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Legal Developments Alert: SBA OHA Holds Three-Year Period for Calculating Receipts Continues to Apply

The Small Business Runway Extension Act of 2018 ("Runway Act") extended the period for calculating a business' receipts to determine size status from three years to five years.  Although the legislation became law in December 2018, the Small Business Administration ("SBA") did not issue proposed regulations adopting the new standard for notice and comment until June 24, 2019 and has not issued a final rule as of this date.  In the interim, SBA maintains that the five-year period established by the Runway Act is not binding until a final rule goes into effect.  Some contractors have asserted that the five-year period became effective upon enactment.  The inconsistency between the Runway Act and regulations left contractors in doubt as to the proper period for calculating receipts in determining their size status.

Some clarity came in a decision last month by SBA's Office of Hearings and Appeals ("OHA").  Cypher Analytics, Inc. dba Crown Point Systems, SBA No. SIZ-6022 (2019), concerned a contractor's appeal from a decision of an SBA area office finding Cypher Analytics other than small.  The area office had measured Cypher Analytics' annual receipts using the three-year period in SBA's existing regulations.  Cypher Analytics challenged the size determination, arguing the Runway Act's five-year measuring period became effective upon enactment.  

In response, SBA's Office of General Counsel asserted that the Runway Act was not immediately effective, SBA's existing regulations controlled, and SBA was entitled to time to amend its regulations to provide for a five-year receipts period.  OHA agreed with the SBA, finding that the Act only amended the provisions of the Small Business Act pertaining "specifically to the promulgation of size standards, not to the methodology used to calculate the size of a particular business." 

OHA also determined that notwithstanding the Runway Act, "the Small Business Act continues to state that a size standard may be established only after notice-and-comment rulemaking and with approval of the SBA Administrator."  OHA's decision made clear that until SBA regulations are amended, SBA is bound only by the three-year period in the current regulations.

Earlier this year, the Government Accountability Office ("GAO") similarly denied a pre-award protest challenging an agency's use of SBA's three-year standard for calculating a business' receipts to determine size.  Techanax, LLC; Rigil Corp., B-408685.22, Aug. 16, 2019, 2019 CPD ¶ 294.  Similar to Cypher Analytics, the protestors argued the agency failed to comply with the Runway Act's establishment of a five-year period for calculating receipts to determine size.  GAO held that the agency reasonably relied on SBA's interpretation that notice-and-comment rulemaking was required to change SBA's regulations and apply the five-year period.  GAO also granted deference to SBA's role in establishing, amending, and interpreting small business size standards.  GAO held that there was no basis to find SBA's interpretation of its own regulations unreasonable.

By extending the period for calculating receipts from three years to five years, Congress intended for businesses to maintain their small business size status for a longer period of time, although that might not be the result in every case.  The longer period should generally result in additional time for businesses to compete as small businesses before transitioning to other-than-small status.  SBA's delay in adopting regulations substituting the longer period has caused uncertainty and led to litigation. 

SBA's actions also appear to have irked Congress.  The House Committee on Small Business approved legislation on May 1, 2019 (H.R. 2345) clarifying that SBA is subject to the Runway Act and directing SBA to issue a final rule implementing the Act no later than December 17, 2019.  The U.S. House of Representatives approved the measure on July 15, 2019.  Nonetheless, absent action by SBA or bicameral legislation, the OHA and GAO decisions indicate that businesses will likely have to wait until SBA's proposed rule takes effect before using the five-year period to calculate their size status.

Our firm will continue to monitor decisions affecting small business contractors, including decisions related to the Small Business Runway Extension Act and how small business contractors calculate receipts.  If you have questions, please contact: 

Edmund M. Amorosi
eamorosi@smithpachter.com

Todd M. Garland
tgarland@smithpachter.com 

Zachary D. Prince
zprince@smithpachter.com 

Jonathan D. Shaffer
jshaffer@smithpachter.com 

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