STA TECHNOLOGIES, INC., APPELLANT

*1 This appeal arises from a April 5, 2006 size determination (3-2006-43) finding STA Technologies, Inc., (“Appellant”) to be other than a small business for North American Industry Classification System (“NAICS”) codes 541618 and 561621. The U.S. Small Business Administration Office of Hearings and Appeals (“this Office”) decides size determination appeals under the Small Business Act of 1958, 15 U.S.C. § 631 et seq., and 13 C.F.R. Parts 121 and 134.

*1 Whether the Area Office made a clear error of fact or law when it determined Appellant was affiliated with a larger concern under the totality of the circumstances.

*1 The Record establishes the following facts by the preponderance of the evidence:

*1 1. On March 24, 2006, the U.S. Small Business Administration, Office of Government Contracting, Atlanta Area Office (“Area Office”) received a size protest from the U.S. Small Business Administration, Acting Assistant Administrator, Division of Program Certification & Eligibility, (“AADPCE”) requesting it make a size determination of STA Technologies, Inc. (“Appellant”). The protest originated from a February 22, 2006 offering letter received by the U.S. Small Business Administration's North Carolina District Office (“District Office”) from the Federal Bureau of Prisons requesting the District Office consider whether Appellant qualified under the 8 (a) Business Development Program to supply and install a perimeter detection system at a Phoenix, Arizona prison.

*1 2. The Bureau of Prisons offering letter designated NAICS code 561621, Security Systems Services, for its procurement. NAICS code 561621 has a size standard of $11.5 million. The Bureau of Prisons estimated the value of the contract as between $250,000 and $500,000.

*2 3. The AADPCE first asked the Area Office to review whether Appellant is affiliated with SIGCOM, Inc. (“SIGCOM”), a telecommunications company because SIGCOM is an other than small concern under NAICS code 561621. If the Area Office determined Appellant and SIGCOM were not affiliated, the Area Office was to review whether they were affiliated for performance of the Bureau of Prisons sensor requirement.

*2 4. Mr. Erwin Ayscue and Ms. Shana Ayscue are husband and wife. Ms. Ayscue owns 100% of Appellant and is also its President. Mr. Ayscue serves as Appellant's Vice President.

*2 5. Mr. Ayscue is a full-time SIGCOM employee and provider for his household (See Response No. 3, Appeal Petition). Mr. Ayscue's only ownership interest in SIGCOM is a small one ($17,542 in the SIGCOM ESOP without voting power).

*2 6. Appellant was certified in the 8(a) program on June 28, 2005, under the primary NAICS code of 541618, Other Management Consulting Services, with a $6.5 million size standard. Appellant also requested approval under 21 other NAICS codes under its business plan. The District Office opined that it was able to demonstrate capability for five additional NAICS codes beyond its primary code, i.e., 517910,541512, 541513, 541519, and 541690, but not the code for the Bureau of Prisons procurement.

*2 7. Appellant had negative revenue between 2003 and 2005.

*2 8. Appellant submitted a Mentor-Protégé Agreement between it and SIGCOM for approval. As of April 4, 2006, SBA had not approved the Mentor-Protégé Agreement.

*2 9. Appellant was unable to obtain bank financing to perform the Bureau of Prisons requirement. Instead, it formed a financial agreement with SIGCOM for $250,000 that gave SIGCOM effective control of all of its assets to ensure payment of amounts advanced.

*2 On April 5, 2006, the Area Office issued Size Determination No. 3-2006-43 (“size determination”) finding Appellant to be other than a small business for Appellant's primary NAICS code 541618, with a $6.5 million size standard, and for NAICS code 561621, with a $11.5 million standard. Since the Area Office was not empowered to determine Appellant's continued performance in the 8(a) program, it made no such determination.

*2 The Area Office's size determination found the following:

*2 a. Appellant has minimal expertise under NAICS code 561621;

*2 b. SIGCOM is providing Appellant financial assistance and allowing them to buy equipment and supplies at a competitive advantage;

*2 c. SIGCOM would be performing the primary and vital requirements of the contract;

*2 d. A Mentor-Protégé Agreement between Appellant and SIGCOM has not been approved and thus Appellant is not entitled to an exception from a finding of affiliation;

*2 e. Mr. Ayscue is a current SIGCOM employee and Ms. Ayscue is a former SIGCOM employee; and

*3 f. Appellant and SIGCOM are affiliated under the totality of the circumstances.

*3 Appellant received the size determination on April.7, 2006. Appellant sent its appeal on April 21, 2006 (a Friday). Since this Office received the appeal after business hours, Appellant's appeal is deemed received on Monday, April 24, 2006.

*3 While not alleging the Area Office based its size determination upon a clear error of fact or law,¹ Appellant does allege error. Specifically, Appellant alleged it is a small business not affiliated with SIGCOM. Appellant claimed to have familiarity with the security fencing equipment even though it had never previously installed it. Appellant asserted it has “the knowledge and experience of installing security equipment but not to the extent of SIGCOM,” (Appeal Petition at 4) and can provide 51% or more of the services required by the Bureau of Prisons (Supplement to Appeal Petition, at 2).

