Erline M. Patrick, No. 3269 (March 21, 1990) Docket No. SIC-89-11-20-166 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. 20416 SIC APPEAL OF: ) ) Erline M. Patrick ) ) Appellant ) Docket No.SIC-89-11-20-166 ) Solicitation No. HSQB-89-001 ) Health Care Financing ) Administration ) Baltimore, Maryland ) DIGEST The Associate Administrator for Minority Small Business and Capital Ownership Development has no authority under the terms of 3 CFR 121 as they existed prior to their amendment effective January 1, 1990, or under 13 CFR 124.308(b), effective August 21, 989, to appeal a SIC code designation for a requirement that was accepted by SBA into the Section 8(a) program in June, 1989. DECISION March 21, 1990 PHILLIPS, Administrative Judge, Presiding: Jurisdiction This appeal is resolved in accordance with 13 CFR 124.308(b), 54 Fed. Req. 34692 (August 21, 1989) and 13 CFR 121, 48 Fed. Req. 55832, 49 Fed. Req. 5024 and the amendments thereto. Issues Whether sec. 124.308(b) of SBA's new regulations governing the Section 8(a) program for Minority Small Business and Capital Ownership Development or Part 121 of the regulations governing size matters in general is applicable to the requirement at issue in this proceeding. Facts On November 20, 1989, Erline M. Patrick, Associate Administrator for Minority Small Business and Capital Ownership Development (AA/MSB&COD) filed a Standard Industrial Classification (SIC) code appeal with this Office challenging the Contracting Officer's assignment of SIC code 7374, "Computer Processing and Data Preparation and Processing Services," with an accompanying size standard of $7 million average annual receipts, to HSQB-89 001, a requirement of the Health Care Financing Administration (HCFA) for a survey of 450 psychiatric hospitals to determine compliance with certain HCFA regulations governing the Medicare and Medicaid programs that was offered for potential award under SBA's Section 8(a) program for minority small businesses. Patrick contends that the proper SIC code to be assigned to the requirement is SIC code 8732, "Commercial Economic, Sociological, and Educational Research," to which a $3.5 million average annual receipts size standard applies. Should this size standard be applied, HCR would be ineligible for award of the requirement. Patrick's appeal has been filed pursuant to 124.308(b) and the accompanying, relevant regulations, which state, in pertinent part, as follows: 124.308 Procedures for obtaining and accepting procurements for the 8(a) program. * * * * * * * (b) Requirement identification. (1) A requirement for possible award may be identified by SBA, a particular Program Participant or the procuring agency itself. Once a requirement that appears suitable for the 8(a) program has been identified, SBA shall verify the appropriateness of the SIC code designation assigned to the requirement and request the procuring agency to offer the requirement to the 8(a) program. So long as the SIC code assigned to the requirement by the procuring agency contracting officer is reasonablet the SIC Code will be accepted. (2) If SBA and the procuring agency are unable to agree as to the proper SIC code designation for the requirement, SBA may refuse to accept the requirement for the 8(a) program, or appeal the contracting officer's determination to the head of the agency pursuant to sec. 124.320, or the AA/MSB&COD file [sic] SIC code appeal to [sic] SBA's Office of Hearings and Appeals. * * * * * * * (c) Offerinq letter. When a requirement is offered to the 8(a) program, the offering letter or notification from the procuring activity shall contain the following information. (1) A description of the work to be performed or items to be delivered and a copy of the statement of work, if available; * * * * * * * (3) The SIC code that applies to the principal nature of the acquisition; * * * * * * * (12) Identification of any particular 8(a) concern designated for consideration.... * * * * * * * (d) Acceptance of the reauirement. Upon receipt of the procuring agency's offer, SBA will determine whether it will accept the requirement for the 8(a) program. SBA's decision whether to accept the requirement will be transmitted to the procuring agency in writing within 15 working days of receipt of the offer, unless SBA requests, and the procuring agency grants, an extension. If SBA decides to accept a sole source requirement for the 8(a) program, it will advise the procuring agency in writing. * * * * * * * (e) Sole source award where procurinq aqency nominates a specific Drogram particinant. If the procuring agency identifies a particular 8(a) concern for a sole source award, SBA will determine whether an appropriate match