The Emmes Corporation, No. 3730 (January 29, 1993). Docket No. SIZ-92-11-20-138 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. SIZE APPEAL OF: ) ) The Emmes Corporation ) ) Appellant ) ) Re: Statistics and Epidemiology ) Docket No. SIZ-92-11-20-138 Research Corporation ) ) Solicitation No. ) NHLBI-HC-92-12 ) Department of Health and ) Human Services ) Bethesda, Maryland ) DIGEST Where certain faculty of a university control and operate a firm that provides consulting services similar or identical to those provided by the university, the firm and the university will be found to be engaged in the same field of operations, and where such faculty members are responsible for managerial decisions regarding the university's participation in contracts for such services and perform services under those contracts as well as under contracts awarded to their own firm, the firm and the university will be found to be affiliated based upon interlocking management and common employees as well as that identity of interests which necessarily derives from the employment relation ship between the firm's principals and the university. DECISION January 29, 1993 PHILLIPS, Administrative Judge, Presiding: Jurisdiction This appeal is decided under the Small Business Act of 1958, 15 U.S.C. 631 et seq., and the regulations codified at 13 CFR Part 121. Issue Whether Statistics and Epidemiology Research Corporation (SERC) is affiliated with the University of Washington (University). Facts On June 4, 1992, the National Institutes of Health issued Solicitation No. NHLBI-HC-92-12 entitled "Peripheral Arterial Disease: A Pilot Study to Evaluate Treatment and Preventive Strategies for Atherosclerotic Cardiovascular Disease -- Clinical Coordinating Center" under Standard Industrial Classification code 7379, "Computer Related Services, Not Elsewhere Classified," to which a $12.5 million average annual receipts size standard applies. The solicitation requires that the contractor establish a center in which to coordinate the study of treatment and prevention strategies and assist in the study's design and execution and in the gathering of data and the preparing of reports. Proposals were due on July 21, 1992. Upon notification on October 22, 1992, that SERC had been selected as the apparent successful offeror, The Emmes Corporation (TEC) filed a timely size protest on October 27, 1992, alleging as follows: ...[T]he officers and directors of SERC control SERC. In addition, those officers and directors, who are employed by the University, are controlled by the University. Furthermore, the work to be performed by SERC is identical to the work performed by the University, and when such work is performed by the University it is done through the employees who also own and manage SERC. Under these circumstances, the University effectively controls SERC, and the University and SERC have an identity of interest. Put another way, we believe SERC is acting as a surrogate for the University, bidding on this set-aside procurement because the University itself would be ineligible to do so; were this not a set-aside procurement, we believe the University, acting through the same employees who own, manage, and are acting for SERC in this procurement, would have submitted a bid in its own name. In a footnote to this argument, TEC distinguished this situation from that addressed in Size Appeal of University Medical Associates, No. 3561 (1991), in which we declined to find affiliation between doctors engaged in a medical practice conducted in leased university facilities and the university or its medical school in which one of these doctors, who owned the controlling share of the practice, served as a department head and in which the remaining doctors held faculty positions under his supervision. TEC argued that, unlike the instant case, the work to be performed by the university employees [in Medical Associates] as owners and managers of a private company was different from the work they performed for the University. In contrast, SERC is performing the identical work that its owners and managers perform as employees of the University. This distinction merely emphasizes the identity of interest between SERC and the University. The protest was referred to the Seattle Regional Office, which issued a determination on November 10, 1992, finding that no affiliation exists between SERC and the University. The Regional Office based this conclusion on the following evidence and analysis. SERC was incorporated in 1979 and has identified the following as its present officers and directors, all but one of whom (Nasco/Egnew) own 2.5 percent each of SERC's stock: Paula Diehr Pres/Director Richard A. Kronmal Vice President Elaine Nasco-Egnew Secretary Alfred P. Hallstrom Treasurer Janet R. Daling Director Thomas R. Fleming Director James L. Gale Director Maureen Henderson Director Donald C. Martin Director Nayak Lincoln Polissar Director Although the Regional Office did not acknowledge this fact in its determination, the record reveals that all but Henderson and Polissar 1/ are also employed as professors in the University's Departments of Epidemiology or of Biostatistics in the School of Public Health and Community Medicine. Henderson is employed by the University's Fred Hutchinson Cancer Research Center (Research Center), and Polissar is described as "self employed." The Regional Office further noted that the rest of SERC's stock is divided equally among the remaining 31 stockholders and that this "diversity of ownership" vests control of the corporation in its officers and directors, citing 13 CFR 121.401(c)(3) in support. Although the Regional Office did not address this fact, the record indicates that all but five of these 31 individuals are also employed by the University or the Research Center. 