BLOG: Protégé Subcontract Revenues from Mentor Hold No Basis for Economic Dependence

An important benefit of a mentor-protégé agreement (MPA) is that no determination of affiliation may be found between a protégé and its mentor solely because of assistance provided under the agreement. A recent decision of the Small Business Administration (SBA) Office of Hearings and Appeals (OHA), Avar Consulting, Inc.,^[1] upheld a size determination which found that a protégé was not affiliated with its SBA-approved mentor through economic dependence, even though the revenues it received from the mentor constituted over 70% of the revenues it received between formation and the date of size self-certification. A small business government contractor that anticipates future affiliation with a business under the 70% economic dependence rule should consider entering into an SBA-approved small business MPA with that business to prevent future revenues it receives from the business from being considered when economic dependence is assessed.

As many of our readers know, under SBA regulations, there is a presumption of an identity of interest based upon economic dependence if a firm derives 70% or more of its receipts from another business over the previous three fiscal years. In other words, if a small business obtains 70% or more of its total revenues from another business, SBA will assume that the two businesses are affiliated, and may find that the small business is no longer small as a result. This is precisely the flag Avar raised in its appeal to OHA.

In this appeal, Avar was protesting the size of Telaforce, LLC, a self-certified small business which had won a small business set-aside contract with the Bureau of Labor and Statistics (BLS). Telaforce had an SBA-approved Mentor-Protégé Agreement with CACI International, Inc. (a large business). Avar protested that because of, among other things, Telaforce’s reliance on CACI International, Inc. (a large business) for more than 70% of Telaforce’s total revenue, Telaforce should not be considered a small business.

Avar protested that Telaforce’s reliance on CACI predated the MPA, so that reliance should be considered affiliation. To support this argument, Avar pointed to a subcontracting agreement and an asset purchase agreement between CACI and Telaforce, both of which became effective before the MPA was approved. However, OHA disagreed with this assessment for two major reasons. First, OHA found that the revenue generated in the roughly two months before the MPA became effective, but after the other agreements became effective, was only a small amount compared to Telaforce’s overall revenues as of the date of its self-certification as a small business. The vast majority of Telaforce’s revenue from CACI came after the MPA entered into force, so that revenue did not have any bearing on whether Telaforce and CACI were affiliated, per SBA’s regulations. Second, OHA found that, while it was true the MPA came into effect after the other agreements, the other agreements were not pre-MPA “assistance” from CACI to Telaforce. Rather, they were standard, arm’s-length business transactions, and there was no evidence that CACI had given Telaforce special treatment during those transactions. Therefore, neither the revenues Telaforce received from CACI before the MPA, nor the agreements that gave rise to those revenues, were sufficient to show that Telaforce impermissibly relied on CACI. OHA thus held that Telaforce and CACI were not affiliated, so Telaforce was indeed a small business.

While not path-breaking, there is a useful takeaway from this decision. A small business that anticipates affiliation with another business under the 70% economic dependence rule should consider entering into an SBA-approved small business mentor-protégé relationship to prevent revenues it receives from its mentor after the formation of the mentor-protégé relationship from being considered when economic dependence is assessed. Members of PilieroMazza’s Government Contracts Law practice group are well-equipped to advise government contractors with the formation of a mentor-protégé relationship.

Patrick Rothwell, an Associate with the Firm, is a member of the Government Contracts Lawand Small Business Programs & Advisory Services practice groups.

Anna Wright, an Associate with the Firm, is a member of the Government Contracts Law Practice Group.