Morrison Foerster’s Government Contracts Insights provides our in-depth analysis of developments and trends impacting government contracting. Through Insights, our attorneys offer a real-time assessment of the statutory, regulatory, legal, and business-related developments and trends that are shaping the industry. We also examine a full array of non-U.S. public procurement issues, mindful that our clients compete in a global marketplace.Morrison Foerster’s nationally recognized Government Contracts and Public Procurement practice represents the world’s leading companies in the aerospace and defense, intelligence, cybersecurity, information technology, financial and professional services, education, healthcare, infrastructure, and logistics support sectors. We are enlisted to address our clients’ most complex and important legal issues. Our work includes contract and subcontract negotiation and other transactional matters, business and regulatory compliance counseling, internal investigations, bid protests, and a wide array of enforcement and litigation matters. Our clients range from Fortune 50 companies to small and medium-sized companies just entering the public sector. We advise both U.S. and non-U.S. companies involved in municipal, state, federal, and non-U.S. procurement matters.<h2>ABOUT MORRISON FOERSTER</h2>Morrison Foerster is a leading global law firm that transforms complexity into advantage for its clients. Our clients include some of the largest financial institutions, banks, consulting and accounting firms, and Fortune 100, technology, and life sciences companies. Highlighting the firm’s commitment to client service, leadership in market-changing deals and impact litigation, and values-based culture, Morrison Foerster has been repeatedly recognized as one of the top 10 firms on The American Lawyer’s A-List. Year after year, the firm receives significant recognition from Chambers and The Legal 500 across their various guides, including Global, USA, Asia‑Pacific, Europe, UK, Latin America, and FinTech Legal. Our lawyers passionately care about delivering legal excellence while living our values. Morrison Foerster has a long-standing commitment to creating a culture that respects and celebrates differences, while providing an inclusive environment. The firm has achieved Mansfield Certification Plus since 2018 as a result of successfully reaching at least 30 percent women, communities of color, and LGBTQ+ lawyer representation in a notable number of current leadership roles and committees. The firm also has a long history of commitment to the community and society through providing pro bono legal services, including litigating for civil rights and civil liberties, improving public education and fostering the wellbeing of children, advocating for veterans, promoting international human rights, enforcing the right to asylum, and safeguarding the environment.

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Tina is Co-chair of Morrison Foerster’s Government Contracts & Public Procurement practice. She represents a wide variety of government contractors including information technology, defense, biotechnology, and pharmaceutical companies, with a focus on general contract counseling and compliance, particularly concerning intellectual property, and cybersecurity matters and federal grant funding.Tina counsels contractors on compliance with federal, state and local acquisition and ethics regulations and with the evolving myriad of requirements pertaining to data security and cybersecurity. She has been involved with numerous internal investigations and compliance reviews, and with mandatory and voluntary disclosures to agencies, and litigation of False Claims Act matters.Tina routinely advises clients concerning:<ul><li>Prime-subcontractor relationships</li><li>Sources of supply and country of origin requirements</li><li>Price reductions and price reporting issues</li><li>Organizational conflicts of interest</li><li>Safeguarding of intellectual property and other proprietary interests</li><li>Licensing and data rights issues</li><li>Handling of classified materials and controlled unclassified information</li><li>Agency suspension and debarment proceedings</li></ul>She also assists clients with due diligence and other activities related to the acquisition of government contracting concerns, and with the drafting and negotiation of teaming agreements, subcontracts, licensing agreements, and cooperative research and development agreements. She also assists clients applying for federal grants (including SBIR and STTR agreements), and those who seek to obtain other transactional authority agreements, as well as those competing for state and local government work.Tina’s litigation experience includes government contracts claims litigation in federal courts and before boards of contract appeals, bid protests before the Government Accountability Office and the Court of Federal Claims, and complex disputes in federal courts, including civil fraud and False Claims Act litigation and reverse Freedom of Information Act litigation.Prior to joining Morrison Foerster, Tina worked at another large national firm and as a trial attorney in the Office of the General Counsel of the Navy, Navy Litigation Office.<h4>Representative Experience</h4><ul><li>Negotiation of largest CHIPS Act federal funding agreement between multinational semiconductor corporation and U.S. Department of Commerce.</li><li>Negotiated prime contract and major subcontracts related to the Department of Energy’s next generation supercomputer program, including extensive IP rights negotiations and negotiation of associated patent rights waivers.</li><li>Negotiated series of other transaction authority agreements with DARPA and associated subcontracts with more than a dozen research universities on behalf of a firm biotech client, including complex IP rights allocations and material transfer agreements.</li><li>Assist clients with FedRAMP authorization process and with development of license agreements for software products sold to federal, state and local government agencies.</li><li>Cyber incident response counseling to some of the largest companies and organizations impacted by security incidents.</li><li>Advises clients on Bayh-Dole reporting of inventions and IP strategies for contracts and grants.</li><li>Conducts due diligence for major government contract mergers and acquisitions.</li></ul>

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Tina is co-chair of Morrison Foerster’s Government Contracts & Public Procurement practice. She counsels a wide variety of government contractors on compliance with federal acquisition and ethics regulations. She drafts and negotiates contracts on their behalf and has been involved with numerous internal investigations and compliance reviews, and with bid protest, contract claims, and False Claims Act litigation. She also advises on M&A transactions involving government contractors.

