IN THE MATTER OF: WIND CLAN CONSTRUCTION COMPANY, INC., PETITIONER
2017 WL 5483557November 3, 2017
2017 WL 5483557 (S.B.A.)
Small Business Administration (S.B.A.)
Office of Hearings and Appeals
[Equal Access to Justice Act]
*1 IN THE MATTER OF: WIND CLAN CONSTRUCTION COMPANY, INC., PETITIONER
*1 Docket No. EAJA-2016-12-21-06
*1 November 3, 2017
DECISION
*1 This decision responds to the U.S. Small Business Administration's Request for Review (“Request for Review”) of the March 10, 2017 Initial Decision on Fee Petition (“Initial Decision”) issued by United States Administrative Law Judge J. Jeremiah Mahoney (“Judge Mahoney” or “ALJ”) granting attorney's fees to Wind Clan Construction Company, Inc. (“Petitioner” or “Wind Clan”). Specifically, the U.S. Small Business Administration (“SBA” or “Agency”) requests that the SBA Administrator reverse the Initial Decision.
PROCEDURAL HISTORY
*1 On April 9, 2016, SBA's Associate Administrator for Business Development (“AA/BD”) issued a final decision declining Wind Clan's application for admission to the 8(a) Business Development (“8(a) BD”) program, based on Wind Clan's failure to provide sufficient evidence to overcome SBA's initial determination that a non-disadvantaged individual controls or has the power to control the firm. Petitioner appealed SBA's determination to the Agency's Office of Hearings and Appeals (“OHA”). OHA assigned the appeal to Judge Mahoney, an Administrative Law Judge with the U.S. Department of Housing and Urban Development who is authorized to hear cases for SBA pursuant to an Interagency Agreement. On November 23, 2016, Judge Mahoney issued a Decision finding that SBA had erred in denying Petitioner's application to the 8(a) BD program (“Decision”). In the Matter of Wind Clan Construction, SBA No. BDPE-556 (2016). In accordance with the Decision, SBA admitted the Petitioner into the 8(a) BD program. On December 21, 2016, Petitioner filed a Motion for Attorney's Fees (“Fee Motion”) with OHA seeking reimbursement of attorney's fees under the Equal Access to Justice Act (“EAJA”). In the Fee Motion, the Petitioner, as the prevailing party, requested reimbursement of attorney's fees associated with Petitioner's appeal. The Fee Motion included an Affidavit of Petitioner's Net Worth and Number of Employees dated December 21, 2016 (“Initial Affidavit”). The Fee Motion was also assigned to Judge Mahoney for review and disposition.
*1 On February 6, 2017, SBA filed an Answer to the Fee Motion (“Answer”) requesting that it be denied because (1) Petitioner failed to establish its eligibility to recover fees under EAJA within the thirty-day period prescribed by statute; and (2) SBA was substantially justified in denying Petitioner's 8(a) BD application. On February 15, 2017, the Petitioner filed a Reply to SBA's Answer, which included a Supplemental Affidavit of Petitioner's Net Worth, No Affiliates, and Number of Employees dated February 13, 2017 (“Supplemental Affidavit”). On March 1,2017, SBA filed a Reply to Petitioner's Reply. On March 2, 2017, Petitioner filed a Corrected Reply to SBA's Answer.
*2 On March 10, 2017, the ALJ issued the Initial Decision finding that Petitioner was eligible for reimbursement of attorney's fees under EAJA. In the Matter of Wind Clan Construction Company, Inc., SBA No. EAJA-558 (2017). The ALJ granted the Fee Motion in part, ruling that the Petitioner was entitled to receive compensation in the amount of $2,535 for attorney's fees.
*2 On April 10,2017, in accordance with 13 C.F.R. § 134.228, SBA timely submitted the Request for Review to the SBA Administrator. In the Request for Review, the SBA asks the Administrator to reverse the ALJ's Initial Decision to award attorney's fees to Petitioner, arguing that (1) the Fee Motion was insufficient because it failed to demonstrate Petitioner's eligibility to recover fees under EAJA within the thirty-day statutory timeframe; and (2) SBA's position in the underlying proceeding had a reasonable basis in both fact and law and was thus substantially justified.
*2 On April 28,2017, Petitioner served a response to SBA's Request for Review (“Response to Request for Review”) arguing that, contrary to SBA's assertion, the Petitioner is eligible for reimbursement of attorney's fees under EAJA, and that SBA's position in the underlying proceeding was not substantially justified.
