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SBA’s All Small Mentor-Protégé Program Provides Critical Affiliation Exception for Eligible Joint Ventures

By Todd R. Overman*

As one of the Small Business Administration’s (SBA) contracting assistance programs, the All Small Mentor-Protégé Program (ASMPP) aims to help small businesses learn from larger, experienced government contractors. To qualify as a protégé, a business must classify as a small business with industry experience and have a proposed mentor prior to applying. In addition, the small business must be organized for profit and have no more than two mentors during its lifetime. As a mentor, the SBA only requires that business to be organized for profit and have no more than three protégés at any given time.

In order to apply for the program, the mentor and protégé must have already found each other and prepared a business plan. In addition, it is essential for the pair to create—and agree to—a Mentor-Protégé Agreement (MPA). The MPA must be consistent with the parties’ goals and the requirements of the program. As explained further herein, it is important to write the MPA with care and encompass all that the companies hope to accomplish through the relationship.

Joint Ventures under ASMPP

Under the ASMPP, businesses who share a mentor-protégé relationship can form a joint venture (JV) and compete together for government contracts reserved for small businesses. In addition, as long as the protégé qualifies for additional set-asides, the JV can also bid on contracts reserved for service-disabled veteran-owned, women-owned, or HUBZone businesses. The JV agreement must be in writing and follow all SBA requirements, and the protégé must provide a JV compliance certificate to the SBA and contracting officer.

The ASMPP requires that the JV perform the appropriate percentage of work based on the subcontracting requirements, and the protégé must perform at least 40% of that work. In addition, the JV must submit annual reports to the SBA and the contracting agencies explaining how the work is performed under each contract.

Size Appeal of Hendall, Inc.

Earlier this year, the SBA highlighted the extent of the ASMPP’s advantages to JVs through the repeated denial of an appeal based on the size determination of an ASMPP JV. In December 2017, the SBA Office of Government Contracting issued a size determination that found IQS Solutions, LLC (IQS)—a JV under the ASMPP—as an eligible small business for the subject procurement. Hendall, Inc. protested IQS’s size and went on to appeal the size determination as clearly erroneous—requesting the Office of Hearings and Appeals (OHA) to reverse. Ultimately, OHA denied the appeal and affirmed the size determination for IQS.

On October 16, 2017, the Department of Health and Human Services awarded IQS a small-business set-aside contract. IQS is a JV between Synergy Enterprises (SEI) and its mentor, IQ Solutions (IQ), formed under the ASMPP. SEI and IQ entered into a MPA on May 31, 2017, stating that SEI desired to “seek more experience” and was unable to penetrate the larger market due to size and lack of past performance in the area. SET requested assistance in pursuing and performing work for the federal government. To address the issue, SEI and IQ entered into a JV to pursue opportunities and allow SEI to gain hands-on experience with IQ’s help. The JV agreement (formed on July 18, 2017) stated that SEI owned 51% and IQ owned 49%–with SEI as the managing venturer. SEI had the full, complete, and exclusive discretion to manage and control IQS’s business.

Affiliation

Hendall asserted IQS was ineligible for the award essentially due to affiliation. Hendall’s assertions largely failed due to the advantages the ASMPP provides to JVs formed under it. While JVs are usually affiliated with one another for any contract performed by the JV, the SBA authorized an exception for ASMPP JVs under § 125.9(d)(1). As mentioned above, as long as the protégé qualifies for the small business set-aside, the JV can also bid on contracts reserved for small business. While it is possible for an ASMPP mentor and protégé to be affiliated based on assistance or interactions beyond the scope of their MPA, Hendall did not identify any valid reason to find SEI and IQ generally affiliated.

Unable to overcome the exception, Hendall also argued for a totality of the circumstances affiliation: which requires a showing that one concern controls another, or that a third party can control both. None of the connections Hendall pointed to demonstrated that IQ controlled SEI or vice versa. OHA asserted that most of the connections Hendall alleged were actually just examples of a mentor assisting its protégé, which the ASMPP encourages. By carefully staying within the parameters of the MPA and complying with the SBA’s requirements for forming the JV, the ASMPP JV exception to affiliation applied.

Protesting the MPA through Size Determination

In support of its affiliation arguments, Hendall also asserted that IQ and SEI entered into their MPA for the purpose of circumventing the SBA rules. OHA viewed this assertion as second-guessing the SBA’s approval of the original MPA. The approval of a mentor and protégé into the ASMPP cannot be challenged by a third party through a size protest. The applicable SBA regulations make clear that an ASMPP mentor is encouraged to provide business development assistance to its protégé, which may include “assistance in performing prime contracts with the Government through joint venture arrangements” (13 C.F.R. § 125.9(a)). Once the SBA approved the MPA, an ASMPP mentor and protégé are exempt from affiliation as discussed earlier.

Conclusion

The Hendall case is a great example of one of the primary business development benefits under the ASMPP – the ability for a large business and small business to form a joint venture and pursue a small business set aside contract as a team. Without the ASMPP JV affiliation exception – these businesses would normally be considered affiliates and unable to pursue the opportunity as a joint venture.  The case also highlights the importance of carefully drafting the MPA and being very specific as to the benefits the protégé will receive.

* Todd Overman is the Chair of the Government Contracts Practice Group at Bass, Berry & Sims PLC, and is based in the firm’s Washington, D.C. office.  Todd routinely counsels clients on various small business programs, and has particular expertise in SBA’s ASMPP and the formation of joint ventures under the program.  He can be reached at toverman@bassberry.com or 202-827-2975.

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