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06/02/78 Eastern Canvas Products, v. Harold Brown

June 2, 1978







of Defense, et al. 1978.CDC.80

Appeals from the United States District Court for the District of Columbia (D.C. Civil 76-1284).


Tamm and MacKinnon, Circuit Judges, and Howard T. Markey,* Chief Judge, United States Court of Customs and Patent Appeals. Opinion for the court filed by Chief Judge Markey.


Markey, Chief Judge, United States Court of Customs and Patent Appeals:

Action by Eastern Canvas Products, Inc. (Eastern), a disappointed bidder, seeking to enjoin the award of two Defense Supply Agency contracts. Eastern appeals from an Order of the District Court for the District of Columbia denying its motion, and granting defendants' cross-motion, for summary judgment. We reverse and remand.

Eastern, a Massachusetts corporation engaged in the manufacture and sale of canvas, synthetic and webbing products (backpack frames, straps and knapsacks) was second low bidder on two formally advertised, competitive DSA procurements. Eastern was qualified as a "small business," as defined in the Small Business Act (Act) 15 U.S.C. § 632 and implementing regulations 13 C.F.R. §§ 121.3 et seq., at that time and when this suit was commenced. Having grown substantially, Eastern no longer qualifies as a "small business.", Defendants are the Secretary of Defense, the Director of DSA, and the Administrator of the Small Business Administration , sued in their official capacities.

Defendant-intervenor (Welmetco), a competitor of Eastern and qualified as a "small business" under the Act and regulations, was low bidder on the two DSA competitive procurements in dispute. *fn1


Under § 8(a) of the Act, 15 U.S.C. § 637(a), and several executive orders, E.O. 11458, 34 Fed. Reg. 4937 (1969); E.O. 11518, 35 Fed. Reg. 4939 (1970); E.O. 11625, 36 Fed. Reg. 19967 (1971), government agencies are directed to foster and promote business enterprises of "disadvantaged" persons and entities. The constitutional and statutory validity of what has come to be known as the "§ 8(a) program" was upheld in Ray Baillie Trash Hauling, Inc. v. Kleppe, 477 F.2d 696 (5th Cir. 1973), cert. denied, 415 U.S. 914, 39 L. Ed. 2d 468, 94 S. Ct. 1410 (1974), in Valley Forge Flag Co., Inc. v. Kleppe, 165 U.S. App. D.C. 182, 506 F.2d 243 (1974), and in Fortec Constructors v. Kleppe, 350 F. Supp. 171 (D. D.C. 1972), aff'd, No. 72-1924 (D.C. Cir. October 11, 1972).

SBA is authorized under § 8(a) to enter into contracts with other government agencies and "to arrange for the performance of such contracts by negotiating or otherwise letting subcontracts to small business concerns or others . . . as may be necessary to enable the Administration to perform such contracts." 15 U.S.C. § 637(a). Pursuant to that authority, SBA established its § 8(a) program to assist "small concerns owned and controlled by socially or economically disadvantaged persons to achieve a competitive position in the marketplace," 13 C.F.R. § 124.8(b), and limited eligibility to concerns "owned and controlled by one or more persons who have been deprived of the opportunity to develop and maintain a competitive position in the economy because of social or economic disadvantage." 13 C.F.R. § 124.8-1(c)(1).

Applicants for the § 8(a) program, "must submit a business plan, including complete information regarding the concern's qualifications, which will demonstrate that section 8(a) assistance will foster its participation in the economy as a self-sustaining, profit-orientated small business." 13 C.F.R. § 124.8-2(a). Approval of the plan does not obligate SBA to award a subcontract. After consultation with other government agencies, SBA selects proposed procurements suitable for performance by § 8(a) concerns, considering such factors as:

Percentage of all similar contracts awarded under the section 8(a) program over a relevant period of time, issuance of prior public solicitation of the procurement under a small business set-aside, the probability that an eligible concern could obtain a competitive award of the contract, and the extent to which other small concerns have historically been dependent upon the contract in question for a significant percentage of their sales. 13 C.F.R. § 124.8-2(b).

SBA regulations further provide that "[a] section 8(a) concern which has substantially achieved the objective of its business plan will be notified that its participation in the program is completed." 13 C.F.R. § 124.8-2(e). Having achieved its business plan objective, the concern is said to have "graduated" from the § 8(a) program.

The § 8(a) program is an exception to the general rule that "all procurements, whether by formal advertising or by negotiation, shall be made on a competitive basis to the maximum practicable extent." Armed Forces Procurement Regulation 1-300.1. The Department of Defense will "enter into contracts with the SBA to foster or assist in the establishment or the growth of small business concerns as designated by the SBA so that these concerns may become self-sustaining, competitive entities within a reasonable period of time," ASPR 1-705.5(b)(1), and when SBA "certifies to the Secretary concerned in accordance with Section 8(a) . . . that the SBA is competent to perform a specific contract, the contracting officer is authorized, in his discretion, to award the contract to the SBA." ASPR 1-705.5(a). In awarding its subcontracts, SBA is not bound by normal competitive considerations. 13 C.F.R. § 124.8-2(d), 15 U.S.C. § 634(b)(6).