*2 In a letter dated May 17,2017,1 was designated by the Administrator to perform all duties required of the Administrator with respect to the Request for Review.
JURISDICTION
*2 SBA's regulations permit any party to file and serve a request for review by the Administrator of an initial decision of a Judge. 13 C.F.R. § 134.228(a). The request for review must be served and filed within thirty days of the initial decision and must set forth the filing party's specific objections to the initial decision as well as any alleged support for those objections. Since SBA, the requesting party, has met the above requirements, I, as the Administrator's designee, am authorized under 13 C.F.R. § 134.228(e) to affirm, reverse or modify the Initial Decision, or to remand the Initial Decision to the ALJ for appropriate further proceedings.
STANDARD OF REVIEW
*2 As set forth in 13 C.F.R. § 134.228(d), I must sustain the Initial Decision unless it is based on an erroneous finding of fact or an erroneous interpretation or application of case law, statute, regulation, or SBA policy.
INITIAL DECISION
*2 The Initial Decision that is the subject of SBA's Request for Review holds that the Petitioner has met the requisite eligibility requirements under EAJA and SBA's regulations implementing EAJA, that the Agency's action in the underlying proceeding was not substantially justified, and grants Petitioner reimbursement of $2,535 in attorney's fees. In the Matter of Wind Clan Construction Company, Inc., SBA No. EAJA-558 (2017). In the Initial Decision, the ALJ acknowledges that a party seeking reimbursement under EAJA bears the burden of demonstrating that it has met EAJA's eligibility requirements and its accompanying regulations, including size and net worth requirements. Id. at 2. The ALT also acknowledges that a prevailing party that is found to be eligible may receive an award of attorney's fees unless an ALJ finds that the Agency's position was substantially justified or special circumstances exist that would make the granting of an award unjust, and the fact that the Agency did not prevail in a proceeding does not create a presumption that the Agency's position was not substantially justified. Id at 3.
*3 In determining that the Petitioner met the requisite eligibility requirements, the ALJ considered both the Initial Affidavit that the Petitioner included with the timely-filed Fee Motion on December 21,2016, and the Supplemental Affidavit filed by the Petitioner on February 15, 2016 outside of the thirty-day statutory timeframe. After reviewing both documents, the ALJ found that the Petitioner met the eligibility requirements as specified by 13 C.F.R. § 134.606. Id. at 4.
*3 With respect to the issue of whether the Agency's position in the underlying proceeding was substantially justified, the Initial Decision rests entirely on the Decision issued on the Petitioner's appeal, where the ALJ concluded that SBA's position was arbitrary, capricious and contrary to law. The ALJ admonishes the Agency for “attempting] to re-litigate matters decided adversely in the underlying case” in asserting that the Agency's position was substantially justified. Id. The ALJ further states in the Initial Decision that “[i]t is simply not possible to reconcile the Court's previous ruling with SBA's contention of ‘substantial justification’ in bringing the action.” Id. at 5.
ANALYSIS
*3 The issue I must decide is whether the ALJ erroneously interpreted or applied a statute or regulation when he determined that the Petitioner was eligible to receive reimbursement for attorney's fees as the prevailing party in the underlying appeal.
*3 The portion of EAJA applicable to administrative proceedings is codified at 5 U.S.C. § 504, which provides in part as follows:
*3 (a)
*3 (1) An agency that conducts an adversary adjudication shall award, to a prevailing party other than the United States, fees and other expenses incurred by that party in connection with that proceeding, unless the adjudicative officer of the agency finds that the position of the agency was substantially justified or that special circumstances make an award unjust. Whether or not the position of the agency was substantially justified shall be determined on the basis of the administrative record, as a whole, which is made in the adversary adjudication for which fees and expenses are sought.
*3 (2) A party seeking an award of fees and other expenses shall, within thirty days of a final disposition in the adversary adjudication, submit to the agency an application which shows that the party is a prevailing party and is eligible to receive an award under this section ....
*3 SBA regulations implementing EAJA are found in Subpart F of 134 C.F.R.. The eligibility requirements are set forth in 13 C.F.R. §§ 134.606 to 134.608. Under 13 C.F.R. § 134.606, a corporation that is a prevailing party is eligible for possible reimbursement if it meets the applicable net worth and employee eligibility requirements described in 13 C.F.R. § 134.607; specifically if, as of the date the administrative proceeding was initiated, the net worth of the business did not exceed $7 million and the business had no more than S00 employees. Pursuant to 13 C.F.R. § 134.608(b), the net worth calculation for a corporation must include the net worth of all affiliates. EAJA application requirements are found at 13 C.F.R. §§ 134.611 to 134.612, and include information regarding the number of employees of the business as of the date the administrative proceeding was initiated, the submission of a description of any affiliates or a statement that no affiliates exist, and a statement acknowledging that the application and any accompanying materials are true and complete and subject to federal penalties for false statements.