exists. (1) Once a procurement is deemed suitable for acceptance as an 8(a) sole source contract, it will normally be accepted on behalf of the participant recommended by the procuring agency, provided that: (i) The procurement is consistent with the Participant's business plan; (ii) The Participant is determined by SBA to be a responsible contractor with respect to performance of the contract; and (iii) The award of the contract would not result in the Participant [sic] exceeding its approved 8(a) business support level or the business mix requirements established under Sec. 124.312. (2) If an appropriate match exists, SBA will send a letter accepting the offer in support of the business plan of the identified Participant to the procuring agency. This letter will advise the procuring agency whether SBA will participate in contract negotiations or whether SBA will authorize the procuring agency to negotiate directly with the identified Program Participant. A Program Participant selected by SBA to perform a noncompetitive 8(a) contract shall, when practicable, participate in any negotiation of the terms and conditions of such contract. Section 124.320(b) sets forth the following procedures for the Administrator's appeal to the procuring agency of a SIC code selected by a Contracting Officer: Sec. 124.320 Disputes and appeals. * * * * * * * (b) SBA Appeal of nonselection or terms and conditions. (1) The Administrator of SBA may appeal the following matters to the head of the procuring agency. * * * * * * * (ii) The terms and conditions of a particular contract to be awarded under the 8(a) program, including selection of an appropriate SIC code. 2) The SBA must notify the contracting officer of the Administrator's intent to appeal an adverse determination within 5 working days of the SBA's receipt of such determination. The SBA Administrator must file a written request to reconsider the adverse decision with the head of the procuring agency (appeal) within 15 working days of the SBA's notification of intent to appeal. (3) Upon receipt of the notice of intent to appeal, the procuring agency shall suspend further action regarding the procurement until the head of the procuring agency issues a written decision on the appeal, unless the head of the procuring agency makes a rwritten determination that urgent and compelling circumstances which significantly affect interests of the United States will not permit waiting for a reconsideration of the adverse decision. (4) If the Administrator's appeal is denied, the procuring agency head shall so not notify the SBA, specifying the reasons for the denial. This information shall be made a part of the contract file for the requirement. The record establishes the following series of communications between HCFA and SBA regarding this requirement. By letter dated June 9, 1989, HCFA offered this requirement to SBA's Section 8(a) Office of Program Development on behalf of HCR, a Section 8(a) firm located in Rochester, New York. This letter identified SIC code 7374 as the SIC code assigned to this requirement. By letter to HCFA, dated June 27, 1989, the contract negotiator for MSB&COD in the Syracuse, New York District Office, "authorized [HCFA] to conduct negotiations directly with...HCR for the subject requirement." In an earlier letter to HCFA, dated June 26, 1989, the Assistant District Director for MSB&COD in the Syracuse District Office stated that "SBA desires to enter into contract [sic]" acknowledging that "the request is in support of...HCR...a certified 8(a) contractor." In an affidavit attached to the SIC appeal, Debra B. Libow, a Contracting Officer assigned to the MSB&COD program in the New York Regional Office attests as follows: On September 5, 1989, I received the resultant $3.5 million contract from the Syracuse District Office. I declined to execute the contract at that time because I did not agree with the assigned SIC code (7374), and for other reasons. By memorandum dated September 25, 1989, and received by the AA/MSB&COD on September 27, 1989, Libow then requested the AA/MSB&COD to file a SIC code appeal with the Office of Hearings and Appeals pursuant to 124.308(b), contending that the requirement should be classified under SIC code 8732 or 8742. Libow's affidavit and the accompanying SBA brief filed in conjunction with Patrick's appeal set forth SBA's substantive arguments in support of its contention that the proper SIC code to be applied to this requirement is SIC code 8732. On December 12, 1989, the closing of the record was extended, upon motion of the Agency, until December 18, 1989, based on its representation that the Agency was engaged in extensive settlement negotiations with HCR