E. Huttenbauer & Son, Inc., No. 3957 (October 13, 1994) Docket No. SIZ-94-7-1-87 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. SIZE APPEAL OF: ) ) E. Huttenbauer & Son, Inc. ) ) Appellant ) ) Re: Vanee Foods Company ) Docket No. SIZ-94-7-1-87 ) Solicitation No. ) DLA13H-92-R-9074 ) Defense Logistics Agency ) Defense Personnel Support ) Center ) Philadelphia, Pennsylvania ) DIGEST In determining whether a challenged firm is dominant in its field of operations, the relevant field is the Standard Industrial Classification (SIC) code assigned to the solicitation, absent proof that a constellation of products or services within that SIC code has sufficient economic impact to be regarded as a separate field of operation. Mere allegations, without probative evidence, are insufficient basis to show that a significant and sufficient economic impact exists which constitutes barriers to entry into a certain market. In conducting its size investigation, a Regional Office cannot reveal to the protesting party confidential and proprietary information that it had gathered during the course of its size investigation. Failure to disclose such material to the protesting party is not ex parte communications within the meaning of SBA regulations and Federal law. DECISION October 13, 1994 BLAZSIK, Administrative Judge: Jurisdiction This appeal is decided under the Small Business Act of 1958, 15 U.S.C. 632 et seq., and the regulations codified at 13 CFR Part 121. Issues Whether the challenged party was properly found not dominant in its field of operation by the Regional Office. Whether the Regional Office engaged in improper ex parte communications in failing to disclose to the protesting party confidential and proprietary information it gathered during the course of the size investigation. Facts On July 13, 1993, Defense Logistics Agency, Defense Personnel Support Center, Philadelphia, Pennsylvania, issued this negotiated solicitation for "Beef Tray Pack Rations" and classified it under Standard Industrial Classification (SIC) code 2032 (Canned Specialties), having a 1,000-employee size standard. The solicitation was totally set aside for small businesses and best and final offers were received on April 4, 1994. On April 22, 1994, Vanee Foods Company (Vanee) was awarded the contract. On April 29, 1994, E. Huttenbauer & Sons Inc. (Huttenbauer or Appellant) timely filed a protest against the award of contract to Vanee.1 The protest alleged that Vanee improperly certified itself as a small business since it is dominant in the field of operation in which it is bidding on this contract i.e., tray pack entrees. Thereafter, the Contracting Officer forwarded the protest to the Chicago Regional Office of the Small Business Administration (SBA) for a size determination. The Regional Office file contains Vanee's SBA Form 355, Articles of Incorporation, bylaws, and legal argument from its Counsel. Vanee's SBA Form 355 shows that, combined with its acknowledged affiliate, Joseph's Food Products, Vanee has under 1,000 employees. The Regional Office issued its determination on June 17, 1994. With respect to the issue of dominance, the Regional Office cited long-standing case precedent that "the relevant field of operations is the SIC code assigned to the procurement, absent proof that a constellation of products or services within the SIC code has sufficient economic impact to be regarded as a separate field of operation."2 It noted that Huttenbauer had produced no evidence supporting a finding that tray pack entrees constitute a "constellation of products or services," and observed that tray pack entrees are a single product and therefore cannot constitute an industry. The Regional Office also noted that Huttenbauer's assertion that the market for tray pack entrees has a significant economic impact was based on self serving assertions since the only evidence presented to support that assertion was a statement that "the market has averaged $50 million over the last three years and that this proves that sufficient economic impact exists." Finally, the Regional Office concluded that Huttenbauer had failed to establish the existence of any barriers to entry in the tray pack entree market, noting that "its assertion that industry giants such as Heinz and Campbells are precluded from entering this field" was not supported by any evidence. Based upon these factual findings, the Regional Office determined that Vanee is not dominant in its field of operations and is a small business for the instant solicitation. Huttenbauer received the Regional Office determination on June 23, 1994, and timely filed an appeal from that determination within five business days from receipt of the determination, by letter postmarked June 30, 1994. See 13 CFR 