*4 13 C.F.R. § 134.605(a) discusses the circumstances under which fees and expenses are reimburseable:
*4 (a) If you are a prevailing eligible party, you may receive an award for reasonable fees and expenses unless the position of the agency in the proceeding is found by the ALJ to be “substantially justified”, or special circumstances exist which make an award unjust. The “position of the agency” includes not only the position taken by SBA in the administrative proceeding, but also the position which it took in the action which led to the administrative proceeding. No presumption arises that SBA's position was not substantially justified because it did not prevail in a proceeding. However, upon your assertion that the position of SBA was not substantially justified, SBA will be required to establish that its position was reasonable in fact and law.
Eligibility
*4 In the Request for Review, the Agency asserts that the ALJ erred as a matter of law in determining that the Petitioner was eligible to recover fees under EAJA. The Agency argues that the timely-filed Fee Motion, although accompanied by the Initial Affidavit, lacked certain materials related to the Petitioner's size and net worth that must be included in an EAJA application, specifically information regarding the number of employees of the Petitioner as of the date the administrative proceeding was initiated, a description of any affiliates or a statement that no affiliates exist, and a statement acknowledging that the application and any accompanying materials are true and complete and subject to federal penalties for false statements. The Agency thus contends that the Petitioner failed to demonstrate its eligibility to recover EAJA fees within the required timeframe, and the ALJ should have denied the Fee Motion for lack of jurisdiction. However, in the Request for Review, the Agency concedes that the Supplemental Affidavit filed by the Petitioner subsequent to the filing of the Fee Motion and the Initial Affidavit cured all deficiencies identified by SBA related to the Petitioner's EAJA eligibility.
*4 In the Request for Review, the Agency acknowledges that there is a split of authority regarding whether a party may supplement a timely-filed EAJA application to meet pleading requirements. Some jurisdictions have held that a petitioner's burden to demonstrate its eligibility within the thirty-day timeframe is a jurisdictional requirement. See, e.g., U.S. Hopkins Dodge Sales, Inc., 707 F.Supp. 1078 (D. Minn. 1989). Other courts and agencies have held that a petitioner may supplement an EAJA application, including by submitting additional information related to eligibility, outside the thirty-day statutory period absent prejudice to the government or non-compliance with court orders for timely supplementation. See, Singleton v. Apfel, 231 F.3d 853 (11th Cir. 2000). The Agency further acknowledges that recent trends in case law appear to favor a more lenient approach to supplementation of EAJA applications.
*5 The record shows that Petitioner filed the Fee Motion, accompanied by the Initial Affidavit, within the required thirty-day timeframe, and shortly after the Agency filed its Answer pointing out the pleading deficiencies, the Petitioner filed the Supplemental Affidavit curing all deficiencies. As such, the Agency does not appear to have been prejudiced by the supplementation. Based on my review of the applicable case law and the record in this matter, I have determined that the ALJ did not err as a matter of law when he found that the Petitioner met the eligibility requirements under 13 C.F.R. § 134.606.
Substantial Justification
*5 In the Request for Review, the Agency argues that the ALJ's reasoning in the Initial Decision “rests on a fundamental misapprehension of the substantial justification inquiry.” The Agency asserts that the ALJ was required to examine whether the Agency's position in the underlying proceeding was reasonable, not whether the Agency's decision was arbitrary and capricious. The Agency posits that the record demonstrates that the Agency's decision was substantially justified, and for that reason, requests that the Administrator reverse the Initial Decision.
*5 In the Response to Request for Review, the Petitioner does not address the Agency's argument that the ALJ erred as a matter of law in the Initial Decision because he relied solely on his prior determination that the Agency's position was arbitrary and capricious rather than examining whether the Agency's position in the underlying proceeding was reasonable. Instead, the Petitioner argues that the Agency is attempting to re-litigate matters previously decided adversely.
