Chicken Little was in the woods one day when an acorn fell on her head. It scared her so much she trembled all over. She shook so hard, half her feathers fell out. “Help! Help! The sky is falling! I have to go tell the king!” So she ran in great fright to tell the king.1
You advise the command at U.S. Army South (ARSOUTH), the Army Service Component Command for U.S. Southern Command. ARSOUTH has spent months in negotiations with the State Department, the Government of Guatemala, and the Guatemalan military to plan its upcoming training mission to Guatemala. As always, time is of the essence for this mission. During the next planning meeting, the representative from the Contract Support Brigade (CSB) interjects and informs the commander that the process may take longer than expected on some of the contract actions, saying,
Sir, a number of these actions are going to take a little longer than we are used to. Some rules have changed in the contracting world. This procurement is under the simplified acquisition threshold (SAT) and under the new rule it is now reserved for American small businesses, regardless of the place of performance. We’re going to need to make sure an American small business gets first crack at this. But if no U.S. small businesses bid on the contract, we can then resolicit the contract so the Guatemalan companies can bid.
All the commander hears is “the CSB is delaying my mission.” He knows the Guatemalans are not going to be happy about this.
This hypothetical centers around the Small Business Administration’s (SBA) efforts to apply Federal Acquisition Regulation (FAR) Part 19 small business set-asides extraterritorially. The efforts have been the topic of numerous protests to the Government Accountability Organization (GAO) over the last twenty years. The debate, while fierce, has only been fought in the world of administrative law courts and chat forums. While the two camps are firmly digging into their trenches, trading dubious stares, and tossing legal hand-grenades labeled “Chevron deference” and “validly-promulgated, long-standing regulation,” little has been said about why it should or should not apply practically.
Why does it matter if FAR Part 19 is read to apply extraterritorially? What is the real world impact of extraterritorial application of FAR Part 19 set-asides for the Army (and the Department of Defense (DoD) for that matter) on the strategic, operational, and tactical levels? Application of mandatory extraterritorial small business set-asides would have serious negative impacts on a commander’s ability to contract strategically, negatively affecting his/her ability to accomplish the mission. Chicken Little is not as irrational as the rest of the barnyard might think.
II. The History of the Small Business Administration and Application of Overseas Small Business Set-Asides
The roots of the SBA took form early in 1932 with the creation of the Reconstruction Finance Corporation (RFC) in hopes of increasing wartime production. The RFC went through various other forms until 1953, when Congress created the SBA. Its mission would be to “aid, counsel, assist and protect, insofar as possible, the interests of small business concerns.” To accomplish the mission, Congress gave the SBA a mandate to ensure small business would receive a “fair proportion” of government contracts. Government agencies, in turn, created internal procedures to ensure that a fair proportion was set aside for small business.
Almost from the inception of small business set-asides, the DoD, in the Armed Services Procurement Regulation (ASPR), created an overseas exception. This exception continued in 1984 when the ASPR was replaced by the FAR. That same limitation is found in the FAR today. FAR Part 19, which implements the acquisition-related portions of The Small Business Act (The Act), is limited by FAR Part 19.000(b), which states “this part, except for Subpart 19.6, applies only in the United States or its outlying areas. Subpart 19.6 applies worldwide.”
- Small Business Administration Set-Asides’ Expansion Overseas
Since GAO’s first decision regarding a protest on the overseas exception for small business, rationales for whether to apply the exception have been somewhat inconsistent and piecemeal. The first few cases decided by GAO expanded a portion of the SBA’s reach overseas. The first such case, Eastern Marine, Inc., focused on a protest filed by the second-lowest bidder on a contract to deliver a tugboat to Panama. The awardee, a small business concern, did not satisfy the solicitation’s requirement that a “successful bidder must have been engaged in construction of similar tugboats for the past 5 years.” The SBA issued a certificate of competency (CoC) on the awardee’s behalf. The protestor argued there was an overseas exception to small business set-asides and that the contracting officer acted arbitrarily by accepting the CoC. GAO, after inquiring into the SBA’s stance on the applicability of the CoC program, gave deference to the SBA. Similarly, six years later in Discount Machinery, a small business protested another solicitation by the Panama Canal Commission (PCC), arguing the PCC was not using the SBA’s CoC program to award contracts. The PCC again pointed out that FAR Part 19.000(b) did not apply extraterritorially. The SBA’s argument, which GAO again accepted, was that the Act imposed no geographical limitation to its applicability. The first round of the fight regarding the overseas exception went to the SBA. In that decision, GAO recommended the Federal Acquisition Regulatory Council (FAR Council) to redraft the FAR specifically to exempt the CoC program. The FAR was then rewritten to exempt the CoC program from 19.000(b)’s geographical limitation.