121.1705(a)(2). In its appeal, Huttenbauer requests that the Panel's finding in Size Appeal of E. Huttenbauer & Son. Inc., id. be reversed, and argues that Vanee's dominance should be assessed in terms of the tray pack entree market industry rather than SIC code 2032, since [i]t has received 88% of all tray pack entree awards, by units and by dollar amount, since 1990 -- $137 million for Vanee versus $18 million for Huttenbauer.... Concerning tray pack entrees, Vanee has achieved a monopolistic position in its industry on a national basis in terms of sales, amounting to dominance in its field of operation. Referencing Section 3(a) of the Small Business Act, 3 Huttenbauer argues that the dominance and the size criteria are separate, that the regulatory provision at 13 CFR 121.406 does not mention SIC codes, that Section 52.219-1 of the Federal Acquisition Regulations provides that a "small business concern" must be "independently owned and operated [and] not dominant in the field of operation in which it is bidding on government contracts" and that equating the term "field of operation" with the concept of SIC codes "is tantamount to reading this provision [dominance] right out of the Small Business Act." Huttenbauer argues that under SBA case precedent, SBA will consider dominance in a field of operation smaller than a SIC code when that sub-industry has "sufficient barriers to entry" and "sufficient economic impact," citing Size Appeal of Marcraft. Inc., No. 1754 (1983) and argues that here there are barriers to entry, as well as economic impact and that, accordingly, tray pack entrees qualify as a separate field of operations and Vanee is dominant in that field. To support its argument, Huttenbauer submitted an affidavit from Lawrence M. Ausubel, an economist, who testifies as follows: By a "barrier to entry," an economist means anything which deters potential entrants from entering an industry. One relevant factor which, generally, may constitute a barrier to entry is if the "minimum efficient scale" is a significant fraction of the total size of the industry's capacity or demand. If that is the case, then it is only profitable for another firm to enter the market if it can somehow quickly capture a large market share; small-scale entry is unprofitable. It is standard to define the minimum efficient scale of operation as the lowest rate of production at which a firm can attain a level of average cost within a small percentage of the lowest achievable average cost. The letter [from P.J. Carr of the Defense Logistics Agency] has determined the "minimum sustaining rate" for Huttenbauer is 648,000 cans per year. Mr. Huttenbauer has told me that the minimum sustaining rate for Vanee was determined to be 780,000 cans per year. It would appear that the Defense Logistics Agency's minimum sustaining rate is the best available figure to use for the economists's notion of minimum efficient scale..... The letter [from P.J. Carr] also states..."that the forecasted FY 94 peacetime requirements and future projections are 1.1 million tray cans per year...." A second relevant factor which, generally, may constitute a barrier to entry is the presence of "sunk costs" associated with entry. A sunk cost is defined as a fixed cost which an entrant cannot recover if it later chooses to leave the industry.... Using the 1.1 million can per year forecast, the tray pack industry is approximately a $20 million per year business. If the entry barriers of scale economies and sunk costs were not present, and if the existing firms are earning profit, one would expect that there would be potential entrants seeking to enter the industry.... Huttenbauer also asserts that the industry giants such as Heinz, Campbells, and Green Giant have not bid on tray pack entree solicitations because of the substantial barriers to entry. Finally, Huttenbauer asserts that in its protest it specifically requested copies of all submissions made in response to the protest, but none was received. Notwithstanding this, the Regional Office's decision is replete with references to "facts" from identified sources, presumably Vanee. Thus, Huttenbauer, concludes, the Regional Office considered ex parte communica- tions, without providing Huttenbauer an opportunity to respond. Huttenbauer argues that such communications are prohibited by SBA regulations at 13 CFR 121.1715, the Administrative Procedure Act, and the due process clause of the United States constitution and, accordingly, the Regional Office erred in not releasing such information to Huttenbauer. On July 19, 1994, Vanee filed a timely reply to the appeal. Vanee asserts that Huttenbauer's appeal, which is virtually duplicative of its appeal in Size Appeal of E. Huttenbauer & Son. Inc., id, has no merit and