Diamond Quality Construction Enterprises, Inc., No. MSB-523 (September 1, 1995) Docket No. MSBE-95-3-30-7 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. _______________________________ ) IN THE MATTER OF: ) ) Docket No. MSBE-95-3-30-7 Diamond Quality Construction ) Enterprises, Inc. ) _______________________________) APPEARANCES For the Petitioner: For the Agency: James C. Stearns, Esq. John T. Spotila, Esq. Porter, Wright, Morris & Arthur General Counsel 1233 20th Street, NW Robinson S. Nunn, Esq. Suite 400 Agency Representative Washington, DC 20036 Small Business Administration 409 3rd Street, SW Washington, DC 20416 DIGEST In 8(a) cases, discovery is permitted only if an administrative law judge first determines that the applicant has "made a substantial showing, based upon credible evidence, and not mere allegation, the Agency determination in question may have resulted from bad faith or improper behavior." 13 C.F.R. Section 124.210(h)(3)(i). A motion for discovery based upon information and belief, not credible evidence, does not meet the standard for discovery established by 13 C.F.R. Section 124.210(h)(3)(i). An unsubstantiated claim that the SBA systematically excludes individuals with disabilities cannot establish a prima facie case of arbitrary and capricious action. An applicant for the 8(a) program, who is claiming social disadvantage based upon a physical handicap, must present clear and convincing evidence of having suffered discrimination by others because of his handicap. A claim that it is more difficult to compete as a handicapped business does not reach a clear and convincing standard without additional evidence supporting personal discrimination against the applicant. Doe v. Heatherly, 671 F.Supp. 1081, 1083 (D.Md. 1987). FINAL DECISION September 1, 1995 ARKOW, Administrative Law Judge: Petitioner Diamond Quality Construction Enterprises, Inc. (Diamond) challenges a decision by the Respondent U.S. Small Business Administration (SBA) denying it entry into the 8(a) program[1] because the individual who owns and controls the firm, Mr. David Reitz, failed to demonstrate he is socially disadvantaged due to physical handicap discrimination. Diamond claims the SBA's conclusion is arbitrary, capricious, and contrary to law. Diamond also requests an order allowing discovery of SBA's treatment of other 8(a) applications in cases involving physical handicap. For the reasons set forth below, I disagree with Diamond's claim and deny both its appeal and request for discovery. Jurisdiction Jurisdiction on appeal is properly based on 15 U.S.C. Section 637(a)(9) and 13 C.F.R. Parts 124 and 134. The appeal was timely filed under 13 C.F.R. Sections 124.210(b) and 134.11(a)(7). Issues Whether Diamond's request for an order allowing discovery, under 13 C.F.R. Section 124.210(h)(3), of the SBA's treatment of applications for admission into the 8(a) program by individuals with physical disabilities, should be granted. Whether Diamond, which claims to be a socially and economically disadvantaged firm by reason of the physical handicap of its President, Mr. David Reitz, established its eligibility for admission into the 8(a) program by clear and convincing evidence. 13 C.F.R. Section 124.105(c). Whether the action of the SBA denying Diamond entry into the 8(a) program is arbitrary, capricious, or contrary to law. 15 U.S.C. Section 637(a)(9)(C), 13 C.F.R. Section 124.210(h)(1). Facts On August 31, 1994, Diamond applied for admission into the 8(a) program. The basis for the application is that Diamond is owned and controlled by Mr. David Reitz, a socially and economically disadvantaged physically handicapped individual. The SBA denied the application on November 29, 1994. On January 12, 1995 Diamond requested the SBA reconsider its denial of the application. The SBA denied the reconsideration request on February 21, 1995. Diamond appealed the denial of the reconsideration request on March 30, 1995. The SBA denied the reconsideration request because Diamond did not present sufficient evidence to establish Mr. Reitz was socially and economically disadvantaged because of his physical handicap. Specifically, in rejecting a claim Mr. Reitz was denied educational opportunities at continuing education courses, the SBA reasoned, merely because current training methodologies failed to consider Mr. Reitz' particular handicap, does not require a conclusion that such failure was the result of personal discrimination against Mr. Reitz due to his physical handicap. Diamond, which was established in 1985 by Mr. Reitz, specializes