B. GAO Begins Limiting Overseas Application
The next major protest occurred in 2013, in a GAO protest affectionately known in the contracting world as “Latvian,” where Latvian Connection General Trading and Construction LLC (Latvian), an American small business, filed a protest with GAO arising from an Air Force request for quotes (brand name or equal armored cable to be used at Thumrait Air Base, Oman). Latvian claimed the procurement should have been set-aside for small business. Latvian argued that Section 644(j) of The Act should have applied, which provides that contracts above the micro-purchase threshold, but not greater than the simplified acquisition threshold, “shall be reserved exclusively for small business concerns unless the contracting officer is unable to obtain offers from two or more small business concerns that are competitive with market prices and are competitive with regard to the quality and delivery of the goods or services being purchased.” The Air Force relied on the plain language of 19.000(b). GAO, siding with the Air Force, made two points: (1) The FAR (and its predecessor) have long applied the overseas exception to small business set-asides; and (2) SBA’s implementing language is silent regarding §644(j)(1)’s application outside of the United States. Using a Chevron analysis to resolve that ambiguity and silence, GAO gave deference to the FAR and its longstanding exception. Almost coincidently, just weeks after this decision, the SBA published redrafted implementing regulations to resolve any ambiguity. The SBA’s implementing regulation, now reads:
Small business concerns must receive any award (including orders, and orders placed against Multiple Award Contracts) or contract, part of any such award or contract, and any contract for the sale of Government property, regardless of the place of performance, which SBA and the procuring or disposal agency determine to be in the interest of:
(1) Maintaining or mobilizing the Nation's full productive capacity;
(2) War or national defense programs;
(3) Assuring that a fair proportion of the total purchases and contracts for property, services and construction for the Government in each industry category are placed with small business concerns; or
(4) Assuring that a fair proportion of the total sales of Government property is made to small business concerns.
The addition of those five italicized words to the SBA’s implementing regulation fundamentally changed the analysis of SBA set-aside bid protests. Due to the consistent application of Chevron in bid protests regarding FAR Part 19.000(b), and its likely application in any new cases heard by GAO or the U.S. Court of Federal Claims, the Chevron decision warrants more discussion. In Chevron, the Supreme Court of the United States heard a petition regarding whether the Environmental Protection Agency (EPA) had authority to implement permit requirements pursuant to the Clean Air Act Amendments of 1977. Implementation hinged on the EPA’s definition of source, which the Court, after applying the test below, determined was a permissible construction of the statute. To get the answer, the Supreme Court came up with a two-part test:
First, always, is the question whether Congress has directly spoken to the precise question at issue. If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress. If, however, the court determines Congress has not directly addressed the precise question at issue, the court does not simply impose its own construction on the statute . . . . Rather, if the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute.
The next major protest occurred in 2014 where Maersk, a large corporation, protested a small business set-aside it felt was to be performed outside of the United States and its outlying territories, thus making it exempt from a small business set-aside. Ruling against Maersk because part of the requirement was to be performed in the United States, GAO attempted to clarify its decision in Latvian. GAO explained that when a procurement is conducted outside of the United States and where the work is to be performed outside the United States as well, it is reasonable for an agency to determine that it is not required to set-aside the procurement for small business concerns. GAO made it clear that if both the contracting office and requirement were outside the United States, then SBA set-aside requirements would not apply. The tide had turned again. The Government Accounting Office, thirteen years after deciding its last protest on the extraterritoriality of the Act and ruling in favor of the SBA, based on not much more than SBA’s opinion, had now ruled against the SBA.
In an interesting series of events, it seemed the tide was turning back in the SBA’s favor. In a protest with the Department of State (DoS), the SBA was prepared to argue that GAO’s previous ruling in Latvian, based in part on the SBA implementing regulation’s silence regarding extra-territoriality, had now been resolved. Department of State in turn canceled the solicitation, resolicited it to include small businesses, and even redrafted the Department of State Acquisition Regulation to extend the scope of small business set-asides. At the same time, Latvian protested an Army solicitation for installation of sunshades at Camp Arifjan, Kuwait. In light of the recent developments with the DoS protest and the redrafting of the SBA regulation, the 408th CSB, located in Kuwait, seemed unsure of its legal footing. Despite falling squarely within the type of procurement the Maersk decision held did not have to be set aside, the 408th CSB cancelled its solicitation.