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Jim Tucker is of counsel in Morrison Foerster’s Government Contracts and Public Procurement Practice Group and is based in the firm’s Washington, D.C. office.Jim’s practice runs the gamut of litigation and counseling in federal procurement matters, with an emphasis on bid protests, Cost Accounting Standards disputes, and small business matters. He has represented both protesters and awardees in scores of protests before the Government Accountability Office, the Court of Federal Claims, and procuring agencies, in acquisitions ranging from small business procurements to multibillion-dollar contracts of global significance. His representative protest matters span the aerospace sector, the Intelligence Community, base operations and logistics, healthcare, nuclear and environmental work, and information technology and software acquisitions. His protests have included both classified and unclassified programs. In addition to prevailing in published decisions, Jim has also secured favorable corrective action on behalf of clients in a wide variety of protests that were resolved without a published decision.Jim’s work also focuses on disputes over cost allowability and compliance with the Cost Accounting Standards, and he has appeared before the Armed Services and Civilian Boards of Contract Appeals, in size and status protests before Small Business Administration (SBA) area offices, and appeals before the SBA Office of Hearings and Appeals. Jim regularly counsels clients on contract interpretation, organizational conflicts of interest, and small business compliance.Jim graduated with high honors from the George Washington University Law School, where he focused his studies on federal procurement law, was a member of the Law Review, and interned with the General Services Administration’s suspension and debarment office. Jim also holds a degree in theology magna cum laude from the Pontifical Gregorian University in Rome and a bachelor’s degree in classical languages and literature summa cum laude from the University of Kentucky, where he graduated Phi Beta Kappa.

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Jim maintains an active practice in bid protests before the Government Accountability Office and contracting agencies and counsels clients in contract disputes and compliance obligations.

Jim Tucker is of counsel in Morrison Foerster’s Government Contracts and Public Procurement Practice Group and is based in the firm’s Washington, D.C. office. Jim’s practice runs the gamut of litigation and counseling in federal procurement matters, with an emphasis on bid protests, Cost Accounting Standards disputes, and small business matters.

James Tucker

<div style="margin-bottom: 15px;" class="videoWrapper"><iframe class="sticky-video" title="Meet Alex Ward, Government Contracts Practice Co-Chair" src="https://www.youtube-nocookie.com/embed/TkliwdSlTaQ?rel=0" frameborder="0" allow="autoplay; encrypted-media" allowfullscreen="1" title="iframe"></iframe></div>J. Alex Ward is co-chair of Morrison Foerster’s Government Contracts and Public Procurement group. His practice covers a full range of government contracts matters, including investigations, bid protests, claims, general litigation, corporate transactions, and counseling. Alex strives in all matters is to provide his clients the highest level of efficient and effective representation.Alex represents contractors in internal and external investigations, disclosures to the government, and qui tam litigation, with great success in reducing or eliminating his clients’ exposure through active engagement with the government. His work in this area includes obtaining numerous declinations and dismissals of False Claims Act cases in their earliest stages, sparing his clients the cost, risk, and exposure of litigation.He has also served as lead counsel in dozens of bid protests involving military and civilian agency procurements of a wide range of products and services, including all manner of pre- and post-award protests in the GAO, the U.S. Court of Federal Claims, and state tribunals, as well as appeals to the U.S. Court of Appeals for the Federal Circuit and size protest appeals before the SBA’s Office of Hearings and Appeals.Alex handles all aspects of the claims process, from the initial assessment and drafting of requests for equitable adjustment through litigation in the Boards of Contract Appeals and the Court of Federal Claims. Alex’s practice also covers the full gamut of other controversies confronting government contractors, including prime-sub, teaming partner, employer-employee, competitor, and indemnification disputes. His litigation work also includes a wide variety of pro bono engagements, in which he has represented both individual and institutional clients in matters ranging from immigration and criminal defense to sustainable procurement and protection of the environment.Prior to joining the firm, Alex served in the U.S. Army as a commissioned officer and an Assistant to the General Counsel of the Army responsible for civil works and international matters, and as a clerk for judges on the U.S. Courts of Appeals for the Armed Forces and the D.C. Circuit. He is a member of the Boards of the Morrison & Foerster Foundation and the Chesapeake Bay Foundation and of Law360’s Government Contracts Editorial Board.

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Alex is co-chair of Morrison Foerster’s Government Contracts and Public Procurement practice. His practice covers a full range of government contracts matters, including bid protests, claims, investigations, corporate transactions, and counseling.

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Morrison Foerster’s Government Contracts Insights blog provides an in-depth analysis of news, developments, and trends impacting government contracting and procurement. Through Insights, attorneys from our nationally recognized Government Contracts and Public Procurement practice will offer a real-time assessment of the statutory, regulatory, legal, and business-related developments that are shaping the industry. This blog will also examine a full array of U.S. and non-U.S. public procurement issues, mindful that our clients compete in a global marketplace.Read about our <a href="http://govcon.mofo.com/editors/">Authors</a>.Never miss a post. Subscribe to get real-time updates.