concerning an action that HCR r had initiated in Federal court against the Agency. The motion was supported by HCR. On December 18, 1989, HCR filed a motion to dismiss the appeal or, in the alternative, for affirmance of the Contracting Officer's SIC code designation. HCR argues that the appeal should be dismissed because 124.308(b) is inconsistent with amendments to the Small Business Act effected by the Business Opportunity Development Reform Act of 1988, Pub. L. 100- 656, enacted on November 15, 1988, and with the Administrative Procedure Act; that, even if valid, 124.308(b), which became effective on August 21, 1989, cannot be applied retroactively to a requirement offered by HCFA and accepted by SBA for the Section 8(a) program two months prior to that date; that OHA lacks jurisdiction over this appeal; and that, assuming jurisdiction is proper, the appeal was untimely filed. Assuming that no procedural impediments exist to resolution of the appeal on the merits, HCR offers several arguments in support of the procuring agency's selection of SIC code 7374. On December 28, 1989, SBA filed a motion to reopen the proceeding in order to respond to HCR's filing, to which HCR filed a motion in opposition on January 3, 1990. On January 5, 1990, an order was issued extending the closing of the record until January 12, 1990, in order to enable the Agency to respond to "several seminal issues raised by HCR" concerning the validity of Sec. 124.308(b)(2) and its application in this proceeding, the timeliness of the SIC appeal, and the standard of review applicable to its resolution. Both SBA and HCR were also invited to address several other issues identified in the order. Both SBA and HCR filed responses on January 12, 1990. Since resolution of this case turns on the threshold issue of the effective date of sec. 124.308, only those portions of the responses that pertain to that issue will be discussed. HCR argues that Sec. 124.308 is inapplicable to this proceeding because it became effective on August 21, 1989, several months subsequent to "a decision made on June 9, 1989, more than two months before the new regulations became effective." HCR is, presumably, referring to the date HCFA offered the requirement for the Section 8(a) program. HCR argues that, previous to August 21, 1989, the AA/MSB&COD had no authority to appeal from a SIC code decision regarding a Section 8(a)-designated requirement since sec. 121.11, under whose exclusive jurisdiction SIC code appeals had previously been initiated, allegedly "covers only competitive bidding situations," not Section 8(a) procurements. SBA argues, in contrast, that the Associate Administrator's authority to file a SIC code appeal derives from two sources: sec.124.308(b) and her previously existing and continuing authority r under sec. 121.11(c), which states that "[a]ppeals from size determinations and product or service [SIC code] classifications may be filed...by...[t]he Small Business Administration Associate Administrator for the Small Business Administration program involved." With respect to the AA's authority under sec. 124.308(b), SBA argues as follows: ...[T]he need to take the appeal did not arise until September 27, 1989, the date the AA/MSB received a request by Agency Regional personnel to do so.... The June 9 date, to which HCR refers, is the date the Agency accepted the contract for the 8(a) program. HCR places great importance on this time period, and claims, in its Motion at page 3, that the Agency's Syracuse District Office "approved" SIC 7374 for the 1989 contract at a meeting on June 21. [1/] It is important to interject, at this point, that the only support HCR gives for that statement is the paragraph in the affidavit of Ms. Robinson, an employee of HCR, which states that as her "understanding" of what happened. Further, while notice that contract [sic] was accepted into the program could have been sent to HCFA by the Syracuse District Office, no one there had the authority to execute this particular contract (valued at approximately 3.5 million dollars) since it exceeded the contracting officer's warrant. Acceptance and execution are two entirely different procedures. Often, when the Agency accepts a contract, the Statement of Work will not be as clearly set out as it has to be when the contract is to be executed. This is clearly what happened in this case. Even if someone in the Syracuse District Office had "approved" the SIC when it was accepted, that was not a legally binding act, since it is implicit that there is a possibility of change in a Statement of Work during contract negotiations which begin after acceptance. Here, three Agency people could have approved the contract: a