B-157198, OCT. 15, 1965

B-157198: Oct 15, 1965

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JAFFE AND LEVIN: REFERENCE IS MADE TO YOUR LETTERS OF JULY 15 AND 27. IS NOT A SMALL BUSINESS CONCERN WITHIN THE MEANING OF THE SMALL BUSINESS ACT OF 1953. TWELVE BIDS WERE SUBMITTED UNDER THE ABOVE-REFERENCED INVITATION. WHICH WERE RESTRICTED TO SMALL BUSINESS CONCERNS PURSUANT TO A TOTAL SET ASIDE. SINCE JETRONIC WAS DELINQUENT IN PROGRESS AND DELIVERIES UNDER CERTAIN RECENT CONTRACTS WITH THE BUREAU OF SHIPS (THE PRESENT PROCURING ACTIVITY) THE CONTRACTING OFFICER DETERMINED THAT IT WAS NOT A RESPONSIBLE PROSPECTIVE CONTRACTOR. THE MATTER WAS REFERRED TO THE SMALL BUSINESS ADMINISTRATION UNDER THE CERTIFICATE OF COMPETENCY PROCEDURE. BOTH JETRONIC AND THE BUREAU OF SHIPS WERE SUBSEQUENTLY NOTIFIED BY THE PHILADELPHIA REGIONAL OFFICE OF SBA THAT JETRONIC WAS NOT ELIGIBLE FOR A CERTIFICATE OF COMPETENCY INASMUCH AS IT IS NOT A SMALL BUSINESS CONCERN.

B-157198, OCT. 15, 1965

TO MESIROV, GELMAN, JAFFE AND LEVIN:

REFERENCE IS MADE TO YOUR LETTERS OF JULY 15 AND 27, 1965, IN WHICH YOU PROTEST THE DETERMINATIONS OF THE SMALL BUSINESS ADMINISTRATION AND ITS SIZE APPEALS BOARD TO THE EFFECT THAT JETRONIC INDUSTRIES, INC., PHILADELPHIA, PENNSYLVANIA, IS NOT A SMALL BUSINESS CONCERN WITHIN THE MEANING OF THE SMALL BUSINESS ACT OF 1953, AND THAT THE AWARD OF THE CONTRACT UNDER NAVY DEPARTMENT INVITATION FOR BIDS NO. 600-556-65'S TO ANY BIDDER OTHER THAN YOUR CLIENT, THE LOW BIDDER, WOULD BE IMPROPER.

TWELVE BIDS WERE SUBMITTED UNDER THE ABOVE-REFERENCED INVITATION, WHICH COVERS A QUANTITY OF 495 FREQUENCY SPECTRUM ANALYZERS AND RELATED SUPPLIES ON AN "ALL OR NOTHING" BASIS, AND WHICH WERE RESTRICTED TO SMALL BUSINESS CONCERNS PURSUANT TO A TOTAL SET ASIDE. SINCE JETRONIC WAS DELINQUENT IN PROGRESS AND DELIVERIES UNDER CERTAIN RECENT CONTRACTS WITH THE BUREAU OF SHIPS (THE PRESENT PROCURING ACTIVITY) THE CONTRACTING OFFICER DETERMINED THAT IT WAS NOT A RESPONSIBLE PROSPECTIVE CONTRACTOR. JETRONIC HAD REPRESENTED ITSELF AS A SMALL BUSINESS CONCERN AND ON JUNE 25, 1965, THE MATTER WAS REFERRED TO THE SMALL BUSINESS ADMINISTRATION UNDER THE CERTIFICATE OF COMPETENCY PROCEDURE. BOTH JETRONIC AND THE BUREAU OF SHIPS WERE SUBSEQUENTLY NOTIFIED BY THE PHILADELPHIA REGIONAL OFFICE OF SBA THAT JETRONIC WAS NOT ELIGIBLE FOR A CERTIFICATE OF COMPETENCY INASMUCH AS IT IS NOT A SMALL BUSINESS CONCERN, BECAUSE JETRONIC'S NUMBER OF EMPLOYEES IS IN EXCESS OF 500, THE STANDARD PRESCRIBED IN THE IFB. JETRONIC APPEALED THIS SIZE DETERMINATION TO THE SIZE APPEALS BOARD, SBA, WHICH HELD A HEARING ON JULY 20, 1965, AND AFFIRMED THE DETERMINATION OF THE REGIONAL OFFICE.