*5 In Pierce v. Underwood, 487 U.S. 552 (1988), the U.S. Supreme Court elucidated the meaning of the term “substantially justified” for purposes of EAJA. The Court found as follows:
*5 We are of the view, therefore, that as between the two commonly used connotations of the word “substantially,” the one most naturally conveyed by the phrase before us here is not “justified to a high degree,” but rather “justified in substance or in the main” — that is, justified to a degree that could satisfy a reasonable person. That is no different from the “reasonable basis both in law and fact” formulation adopted by the Ninth Circuit and the vast majority of other Courts of Appeal that have addressed this issue.
*5 Id. at 565-566 (citations omitted).
*5 In FEC v. Rose, 806 F.2d 1081 (D.C. Cir. 1986), the Court determined that a finding that an agency's action was arbitrary and capricious does not preclude a decision that the agency's action was substantially justified. Id. at 1087-90. The Court stated:
*6 In short, the “arbitrary and capricious” label is just that, a label or conclusion applied to a rich variety of agency conduct, including sensible but legally flawed actions as well as outrageous ones. By creating in EAJA a distinct legal standard — “substantially justified” — Congress has expressed its intent that after every sort of merits determination, including a determination that agency action descended to the depths of “arbitrary and capricious” conduct, the court entertaining an EAJA application is obliged to reexamine the facts under a different legal standard to determine whether that conduct is slightly more than reasonable. Mechanical jurisprudence will not do. We are called upon by Congress to act as judges by exercising judgment in these matters, not blithely reach for easy answers suggested by evocative labels.
*6 Id. at 1089 (emphasis added).
*6 In a subsequent decision, the D.C. Circuit stated that the Rose case implies that when considering whether an agency's conduct is substantially justified, a Court should look to the reason the agency action was invalidated as arbitrary and capricious. See, LePage's 2000, Inc. v. Postal Regulatory Commission, 674 F.3d 862, 866 (D.C. Cir. 2012). The Court further stated that an agency action may be arbitrary and capricious, but yet substantially justified, when it is “neither ‘flatly at odds with controlling case law,’ nor ‘in the face of an unbroken line of authority.”’ Id., citing Hill v. Gould, 555 F.3d 1003,1008 (D.C. Cir. 2009). In another case, the D.C. Circuit determined that although an agency's action was deemed to be arbitrary and capricious because it failed to provide an adequate explanation, the agency's position was found to be substantially justified. Summer Hill Nursing Home LLC v. Sebelius, 677 F.Supp.2d 181, 186-187 (D.C. Cir. 2010). Another court found that “if the agency reasonably believes the action or inaction is required by law, then, by definition, it cannot be the basis for an award of EAJA fees, even if a court ultimately determines the agency's reading of the law was not correct.” Aronov v. Napolitano, 562 F.3d 84, 94 (1st Cir. 2009).
*6 A decision to award EAJA fees is a “judgment independent of the results on the merits, and is reached by an examination of the government's position and conduct through the EAJA ‘prism,’ not by redundantly applying whatever substantive rules governed the underlying case.” Luciano Pisoni Fabbrica Accessori Instrument Musicali v. United States, 837 F.2d 465, 467 (Fed. Cir. 1988). Thus, the “inquiry into reasonableness for EAJA purposes may not be collapsed into [the] antecedent evaluation of the merits, for EAJA sets forth a distinct legal standard.” Morgan v. Perry, 142 F.3d 670,685 (3rd Cir. 1998) (quoting Cooper v. United States Railroad Retirement Board, 24 F.3d 1414,1416 (Fed. Cir. 1994)).
*7 In the Initial Decision, the ALJ did not conduct an independent review of the record using the EAJA prism of substantial justification; instead the ALJ simply made a conclusory statement that it was not possible to reconcile the ALJ's previous ruling that the Agency's action in the underlying proceeding was arbitrary and capricious with the Agency's position that its action was substantially justified for EAJA purposes. Initial Decision at 5. Because the ALT collapsed the substantial justification inquiry into the antecedent evaluation on the merits, instead of applying the distinct legal standard required by EAJA, I find that the ALJ erred as a matter of law.
*7 Because I have found that the ALJ erred as a matter of law in his analysis of whether the Agency was substantially justified in the underlying proceeding, I am compelled to review the record to determine whether the Agency met its burden of proof in showing that its position was reasonable in fact and law as required by 13 C.F.R. § 134.605(a).