contracting officer who had the proper warrant authority, the Regional Administrator, or the AA/MSB. The one who chose to act on the contract for approval was the Contracting Officer in the New York Regional Office, who did have a proper warrant. After much discussion with the parties involved, she found she could not agree with the SIC assigned by HCFA, and she made this known to the AA/MSB in late September. Therefore, there is no validity to HCR's implied argument that the acceptance should include the exact terms as the contract as finally approved, or that June is the operative time for final determination on the terms of the contract. Discussion We find that the AA/MSB&COD is without authority to appeal the SIC code and accompanying size standard assigned to the requirement at issue in this case and conclude that her appeal must be dismissed, in consequence. No such authority to appeal lies under the regulations in Part 121 as they existed prior to their amendment, effective January 1, 1990. 2/ SBA's citation to sec. 121.11(c), identifying "Who May Appeal" a size or SIC code determination, is unavailing since it ignores the fact that our jurisdiction to decide SIC code appeals, by whomever brought, is limited by sec. 121.11(a) to [c]lassifications by contracting officers of the Standard Industrial Classification (SIC) Code and/or the Small Business Administration (SBA) size standard applicable to a product or service for the purpose of Government procurements and sales made pursuant to secs. 121.5 and 121.6 of this part. The types of procurements referenced in the regulation involve competitive bidding and negotiating and have long been distinguished by the language of the regulations and by case precedent interpreting those regulations from contracts assigned to, and performed under, the Section 8(a) program. 3/ Nor is the present appeal authorized under sec. 124.308(b). The preambular text published with the regulatory revisions to Part 124 explicitly states that, "[e]xcept for 124.311 and 124.312, this regulation is effective on August 21, 1989." In applying this effective date, we must determine the operative event to which it must be referenced. HCR argues that this should be the date the requirement is offered for inclusion in the Section 8(a) program, i.e., June 9, 1989. SBA argues that it is the date the need to take the appeal" arose, i.e., "September 27, 1989, the date the AA/MSB received a request by Agency Regional personnel to do so." Review of the provisions of sec. 124.308 and the regulatory scheme imbedded therein demonstrates that the operative event to which the August 21, 1989 date must be referenced is SBA's acceptance of the requirement for award under the Section 8(a) program. With slight variations, both sec. 124.308(b) and sec. 124.308(c) and (d) contemplate that the procuring agency will identify the applicable SIC code in its offering letter directed to SBA and that SBA will either accept or refuse the requirement based on several factors, including the SIC code designated. The determinative nature of SBA's acceptance with respect to the SIC code designated is evident not only from the wording of the regulation itself but with reference to the integrity of the negotiating process at issue, because the size standard for the SIC code designated determines whether a Section 8(a) firm is eligible to perform the contract. 13 CFR 121.4(g)(2). 4/Its determinative nature is the more evident where, as here, the requirement is a sole source requirement for, necessarily inherent in such an acceptance, is the acknowledgement that the designated firm meets the size standard, as required by sec. 121.4(g)(2). If equity and reasonable process are to prevail, it is essential, then, that the SIC code be finalized at the time of acceptance. To suggest otherwise, would be to jeopardize administrative regularity and erode that working relationship with the procuring agencies that is so necessary to the success of the Section 8(a) program. 