Small businesses participating in the Small Business Administration’s (SBA’s) 8(a) Business Development Program (BD Program) would do well to recall the story of Pinocchio, the marionette who wanted to be a real boy. Pinocchio learned two important lessons: be self-reliant and don’t lie. Similarly, the petitioner in the recent The Desa Group, Inc., SBA No. BDPT-543 (February 5, 2015) decision was given credit for trying to tell the truth, but found out the hard way that you cannot rely too heavily on another, non-disadvantaged, entity. The decision makes clear it is not enough that a socially and economically disadvantaged business be free from the control and management of a non-disadvantaged business; overreliance on the non-disadvantaged business may independently lead to the 8(a) firm’s termination from the BD Program.
The appeal arose in response to the SBA’s termination of The Desa Group (DGI) from the 8(a) BD Program based on two grounds set forth in SBA’s Regulations (13 C.F.R. §124.202): DGI alleged (i) submission of false information in its program application, and (ii) failure to maintain full-time, day-to-day management and control by a disadvantaged individual. Specifically, SBA received a tip that DGI’s president, Dionne Fleshman, whose socially and economically disadvantaged status qualified DGI for the 8(a) BD Program, actually worked for DESA Inc. (DESA) and did not manage DGI. DESA was owned by Ms. Fleshman’s mother, Diane Sumpter, who is no longer disadvantaged.
On appeal, OHA rejected SBA’s conclusion that DGI should be terminated from the program based on Ms. Fleshman’s allegedly false statements in the Program Application, finding her statements contained merely honest and reasonable mistakes. Absent evidence of intent to deceive SBA, OHA concluded that inaccurate statements are not grounds to terminate an 8(a) firm from the BD Program. OHA also rejected the SBA’s finding that DGI was managed and controlled by a non-disadvantaged individual (Ms. Sumpter), after considering and rejecting the evidence on which SBA based its conclusions: that (i) DGI and DESA were referenced on each other’s LinkedIn and Facebook profiles and company websites; (ii) Ms. Fleshman was listed as a “leader” on DESA’s website and earned between $7,000-$10,000/month from DESA over a two-year period; and (iii) DGI’s website referenced the accomplishments of DESA.
OHA found that none of the evidence identified by SBA established that DESA controlled DGI. For example, according to OHA, DESA and DGI’s references to each other on their websites only showed that DESA and DGI were related. Moreover, the monthly payments to Ms. Fleshman were actually payments to DGI under a subcontract from DESA and did not establish that Ms. Fleshman worked for DESA instead of DGI. OHA concluded that, at most, the evidence showed that DGI and DESA were interconnected, not that DGI was controlled or managed by DESA or Ms. Sumpter.
But OHA’s inquiry did not end there however. OHA considered additional evidence and, based on this evidence, concluded that DGI and DESA were so interconnected that their business relationship interfered with DGI’s ability to “exercise independent business judgment without great economic risk” – a different basis for terminating DGI from the 8(a) BD Program.
This decision underscores for 8(a) firms the importance of closely examining their relationships with individuals and entities that are not disadvantaged. Even if such individuals or entities do not manage, own or control the participant, the 8(a) firm’s interconnectedness with non-disadvantaged companies and individuals (including sufficiently substantial contractual relationships) may still be enough to justify the 8(a) firm’s termination from the BD Program. On a positive note, The Desa Group, Inc. decision should provide 8(a) BD Program applicants with a sense of relief that an honest misunderstanding about an application question is unlikely to provide grounds for 8(a) BD Program termination.
Lara Nochomovitz is responsible for the contents of this article.
© Jackson Kelly 2015