Zoned Out

Acquisition officials walk a fine like after a court rules low-income areas trump veteran or minority status in competition for small business contracting dollars.

All small businesses are not created equal, at least according to one U.S. Court of Federal Claims judge. The judge's recent ruling invoked a statute that gives companies with Historically Underutilized Business Zone (HUBZone) status priority over others eligible for set-aside contracts, including service-disabled veterans and minorities. The ruling poses a challenge for contracting officers and federal small business advocates, who have long been conditioned to provide equal opportunities for all firms in the small business programs.

Chief Judge Emily C. Hewitt said agencies must consider whether HUBZone companies can compete for a contract before awarding it under another small business program or on a sole-source basis. And the fine distinction between the words "shall" and "may" made all the difference in this case.

The law that governs the 8(a) program for minority-owned small businesses and the service-disabled veteran-owned business program states, "a contracting officer may award contracts on the basis of competition restricted to small business concerns owned and controlled by service- disabled veterans." The HUBZone law says a contract opportunity "shall" be awarded on the basis of competition restricted to qualified HUBZone small business concerns.

"The 8(a) statute explicitly affords discretion both to the [Small Business Administration] and to agency contracting officers in deciding whether to place a contract opportunity in the 8(a) program," Hewitt wrote in the decision. But the HUBZone statute was "unambiguous and mandatory."

Same Debate, New Chapter

The case that prompted this ruling, Mission Critical Solutions vs. the United States, is far from the first hint of disagreement about parity among small business programs. The court's ruling is reminiscent of Government Accountability Office decisions that favored HUBZone companies in bid protests.

In a May 2009 protest, also filed by Mission Critical Solutions, GAO cited statutory preference for HUBZones, prompting a flurry of legal activity. Mission Critical Solutions-both an 8(a) and a HUBZone firm-had lost an Army contract for information technology support services to the Alaska native corporation Copper River Information Technology LLC. But weeks after the decision, the Office of Management and Budget directed agencies to ignore GAO's recommendations, saying they would "significantly limit the discretion contracting officers have historically possessed."

OMB Director Peter R. Orszag said GAO's decision is "contrary to regulations promulgated by the Small Business Administration that provide for parity among the three small business programs." He also reminded agency officials that GAO decisions are not binding.

The Justice Department sprang into action as well, with its Office of Legal Counsel issuing an opinion disagreeing with GAO's interpretation of the statutes for each program. The office said its decision-not the watchdog agency's-was binding for executive agencies.

According to legal professionals, OMB's directive to ignore GAO is rare, if not unprecedented. "It is not un-common to have disagreements on the proper interpretation of the law between the executive branch on the one hand-White House, Justice and SBA-and the legislative-GAO-and judicial branches on the other hand," says Joseph Hornyak, a partner in the government contracts group of the Washington law firm Holland & Knight. "What was unusual about this situation is OMB and Justice essentially told executive branch agencies to ignore GAO's interpretation of a procurement statute."

Ralph White, acting managing associate general counsel in GAO's procurement law division, agrees: "I am not aware of any other instance, in a federal contracting career of almost 30 years, where the director of OMB has counseled executive branch agencies not to follow the recommendation in a GAO bid protest decision."

In the wake of the SBA-versus-GAO kerfuffle, several lawmakers intervened to clarify the intent of the statute. The Senate approved an amendment, introduced by Sens. Mary Landrieu, D-La., and Olympia Snowe, R-Maine, to the fiscal 2010 National Defense Authorization Act that would have placed the three small business programs on an equal footing in the contracting process. But the amendment was stripped out during conference committee negotiations.

What to Do

In the wake of the federal claims court decision, there is extreme confusion over how contracting officers should move forward. SBA spokeswoman Hayley Matz says the ruling, which Justice is appealing, applies only to the specific contract in that case. "DOJ advises that the decision does not apply to the operation of SBA's existing parity rule generally," she says.

Nevertheless, she says the agency remains concerned about the decision's "potential practical effect" in the contracting community. In response, SBA will be aggressively spreading the message that parity among the small business programs still applies. Agency officials also are working with Congress to pursue legislation to confirm lawmakers' intent for the various programs.

"In light of a recent court decision, it would be useful to clarify and reiterate Congress's original intent that there be parity among the programs," SBA Administrator Karen Mills told lawmakers in April. "The administration supports legislative efforts to confirm Congress's original intent."

But that intent might not be as clear as SBA implies. Robert A. Burton, former administrator of OMB's Office of Federal Procurement Policy and a partner at the Washington law firm Venable, says Congress rarely makes errors with respect to the words "shall" and "may."

"People really do know, on the Hill, that there is a significant difference," he said. "I can't believe it was just an oversight."

