Ute Indian Machine and Manufacturing, Inc., No. MSB-451 (February 7, 1994) Docket No. MSBE-92-4-3-4 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, DC IN THE MATTER OF: ) ) Docket No. MSBE-92-4-3-4 Ute Indian Machine and ) Manufacturing, Inc. ) APPEARANCES For the Petitioner: For the Agency: Sandra Hansen, Esq. John T. Spotila, Esq. Robert S. Thompson, Esq. General Counsel Whiteing & Thompson Amy Mertz Brown, Esq. 1136 Pearl Street Agency Representative Boulder, CO 80304 Small Business Administration 409 Third Street, SW Washington, DC 20416 DIGEST The regulations published at 54 Federal Register 34692, et seq., on August 21, 1989 and codified at 13 CFR Part 124 must be used to evaluate all applications for participation in the Agency's 8(a) Program pending as of August 21, 1989 or filed thereafter. 13 CFR 124.1(a)(2)(i). An applicant for participation in the 8(a) Program has the burden of proving, by a preponderance of the evidence, all elements of its eligibility. The management and daily business operations of a tribally-owned concern must be controlled by individual members of an economi- cally disadvantaged tribe, who do not manage and control more than one other tribally-owned 8(a) Program Participant. The individual members of the eligible tribe who control the management and daily business operations of the tribally-owned concern must be found to possess the requisite management or technical capabilities as determined by the Agency. 13 CFR 124.112(c)(4). Although the management and daily business operations of a tribally-owned concern may be delegated by the individual members of the eligible tribe to a committee, team, board or individual who is controlled by such individual members of the tribe, the individual members of the tribe who control the concern must possess the requisite management or technical capabilities as determined by the Agency. 13 CFR 124.112(c)(4). The individual members of the eligible tribe who control the management and daily business operations of the tribally-owned concern may be found to possess the requisite management or technical capabilities as determined by the Agency if they (or any one or more of them) possess either managerial or technical expertise and competency directly related to the primary industry in which the applicant concern is seeking Section 8(a) Program certification; they need not possess both technical and mana- gerial competency and expertise. 13 CFR 124.104(a)(1). Although individuals who are not members of the tribe may be in volved in the management or operation of the firm, no nonmember may control the firm or have the power to control the firm. 13 CFR 124.112(c)(4). While the ability of a nonmember of the tribe to supply technical expertise necessary for the operation of a business may - but does not, in and of itself - afford that individual the power to control the firm, evidence of such ability, coupled with an apparent lack of necessary expertise on the part of the members of the tribe, may well combine to afford a rational basis for a conclusion adverse to the applicant firm. The regulation codified at 13 CFR 124.112(c)(4), as applied here, does not conflict with Congressional intent to have the Small Business Administration, through the 8(a) Program, improve busi- ness opportunities for small businesses owned by Indian tribes. A determination by the AA/MSB&COD that individual members of the eligible tribe do not control the Petitioner will not be reversed as arbitrary, capricious or contrary to law if there is a reason able factual basis or supporting rationale for that conclusion in the record that was before the AA/MSB&COD at the time he made the determination; if it is clear from the determination itself that all of the evidence adduced by the Petitioner was considered by the AA/MSB&COD in making his determination; and if there was no error in considering the evidence adduced or in interpreting or applying the law and regulations to the facts. Section 8(a)(9) of the Act authorizes the Administrative Law Judge to decide questions concerning whether the AA/MSB&COD's determinations are contrary to the law; consistency of an Agency regulation with the underlying Act constitutes such a question. FINAL DECISION February 7, 1994 USHER, Administrative Law Judge: Jurisdiction Authority for these proceedings is found in Section 409 of the Business Opportunity Development Reform Act of 1988, Public Law 100-656 (Section 8(a)(9) of the Small Business Act of 1958, as amended; 15 U.S.C. 637(a)(9)), hereinafter referred to as "the Act," and in the regulations codified at 13 CFR Parts 124 and 134, which are referred to hereinafter by section numbers only. Issues Is there a reasonable factual basis and an evidential rationale for the conclusion of the AA/MSB&COD 1/ in the record that was before him at the time he made his determination on remand; and is it clear from the record and from the determination itself that the AA/MSB&COD did not err in interpreting the facts or the law or in applying the law to the facts found in the record? Facts and Procedural History The Petitioner filed its application for admission to the Agency's Section 8(a) Program with the Agency's Salt Lake City, Utah