5/ While SBA concedes in its brief that it accepted the requirement for the Section 8(a) program prior to August 21, 1989, it attempts to argue in the first instance that acceptance does not constitute approval of the SIC code and that, if it is so construed, such approval "was not a legally binding act, since it is implicit that there is a possibility of change in a Statement of Work during contract negotiations which begin after acceptance." This is beside the point. While it is undoubted that changes may occur in a statement of work, it is important to note that sec. 124.308(e)(2), which states as follows, implicitly r recognizes this while requiring SBA nevertheless to indicate its acceptance of the designated Section 8(a) firm (and, by implication, the SIC code under which its contract eligibility must be determined) prior to their commencement: (e) Sole source award where procurinq aqency nominates a specific proqram participant. If the procuring agency identifies a particular 8(a) concern for a sole source award, SBA will determine whether an appropriate match exists. * * * * * * * (2) If an appropriate match exists, SBA will send a letter accepting the offer in support of the business plan of the identified Participant to the procuring agency. This letter will advise the procuring agency whether SBA will participate in contract negotiations or whether SBA will authorize the procuring agency to negotiate directly with the identified Program Participant. A Program Participant selected by SBA to perform a noncompetitive 8(a) contract shall, when practicable, participate in any negotiation of the terms and conditions of such contract. Consequently, the possibility of changes in the statement of work cannot be invoked as either a conceptual or a practical basis for rejecting the date of acceptance as that to which the effective date of the regulations must be referenced. In so holding we are not, as SBA suggests, barring amendment of the "exact terms" of the contract during the negotiation process. SBA also attempts to evade the consequences of the acceptance letters issued to HCFA by the Syracuse District Office in June by arguing that neither the signatories nor any other SBA personnel in the Syracuse District Office "had the authority to execute this particular contract...since it exceeded the [MSB&COD] Contracting Officer's warrant." SBA concedes that "notice that contract [sic] was accepted into the program could have been sent r to HCFA by the Syracuse District Office." It also acknowledges that "[a]cceptance and execution are two entirely different procedures." We find, based on the wording of the regulations, that the distinction between acceptance and execution of the contract, however valid in other contexts, is without legal significance in the matter before us. Because the provisions of 124.308(b) do not apply to the requirement at issue in this proceeding and there existed no other basis for the appeal in Part 121, we must dismiss the SIC code appeal filed by the AA/MSB&COD. Conclusion We conclude that the AA/MSB&COD lacked authority to institute the present SIC code appeal, and it is, accordingly, DISMISSED. __________________________________ Jane E. Phillips (Presiding) Administrative Judge __________________________________ Joseph K. Riotto (Concurring) Administrative Judge __________________________________ Elwin N. White (concurring) Administrative Judge ______________ 1/ The text of HCR's comments in this regard reads as follows: In the offering letter to SBA dated June 9, 1989, HCFA selected SIC code 7374, "Computer Processing and Data Preparation and Processing Services," for the 1989 contract. See Exhibit C to Robinson Aff. This was the same designation that was chosen for the 1988 version of the contract. This SIC Code carries a size standard of $7.0 million. Robinson Aff. s 9. As a result of a meeting between SBA, HCFA and HCR on June 21, 1989, SBA's Syracuse District Office approved SIC Code 7374 for the 1989 contract. Id. 2/ Section 121.1102(c) of the new size regulations, which became effective on January 1, 1990, states as follows regarding the AA's authority to file a SIC code appeal with OHA concerning a requirement reserved for the Section 8(a) program: (c) The determination of the appropriate SIC code designation for the product or service being procured under a section 8(a) contract shall initially be made by the procuring agency contracting officer. Such designation shall be accepted by SBA unless the AA/MSB&COD elects to appeal to SBA's Office of Hearings and Appeals in the manner provided in 121.1701 through 121.1722 (See sec. 124.308(b)) 3/ See SIC Appeal of Systematic Management Services, No. 3105 (1989). 4/ Section 121.4(g)(2) states as follows: In order to continue to participate in the section 8(a) program once a concern is admitted to the program, the concern must certify to SBA that it is a small business for the purpose of performing each individual contract which it is awarded. SBA, in turn, will verify such certification. 5/ We note, in this regard, that the effective date provisions of the new regulations for Part 121 provide as follows with respect to Section 8(a) contracts: The provisions of this regulation will also apply to any non-competitive requirement offered for the 8(a) program which has been accepted by SBA subsequent to the effective date of these regulations. [Emphasis added.]