Pointe Precision, LLC, No. 4466 (December 18, 2001) Docket Nos. SIZ-2001-09-07-35 (RMD), SIZ-2001-03-30-09 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. ) SIZE APPEAL OF: ) Docket Nos. SIZ-2001-09-07-35 (RMD) [1] ) SIZ-2001-03-30-09 ) Pointe Precision, LLC ) Decided: December 18, 2001 ) Appellant ) ) Solicitation Nos. ) N68836-00-P-1527 and F34601-00-M-0719 ) ) Defense Contract Management ) Agency ) DCM Rockford ) Rockford, Illinois ) ) APPEARANCES Jenifer D. Binder, Esq. First Law Group S.C. for Appellant Christopher M. Curran, Esq. Karie Jo Barwind, Esq. White & Case LLP for Intervenor Woodward Governor Company DIGEST The contractual relationships rule may be applied to a totality of the circumstances analysis even though the challenged firm and its alleged affiliate have an arm's length relationship. The contractual relationships rule is applicable to a totality of the circumstances analysis where sales to the alleged affiliate accounted for 86% - 88% of the challenged firm's revenues over three years. A continued 26% ownership interest in a newly organized concern by its alleged affiliate clearly counters the argument that a clear fracture between the two firms has taken place. Where the challenged firm has status as a newly organized concern, is 26% owned by its alleged affiliate, has "contractual relationships" with that firm, and has other connecting relationships with it including a bailment of equipment at no charge, promised significant work, accelerated payment terms, and "essential" financial guarantees, the challenged firm is affiliated with its alleged affiliate under the totality of the circumstances. General affiliation between two firms occurs where the operative facts relate more to the firms' ownership, management, contractual relationships, or other factors, than to a specific procurement, although facts relating to a specific procurement also may be relevant. DECISION HOLLEMAN, Administrative Judge: Jurisdiction This appeal is decided under the Small Business Act of 1958, 15 U.S.C. Section 631 et seq. and 13 C.F.R. Parts 121 and 134. Issues Whether the contractual relationships rule may be applied to a totality of the circumstances analysis, where the challenged firm and its alleged affiliate have an arm's length relationship. Whether the contractual relationships rule is applicable to a totality of the circumstances analysis, where sales to the alleged affiliate accounted for 86% - 88% of the challenged firm's revenues over three years. Whether a continued 26% ownership interest in a newly organized concern by its alleged affiliate counters the argument that a clear fracture between the two firms has taken place. Whether the challenged firm is affiliated with its alleged affiliate under the totality of the circumstances, where the challenged firm has status as a newly organized concern, is 26% owned by its alleged affiliate, has "contractual relationships" with that firm, and has other connecting relationships with it including a bailment of equipment at no charge, promised significant work, accelerated payment terms, and "essential" financial guarantees. Whether general affiliation between two firms occurs where the operative facts relate more to the firms' ownership, management, contractual relationships, or other factors, than to a specific procurement. I. BACKGROUND A. Procedural Facts On November 21, 2000, the Contracting Officer (CO) for the Defense Logistics Agency, Defense Contract Management Agency, in Rockford, Illinois, protested the small business size status of Pointe Precision, LLC (Appellant). The CO referred specifically to Contract Nos. N68836-00-P-1527 and F34601-00-M-0719, on which Woodward Governor Company (Woodward) is the prime contractor and Appellant is a subcontractor. The CO asserted that, notwithstanding Woodward's claim that Appellant is an independent small business subcontractor, prior Defense Contract Audit Agency (DCAA) reviews of Woodward indicate Appellant appeared to be Woodward's affiliate. The CO referred his protest to the Small Business Administration's (SBA) Area IV Office of Government Contracting in Chicago, Illinois (Area Office), for a size determination on Appellant. On November 29, 2000, the Area Office informed Appellant of the protest, and requested Appellant to submit a completed SBA Form 355, a response to the CO's letter, and other information. The Area Office informed Appellant that it would determine Appellant's "current size" using North American Industrial Classification System (NAICS) codes 332710, Machine Shops, and 332721, Precision Turned Product Manufacturing, each with a corresponding 500-employee size standard. Appellant submitted the requested information. On February 27, 2001, the Area Office issued a size determination that concluded Appellant is other than small. On March 30, 2001, Appellant appealed the size determination to this Office. On May 23, 2001, the Administrative Judge vacated the February 27th size determination and remanded this proceeding to the Area Office for further investigation and a new size determination on Appellant. Size Appeal of Pointe Precision, LLC, SBA No. SIZ-4434 (2001) (Remand Order). On August 6, 2001, the Area Office issued a new size determination in response to the Remand Order. It concluded Appellant is affiliated with Woodward under the totality of circumstances and therefore is other than small. Appellant received the size determination on August 14, 2001, and, through counsel, filed the instant appeal, together with a