2/ The Regional Office did, however, note that four of the five depart- ments in the University's School of Public Health and Community Medicine, including the Departments of Epidemiology and of Biostatistics, are chaired by SERC shareholders, but concluded that no common control through common management derives from this fact since neither they nor any member of the University's governing Board of Regents serves as an officer or director of SERC. It noted further, with respect to the issue of common management, that [t]he management of SERC do not serve in any position of control or authority within the Department of Epidemiology, or the School of Public Health and Community Medicine of the University of Washington. Further, the school is one of sixteen separate schools and colleges which comprise the University of Washington and the officers, directors, stockholders and employees of SERC are not in a position of control or authority within these schools or colleges. As such, these individuals cannot be construed as having management or key employee positions within the University of Washington pursuant to 13 CFR 121.401(h) [concerning affiliation through common management]. With respect to that control which TEC argued that the University may exert over SERC's officers and directors as their primary employer, the Regional Office erroneously and inexplicably observed that [t]he employment contract between the faculty and the University of Washington allows each member to perform one hour of outside consulting work per week, or 52 hours annually. Accordingly, advising the Department Chair [of such work] is necessary, but does not constitute control as the notification is to ensure there are no scheduling conflicts between the consulting and school responsibilities.... [Emphasis added.] In contrast to this assertion, however, the record reveals that SERC stated as follows on this issue of outside employment in its response to the protest: "University guidelines allow each faculty member to spend up to one day a week in outside consulting with the approval of their [sic] department chair or dean." Emphasis added. Although SERC admitted that "the University of Washington is extensively involved in providing statistical and clinical coordinating center support for the federal government under both grant and non-set-aside contract mechanisms," the Regional Office failed to mention this fact in its determination. Instead, it disposed of the issue of common employees (as opposed to common management) by comparing SERC's and the University's respective fields of operation as follows: Statistics & Epidemiology Research Corporation (SERC) operates as a consulting service specializing in the study of statistics of disease and the development of Epidemiology research software. The University of Washington is a recognized institution of higher learning founded in 1861. The role of the University is to create, preserve and disseminate knowledge. The School of Public Health and Community Medicine was established in 1970 and its objective is the training of future public health personnel and the promotion of public health practices. SERC and the University of Washington are not in the same or related industry or field of operations. Absent coincident fields of operation, the Regional Office determined that no affiliation based on common employees was possible between SERC and the University. The Regional Office noted that SERC has ten employees and "operates from leased facilities that are not owned by the University" and concluded its analysis as follows: Review of the documentation supplied, including the sole subcontract between SERC and the University of Washington, revealed that SERC revenues are garnered from a variety of sources. The subcontract between SERC and the University of Washington equates to 3% of revenues in the last 12 months. Other earnings in this same period are for consulting, which comprise 17% of revenue; software sales, which comprise 42% of revenue; and dedicated contracts solicited, negotiated and awarded to SERC, which comprise 44% of revenue. SERC is determined as not being dependent upon the University of Washington for its livelihood pursuant to 13 CFR 121.401(k) [concerning affiliation through contractual relationships]. This decision is consistent with S8A Office of Hearings and Appeals (OHA) Size Appeal SIZ-91-12-13-157, dated 12/31/91. [Size Appeal of University Medical Associates, supra.] Although the Regional Office did not address the identity of interest issue raised by TEC as it relates to bidding decisions, the record also contains the following information submitted by SERC in response to this issue: The decision to bid on this proposal was made by the Principal Investigator, Kathryn Davis, Ph.D., and SERC. The Department of Biostatistics was not consulted until the decision had been made. University guidelines allow each faculty member to spend up to one day a week in outside consulting with the approval of their department chair and dean. After Dr. Davis decided to apply, she informed the Chairman of Biostatistics of her intent and was given permission to perform the outside consulting work. The permission only concerned Dr. Davis and her professional obligations to the University. The University was not asked for and indeed could not give permission for SERC to do this work since the University of Washington and SERC are separate entities. With the exception of Dr. Davis, who was working as a consultant to SERC outside of the University, no technical skills of the department staff or University resources were used in the development of the proposal. It is true that the University of Washington is extensively involved in providing statistical and clinical coordinating center support for the federal government under both grant and non-set-aside contract mechanisms. This is also true of SERC. If this procurement had not been a small business set- aside, Dr. Davis could have chosen to respond through the University, but in that case her proposed staff would have been completely different, as would the proposed office space, computing facilities, and equipment. 