United States: SBA NOTICE: Small Business Runway Extension Not Effective Until Rulemaking

David S Black is a Partner in our Tysons office.

Mitchell A Bashur is an Associate in our Tysons office.

To ring in the new year, we have an important update on the Small Business Runway Extension Act. Effective Dec. 21, 2018, Small Business Administration (SBA) issued an internal notice that the Small Business Runway Extension Act is not effective until its rulemaking is completed. Instead, it is SBA's view that the three-year trailing average for size eligibility based on revenue remains in place for now.

As we previously covered, on Dec. 17, 2018, the President signed the Small Business Runway Extension Act, which amended the Small Business Act to change the size lookback for small business size standards from three to five years. This will reduce the impact of years wherein businesses experience unexpectedly rapid growth, often causing them to prematurely lose their small business status.

In passing the bill, the House Small Business Committee noted that the bill was intended to lengthen the time in which the SBA measures size through revenue, from the average of the past three years to the average of the past five years. Given the simplicity of the law, we wondered whether the SBA would interpret it as applying immediately or whether it would require rulemaking to become effective. In an  Information Notice issued by Robb Wong, Associate Administrator of SBA's Office of Government Contracting and Business Development (GCBD) to all GCBD employees effective Dec. 21, 2018, the SBA provided its interpretation. In the Notice, the SBA provided:

The change made by the Runway Extension Act is not presently effective and is therefore not applicable to present contracts, offers, or bids until implemented through the standard rulemaking process. The GCBD is drafting revisions to SBA's regulations and forms to implement the Runway Extension Act. Until SBA changes its regulations, businesses still must report their receipts based on a three-year average.

(emphasis added.) The SBA explained that the legislative is not immediately effective because "The Runway Extension Act does not include an effective date, and the amended section 3(a)(2)(C)(ii)(II) does not make a five-year average effective immediately." In previously addressing this issue, though, federal courts have held that "the omission of an express effective date simply indicates that, absent clear congressional direction, it takes effect on its enactment date." Johnson v. United States, 529 U.S. 694 (2000) (citing Gozlon–Peretz v. United States, 498 U.S. 395 (1991)). The SBA does not explain in its Information Notice how its interpretation is consistent with this established principle of statutory construction.

Although not addressed in the information notice, the SBA also holds the view that the statutory requirements for size standards issued by Federal agencies in 15 U.S.C. § 632(a)(2)(C) do not apply to the SBA. The SBA asserts that the requirements for size standards in § 632(a)(2)(C) (which includes the trailing average standard for size based on revenue) apply only to the SBA-approved size standards proposed by other Federal agencies, but not to the SBA's own size standards, arguing that its regulations are governed by far less restrictive § 632(a)(2)(A). SBA's view that it is beyond the reach of § 632(a)(2)(C) (and therefore not subject to the Small Business Runway Extension Act) is likely surprising and concerning to Congress, which intended the new Act to change SBA's regulations.

Because SBA has made its position clear, notwithstanding how dubious Congress might find it, contractors should consider SBA's position and possible enforcement of the three-year lookback when bidding on set-aside contracts prior to completion of SBA's rulemaking. SBA and contracting agencies that adopt SBA's view will conclude that, until SBA's rulemaking is complete, offerors may not determine their size based upon the new five-year trailing average set forth in the Small Business Runway Extension Act. Instead, SBA and these agencies will continue to apply the three-year trailing average standard for size eligibility that Congress expressly sought to replace. Contractors who conclude SBA's legal interpretation is erroneous and elect to bid on set-aside opportunities in reliance on the new five-year lookback standard should be express and transparent to the agency about their reliance on the five-year standard in their proposal. Such contractors would still face a risk of proposal rejection or the possibility of protest litigation to vindicate their legal position.

As always, Holland & Knight's Government Contracts team is ready to assist you in navigating this and other small business issues.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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