III. The Current Legal Arguments
A. The Small Business Administration’s Argument
The SBA’s argument rests partially in its very existence, being the embodiment of Congress’s manifest intent to create an agency whose purpose is to ensure a fair portion of government contracts are awarded to American small business interests. The SBA argues it was designated by Congress to administer the Act, and that nowhere within the Act does it give it the Office of Federal Procurement Policy (OFPP) or the FAR Council responsibility for implementing and administering the Act, pointing to the implementing language of the Act itself, which states:
In order to carry out the policies of this Act there is hereby created an agency under the name “Small Business Administration” (herein referred to as the Administration), which Administration shall be under the general direction and supervision of the President and shall not be affiliated with or be within any other agency or department of the Federal Government.
To the contrary, the SBA argues it is “charged with carrying out the policies of The Act and issuing such rules and regulations as it deems necessary.” Because the SBA is clearly designated by Congress as responsible for the implementation and administration of the Act, SBA argues its interpretation of the Act should be given deference under a Chevron analysis. This particular argument was persuasive early in the SBA’s attempts to expand the reach of the Act. In both Eastern Marine and Discount Machinery, GAO ruled in favor of the SBA, relying on not much more than the SBA’s argument that it was an SBA regulation and SBA’s interpretation controlled.
Second, the SBA points out there is no geographic limitation placed on 15 U.S.C. § 644(j)(1). The SBA argues that if Congress had intended to limit the application of The Act, Congress would have done so, as it did in 15 U.S.C. § 637(d)(2). The SBA argues that absent clear congressional intent to limit the application in certain circumstances, the Act should be applied in a manner that ensures small business concerns are given “the maximum practicable opportunity to participate in the performance of contracts . . . ”
Finally, the SBA also relies on the fact that both the U.S. Court of Federal Claims and GAO have held that the SBA’s implementation of a provision of The Act, via regulation, was viewed as controlling when there is an inconsistency with a FAR rule. This argument was persuasive in the mid 1990’s regarding application of the CoC program extra-territorially and successfully resulted in the FAR Council’s redrafting FAR subpart 19.6 to apply the program globally. At some point though, in the thirteen years between Discount Machinery and Latvian, something changed at GAO. GAO, which has not explained why this shift occurred, found the SBA’s position less persuasive and began consistently giving deference to the plain language in the FAR.
B. An Argument for The Department of Defense
A strong argument can be made on behalf of The Department of Defense, relying partly on GAO’s most current line of decisions in Latvian and Maersk, that the FAR deserves deference after applying its version of the Chevron test. Combining the facts that the overseas exclusion is a “validly-promulgated, long-standing regulation,” OFPP’s statutory authority to create government-wide procurement regulations, and the legislative history where Congress has specifically declined to implement language in the Act that would apply set-asides globally, all support applying FAR Part 19.000(b) as business as usual.
The first hurdle of Chevron is to determine whether the language at question provides an unambiguous expression of congressional intent. If the intent is clear, analysis ends and Congress’s intent will control. The Act itself is silent regarding geographic limitations on small business set-asides. That silence, when combined with the existence of the overseas exception for the last 58 years, along with Congress’s knowledge and inaction, seems to clear this hurdle with high jump prowess.
The next step, whether to give deference to the interpretation of an administering agency is dependent on the circumstances. It seems there is an overlap of power (whether real or perceived) between the SBA and OFPP. The power of the SBA to interpret the Act and the power of OFPP to create procurement policy. GAO has recognized the SBA’s broad authority under the Act to promote policies and take actions to ensure that small businesses obtain their fair share of contracts awarded by the U.S. government. To extend this power of interpretation to the SBA would functionally give the SBA rulemaking authority over government procurement. Contrast that authority with OFPP, which was specifically delegated the authority to promulgate procurement policies. It seems both the SBA and OFPP have a role to play in changing procurement policy in order to promote the Act. The U.S. Court of Federal Claims warned us of this very predicament in 1989.