District Office on July 13, 1990. On February 2, 1991, the Associate Administrator denied the Petitioner's application for several specified reasons. Additional information was submitted by the Petitioner with a request for reconsideration on March 13, 1991, and, on the basis of the additional information, the Asso- ciate Administrator again denied the Petitioner's application in a letter dated February 18, 1992, because it was determined that the members of the Ute Tribe of the Uinta and Ouray Reservation do not control the Board of Directors, and, according to the AA/MSB&COD, "current 8(a) program eligibility criteria require that a tribally-owned concern's application for 8(a) participa- tion be declined if it is determined that tribal members do not control and manage the daily business operations of the concern, or if control or power to control the concern resides in nondis- advantaged individuals." On April 3, 1992, Counsel for the Petitioner appealed to me to review the reconsidered determination of the Associate Adminis- trator, arguing: [The Agency's] denial of 8(a) program admission to [P]etitioner...which was based upon a negative finding of control pursuant to 13 C.F.R. 124.206...is arbi- trary, capricious and contrary to law. Regulations of the Small Business Administration, upon which [the Agency's] denial of 8(a) program admission to [P]etitioner...was based, are arbitrary, capricious and contrary to law. Following my review of the matter, I issued a Decision and Remand Order, dated November 27, 1992, which reads, in pertinent part: Thus, I am asked in this appeal to decide: 1) whether the regulations promulgated by the Agency, as they apply to Tribally-owned concerns, are arbitrary, capri- cious, or contrary to the Act; and 2) considering the evidence of record, whether the AA/MSB&COD acted arbi- trarily, capriciously or contrary to the law when she made her adverse determination about the Petitioner's eligibility on February 18, 1992. * * * * * * * As the adjudicator selected to preside over this pro- ceeding, I am charged by 8(a)(9) of the Act to decide whether the Agency's proposed denial of admission of the Petitioner to the Section 8(a) Program is "arbi- trary, capricious or contrary to law." I cannot agree with the contention of the Agency's Counsel that I have no authority to rule on the question of whether the regulations are contrary to the provisions of the Act. [Footnote and quotation omitted here.] [2/] * * * * * * * The assertions made by the Petitioner's Counsel con- cerning the Tribe's inability to comply with the restrictive requirements of the regulation found at 124.112(c)(4)(i), as well as the obvious intent of the Act, suggest that a conflict exists between the Act and the regulation promulgated under its authority, at least as it applies to this Petitioner. If, in fact, the Petitioner's assertions regarding its inability to comply with the provisions of 124.112(c)(4)(i) are proven, a conflict exists, and the regulation as pro- mulgated must be found to be inapplicable to the facts obtaining here, and an adverse determination based on it must be found to be contrary to the law. However, except for the general assertions made by the Petitioner's Counsel that "few, if any, small business concerns owned by Indian tribes will qualify for 8(a) participation" if the requirements of 124.112(c)(4)(i) are adhered to, and that "an Indian from an economical ly disadvantaged tribe, with the education and exper- ience to manage and control the day-to-day operations of a manufacturing concern...is the rarest of people," there is little information, and no evidence, in the record concerning the allegation of the Petitioner's Counsel that the regulation found at 124.112(c)(4)(i) does not comport with the purposes of the Act and the intent of the Congress in its enactment. [Footnote omitted.] If, therefore, facts can be adduced to support the con- clusion that the requirements of the disputed section of the regulations impose an undue or insurmountable burden upon Indian tribes that seek to avail themselves of the benefits of the Act, and on this Tribe in par- ticular, there ought to be a forum for the evaluation of such evidential facts and a decisionmaker to whom those facts can be presented. * * * * * * * A careful review of the record in these proceedings indicates with clarity that the Agency has not con- sidered all of the facts with regard to the Peti- tioner's eligibility. Further, and of greater significance, it is apparent that the Associate Admin- istrator applied a regulatory standard that may con- flict with the statute when applied to the facts obtaining here. * * * * * * * It is not evident that the Agency here has considered all relevant factors concerning the Petitioner's eligibility for admission to the Section 8(a) Program and correctly applied the law; it is not possible to ascertain whether the determination is arbitrary, capricious or contrary to the law; therefore, the matter is REMANDED TO THE ASSOCIATE ADMINISTRATOR for further consideration and a determination not incon- sistent with this Order. The Petitioner shall be allowed 30 days from the date of this Order to submit any additional evidence