Under the § 8(a) program, the procuring agency pays the estimated current fair market price. Additional costs for start-up, training, and initial investment, termed "business development expenses" , are funded by SBA. ASPR 1-705.5(b)(2). Market price is based on "likely costs" under normal competitive conditions, ASPR 1-705.5(b)(2), and, in repetitive procurements market price is based on the most recent award price for the same products, incorporating any interim increases. ASPR 1-705.5(c)(1)(ii). When SBA and the procuring agency agree upon a fair market price, and the § 8(a) subcontract is awarded, payments are made to the subcontractor by the procuring agency. BDE costs are paid by SBA through the procuring agency, which acts as distributing agent. 1 R. Nash & J. Cibinic, Federal Procurement Law 513, n. 5 (3d ed. 1977).


The facts and events described by deposition witnesses are undisputed.

In December, 1975, SBA determined Welmetco eligible for its § 8(a) program as an enterprise owned or controlled by a person deprived of the opportunity to develop and maintain a competitive position because of social or economic disadvantage. See 13 C.F.R. § 124.8-1(c)(1).

On December 18, 1975, SBA's Office of Business Development asked DSA for a § 8(a) set-aside of 162,000 strap and backpack frame assemblies at an estimated value of $400,000. On January 21, 1976, DSA set aside 60,000 strap and frame assemblies for § 8(a) procurement. After negotiations with Welmetco, the New York regional office of SBA sent an April 15, 1976, letter to DSA's contracting officer, proposing a unit price of $26.50 and a total contract price of $1,590,000.

DSA advised SBA's New York office, on April 21, 1976, that the proposed price was unacceptable because it was above the market price defined in ASPR 1-705.5(b)(2). An analysis of the bidding on an earlier procurement of the same goods led DSA's contracting officer to determine a fair market price of $21.88 per unit and a total price of $1,312,800. *fn2 The contracting officer recommended that SBA resume negotiations with Welmetco and, if Welmetco would not agree to the $21.88 price, that SBA should submit to DSA a Certificate of BDE for any price in excess of $21.88.

It appears that sometime prior to February 20, 1976, Welmetco had requested SBA to furnish government equipment for use on the proposed 8(a) procurement. Welmetco originally requested about $400,000 worth of equipment, but reduced the amount to $200,000, then to $100,000 and, eventually to about $16,000.

On February 20th, Bernard Zeller, Deputy Director of SBA's New York regional office wrote the Defense Contract Administrative Services Region, New York, , a component of DSA, requesting review of Welmetco's equipment request. DCASR personnel visited Welmetco on February 27 and March 3, 1976, and concluded that Welmetco did not need any equipment for the § 8(a) procurement.

The basis for that conclusion was that with its existing equipment and slightly over one work shift, Welmetco was then performing under two contracts for approximately 50,000 units. The DCASR report indicated that Welmetco foresaw no difficulties with adding a full second shift, and possibly a third, if necessary.

In apparent response to further equipment requests by Welmetco, Zeller again wrote DCASR on April 7, 1976, requesting a review of Welmetco's equipment needs. DCASR responded on April 28, 1976, and again concluded "that Welmetco does not require the capitol [sic] equipment for subject procurement [the § 8(a) procurement].

On April 15 and 16, 1976, DSA issued the two Invitations for Bids (IFB's) in the competitive procurements giving rise to the present controversy. DSA 100-76-B-0998 ('0998) sought bids on 270,000 units, each unit consisting of pack frames and four straps. DSA 100-76-B-1008 ('1008) sought bids on 303,556 units, each unit consisting of two straps. Both solicitations were restricted to small business concerns and opening dates were set for May 5 and 10, 1976, respectively.

Because SBA's § 8(a) request had been for more than the 60,000 units set aside, DSA's contracting officer believed SBA was aware that DSA would be issuing the '0998 IFB for additional units, but was uncertain whether SBA anticipated the '1008 solicitation.

On April 20, 1976, Welmetco's president, Mr. Medina, wrote SBA in Washington, D.C., requesting "any assistance that your good offices may be able to offer . . . towards [sic] a rapid and successfully [sic] award of 60,000 Frame and Strap Assemblies under the 8A Program." Mr. Medina indicated that SBA's New York office had advised him of a problem with the Department of Defense on the price and BDE funds for $104,000 worth of factory equipment. Medina insisted that Welmetco needed $104,000 worth of equipment "to perform . . . [the § 8(a) contract] at the negotiated price and ...

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