COLLEEN KOLLAR-KOTELLY, District Judge.
Plaintiff CS-360, LLC ("CS360") brings this action against the U.S. Department of Veteran Affairs (the "VA"), asserting three claims that, in one way or another, all challenge the VA's decision to deny CS360's application to be included in an online database of businesses eligible to participate in a veteran-owned small business program managed by the VA. Count I of the [1] Complaint alleges that the VA violated the Administrative Procedure Act because its denial of CS360's application was arbitrary and capricious. Count II alleges that the VA violated the Due Process Clause of the Fourteenth Amendment of the United States Constitution by failing to permit applicants to appeal application decisions to an independent decision-maker and by using "inflammatory language" in the decision to deny CS360's application. Count III alleges that the VA is without statutory authority to issue the regulations at issue in this case.
There are currently two motions before the Court: CS360's [13] Motion for Summary Judgment and the VA's [15] Motion to Dismiss and/or for Summary Judgment ("Motion to Dismiss"). Upon careful consideration of the certified administrative record, the parties' submissions, the relevant authorities, and the record as a whole, the Court shall GRANT-IN-PART and DENY-IN-PART CS360's [13] Motion for Summary Judgment and GRANT-IN-PART and DENY-IN-PART the VA's [15] Motion to Dismiss. On Count I, the Court finds that the VA has failed to provide a satisfactory contemporaneous explanation for its decision to deny CS360's application and concludes that the best course is to
Unless otherwise noted, the following background is derived from the certified administrative record filed by the VA in this action.
Congress enacted the Veterans Benefits, Health Care, and Information Technology Act of 2006, Pub.L. No. 109-461, §§ 502-03 (codified at 38 U.S.C. §§ 8127-28), to increase contracting opportunities for small businesses owned by service-disabled veterans. See 38 U.S.C. § 8127(a). To this end, Congress conferred upon the VA the authority to set aside certain government contracts for service-disabled veteran-owned small businesses ("SDVOSBs"). As part of this design, Congress required the Secretary of the VA to maintain a database of eligible small businesses. Id. § 8127(f).
Responding to this statutory command, the VA maintains the VetBiz Vendor Information Pages ("VIP") database, an online "database of businesses eligible to participate in [the] VA's Veteran-owned Small Business Program," 38 C.F.R. § 74.1, which is accessible at http://www.VetBiz.gov. By statute, "[a] small business concern may be awarded a contract [set aside for SDVOSBs] only if the small business concern and the veteran owner of the small business concern are listed in the
The Center for Veterans Enterprise (the "CVE"), a subdivision of the VA's Office of Small and Disadvantaged Business Utilization (the "OSDBU"), is charged with evaluating applications by small businesses seeking to be included in the VetBiz VIP database. 38 C.F.R. §§ 74.1, 74.11(a). To qualify for inclusion, a small business "must be unconditionally owned and controlled by one or more eligible veterans, service-disabled veterans or surviving spouses." 38 C.F.R. § 74.2(a). Thus, eligibility turns on the twin requirements of ownership and control.
On November 4, 2009, CS360, a limited liability company that was formed less than a month earlier, submitted an application for inclusion in the VetBiz VIP database. VA00001, VA00006. On February 1, 2010, the CVE notified CS360 that its application had been received and was being processed. VA00004. While the application was under review, CS360 was listed in the VetBiz VIP database on the basis of self-reporting but, despite this listing, CS360 had not been verified, certified, or licensed as an eligible SDVOSB during this interim period.
On December 2, 2009, the VA announced that it was soliciting bids in connection with a construction project for a medical center in Lexington, Kentucky (the "Lexington Contract"), with the entire contract set aside for SDVOSBs. VA00022. CS360 competed for the Lexington Contract and was found to be the apparent low bidder on January 27, 2010. VA00032.
By regulation, an offeror bidding on a contract may challenge another offeror's claimed status as an eligible SDVOSB by filing a third-party protest with the OSDBU. 48 C.F.R. § 819.307(c). On January 29, 2010, the fourth lowest bidder on the Lexington Contract filed a protest challenging CS360's SDVOSB eligibility. VA00034-00036. The essential thrust of the protest was that CS360 was controlled not by a service-disabled veteran but instead by a non-veteran-owned entity — specifically, a company called B & R Constructions Services ("B & R"). VA00035.