motion to admit attached new evidence, on September 7, 2001. On September 27, 2001, Woodward, through counsel, moved to intervene in this matter in support of Appellant. B. Facts The Area Office file includes Appellant's completed SBA Form 355, its response to the protest, its audited financial statements for 1999 and 2000, its Operating Agreement, and its employee census; Woodward's Form 10-K for 2000, the DCAA audit report, Woodward's response to that report; and other documents. This information shows Appellant, by itself, is well below the applicable size standard, and that its alleged affiliate Woodward exceeds the size standard. Appellant was organized as a Wisconsin limited liability company in 1995, after Woodward's decision, made sometime in 1994, to cease operations at its Stevens Point, Wisconsin, facility, and to outsource the parts it manufactured there. Woodward designs, manufactures, and services energy control systems and components for aircraft and industrial engines and turbines. Among the Woodward employees who worked at Stevens Point, and would lose their jobs there in the restructuring, were Joseph Kinsella, the general manager of the aircraft controls division and support facilities in Stevens Point; Jeffery Lemmenes, the accounting and production support manager for the hydraulics turbine control division; and Thomas Osowski, manager of rotational manufacturing operations. Messrs. Kinsella, Lemmenes, and Osowski prepared a business plan for a new company in early 1995 and, with Woodward's representative, established Appellant on June 9, 1995. Appellant's Operating Agreement also references a May 19, 1995, Memorandum of Understanding (MOU) among the four parties. Under the Operating Agreement, Woodward and Messrs. Kinsella, Lemmenes, and Osowski became Appellant's Members, each with one vote on the Management Committee. In the event of deadlock, the vote would be weighted in proportion to each Member's ownership interest. The Operating Agreement vests authority for matters in the ordinary course of business to Messrs. Kinsella, Lemmenes, and Osowski, but certain actions, such as borrowing money, admitting new Members, and amending the Operating Agreement require unanimous approval. Each Member shares profits and losses according to ownership interest. In exchange for their ownership interests in Appellant, totaling 74%, Messrs. Kinsella, Lemmenes, and Osowski made their capital contributions in cash. Woodward's capital contribution, for the remaining 26% interest, was in property and services. Woodward's services to Appellant included guarantees to the financial institutions providing Appellant's financing, as described in the MOU, to be maintained for not less than five years, commencing July 1, 1995. The MOU refers to these as "the essential financial guarantees necessary to establish" Appellant. One guarantee was of a $250,000 note payable to the City of Stevens Point Community Development Authority (CDA). In light of these financial guarantees, the MOU forbade Appellant from undertaking long-term commitments without Woodward's permission, limited Appellant's indebtedness, and required certain performance and asset standards. If Appellant fails to meet these standards, Woodward has the right to step in and manage Appellant and, during the first two years, to buy out the other Members' interests. These rights cease after the installment contract is paid, Woodward's financial guarantee expires, and an equipment lease expires. Also under the MOU, Woodward would sell to Appellant certain machines and equipment, payment to be made over three years, with a balloon payment at the conclusion of the term. In addition, Woodward would bail to Appellant certain other machinery at no charge, unless Appellant uses it to produce parts for customers other than Woodward, in which case Appellant would pay Woodward a market-based hourly charge. The bailment would be for two years, with an automatic one-year renewal. The book value of the bailed machinery was over one million dollars in 1995. Also under the MOU, Woodward would guarantee Appellant a significant number of hours of work over its first three years (130,000, 110,000, and 80,000 hours, respectively, for the first, second, and third years), contingent on Woodward's attaining a certain level of sales in its aircraft business, with proportionate adjustments according to actual sales. Appellant, in return, promised to provide those hours, and accepted the risk of a downward change in Woodward's aircraft component sales. For the first two years, Woodward would pay for work done by Appellant under accelerated payment terms. Woodward also offered to lease to Appellant the Stevens Point facility. Mr. Kinsella became Appellant's president, Mr. Lemmenes became its vice president of finance and administration, and Mr. Osowski became Appellant's vice president of production. Appellant hired approximately 90 of Woodward's former employees, leased approximately 25% of the Stevens Point facility from Woodward, and began production of manufactured component parts for Woodward's aerospace activities, on an ongoing purchase order basis. Appellant also has been developing other product lines. Significant events following the formation of Appellant include the following: (1) By February 1998, Mr. Kinsella had bought out Mr. Lemmenes's and Mr. Osowski's interests and since then has owned 74% of Appellant, with Woodward continuing to own the remaining 26%. Mr. Osowski is no longer involved in Appellant. (2) Woodward