Finally, “where the agency’s position reflects an informal interpretation, Chevron deference is not warranted; in these cases, the agency’s interpretation is ‘entitled to respect’ only to the extent it has the ‘power to persuade.” The SBA’s argument is not persuasive when Congress has twice decided not to include language in the Act that would apply set-asides globally. The first attempt to amend the statute included a statement of congressional policy stating that “…Federal agencies shall endeavor to meet the contracting goals established under this subsection, regardless of the geographic area in which contracts will be performed.” The second attempt to amend the statute included slightly different language, stating that procurement goals would “apply to all procurement contracts, without regard to whether the contract is for work within or outside the United States.” Neither proposal became law. If DoD’s application of its longstanding overseas exception were contrary to Congress’s intent, Congress would not have passed the chance to correct it.
IV. Beyond the Legality: The Practical Impacts Of Applying Set-Asides Globally
More important than the legal arguments are the pragmatic arguments for why small business set-asides should or should not be applied globally. It is important to consider are the practical impacts possibly affecting both the SBA and the DoD. What does the SBA have to gain and what does the DoD have to lose?
- What the SBA Has to Gain
The goal and mission of the SBA—its very “raison d’etre”—is to increase small business opportunities. The SBA will always be in the position where it is looking for ways and places to extend the Act. The status quo will never be good enough.
While there may always be the bureaucratic motivation to justify its existence, in the SBA’s defense, it is not as if it is an insatiable beast looking to devour all life that comes within its clutches. A good example is the setting of goals. The SBA has a definite self-interest in setting attainable goals, thereby encouraging efforts to reach them. The SBA set its goals for the DoD in 2006 and 2007 at 23% and lowered their goal in 2008 to 22.24%. It seems in 2008 the SBA did a reality check and lowered the goal, which it did again in 2014 when it lowered DoD’s goal to 21.60%. So while the SBA is part of the bureaucratic machine, it does not seem to be arbitrarily raising goals, year in and year out, simply in an effort to bring in more business for its constituency.
What is the impetus behind this push to have the overseas set-aside exclusion abolished? In years past, when DoD was short in reaching its goal, the inclusion would have certainly brought them closer. In the SBA’s defense, its current goal of 21.60% for DoD is not a true 21.60%. In reaching its percentage determination, the SBA does not include certain procurements, like those procurements made overseas or those that have foreign funding (i.e. Foreign Military Sales). The SBA is attempting to get 21.60% of that which is more reflective of what DoD is really spending. An internal Office of the Secretary of Defense (OSD) study analyzed the potential difference between small business performance with overseas procurements included and without. The OSD determined that if the overseas exception were taken away, the net gain in small business would be roughly half of a percent.
- What the Department of Defense Has to Lose
The Department of Defense has everything to lose and little to gain. The unintentional side effects of mandatory set-asides could have serious ramifications on its unique mission. Most important of those unintended effects would be the negative impact on DoD’s ability to contract strategically. In a complex and unpredictable world, Chicken Little needs every weapon it has at its disposal, and to lose one of its most powerful weapons would certainly feel like the sky was falling.
The Department of Defense is like no other government agency the SBA deals with. To highlight that difference, one can look to the United States Army, whose mission, as defined by Congress is:
preserving the peace and security, and providing for the defense, of the United States, the Commonwealths and possessions, and any areas occupied by the United States; supporting the national policies; implementing the national objectives; and overcoming any nations responsible for aggressive acts that imperil the peace and security of the United States.
That mission, to defend our nation, is far different than other government agencies whose sole focus is within the bounds of the United States. Take for instance, the Department of Housing and Urban Development, whose mission is limited in both geographical application and scope to “create strong, sustainable, inclusive communities and quality affordable homes for all.”
To meet its mission, the DoD uses contracting officers established throughout the DoD and within each of the military services. However, military contracting and procurement is more than just a mechanism to supply troops with the things they need. Procurement is a force multiplier that enables Soldiers on the ground to win wars, not just by outfitting the Soldier in his gear, but by anticipating their needs and shaping the environment in which they operate. The importance of DoD’s role can be seen in former Chief of Staff of the Army, General Raymond Odierno’s introduction to the Army Operating Concept (AOC). The Army sees a future where the enemy is unknown and increasingly skilled; a future where our forces are regionally aligned and part of globally responsive combined arms teams. General Odierno goes on to say that “[w]hile the [AOC] underscores the foundational capabilities the Army needs to prevent wars and shape security environments, it also recognizes that to deter enemies, reassure allies, and influence neutrals, the Army must conduct sophisticated expeditionary maneuver and joint combined arms operations.” The last thing the Army needs to consider in the world General Odierno describes is small business set-asides.