By regulation, the OSDBU is responsible for deciding whether to sustain a third-party protest of this kind. 48 C.F.R. § 819.307(c). On March 3, 2010, the OSDBU formally notified CS360 of the protest and directed CS360 to submit evidence demonstrating that it is unconditionally owned and controlled by a service-disabled veteran. VA00058-00061.
On March 9, 2010, CS360 responded with a written submission and supporting documentation. VA00069-00179. At the time of CS360's submission, two service-disabled veterans, Walter A. Davis ("Davis") and James A. Blanco ("Blanco"), were designated as CS360's sole Managing Members and each held a 25.5% individual interest in the company for a combined 51% interest. VA00092, VA00131. Meanwhile, six non-veterans held interests that combined to reflect the remaining 49%-namely, William R. Britt ("Britt"), David P. Vocci ("Vocci"), Edward E. Meadows ("Meadows"), Dana M. Borowy ("Borowy"), Benjamin L. Cox ("Cox"), and Gabriel R. Velicu ("Velicu"). VA00131. In its written submission, CS360 argued that it met the ownership requirement for SDVOSB eligibility because Davis and Blanco collectively held a majority interest in the company. VA00069. Similarly, CS360 argued that it met the control requirement
In addition to requesting materials from CS360, the OSDBU engaged an outside contractor to conduct an onsite examination of CS360. The contractor conducted the examination on April 26, 2010 and submitted its written report to the OSDBU on April 29, 2010. VA00371-00382. According to the written report, the contractor reviewed documentation and interviewed four individuals in connection with the examination. VA00372, VA00380-00382. Based upon its review, the contractor concluded that CS360 had failed to establish that Davis and Blanco unconditionally owned and controlled the company. VA00372. In terms of ownership, the contractor found that (1) the equity section of CS360's balance sheet identified six individuals who provided capital contributions to CS360, and Davis and Blanco were not included on this list; (2) there was no goodwill recorded on CS360's books and records to identify Davis and Blanco's alleged investment in the company; (3) Blanco was the owner of another entity that was also applying for inclusion in the VetBiz VIP database, contrary to regulations permitting only one company to be verified; (4) Blanco's separate entity was also certified by the Small Business Administration ("SBA") in a program that required him to be involved full-time in the day-to-day management of that entity, preventing him from being involved in the day-to-day operations of CS360. VA00372-00374. In terms of control, the contractor took into account that (1) CS360's Operating Agreement was silent as to management percentages; (2) the Operating Agreement stated that the Executive Committee was not required to devote any particular amount of time to the performance of their duties and were able to delegate their duties to others; (3) Blanco was paid as a consultant; (4) while Davis performed the "vast amount of functions" for CS360, it was unclear whether he "fully managed the majority of the day to day operations"; and (5) a review of four contracts revealed that Davis and Blanco only had oversight and signing authority over one contract. VA00374.
Also included in the contractor's onsite examination report is a summary of statements made by the four interviewees. According to the report, Davis stated that he made no capital contribution to CS360 and characterized his contribution as his "expertise." VA00382. Similarly, Vocci reportedly stated that Davis and Blanco's contributions to the company were their status as service-disabled veterans. VA00381. In addition, Meadows indicated that CS360 was formed to solicit contracts from the VA and other agencies that were unavailable to B & R because it was not
On April 30, 2010, the OSDBU issued its final determination sustaining the third-party protest. VA00383-00387. Although that determination is not directly challenged in this action, it sets the scene for later administrative action. Based on the totality of the evidence, the OSDBU found that CS360 had failed to establish its eligibility for SDVOSB status. VA00383. The basis for the OSDBU's decision was narrow. As an initial matter, the OSDBU conceded that CS360 had submitted evidence supporting its contention that Davis and Blanco met the ownership requirement because they held a majority interest in the company. VA00386. However, the OSDBU concluded that CS360 failed to show that Davis and Blanco met the control requirement for a single reason. VA00386. Specifically, the OSDBU concluded that Section 4.01(a) of the Operating Agreement could allow non-veterans to control the decisions of CS360 because the three non-veteran members of the Executive Committee could join with either Davis or Blanco to override the will of the other. VA00387. For this reason, the OSDBU found that CS360 failed to demonstrate its eligibility and informed the company that its profile would be removed from the VetBiz VIP database. VA00387. From that point forward, CS360 has been prohibited from submitting offers set aside for SDVOSBs until "it demonstrates that it has overcome the reasons for the determination of ineligibility." 48 C.F.R. § 819.307(c)(3).