sold the Stevens Point facility at the end of December, 1998. Since January 1999, Appellant has leased it from the new owners. (3) The bailment expired on June 1, 1998; however, according to Note 5 to Appellant's financial statements for the year ending December 31, 2000, Appellant and Woodward continue to operate under it pending formal renewal. Appellant has never made any payments to Woodward under the bailment. (4) Sales to Woodward accounted for 88% of Appellant's receipts in 1998, and 86% of Appellant's receipts in 1999 and 2000. (5) At the time of the February 27, 2001, size determination, Woodward's guaranty of the CDA loan was still in force. Woodward's guaranty of this loan expired on March 29, 2001. C. The Original Size Determination, Appeal, and Remand Order In its February 27, 2001, size determination, the Area Office concluded Appellant is affiliated with Woodward and thus other than small. The Area Office found Woodward has the ability to control Appellant under the totality of the circumstances, despite its small ownership interest in Appellant, because Woodward owns Appellant's production equipment, accounts for 86% of Appellant's sales, and provides Appellant with a financial guarantee. The Area Office also determined the two firms do not have an arm's length relationship because: (1) Woodward never required payment under the bailment, and; (2) there has been no clear fracture between the firms since Appellant is still dependent on Woodward for sales and continued economic viability. On appeal, Appellant presented evidence clarifying that Woodward owns 12%, not all, of Appellant's production equipment, and that Appellant never made payment to Woodward under the bailment because Appellant had never used the bailed equipment for any other customer's work. Further, all of Appellant's sales to Woodward resulted from competitive bidding, and Appellant failed to win Woodward work at least 18 times (approximately $1.5 million of work) between April, 2000, and April, 2001. Moreover, Woodward's financial guarantees expired on March 29, 2001, and Appellant has obtained a new loan without Woodward's guarantee. 6 The Administrative Judge concluded the Area Office had erred (1) in its finding Woodward owns all of Appellant's production equipment; (2) in its determination, based on the absence of payments under the bailment, that the two firms do not have an arm's length relationship; and (3) in its conclusory affiliation analysis. Therefore, the Administrative Judge vacated the February 27, 2001, size determination, and remanded the matter to the Area Office for further investigation and a new size determination. Size Appeal of Pointe Precision, LLC, SBA No. SIZ- 4434 at 5-6 (2001). D. The August 6, 2001, Size Determination (on Remand) On August 6, 2001, the Area Office issued its size determination on remand, and again concluded that Appellant is affiliated with Woodward and thus other than small. The Area Office based its affiliation determination on the totality of the circumstances rationale. Referring to the contractual relationships rule, the Area Office determined Appellant is economically dependent on Woodward because Woodward accounts for 86% of Appellant's receipts, a percentage that has varied little over the past three years, despite Appellant's having to bid for Woodward work. The Area Office also determined that the newly organized concern rule was applicable. In support, the Area set out its findings that Appellant and Woodward are in the same or related industry, that Messrs. Kinsella, Lemmenes, and Osowski had been key employees of Woodward and became key employees of Appellant; and that Woodward had a 26% ownership interest in Appellant since its creation, owns 12% of Appellant's production equipment, and has furnished Appellant with subcontracts. The Area Office also found Woodward's sale of the Stevens Point facility and the recent expiration of Woodward's financial guarantee did not create a clear fracture between the firms. The Area Office noted that, while neither the contractual relationships between the firms nor Appellant's status as a newly organized concern, by itself, is sufficient to support affiliation, when viewed together, under the totality of the circumstances, there is a sufficient basis for affiliation. Finally, in Footnote 6, the Area Office stated its "other than small" determination "stems from an out-right finding of affiliation-not an affiliation based on 'contract-specific' facts." Thus, the size determination applies to all contracts in which Appellant is engaged. F. The Instant Appeal Appellant received the August 6, 2001, size determination on August 14, 2001, and filed its appeal on September 7, 2001. Appellant asserts the size determination is based on errors of fact and law, and should be vacated. First, regarding contractual relationships, Appellant asserts the Area Office erred by neglecting to consider that Appellant's sales to Woodward resulted from an arm's length competitive bidding process, and not a continued contractual relationship. Appellant asserted that, in 2000, it bid for and did not win some $1.5 million in Woodward work. Thus, despite the fact that Woodward accounted for 86% of Appellant's receipts, Woodward does not have the power to control Appellant. Appellant further asserts that the Area Office erred in finding Appellant economically dependent on Woodward because, unlike the challenged firm in Size Appeal of J & R Logging, SBA No. SIZ-4426 (2001), Appellant is not in the