UNITED STATES OF AMERICA
SMALL BUSINESS ADMINISTRATION
OFFICE OF HEARINGS AND APPEALS
SIZE APPEAL OF:
Microwave Monolithics, Inc.
RE: Signal Engineering, Inc.
Solicitation No. FA8902-06-R-1003
Department of the Air Force
Air Force Materiel Command
Brooks City Base, TX
Docket No. SIZ-2006-10-10-57
Decided: November 16, 2006
Daniel R. Ch’en
President, Microwave Monolithics, Inc.
for Signal Engineering, Inc.
A firm which will perform 65% of the work on a prospective contract, is responsible for the design of the item to be procured, is the manufacturer of the item, and is responsible for
managing the contract is not unduly reliant upon its ostensible subcontractor.
HOLLEMAN, Administrative Judge:
This appeal is decided under the Small Business Act of 1958, 15 U.S.C. § 631 et seq., and 13 C.F.R. Parts 121 and 134.
Whether a firm which will perform 65% of the work on a prospective contract, is responsible for the design of the item to be procured, is the manufacturer of the item, and is
responsible for managing the contract is unduly reliant upon its ostensible subcontractor.
A. The Solicitation
On April 21, 2006, the Department of the Air Force (Air Force), Brooks City Base, Texas, issued the subject Request for Proposals (RFP) as a total small business set-aside. The
procurement is for the production, testing, and delivery of 20 production representative personnel locator beacons (PLB). The Contracting Officer (CO) designated North American Industry Classification System (NAICS) code 334511 (Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing) with a corresponding 750- employee size standard. This RFP was also the subject of this Office's decision in Size Appeal of Emergency Beacon Corporation, SBA No. SIZ-4813 (2006).
The Air Force decided to solicit for the next generation of PLBs because frequencies used by its aircrews on their survival beacons “will be rendered obsolete in February 2009.” RFP, Statement of Objectives, Paragraph 1.0. The beacons are to become obsolete because the frequency used for tracking survival beacons is to change from 121.5/243.0 MHz to 406 MHz. Id. On May 10, 2006, the CO issued Amendment 0003, which extended the proposal due date to June 2, 2006.
B. The Protest
On September 7, 2006, the CO issued a notice that Signal Engineering, Inc. (SEI) was the apparent successful offeror. On September 12, 2006, Microwave Monolithics, Inc. (Appellant) filed a size protest alleging that SEI is unduly reliant on its subcontractor, Tadiran Spectralink (Spectralink), a large concern. Appellant asserted that Spectralink previously approached them to form a “team” and submit what was really a thinly disguised proposal from Spectralink, in violation of SBA size regulations. Appellant thus concluded that after Appellant rejected this offer, Spectralink teamed with SEI to evade US laws. Appellant alleged that “SEI has never produced a certified Cospas Sarsat emergency beacon…and is not included on the official Cospas Sarsat list of certified suppliers,” while Spectralink is a certified supplier. Additionally, Appellant alleged that SEI was previously a subcontractor to Spectralink on Navy contracts for a similar item. Appellant asserted that Spectralink will be the actual supplier of SEI’s proposed PLB technology and that SEI is dependent on Spectralink for “both the underlying hardware and all technical support necessary to correct any hardware deficiencies…during the conduct of the contract,” in violation of the ostensible subcontractor rule. Protest, at 2.
On September 18, 2006, the CO forwarded the protest to the Small Business Administration (SBA) Office of Government Contracting – Area VI in San Francisco, California (Area Office). On September 18, 2006, the Area Office informed SEI of the protest and requested it submit a response, a completed SBA Form 355, and certain other information.
On September 21, 2006, SEI responded to the protest and argued that SBA should dismiss the protest. SEI asserts that Appellant’s allegation that SEI and Spectralink intended to
circumvent US laws is patently false. SEI maintains that it will perform the majority of the work (at least 51%) and its subcontractors (Spectralink, M2 Global Technology, Ltd. (M2), and KDC TechSolutions International, LLC (KDC)) will carry out portions of the work under the supervision of SEI. SEI asserts that they have never concealed the fact that they served as a subcontractor to Spectralink on previous Navy contracts; indeed, they highlight this experience in their Proposal. SEI claims they were the designers of the AN/URT-140 beacons used in the Navy program and have developed a Cospas Sarsat emergency beacon for the subject procurement. In sum, SEI argues that they will perform the majority of the work, including Program Management and design tasks to modify their current products, and possess the requisite expertise on this solicitation.
C. Size Determination No. 6-2006-092
On October 5, 2006, the Area Office issued Size Determination No. 6-2006-092, finding that SEI is a small business for the instant solicitation. The Area Office first found that SEI, M2, and KDC each had fewer employees than the applicable size standard. In evaluating the ostensible subcontractor issue, the Area Office evaluated whether SEI was unduly reliant on Spectralink on the basis of the information in SEI’s final proposal dated September 5, 2006. See 13 C.F.R. § 121.404(d).