*3 Appellant further asserted that the Mentor-Protégé Agreement did not give SIGCOM the power to control Appellant. Finally, Appellant expressed its desire that it continue to be allowed to compete for future small business set-aside contracts since it believed the procurement at issue was no longer pending.

*3 As noted above, Appellant appealed the Area Office's April 5, 2006 size determination within 15 days of receiving it. Therefore, its appeal is timely. 13 C.F.R. § 134.304(a)(1).

*3 The standard of review for this appeal is whether the Area Office based its size determination upon clear error of fact or law. 13 C.F.R. § 134.314. In evaluating whether there is a clear error of fact or law, this Office does not consider Appellant's size de novo. Rather, we (this Office) review the record to determine whether the Area Office based its size determination upon a clear error of fact or law. (See Size Appeal of Taylor Consulting, Inc., SBA No. SIZ-4775 (2006), for a full discussion of the clear error standard or review.) Consequently, I will disturb the Area Office's size determination only if I have a definite and firm conviction the Area Office made key findings of law or fact that are mistaken.

*3 As explained above, I cannot find a clear error of fact or law merely because of a disagreement with the Area Office's decision. Rather, there must be a definite and firm conviction of an error. In this appeal, I find the Area Office has failed to articulate a basis for finding affiliation between Appellant and SIGCOM and that* in any case, one could not exist under the evidence in the Record. However, I do find Appellant and SIGCOM are affiliated for purposes of the Bureau of Prisons contract because Appellant is unusually reliant upon SIGCOM for performance of the contract.

*4 As described above, this Office must determine whether the Area Office made a clear error of law or fact. 13 C.F.R. § 134.314. We bound our analysis with 13 C.F.R. § 121.103(a)(5)'s requirement that the Area Office consider the totality of the circumstances in determining whether affiliation exists under one (or more) of the principles of affiliation or power to control separately listed in 13 C.F.R. § 121.103. That is, the requirement to consider the “totality of the circumstances” is the standard area offices must apply to determine whether one of the principles listed elsewhere in 13 C.F.R. § 121.103 apply. This means this Office evaluates whether the Area Office: (1) properly considered available and relevant facts; (2) evaluated the arguments of the parties; and (3) correctly applied the regulations and law to the relevant facts in making its size determination.

*4 Area Offices are responsible for determining affiliation by applying 13 C.F.R. § 121.103 to the record (the totality of the circumstances) before them. 13 C.F.R. § 121.1002. Affiliation arises from one concern having the power to control the other. 13 C.F.R. § 121.103(a). Area Offices may base findings of control on numerous and independent considerations including, but not limited to: (a) stock ownership; (b) interlocking boards of directors; (c) common management; (d) creation of a newly organized concern; (e) creation of joint ventures; and (f) affiliation based upon identity of interest.

*4 For the purposes of this appeal, the type of general affiliation addressed by the Area Office arises under an identity of interest affiliation, found at 13 C.F.R. § 121.103 (f), which states, in relevant part:

*4 The Area Office based its finding of affiliation on familial identity of interest. It is well accepted that individuals with substantially identical business interests, such as family members, may be affiliated. 13 C.F.R. § 121.103 (f). However, affiliation predicated upon a familial identity of interest requires the family member to have the power to control the larger concern. See Size Appeal of U.S. Grounds Maintenance, Inc., SBA No. SIZ-4601 (2003); Size Appeal of Morgan Construction Enterprises, Inc., SBA No. SIZ-4503 (2002) (both spouses were officers in both concerns).

*5 The Area Office also based its overall finding of affiliation on economic dependence. Affiliation based on economic dependence arises where one concern is dependent upon another for contracts and business to such a degree that its economic viability would be in jeopardy without that business. See Size Appeal of O'Donnell Construction Company, SBA No. SIZ-4125 (1995); Size Appeal of J&R Logging, SBA No. SIZ-4426 (2001) (98% of the challenged firm's receipts were attributable to contracts with one firm.) Consequently, for economic dependence to support a determination of affiliation, the concern whose size is at issue must; at the very least, be active and have actual business receipts that flow from the large concern.

*5 The ostensible subcontractor rule is an independent basis for finding affiliation between two concerns. 13 C.F.R. § 121.103(h)(4). A violation of the ostensible subcontractor rule is contract specific only and prevents a concern from being determined small for the challenged procurement. See Size Appeal of A&S Tribal Industries, SBA No. SIZ-4500 (2002). The purpose of the rule is to prevent other than small firms from forming relationships with small firms to evade SBA's size requirements. The ostensible subcontractor rule permits the Area Office to determine a subcontractor and a prime have effectively formed a joint venture (and are thus affiliates) for determining size. An ostensible subcontractor is a subcontractor that performs primary and vital requirements of a contract. 13 C.F.R. § 121.103(h)(4). In determining whether a subcontractor performs primary and vital requirements, the Area Office is obligated to consider all aspects of the prime-subcontractor relationship including, but not limited to, the proposal, teaming agreements, and whether the subcontractor is an incumbent contractor and is ineligible to submit a proposal because it exceeds the size requirements for the solicitation. Id. Traditionally, SBA has applied the “unusual reliance” standard to evaluate whether the rule has been violated. Size Appeal of Radiation Service Organization, SBA No. SIZ-1270 (1979) (further citations omitted).