position of a "captive" small business that has no alternative market for its products. [2] Second, regarding Appellant's status as a newly organized concern, Appellant asserts the Area Office erred in finding that Messrs. Kinsella, Lemmenes, and Osowski had been key employees of Woodward. Appellant also asserts the Area Office erred in characterizing the subcontracts it performed for Woodward as having been "furnished" to Appellant by Woodward, because those subcontracts had been competitively bid. Therefore, Appellant asserts, the Area Office erred in applying the newly organized concern rule because there are only two relevant facts (Woodward's 26% ownership interest in Appellant and its ownership of 12% of Appellant's production equipment), and these are insufficient to support the application of that rule. Alternatively, Appellant asserts that even if the newly organized concern rule were applicable, the presumption of affiliation created by that rule has been adequately rebutted because there is a clear line of fracture between the two firms. In support, Appellant asserts Messrs. Kinsella, Lemmenes, and Osowski ended their employment with Woodward and do no consulting for it, Woodward's financial guarantees have expired, Appellant no longer leases space from Woodward, and Appellant has expanded its business into new areas, including the manufacture of parts for other industries in which Woodward was never involved when it operated the Stevens Point facility. Therefore, under the totality of the circumstances, Appellant is not affiliated with Woodward. Finally, Appellant asserts the Area Office erred in applying its affiliation determination to all contracts in which Appellant is engaged, rather than to just the two contracts under protest. As new evidence, Appellant submits an affidavit from its president, Mr. Kinsella, supporting the assertions made in its appeal. In his affidavit, Mr. Kinsella states that his work for Woodward was under the direction and control of Woodward's corporate officers, including the vice president of aircraft controls and the vice president of facilities support. He also states Appellant has expanded its component machining business into medical, paper, fluid power, and the lawn and garden markets. Intervenor Woodward supports the appeal and asserts the size determination was based on errors of fact and law. Specifically, the Area Office erred in not considering that Appellant's contracts with Woodward resulted from arm's length bidding, and it erred in finding Messrs. Kinsella, Lemmenes and Osowski had been "key" employees of Woodward. Woodward also asserts that the Area Office improperly attempts to apply the outcome of the size determination retroactively to contracts other than the two that were the subject of the size determination, and states that most of the work under those two contracts has already been performed. II. DISCUSSION A. Threshold Questions Appellant filed the instant appeal within 30 days of receiving the size determination, and the appeal does not concern a pending procurement. Therefore, the appeal is timely. 13 C.F.R. Section 134.304(a)(2). As the prime contractor on the subject contracts, Woodward has a direct interest in the instant appeal. Therefore, the Administrative Judge GRANTS Woodward's motion to intervene. 13 C.F.R. Section 134.210(b). After reviewing the Appellant's new evidence, the Administrative Judge concludes that this evidence is relevant to the issues on appeal and does not unduly enlarge the issues because it deals with questions of Appellant's relationship to Woodward. Further, it clarifies the facts in the issues on appeal. Accordingly, the Administrative Judge GRANTS Appellant's motion for admission of new evidence. 13 C.F.R. Section 134.308(a)(2); Size Appeal of Bend Research, Inc., SBA No. SIZ-4369, at 5 (1999). B. Merits Appellant has the burden of proving, by a preponderance of the evidence, all elements of its appeal. Size Appeal of Rebmar, Inc., SBA No. SIZ-4173, at 4 (1996). Specifically, it must prove the Area Office size determination is based on a clear error of fact or law. See 13 C.F.R. Section 134.314; Size Appeal of Procedyne Corp., SBA No. SIZ-4354, at 5 (1999). It is undisputed that Appellant, by itself, is below the applicable size standard, and that Woodward exceeds the size standard. Thus, the only substantive issue raised in this appeal is whether the Area Office erroneously found Appellant affiliated with Woodward. 1. Contractual Relationships Rule The Area Office found the contractual relationships rule applicable in determining whether Appellant is affiliated with Woodward under the totality of the circumstances. Appellant asserts the Area Office erred in finding this rule applicable, specifically because: (1) the Area Office neglected to consider that Appellant's sales to Woodward resulted from an arm's length competitive bidding process, and not a continued contractual relationship; and (2) Appellant is not economically dependent on Woodward because Appellant is not a "captive" small business lacking an alternative market. The Administrative Judge finds Appellant's arguments lack merit, and concludes the Area Office correctly considered contractual relationships in its analysis of the totality of the circumstances. Contractual relationships existed as a separate basis for affiliation before 1996. Under this rule, affiliation generally arises where one firm is dependent upon another for contracts and business to such a degree that its economic viability would be in jeopardy without such contracts or business. 