United States: NAICS Code Appeals: One Size Does Not Fit All

Last Updated: September 18 2017
Article by Damien C. Specht and James A. Tucker

The federal government sets aside many contracts for small businesses, but not all small business set-asides are created equal.  Instead, different size standards define small business status for different procurements.  The size standards vary from industry to industry, so a given firm may be a small business for one procurement at the same time it may be other-than-small for a different procurement for seemingly similar goods or services.

To keep order, the Small Business Administration (SBA) maintains a manual of industrial codes – called North American Industry Classification System (NAICS) codes – that are assigned to particular classes of manufacturing and service industries.  Each NAICS code is associated with a particular size standard that changes over time.  Some size standards are based on a firm's revenues and are expressed as dollar values – a firm is small if its average annual receipts do not exceed the specified number of dollars.  Others are based on the size of a firm's workforce – a firm is small if its average number of employees does not exceed the figure associated with the particular NAICS code in question.

For each procurement in excess of the micro-purchase threshold (currently $3,500 for most acquisitions), the contracting officer must designate within the solicitation a single NAICS code that best corresponds to the goods or services the agency is soliciting.  FAR 19.303.  The chosen NAICS code establishes the size standard for that procurement.  If the procurement is a small business set-aside, the size standard can determine (in large part) whether a particular offeror is eligible for award.

As one might expect, an agency's choice of NAICS code is often more art than science, and reasonable minds may disagree what the best NAICS code may be for a given procurement.  Because different NAICS codes may correspond to different size standards, the agency's code choice in a set-aside procurement may result in a particular firm being eligible or ineligible to compete for award.  Exclusion from a competition is a powerful incentive for firms to challenge an unfavorable NAICS code selection.

Unlike normal pre-award solicitation challenges, a challenge to a NAICS code is not a bid protest that can be filed with the Government Accountability Office (GAO), Court of Federal Claims, or the procuring agency.  Instead, an aggrieved potential offeror must file a NAICS Appeal with the SBA Office of Hearings and Appeals (OHA), within 10 calendar days after issuance of the solicitation containing the objectionable NAICS code.  See 13 C.F.R. § 121.1103.  OHA does not require the agency's selected NAICS code to be perfect.  Rather, an appellant has the burden of proving that the chosen code is based upon a clear error of fact or law and does not best describe the principal purpose of the product or service being acquired.  If OHA issues an adverse decision, a party with standing may then appeal OHA's decision to the Court of Federal Claims.

Illustrative Case:  American West Laundry, Inc.

A recent decision from OHA illustrates how a NAICS code appeal proceeds, and what remedies are available.  American West Laundry, Inc., SBA No. NAICS-5842 (2017), involved an Army solicitation for a contractor to perform bulk laundry services, including picking up dirty laundry from an Army hospital, cleaning and drying it at the contractor's facility, and returning the laundry to the Army within 24 hours.  The Army set the procurement aside for small businesses, and assigned NAICS code 812331 (Linen Supply), with a size standard of $32.5 million in average annual receipts.

Within 10 days after issuance of the solicitation, American West filed a timely NAICS appeal with OHA, arguing that the Army should have assigned NAICS code 812320 (Drycleaning and Laundry Services (except Coin-Operated)), with a much smaller size standard of $5.5 million in average annual receipts.  Reading between the lines, American West had less than $5.5 million in average receipts (and thus would meet the stricter size standard), but believed a number of its potential competitors (which might have less than $32.5 million in annual receipts under the more generous size standard) exceeded the stricter standard.  Reducing the size standard to $5.5 million would thus clear out a portion of the appellant's competition.

A second offeror, Division Laundry & Cleaners, intervened in the appeal to defend the agency's choice of NAICS codes.  Reading between the lines, this firm likely was one of the companies that was small under the $32.5 million standard, but would have been other-than-small under the $5.5 million standard.  Division Laundry argued that the Army's chosen code was correct because it included "businesses that provide laundered items, such as bed linens, towels, and hospital gowns," which are the items this solicitation required to be laundered.  Division Laundry also argued that this is the code the agency had used in the past for similar procurements.