The Area Office found that SEI was not unduly reliant on Spectralink for the engineering of its proposed PLB product (AN/URT-140, containing the 406 MHz Cospas/Sarsat transmitter technology) because SEI holds the intellectual property rights, owns, and maintains the engineering/production documentation package for the PLB product. The Area Office found that Spectralink is merely a certified supplier of the PLB product through a July 2002 manufacturing license agreement with SEI, whereby SEI licenses its technology to Spectralink to manufacture and market the PLB product. Moreover, the Area Office determined that:
The primary and vital function of this procurement is to acquire a manufactured end item, and while Spectralink has previously, under the manufacturing license agreement, been the end manufacturer, in this instance, SEI has subcontracted with M2 to provide most of the manufactured components…and will itself add additional in-house manufactured components…for a final end product. Therefore, SEI is considered the end manufacturer of the proposed PLBs.
Size Determination, at 4-5.
Therefore, the Area Office found that SEI was in control of the contract and not unduly reliant on Spectralink because SEI is the end manufacturer of the proposed PLB product, which is based on an SEI design which SEI will further develop and test.
In addition, the Area Office analyzed the management structure for the contract. The Area Office found that Mr. Coates of KDC was the Program/Project Manager but reported to
SEI, not Spectralink, and the Project Engineer and Engineering Manager were Messrs. Thompson and Herbert, officers/owners of SEI.
D. Award of the Contract & GAO Protest
The subject solicitation is a multi-award solicitation. On August 2, 2006, the CO awarded the first contract to Digital Angel Corp. On September 7, 2006, the CO notified Appellant of her intent to award the second contract to SEI. On October 9, 2006, Appellant filed a letter with the U.S. Government Accountability Office (GAO) requesting an “immediate ruling
by the Comptroller General of the United States that a Temporary Procurement Stay be placed on this procurement.” On October 10, 2006, the CO awarded the second contract to SEI. On October 12, 2006, the CO issued a stop-work order for the second contract with SEI because of the GAO protest.
E. The Appeal
On October 10, 2006, Appellant filed the instant appeal. Appellant asserts the Area Office erred in determining that program control rests with SEI when Spectralink owns the
technology required for the solicitation. Appellant asserts that the Area Office confused the “low tech VHF technology” developed by SEI and licensed to Spectralink in a July 2002 agreement, but not required for the present solicitation, with the “high tech 406 MHz Cospas/Sarsat transmitter technology contained in the AN/URT-140,” which is required for this solicitation and already owned and controlled by Spectralink. Appellant asserts that Spectralink has been producing and selling the AN/URT-140 since December 1998, and had sold over 10,000 units to the Navy by the time the July 2002 manufacturing agreement with SEI was signed. Appellant concludes that based on Spectralink’s ownership of the required technology for the solicitation, SEI is unduly reliant on Spectralink.
Appellant further argues that the Area Office mischaracterized the purpose and objective of the solicitation. The Area Office stated that the solicitation is for the “producing, testing, and delivery” of PLBs, while the CO’s fax-back memo to OHA stated that the purpose of the solicitation is to “develop and produce” the PLBs (emphasis added). Appellant contends the use of the word “develop” acknowledges that the required products do not yet exist and indicates thatthe owner of the 406 MHz Cospas/Sarsat technology will control the contract. Appellant contends the solicitation’s Statement of Objectives reinforces the developmental nature of the program by stating that there are no “beacons that interface correctly to Air Force equipment….” Accordingly, Appellant argues that Spectralink is the only entity capable of performing under the solicitation because they own and control the key technology to develop the beacons, making Spectralink “in control of the program no matter what the management structure appears to be on paper.” Appeal Petition, at 4.
Appellant asserts that SEI’s Final Proposal Revisions made cosmetic management changes that were a “sham and have nothing to do with the critical fact of who owns and controls
the Cospas/Sarsat technology….” Id. Appellant asserts that the primary and vital requirement of the contract is the Cospas/Sarsat technology needed to develop the beacon and SEI cannot develop the required technology in the short time frame allocated, making SEI unduly reliant on its subcontractor, Spectralink, to supply the required technology.
F. SEI’s Response
On October 20, 2006, SEI responded to the appeal and urged that it be denied. SEI asserts that Appellant’s allegation that SEI did not develop and does not own the necessary technology to perform the solicitation is unsupported. SEI asserts that “SEI alone owns and maintains the underlying intellectual property, including the critical ‘engineering production
documentation package for the AN/URT-140.’” Response, at 2. SEI asserts that their licensing agreement and public documents on the Navy’s website support the Area Office’s finding that SEI owns and developed the technology at issue. Specifically, in 1991, the Navy awarded SEI a contract for the initial development of PLBs and later the full-scale development of PLBs. SEI asserts that Spectralink did not become involved until the Navy’s Phase III contract, after SEI had produced and developed the Cospas/Sarsat technology contained in the AN/URT-140.