13 C.F.R. Section 121.401(k) (1995); Size Appeal of Defense Logistics Agency, SBA No. SIZ-3974, at 7 (1995). In eliminating contractual relationships as a separate basis for affiliation, the SBA noted it still would be "referenced as a factor that may cause affiliation under the totality of circumstances." 60 Fed. Reg. 57982, 57985 (Nov. 24, 1995) (preamble to proposed 13 C.F.R. Section 121.103). The contractual relationships rule centers on the challenged firm's dependence on the alleged affiliate for contracts and business. Thus, it may be found when the alleged affiliate's business accounts for a large part of a challenged firm's receipts. See Size Appeal of J & R Logging, SBA No. SIZ-4426, at 3-4 (2001). Although the absence of a normal arm's length relationship between the firms strengthens the case for applying the contractual relationships factor, see Defense Logistics Agency, SBA No. SIZ-3974, at 7, the presence of an arm's length relationship is not sufficient, by itself, to preclude a finding of contractual relationships. Thus, a firm may be found economically dependent on one customer for business, even absent evidence that their dealings are not at arm's length. See, e.g., J & R Logging. Therefore, the Administrative Judge must reject Appellant's argument that the contractual relationships rule is inapplicable here merely because its relationship with Woodward is at arm's length. Although the Administrative Judge agrees with Appellant that J & R Logging is an extreme case of contractual relationships, he notes that this Office also has found 62% and 70% of receipts sufficient to support conclusions of economic dependence and thus contractual relationships affiliation. Size Appeal of Supreme- Technology, Inc., SBA No. SIZ-4092 (1995); Size Appeal of Wireless Technology Equipment Co., Inc., SBA No. SIZ-4204 (1996). Here, Appellant does not dispute that its sales to Woodward accounted for 88% of Appellant's receipts in 1998, and 86% of Appellant's receipts in 1999 and 2000. These percentages are well above this Office's Supreme-Technology and Wireless precedents. Therefore, the Administrative Judge concludes the Area Office did not err in finding the contractual relationships rule applicable in its totality of the circumstances analysis. 2. Newly Organized Concern Rule The Area Office found the newly organized concern rule applicable in determining whether Appellant is affiliated with Woodward under the totality of the circumstances. Appellant asserts the Area Office erred in doing so. Specifically, Appellant asserts the Area Office erred: (1) in finding that Messrs. Kinsella, Lemmenes, and Osowski had been key employees of Woodward; (2) in characterizing the subcontracts Appellant performed for Woodward as having been "furnished" to Appellant by Woodward; and (3) in applying the newly organized concern rule because only two facts (Woodward's 26% ownership interest in Appellant and its ownership of 12% of Appellant's production equipment), are relevant and these are insufficient to support application of that rule. Alternatively, Appellant asserts, if the newly organized concern rule applies, the presumption of affiliation has been rebutted because there has been a clear fracture between the firms. The Administrative Judge finds each of Appellant's arguments lacks merit, and concludes the Area Office correctly considered Appellant's status as a newly organized concern in its totality of the circumstances analysis. The newly organized concern rule existed as a separate basis for affiliation before 1996. Under this rule, firms are affiliated when former officers, directors, principal stockholders, or key employees of one firm organize a new firm in the same or a related industry or field of operation, and serve as its officers, directors, principal stockholders or key employees, and the one concern is furnishing or will furnish the other concern with subcontracts, financial or technical assistance, bid or performance bond indemnification, or other facilities, whether for a fee or otherwise. 13 C.F.R. Section 121.401(j) (1995); Size Appeal of Field Support Services., Inc., SBA No. SIZ-4176, at 8 (1996). Under this Office's caselaw, affiliation under the newly organized concern is rebutted if the challenged firm can demonstrate a clear line of fracture between itself and the other firm. See Field Support Services, SBA No. SIZ-4176, at 8. The purpose of the newly organized concern rule is to prevent circumvention of the size standards by the creation of spin-off firms which appear to be small, independent firms, but are really affiliates or extensions of large firms, even absent evidence the new firm was formed to circumvent the regulations. Id. In 1996, the SBA eliminated the newly organized concern rule as a separate basis for affiliation, reasoning that its elimination as a separate affiliation ground "would not eliminate the underlying reasons for finding affiliation on other grounds." 