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The U.S. Office of Management and Budget (OMB) has issued <a href="https://www.whitehouse.gov/wp-content/uploads/2024/01/REV_Increasing-Opportunities-to-Small-Businesses-under-MACs-CATS-Final-Copy-1-25-24.pdf" target="_blank">a policy memorandum</a> with a goal of promoting small business participation under multiple-award indefinite delivery/indefinite quantity contracts (MACs). One of the memorandum’s three areas of focus – and the focus of this article – is the “[a]ward of orders under new and existing agency and government-wide multiple-award contracts.” Although the memorandum’s policies will require notice-and-comment rulemaking to take effect, OMB is encouraging agencies to begin implementing them now. The policy garnering the most attention is a directive that contracting officers “should” conduct a Rule of Two analysis before competing task orders under MACs and “should” document any decision not to set aside such requirements for small business concerns. This would constitute a significant shift in the treatment of task orders. The Rule of TwoOne of the touchstones of federal small business contracting is the “Rule of Two,” codified at Federal Acquisition Regulation (FAR) 19.502-2. For acquisitions valued at more than the micro-purchase threshold, but no more than the simplified acquisition threshold, a contracting officer ordinarily must set the procurement aside for small business concerns “unless the contracting officer determines there is not a reasonable expectation of obtaining offers from two or more responsible small business concerns that are competitive in terms of fair market prices, quality, and delivery.” FAR 19.502-2(a). For acquisitions valued at more than the simplified acquisition threshold, the contracting officer must set aside the procurement for small business concerns when there is a reasonable expectation that offers will be received from at least two responsible small business concerns, at fair market prices. FAR 19.502-2(b). The FAR makes clear that the Rule of Two and other FAR Part 19 preferences do not apply to orders under Federal Supply Schedule (FSS) contracts, although contracting officers have the discretion to set aside those orders for small business concerns, too. See FAR 8.405-5(a)(1). But how (if at all) does the Rule of Two apply to acquisitions using MACs? For example, if an agency has a requirement, and it knows of four responsible small businesses that are willing and able to perform the requirement at fair market prices, may the agency issue an in-scope task order for that work under an existing MAC that has no small business contract-holders? What about an existing MAC with both large and small contract-holders: may the agency compete the task order among all the holders, without using a set-aside, even if there are two small business contract-holders willing and able to do the work? Legal DisagreementThe Government Accountability Office (GAO) has noted that the Small Business Jobs Act of 2010 permits contracting agencies, “at their discretion” and “notwithstanding the fair opportunity requirements under” 10 U.S.C. § 3406(c), to set aside orders placed against multiple award contracts for small business concerns. See ITility, LLC, B-419167, Dec. 23, 2020, 2020 CPD ¶ 412 at 10-14.  The GAO reasons that this discretionary language means an agency is not required to perform a Rule of Two analysis before selecting a MAC to fill a requirement, and (once a MAC is selected) is not required to set the order competition aside for small businesses even if the Rule of Two is satisfied under that contract or otherwise. Id. at 19.Judge Solomson at the Court of Federal Claims and the Small Business Administration (SBA) have read the same statute and regulations very differently. In their analysis, FAR 19.502-2’s directive to set aside “any acquisition” that satisfies the Rule of Two necessarily includes acquisitions by task order – even when the overall MAC is not set aside. See Tolliver Grp., Inc. v. United States, 151 Fed. Cl. 70, 55 (2020). These authorities point to FAR 8.404(a)’s specific carve-out for FSS procurements as evidence that “where the FAR intends to make the Rule of Two entirely inapplicable to the selection of a particular procurement vehicle, the FAR knows how to do so.” Id. at 56. In their view, if the Rule of Two did not apply prior to selection of a MAC vehicle, the FAR would have said so. And, in their reading, the fact that the Small Business Jobs Act clarified agencies are permitted to set aside task orders under MACs did not make the Rule of Two optional before deciding what vehicle to use for the procurement. Thus, under Tolliver, if an agency has reason to expect two or more responsible small business concerns would submit proposals to fill specific requirements at fair market prices, the agency must set those requirements aside for small businesses, even if the agency has access to a MAC where there are no small business contract-holders or where set-asides otherwise would be discretionary. Broadly speaking, the Tolliver holding reflects the SBA’s own reading of the Small Business Jobs Act and the set-aside regulations with respect to MACs (in contrast to longstanding practice, which conforms more closely to the GAO’s position). New OMB Memorandum  Enter the new OMB memorandum. The memorandum articulates a policy that, apart from certain stated exceptions, agencies “should” set aside an order for small business concerns if the Rule of Two is met. The memorandum appears to contemplate that the Rule of Two analysis should occur before an agency decides whether to meet its requirements using an existing MAC. The results of that analysis should then inform the decision of which MAC to use, or whether not to use a MAC at all. The memorandum also provides that contracting officers “should” document any decision not to set aside an order, including in cases where a chosen MAC has no or only one small business contract-holder. This documentation is to include an explanation for why the agency decided to choose a particular MAC to fill the requirements, and what market research showed concerning availability of small businesses not on the chosen vehicle. The memorandum envisions that the SBA will receive copies of such documentation for acquisitions above a certain value. The memorandum states that the SBA and FAR Council have begun drafting proposed regulatory amendments to implement the policies set forth in the memorandum. Although these policies will not go into effect until the regulatory amendments have gone through notice-and-comment rulemaking and have been duly promulgated, OMB “encourages early agency adoption of these management steps.”Takeaways1. For the time being, the memorandum’s policies lack the force of law, although OMB encourages agencies to begin implementing them voluntarily now. Until new regulations are promulgated, the GAO will likely not sustain a protest for a failure to employ the Rule of Two in connection with a task order procurement. And, in accordance with Tolliver, at least one judge on the Court of Federal Claims is likely to sustain a protest on this basis even without new regulations. 2. The SBA and the FAR Council will have to decide what to do with all the “shoulds” in the memorandum. Ordinarily, “should” means one is encouraged to do something but not strictly required to do so. This falls on middle ground somewhere between the Court’s Tolliver decision (mandating a Rule of Two analysis before choosing a MAC) and the GAO’s ITility decision (leaving set-aside decisions and the Rule of Two wholly to the procuring agency’s discretion if it chooses to use a MAC). 3. If the SBA and FAR Council decide that a Rule of Two analysis is required for all MACs across the federal government, it would constitute a significant shift in the previously discretionary regime. Large firms on mixed-size MACs will likely see significant decreases in expected opportunities, even on existing contracts.4. None of the memorandum’s discussion of MACs applies to competitions under FSS contracts. Everyone appears to agree that agencies do not have to undertake a Rule of Two analysis before placing orders or competing Blanket Purchase Agreements under the FSS program.