in the roofing of commercial and historical buildings. A number of roofing material manufacturers license Diamond to install their products. Licensing is necessary, although not legally required, to be successful in the roofing business because a license validates a manufacturer's warranty. Diamond is a family operated business. Its organizational chart shows Mr. David Reitz as the President and acting marketing chief. Mrs. Michele Reitz, David's wife, is in charge of company finances. Mr. Edward Reitz, David's brother is operations manager, project manager, and in charge of safety, quality control, and company work crews. Mr. Reitz was in a serious accident in July of 1988. His truck was forced off the highway, overturned, and caught fire. As a result, his right hand, fingers, and forearm were sheared off. Both his left arm and the remaining parts of his right arm were severely burned and remain badly scarred. These injuries severely limit his ability to engage in the roofing business. He has difficultly maintaining his balance, adjusting to hot temperatures, and using tools commonly used in the roofing business. Further, Mr. Reitz must wear long sleeve shirts for both health and cosmetic reasons. Mr. Reitz' physical limitations hampers his ability to participate in social and athletic activities which are a valuable source of potential clients. Mr. Reitz' bids for contracts must account for his disability because he works more slowly at jobs than his competitors and must hire another worker to assist him. This reduces Diamond's profits. It also takes him a longer time to train new workers because it is difficult or impossible to demonstrate required building techniques with only one arm. To be competitive in the commercial roofing industry, a roofer must have a manufacturer's license. In order to be licensed, a roofer must attend a manufacturer's training course which covers such topics as how to install the roofing materials. In virtually identical affidavits, Mr. Eric Haberstumpf and Mr. Edward Reitz state they attended training courses with Mr. David Reitz and these courses did not provide for students with Mr. Reitz' handicap. They stated the techniques taught at these classes cannot generally be accomplished with one arm. Mr. Reitz' particular handicap was not taken into account in these classes. This, they both opine, makes it difficult for Mr. David Reitz to transfer these newly learned roofing techniques to his crews. In 1991, the Philadelphia Naval Shipyard awarded Diamond a contract to re-roof one of its buildings. Diamond claimed it had a difficult time performing the contract because of what it believes was physical handicap discrimination by government workers. The job superintendent frequently reported job condi- tions to crew members instead of Mr. Reitz and the contracting officer frequently refused to cooperate with Mr. Reitz' requests for information and "lost" change orders Diamond submitted to the government, which made performance of the contract more difficult. Government workers subjected Mr. Reitz to comments such as, "I want you to finish this project, get off this base and never see your face again." Mr. Reitz was threatened with adverse actions regarding bonding, removal from the solicitor's list, as well as a general bar from future government contracts. After completion of the job, Diamond received a letter from a Supervisory Contract Specialist at the shipyard which commended Diamond for its performance. The letter noted that Diamond's "cooperation on change orders and innovative ideas on problem solving has been exemplary" and that Diamond's "performance has truly been OUTSTANDING!" Letter from A. Randazzo to Diamond of January 5, 1995. In 1994, Diamond received a quote for a performance bond at a rate of 2.5%. It covered a single job of up to $250,000 and multiple jobs totaling no more than $500,000 from an "A" rated company. In 1992, a competitor of Diamond, Tri-State Design Construction Co., Inc., sent an estimate of a job to a prospec- tive customer. The estimate quotes a charge of 1.5% for a bond. Position of the Parties Diamond contends that the SBA systematically excludes individuals with disabilities, which creates a prima facie case of arbitrary and capricious action. It bases this argument on its information and belief, because Diamond claims it does not have access to the pertinent files of the SBA. It believes access to the pertinent files would support its argument. It asserts that it is only aware of two cases where a disabled person was admitted into the 