*5 Two firms approved by the SBA to be a mentor and protégé under 13 C.F.R. § 124.520 may joint venture as a small business for any Federal Government Procurement. When the two firms create a joint venture, the joint venture becomes exempt from the normal rules of affiliation. 13 C.F.R. § 121.103(h)(3). The exemption is valid as long as the protégé concern qualifies as small for the size standard applicable to the contract and the joint venture meets other regulatory requirements; 13 C.F.R. §§ 124.513(b)(3), 124.513(c).

*6 The Record contains no evidence of an approved mentor-protégé arrangement or joint venture between Appellant and SIGCOM. Accordingly, all of the normal affiliation rules apply to the relationship between Appellant and SIGCOM. Thus, Appellant is not exempt from the affiliation rules of 13 C.F.R. § 121.103.

*6 The Area Office concluded Appellant and SIGCOM are affiliated under the totality of the circumstances. In its determination, the Area Office did not delineate what regulatory principle or power to control supported its finding. That is, it did not explain how SIGCOM had the power to control Appellant through ownership, common management, economic dependence, family relationship or any other specific reason for affiliation sanctioned under 13 C.F.R. § 121.103. Rather, it merely concluded the totality of the circumstances supported a finding of affiliation and mentioned facts relevant to familial and economic identity of interest.

*6 While the Record persuaded the Area Office that the relationship between Appellant and SIGCOM supported a finding of affiliation, it is clear error on its part not to find a specific basis for affiliation. Even though it found the totality of the circumstances support a finding of affiliation, it is legally insufficient not to tie the circumstances to a type of affiliation specified by 13 C.F.R. § 121.103.

*6 Regardless, it is plain there is no applicable violation of SBA's affiliation rules. Plainly, Appellant is not economically dependent upon SIGCOM for it has no revenue from SIGCOM (or anyone else) for the past three years.² In effect, Appellant cannot be economically dependent upon SIGCOM for their business since they have no business.

*6 Moreover, while Mr. Ayscue works for SIGCOM, he is not a key employee, officer, or owner of SIGCOM, which is required to trigger familial identity of interest affiliation. Accordingly, it is irrelevant that Mr. Ayscue works for SIGCOM for, as explained above, this Office does not find affiliation based upon a familial relationship unless a family member owns or has the ability to control the larger concern.

*6 The Record clearly shows a violation of the ostensible subcontractor rule. Appellant has no relevant experience in installing alarm systems or in performing work near the estimated size of the Bureau of Prisons contract. Nor can Appellant obtain financing or equipment necessary to perform the contract work without SIGCOM. Similarly, SIGCOM, as a large concern under NAICS code 561621, would be ineligible to perform work under the proposed Bureau of Prisons contract unless it formed a relationship with Appellant or some other qualified 8(a) concern.

*7 As discussed, the Record shows SIGCOM will perform primary and vital requirements of the contract. The Area Office found and Appellant does not contest that Appellant intended to subcontract the engineering, design services, and site management for the Bureau of Prisons contract. SIGCOM's performance of these tasks is necessary, for the Bureau of Prisons told the District Office that SIGCOM is one of the few contractors approved to perform the work required in the statement of work for the contract. In addition, Appellant admitted that “SIGCOM will more than likely [perform the more complex and costly contract functions] because they are a more experienced company.” (Appellant's Response to Area Office Question, No. 7).

*7 SIGCOM's performance of primary and vital requirements and its dominant role in its relationship with Appellant makes Appellant unusually reliant upon SIGCOM. Appellant is thus affiliated with SIGCOM for the purposes of this procurement under the ostensible subcontractor rule. This requires the Area Office aggregate SIGCOM (the affiliate) and Appellant's average annual receipts to determine Appellant's size for that procurement. 13 C.F.R. § 121.104(d). Thus, Appellant is other than small for the $11.5 million size standard applicable to NAICS code 561621 designated for the Bureau of Prisons procurement.

*7 I have considered Appellant's Petition in light of the Record. The Record partially supports the Area Office's finding of facts and size determination. Specifically, the Record supports a violation of the ostensible subcontractor rule for the proposed Bureau of Prisons contract However, the Record neither supports, nor did the Area Office find, affiliation between Appellant and SIGCOM under 13 C.F.R. § 121.103.

*7 Appellant's Appeal is DENIED in part and SUSTAINED in part. Appellant is affiliated with SIGCOM for the purpose of the Bureau of Prisons contract, but is not otherwise affiliated.

*7 This is the final decision of the Small Business Administration. See 13 C.F.R. § 134.316(b).