OMB Says Agencies “Should” Perform a Rule of Two Analysis and Set Aside Requirements for Task Orders Under Multiple-Award Contracts

Jim Tucker is of counsel in Morrison & Foerster’s Government Contracts and Public Procurement Practice Group and is based in the firm’s Washington, D.C. office.
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OMB Says Agencies “Should” Perform a Rule of Two Analysis and Set Aside Requirements for Task Orders Under Multiple-Award Contracts

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The U.S. Office of Management and Budget (OMB) has issued a policy memorandum with a goal of promoting small business participation under multiple-award indefinite delivery/indefinite quantity contracts (MACs). 

Small business regulations create one of the stickier wickets in bid protest litigation. Although the Small Business Administration (SBA) has exclusive authority to determine a company’s size and socioeconomic status, the Government Accountability Office (GAO) sometimes must wrestle with size and status questions to adjudicate bid protests. The GAO’s recent decision in <a href="https://www.gao.gov/assets/870/864489.pdf" target="_blank" dir="ltr">Washington Business Dynamics, B-421953, B-421953.2, Dec. 18, 2023</a>, includes a lengthy analysis of a particularly complicated question: the effect of a merger or acquisition on a pending quotation for an order or Blanket Purchase Agreement (BPA) under a Federal Supply Schedule (FSS) contract. In this decision, the GAO held that, although a company recertified its size under an FSS contract following a merger or acquisition, that recertification did not trigger a further recertification in connection with its pending quotation for a BPA under that FSS contract. That, at least, was the outcome under the regulations as they stood at the time and the facts of this particular case.Factual BackgroundThe protest involved an Office of Personnel Management (OPM) Request for Quotations (RFQ) for a BPA under Federal Acquisition Regulation (FAR) Subpart 8.4. OPM issued the RFQ to service-disabled veteran-owned small businesses (SDVOSB) holding FSS contracts for professional services. The RFQ did not request vendors to recertify their size or status in connection with the procurement.On February 1, 2023, the protester (which was the incumbent for these services) submitted its quotation in response to the RFQ. At that time, and as of the date of its initial offer for its underlying FSS contract, the protester was an SDVOSB. On June 28, 2023, which was 147 days after it submitted its quotation, the protester was acquired by a non-SDVOSB firm and lost its SDVOSB status as a result. In accordance with FAR 52.219-28(b)(2), the protester timely notified OPM under the protester’s incumbent BPA of the acquisition and that it was no longer an SDVOSB.OPM completed the procurement for the new BPA, documented that the protester was no longer an SDVOSB, and awarded the BPA to a vendor with a lower price and equal non-price ratings. The protest followed.AnalysisAs a threshold matter—and the question on which this article focuses—OPM requested that the GAO dismiss the protest because the protester’s change in size status allegedly meant it was no longer eligible for award of the BPA. According to OPM, because the protester ceased to be an SDVOSB within 180 days after the submission of its BPA quotation, the protester was ineligible for award pursuant to 13 C.F.R. § 121.404(g)(2)(iii). That regulation, in the form it existed at release of the RFQ, provided:If the merger, sale or acquisition occurs after offer but prior to award, the offeror must recertify its size to the contracting officer prior to award.  If the merger, sale or acquisition (including agreements in principal [sic]) occurs within 180 days of the date of an offer and the offeror is unable to recertify as small, it will not be eligible as a small business to receive the award of the contract.  If the merger, sale or acquisition (including agreements in principal [sic]) occurs more than 180 days after the date of an offer, award can be made, but it will not count as an award to small business.13 C.F.R. § 121.404(g)(2)(iii) (emphasis added). SBA subsequently amended this regulation to provide that it applies not only to offers for the award of a contract, but also to offers for the award of an order or agreement; it appears unlikely this change would have altered the outcome here, but that is an open question, as the GAO found the amendment had no effect on this procurement. The GAO sought input from SBA, which apparently agreed with OPM and the awardee that the acquisition required the protester to recertify in connection with the procurement and, because the transaction occurred within 180 days after submission of the protester’s quotation for the BPA, the protester’s change in status made it ineligible for award.The GAO disagreed and found that OPM’s and SBA’s interpretation of the governing SBA regulations was unreasonable. In the GAO’s view, these recertification and ineligibility provisions do not apply to quotations for orders and BPAs under an FSS contract.  In Odyssey Systems Consulting Group, Ltd., B-419731 et al., July 15, 2021, 2021 CPD ¶ 260, the GAO previously considered the 180-day rule in the context of a task order competition under a non-FSS multiple-award contract, where the contract was previously set aside for small business. In that context, where the contracting officer had not specifically required a recertification in connection with the order, the GAO held that an offeror remains eligible for award of the order, regardless of any transactions or size status changes inside or outside the 180-day window. As we have <a href="https://govcon.mofo.com/topics/220222-january-2022-bid-protest-roundup" target="_blank" dir="ltr">previously discussed</a>, SBA’s Office of Hearings and Appeals (OHA) has made the same determination. See Size Appeal of Odyssey Systems Consulting Group, Ltd., SBA No. SIZ-6135 (2021).Turning to the FSS BPA competition at issue here, the GAO began by quoting OHA’s recognition of the general rule that “a prime contractor that is small at the time of the contract award remains small for all orders issued under the contract, unless the [contracting officer], in his or her role discretion, chooses to request recertification on an individual order-by-order basis.” Size Appeal of EBA Ernest Bland Assocs. PC, SBA No. SIZ-6139 (2022), 2022 WL 529352 at *5.The GAO acknowledged that there are exceptions to this general rule. One of the exceptions applies to subsequent set-aside competitions under unrestricted multiple-award contracts. In such contexts, “a concern must recertify its size status and qualify as a small business at the time it submits its initial offer, which includes price, for the particular order or Blanket Purchase Agreement.” 