SBA's Office of General Counsel filed its own response in the appeal, arguing that both the Army and the appellant got the NAICS code wrong.  According to the SBA, the code should have been 812332 (Industrial Launderers), with an associated size standard of $38.5 million – higher even than the initially chosen NAICS code.  The SBA argued that this code included work related to hospital laundry services (such as the services required by this procurement) and, moreover, corresponded to a superseded code definition that (like the current procurement) included services where a contractor was responsible for replacing or repairing Government-owned items to be laundered if those items were no longer serviceable.

Which of the three codes was correct?  Citing its own precedent, OHA found that the Army's preferred code was incorrect because it described services where the contractor owns the laundered items and rents them to the Government – i.e., supplying linens to the Government.  Here, the Government owned the linens, and the contractor was only going to launder them.  OHA also found the SBA's preferred code was incorrect.  Like the Army's code, the SBA's preferred code also applied only to launderers that "supply[], on a rental or contract basis," the laundered items, but here the contractor was to provide laundry services for Government-owned items.  OHA did not find that slightly different definitions in the obsolete code manual cited by the SBA shed any light on the applicability of current NAICS codes.  Thus, the appellant's preferred code (with its $5.5 million size standard) was the correct one, as only it applied to laundry services performed on Government-owned items and reasonably encompassed the solicited services.

So, the appellant won.  That victory, however, had no effect on the solicitation at issue:  although the appeal was timely filed within 10 days after release of the solicitation, the date set for receipt of quotations was only two weeks after the solicitation's issuance.  Because OHA issued its decision after the due date for quotations, the decision had no effect on the pending procurement, although regulations allow the decision to be applied to future solicitations for the same services.  13 C.F.R. § 134.318(b); FAR 19.303(c)(8).

When to Appeal a NAICS Code

When and why would a company appeal a NAICS code?  As American West demonstrates, a desire for accurate taxonomy is not the primary motivation behind NAICS code appeals.  In general, we recommend that prospective offerors provide preferred NAICS codes to an agency as early in the acquisition process as possible, including in pre-solicitation responses or in questions and answers on draft solicitations.  If the solicitation is issued with a disadvantageous code, here are a few scenarios where an appeal may make good business sense:

  • The chosen NAICS code has an unfavorably high size standard. This was the issue in American West.  The choice between NAICS code 812331 (Linen Supply) and NAICS code 812320 (Drycleaning and Laundry Services (except Coin-Operated)) determined whether a very small firm like the appellant would have to compete only against other firms with annual revenues below $5.5 million, or against firms with revenues as high as $32.5 million.  A lower cutoff can knock a number of rivals out of set-aside competition altogether.
  • The chosen NAICS code has an unfavorably low size standard. This is the other side of the coin.  If the agency's chosen NAICS code has a size standard that your otherwise small business exceeds, you should consider whether a different NAICS code (with a higher size standard) better describes the set-aside procurement.
  • A different NAICS code may drive a different Rule of Two analysis. Under the so-called Rule of Two, an agency must set aside for small businesses all acquisitions between $3,500 and $150,000, unless "there is not a reasonable expectation of obtaining offers from two or more responsible small business concerns that are competitive in terms of market prices, quality, and delivery."  FAR 19.502-2(a).  Similarly, an agency must set aside for small businesses any procurement in excess of $150,000 if there is a reasonable expectation that offers will be obtained from at least two responsible small business concerns, offering the products of different small business concerns, at fair and reasonable prices.  FAR 19.502-2(b).  If a procurement's selected size standard is low enough, there may not be a reasonable expectation of receiving two small business offers – causing the solicitation to be issued on an unrestricted basis, and thus open to large businesses.  Where the choice of NAICS code might be expected to alter the Rule of Two analysis and a procurement status as a set-aside or non-set-aside, it may be advantageous to appeal the selected code so that the procurement will – or will not – be set aside for small businesses.
  • It may make sense to intervene in someone else's NAICS code appeal. Interested parties may participate in another party's NAICS code appeal.  An intervention clearly makes sense when you are not happy with the assigned NAICS code, but it also may be advisable to participate in an appeal when you agree with the assigned code.  If you do not intervene in the appeal, and OHA renders a decision imposing a NAICS code that is unfavorable to you, you likely will be foreclosed from filing an appeal of the new NAICS code or from seeking judicial review.  See Palladian Partners, Inc. v. United States, 783 F.3d 1243 (Fed. Cir. 2015).

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Damien C. Specht
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions