United States: Class Waivers Of The Non-Manufacturer Rule: New OHA Decision Creates Uncertainty

Last Updated: April 8 2019
Article by Damien C. Specht and James A. Tucker

Those familiar with Federal procurements know the general rule: If you submit a proposal against a solicitation despite disagreeing with one of its provisions, you usually waive the right to challenge that provision in the future. That rule applies to bid protests at both the Government Accountability Office (GAO) and the Court of Federal Claims. In Size Appeal of Cypher Analytics, Inc. d/b/a Crown Point Systems, SBA No. SIZ-5986 (2019), the Small Business Administration's (SBA) Office of Hearings and Appeals (OHA) recently showed that the general rule does not necessarily apply to SBA size protests.

Solicitation, Waiver, and Award

The Cypher Analytics case involved a small business set-aside procurement for various types of computer equipment. In a notice accompanying the Solicitation, the contracting officer expressly informed prospective offerors that a class waiver of the Non-Manufacturer Rule applied to the Solicitation. A waiver of the rule meant that small business non-manufacturers (such as resellers) were not required to meet a smaller size standard or supply the goods of another domestic small business manufacturer.

Crown Point, a small business reseller, submitted an offer, proposing to supply the goods of a large business in accordance with the announced waiver of the Non-Manufacturer Rule. The Agency evaluated proposals and announced Crown Point was the apparent awardee.

Size Protest and OHA Appeal

A disappointed offeror filed a timely SBA size protest with the contracting officer, arguing that the awardee did not manufacture the computer equipment itself and did not comply with the Non-Manufacturer Rule because it proposed to supply end items manufactured by a large business. The protester argued that the only Non-Manufacturer Rule waiver applicable to the Solicitation was for mainframe computers, not for the ordinary computer equipment called for in the Solicitation – a point it raised to the contracting officer before proposal submission, and which the contracting officer rejected in writing. The protester made the same argument to SBA after the apparent awardee was announced, and the SBA Area Office agreed with the protester and found the awardee to be ineligible for award.

The awardee appealed to OHA. Before OHA, both the Agency and the awardee argued that the protester's challenge was untimely because the protester was on notice from the outset of the procurement that the Agency considered the Non-Manufacturer Rule waived for purposes of the whole Solicitation, yet submitted a proposal anyway and did nothing when the contracting officer expressly rejected its argument. Both the Agency and the awardee pointed to the sound policy interest underlying both the GAO's and the Court of Federal Claims' timeliness rules, which bar protests of solicitation terms that could have been raised before proposal submission. They also argued that this size protest was, in essence, an untimely appeal of the NAICS code assigned to the Solicitation. The awardee also argued that small business offerors have a right to rely upon the express terms of a solicitation and the contracting officer's assurances of what rules apply to a given procurement.

OHA was unconvinced. It first noted that SBA alone has the right to grant class waivers of the Non-Manufacturer Rule, and here the contracting officer was simply incorrect that the class waiver applicable to this NAICS code covered the end items being procured under the Solicitation. OHA also rejected the argument that offerors should not be penalized for accepting a procuring agency's representation that a particular waiver applied, as that essentially would allow individual contracting officers to usurp SBA's exclusive authority over class waivers of the Non-Manufacturer Rule, and would put OHA in the position of refusing to apply duly promulgated regulations on the basis of policy preferences. Finally, although conceding that the protester possibly could have framed its arguments as a NAICS code appeal or a bid protest prior to proposal submission, it chose to file a size protest instead. Under the size protest regulations, the protest was timely – and, indeed, would have been premature if filed before the apparent awardee was identified. Therefore, OHA denied the appeal and upheld the size determination.

Takeaway: Small business offerors should "trust but verify" when a solicitation states that the Non-Manufacturer Rule has been waived with respect to particular items. OHA's decision in Cypher Analytics puts non-manufacturers in a difficult position: If your attempted verification suggests a stated class waiver may be inapplicable, what should you do? It's not in your best interest to challenge a waiver you want to rely on, but neither is it in your interest to spend bid and proposal resources pursuing an opportunity for which you may be found ineligible. And, even if you do follow up with the contracting officer, OHA has said you cannot necessarily rely on what the contracting officer or solicitation itself tells you: Someone else may wait until after contract award to raise a formal objection to the purported waiver in the form of a size protest.

This outcome seems wrong and out of step with rest of Federal procurement policy. Unless the appellant decides to challenge this decision at the Court of Federal Claims, a change to the governing regulations appears to be the only way to address this problem.

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

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Damien C. Specht
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