benefits of size eligibility for JVs.

If you have any questions about the Seventh Dimension decision or need help understanding or meeting JVA requirements for small business set-aside procurements, please contact Stephen L. Bacon at sbacon@rjo.com.

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