60 Fed. Reg. 57982, 57985 (Nov. 24, 1995) (preamble to proposed 13 C.F.R. Section 121.103); see Size Appeal of American Guard Services, SBA No. SIZ-4397, at 5-6 (2000). The newly organized concern rule also remains useful, pursuant to 13 C.F.R. Section 121.103(a)(2), which requires SBA to consider "previous relationships with or ties to another concern." Size Appeal of Lyons Security Service, Inc., SBA No. SIZ-4264, at 6-7 (1997). a. Key Employees The Administrative Judge rejects Appellant's first argument, that the Area Office incorrectly found Messrs. Kinsella, Lemmenes, and Osowski to have been Woodward's former key employees. A key employee is an employee who, because of his/her position, "has a critical influence in or substantive control over the operations or management of the firm." 13 C.F.R. Section 121.405 (1995). [3] Under this Office's precedent, a manager who has substantial control over a portion of a large firm's operations and management is a key employee. Size Appeal of Wireless Technology Equipment Co., Inc., SBA No. SIZ-4204, at 6-7 (1996). Further, this Office has found a program manager responsible for the manufacture of one product was a key employee. Size Appeal of Plasmaco, Inc., SBA No. SIZ-3139, at 6 (1989). Here, Mr. Kinsella had been the general manager of the aircraft controls division and support facilities in Stevens Point; Mr. Lemmenes had been the accounting and production support manager for the hydraulics turbine control division; and Mr. Osowski had been manager of rotational manufacturing operations. Each held a managerial position at Woodward's Stevens Point operations, which was subsequently spun off as Appellant, despite the fact that, as Mr. Kinsella stated, he was under the direction and control of Woodward's corporate officers. Appellant's argument is meritless, since all corporate employees (except presidents and CEOs) work under the direction of corporate officers. Thus, under this Office's precedent, Messrs. Kinsella, Lemmenes, and Osowski all had been key employees of Woodward. Therefore, the Administrative Judge concludes the Area Office correctly found all of them had been key employees of Woodward prior to Appellant's establishment. b. Furnished Subcontracts The Administrative Judge rejects Appellant's second argument, that the Area Office incorrectly characterized the contracts as having been "furnished." The newly organized concern regulation itself used the term "furnish" in connection with subcontracts, financial or technical assistance, bonding indemnification, and other facilities. 13 C.F.R. Section 121.401(j) (1995). Appellant does not dispute that it has performed subcontracts for Woodward. Therefore, for the purpose of analyzing whether the newly organized concern applies, the Administrative Judge finds that Woodward has furnished those subcontracts to Appellant. c. Application of the Newly Organized Concern Rule and Clear Fracture The Administrative Judge rejects Appellant's third argument, that the Area Office incorrectly concluded that the newly organized concern rule applies in its totality of the circumstances analysis. The newly organized concern rule contains four elements: (1) former officers, directors, principal stockholders, or key employees of one firm organize a new firm; (2) these individuals serve as the new firm's officers, directors, principal stockholders or key employees; (3) the new firm is in the same or a related industry or field of operation; and (4) the one concern is furnishing or will furnish the other concern with subcontracts, financial or technical assistance, bid or performance bond indemnification, or other facilities, whether for a fee or otherwise. 13 C.F.R. Section 121.401(j) (1995). Here, Messrs. Kinsella, Lemmenes, and Osowski had been key employees of Woodward, as discussed, supra. Thus, the first element is satisfied. At Appellant's establishment, Messrs. Kinsella, Lemmenes, and Osowski became its members/owners, along with Woodward. Thus, the second element is satisfied. Although Messrs. Lemmenes and Osowski subsequently sold their ownership interest in Appellant and Mr. Osowski left the firm, their former ownership interests now reside in Mr. Kinsella, Woodward's other former key employee who became Appellant's other individual owner. Although Appellant has expanded its line of business to include manufacturing parts for additional markets, the fact remains that over 85% of its product consists of component parts for Woodward's aircraft business. Under this Office's precedent, where two firms produce a continuum of product, they are considered to be in the same or related industry. Size Appeal of Frontier Applied Sciences, Inc., SBA No. SIZ-4316, at 12-13 (1998) (citing Size Appeal of Agrigold Juice Products, SBA No. SIZ-4136, at 14 (1996)). Thus, Appellant and Woodward are in the same or related industry, and the third element is satisfied. Finally, since Appellant's establishment, Woodward has furnished Appellant with a continuous supply of subcontracts, amounting to over 86% of Appellant's total production over the past three years, and also has continuously provided Appellant with machinery and other equipment needed to perform those subcontracts, at no charge under the bailment agreement. Thus, the fourth element of the newly organized concern rule analysis is satisfied. [4] Therefore, the Administrative Judge concludes that the Area Office correctly found the newly organized concern rule applicable, and correctly considered Appellant's status as a newly organized concern in its totality of the circumstances analysis. The Administrative Judge also rejects Appellant's alternative argument that if the newly organized concern rule is applicable, the presumption created by that rule has been rebutted because there has been a clear fracture between the firms. In this regard, Appellant asserts that Messrs. Kinsella, Lemmenes, and Osowski ended their employment with Woodward when Appellant was organized, Woodward's financial guarantees have expired, Appellant