3/ [Footnote added.] The resources of the University are not at the disposal of SERC, and neither are the resources of SERC at the disposal of the University. We maintain strict separation of all our activities and expenses. The University of Washington has strict regulations to prevent use of the University resources for other than legitimate University business. TEC filed a timely appeal of the Regional Office determination, which it had received on November 13, on November 20, 1992. TEC articulates three bases for alleging error in the Regional Office determination: First, in analyzing the common management between SERC and the University, Region X [the Seattle Regional Office] discussed only the management of the University as a whole. Region X failed to recognize the significant management and control exercised within individual schools and departments of the University. Second, Region X erroneously found that SERC and the University are not in the same or related industry. In fact, the University and SERC are both engaged in providing coordinating center consulting services under federal contracts and grants. Third, Region X failed to address EMMES' assertion that SERC and the University have an identity of interest. With respect to the common management issue, TEC argues that the Regional Office's erroneous focus on the management of the University as a whole obscured the issue of common control addressed in 121.401(h): Affiliation through common management. Affiliation generally arises where officers, directors, or key employees 4/ serve as the majority or otherwise as the controlling element of the board of directors and/or the management of another concern. [Footnote added.] TEC contends that SERC's officers and directors, in whom control of the corporation resides, "constitute...the management of the University, or...key employees of the University" and argues that, contrary to the Regional Office's finding concerning the University's field of operations, "the University engages in a wide range of activity apart from its education function" and that in order to assess the questions of common management and common employees in this case properly, the Regional Office was required to focus on the University's "coordinating center consulting services." In support of this argument, and its implications for the issue of common management, TEC contends that because of the size and breadth of the University and its resources, the management of the University's activities is not centralized. The many schools in the University, and the various departments within those schools, necessarily must operate on a fairly autonomous and independent basis. For example, the members of the Department of Biostatistics and Epidemiology (1) decide which coordinating center consulting business the University should pursue, (2) prepare bids and proposals to seek such business, and (3) provide the consulting services when the University is awarded such business. While the members of these departments may not control or manage the University as a whole, they do control and manage the University's coordinating center consulting business. It argues further that ...[t]he persons who control and manage the University's coordinating center consulting business are the same persons who control SERC. The SERC officers, directors, and shareholders are the same persons who pursue, prepare proposals for, and perform the University's coordinating center consulting business. Indeed, we believe that the SERC officers, directors, and shareholders would not independently pursue any federal coordinating center consulting business if the University were eligible to do so, i.e., if the procurement were not a small business set aside. But, where, as here, a procurement is set aside for small business, so that the University cannot compete, the University employees will seek the business through SERC. Thus, SERC and the University share common management because the persons who control SERC also control and manage the coordinating center consulting activities of the University. Similarly, the persons who control SERC are the key University employees with respect to the University's coordinating center consulting activities.... TEC has provided the following information on prior procurements to verify both that the University is engaged in the same field of operations as SERC and that the same persons are responsible for managing activities in that field for SERC and for the University: [T]he University's Fred Hutchinson Cancer Research Center recently received a $140 million award to provide such services for the Women's Health Initiative. Ross Prentice, the Incorporate of SERC and a shareholder and former director of SERC, is the University's Principle [sic] Investigator for that contract. The University also has provided such services in connection with a 1990 NIH study entitled "Cardiac Arrhythmia Suppression Trial," for which a SERC Director, A. Hallstrom, served as the Principle [sic] Investigator (contract No. 5NOlHC65042-13, $.8 million in FY '90); and a 1989 NIH study entitled "Balloon Valvuloplasty Registry," for which Kathryn Davis, a SERC employee, was the Principle [sic] Investigator (contract No. SNOlHV7800-07, $.8 million in FY '89).... On much the same factual basis, TEC also continues to argue that an identity of interest exists between SERC and the University and complains that this aspect of its protest was nowhere acknowledged or addressed in the Regional Office determination. Noting that the regulation governing this issue 5/ proceeds by example rather than by definitional criteria, TEC argues that [t]hese examples show that an identity of interest exists