And at least one lawmaker is publicly making the case for HUBZone preference. "Most of our [small business] programs are meant to help disabled veterans or women-specific groups," Rep. Roscoe Bartlett, R-Md., said at the Small Business Committee hearing. "The HUBZone program really helps whole communities."

But Landrieu and other lawmakers are pushing ahead with legislative attempts to even the playing field. In announcing a bill that would do just that, Landrieu said she "strongly disagrees" with GAO and court decisions, calling them a "misinterpretation of Congress' intent."

"This legislation will have an immediate, positive impact for small businesses seeking fair access to federal contracts," she said. "It will reaffirm contracting officers' flexibility to award contracts to HUBZone businesses, which provide important benefits for hard-hit communities. It also will reaffirm Congress' intent to ensure robust implementation of the 8(a), [service-disabled veteran-owned] and women-owned small business development and procurement programs."

Landrieu said these programs enable the government to address "significant discriminatory barriers" that still limit the opportunities available for these businesses.

According to Hornyak, the bottom line is Congress needs to clarify the laws. "When it passed the HUBZone statute, did Congress really want that program to have precedence over the service-disabled veteran or 8(a) programs, or did Congress not fully contemplate the effect of the language it put into the statute?" he says.

Burton agrees. "The only way this will be resolved is through legislation. Congress will have to have the last word," he says.

In the HUBZone

Until Congress weighs in, contracting officers could be compelled to consider HUBZone firms before setting aside contracts under other programs, particularly since GAO has repeatedly upheld protests by HUBZone firms. But some see this approach as risky, given reports of widespread fraud within the program. In 2008, GAO found agencies had awarded more than $20 million to 10 firms that were fraudulently participating in the HUBZone program.

Of the 17 HUBZone businesses GAO examined, 10 did not qualify to be in the program. Some had listed an address in an underutilized area but actually were running their companies from another location; others failed to meet the program's requirement that at least 35 percent of their staff live in the HUBZone area.

During their review, auditors applied for HUBZone certifications for four fake firms, using fabricated employee information and documentation. The watchdog agency easily obtained certifications for all four, with little or no inquiry from SBA staff within two to five weeks. In one case, GAO claimed the principal address of its fake firm was in a Starbucks. "If SBA had performed a simple Internet search on the address, it would have been alerted to this fact," the report said.

GAO's study found that only 36 percent of applicants were asked to provide proof of their office locations and 5 percent of certified HUBZone firms were audited for compliance every year. Only one company among the 125 applicants GAO examined received a site visit from an SBA inspector.

"We have long-standing concerns about the ability to really enforce the HUBZone," SBA Inspector General Peggy E. Gustafson told lawmakers in April. "It's a difficult animal to get a hold of because it's hard to find out where the majority of employees live, whether they're really attempting to maintain the statistics they have as far as how many employees live in an economically dis-advantaged area. So this would be preferential treatment for the program we think is hardest to enforce."

At the same hearing, Mills said SBA has made dramatic increases in the number of site visits to HUBZone firms, from fewer than 100 in 2008 to more than 900 in 2009. "We're on track to do more than 1,000 this year," she said. "We're working to ensure that only legitimate and eligible firms are benefiting from HUBZone."

Burton says he does not expect a sizable migration to the HUBZone program because staying compliant within the program is difficult. "There has always been an incentive to be a HUBZone contractor, but it's tough for contractors to remain HUBZone," he says. Tracking where employees live can be difficult, for example, and for small businesses, if a single employee moves out of the HUBZone they could become incompliant. "It's hard to monitor it all the time," Burton says.

But an influx of HUBZone applications will require SBA to devote more resources to the program, according to Hornyak. "Hopefully Congress will appropriate the necessary funds to do so," he says.

One way or another, the ball is in Congress' court, either to clarify whether HUBZone, minority-owned and service-disabled veteran-owned firms are equal in the eyes of the law or to empower SBA to tackle fraud in a program notoriously difficult to monitor.

Shall vs. May

The Government Accountability Office and a U.S. Federal Claims Court judge have determined the language in the statute governing Historically Underutilized Business Zones is stronger than the legal phrasing for other small business programs, such as the 8(a) program for minority-owned companies and the program for service-disabled veteran-owned firms.

• 8(a) and service-disabled veteran statutes say, "a contracting officer may award contracts on the basis of competition restricted to small business concerns owned and controlled by service-disabled veterans."
• The HUBZone statute says, "a contract opportunity shall be awarded pursuant to this section on the basis of competition restricted to qualified HUBZone small business concerns."
• Experts say the legal distinction between the two words is unmistakable: "shall" is compulsory, while "may" is permissive.
• "The HUBZone statute says shall and the others say may, so agencies are bound to give preference to HUBZone," says Robert A. Burton, former Office of Federal Procurement Policy administrator now with the Washington law firm Venable. "The correct legal position here is fairly clear."