and argument necessary for a proper determination of the question of the applicability of the regulation found at 124.211(c)(4)(i) and for a final determination of the Petitioner's eligibility under the provisions of the Act and the regulations as correctly interpreted and applied. After several requests for extensions of time to comply with my November 27, 1992 Remand Order, the Associate Administrator issued his Remand Determination on April 15, 1993, affirming the conclusions reached in the reconsideration determination of February 18, 1992. Although the AA/MSB&COD's Determination on Remand was submitted to me on April 16, 1993 (and docketed on April 19, 1993), it was not accompanied by the administrative record upon which it was based, i.e., the additional submissions by the Petitioner as mandated by my Remand Order. In spite of a specific request in April or May, 1993 that the full and complete administrative record be forwarded for my review, it was not received in this Office until December 8, 1993. 3/ In reviewing the record submitted on December 8, 1993, I find that the Petitioner's Counsel had adduced argument and evidence to the Agency on February 26, 1993 to substantiate its position that "the regulation found at 13 CFR 124.112(c)(4)(i) conflicts with Congress' intent to have the Small Business Administration, through the 8(a) program, improve business opportunities for small businesses owned by Indian tribes." Her argument, set forth in response to the invitation in my Decision and Remand Order, is, in pertinent part, as follows: Indians comprise less than one-half of one percent of the population of the United States. By its own regu- lations, SBA acknowledges that Indian people have been discriminated against in education and employment opportunities because of their status as Indians. Never theless, SBA requires that, before an Indian-owned firm can qualify for 8(a) participation, the tribe must locate the rarest of people - an Indian, from an econom- ically disadvantaged tribe, who has somehow acquired an education and experience to manage and control the day- to-day operations of a small manufacturing firm, who is willing to work for reduced wages in a remote rural area. Indications of how rare such a person [is] are found in applications that the Ute Indian Tribe has received to two recent position vacancies. To fill the position of general manager of Ute Indian Machine and Manufactur- ing, the Tribe contracted with Defense Consultants International, a Salt Lake [City] executive recruitment firm. The firm concluded that the three most qualified applicants were Sam Cooper, B.J. Pitchford and Raymond Connolly. None of those applicants was Indian. Indeed, there is no indication that any Indian, much less a qualified Indian, applied for the position. Certainly, no Indian was referred to the Tribe for an interview by Defense Consultants International. More recently, the Tribe attempted to fill the position of manager of its wood products program. While the required qualifications were minimal, i.e., requesting that applicants have a high school diploma, or its equivalent, and "some management and supervision exper- ience," no Indian with any business management exper- ience applied for the position. The selected applicant ...has a bachelor's degree with a major in biology, and experience as a juvenile counselor, probation officer and security supervisor. Clearly, he would not be qualified to manage a small manufacturing firm - or, perhaps, even a wood products enterprise, under SBA's strict requirements. The lack of qualified candidates is not attributable to there being a dearth of available employees on the Uinta and Ouray Reservations. A 1989 study by the Bureau of Indian Affairs indicates that unemployment on the Reservation stands at 55.6 percent. While the unem- ployment figures are for 1989, there has been no eco- nomic climate in the Uinta Basin (that part of north eastern Utah in which the Reservation is located) which would indicate that the figures have changed. The lack of qualified Indian applicants is attributable to there being a paucity of Indians who have pursued education and/or employment in business and business- related fields. Records of the Ute Indian Tribe Higher Education Department reflect that six members of the Ute Indian Tribe have received post-high-school train- ing or education in business, either from an accredited college or vocational school, in the past 33 years. Thus, the pool of potential applicants who might satis- fy SBA's qualification requirements, which never have been fully disclosed to the petitioners, and who might be available to manage a tribally-owned manufacturing enterprise on the Reservation is s1x. Given this hard data, it is no surprise that the Tribe was compelled to hire a non-Indian to serve as general manager of Ute Indian Machine and Manufacturing. The economic and educational situation existing at the Ute Indian Tribe and on the Uinta and Ouray Reservation are not uncharacteristic of Indian country, in general. In the past, Indians have been encouraged to pursue careers in education, the law, and, more recently, medi- cine. As reflected by the data from the Ute Tribe's