On May 6, 2010, CS360 responded in writing to the OSDBU's decision to sustain the third-party protest. VA00390-00391. Included with CS360's letter was a First Amended Operating Agreement, effective as of May 6, 2010, and a redline to the prior version. VA00392-00479. According to CS360's letter, the First Amended Operating Agreement was designed to "resolve the concerns" identified by the ODSBU. VA00390. Specifically, Section 4.01(a) provided that "[t]he business affairs of the Company shall be managed by or under the direction of the Managing Members" and that "both Managing Members shall be required to form a quorum and to exercise any powers of the Company." VA00451.
CS360 did not stop there. On May 12, 2012, it executed a Second Amended Operating Agreement making additional changes to its management structure. VA00480-00523. Most notably, through the Second Amended Operating Agreement, Blanco formally withdrew as a Member of CS360, leaving Davis as the sole Managing Member. VA00523. From that point forward, Davis has held a 51% ownership interest in CS360, with six non-veterans (Borowy, Britt, Cox, Meadows, Velicu, and Vocci holding the remaining 49%). VA00522. Under Section 4.01(a) of the Second Amended Operating Agreement, Davis, as the sole Managing Member, "shall exercise all powers of the Company in accordance with [the] Agreement and do such lawful acts and things as are not by law or by [the] Agreement directed or required to be exercised or done by the Members." VA00495.
On June 21, 2010, the OSDBU responded to CS360's submissions. VA00530-00531. The OSDBU simply noted that, by regulation, its decision sustaining the protest was final and that the changes made by CS360 to its management structure would be considered in connection with CS360's application for inclusion in the VetBiz VIP database, which remained pending. VA00530-00531.
Turning now to the decision that is at the heart of this case, the CVE denied CS360's application for inclusion in the VetBiz VIP database on June 30, 2010 (the "Initial Determination"). VA00532-00537. According to its six-page Initial Determination, the CVE reviewed CS360's application, the Second Amended Operating Agreement, CS360's written submission dated March 9, 2010, and the results of the onsite examination. VA00532. Based on this review, the CVE ultimately concluded that CS360 had established the ownership prong of the eligibility analysis, but found that several factors "materially affect[ed]" Davis' control over CS360. VA00532.
As an initial matter, the CVE conceded that the concern that led the OSDBU to sustain the third-party status protest — namely, that Section 4.01(a) of the Operating Agreement could allow non-veterans to control the decisions of CS360 because the three non-veteran members of the Executive Committee could join with either Davis or Blanco to override the will of the other — "at least on paper, ha[d] been corrected." VA00533. In particular, the CVE acknowledged that because the Second Amended Operating Agreement eliminated the Executive Committee and designated a single service-disabled veteran as the sole Managing Member, there was no longer a concern that "non-[v]eterans could act in concert with one [service-disabled veteran] to override the other [service-disabled veteran]." VA00533.
Nonetheless, the CVE proceeded to identify four factors that it concluded prevented it from finding that a service-disabled veteran sufficiently controlled CS360. First, the CVE claimed that Section 4.01(c) of the Second Amended Operating Agreement "provides that `Managing Members shall not be required to devote any particular amount of time to the performance of their duties and may delegate their responsibilities as provided in this agreement.'" VA00533. According to the CVE, this ran afoul of regulations "requir[ing] that one or more service-disabled [v]eterans who manage the firm must devote full-time to the applicant or participant during normal working hours of firms in the same or similar line of business." VA00533. However, in expressing this concern, it appears that the CVE mistakenly relied upon the First Amended Operating Agreement, which includes the quoted
Second, Section 4.03 of the Second Amended Operating Agreement provides that "[t]he Managing Member may delegate to any Administrator or other agent such power and authority as the Managing Member deems advisable, subject to the authority of the Managing Member." VA00569-00570. The CVE found that this provision "on its face raises the issue of control where it provides that the Managing Member may delegate to any Administrator or other agent power and authority as the Managing Member may deem advisable including (without limitation) the power and authority to manage the day-to-day operations of the Company." VA00533. Although the CVE conceded that Davis "essentially works full-time at the firm," the Initial Determination does not explain why this would be insufficient. VA0533.
