RG Software Systems, Inc., No. 4113 (October 30, 1995) Docket No. SIZ-95-5-23-53 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. _______________________________ ) SIZE APPEAL OF: ) ) RG Software Systems, Inc. ) ) Appellant ) ) RE: Norman Data Defense ) Docket No. SIZ-95-5-23-53 Systems, Inc. ) ) Solicitation No. ) DAC-100-94-R-0114 ) Department of Defense ) Defense Information Systems ) Agency ) Arlington, Virginia ) _______________________________) DIGEST A firm that is 80% owned by a foreign parent company but contributes to the U.S. economy by paying Federal and state taxes, employing U.S. citizens, and maintaining office space in Virginia, qualifies as a small business. A firm that imports a basic anti-virus software program from its parent company, customizes the software for sale to its United States clients, adds essential software files and instructions, and provides all follow-up support services called for in the solicitation, is the manufacturer of the end product being sold. DECISION October 30, 1995 BLAZSIK, Administrative Judge: Jurisdiction This appeal is decided under the Small Business Act of 1958, 15 U.S.C. Sections 631 et seq., and 13 C.F.R. Part 121. Issues Whether a firm that is 80% owned by a foreign parent company, but contributes to the United States economy, qualifies as a small business. Whether a firm that imports a basic anti-virus software program from its parent company, customizes it for sale to its United States clients, adds additional software files, and provides all follow-up support services required by the solicitation, is the manufacturer of the end product being sold. Facts On September 20, 1994, the Contracting Officer for the Department of Defense, Defense Information Systems Agency (DISA), Arlington, Virginia, issued this solicitation for prepackaged anti-virus software with maintenance support, and classified it under SIC code 7372 (Prepackaged Software), having an $18 million size standard. The contract was entirely set aside for small businesses. Initial offers were due on January 12, 1995, and final offers were due on March 30, 1995. On April 5, 1995, the Contracting Officer notified the unsuccessful offerors that Norman Data Defense Systems, Inc. (Norman USA) was the successful offeror. On April 11, 1995, RG Software Systems, Inc. (Appellant), an unsuccessful offeror, timely filed a protest against the award, asserting that Norman is other than small and does not qualify for the set-aside. Specifically, the protest asserted that Norman USA is other than small because it is affiliated with Norman Data Defense Systems Holding AS of Norway (Norman Holding) and its other wholly owned affiliates, because Norman Holding owns 80% of Norman USA's stock. The protest also asserted that another subsidiary of Norman Holding, Norman Data Defense Systems AS (Norman Norway), not Norman USA, designed and developed the anti-virus program code, the primary portion of the product, and that more than 50% of the cost of the contract is performed abroad by Norman Norway employees. Finally, Appellant asserted that Norman USA is a foreign firm because it is owned by Norman Holding. The Contracting Officer forwarded the protest to the Small Business Administration (SBA) Philadelphia Area Office (Area Office) on April 11, 1995. The facts are undisputed. Norman USA is a software company that sells pre-packaged anti-virus and computer security software, and provides continuing technical support services to its clients. The company was originally incorporated under the name Arcen, Inc. but, on March 1, 1993, changed its name to Norman Data Defense Systems, Inc. The new firm is 20% owned by Dr. David Stang (Dr. Stang), and 80% owned by Norman Holding, its Norwegian parent company. Dr. Stang is a United States citizen, and Norman USA's President and CEO. The firm's major office is in Virginia, where it employs 11 people including three full-time programmers who are United States citizens. Norman Norway, another affiliate of Norman Holding, created the anti-virus program code for the software that Norman USA sells in the United States. Norman USA adapts and modifies the software for its clients in the United States by adding other software and hypertext files to make the software package conform to its clients' specific needs. Norman USA also provides 24-hour telephone support to its clients as well as access to Norman USA's bulletin board, where clients can - - view or download a file describing any of 7,500+ different viruses. The file section also permits callers to upload a file that they suspect might be infected, for automatic analysis. . . . Norman USA also provides its clients with access to virus updates and information on developments via the Internet. DISA's solicitation requires "prepackaged anti-virus software with maintenance support", which includes both supplies and follow-up services. After delivery of this software, the successful offeror is responsible for updating the software as new viruses appear, writing fix programs for new viruses, providing 24-hour telephone support, providing an on-line bulletin board where updates and help are available to the Department of Defense, and modifying and distributing hard copy and on-line documentation for the software. The Area Office file contains Norman USA's SBA Form 355, its corporate charter and bylaws, its financial statements and Federal tax returns for 1993 and 1994, its country of origin summary of the software files, its proposal, financial information for Norman Holding and its other affiliates, and a copy of the solicitation. On May 11, 1995, the Area Office determined that Norman USA is affiliated with its parent, Norman Holding, and other firms wholly or partly owned by Norman Holding. However, Norman USA is still a small business because the average annual receipts of Norman USA, Norman Holding and all other affiliates, in the aggregate, do not exceed the size standard.