higher education department, few Indians have pursued careers in business. By requiring the day-to-day operations of an Indian-owned concern to be managed by an Indian, the SBA has virtually precluded any Indian- owned business from qualifying for 8(a) certification. Such a result is contrary to Congress' intent that the 8(a) program be operated in such a manner as to provide assistance to Indian-owned businesses. Because the SBA regulation requiring an Indian-owned concern to be managed by an Indian is totally unreal- istic and conflicts with Congressional intent, and be cause UIM&M's application for 8(a) certification was denied for the reason that the company's day-to-day operations were not managed by an Indian, the SBA should reconsider its decision and award UIM&M 8(a) certification. [Emphasis in original. Citations to authorities, regulations and evidence omitted.] In his Determination on Remand, 4/ the Associate Administrator maintains that "Section 124.112(c)(4)(i) of the regulations accords with the Small Business Act and does not impose an insurmountable burden on tribally-owned concerns; [t]he assertions of UIMM have no merit...." He argues further that [S]ection 124.112(c)(4)(i), which requires that the management and daily business operations of a tribally- owned concern be controlled by an individual member or members of an economically disadvantaged Indian tribe, reflects exactly the statutory language created by Congress in the Small Business Act. As it pertains to Indian-owned concerns, the Small Business Act states-- (4)(A) For purposes of [section 8(a)], the term "socially and economically disadvantaged small business concern" means any small business concern which meets the requirements of subparagraph B and -- (i) which is at least 51 per centum unconditionally owned by-- * * * * * * * (II) an economically disadvantaged Indian tribe (or a wholly owned business entity of such tribe) * * * * * * * (ii) in the case of any publicly owned business at least 51 per centum of the stock of which is unconditionally owned [by]-- * * * * * * * (II) an economically disadvantaged Indian tribe (or a wholly owned business entity of such tribe) * * * * * * * (B) A small business concern meets the requirements of this subparagraph if the management and daily business operations of such small business concern are controlled by one or more-- * * * * * * * (ii) members of an economically disad vantaged Indian tribe described in subparagraph (A)(i)(II) or subparagraph (A)(ii)(II). 15 U.S.C. 637(a)(4) (emphasis added). Clearly, by statute, the management and daily business operations of a tribally-owned 8(a) concern must be controlled by one or more members of an economically disadvantaged Indian tribe. SBA's regulation at Section 124.112(c)(4)(i) simply reiterates this requirement. [Emphasis in original.] UIMM also challenges SBA's regulatory requirement that individual members of an economically disadvantaged Indian tribe who manage a tribally-owned concern, "must be found to possess the requisite management or techni- cal capabilities as determined by SBA." SBA must ensure that only tribally-owned concerns controlled by individuals who are members of economically disadvan- taged Indian tribes enter into the 8(a) program. SBA has a legitimate interest in preventing "fronts," con- cerns that do not meet the statutory requirements and intent of the Small Business Act, from receiving the benefits of the 8(a) program. Thus SBA must assure that the individuals who are said to control the firm in fact have the ability to do so, in order to ensure that control is not in fact exercised by individuals other than those whom the Act mandates must control the firm. UIMM asserts that it was impossible to find such an individual among the Ute Indian Tribe and, therefore, UIMM was compelled to hire a non-Indian as its General Manager. SBA's regulations do not require that an Indian of the same tribe which owns the 8(a) concern control the management and daily operations of the concern. Thus, UIMM could have searched for a member of any economi- cally disadvantaged Indian tribe to perform the job of General Manager at UIMM. [Emphasis in original.] As of March 10, 1993, there were 17 tribally-owned concerns participating in the 8(a) program. All of these concerns had to meet the requirements of SBA's regulations, including the requirements of [Section] 124.112(c)(4)(i), in order to gain admission to the 8(a) program. Clearly, SBA's regulations do not pose an insurmountable burden upon tribally-owned concerns. * * * * * * * We must make our remand [determination] based on the information in UIMM's application file at the time of the reconsideration [determination]. [5/] Based on UIMM's corporate records and other documents provided to SBA as of February 18, 1992, we concluded that the management and daily business operations of UIMM are not controlled by and [sic] individual member or mem- bers of an economically disadvantaged Indian tribe who were found to possess the requisite management and technical capabilities. Our conclusion was based on our determinations that Mr. Cooper, a non-Indian, controls the management and daily operations of UIMM and that the members