between two concerns when (1) the decisions of either concern would inherently effect [sic] the decisions or interests of the other concern or of a third party, or (2) benefits accruing to either firm would result in benefits to the other concern or a third party. Further, these examples demonstrate that an identity of interest need not be financial. In addition to arguing that "SERC is, in effect, acting as a surrogate for the University by bidding in a small business set aside procurement solely because the University is ineligible to do so," TEC argues that even if SERC and the University could compete against each other (in non-set-aside procurements) for the same coordinating center consulting contracts, both concerns would benefit. In the bidding process, the same persons would be preparing the bids and proposals for both SERC and the University. The resources of the University -- in whose employ the SERC officers and directors presumably gained the experience and expertise that enabled them to establish SERC in the first place -- would unavoidably be available to SERC. If either SERC or the University were to win the contract, both would benefit from the increased prestige of employing persons who successfully perform the work, and the increased job satisfaction of the SERC/University employees. [Footnote omitted.] ...[T]he University would [also] accrue the additional benefits of increased opportunities for employment of the University's graduate students, and increased prospects for publication by faculty members. Under these circumstances, it is apparent that the decisions of SERC or the University inherently affect both concerns, and the activities of SERC and the University inherently benefit each other. This leads to the inescapable conclusion that SERC and the University have an identity of interest, and must be treated as affiliates. On December 4, 1992, TEC filed a request to conduct discovery regarding SERC and its relationship to the University. That request was denied by order dated December 30, 1992 because it was determined that no genuine dispute of decisional significance exists as to the facts of this case and that the controversy instead concerns the regulatory implications of those facts with respect to the issue of affiliation. The contract was awarded to SERC on November 17, 1992. SERC has filed no response to TEC's appeal. Discussion We cannot agree with the Regional Office that no affiliation exists between SERC and the University and conclude that its erroneous determination in this regard rests upon a misappre- hension of the specific facts of this case and the logical implications of our holdings in previous cases concerning affiliation in general and affiliation with universities in particular. The circumstances indicative of affiliation are these: eight of SERC's ten officers and directors (in whom its control undeniably resides) are employed by the University's Research Center or by its Departments of Epidemiology and Biostatistics. As such, they provide educational as well as research services to the University. The Chairmen of the University's Departments of Epidemiology and Biostatistics (as well as two other departments in its School of Public Health and Community Medicine) own 2.5 percent of SERC's stock each. Thirty of SERC's remaining 36 stockholders are also employed by the University. Under their employment contracts with the University, these individuals are permitted to engage in up to one day of outside consulting work per week but must obtain "the approval of their department chair or dean." In addition to operating and performing consulting services for SERC, its principals make determinations regarding the University's participation in solicitations for consulting services and perform those services for the University pursuant to contracts awarded to the University by the Federal government. As the regulation at 13 CFR 121.401(i) governing common employees indicates, "affiliation generally arises where one concern shares...employees...with another concern, particularly where such concerns are in the same or related industry or field of operations." Emphasis added. The qualifier "generally" imposes a reasonability test 6/ in applying the regulation, but it is clear from the structure of this provision that firms face a presumption of affiliation through sharing of employees that is difficult to surmount where the firms are engaged in the same or related fields of operation. Nevertheless, we have held that the mere sharing of one or two employees does not create affiliation. The lack of a regulatorily significant connection has been particularly compelling where the employees themselves have not been officers or directors of either company 7/ but has also been evident in the so-called "moonlighting" cases, where the owner of a company is a salaried employee of the alleged affiliate but there is little more to suggest that the small concern is otherwise dependent upon the "employer" firm for its continued existence. 8/ However, this exception has its limits, and those limits depend upon the scope and implications of the employment arrangement. Thus, where the scope and size of the compensation package was significant, and was accompanied by a covenant by the small business owner not to compete with his employer firm, we predicated our finding of affiliation in Size Appeal of Caddell Construction Co., Inc., No. 1990 (1984) on the reliance, lack of independent economic viability, and inferred power to control in the employer that attends such arrangements. What we observed in Caddell is potentially true in all such cases: "[the employer- affiliate] has the power to control Mr. Caddell by unilaterally threatening to discontinue or by discontinuing his remuneration." Where the salaried owner has also occupied a management position in the employer-affiliate, these joint employment cases have been decided under the interlocking management rule in 121.401(h) or under the newly organized concern rule in 121.401(i), the latter of which bars the principals of one firm from organizing and operating a new firm in "the same or related industry or field of operation if the two firms will exchange financial or technical assistance" or share "other facilities, whether for fee or otherwise." 