The strategic relationships envisioned with partner nations in this increasingly complex world, as described in the AOC, could include the creation of a broad base of contractors and suppliers in areas of operation where future conflict is likely. Just as important could be making a show to our partner nation that we are in a collective effort and that they, and their people, play an important role in that effort. These relationships do not begin at the dawn of a conflict. The loss of goodwill from our partner nations when their own small businesses lose contracts does not appear to be worth the gain in American small business. The application could also have unforeseen consequences where host nations enact laws that so significantly limit foreign businesses from operating in their country that it could potentially create a net loss in American business.
Another strategic aspect of contracting is seen in the context of a humanitarian assistance/disaster relief operation. The initial phase of the operation will be life-saving operations (the basis for DoD’s involvement in the operation to begin with is that the incident is beyond the host nation and USAID’s ability to respond sufficiently on their own). However, there will be a point in the operation where a strategic choice is made to contract with host nation businesses in order to provide economic stimulus to the affected country. Worse, the operation could take the unfortunate turn to a kinetic environment. In either situation, whether engaged in lifesaving or something akin to conflict, the last thing commanders need to worry about is improving American small business.
Operationally and tactically, there will be an impact, but segregating the strategic impacts from their second- and third-order effects at the operational and tactical level, these issues would be more like growing pains. At the outset of new rules applying the set-asides overseas, as feared in the scenario at the beginning of this article, there would be an undeniable delay to contracting until it became the new norm. It will take time for contracting professionals to navigate the new rules, apply the rule of two, and conduct market research. It will take time for planners and commanders to factor that into their operational timelines. It may even create an increase in bid protests, further delaying contracting actions, as small businesses protest each and every contract they are not awarded. It may require the hiring of new contracting officers and the restructuring of contracting offices to accommodate the new level of work. Most of these are inevitable ground level impacts associated with any change in rule or law. However, no law or rule change would ever be implemented if the argument “it’s too painful” ruled the day.
V. Is There a Common Ground?
Congress could easily end the issue with the stroke of a pen and end all Chevron analysis, yet as the court in C&G has pointed out, it has chosen to do nothing in the last 27 years to correct it. OFPP could create an official policy, but this would not put to an end the SBA’s argument that the SBA should be given deference. The Court of Federal Claims could easily throw a dart at the board of congressional intent, but the court and Congress seem content with letting GAO handle the issue. In light of congressional silence and GAO’s recent and consistent—albeit not necessarily articulate—application of FAR Part 19.000(b), it seems nothing is likely to change. Yet, in light of the SBA’s redrafting of its regulation and the continued attempts to raise small business goals, this seems far from over. To solve this problem, the logical first step is to have Chicken Little and Foxy Loxy sit down and talk. Maybe Chicken Little’s fear is not so irrational and maybe Foxy Loxy is not so hungry.
The conversation should begin with the Defense Acquisition Regulation Council (DAR Council) and the SBA. It would make sense for the SBA to find common ground with the DAR Council first (which would make a recommendation to the FAR Council regarding any proposed change or new rule). Each service is represented and would have the opportunity to express its fears over the unanticipated effects application of set-asides overseas may have, and provide the perfect opportunity to craft a rule that benefits the SBA and protects the commander. For instance, if the SBA recognized and took steps to protect the commander in contingency operations, whether it be in combat or humanitarian operations, it would likely garner some goodwill. That goodwill could easily turn into policy that encourages discretionary set-asides. Maybe the fox is not looking to swallow the chicken whole. To find out, they need to talk.
In light of Congressional silence and the quasi-judicial status quo, it seems DoD and the SBA are at a standoff. The trenches are squarely dug in and bayonets fixed. The SBA wants set-asides to apply globally so it can get a bigger piece of the pie for its constituents. The Army and DoD want the exception to remain, protecting its ability to contract strategically. However, if the SBA keeps poking DoD, SBA will pick a battle it will be hard-pressed to win. In a skirmish between a commander’s ability to wage war and protect the nation versus small business getting a little bit more pie, the commander should and will win. American small business cannot hold foreign policy and military strategy hostage.
The Act’s history is rooted in supporting wartime production and defense of our nation, not thwarting it. Chicken Little’s fears are real and grounded in a complex and unpredictable world. But maybe, if Foxy Loxy reaches across the trench with an open hand and a smile, Chicken Little might give him a nibble.