8(a) program. In this regard, Diamond requests discovery of the SBA's files in an attempt to validate that belief. Diamond also argues that, regardless of whether the SBA systematically excludes the handicapped from the 8(a) program, it acted arbitrarily and capriciously in denying Diamond's application because Diamond established the social and economic disadvantage of Mr. Reitz. In its answer, the SBA asserts that Diamond failed to establish its eligibility for the 8(a) program by clear and convincing evidence under current regulations dealing with the eligibility of handicapped individuals, which have been upheld by the courts. The answer further asserts, the SBA's conclusion that Diamond did not present clear and convincing evidence to support its claim of eligibility was reasonable.[2] Discussion 1. Discovery motion. Diamond seeks to discover information relevant to whether the SBA systematically discriminated against those with physical handicaps in order to establish what it believes would be a prima facie case of arbitrary and capricious action. In 8(a) cases, discovery is permitted only if an administrative law judge first determines that the applicant has "made a substantial showing, based upon credible evidence, and not mere allegation, the Agency determination in question may have resulted from bad faith or improper behavior." 13 C.F.R. Section 124.210(h)(3)(i). Diamond bases its motion on its information and belief, not credible evidence. The fact that Diamond states it is aware of two cases where individuals with disabilities have been admitted into the 8(a) program and is also aware of several others who were denied entry into the 8(a) program are mere allegations and do not meet the required standard for discovery. Decisions in other cases generally would not be relevant in deciding this matter because each case must be decided on its own merits. Further, an unsubstantiated claim that the SBA systematically excludes individuals with disabilities cannot establish a prima facie case of arbitrary and capricious action. Accordingly, the discovery motion is without merit because Diamond has not made a substantial showing, based upon credible evidence, and not a mere allegation, that it is entitled to discovery.[3] 2. Eligibility for admission into the 8(a) program. To be accepted into the 8(a) program upon a claim of physical handicap discrimination, Diamond must establish, by clear and convincing evidence, that Mr. Reitz, who controls and manages Diamond, is socially disadvantaged. 13 C.F.R. Section 124.105(c). To establish social disadvantage, Diamond must demonstrate that Mr. Reitz personally suffered social disadvantage in American society, rather than merely establishing that handicapped persons, as a group, could be considered socially disadvantaged. Further, the social disadvantage "must be chronic and substantial, not fleeting or insignificant." Id. at Section 124.105(c)(1)(ii)-(iv). The clear and convincing standard of proof for establishing claims of social disadvantage by persons who are not presumed to be socially disadvantaged under 13 C.F.R. Section 124.105(b)(1) has been repeatedly upheld. See e.g., Central States Construction Co. v. Small Business Administration, 770 F.Supp. 1447 (D.Kan. 1991) and Fagan v. U.S. Small Business Administration, 783 F.Supp. 1455 (D.D.C. 1992), aff'd, 19 F.3d 684 (1992). Those who claim social disadvantage by reason of physical handicap are not presumed to be socially disadvantaged. Compare 13 C.F.R. Section 124.105(b)(1) with 13 C.F.R. Section 124.105(c)(1). Clear and convincing evidence is an evidentiary standard that is more stringent than the preponderance of evidence standard and less stringent than proof beyond a reasonable doubt. This characterization, however, does not define it. A generally accepted definition of clear and convincing is evidence which produces, in the mind of the trier of fact, an abiding conviction that the truth of the factual contentions is highly probable. Colorado v. New Mexico, 467 U.S. 310 (1984). It does not mean evidence which unequivocally proves a point or dispels all reasonable doubt. Yet it is greater than a preponderance of the evidence which requires proof that the existence of a fact is more probable than its nonexistence. United States v. Mastrangelo, 561 F.Supp. 1114, 1119-20 (E.D.N.Y. 1983). In addition, Diamond must show a nexus between a claim of social disadvantage and the negative impact it has had on Mr. Reitz' entry or advancement in the business world. This nexus may be shown by any relevant evidence, but the SBA