13 C.F.R. § 121.404(a)(1)(i)(A) (for unrestricted multiple-award contracts assigned a single NAICS code); see also 13 C.F.R. § 121.404(a)(1)(ii)(A) (same for unrestricted multiple-award contracts assigned multiple NAICS codes). By the terms of the regulations themselves, however, this exception to the general rule does not apply to “orders and Blanket Purchase Agreements issued under any Federal Supply Schedule contract.” 13 C.F.R. § 121.404(a)(1)(i)(A); see also 13 C.F.R. § 121.404(a)(1)(ii)(A). Thus, there is no standalone requirement for vendors to recertify in connection with offers for orders or BPAs under an FSS contract. The GAO noted that SBA’s OHA has expressly held the same thing. Size Appeal of Oxford Gov. Consulting LLC, SBA No. SIZ-5732 (2016), 2016 WL 4990545 at *2 (“[R]ecertification is not required under a BPA issued against an FSS.”); see also Size Appeal of EBA Ernest Bland Assocs. PC, SBA SIZ No. 6139 (2022), 2022 WL 529352 at *6 (finding that, absent a specific order-level recertification requested by the contracting officer, there was no requirement to recertify at the FSS-order level).The GAO briefly noted that, for contracts already awarded, 13 C.F.R. § 121.404(g)(2)(i) (like FAR 52.219-28(b)) requires a contractor to recertify as small or notify the agency of a change in status under an awarded contract within 30 days after a merger, sale, or acquisition, where contract novation is not required. If the contractor is no longer small, the agency may continue to exercise options and issue new orders under the contract but can no longer count them towards its small business goals. This post-award recertification/notification requirement does not apply to pending offers.The GAO finally turned to 13 C.F.R. § 121.404(g)(2)(iii), which articulates the 180-day rule for pending offers. This rule is a creature of regulation and does not come from any specific statutory requirement. If a transaction occurs more than 180 days after the offer submission, and that causes a concern to exceed the size status, then, similar to 13 C.F.R. § 121.404(g)(2)(i), the concern remains eligible for the set-aside award, but the agency may not count the award towards its small business goals. If, however, the transaction occurs within 180 days after offer submission, then the concern will be ineligible to receive the award. The GAO agreed with the protester that 13 C.F.R. § 121.404(g)(2)(iii) is inapplicable to pending offerors for FSS orders or BPAs. The GAO observed that set-aside orders and BPAs issued against the FSS are expressly exempt from recertification requirements. 13 C.F.R. §§ 121.404(a)(1)(ii)(A), 121.404(a)(2). It also noted that SBA’s OHA has previously held that a transaction requiring an FSS contract-level recertification under 13 C.F.R. § 121.404(g)(2)(i) does not trigger a similar recertification obligation with respect to pending quotations for orders or BPAs under that FSS contract. Size Appeal of EBA Ernest Bland Assocs. PC, SBA SIZ No. 6139 (2022), 2022 WL 529352 at *4. Thus, consistent with this OHA holding, the GAO found the transaction had no effect on the protester’s eligibility for award of the BPA here.The GAO acknowledged, in a footnote, that the SBA raised policy reasons to support its position that the recertification regulations apply to all orders and agreements, including those under the FSS. But policy considerations cannot override the text of the regulations, which the GAO found expressly exempted FSS orders and agreements.The GAO, in another footnote, highlighted the “incongruous” results that would flow from OPM’s and SBA’s interpretation. Under the agencies’ interpretation, if the protester had been acquired before offer submission, then 13 C.F.R. § 121.404(a)(1)(ii)(A) would govern the subsequent BPA competition, under which the protester would not be required to recertify in connection with the offer and would be eligible for award. The GAO reasoned that, because there was no apparent reason for such an absurd result, the agencies’ preferred interpretation did not appear reasonable.The GAO noted its decision was “limited to the unique factual circumstances presented in this case,” but that was enough to find the protester was eligible for award and thus was an interested party with standing to protest. Unless the SBA amends its regulations, though, this decision will be instructive for FSS contractors in the not so “unique factual circumstances” of undergoing transactions while they have FSS order or BPA bids pending.Takeaways<ol><li dir="ltr">Small business regulations are complicated, as a general rule. And, as the GAO observed in Odyssey Systems, the regulations governing transactions in particular are “not a model of clarity.” Companies with small business contracts and proposals (and those interested in acquiring them) should seek legal counsel prior to any merger or acquisition.</li><li dir="ltr">Don’t assume the rules applicable to contracts are also applicable to orders and BPAs, or that the rules governing FSS orders and BPAs are the same as those governing non-FSS orders and agreements.</li><li dir="ltr">Careful parsing of the regulatory text is always necessary. What the small business regulations require and what the SBA intended them to require are not necessarily the same thing. Although the GAO will give due deference to SBA’s views, this and similar protest decisions show the GAO will not endorse an SBA interpretation that it finds is inconsistent with the text of a regulation.</li></ol>

GAO Finds Company's BPA BID Remains Eligible for Award Despite a Transaction, Recertification, and Change in Size Status in Connection with Its Underlying Federal Supply Schedule Contract

GAO Finds Company's BPA BID Remains Eligible for Award Despite a Transaction, Recertification, and Change in Size Status in Connection with Its Underlying Federal Supply Schedule Contract

Small business regulations create one of the stickier wickets in bid protest litigation. 