*7 In the underlying proceeding, the Agency denied the Petitioner admission to the 8(a) BD program after determining that a non-disadvantaged individual controls or has the power to control the Petitioner in violation of SBA regulations governing 8(a) BD eligibility. The record shows that Petitioner filed an 8(a) BD application on June 24,2015. Administrative Record Exhibit 14, at 10. The application was submitted by Tara Peaden, the current President and 75% owner of Petitioner. Id. The application states that Petitioner is a construction firm, with a primary NAICS Code of 236115 (New Single-Family Housing Construction (except For-Sale Builders)), and that 100% of Petitioner's business during the 12 months preceding the application was performed under this NAICS Code.1 Id. at 5. The record reflects that Petitioner was established by Articles of Incorporation filed in the State of Florida on July 23,2009 by Gail Dorsey as incorporator, with Curtis Dorsey and Kenneth Dorsey listed as the initial officers. Id. at 195. On November 13,2009, Petitioner issued stock certificates providing Ms. Peaden with a 75% ownership interest and Curtis Dorsey with a 25% ownership interest. Id. at 200. On November 17,2009, Ms. Peaden was elected President of Petitioner and Curtis Dorsey was elected Vice President. Id. at 216.
*7 In the 8(a) BD application, Ms. Peaden claims socially disadvantaged status as a Native American member of the Poarch Band Creek Indians, a Federally recognized Indian tribe. Id. at 21. The resume that Ms. Peaden submitted with the application shows that she has a high school degree, worked as an office manager at a construction firm from 1996 through 2003, then founded another residential construction firm with her non-disadvantaged husband where she worked from 2003 through 2011. Id. at 51. The application shows that Curtis Dorsey (“Mr. Dorsey”) is a non-disadvantaged individual who holds the General Contractor's license for the Petitioner. Id. at 14 and 55. The resume that Mr. Dorsey submitted with the application indicates that he has college degrees in Industrial Technology and Construction Technology, and since 1996 has been operating his own commercial and residential construction firm. Id. at 54.
*8 The application includes partial and complete copies of numerous subcontracts for commercial construction work. Id. at 58-194. Most of the subcontracts contain Mr. Dorsey's signature, while one appears to have been signed by Ms. Peaden. The application also contains copies of other contracts where Petitioner appears to be the general contractor for residential construction projects with the Poarch Creek Indians Housing Authority. Id. at 110-156. Most of those contracts are signed by Ms. Peaden, while one was signed by Mr. Dorsey.
*8 The record shows that after reviewing Petitioner's 8(a) BD application, the Agency sent Petitioner a letter dated November 29,2015 declining the application (“Initial Decline Letter”). Administrative Record Exhibit 7. The Agency cited the following reasons, among others, for the denial:
*8 Based on the information in the file the strategic, operational and daily decisions of the firm appear to be with the 25% non-disadvantaged owner of your firm, Mr. Dorsey. Mr. Dorsey's resume shows a career in the construction industry beginning in 1982. He has the educational background with a B.S. in Construction Technology and has worked as a project engineer on numerous projects. Mr. Dorsey provides your firm's critical construction licensing. Virtually all of the contracts, invoices, letters of reference provided are signed or addressed to Mr. Dorsey.
*8 He presently is the owner/President of his own firm Dorsey Construction Company, is a 25% owner in your firm, has the critical licensing, signs all the contracts and invoices for your firm, and thus your application give the appearance that your firm is a front for the non-disadvantaged owner of Dorsey Construction.
...
*8 Based on the extent of Mr. Dorsey's provision of crucial business requisites including licensing, technical know-how, day-to-day operational management, SBA has determined that Mr. Dorsey has the ability to control you/your firm either directly or indirectly. Your firm does not meet the control requirements of the program.
*8 The Initial Decline Letter advised that Petitioner could file a request for reconsideration in accordance with SBA regulations.
*8 By letter dated January 12, 2016, Petitioner filed a request for reconsideration (“Request for Reconsideration”). Administrative Record Exhibit 6. In the Request for Reconsideration, Ms. Peaden stated that due to her experience working at the residential construction firm that she operated with her husband as well as her experience working on Petitioner's contracts with the Poarch Band Creek Indians, she possesses the technical know-how and oversees the day-to-day management of Petitioner. Ms. Peaden acknowledged that Mr. Dorsey holds the Petitioner's General Contractor's license, but stated that the Petitioner “rarely ha[s] need of this license” because the “majority of our work is as a sub-contractor (primarily drywall as evidenced by our primary NAICS code) so we are not required to hold any professional license.”2 Ms. Peaden stated that she asked Mr. Dorsey to join Petitioner “to assist with office operations under my direction,” but that due to her health issues over the past two and a half years “Mr. Dorsey did sign a number of contracts and other documents.”