regulations particularly emphasize evidence of discrimination in education, employment, and business history when it is relevant. Id. at Section 124.105(c)(1)(v). The 8(a) applicant, however, need not prove all of these emphasized criteria. Matter of Informed Decision Services, Inc., SBA No. 518 (1995). Diamond believes it has established its eligibility through three instances of alleged discrimination: The denial of educational opportunities, interference in the performance of a government contract, and financial discrimination against its business. These beliefs are not supported in the record. Mr. Reitz' inability to accomplish tasks as well, if at all, as those not suffering similar limitations, is an unfortunate result of the nature of his handicap rather than discrimination by others. Mr. Reitz' disability hampers him from doing many of the things other people in the business world do to help their businesses, such as promoting his business and performing job related tasks efficiently, putting him at a competitive disadvantage. This does not amount to discrimination or prejudice by others against him because of his handicap.[4] The SBA and the federal courts have consistently held that the inequality suffered "in competitive position is an unfortunate result of the nature of the handicap itself, rather than of society's attitude toward it." Doe v. Heatherly, 671 F.Supp. 1081, 1083 (D.Md. 1987) as quoted in Matter of MJB, Inc., SBA No. 444 (1993). See also, Matter of PC Partners, Inc., SBA No. 424 (1993). Accordingly, evidence of the extent of Mr. Reitz' physical handicap alone cannot be used to support Diamond's claim that Mr. Reitz suffers discrimination because of his handicap. Having made this distinction, I will examine the alleged instances of discrimination in their proper context. The fact that the curriculum in continuing education courses does not take into account individuals with Mr. Reitz' disability does not necessarily mean he was denied educational opportunities because of his disability. There is no evidence in the record that Mr. Reitz was ever denied permission to attend a continuing education course or that he was ever denied a manufacturer's license because of his disability. In sum, Mr. Reitz had educational opportunities and took advantage of them. Merely because the courses did not address his particular disability does not establish the type of discrimination contemplated by 13 C.F.R. Section 124.105. Diamond's claim that it paid more for bonding than one of its competitors because of Mr. Reitz' disability is not supported by the evidence and is nothing more than speculation and conjecture. The evidence shows disparate rates given two years apart to different firms without any showing of the extent of the coverage or how the rates were computed. It is, therefore, meaningless to establish that the reason for the difference is discrimination due to Mr. Reitz' disability. Without a showing of the reasons for the rate difference, such as an increase in rates to Diamond after Mr. Reitz' accident or that Diamond and the other firm were identical in the risk factors considered in establishing the rates except for Mr. Reitz' condition, the SBA cannot be faulted for concluding Diamond has not established this to be a discriminatory act. Diamond's conclusion, that the conduct of a number of government employees at the Philadelphia Naval Shipyard interfered with Diamond's performance of a government contract and was motivated by Mr. Reitz' handicap, is nothing more than mere supposition. Nowhere in the record is there any evidence that those employees' actions can, in any way, be attributed to an animus towards Mr. Reitz because of his handicap. For example, there is no evidence that these individuals referred to Mr. Reitz in a derogatory manner by name-calling, joked about his condition, or alleged poor performance on the job because of his handicap. Furthermore, nowhere in the record is there evidence that the actions of the government employees were improper, unjusti- fied, or actually interfered with the performance of the contract, rather than legitimate requirements in the administra- tion of the contract. On the other hand, the Supervisory Contract Specialist's conclusion that the job was done in an outstanding manner, even with change orders and other problems with the job, belies the claim of discrimination. It was, therefore, reasonable for the SBA to conclude that this was not an established incident of discrimination. Even if the SBA was incorrect in its conclusion that this was not discrimination of the type envisioned by its regulations, this one incident alone, on one job, cannot be used by itself to establish eligibility for the 8(a) program. Diamond must establish that the discrimination was chronic and substantial, which requires proof of more than one isolated incident. 