9/ "Other facilities" may include joint employees, and the emphasis in such cases on the sharing of essential employees indicates that the finding of affiliation could also have been based on the existence of common employees under 121.401(i). Thus, in Size Appeal of American Systems Engineering Corporation, No. 2405 (1986) we held that, where the new owners of a firm created through an employee buy out of a division of the alleged affiliate continued their employment with the old firm for three months after the buy out, during which time the new firm bid on a small business set aside, the firms were affiliated because of this continuing employment connection and the financial support it provided to the new firm. The Regional Office determination here, which concerns the substantial sharing of vital employees and is at odds with this line of cases, relies on a gross mischaracterization of the employment relationship between SERC's principals and the University and on an analysis of the University's management structure and field of operations derived from a previous, inapposite case which, if applied here, would except universities and their affiliates from a major segment of the affiliation rules and create a "hands off" policy with respect to universi- ties and their affiliates that is nowhere sanctioned in the regulations governing affiliation and size status. Central to the Regional Office's determination is its focus on the University as a whole rather than on its individual schools, departments or research facilities, and its conclusion, in consequence, that SERC and the University are neither commonly managed nor engaged in "the same or related industry or field of operations," because the University, unlike SERC, is an "institution of higher learning" whose business is to "create, preserve and disseminate knowledge." While this analysis appears to accord with certain language in Size Appeal of University Medical Associates, supra, that case is inapposite. Furthermore, the determination is at variance with two prior university affiliate cases in which both the protested concern and the university either were or had been involved in similar research and consulting activities. 10/ In the first such case, Size Appeal of Biossherics, Inc., No. 2025 (1984), a third party had purchased the majority interest in a research laboratory formerly owned and operated by the university's research institute, which had retained a minority interest therein. We specifically examined the organization of both the university as a whole and its research institute in order to determine whether affiliation existed based on inter locking management, the newly organized concern rule or common employees. With respect to the issue of common employees in particular, we stated that the only way in which an agreement to continue to employ laboratory personnel during the first 90 days of operation could create "power to control" in the university, would be if these same employees were shared with the University of Utah or UURI, [the University of Utah Research Institute] or were also officers, directors, stockholders or key employees of the University of Utah or UURI. Since the employees have no present connection with the University of Utah or UURI, it is found that the employment of former UURI employees for at least 90 days is not convincing evidence of control by the University of Utah or UURI over [the protested concern]. [Emphasis added.] In the absence of such common employment or any other proscribed interconnection between the University or its research institute and the protested concern, we held in BiosPherics that there was a "clear line of fracture between [the protested concern] and the University of Utah and/or UURI" and that no affiliation existed between them. Emphasis added. In the second case, Size Appeal of CHT, Inc., No. 2383 (1986), we examined a concern that had recently been organized by the faculty of a university to perform testing services previously performed for the government by the university through its Center for Human Toxicology. While our finding of affiliation between this firm and the university 11/ was primarily based on the firm's lack of facilities for performing the testing as well as its intention to subcontract the testing back to the university during the initial stages of the contract and to use the university's license and its Department of Defense certification in performing the contract thereafter, we also noted with respect to the question of common employees that failure to a find affiliation between the university and the protested concern would be inconsistent with the purposes of the small business set-aside program inasmuch as CHT would thereby be unfairly advantaged. Besides the fact, noted above, that CHT hoped to win this procurement despite having no cash, laboratories, or testing equipment - by making use of University facilities, it also intended to employ specialized personnel who had been trained by the University (the toxicologist), to trade on the University's past performance and DOD drug testing certification, and to enjoy a financial "safety net" derived from the University salaries which its officers would continue to draw. Clearly, these are advantages which no other truly independent small business starting up operations in a specialized, high technology industry would enjoy. That the Regional Office ignored the reasoning in these cases is undoubtedly attributable not only to