Corporate transaction invalidates small business award

Last year, we published an article addressing the actions a government contractor should consider when involved in a corporate transaction during a pending federal procurement (ie, after submitting a proposal but prior to award).  Consistent with the risks highlighted in that article, the United States Court of Federal Claims (COFC) recently invalidated a contract award in such a scenario, relying on an arguably novel interpretation of Federal Acquisition Regulation (FAR) 52.219-28, “Post-Award Small Business Program Representation.”  See HWI Gear, Inc. v. United States, No. 20-930, 2020 WL 7706975, at *6-8 (Fed. Cl. Dec. 23, 2020).  Under the COFC’s interpretation, an offeror was required to recertify its size status during a procurement, and the agency’s failure to enforce this requirement invalidated the award.

In HWI Gear, six offerors, including Mechanix Wear, Inc. (Mechanix) and HWI Gear, Inc. (HWI), submitted proposals in response to a solicitation set aside for small businesses.  After proposal submission but before award, Mechanix informed the procuring agency via several letters that it had changed its corporate structure from a corporation to a limited liability company; that it had changed its corporate name; and that all other terms and conditions in its proposal remained unchanged.  HWI Gear, Inc., 2020 WL 7706975, at *3.  Although not mentioned in Mechanix’s letters to the agency, the “change in corporate structure” also had included a “merger” with a large business, such that Mechanix was no longer a small business under the size standard established for the procurement.  Id. at *7.  The agency ultimately selected Mechanix as the awardee, and HWI filed a bid protest challenging the agency’s evaluation.  Id. at *3-4.

The COFC found that the award to Mechanix was “invalid” because the agency deviated from the evaluation criteria provided in the solicitation.  HWI Gear, Inc., 2020 WL 7706975, at *8.  The solicitation did not simply incorporate FAR 52.219-28 by reference, but expressly included the text of the clause in Section I of the solicitation.  Subparagraph (b) of the clause stated that, “[i]f the Contractor represented that it was a small business concern prior to award of this contract, the Contractor shall rerepresent its size status . . . [w]ithin 30 days after a merger or acquisition.”  Id. at *4.  Because Mechanix did not rerepresent its size status after the merger, and because the agency did not inquire into Mechanix’s size status after receiving notice of the corporate transaction from the offeror, the COFC concluded that the agency failed to conduct the evaluation consistent with FAR 52.219-28(b).  Id. at *7.

Curiously, the COFC placed significant weight on the fact that the agency included the actual language from FAR 52.219-28 in the solicitation, stating that the Small Business Administration’s regulations:

do not contain an independent requirement for an offeror to recertify, nor would FAR 52.219-28 require recertification by reference alone. However, the concern in this case is not with the FAR requirement as it exists in the regulations, but rather with the explicit incorporation of the pertinent mandate into the solicitation. . . . The agency in this case specifically chose to include the language from FAR 52.219-28 directly in the solicitation.  This incorporation imbues the solicitation with the recertification requirement.

HWI Gear, Inc., 2020 WL 7706975, at *6.

The COFC’s conclusion on this point appears to have been influenced by the erroneous and “less than fully descriptive” nature of Mechanix’s notice to the agency.  See id. at *7 n.15.  The COFC noted that it “[took] into account” the fact that Mechanix’s notice “erred in representing that the terms and conditions of its offer were unchanged.  The conditions had been modified by its merger and it was no longer a small business.”  Id. at *7.  The COFC also noted that the contracting officer “specifically requested responses during the negotiation process” and interpreted the solicitation as requiring recertification within thirty days of a merger. Id.

The COFC’s decision faults the agency for not investigating whether Mechanix remained a small business after receiving notice of the corporate change.  According to the COFC, “[t]he agency was on notice of Mechanix’s corporate change prior to the contract award, and, therefore, should have inquired as to whether Mechanix continued to qualify as a small business.”  HWI Gear, Inc., 2020 WL 7706975, at *5.  There seemingly is tension between that statement and other COFC decisions which provide that an agency is “reasonably entitled to rely” on an offeror’s representation regarding a corporate transaction.  See Navarro Research & Eng’g, Inc. v. United States, No. 20-774C, 2020 WL 7023897, at *11 (Fed. Cl. Nov. 30, 2020).

In short, the COFC’s finding in HWI Gear, which treated the obligations under FAR 52.219-28(b) as pre-award obligations relevant to the agency’s evaluation of proposals, highlights the risks associated with corporate transactions that are undertaken while a proposal is pending.  With regard to any pending proposal on a set-aside opportunity, government contractors should carefully review the relevant solicitation to determine if the text of FAR 52.219-28 is included or if the clause is merely incorporated by reference.  When the text is included, the COFC’s decision in HWI Gear provides that the offeror should formally recertify its size status prior to award if it undergoes a corporate transaction – not simply provide the agency notice of the transaction. 

Notably, the HWI Gear decision is currently on appeal, so further clarification of a contractor’s pre-award obligations under FAR 52.219-28 may be forthcoming.  See HWI Gear, Inc. v. United States, No. 20-930, 2020 WL 7706975 (Fed. Cl. Dec. 23, 2020), appeal docketed, No. 21-1549 (Fed. Cir. Jan. 14, 2021).  This would be helpful, because FAR 52.219-28 is a standard FAR clause that is required to be included in all solicitations exceeding the micro-purchase threshold when the contract will be performed in the United States.  See FAR 19.309(c)(1).

If you have any questions regarding this publication, please contact the authors or your DLA Piper relationship attorney.