SEI further asserts that Appellant never contested the Area Office’s finding that SEI is the manufacturer for the present solicitation. SEI asserts that it will control and perform all
integration and end product manufacturing work which, together with SEI’s development work, will constitute at least 65% of the contract’s work scope. Response, at 3.
SEI states that it is unclear why Appellant contends that SEI’s management team does not qualify as a small business. SEI argues that the fact that SEI will use the same program
management team in the present solicitation as it did in previous Navy contracts in no way indicates that SEI is unduly reliant upon Spectralink. SEI argues that the SEI project team is
controlled by SEI: the Program/Project Manager is a KDC employee and reports directly to the President of SEI, and the Engineering Manager and Project Engineer are SEI employees.
In addition, SEI moved OHA to admit into the record three public documents describing SEI’s previous Navy contracts. SEI contends that the documents are publicly available on the
Navy website and Appellant will not be prejudiced by their admission into the record. SEI asserts that the documents rebut Appellant’s contention that SEI has only developed World War II “walkie talkie technology,” when SEI has developed AN/URT-140 technology as a prime contractor to the Navy.
G. Subsequent Pleadings
On October 25, 2006, Appellant replied to SEI's Response, disputing SEI's assertion that it owned and developed the technology relevant to this procurement. On October 31st, SEI
moved to strike or respond to the Reply. SEI asserts that the Reply is largely repetitive of Appellant’s earlier arguments.
A. Timeliness and Admission of New Evidence
Appellant filed the instant appeal within 15 days of receiving the size determination, and thus the appeal is timely. 13 C.F.R. § 134.304(a)(1). As to SEI's proffered new evidence, the
Administrative Judge will not consider evidence not previously presented to the Area Office that issued the subject size determination being appealed unless (1) the Judge sua sponte orders submission of such evidence; or (2) the proponent moves its admission, establishing good cause for its submission. 13 C.F.R. § 134.308(a). Here, SEI offers its evidence in response to assertions made on appeal by Appellant, relevant to the arguments on appeal, and which does not unduly enlarge the issues. Accordingly, I ADMIT SEI's new evidence into the record. Size Appeal of Leonardo Technologies, Inc., SBA No. SIZ-4597 (2003).
As to SEI's October 31st pleading, SEI's Motion to Strike is DENIED, and Appellant's reply to SEI's Response is ADMITTED since it was filed before the record closed. However, in
the interest of fairness, SEI's October 31st Reply is also admitted.
B. Standard of Review
Appellant has the burden of proving, by a preponderance of the evidence, all elements of its appeal. Specifically, it must prove the Area Office size determination is based on a clear error of fact or law. 13 C.F.R. § 134.314; Size Appeal of Procedyne Corp., SBA No. SIZ-4354, at 4-5 (1999). This Office will disturb the Area Office’s size determination only if the Administrative Judge, after reviewing the record and pleadings, has a definite and firm conviction the Area Office erred in key findings of law or fact. Size Appeal of Taylor Consultants, Inc., SBA No. SIZ-4775, at 11 (2006).
C. Procedural Matters
Under this Office’s precedent, a size appeal is not moot when the contracting officer has stopped performance on an awarded contract. Size Appeal of B.L. Harbert International LLC, SBA No. SIZ-4525, at 8-9 (2002). This is because it remains uncertain whether the condition for mootness, that the contract will remain in place with the awardee regardless of the outcome of the appeal (and thus that the appeal is purely academic), is fulfilled. Size Appeal of Spectrum Landscape Services, Inc., SBA No. SIZ-4313 (1998). The CO awarded the contract to Appellant on October 10, 2006. On October 12, 2006, the CO issued a stop-work order in response to Appellant’s GAO Protest. Thus, because it remains uncertain whether the contract will remain with SEI, a ruling on SEI’s size is not merely an academic matter. Accordingly, this appeal is not moot.
D. Ostensible Subcontractor Rule
The ostensible subcontractor rule is an independent basis for finding affiliation between two concerns. 13 C.F.R. § 121.103(h)(4). The purpose of the rule is to prevent other than small firms from forming relationships with small firms to evade SBA's size requirements. The ostensible subcontractor rule permits the Area Office to determine a subcontractor and a prime have formed a joint venture (and are thus affiliates) for determining size. An ostensible subcontractor is a subcontractor that performs primary and vital requirements of a contract or a subcontractor upon which the prime contractor is unusually reliant. 13 C.F.R. § 121.103(h)(4). In determining whether a subcontractor performs primary and vital requirements or that the prime is unusually reliant, the Area Office must consider all aspects of the prime-subcontractor relationship including, but not limited to, the terms of the proposal, agreements between the prime and the subcontractor (such as teaming agreements), and whether the subcontractor is an incumbent contractor and is ineligible to submit a proposal because it exceeds the size requirements for the solicitation. Id.