Third, turning to the results of the onsite examination, the CVE found that "deeper organizational structural flaws [were] fatal to the application." VA00533. Although it is not entirely clear from the face of the Initial Determination, it appears that the "structural flaws" the CVE had in mind relate to the extent of CS360's economic dependence on B & R. By regulation, the CVE may conclude that a small business fails to comply with the control requirement when "[b]usiness relationships exist with non-veterans or entities which cause such dependence that the applicant cannot exercise independent business judgment without great economic risk." 38 C.F.R. § 74.4(i)(4). Citing this provision, the CVE found that, "[s]ince [CS360] has only one full-time employee,... the inexorable conclusion is that CS360 cannot perform any contract without B & R agreeing and providing very nearly all the resources necessary to perform any work." VA00534. In other words, the CVE found that CS360's resources were insufficient to permit it to effectively exercise independent judgment.
Fourth, noting that its review extends beyond "formalities" and examines the "practical realities of how the applicant concern is actually run on a daily basis," the CVE concluded that CS360 was created as a "sham" entity designed to solicit contracts set aside for SDVOSBs on B & R's behalf. VA00533-00534. In support of this conclusion, the CVE cited the following: (1) B & R is "co-located" with CS360; (2) CS360's "minority owners" were "all employees of B & R"; (3) Davis was CS360's "only paid employee"; (4) "B & R provided all the financing for starting up" CS360; (5) Davis "provided no capital" in the formation of CS360; and (6) during the onsite examination, Vocci indicated that Davis' "contribution to [CS360] was [his] [service-disabled veteran] status" and that "B & R would furnish all the people necessary to do work for CS360." VA00533-00534. Based on this record, the CVE found that "[t]he purpose for creating CS360 was solely to bring to life a SDVOSB for B & R to seek work from VA and possibly other agencies on SDVOSB set-asides." VA00534.
After reaching this conclusion about the purpose behind the formation of CS360, the Initial Determination proceeds to explain why the CVE found that the Mentor-Protégé Agreement entered into between CS360 and B & R, and approved by DHS, did not warrant a different result. VA00534-00535. Initially, the CVE provided that the "VA is not bound by [the agreement's] terms" because it "has its own regulatory provisions on mentor-protégé agreements" that became final in January 2010. VA00535 (citing 48 C.F.R. §§ 819.7101-819.7115). In any event, the CVE found that the Mentor-Protégé
Based on this foundation, the CVE denied CS360's application for inclusion in the VetBiz VIP database and informed the company that it would no longer be listed in the database. VA00536. CS360 was advised that it could request reconsideration of the Initial Determination and the VA invited CS360 to submit "a letter of explanation, signed by all owners, that clearly and conclusively addresses each of the issues raised in this denial," accompanied by "official corporate documentation substantiating each claim made in [the] request." VA00536.
By regulation, "[a]n applicant may request that the Director, CVE, reconsider his or her decision to deny an application by filing a request for reconsideration with CVE." 38 C.F.R. § 74.13(a). On August 26, 2010, CS360 submitted its thirteen-page Request for Reconsideration. VA00538-00700. As it was invited to do, CS360's Request for Reconsideration purports to "provide [the CVE] with additional information relating to CS360's operations and [to] clarify certain other information contained in its application." VA00539. The Request for Reconsideration is signed by Davis, affirmed under the penalty of perjury, and certified by a public notary. VA00550. It responds to each of the four considerations identified by the CVE as the basis for its Initial Determination.
First, CS360 noted that the language identified by the CVE in Section 4.01(c) had already been removed from the Second Amended Operating Agreement before the CVE issued its Initial Determination and therefore "should not be the basis of any concerns." VA00540.
Second, CS360 responded that the delegation authority in Section 4.03 of the Second Amended Operating Agreement was designed "merely to allow [the Managing Member] to appoint individuals to perform certain functions for CS360" and that "[s]uch appointments are at all times revocable and subject to [the Managing Member's] authority." VA00540-00541. In addition, Davis represented that he "ha[d] not made any designation under the authority granted to [him] by Section 4.03." VA00541.