IT IS YOUR CONTENTION THAT THE DETERMINATIONS OF THE SBA ARE NOT CORRECT FOR TWO REASONS. FIRST, YOU SAY THAT THE SBA SIZE STANDARDS REGULATION (13 CFR SEC. 121.3-2 (0) (, WHICH DEFINES ,NUMBER OF EMPLOYEES, AS THE AVERAGE EMPLOYMENT FOR THE PAST FOUR CALENDAR QUARTERS, IS ARBITRARY AND INCONSISTENT WITH SECTION 203 OF THE SMALL BUSINESS ACT OF 1953, 67 STAT. 232, 233, SINCE THAT SECTION STATES THAT "A SMALL BUSINESS CONCERN SHALL BE DEEMED TO BE ONE WHICH IS INDEPENDENTLY OWNED AND OPERATED AND WHICH IS NOT DOMINANT IN ITS FIELD OF OPERATION.' IT APPEARS TO BE YOUR POSITION THAT THE USE OF THE PRESENT TENSE INDICATES THAT CONGRESS DID NOT INTEND THAT THE PAST BE USED EXCLUSIVELY IN DETERMINING WHETHER A BUSINESS IS A SMALL BUSINESS CONCERN, BUT RATHER PRESENT AND EXPECTED FUTURE LEVELS OF EMPLOYMENT SHOULD ALSO BE CONSIDERED. IN THIS REGARD WE NOTE THAT IT IS THE EXPRESSED POLICY OF CONGRESS TO PRESERVE FREE COMPETITIVE ENTERPRISE BY PROMOTING SMALL BUSINESS AND THEREBY DECREASING THE POSSIBILITY OF MONOPOLISTIC PRACTICES IN INDUSTRY. BECAUSE IT WOULD BE IMPRACTICAL IF NOT IMPOSSIBLE TO ENUNCIATE A WORKABLE DEFINITION OF"SMALL BUSINESS CONCERN" IN THE ACT ITSELF, THE ACT AUTHORIZES THE ADMINISTRATOR OF THE SMALL BUSINESS ADMINISTRATION TO FORMULATE SUCH A DEFINITION GIVING DUE CONSIDERATION TO THE VARIANCES BETWEEN THE DIFFERENT INDUSTRIES. WE AGREE THAT IF THE DEFINITION WHICH THE ADMINISTRATOR FORMALIZES IS NOT IN HARMONY WITH THE ACT, THEN THE REGULATION SHOULD NOT BE GIVEN EFFECT. HOWEVER, IN VIEW OF OUR CONCLUSION ON YOUR SECOND CONTENTION, WE FIND IT UNNECESSARY TO GO INTO THE QUESTION OF THE VALIDITY OF THIS ASPECT OF THE REGULATION.