of the Board of Directors of UIMM, a majority of which is composed of members of the Ute Tribe, do not possess the requisite managerial or technical manufacturing expertise necessary to control the management and daily operations of UIMM. Based on further review of the record, and for the additional reasons discussed above, we reaffirm the conclusions stated in our reconsideration [determination] and again decline UIMM's application for the 8(a) program. Discussion I am convinced by the argument adduced by the AA/MSB&COD in his Determination on Remand that the regulation found at Section 124.112(c)(4)(i) comports with the provisions of the Act and obvious Congressional intent. Further, I am satisfied that the AA/MSB&COD has properly applied the law and the regulations to the facts found in the record that was assembled as the result of the Petitioner's submission of evidence, that is the record as it appeared when the reconsidered determination was made on February 18, 1992, with the addition of the evidence and argument which was adduced by the Petitioner's Counsel in compliance with my Remand Order. Thus, when properly considered in light of the law and the regulations, the record does support the Associate Administrator's conclusion that the Petitioner has not adduced preponderant evidence to support its application and thus has not carried its burden of proving its eligibility for admission to the Agency's Section 8(a) Program. Citizens to Preserve Overton Park. Inc. v. Volpe, 401 U.S. 402, 28 L.Ed.2d 136, 91 S.Ct. 814 (1971), instructs me that to make a finding that the Associate Administrator has not acted arbitrar- ily or capriciously or abused his discretion, I must consider whether his determination was based on a consideration of all of the relevant factors and whether there has been an error of judgment on his part. See Burlington Truck Lines, Inc. v. United States, 371 U.S. 156, 9 L.Ed.2d 207, 83 S.Ct. 239 (1962); Bowman Transportation, Inc. v. Arkansas-Best Freight System, Inc., 419 U.S. 281, 42 L.Ed.2d 447, 95 S.Ct. 438 (1974); United States Lines, Inc. v. Federal Maritime Commission, 584 F.2d 519 (D.C. Cir. 1978). It is now apparent that the Associate Administrator has con- sidered all of the relevant data; there was no clear error of judgment. Motor Vehicle Manufacturers Association of the United States, Inc. v. State Farm Mutual Automobile Insurance Company, 463 U.S. 29, 77 L.Ed.2d 443, 103 S.Ct. 2856 (1983). Conclusion The Agency's April 15, 1993 Determination on Remand, finding the Petitioner, Ute Indian Machine and Manufacturing, Inc., ineligi- ble for admission to the Section 8(a) Program, is reasonably based upon the record that was before the AA/MSB&COD at the time he made that determination, and it is not contrary to the law or the regulations; thus, I find that it IS NOT ARBITRARY, CAPRICIOUS OR CONTRARY TO LAW. This constitutes the final decision of the Small Business Administration, and it is binding upon the Petitioner, the Agency and those within the employ of the Agency. See Sections 124.210(i) and 134.32(a)(4) of the regulations. _____________________________ Benjamin G. Usher Administrative Law Judge 1/ The Associate Administrator for the Agency's Office of Minority Small Business and Capital Ownership Development may be referred to herein as the "Associate Administrator" or the "AA/MSB&COD," and either term may refer to the Acting Associate Administrator, where applicable. 2/ See Carozza v. United States Steel Corporation, 727 F.2d 74 (3 Cir. 1984). 3/ When it seemed that the record was unobtainable from the office of the AA/MSB&COD, an unanswered request was directed to the Petitioner's Counsel in an effort to obtain a copy of the material she had submitted to the AA/MSB&COD. 4/ Nine pages of the AA/MSB&COD's 26-page Determination on Remand were devoted to a refutation of my assertion of authority to rule on the question of whether Section 124.112(c)(4)(i) of the regulations as applied here is contrary to the provisions of the Act. The lengthy argument of the AA/MSB&COD is not at all persuasive; for the reasons set forth in the Decision and Remand Order issued in this matter on November 27, 1992 (and repeated in part above), I remain convinced that I have authority to decide questions relating to whether the Associate Administrator's determinations are contrary to the law and that consistency of an Agency regulation with the underlying statutory scheme set forth in the Act constitutes such a question. See Matter of Ute Indian Machine and Manufacturing. Inc., No. 419 (November 27, 1992) at pages 17 and 18. The reasoning of the court in Carozza, cited above, clearly applies here. Not unlike the statutory language in 33 U.S.C. 921(b)(3), the Act being considered here empowers me to hear and determine appeals, which raise substantial questions of law and fact, taken by parties in interest from determinations of the AA/MSB&COD with respect to entitlement to the benefits of Section 8(a) of the Act. 5/ This statement is in error; the remand determination should be based on the record as the AA/MSB&COD found it following the submission of the evidence and argument allowed by the Remand Order. See the discussion below.