[1] Further, the Area Office determined that, although Norman USA is a subsidiary of a foreign firm, it still qualifies as a U.S. small business because it is organized for profit in Virginia, and because it contributes to the U.S. economy. Finally, the Area Office found that Norman USA manufactures a majority of the anti-virus software domestically because, although the program code is from Norway, Norman USA produces 93% of the total bytes of software. Appellant received the Area Office determination on May 11, 1995, and filed an appeal, postmarked May 18, 1995. Arguments on Appeal Appellant asserts that Norman USA is a foreign-owned firm and is ineligible for the award pursuant to 13 C.F.R. Section 121.403(a). Appellant also asserts that the products portion of the contract predominates. Whatever services are required are only incidental to the contract. It asserts that Norman USA does not produce the essential product, the anti-virus code for the software. Therefore, it is unduly reliant on its Norwegian parent company and its affiliates to create the software, and it is not the manufacturer of the end product. See 13 C.F.R. Section 121.906(b).[2] Norman USA responds that the solicitation requires products and services as a complete unit, and that it performs a major portion of the contract. Norman USA asserts that its position is supported by the Contracting Officer's classification of this contract under a SIC code that includes both products and services. Norman USA notes that the Contracting Officer marked both the "supplies" box and the "services" box on the solicitation. Norman USA further asserts that it performs a clear majority of the contract because it provides all the services in addition to its substantial contribution to the anti- virus software. Discussion Appellant filed this appeal within five business days, and it applies to the instant solicitation. 13 C.F.R. Section 121.1702(a)(2). Appellant's assertion that Norman USA is not an eligible business lacks merit. The definition of a small business is found in 13 C.F.R. Section 121.403: (a) A business concern eligible for assistance as a small business is a business entity organized for profit, with a place of business located in the United States and which makes a significant contribution to the U.S. economy through payment of taxes and/or use of American products, materials and/or labor. Foreign ownership is not necessarily a bar to treatment as an eligible business. See Size Appeal of GMA, Inc., No. 3601 (1992). The Area Office properly determined that although Norman USA is controlled by a foreign firm, it is an eligible small business. Norman USA is a Virginia corporation that pays Federal and state taxes. The firm employs 11 persons, including three full-time programmers who are United States citizens. It has maintained a Virginia office since its creation in 1993, and must continue to do so for at least the life of the contract. Clearly, Norman USA's various business and economic activities in Virginia significantly contribute to the U.S. economy, sufficient to qualify it as an eligible business concern. Appellant's assertion that Norman USA does not manufacture the software is also without merit. Norman USA manufactures the software because it combines the basic program code with other essential components to produce the end product required by the solicitation. The solicitation specifies an anti-virus software program which must satisfy the solicitation's technical detection and removal requirements, and which provides help screens and instructions to users. Norman USA adds hypertext files that create functions to generate the necessary help. The functions, including writing the text, instructions, virus descriptions, and removal guidance, are all essential to the final product required by the Department of Defense. Norman USA's efforts constitute a significant contribution to the end item, without which, the software could not satisfy the requirements of the solicitation. See Size Appeal of Graham Brake and Diesel Company, No. 3327 (1990). Further, even if Norman USA does not produce an essential portion of the software, it still performs more than 50% of the value of the contract. The contract is a mix of products and services and requires substantial technical support services, which comprise a large percentage of the total value of the contract. Because Norman USA will provide all these services, and will significantly contribute to the software, it is not unduly reliant on Norman Holding to perform the contract. Conclusion For the above reasons, the Regional Office determination is AFFIRMED, and the appeal is DENIED. This is the final decision of the Small Business Administration. See 13 C.F.R. Section 121.1720(b). ___________________________ Gloria E. Blazsik Administrative Judge ____________________ [1] Norman Holding owns 100% of the shares of Norman Data Defense Systems GmbH, Norman Data Defense Systems AS, and Infolock AS. It is affiliated with Cappella AS because Arthur Olafsen, the majority stockholder in Norman Holding owns 60% of Cappella's stock. [2] Appellant also asserts that Norman USA does not have the personnel to provide the level of support required by the solicitation. This issue was not raised in the original protest and will not be considered. See 13 C.F.R. Section 121.1707.