its misplaced reliance on Size Appeal of Medical Associates but to its mistake concerning the amount of time that SERC principals are permitted to spend on outside consulting work. The practical significance of an option to spend up to 52 days a year working for SERC as opposed to 52 hours a year cannot be denied. Eight of SERC's ten officers and directors and all but six of its stockholders are employed by the University. While it is not clear how many of these individuals perform work similar to that performed by SERC in their capaci- ties as University employees, congruence need not be absolute in order to determine that those two entities, in the same field of operations, share employees pursuant to 5121.401(i) or that it is reasonable to find them affiliated with one another based on that fact. The salaries paid to SERC's principals are the "safety nets" that betoken SERC's reliance upon the University and provide it with "advantages which no other truly independent small business starting up operations in a specialized, high technology industry would enjoy." 12/ Thus, we find that SERC is affiliated with the University based on common employees. The emphasis on the University's participation in consulting services contracts in determining its field of operations also commands a different result from that reached by the Regional Office on the issue of common management. Universities are unique with respect to the question of management. Thus, we must look beyond the structure of the University as a whole, as we did in Size Appeal of Biospherics. Inc., supra, 13/ and determine the locus of management authority with respect to the University's consulting service activities. This approach is consistent with the definition of "key employee" in 121.405 in which a "key employee" is described as an "employee, who, because of his or her position in the concern, has a critical influence in or substantive control over the operations or management of the concern." SERC concedes that Dr. Davis, the employee responsible for determining SERC's participation in the present solicitation "could have chosen to respond through the University" had this not been a small business set aside. SERC principals have served and continue to serve as the University's principal investigators on similar consulting contracts awarded to the University. It is clear, therefore, that, in these capacities, SERC principals are key employees of the University because they occupy positions in which they may exercise critical influence over the University's participation in the consulting services business. To determine otherwise, would ignore the schizoid nature of most modern universities, which are active competitors in the market for research and other consulting services, as well as institutions of higher learning, and would reinforce their superior competitive position, the effects of which the small business set aside program seeks to mitigate for legitimate small businesses. Thus, because SERC's principals control the decisions of both SERC and the University concerning participation in solicitations for coordinating center consulting services, SERC is affiliated with the University based on common management. TEC's allegation concerning an identity of interests between SERC and the University based on their synchronization of bids and the mutuality of benefits stemming from their respective participa- tions in consulting services contracts hinges on the fact that management authority regarding such contracts performed by both the University and SERC reposes in SERC's principals. We cannot and will not be insensible to the "practicalities of business life" 14/ and the fact that, while SERC has independent decisional authority, it will tend to make those business decisions that preserve its very vital relationship with the University and will refrain from competing with the University for procurements that are not small business set asides. How could it be otherwise where a single cadre of professionals constitutes the potential workforce whether the contract is awarded to the University or to SERC. The salaries and other professional benefits accruing to SERC's principals as members of the University's faculty are "safety nets" that ensnare. This is the element of control implicit in the concepts of affiliation through common employees and affiliation through interlocking management. It is the commonality of interests that underlies what approximates an alter ego relationship for purposes of determining affiliation under Part 121, if not according to the letter of the law, at least according to its spirit. No matter the bona fides of the entities' corporate structures, no matter the good faith that attended the creation of the protested concern and the fact that, as in this case, no conflict of interest exists with respect to the use of University property for private commercial purposes: this relationship bespeaks that concert of purpose and effort which is at the heart of the identity of interest rule. While the rule has previously been invoked principally in cases involving familial relationships or common investments, the regulation proceeds by way of examples, examples that are not exclusive. Thus, the rule has also been invoked where the majority of a large firm's assets were purchased by a new firm that functioned as its predecessor's successor in interest in terms of contractual obligations, staff and facilities. Given these circumstances, we held in Size Appeal of Ace-Federal Reporters. Inc., No. 2814 (1988) that the firms were affiliated and that the new firm had also succeeded to its predecessor's size status. The commonality of interests in the present case is equally thorough and, under the circumstances, we do not deem it improper to conclude that, in addition to being affiliated under the regulations governing common employees and