On December 22, 2023, President Biden signed the <a href="https://www.congress.gov/bill/118th-congress/house-bill/2670" target="_blank" dir="ltr">National Defense Authorization Act for Fiscal Year 2024</a> into law after bipartisan congressional majorities approved the bill earlier in the month. The annual bill authorizes appropriations and sets policy for the Department of Defense (“DoD”) and generally reflects the priorities of the House and Senate Armed Services Committees. Below, we review select provisions likely to be of greatest interest to government contractors. Many of these provisions will only take effect after the government promulgates implementing regulations, following notice-and-comment procedures.Noteworthy ProvisionsContract Administration<ul><li>Expansion of Multiyear Contracts. A need for industrial base stability can now justify multiyear procurement contracts. Previously, multiyear contracts were only permissible if the DoD determined they would bring “significant savings” to the total price that the government would pay over the course of the contract. In expanding the availability of multiyear contracts, Congress determined that reliance on cost savings only was too restrictive and that promoting defense industrial base stability was sufficient justification for longer contracts. (Section 820)</li><li>Extension of Inflation Relief. The DoD will have more time to write inflation adjustments into fixed-price contracts as the NDAA extends an inflation relief program first enacted in the Fiscal Year 2023 NDAA by a year, until December 31, 2024. The program allows DoD contracting officers to make price adjustments to contracts as compensation for high inflation, even for fixed-price contracts that do not otherwise provide for economic price adjustment. (Section 824)</li><li>Waiver of Procurement Rules for Replenishment of Stockpiles. Emergency acquisition authorities can now be invoked to replace military supplies that have been provided to allies. This provision expands upon emergency acquisition authorities at 10 U.S.C. §  3601, which allow the military to waive certain procurement rules, including competition requirements, in emergency situations. The provision was designed to accelerate the pace at which the United States can refill its stockpiles of weapons and other equipment that have been sent to Ukraine. (Section 831)</li><li>Earned Value Management System Exemption. DoD contracts and subcontracts for purchase of software will be exempt from Earned Value Management System requirements. The DoD has 180 days from the NDAA’s enactment to update the Defense Federal Acquisition Regulation Supplement (DFARS) to implement this provision. (Section 827)</li></ul>Contracting Innovation<ul><li>Increasing Use of Commercial Products and Services. As part of its continued efforts to simplify the process for DoD acquisition of commercial goods and services, Congress has directed the Under Secretary of Defense for Acquisition and Sustainment to prepare a report about the feasibility of several measures that would reduce administrative barriers to procuring commercial goods and services. The first measure would “establish a default determination” that products and services the military buys are commercial. Another measure would direct more acquisitions under FAR Part 12, which contains specialized procedures for commercial purchases. (Section 875)</li><li>Supply Chain Scrutiny. The supply chains of five weapons platforms will receive greater scrutiny under a DoD pilot program. The pilot program should “identify critical suppliers” and “potential risks to and vulnerabilities of” those suppliers. The program could also be used to develop strategies to expand production of each platform’s components. New technologies, such as artificial intelligence and machine learning, could aid in the identification and analysis of supply chain vulnerabilities. (Section 856)</li><li>DoD to Obtain Enhanced Data Rights. Congress wants the DoD to experiment with innovative intellectual property strategies to acquire more data rights in information technology products. The suggested new strategies include holding intellectual property data in an escrow account or the innovative use of royalties and licenses. Each military department must select one acquisition program for the new strategies, and an additional program will come from one of the DoD agencies or field activities. DoD components have until May 1, 2024, to designate the data rights pilot programs. (Section 808)</li><li>New Technology Acquisition Model. The DoD will run a pilot program to buy “technology-supported” capabilities on an “anything-as-a-service” model. This acquisition model should “provide users on-demand access, quickly add newly released capabilities, and bill based on actual usage at fixed price units.” The pilot program should only include capabilities for which there is a measurable outcome that can be compared to results using more traditional acquisition methods. Contracts could be signed quickly under this pilot program: the provision directs the military to enter into a contract or agreement within 100 days of providing public notice for each capability that it seeks to buy. (Section 809)</li></ul>Small Businesses<ul><li>Affiliate Past Performance May Be Considered. Contracting officers may now consider the past performance of a small business’s affiliated companies as the past performance of the small business in proposal evaluation. The DFARS must be amended by July 1, 2024, to implement the provision. (Section 865)</li><li>New SDVOSB Certification Requirement. Contractors and subcontractors will no longer be able to self-certify their status as service-disabled veteran-owned small businesses (SDVOSB). This provision will take effect at the beginning of the first fiscal year after the Small Business Administration (SBA) promulgates regulations implementing an SBA certification process. Contractors that have previously self-certified as SDVOSBs will have one year after the NDAA’s enactment to file for certification with the SBA. If contractors file within that one-year period, their self-certification will remain valid until the SBA rules on their certification applications. (Section 864)</li><li>Change to Federal SDVOSB Goals. The goal for SDVOSB contracting has been increased to five percent across the whole federal government, up from three percent. The government-wide goal had stood at three percent of the total value of prime and subcontract awards for more than two decades. (Section 863)</li></ul>Antitrust<ul><li>Expanded Role for DoD in Antitrust Reviews. The DoD could take on a greater role in antitrust enforcement for the defense industry going forward. The NDAA requires companies to notify the DoD of certain defense-related transactions, specifically mergers and acquisitions that must be reported to the Department of Justice and Federal Trade Commission under section 7A of the Clayton Act. Notably, an earlier Senate draft also would have required notice to DoD of other types of investments and joint ventures involving major defense contractors, not just mergers and acquisitions, but this provision was not included in the final bill. (Section 857)</li></ul>Greenhouse Gas Reporting<ul dir="ltr"><li dir="ltr">Delay and Elimination of Reporting Requirements. The DoD may not require nontraditional defense contractors to report greenhouse gas emissions at all and may not compel other contractors to submit greenhouse gas reports for at least a year, starting with the enactment of the NDAA. The provision includes exceptions, so certain contractors might be forced to disclose emissions to verify other reports or disclosures. (Section 318)</li></ul>Sanctions and Other Foreign Country-Related Restrictions<ul><li>No Contracts to Russian Energy Partners. DoD cannot award contracts to companies that partner with Russian state-owned oil or gas companies or any other company that extracts oil or gas in Russia. The provision includes humanitarian aid exceptions. It will expire at the end of 2029 without congressional renewal. (Section 804)</li><li>No Consulting Advice to Russia or China. Consulting firms cannot work for the DoD if they also work with Chinese or Russian government clients or sanctioned companies in those countries, unless they receive a waiver and implement a mitigation plan. (Section 812)</li></ul>Noteworthy Omission<ul dir="ltr"><li dir="ltr">Bid Protest Fee Shifting Provision Fails Again. The NDAA did not include a provision, which had passed the House, that would have created a “loser pays pilot program” for bid protests at the Government Accountability Office. Under the draft provision, contractors with more than $250 million in annual revenues that lost a bid protest at the GAO would have been required to reimburse the DoD for the cost of fighting the protest. A nearly identical provision passed into law in the Fiscal Year 2018 NDAA but was repealed before taking effect.</li></ul>Ethan Sterenfeld, a Law Clerk, contributed to the writing of this post.

