By Robert Brodsky – March 8, 2010

The U.S. Court of Federal Claims has rearranged the small business contracting hierarchy with a ruling that firms in low-income neighborhoods take priority in federal awards.

The court’s decision, which was unsealed on March 2, stated that agencies now must consider whether companies in a Historically Underutilized Business Zone can compete for a contract before awarding it under another small business program or on a sole-source basis. The ruling by Chief Judge Emily Hewitt supports an earlier Government Accountability Office decision and is a departure from recent Office of Management and Budget and Justice Department guidance.

The case boiled down to whether the HUBZone program took precedence over the 8(a) program — in which businesses are owned by socially or economically disadvantaged individuals. While the service-disabled veteran-owned small business program was not at issue, the court ruled it should be treated the same as the 8(a) program. All three categories are eligible for set-aside small business contracts.

The plaintiff in the case, Mission Critical Solutions of Tampa, Fla., protested the Army Office of the Judge Advocate General’s January 2009 award of a sole-source $10.5 million information technology pact to Copper River Information Technology, an 8(a) Alaska native contractor.

Mission Critical, which is an 8(a) and HUBZone business and was the incumbent contractor, complained that it should have been able to compete for the award. The Federal Acquisition Regulation requires agencies to open contracts to Historically Underutilized Business Zone companies if procurement officials have a reasonable expectation that two qualified HUBZone businesses will submit offers at a fair market price, Mission Critical argued.

Hewitt agreed, noting that set asides for 8(a) companies were optional. “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,” she said.

She added, “The plain meaning of the HUBZone statute requires a contract opportunity to be competed among qualified HUBZone small business concerns whenever the specified criteria are met, notwithstanding other provisions of law–including those found within the Small Business Act itself.” Hewitt said the HUBZone statute was “unambiguous and mandatory.”

Contracts still can be placed in the 8(a) program when the specified criteria in the HUBZone statute are not met, she said.

The decision also prevents the Army from awarding the IT contract to Copper River unless it first considers whether HUBZone firms can compete for the work. Mission Critical Solutions is operating under a bridge contract until the matter is resolved.

The court’s ruling is virtually identical to a decision GAO reached last May after Mission Critical Solutions and another small business contractor protested the Army’s contract award. GAO sustained the protests and later denied SBA’s request for reconsideration.

But, in a move that many legal experts considered unprecedented, OMB in July 2009 directed agencies to ignore GAO’s recommendations because they would “significantly limit the discretion contracting officers have historically possessed.”

The memorandum from OMB Director Peter R. Orszag stated that GAO’s decisions “are not binding on federal agencies and are contrary to regulations promulgated by the Small Business Administration that provide for ‘parity’ among the three small business programs.”

Last August, the Justice Department’s Office of Legal Counsel issued an opinion disagreeing with GAO’s interpretation of the HUBZone statute. The memo argued that its opinion — rather than GAO’s decision — was binding for executive branch agencies.

When the Army announced it intended to use the Justice memo as the basis for awarding the contract to Copper River, Mission Critical protested to the Court of Federal Claims.

OMB on Monday declined requests to discuss the court’s ruling or comment on whether the Obama administration would challenge the case with the U.S. Court of Appeals for the Federal Circuit.

Ralph White, acting managing associate general counsel in GAO’s procurement law division, said he was not surprised by the court’s ruling. “We based our view on the priorities set in the statute,” he said.

Although it previously disagreed with GAO’s decision, SBA said it was reviewing the ruling.

“SBA has consistently interpreted the Small Business Act to provide that federal contracting officers are to choose equally among all of SBA’s procurement and business development programs … without giving one preference over the others,” agency spokesman Jonathan Swain said. “This is the rule of ‘parity’ between the programs.”

Congress attempted to intervene in the dispute last July, as the Senate approved an amendment to the fiscal 2010 National Defense Authorization Act that would have placed the three small business programs on an equal footing when competing for contracts. But the amendment, introduced by Sens. Mary Landrieu, D-La., and Olympia Snowe, R-Maine, was stripped out during conference committee negotiations.

A source familiar with the negotiations said the Office of Legal Counsel told Congress the provision was unnecessary in light of its memo. The amendment also reportedly became entangled in a jurisdictional dispute between the House and Senate small business and armed services committees.

A spokeswoman said Landrieu plans to reintroduce the amendment as a stand-alone bill in the near future. Snowe’s office, meanwhile, urged the Senate to pass the Small Business Contracting Programs Parity Act, a stand-alone bill Snowe introduced in 2009 to make the programs equal.

The matter also could be resolved through a regulatory change. A proposed FAR rule, filed in March 2008, would have clarified that no order of award preference exists among small business programs. That rule remains under review.

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