13 C.F.R. Section 124.105(c)(iv). It failed to produce such proof. The determination of the SBA, denying Diamond's 8(a) application, must be sustained unless a review of the written administrative record demonstrates the SBA acted arbitrarily, capriciously, or contrary to law in concluding Mr. Reitz was not socially disadvantaged. 13 C.F.R. Section 124.210(h)(1). Such a review is narrow and does not permit a reviewing authority to substitute its own judgment for that of the SBA. The review should examine whether the SBA considered all of the facts presented and correctly applied the applicable laws and regulations to those facts in deciding whether or not to approve Diamond's 8(a) application. Then, the review must examine if there was a clear error of judgment by the SBA in making the determination before a finding of arbitrary and capricious can be made. A clear error of judgment can be found if the SBA: Fails to properly apply the law and regulations to the facts of the case; fails to consider an important aspect of the problem; offers an explanation for its determination that runs contrary to the evidence; or provides an implausible explanation that is more than a difference in the views of the SBA and the administrative law judge. In sum, the SBA must articulate a satisfactory explanation for its action, including a rational connection between the facts found and its determination. Motor Vehicle Mfrs. Ass'n of the United States, Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). The SBA appears to have considered all of the facts presented by Diamond and correctly applied the laws and regulations applicable to these proceedings to those facts prior to reaching its decision denying eligibility. The SBA acted reasonably and had a rational basis for reaching its decision that Diamond has not established, by clear and convincing evidence, that it is eligible for admission into the 8(a) program. Accordingly, the SBA's decision cannot be considered arbitrary, capricious, or contrary to law. Conclusions Diamond failed to establish it is entitled to discovery under 13 C.F.R. Section 124.210(h)(3). Accordingly, the request for an order allowing discovery of SBA's treatment of applications for admission into the 8(a) program by individuals with physical disabilities IS DENIED. Respondent's February 21, 1995 determination denying 8(a) program entry to Petitioner, Diamond Quality Construction Enterprises, Inc. is NOT ARBITRARY, CAPRICIOUS, OR CONTRARY TO LAW. See 15 U.S.C. Section 637(a)(9)(C), 13 C.F.R. Section 124.210(h)(1). This is the final decision of the Small Business Administration and is binding upon all parties, including those within the employ of the Agency. 15 U.S.C. Section 637(a)(9)(D), 13 C.F.R. Sections 124.210(i), 134.32(a)(4).[5] ______________________________ Richard S. Arkow Administrative Law Judge ____________________ [1] Small Business Act of 1958, Section 8(a), 15 U.S.C. Section 637(a) and 13 C.F.R. Parts 124 and 134. "The 8(a) Program is intended to be used exclusively for business development purposes to help small businesses owned and controlled by socially and economically disadvantaged individuals. . . ." 13 C.F.R. Section 124.1(a). [2] The answer fails to specifically address the instances of discrimination which, Diamond argues, establish its eligibility for admission into the 8(a) program. [3] Diamond could have requested the information they are seeking to discover under the Freedom of Information Act (5 U.S.C. Section 552) or could have examined records of appeal proceedings and decisions at the SBA Office of Hearings and Appeals. 13 C.F.R. Section 134.29. Decisions are also available in the Westlaw and Lexis legal research databases. [4] See Facts supra pp. 3-4. [5] When this appeal was filed on March 30, 1995, no Administra- tive Law Judge was assigned to the SBA. I was assigned to the case on May 2, 1995. The matter was not decided within 90 days of the filing of the petition because Diamond requested and received an extension of time to file an amended petition. The amended petition was filed May 30, 1995. On May 15, the SBA was granted an extension of time to file its answer, which was timely filed June 29, 1995. See 15 U.S.C. Section 637(a)(9)(F); 13 C.F.R. Section 124.210(j).