The "seven factors test" is an earlier way of encapsulating what has become the ostensible subcontractor rule codified in 13 C.F.R. § 121.103(h)(4). These seven factors are now
almost twenty years old; they are neither exclusive nor exhaustive, nor do they address "all aspects" of the prime contractor/subcontractor relationship required by 13 C.F.R.
§ 121.103(h)(4). Instead, Area Offices must, at a minimum, consider the aspects listed in 13 C.F.R. § 121.103(h)(4) and should analyze factors outside of the seven factors if relevant. See Size Appeal of FDR, Inc., SBA No. SIZ-4781 (2006); Size Appeal of Taylor Consultants, Inc., SBA No. SIZ-4775 (2006). In their analyses, Area Offices may choose to concentrate on one factor if it is dominant or persuasive. See Size Appeal of Ahuska Int'l Security Corp., SBA No. SIZ-4752 (2005). Therefore, while it is acceptable to consider the seven factors, the Area Office must evaluate "all aspects" of the prime contractor/subcontractor relationship (or the totality of the circumstances) to determine if the ostensible subcontractor rule applies. See 13 C.F.R. § 121.103(a)(5).
E. SEI’s Affiliation
The issue on this appeal is whether SEI’s subcontractor, Spectralink, would perform the primary and vital requirements of the contract to result from the RFP, making SEI affiliated with Spectralink under the ostensible subcontractor rule. 13 C.F.R. § 121.103(h)(4). The subject solicitation is for the producing, testing, and delivery of 20 production representative PLBs. The designation of a manufacturing NAICS code (334511), in lieu of one for research and development, indicates that the primary and vital function of this procurement is to acquire a manufactured end item, i.e., 20 PLBs.
It is clear that SEI is the manufacturer of the end item being procured. SEI will acquire most of the manufactured components from M2, which has fewer employees than the applicable size standard. SEI will then add in-house manufactured components and integrate all the components into a final end product. SEI is thus the manufacturer of the end product under the nonmanufacturer rule. 13 C.F.R. § 121.406; Size Appeal of Lanzen Fabricating North, Inc., SBA No. SIZ-4723 (2005).
Further, SEI’s Teaming Agreement with Spectralink provides that SEI will perform 65% of the work including program management, PLB modification design and testing, program
administration, and evaluation test support. Spectralink will perform 22 – 26% of the work including integrated logistic support, system engineering support, quality assurance support, and purchasing support.
The record also contains nothing that would indicate that Spectralink is managing the contract. Two of the top three positions are SEI employees. The Project Manager is not an SEI
employee, but neither is he a Spectralink employee, and he reports to SEI and is under SEI's direction. Accordingly, the record confirms that SEI, not Spectralink, will be managing this
Even if, as Appellant argues, the primary function of this procurement is the development of PLBs, SEI is still not unduly reliant upon Spectralink. While Spectralink provided the AN/URT-140 beacons to the Navy on previous contracts, SEI was the designer of such units. In addition, SEI states that SEI developed the predecessor units under SBIR contracts awarded by the Navy directly to SEI in 1991 and 1994, and performed the recent upgrade from AN/URT-140 to AN/URT-140G. SEI Response to Protest, at 2.
The record includes the July 2002 Manufacturing Licensing Agreement whereby SEI licenses its technical data to Spectralink for the production of the SEI-developed and
manufactured AN/URT-140. SEI was the designer of the AN/URT-140 and holds all the intellectual property rights. Spectralink merely distributes the product under a licensing
agreement. September 28, 2006 Response to SBA email, at 2. The record thus contains ample evidence of SEI being the designer of the product it intends to provide.
In contrast, Appellant offers nothing that would contradict the Area Office's conclusion. Appellant's argument is based upon a number of bare assertions, none of which have any support in the record. The material submitted by SEI establishes that the product relies on an SEI design, and that SEI will manufacture and control the project. Appellant has failed to establish that SEI is not performing the primary and vital tasks of this procurement and failed to meet its burden of establishing error in the size determination.
Accordingly, I AFFIRM the size determination of the Area Office, and DENY the instant appeal.
For the above reasons, the Administrative Judge AFFIRMS the Area Office’s size determination and DENIES the instant appeal.
This is the final decision of the Small Business Administration. See 13 C.F.R. § 134.316(b).