no longer leases space from Woodward, and Woodward has expanded its business into new areas, including the manufacture of parts for other industries in which Woodward was never involved when it operated the Stevens Point facility. All of these assertions are meritless. First, even without Woodward employment for Messrs. Kinsella, Lemmenes, and Osowski, all elements of the newly organized concern rule were satisfied at Appellant's establishment. Therefore, employment there or not is irrelevant to the clear fracture analysis. Second, Woodward's financial guarantees did not expire until well after the issue of affiliation arose in connection with the two subject contracts, and after the Area Office issued its first size determination. Because SBA determines a firm's size as of the date of its self- certification, submitted with the firm's initial offer, the subsequent expiration of the guarantees is irrelevant here. 13 C.F.R. Section 121.404. Third, the fact Appellant no longer leases its space from Woodward is negated by the other, more important connections that persisted. Finally, the percentage of Appellant's sales accounted for by its expansion into new areas is less than 15%, a small fraction of its aircraft-related business with Woodward. Moreover, Woodward retains its 26% ownership interest in Appellant, a fact which clearly counters Appellant's argument that a clear fracture between the two firms has taken place. Therefore, although the Administrative Judge recognizes that Appellant and Woodward have reduced their connections to each other over the past several years, he concludes there has not yet been a clear line of fracture between the two firms as to negate Appellant's status as a newly organized concern and thus rebut the applicability of the newly organized concern rule. 3. Affiliation under the Totality of the Circumstances Two firms are affiliated for size determination purposes when one firm controls or has the power to control the other, or a third party controls or has the power to control both. 13 C.F.R. Section 121.103(a)(1). SBA considers factors such as ownership, management, previous relationships, and contractual relationships in determining whether two firms are affiliated. 13 C.F.R. Section 121.103(a)(2). Even absent a single factor sufficient by itself to constitute affiliation, where "connecting relationships between firms are so suggestive of dependence as to render them affiliated," SBA will find them affiliated under the totality of circumstances. Size Appeal of Inland Dredging Company, LLC, SBA No. SIZ-4350, at 6 (1999) (citing Size Appeal of Field Support Services, Inc., SBA No. SIZ-4176, at 10 (1996)). This Office and its predecessor, the Size Appeals Board, have long determined whether firms were affiliated under the totality of the circumstances rationale. See, e.g., Size Appeal of Diaz Contracting, Inc., SBA No. SIZ-1871 (1984); Size Appeal of Savini Construction Company, SBA No. SIZ-477 (1971). [5] Here, in addition to the "contractual relationships" and Appellant's status as a newly organized concern, there are other indicia of affiliation, or connecting relationships, both past and present, between the two firms that contribute to their affiliation under the totality of the circumstances. One of these indicia is ownership interest. A minority owner may have the power to control a challenged firm under the totality of the circumstances, notwithstanding the presence of a majority shareholder, where other indicia of affiliation are involved. Size Appeal of Pacific Treatment Analytical Services, SBA No. SIZ- 4073, at 4 (1995). Here, Woodward has had a 26% ownership interest in Appellant since its establishment in June 1995. Among these other indicia of affiliation this Office has considered, is a parent firm's establishment of a challenged firm as a spin-off. Such a relationship indicates a greater, rather than a lesser, connection between the two firms. Size Appeal of Frontier Applied Sciences, Inc., SBA No. SIZ-4316, at 12 (1998). Here, the parent firm, Woodward, clearly was an essential participant in Appellant's establishment because it contributed equipment and services, including what the MOU refers to as "essential financial guarantees necessary to establish" Appellant, in return for an ownership interest. Other indicia of affiliation are provided under the MOU, under which it is clear that the parties intended to and did establish many contractual connections between the two firms. These connections lasted for many years and shaped Appellant's development as primarily a regular supplier to Woodward. Under the MOU, Woodward bailed to Appellant over a million dollars' worth of machinery at no charge when used to produce Woodward parts. Although the bailment contract formally expired on June 1, 1998, the two firms have continued to operate under it. Thus, Appellant has had the free use of this equipment since 1995. Also under the MOU, Woodward promised Appellant 320,000 hours of work over its first three years, with actual number of hours based on Woodward's aircraft sales. Moreover, under the MOU, Woodward gave Appellant accelerated payment terms for its work for the first two years. The free use of the bailed equipment, the large amount of promised aircraft work, and the accelerated payment terms clearly factor into the resultant development of aerospace parts as its Appellant's dominant product line, and Woodward as its one major customer. Woodward also provided financial guarantees to Appellant. Through