common management, SERC and the University are also affiliated under _121.401(a)(2) and (d) because of their identity of interests. It might be argued that this decision will impede the research process, since many researchers are employed by universities and this employment might bar their companies from participating in small business set asides. We do not agree. Our decision here merely attempts to place firms so intimately and inextricably involved with universities as to be affiliated with them, on an equal footing with those other, truly independent research firms whose small size requires that they be accorded the competitive advantages of a small business set aside when bidding on Federal research projects. That is the purpose of the set aside program, and to ignore the substantial competitive and other financial benefits which attend a group of researchers in SERC's position would be to defeat it. Conclusion SERC is other than small under the $12.5 million average annual receipts size standard. The Regional Office determination is REVERSED. The appeal is GRANTED. This constitutes the final decision of the Small Business Administration. See 13 CFR 121.1720. _______________________________ Jane E. Phillips (Presiding) Administrative Judge _______________________________ Gloria E. Blazsik (Concurring) Administrative Judge _______________________________ G. Stephen Wright (Concurring) Administrative Judge _______________ 1/ Nasco-Egnew's employment status is not indicated in the SBA Form 355 submitted by SERC. 2/ The minutes for SERC's October 6, 1992 Board of Directors meeting, held subsequent to the date of self certification, state that "[t]he Board decided to limit who would be allowed to become a member of SERC, restricting it to persons holding appointments in the Department of Biostatistics and Epidemiology" but to permit the "grandfathering" of "all current members." 3/ SERC acknowledged that "[s]ome of the stockholders, board members and officers of SERC have performed biostatistical consultation for SERC which is similar to some aspects of their faculty duties." 4/ The term "key employee" is further defined at 121.405 as follows: A key employee is an employee who, because of his/her position in the concern, has a critical influence in or substantive control over the operations or management of the concern. 5/ The regulations at 13 CFR 121.401(a)(2) and (d) governing identity of interest provide as follows: Concerns are affiliates of each other when either directly or indirectly * * * * * * * (iii)An identity of interest between or among parties exists such that affiliation may be found. * * * * * * * Identity of interest between and amona persons as an affiliation determinant. Affiliation can arise between or among two or more persons with an identity of interest, such as members of the same family or persons with common investments in more than one concern. In determining who controls or has the power to control a concern, persons with an identity of interest may be treated as though they were one person. 6/ The previous iteration of this rule, amended as part of the reorganization of Part 121, stated as follows: Control through common management. A concern may be found as controlling or having the power to control another concern when one or more of the following circumstances are found to exist, and it is reasonable to conclude that under the circumstances, such concern is directing or influencing or has the power to direct or influence the operation of such other concern. * * * * * * * Common facilities. One concern shares common office space and/or employees and/or other facilities with another concern particularly where such concerns are in the same or related industry or field of operation, or where such concerns were formerly affiliated. 13 CFR 121.3(vi)(B), 1987 edition. 7/ Size Appeal of Applied Technical Systems. Inc., No. 2435 (1986) and Size Appeal of International Service corporation, No. 2296 (1985). 8/ Size Appeal of National Environmental Waste Systems Inc., No. 1719 (1983) and cases cited therein. 9/ The regulations at 13 CFR 121.401(h) and (j) governing interlocking management and newly organized concerns respectively, provide as follows: Affiliation through common management. Affiliation generally arises where officers, directors, or key employees serve as [the majority or otherwise as the controlling element] of the board of directors and/or the management of another concern. * * * * * * * Affiliation with a newly organized concern. Affiliation generally arises where former officers, directors, principal stockholders, and/or key employees of one concern organize a new concern in the same or related industry or field of operation, and serve as its officers, directors, principal stockholders, and/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, and/or other facilities, whether for a fee or otherwise. 10/ Size Appeal of University Medical Associates is readily distinguishable on this point, as is Size Appeal of White Water Associates, Inc., No. 3532 (1991), in which we declined to find affiliation between a new firm formed by university employees and the university because the employees did not "change hats," performing for their firm activities similar to those performed for the university. 11/ CHT focused on the protested concern's relationship with the university's research facility rather than its inter connections with the university as a whole but based its finding of affiliation between the protested concern and the university on the fact that the research center, while not an independent entity, was a subsidiary of the university whose individual affiliations would thus accrue to the university, as its parent. 12/ Size Appeal of CHT, Inc., supra, at page 9. 13/ No interlocking management was found to exist in this case. 14/ Size Appeal of Heral Industries Corp., No. 601 (1973).