*9 The record shows that the Agency reviewed the Request for Reconsideration and by letter dated April 9,2016 notified Petitioner that the reconsideration was declined (“Reconsideration Denial Letter”). Administrative Record Exhibit 1. In making this determination, the Agency cited the following reasons, among others:
*9 SBA considered your claims, however, we continue to conclude that, not only does Mr. Dorsey provide the industry critical licensing to your firm (and per the regulations as an equity owner, he is presumed to control. Absent your ability to rebut this presumption as prescribed in the regulation, SBA must conclude he has the ability to control by virtue of his licensing). He also provides the critical construction industry expertise.
...
*9 Although you state that Mr. Dorsey's construction license is not necessary for the firm to do business in its primary NAICS code, the firm's website, www.windelanconstruction.com. advertises that, “Wind Clan is a licensed general contractor in the state of Florida and Alabama.” ... Dr. [sic] Dorsey was involved with the firm at its inception, contrary to your statement that you asked Mr. Dorsey to join the firm that you founded.
...
*9 Based on the extent of Mr. Dorsey's provision of crucial business requisites including licensing, technical know-how, day-to-day operational management, SBA has determined that Mr. Dorsey has the ability to control you/your firm either directly or indirectly. SBA finds your involvement with the firm appears to be more of a figurehead.
*9 On May 25, 2016, Petitioner appealed the Agency's determination to OHA. In a letter dated May 24, 2016 accompanying the appeal (“Appeal Letter”), Ms. Peaden states that the impetus for founding Petitioner was that fact that the “Poarch Creek Tribe was starting to pick up their commercial development” and the firm that Ms. Peaden founded with her non-disadvantaged husband “didn't have the licenses to handle the work.” For those reasons, “[a]s a result of several discussions and meetings with intent to focus on opportunities that the tribe could provide given my status as a tribal member I formed Wind Clan Construction with the owner of Dorsey Construction, Curt Dorsey.” Ms. Peaden goes on to explain that “I've hired and affiliated with the resources that have those licenses anticipating that it could become a bigger part of our business, but for the most part, we currently don't utilize the licenses as we anticipated we would ... I'm not saying we can't perform as a GC because we have, and still can. We do hope to make that a bigger part of our business.”
*9 After reviewing the briefs and the record, the ALT decided that the Agency's denial of Petitioner's 8(a) BD application was arbitrary, capricious and contrary to law, and ordered that Petitioner be afforded access to the 8(a) BD program. Decision at 7. In making this decision, the ALJ found that the Agency's determination failed to provide sufficient evidence and analysis that Mr. Dorsey's license is critical to Petitioner, or how the license gives Mr. Dorsey the ability to, directly or indirectly, significantly influence the business. Id. at 4. The ALJ also found that even if the Agency were able to determine that Mr. Dorsey's General Contractor's license was critical to Petitioner, the Agency still failed to explain how holding the license would allow Mr. Dorsey to, directly or indirectly, significantly control Petitioner. Id. at 5. Further, the ALJ found that the Agency did not explain how Mr. Dorsey's expertise gives him the ability to control Petitioner, and that nothing in the record supports the Agency's finding that Mr. Dorsey, while competent and experienced, exerts the sort of coercive pressure envisioned by the regulations or seen in the case law. Id. at 6.
*10 The purpose of the 8(a) BD program is to promote the business development of small business concerns owned and controlled by socially and economically disadvantaged individuals so that such concerns can compete on an equal basis in the American economy. 15 U.S.C. § 631(f)(2); 13 C.F.R. § 124.1. Consequently, the Small Business Act and implementing SBA regulations require that an applicant for 8(a) BD certification be unconditionally owned and controlled by one or more socially and economically disadvantaged individuals. 15 U.S.C. § 637(a)(4); 13 C.F.R § 124.101.
*10 13 C.F.R. § 124.106 of SBA's regulations governing 8(a) BD eligibility states as follows:
*10 (g) Non-disadvantaged individuals or entities may be found to control or have the power to control in any of the following circumstances, which are illustrative only and not all inclusive:
...
*10 (2) A non-disadvantaged individual or entity, having an equity interest in the applicant or participant, provides critical financial or bonding support or a critical license to the applicant or Participant which directly or indirectly allows the non-disadvantaged individual significantly to influence business decisions of the Participant.