Tina is a partner in Morrison & Foerster’s Government Contracts practice. She represents a wide variety of government contractors including information technology, defense, biotechnology, and pharmace

Tina Reynolds

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GAO Finds CIO-SP4 Solicitation Is Unduly Restrictive of Competition

On December 22, 2023, President Biden signed the National Defense Authorization Act for Fiscal Year 2024 into law after bipartisan congressional majorities approved the bill earlier in the month. The annual bill authorizes appropriations and sets policy for the Department of Defense (“DoD”) and generally reflects the priorities of the House and Senate Armed Services Committees.

Notable Provisions of the FY 2024 National Defense Authorization Act

In recent months, there have been a number of articles about an increase in venture capital interest in entities that do business with the federal government. In fact, this interest is not new. Small entities with venture backing have used programs like the Small Business Innovation Research (SBIR) program to obtain early stage research and development funding and government entities, like the Department of Defense, have tried to encourage smaller firms with cutting edge technology to enter the federal market. However, traps for the unwary remain. Specifically, many small businesses and venture capital firms assume that minority investments on standard market terms will not change a company’s status under the Small Business Administration (SBA) affiliation rules. This assumption can be a mistake and is one of the most common pitfalls we see companies get caught in when making a minority investment in a small business.To calculate the size of a business for purposes of SBA small business rules, SBA aggregates the number of employees or annual receipts of the business with those of all of its affiliates.   Under the SBA rules, affiliation includes both exercised and potential control ‒ both affirmative and negative control. To avoid the small business becoming affiliated with its minority investors (and perhaps its other investments) for purposes of determining the size of the small business, such minority investors cannot have control over the small business’s day-to-day actions.SBA’s Office of Hearing and Appeals (OHA) case law has explained that the following activities constitute day-to-day actions that a small business must maintain exclusive control over:<ul><li dir="ltr">Paying dividends;</li></ul><ul><li>Forming a quorum of shareholders;</li><li>Determining employee compensation;</li><li>Hiring and firing executives;</li><li>Blocking “any changes in the [company’s] strategic direction”;</li><li>Committing any act that would alienate or encumber a concern’s assets;</li><li>Amending or terminating existing lease agreements;</li><li>Purchasing equipment;</li><li>Incurring debts or obligations (even if a dollar threshold is established);</li><li>Selecting independent auditors;</li><li>Choosing accounting methods; and</li><li>Making changes to the budget.</li></ul>This list is not exhaustive, and case law is constantly developing to highlight additional actions that SBA considers to be day-to-day. However, here’s the important point ‒ many of the terms used in venture capital investments (such as the National Venture Capital Association (NVCA) form certificate of incorporation and investor rights agreement) contain controls that would be deemed to result in a venture capital firm having negative control over the small business, and thus result in affiliation under the SBA rules ‒ and perhaps making that business ineligible for SBIR<a href="#_ftn1" dir="ltr" target="_self">[1]</a> or other small business contracts. A few examples of such standard terms that could (and in some instances likely would) result in affiliation under SBA rules include, but are not limited to, the following:<ul><li dir="ltr">Create, or authorize the creation of, or issue, or authorize the issuance of any debt security or create any lien or security interest (except for purchasing money liens or statutory liens of landlords, mechanics, materialmen, workmen, warehousemen and other similar persons arising or incurred in the ordinary course of business) or incur other indebtedness for borrowed money, including, but not limited to, obligations and contingent obligations under guarantees, or permit any subsidiary to take any such action with respect to any debt security lien, security interest or other indebtedness for borrowed money[, if the aggregate indebtedness of the corporation and its subsidiaries for borrowed money following such action would exceed $_____] [other than equipment leases, bank lines of credit or trade payables incurred in the ordinary course] [unless such debt security has received the prior approval of the board of directors, including the approval of [at least one] preferred director];</li><li dir="ltr">Purchase or redeem (or permit any subsidiary to purchase or redeem) or pay or declare any dividend or make any distribution on, any shares of capital stock of the corporation other than (i) redemptions of, or dividends or distributions on, the preferred stock as expressly authorized herein, (ii) dividends or other distributions payable on the common stock solely in the form of additional shares of common stock and (iii) repurchases of stock from former employees, officers, directors, consultants, or other persons who performed services for the corporation or any subsidiary in connection with the cessation of such employment or service at no greater than the original purchase price thereof [or (iv) as approved by the board of directors, including the approval of [at least one] preferred director];</li><li dir="ltr">Create, or authorize the creation of, or issue, or authorize the issuance of any debt security or create any lien or security interest (except for purchasing money liens or statutory liens of landlords, mechanics, materialmen, workmen, warehousemen and other similar persons arising or incurred in the ordinary course of business) or incur other indebtedness for borrowed money, including, but not limited to, obligations and contingent obligations under guarantees, or permit any subsidiary to take any