COFC Decision Highlights Risks In Mentor-Protégé Joint Venture Agreements

On September 18, the Court of Federal Claims (COFC) issued a decision in Multimedia Environmental Compliance Group JV v. United States, denying a bid protest that challenged the Small Business Administration's (SBA's) Office of Hearings and Appeals (OHA) ruling on joint venture eligibility.

The case reinforces SBA's insistence that mentor-protégé joint venture agreements (JVAs) must not only include the required provisions under 13 C.F.R. § 125.8 but also clearly establish that the small business protégé, not the mentor, maintains real and practical control over contract performance.

Background

The dispute arose from a Navy procurement for environmental compliance engineering services, issued in June 2022 as a total small business set-aside. Multimedia Environmental Compliance Group JV (Multimedia), formed under SBA's mentor-protégé program, submitted a proposal. After a competitor, Acacia7 JV, filed a size protest, the SBA Area Office determined that Multimedia was eligible because its small business partner met the size standard and the JVA complied with the regulatory requirements. Acacia7 appealed to OHA, which reversed a decision we previously wrote about here.

OHA concluded that the JVA did not satisfy the requirements of § 125.8(b)(2)(ii), which mandates that the small business serve as the managing venturer and designate a protégé employee as the responsible manager with ultimate responsibility for performance. OHA found that Multimedia's JVA undermined this requirement by giving the mentor, Wood Environmental & Infrastructure Solutions (WEIS), significant negative control. Multimedia protested OHA's decision to the court, arguing that OHA exceeded its authority, misconstrued the regulation, and failed to properly assess the evidence.

Court's Analysis

The COFC rejected each of Multimedia's arguments. First, the COFC held that OHA properly applied the "clear error" standard of review, which is deferential to SBA Area Offices but allows reversal if a definite and firm conviction of error exists. OHA had identified provisions in the JVA that the Area Office either overlooked or misapplied, including an executive committee structure requiring unanimous votes and a dual management scheme that placed a program manager from the mentor on equal footing with the responsible manager from the protégé. The COFC concluded that OHA was within its authority to find these provisions inconsistent with SBA regulations.

Second, the COFC affirmed OHA's substantive interpretation of § 125.8(b)(2)(ii). While Multimedia argued that the regulation required only that the protégé be named managing venturer and appoint a responsible manager, OHA emphasized, and the COFC agreed, that the regulation requires meaningful control, not merely "pro forma" compliance. By granting WEIS veto rights on the executive committee and introducing a program manager role outside the regulation, Multimedia's JVA effectively stripped the responsible manager of the clear, ultimate authority envisioned by SBA. The COFC noted that the responsible manager's authority was not only diluted but also subordinated to a dispute resolution structure that could leave control in the hands of arbitrators rather than the small business itself.

Third, the COFC addressed Multimedia's claim that OHA ignored favorable evidence. The COFC found that OHA had, in fact, considered all relevant provisions, including those naming NEI (the protégé) as managing venturer and its president as responsible manager, but reasonably concluded that those provisions were overridden by conflicting terms. Specifically, the JVA required that solicitations and proposals be reviewed jointly by the responsible manager and program manager, that contract negotiations be led together, and that project management be performed by both. In the event of disputes, the matter would go to the executive committee, where WEIS held a veto and, if unresolved, to arbitration. This framework, the COFC explained, meant that NEI could not reliably exercise the independent authority that § 125.8 requires.

Looking Ahead

The decision has several implications for government contractors. First, the COFC will closely scrutinize not just whether a JVA contains the required boilerplate provisions but whether the agreement, taken as a whole, actually cedes contract performance authority to the small business. Second, provisions granting the mentor negative control, such as unanimity requirements, committee structures, or co-equal management roles, are red flags that can invalidate a JVA. Third, OHA's reasoning reflects a practical approach that the small business must have functional control, not just symbolic authority. Even dispute resolution mechanisms can raise concerns if they leave the small business unable to enforce its own decision-making power.

Finally, the COFC's opinion underscores that its review of OHA decisions is highly deferential. Under the Administrative Procedure Act, a procurement decision will be upheld so long as it is rational and consistent with the law. Unless contractors can show the decision was arbitrary, capricious, or contrary to statute, the COFC will not intervene. In this case, because OHA provided a coherent rationale rooted in the text of § 125.8 and supported by the record, the COFC sustained the decision and denied Multimedia's protest.

JVAs under the mentor-protégé program must be drafted with precision, ensuring that the protégé's responsible manager has unquestioned authority over day-to-day contract performance. Efforts to balance control more evenly with the mentor risk disqualification from small business opportunities. Given the scrutiny applied by SBA, OHA, and now affirmed by the COFC, parties entering into JVAs should conduct thorough regulatory reviews and avoid governance structures that could be seen as diluting the protégé's control.

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