has presented no new argument that has not been considered and disposed of by the Regional Office nor has it shown any error in the Regional Office's determination. Vanee asserts that the only new material presented in the appeal, the affidavit of Lawrence Ausubel, is merely based on facts presented to him by Huttenbauer and its Counsel. Further, Vanee asserts that Huttenbauer has presented no probative evidence, either at the Regional Office level or on appeal, to establish a sub-industry for tray pack entrees. Finally, Vanee rejects Huttenbauer's allegation that the Regional Office relied upon ex parte communications in reaching its result and failed to provide Huttenbauer with information submitted by Vanee. Vanee argues that the Regional Office was justified in withholding such information inasmuch as most of it consisted of confidential material protected by SBA regulations and the Freedom of Information Act. Discussion There is no merit to Appellant's argument that the field of operation under which Vanee's dominance should be assessed is the field in which Vanee is bidding on government contracts (tray pack entrees) and not the entire SIC code. In this regard, Appellant requests that Size Apseal of E. Huttenbauer & Son. Inc. id. be reversed and if not, then tray pack entrees should be recognized as a "sub-industry." This argument was disposed of in the above-cited case where it was held that the field of operation cannot be so narrowly defined as to confuse success with monopolistic power. Id., at 12. This holding was supported by the legislative history of Section 3(a) of the Small Business Act. The report of the House Banking and Currency Committee (H.R. 494, 83rd Congress, 1st Session, May 28, 1953, at page 10 stated in pertinent part: ...With respect to nondominance in its field, the Committee does not intend to exclude business enterprises which are actually small business enterprises that manufacture an article or commodity which is not manufactured by any other business. The mere fact that a small business makes a particular product or item and is-dominant in its field with respect to the particular product is not intended to disqualify it from the benefits of this Act if it is actually a small business enterprise. In this connection, Appellant's attempts to show proof of economic impact sufficient to qualify tray pack entrees as a separate field of operation, by attaching another affidavit from an economist as purported proof of economic impact and barriers to entry and asserting that industry giants such as Campbells and Heinz are barred from participating in the tray pack entree market, is insufficient and self-serving and has no probative value. Appellant, thus, has produced insufficient evidence to support its speculations regarding economic impact and barriers to entry or that Campbells' and Heinz's absence from this market is other than voluntary. Finally, Appellant's argument that the Regional Office was engaged in ex parte communications with Vanee and failed to disclose information obtained from Vanee to Appellant is baseless. Pursuant to 13 CFR 121.1606, a Regional Office is charged with making a size determination after a request for a formal size determination or a protest has been made. The basis for its determination is based upon inquiries made to the challenged firm, certain confidential information that the challenged firm must submit (e.g., SBA Form 355) and other information requested by the Regional Office (such as Federal income tax records, finance statements, etc.). All of these are confidential or proprietary and cannot be disclosed to the protesting party (here, the Appellant) pursuant to SBA and Federal regulations. Further, the regulation at 13 CFR 121.1715 prohibiting ex parte communications cited by Appellant, pertains to prohibition against consulting a Judge on a question of law or fact at issue in an appeal. Conclusion The Regional Office determination is AFFIRMED, and the appeal is DENIED. This constitutes the final decision of the Small Business Administration. See 13 CFR 121.1720(a), (b), and (c). _____________________________ Gloria E. Blazsik Administrative Judge _________________________ 1 The protest was filed within five business days from date of award as provided in 13 CFR 121.1603(a)(2). 2 Size Appeal of E. Huttenbauer & Son. Inc., No. 3865 (1993). 3 Section 3(a) provides as follows, in pertinent part: For purposes of this Act, a small-business concern...shall be deemed to be one which is independently owned and operated and which is not dominant in its field of operation. In addition to the foregoing criteria the Administrator, in making a detailed definition may use these criteria among other: Numbers of employees and dollar volume of business....