*10 The unnumbered paragraph of the same regulation provides:
*10 A disadvantaged individual need not have the technical expertise or possess a required license to be found to control an applicant or Participant if he or she can demonstrate that he or she has ultimate managerial control over those who possess the required licenses or technical expertise. However, where a critical license is held by a non-disadvantaged individual having an equity interest in applicant or Participant firm, the non-disadvantaged individual may be found to control the firm.
*10 The preamble to the regulation recognizes that when a non-disadvantaged equity owner holds a critical license, the burden shifts to the 8(a) BD applicant firm to show that the non-disadvantaged license holder does not control the firm. The pertinent excerpt of the preamble is set forth below:
*10 Proposed 124.106 explained the concept of control and the factors which SBA looks at to determine who controls an 8(a) BD concern. Several commenters raised issues of control where a non-disadvantaged individual held a critical license. SBA does not believe that the mere fact that a non-disadvantaged employee who is not also an equity owner of the firm holds a critical license would cause the disadvantaged principal(s) to lose control. In such a case, the disadvantaged principal(s) must demonstrate their management expertise and the right to replace the non-disadvantaged employee at any time with another technical employee. However, SBA agrees that the situation is much more complicated where the non-disadvantaged employee who holds a critical license is also an equity owner of the firm. The final rule permits SBA to find negative control where a non-disadvantaged owner holds a critical license. The burden is on the applicant or Participant to demonstrate that control is in the hands of one or more disadvantaged individuals.
*11 63 Fed. Reg. 35726, 35729 (Jun. 30,1998) (emphasis added).
*11 While SBA's regulations do not define a “critical license,” previous OHA decisions have found that a license is critical when it is “important” or ““necessary.” See, In the Matter of Nelco Diversified, Inc., SBA No. VET-140, at 7 (2008). See also, In the Matter of Daigle Contracting Enterprises, Inc., SBA No. MSB-376, at 9 (1991). In the Decision, the ALJ determined that Mr. Dorsey's General Contractor's license is “not necessary to the day-to-day business Petitioner actually conducts,” because a “slew of contracts submitted in the original application ... show that Petitioner is being hired as a subcontractor.” Decision at 5. In the Response to Request for Review, Petitioner argues that on appeal, after correcting the “scrivener's error” in Petitioner's application, it provided evidence establishing that “more than 99.9999% of Petitioner's revenue during the 12 months immediately preceding Petitioner's application was generated from work that did not require Mr. Dorsey's general contractor's license.” Response to Request for Review at 11.
*11 However, my review of the record shows that the Agency made a reasonable determination that Mr. Dorsey's General Contractor's license is “important” or ““necessary” to Petitioner. Petitioner decided that the existence of the license was important enough to include on its website. The record contains copies of what appear to be contracts between Petitioner and the Poarch Creek Indians Housing Authority where Petitioner was acting as a general contractor for which a license is necessary. In the Request for Reconsideration, Ms. Peaden stated that Petitioner “rarely ha[s] need of this license,” not that the license was never necessary. Ms. Peaden reiterated this in the Appeal Letter where she stated “I'm not saying we can't perform as a GC because we have, and still can.” In that case, the license was and would still be necessary.
*11 The ALJ found that even if the Agency were able to determine that Mr. Dorsey's General Contractor's license was critical to Petitioner, the Agency failed to explain how holding the license would allow Mr. Dorsey to, directly or indirectly, significantly control Petitioner. Decision at 5. Until the ALJ issued the Decision, there was no requirement under regulation or case law requiring the Agency to separately explain how holding the license afforded Mr. Dorsey significant control. In fact, as the preamble to 13 C.F.R. § 124.106 states, once the Agency determined that the non-disadvantaged owner provided a critical license, the Agency was justified in presuming direct or indirect control. 63 Fed. Reg. 35726, 35729. After this presumption of control arose, the burden shifted to Petitioner to overcome the presumption. Id.
*12 Petitioner's Request for Reconsideration attempts to overcome this presumption. Administrative Record Exhibit 6. In that document, Ms. Peaden stated that she oversees day-to-day operations and that all of Petitioner's employees, including Mr. Dorsey, perform work under her direction. Ms. Peaden also noted that due to her experience working with her husband at a prior firm and her work on the Poarch Band Creek Indians contracts at Petitioner, she possesses the required “technical know-how.” Ms. Peaden also stated that she asked Mr. Dorsey to join Petitioner “to assist with office operations under my direction.”