such action with respect to any debt security lien, security interest or other indebtedness for borrowed money[, if the aggregate indebtedness of the corporation and its subsidiaries for borrowed money following such action would exceed $_____] [other than equipment leases, bank lines of credit or trade payables incurred in the ordinary course] [unless such debt security has received the prior approval of the board of directors, including the approval of [at least one] preferred director];</li><li dir="ltr">Make, or permit any subsidiary to make, any loan or advance to, or own any stock or other securities of, any subsidiary or other corporation, partnership, or other entity unless it is wholly owned by the company;</li><li dir="ltr">Guarantee, directly or indirectly, or permit any subsidiary to guarantee, directly or indirectly, any indebtedness except for trade accounts of the company or any subsidiary arising in the ordinary course of business;</li><li dir="ltr">Incur any aggregate indebtedness in excess of $[_____] that is not already included in the budget, other than trade credit incurred in the ordinary course of business;</li><li dir="ltr">Hire, terminate, or change the compensation of the executive officers, including approving any option grants or stock awards to executive officers;</li><li dir="ltr">Sell, assign, license, pledge, or encumber material technology or intellectual property, other than licenses granted in the ordinary course of business; or</li><li dir="ltr">Enter into any corporate strategic relationship involving the payment, contribution, or assignment by the company or to the company of money or assets greater than [_____] dollars ($[_____]).</li></ul>So, if you have an outside investment with these terms and are bidding on small business contracts with the federal government, you are at significant risk of not only losing a size protest but, in some instances, you may face action under the False Claims Act.Case law and guidance from SBA also clarifies that minority investors may take actions that are meant to protect their own interests, rather than impede a small business’s ability to control its day-to-day operations. In other words, a minority investor may block extraordinary actions without SBA finding the minority investor has negative control over the small business. Although there is no bright-line test for what meets this standard, OHA has found that a minority investor can block the following extraordinary actions without the result of its actions becoming a finding of control by minority investors:<ul><li>Selling all or substantially all of a company’s assets;</li><li>Mortgaging or placing an encumbrance upon all or substantially all assets of a company;</li><li>Engaging in any action that could result in a change in the amount or character of a company’s contributions to capital;</li><li>Changing the character of a company’s business;</li><li>Amending a concern’s charter, bylaws, operating agreement, or the articles of organization;</li><li>Taking an action in contravention of a concern’s operating agreement;</li><li>Committing any act that would make it impossible for a company to carry on its ordinary course of business;</li><li>Disposing of the goodwill of a company;</li><li>Correcting a false or erroneous statement in a concern’s articles of organization;</li><li>Submitting a company’s claim to arbitration;</li><li>Confessing about a judgment;</li><li>Initiating litigation;</li><li>Issuing additional stock;</li><li>Entering into substantially different lines of business;</li><li>Adding new members;</li><li>Dissolving the company;</li><li>Approving an increase or decrease in the size of the concern’s board;</li><li>Approving an increase or decrease in the number of authorized interests, or reclassifying interests;</li><li>Amending the operating agreement in any manner that materially alters the rights of existing members; and</li><li>Filing for bankruptcy.</li></ul>Navigating the line between day-to-day management and extraordinary actions and staying attuned to further developments in case law that provide additional data points about what falls on either side of that line are critical for both small startups and investors. However, the key action item for investors and small businesses is to review their current agreements and, at minimum, eliminate any of the prohibited negative controls before submitting future small business proposals. You can gain an invaluable amount of the knowledge needed to manage the legal aspects of launching, funding, and growing a startup, with insights to avoid many common mistakes that can have serious consequences down the road at <a href="https://scaleup.mofo.com/" target="_blank">MoFo ScaleUp</a>.<a href="#_ftnref1" target="_self">[1]</a> We note that the risk around affiliation for the SBIR program is significantly mitigated by 13 CFR 121.702(c)(9), where SBA has gone out of its way to make the program more accessible to investors (“If a venture capital operating company, hedge fund, or private equity firm that is determined to be affiliated with an awardee is a minority investor in the awardee, the awardee is not affiliated with a portfolio company of the venture capital operating company, hedge fund, or private equity firm, unless: (i) The venture capital operating company, hedge fund, or private equity firm owns a majority of the portfolio company; or (ii) The venture capital operating company, hedge fund, or private equity firms holds a majority of the seats of the board of directors of the portfolio company.”

Venture Capital Investment in a Small Business? Know the SBA rules first.

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Tyler Sewell is a corporate partner in the firm’s Denver office, specializing in mergers and acquisitions and general corporate matters.

Tyler J. Sewell

Tyler Sewell

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Associate

Ali Young is an associate in the Government Contracts practice in Morrison Foerster’s Washington, D.C. office.

Alissandra Young McCann

Ali Young is an associate in the Government Contracts practice in Morrison Foerster’s Washington, D.C. office.

Alissandra McCann

Venture Capital Investment in a Small Business? Know the SBA rules first.