SDV Not In “Control” – Court Affirms Overturn of Set Aside Award!

In XOTECH, LLC v. UNITED STATES, 950 F.3d 1376 (Fed. Cir. 2020) (XO), the Federal Circuit recently affirmed the overturn of an award to a service-disabled-veteran-owned (SDVO) LLC small business on the grounds that the LLC failed to show that its decisions were controlled by the SDV as required by law.

THE BACKGROUND

In 2017, the Army issued an RFP –set aside for SDVO small business –to provide logistical support for certain Army Reserve facilities.  XO submitted a proposal and was awarded the contract.  An unsuccessful bidder protested to the SBA, the agency responsible for making eligibility determinations, contending that XO was not eligible to obtain this award as an SDVO small business.  The SBA agreed.    In brief, the SBA determined that XO failed to show that an SDV “controlled” XO’s decisions as required by law.  XO then filed its own protest with the Court of Federal Claims. The court agreed with the SBA.  XO then filed this appeal to the Federal Circuit.  The Circuit affirmed.

THE FEDERAL CIRCUIT’S ANALYSIS

In general, for a contractor to have SDVO status it must show SDV ownership and control.  Here the issue was SDV “control.”  SBA regulations, insofar as pertinent, require that for an LLC to be controlled by an SDV, the SDV must have control over all decisions of the LLC.  13 C.F.R. 125.13(d).

Under XO’s “Operating Agreement” (OA), management authority was vested in three managers. Each manager had one vote, and management decisions required a majority.  The problem here was that one manager was an SDV, but the other two managers were not.  Thus, the SDV manager needed the vote of a non-SDV manager to make decisions.  Moreover, the two non-SDV managers – acting as a majority—could make management decisions without regard to the SDV.

The Court held that to establish SDV control of the LLC, the SDV must independently control all decisions of the LLC without the need for consent of non-SDVs. This was not the case here. The Court concluded that the SDV did not exercise control of all decisions of the LLC as required by the regulations.  Accordingly, XO was ineligible to obtain the award of this contract that was set aside for SDVO small business.

XO argued that under its OA the SDV had the authority to unilaterally remove the other managers, and thus the SDV maintained firm control of the business.  The Court was not persuaded, stating among other things that this authority did not grant the SDV the power to annul or undo management decisions once they were made.

THE TAKEAWAY

For years prior, it appears that XO had SDVO small business status– the SDV was the sole member and sole manager of the LLC under its OA.  For reasons unexplained in the Court’s opinion, XO amended its OA in 2012 to change XO from a “single manager” company to a “multiple manager” company, which ultimately led to the problems here.  OAs may be structured in many ways for many different reasons, but that structure must ensure that the special SDVO legal status of the business is not jeopardized.