YOUR SECOND OBJECTION IS TO THE SBA DETERMINATION THAT JETRONIC IS AN AFFILIATE OF KENRICH CORPORATION, AND JETRONIC'S NUMBER OF EMPLOYEES MUST INCLUDE THOSE OF KENRICH CORPORATION. ,AFFILIATES" ARE DEFINED AS FOLLOWS: "CONCERNS ARE AFFILIATES OF EACH OTHER WHEN EITHER DIRECTLY OR INDIRECTLY (1) ONE CONCERN * * * CONTROLS OR HAS THE POWER TO CONTROL THE OTHER, * * *. IN DETERMINING WHETHER CONCERNS ARE INDEPENDENTLY OWNED AND OPERATED AND WHETHER OR NOT AFFILIATION EXISTS, CONSIDERATION SHALL BE GIVEN TO ALL APPROPRIATE FACTORS INCLUDING COMMON OWNERSHIP, COMMON MANAGEMENT, AND CONTRACTUAL RELATIONSHIPS.' (13 CFR 121.3-2 (A).) VIEW OF THE FACT THAT KENRICH CORPORATION OWNS 34.96 PERCENT OF JETRONIC'S VOTING STOCK, IS BY FAR THE LARGEST SHAREHOLDER, WE DO NOT UNDERSTAND HOW IT MAY BE SERIOUSLY CONTENDED THAT JETRONIC IS OWNED INDEPENDENTLY OF KENRICH. CERTAINLY, A MAJORITY SHAREHOLDER IS CONSIDERED AS MUCH AN OWNER AS ANY LESSER SHAREHOLDER. FURTHER, WE NOTE THAT JETRONIC HAS SIX DIRECTORS; OF THESE THE TREASURER AND DIRECTOR OF JETRONIC IS THE CHAIRMAN OF THE BOARD OF KENRICH; ANOTHER DIRECTOR OF JETRONIC IS THE PRESIDENT AND A DIRECTOR OF KENRICH; ANOTHER DIRECTOR OF JETRONIC IS THE DIRECTOR OF KENRICH AND PRESIDENT AND A DIRECTOR OF DELAWARE VALLEY FINANCE CORPORATION OF PHILADELPHIA, AN AFFILIATE OF KENRICH. THUS, KENRICH DIRECTLY CONTROLS THREE OF JETRONIC'S SIX DIRECTORS; AND THIS MUST CERTAINLY CONSTITUTE COMMON MANAGEMENT. WHILE WE DO NOT KNOW WHAT PORTION OF JETRONIC'S BOARD OF DIRECTORS IS NECESSARY TO APPROVE AFFIRMATIVE ACTION, IT IS VERY DOUBTFUL THAT WITHOUT THE VOTES OF KENRICH'S THREE DIRECTORS, JETRONIC COULD OPERATE AT ALL, AND THIS VETO POWER IS IN REALITY JUST AS EFFECTIVE AS IF KENRICH DIRECTLY CONTROLLED THE OTHER THREE DIRECTORS. WHETHER OR NOT KENRICH DOES IN FACT TELL THESE MEN HOW TO VOTE IS NOT THE TEST, BUT RATHER COULD THEY CONTROL THEIR VOTES IF AND WHEN THEY SO DESIRE. WE BELIEVE THAT THIS IS THE MEANING OF THE TERM "NEGATIVE CONTROL" TO WHICH YOU OBJECT. SHOULD THE SHAREHOLDERS OF JETRONIC DECIDE TO RAISE OR LOWER THE VOTING STANDARDS OF THE BOARD OF DIRECTORS, KENRICH WOULD BE IN AN EXCELLENT POSITION TO HAVE ITS PROPOSALS ADOPTED. IN LIGHT OF THE ABOVE, WE ARE OF THE OPINION THAT KENRICH "CONTROLS OR HAS THE POWER TO CONTROL" JETRONIC AND THEREFORE THE TWO CONCERNS ARE AFFILIATES THUS REQUIRING THE ADDITION OF KENRICH'S EMPLOYEES TO THOSE OF JETRONIC AND THEREBY DISQUALIFYING JETRONIC AS A ,SMALL BUSINESS CONCERN" FOR THE PURPOSE OF THIS PROCUREMENT.

FOR THE ABOVE REASONS WE FEEL THAT JETRONIC WAS PROPERLY REFUSED A SMALL BUSINESS DESIGNATION BY THE SBA. HOWEVER, WE ALSO WISH TO POINT OUT TO YOU DECISIONS ISSUED BY THE COMPTROLLER GENERAL OF THE UNITED STATES; ONE ON AUGUST 3, 1964, (B-154428) TO THE EFFECT THAT UNDER 15 U.S.C. 637 (B) (6), THE SBA IS AUTHORIZED TO DETERMINE THE CONCERNS WHICH ARE TO BE DESIGNATED SMALL BUSINESS CONCERNS. THE SECTION FURTHER PROVIDES THAT OFFICES OF THE GOVERNMENT HAVING PROCUREMENT POWERS SHALL ACCEPT AS CONCLUSIVE THE ADMINISTRATION'S DETERMINATIONS AS TO WHICH ENTERPRISES ARE TO BE DESIGNATED SMALL BUSINESS CONCERNS AND THAT THESE DETERMINATIONS ARE BINDING IN THE GENERAL ACCOUNTING OFFICE. (SEE ALSO B-137474, 38 COMP. GEN. 328, 331; 1958.) COPIES OF BOTH DECISIONS ARE ENCLOSED.