Recent decisions by the Small Business Administration (“SBA”) Office of Hearings and Appeals (“OHA”) and the Court of Federal Claims offer important advice to anyone in the process of drafting and negotiating a mentor/protégé joint venture agreement:  Be specific.  Those agreements, in many cases, are the crown jewel of the mentor-protégé program enabling mentors and protégés to work together on set-aside opportunities that they would not otherwise have been eligible.  And like anything of great value, it should not be taken for granted.  Instead, as a matter of meeting both regulatory requirements and best practice, mentor/protégé joint venture agreements should specifically list all resources, equipment and facilities (and their estimated values) that each party will provide and detail how work will be shared between the joint venture members.

Affiliation Exception for Mentor-Protégé Joint Ventures

When the SBA measures size to determine eligibility as a small business, it considers the concern at issue and all of the concern’s affiliates.  Generally, members of a joint venture are considered “affiliates” for small business purposes, which is often sufficient to eliminate a business concern’s small business eligibility.  See 13 C.F.R. § 121.103(h)(3).  Participants in the SBA’s mentor-protégé program, however, can form joint ventures without causing affiliation when the joint venture agreement meets certain regulatory requirements.  13 C.F.R. § 121.103(h)(3)(iii).  Among those requirements, the joint venture agreement must (a) “[i]tem[ize] all major equipment, facilities, and other resources to be furnished under the contract by each party to the joint venture, with a detailed schedule of its cost or value” and (b) “specify[] the responsibilities of the parties with regard to negotiation of the contract, source of labor, and contract performance, including ways that the parties to the joint venture will ensure that the joint venture and the 8(a) partner(s) will [perform at least 40% of the work performed by the joint venture].”  13 C.F.R. § 124.513(c)(6)-(7).  If the joint venture agreement does not meet those standards, the exception does not apply and the two entities are affiliates—and most likely ineligible to bid as a small business.  IEI-Cityside JV v. United States, No. 15-673C (Fed. Cl. Aug. 25, 2015), Slip Op. at 12 (affirming determination that joint venture offeror was not small because its agreement’s failure to meet requirements resulted in affiliation of the JV members); Kisan-Pike, a Joint Venture, SBA No. SIZ-5618 (2014).  See also 13 C.F.R. § 124.520(d)(1)(ii) (“In order to receive the exclusion from affiliation for both 8(a) and non-8(a) procurements, the joint venture must meet the requirements set forth in § 124.513(c).”).

SBA Regulations Require Specificity for Mentor-Protégé JV Agreements

In November 2014, OHA emphasized that it expects 8(a) mentor-protégé JV agreements to be specific about the roles each party will play and has rejected generic statements that provide little insight into those roles.  See Kisan-Pike, a Joint Venture, SBA No. SIZ-5618 (2014).  In Kisan-Pike, OHA reviewed a contracting-officer-initiated size determination of the presumptive awardee joint venture.  The agreement at issue provided only that the parties “will provide equipment, facilities and other resources to the Joint Venture required to execute the contract” and that the 8(a) partner would perform 40% of the work performed by the joint venture (as required by the regulations).  Id. at *2.  OHA found these generic statements insufficient to meet the regulatory requirements necessary for the affiliation exception, noting that the agreement “does not designate specific tasks or responsibilities to [the parties]” nor does it “explain how Appellant will fulfill the performance of work requirements.”  Id. at *9.

More recently, the Court of Federal Claims affirmed a different OHA determination that acceptable joint venture agreements between mentors and protégés must specifically describe (including approximate value) the resources and facilities each joint venture member is contributing and must detail the tasks and responsibilities of each task member.  IEI-Cityside JV, Slip Op. at 10-11. There, the court addressed the joint venture affiliation exception issue during a post-award protest of an award to the joint venture.  Id. at 12.  Upon review, OHA found that that agreement failed to meet the specificity requirements and, as such, the joint venture members were affiliated (and no longer eligible as a small business).  When the joint venture challenged the reasonableness of OHA’s adverse decision, the Court of Federal Claims affirmed the ruling.  Id. at 1.  In so doing, the court held that the joint venture agreement between IEI and Cityside did not include a schedule detailing the value of the resources from each party.  Id. at 10.  It also found that the agreement did not delineate the responsibilities of each party.  Id.  Instead, the agreement generically provided that IEI would negotiate the contract, the parties would split the work 50-50, and that IEI would have a right of first refusal in the final selection of personnel staff positions if the work allocation could not be distributed to meet the regulatory requirement of 40%.  Id.  See also id. at 4.  The court found that OHA reasonably concluded these statements were inadequate because they did not designate specific tasks or responsibilities and did not explain how the joint venture will fulfill the 40% minimum work requirements.  Id. at 10.

Further, IEI-Cityside specifically rejected the joint venture’s argument that, because the contract at issue was an indefinite delivery, indefinite quantity (“IDIQ”) contract, it was impossible to know what tasks it would be expected to perform and what resources were needed.  Id. at 11.  It held that there was no impossibility exception to the affiliation exception and, more significantly, that the joint venture could have provided more details than the generic statements it offered.  Id.  The court repeated OHA’s suggestion that, despite the uncertainty, the joint venture “might nevertheless have complied with 13 C.F.R. § 124.513(c) and (d) by discussing the types of work each joint venture partner would perform, and the resources each partner would contribute, for each region awarded to the [joint venture].” Id. at 11 (quoting the OHA decision in the administrative record).

Conclusion and Best Practices

These cases confirm that the affiliation exception is not automatic and that the SBA takes the regulatory requirements seriously.  Accordingly, mentors and protégés should follow these best practices for ensuring a compliant JV agreement:

• Lay out the resources each party will bring to the joint venture with as much painstaking detail as possible, including the accompanying schedule of approximate value.
• Provide a complete picture of the work share allocation including all potential permutations and contingency plans for all possible scenarios.
• Specify what types of tasks will be performed by each party and how work will be allocated to ensure that the minimum work percentages are met.
• Remember that even if this level of detail was not required by the regulations, negotiating how work will be divided during negotiation of the joint venture agreement would help prevent disputes from arising down the road.

In addition, while these requirements are currently limited to joint venture agreements between mentors and 8(a)-small-disadvantaged-business protégés, it is likely that, when the mentor-protégé program expands, similar specificity requirements will be imposed as conditions of affiliation exceptions for mentor/protégé joint ventures from other small business programs, such as woman-owned small businesses or veteran-owned small businesses.  SBA released a proposed rule expanding the program to non-8(a) programs in February and a final rule is expected soon.  See Proposed Rule, 80 Fed. Reg. 6617, 6617-6644 (Feb. 5, 2015).