Court of Federal Claims Reaffirms VOSB/SDVOSB’s Rights to Due Process During Protests

Last week, the Court of Federal Claims issued its opinion in Ambuild Company v. LLC v. U.S. AmBuild is a major victory for veteran-owned because it reaffirms their due process rights in the context of status protests.

The AmBuild case is of particular interest to me and my colleagues because it concerns the interpretation of a Department of Veterans’ Affairs (“VA”) regulation that was promulgated in response to a successful ruling we secured for a service-disabled veteran-owned small business client last year (Miles Construction, LLC v. United States (Case No. 12-597C)). In that case, the VA improperly canceled the SDVOSB status of our client, Miles Construction Company, LLC’s (“Miles”). The cancelation happened as a result of a protest from a competitor. What was interesting was that the VA’s ultimate basis for cancelation was something that was never alleged in the protest. The protest had set forth certain allegations about Miles’ owner’s purported lack of “unconditional control” over the company pursuant to 38 C.F.R. 74.4. Miles was asked to provide, and did provide, a response to all of the allegations set forth in the protest concerning control of the company. When investigating the protest, the VA’s Office of Small and Disadvantaged Business Utilization (“OSDBU”) found that there was no issue with Miles’ owner’s control over the company. However, OSDBU took it upon itself to expand the scope of the protest investigation to include issues of “unconditional ownership” pursuant to 38 C.F.R. 74.3; OSDBU ultimately found that Miles was not unconditionally owned by a service disabled veteran, due to the presence of a right of first refusal provision in its operating agreement. Miles then protested before the Court of Federal Claims. The Court (through Judge Lettow) ruled that Miles was unconditionally owned by a service disabled veteran because rights of first refusal are commercially practical provisions, which do not divest an owner of their ownership rights. More importantly, however, the Court went on to find that the VA had overstepped its authority and violated Miles’ due process rights when it divested Miles of its SDVOSB status on bases not alleged in the protest, to which Miles never had a chance to respond. Citing to the Administrative Procedures Act (“APA”), the Court reasoned that an agency performing an investigatory function (such as the VA’s OSDBU during a protest investigation) must provide the investigated party notice of all allegations against it, and afford that party an opportunity to meaningfully respond and participate in the investigation. The Court said: “an interpretation of 48 C.F.R. § 819.307(c) [the regulation pertaining to SDVOSB/VOSB eligibility protests] that does not allow this basic procedural due process is plainly erroneous and cannot be upheld.”

Following the Miles decision, the VA revised its regulations. The amended version of 48 C.F.R. 819.307 (which went into effect on September 30, 2013) now gives the VA’s Center for Veteran’s Enterprise (“CVE”) the ability to determine the SDVOSB or VOSB status of the protested concern based upona totality of the circumstances.” (48 C.F.R. 819.307(e)). The VA relied heavily on that language in the AmBuild case, using it to defend the fact that it once again canceled a concern’s SDVOSB status following a protest, but for reasons not set forth in that protest. Throughout the litigation, the VA argued that the revised 48 C.F.R. 819.307(e) granted CVE permission to consider facts or issued not specifically raised by the protesting party. In other words, the VA argued that the new language allowed them to interpret the protest regulations at 48 C.F.R. § 819.307 in the exact manner found to be “plainly erroneous” in Miles. In effect, the VA attempted to write out of 48 C.F.R. § 819.307 a protested party’s due process right to respond to the allegations against it.

In yesterday’s AmBuild decision, the Court of Federal Claims (again through Judge Lettow) squarely rejected the VA’s argument. The Court again emphasized the importance of a protested party’s due process rights, and the necessity of giving a protested party a chance to respond to any allegations against it, stating that: “The requirements of due process rest at the core of our nation’s Constitution and governmental institutions and are ingrained in our national traditions and designed to maintain them.” The Court explained that, therefore: “Before adverse action is to be taken by an agency, the individual immediately concerned should be apprised not only of the contemplated action with sufficient precision to permit his preparation to resist, but, before final action, he should be apprised of the evidence and contentions brought forward against him so that he may meet them.” Accordingly, the Court reasoned that the VA’s “strained construction” of 48 C.F.R. § 819.307 “would convert CVE’s scope of review into a general license to act on a protest without giving notice of issues not raised by the protesting party or contracting officer but rather generated sua sponte by CVE. The requirements of procedural due process cannot be so easily cast aside.” The Court therefore found that the 2013 amendment of 48 C.F.R. § 819.307 may be interpreted to establish a scope of review only — not to abrogate requirements of procedural due process. Thus, going forward, the “totality of the circumstances” language in 48 C.F.R. 819.307(e) must be read to include only those issues to which the protested party was afforded an opportunity to respond.

This is a major victory for SDVOSBs. AmBuild reaffirms that the VA cannot cancel a concern’s VOSB/SDVOSB status without explicitly notifying that concern of any and all potential issues concerning its eligibility status, giving that concern an opportunity to provide a meaningful response, and allowing that concern to participate in the investigatory process. It will be interesting to see if the VA attempts to amend its regulations again.

About the Authors:
Maria L. Panichelli and Jennifer M. Horn, of Cohen Seglias Pallas Greenhall & Furman, represent a national client base of prime and sub-contractors, with a focus on federal and construction contracting and small business procurement issues.  Their practice spans a variety of construction contracting and federal contracting matters, including bid protests, REAs, contract claims, and appeals.  They have represented clients before numerous Federal agencies, the Government Accountability Office, and various Federal and state courts, and have litigated cases covering a wide range of construction-related issues such as defective designs, defective specifications, differing site conditions, changes, suspensions, delays, and contract terminations.  Follow Maria on twitter at @MariaPanichelli or contact either Maria or Jennifer at 215.564.1700.

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