*12 The record shows that the Agency reviewed and considered the information in the Request for Reconsideration to determine whether Petitioner met its burden. SBA concluded that Petitioner did not. Administrative Record Exhibit 1. The record reflects a distinct disparity between Mr. Dorsey's expertise, education and experience, and Ms. Peaden's background. Administrative Record Exhibit 14, at 51 and 54. In contrast to Ms. Peaden, Mr. Dorsey has college degrees in the construction field and has been operating his own commercial and residential construction firm since 1996. Id. at 54. While Ms. Peaden co-owned a residential construction firm with her husband, she does not appear to have any formal technical education in the construction field. Id. at 51. Ms. Peaden indicated that her health problems over a two and a half year period required Mr. Dorsey's extensive involvement in the dealing with third parties on behalf of Petitioner, including signing contracts. Administrative Record Exhibit 6. Additionally, Ms. Peaden's statement that she asked Mr. Dorsey to join Petitioner to assist with office operations under her direction is contradicted by the fact that the record shows that Petitioner was incorporated by one of Mr. Dorsey's relatives, and that Mr. Dorsey and another relative were the original officers of Petitioner. Adminstrative Record Exhibit 14, at 195.
*12 It is generally accepted that the Agency may consider a variety of factors, including the extent of a non-disadvantaged individual's involvement and communication with third parties, in determining whether the non-disadvantaged individual controls or has the power to control an applicant firm. See, In the Matter of lnfotech International, Inc., SBA No. BDP-205, at 6 (2004) (holding that a non-disadvantaged individual “played too active a role in managing [the firm's] daily operations,” and thus controlled the firm). The Agency also properly considered the disparity between Mr. Dorsey's expertise, education and experience, and Ms. Peaden's background. The preamble to 13 C.F.R. § 124.106 shows that the drafters of the regulation acknowledged that a disparity in technical expertise or experience suggests that a non-disadvantaged individual may actually control or have the power to control a firm because it states: “SBA recognizes that failure to possess technical expertise or a required license are factors that may be considered in evaluating the disadvantaged individual's control of the concern, but that such circumstances are not dispositive.” 63 Fed. Reg. 35726, 35729-30 (emphasis added).
*13 In the Decision, the ALJ acknowledges Mr. Dorsey's expertise and active role in the operations of Petitioner, but states that such factors are not sufficient to show control because there is no evidence that Mr. Dorsey “exerts the sort of coercive pressure envisioned by the regulations or seen in the case law.” Decision at 6. Contrary to the ALJ's ruling, neither the regulation nor its implementing preamble requires a non-disadvantaged individual with more expertise to also have an explicit power to coerce in the context of assessing control.
*13 I find that the record demonstrates that the Agency reasonably applied SBA regulations, regulatory history, and OHA precedent in concluding that Mr. Dorsey, a non-disadvantaged individual, controls or has the power to control Petitioner. That the ALJ ultimately disagreed with the Agency's conclusion does not detract from the Agency's careful, reasoned consideration of all the facts and law governing Petitioner's 8(a) BD application. Because the Agency had a reasonable basis in fact and law to find that a non-disadvantaged individual controls or has the power to control Petitioner, it was reasonable for the Agency to believe that denial of Petitioner's 8(a) BD application was required. 13 C.F.R. § 124.106(g)(2); 13 C.F.R § 124.101. Accordingly, the Agency's denial of Petitioner's application was substantially justified and cannot serve as the basis for an award of EAJA fees. 13 C.F.R. § 134.605(a).
CONCLUSION
*13 For the reasons set forth above, I find that the ALJ erroneously interpreted and erroneously applied 5 U.S.C. § 504(a)(1) and 13 C.F.R. § 134.605(a) when he determined that the Petitioner was eligible to receive reimbursement of attorney's fees under EAJA. Accordingly, the ALJ's Initial Decision is REVERSED.
Footnotes
The Response to Request for Review indicates that the primary NAICS Code listed in Petitioner's application was incorrect due to a “scrivener's error.” When Ms. Peaden submitted the application, she certified as follows: “By signing this form, I certify that I have reviewed the response to every question on this form and all supporting documents required by this form, and that all responses and documents are true and complete to the best of my knowledge, and that I understand that SBA Is relying on this information in making its determination of my company's eligibility for 8(a) BD Program certification.” Administrative Record Exhibit 14, at 10.
The website of the Florida Department of Business & Professional Regulation states that a license is required for the “[i]nstallation or replacement of drywall if the contract also includes work on the load bearing part of the wall, plumbing, electrical, or air conditioning work.” http://www.myfloridalicense.com/dbpr/pro/division/servicesthatrequirealicense_construction.html
2017 WL 5483557 (S.B.A.)
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