the MOU, Woodward forbade Appellant to make long-term commitments without its permission, limited Appellant's indebtedness, and required certain performance and asset standards to avoid having Woodward step in to manage Appellant. Woodward's guarantees, and the restrictions on Appellant, under the MOU, did not cease until Woodward's financial guarantee expired on March 29, 2001, that is, one month after the first size determination. Considering all of these indicia of affiliation, including Appellant's "contractual relationships" with Woodward, Appellant's status as a newly organized concern, Woodward's 26% ownership interest, and the connecting relationships created under the MOU, including the bailment of equipment at no charge, Woodward's promise of significant work, the accelerated payment terms, and Woodward's "essential" financial guarantees, the Administrative Judge concludes the Area Office correctly concluded Appellant is affiliated with Woodward under the totality of the circumstances. [6] 4. General Affiliation and Contract-Specific Affiliation Appellant and Intervenor assert the Area Office erred in applying its affiliation determination to all contracts in which Appellant is engaged, rather than just to Solicitation Nos. N68836-00-P-1527 and F34601-00-M-0719, the two contracts under protest. The Administrative Judge must reject this argument. A contract-specific affiliation, such as under the ostensible subcontractor rule, occurs where the affiliation is peculiar to a specific small business set aside procurement. See 13 C.F.R. Section 121.103(f)(4); Size Appeal of InfoTech Enterprises, Inc., SBA No. SIZ-4346 (1999). Analysis of a contract-specific issue focuses largely on how the contractor proposes to perform that procurement. Id. Because a finding of contract-specific affiliation is meaningless outside the context of that procurement, a finding of contract-specific affiliation does not require the challenged firm to become recertified as a small business before it may self-certify on another set-aside procurement. 13 C.F.R. Section 121.1010(b); see 13 C.F.R. Section 121.1009(g)(3). On the other hand, general affiliation between two firms occurs where the operative facts relate more to the firms' ownership, management, contractual relationships, or other factors, than to a specific procurement, although facts relating to a specific procurement also may be relevant. See 13 C.F.R. Section 121.103(a); Field Support Services, SBA No. 4176, at 10. A firm found other than small because of general affiliation with another firm may not self-certify as a small business again until either this Office has reversed that size determination or the SBA has recertified the challenged firm as small. 13 C.F.R. Section 121.1009(g)(3), (g)(1); see Size Appeal of Evans Cooperage Co., Inc., SBA No. SIZ-4023, at 4 (1995). Here, the issues concern the general relationship between Appellant and Woodward, including such points as Woodward's 26% ownership interest in Appellant, the MOU, and Appellant's historic level of sales to Woodward, facts which are not affected by the subject procurements. Thus, the affiliation between Appellant and Woodward is general, not contract-specific. The CO's designation of these procurements is merely a matter of compliance with the requirement that a size protest must pertain to a particular procurement to be acted upon by the Area Office. 13 C.F.R. Section 121.1007(a); Size Appeal of Encore Computer Corporation, SBA No. SIZ-4227, at 4 (1996). Therefore, the Administrative Judge concludes that the Area Office correctly determined, in footnote 6, that the affiliation between Appellant and Woodward is not contract-specific. Accordingly, the Administrative Judge concludes Appellant has failed to meet its burden of showing the Area Office size determination on remand is based on a clear error of fact or law. III. CONCLUSION For the above reasons, the Administrative Judge AFFIRMS the Area Office's size determination on remand and DENIES the instant appeal. This is the final decision of the Small Business Administration. See 13 C.F.R. Section 134.316(b). ________________________________________ __ CHRISTOPHER HOLLEMAN Administrative Judge _________________________ [1] Because this Decision is on remand, this Office has assigned this case a new docket number to distinguish it from the original Remand Order. [2] Appellant uses the phrase "a single source." Appeal Petition at 6. The Administrative Judge presumes Appellant means "a single market." [3] The size regulations first defined "key employee" in 1990. 52 Fed. Reg. 32870, 32872 (Aug. 31, 1987) (preamble to proposed Section 121.405). Although SBA omitted this definition in the 1996 regulatory revisions, it remains valid as a constituent part of the newly organized concern rule analysis. [4] Woodward also furnished a portion of the Stevens Point facility under a lease until December, 1998, and furnished financial assistance in the form of loan guarantees until March 2001. Thus, in the past, there were even more facts pertinent to this element. [5] Savini was a decision of the Size Appeals Board. This Office has adopted the body of cases decided by the Size Appeals Board as valid precedent, pursuant to the rule of stare decisis. See Size Appeal of Mota Construction Co., Inc., SBA No. SIZ-2061 (1984). [6] The Administrative Judge finds the fact that Appellant did not win 18 Woodward contracts over one year is irrelevant to the totality of the circumstances analysis. Posted: January, 2002