Third, CS360 explained why its staffing complement and resources were consistent with its status as a relatively new
Fourth, CS360 responded to the CVE's claim that it was formed solely as a "sham" to permit B & R to obtain contracts set aside for SDVOSBs. CS360 sought to refute several of the grounds cited by the CVE for reaching this conclusion. Without disputing that the minority non-veteran owners of CS360 were also employees of B & R, CS360 asserted that only three of the six non-veterans that made capital contributions to CS360 (Britt, Meadows, and Vocci) held an actual membership interest in B & R and that other individuals holding a membership interest in B & R held no interest whatsoever in CS360. VA00533. More broadly, it disputed the CVE's assertion that B & R provided all the financing for the formation of CS360, noting that "B & R [itself] provided no capital to, and has no ownership interest in, CS360." VA00543 (capitalization omitted). Similarly, CS360 contested the suggestion that Davis made no contribution to the firm simply because he made no capital contribution, noting that he "took a substantial financial risk in leaving [his] previous provision [sic]" and harbored "the additional risk associated with being a principal in a construction company, including potential risks associated with bonding and letter of credit requirements." VA00542. In any event, CS360 took the position that capital contributions have "no impact" on the control of CS360 because the Second Amended Operating Agreement makes it clear that Davis controlled the decisions of the company regardless of capital contributions. VA00542. On this point, CS360 emphasized that Section 3.06 of the Second Operating Agreement states that "no Member shall have the right ... [to] the repayment of its Capital Contributions." VA00542, VA00567. Furthermore, as described above, CS360 claimed that, instead of employing one full-time employee, it had two full-time employees and past and present arrangements with consultants and that B & R's contributions would be limited to "administrative and technical assistance" provided under the parties' Mentor-Protégé Agreement and would not include "work done to actually service contracts." VA00533-00544.
Turning to the CVE's treatment of the Mentor-Protégé Agreement between CS360 and B & R, CS360 conceded that "the VA is not obligated to recognize the Mentor-Protégé Agreement approved by DHS." VA00545. Nonetheless, CS360 argued that it was improper "to characterize
By regulation, when presented with a request for reconsideration, the CVE "may either approve the application, deny it on the same grounds as the original decision, or deny it on other grounds." 38 C.F.R. § 74.13(b). On November 2, 2010, the CVE denied CS360's Request for Reconsideration (the "Final Decision"), concluding that CS360 did "not satisfy the requirements" for inclusion in the VetBiz VIP database. VA00701-00704. The four-page Final Decision is broken into five parts.
First, the CVE asserted that CS360's Second Amended Operating Agreement "continues to contain indicators of impropriety." VA00701. Claiming that it was "difficult to identify substantive changes from the previous version," even though many of those changes were identified in CS360's written submissions, the CVE "question[ed] how [CS360] could have implemented and/or effected these changes as insufficient time elapsed between the changes in this submission and the version submitted prior to this request." VA00701. In particular, the CVE expressed concern that the provisions governing Managing Members were "revised" and one Managing Member (Blanco) was removed "wholesale" on such a short timeframe. VA00701. Without further explanation, the CVE asserted that "[w]hile business re-organization is normally squarely within the province of the owners, these changes evince an intent solely to bring CS360 within the letter of the regulation as opposed to having real meaning or business purpose." VA00701.
Second, with respect to capital contributions, the CVE stated that it "finds it unreasonable to conclude that any rational person, or group of persons, would personally fund a start-up construction concern with nearly half a million dollars and relinquish total control over that concern, including
Third, the CVE stated, in a single sentence, that "[i]rrespective of whether the start-up capital was furnished by B & R... or individuals employed or otherwise enmeshed with B & R, CVE finds the same underlying implausibility as previously stated." VA00702.
Fourth, the CVE found that CS360 "failed to provide any supporting corporate documentation to substantiate [its] claims that [it] has the ability and intention to provide non-B & R affiliated employees." VA00702. The CVE does not address whether or why CS360's Request for Reconsideration, sworn and notarized, was insufficient. The CVE then proceeded to "take administrative notice" of a government report criticising SDVOSBs with limited resources, but did not explain how the report might relate to CS360 in particular. VA00702. Finally, the CVE contended that CS360 "bid on multi-million dollar construction projects which belies [its] description of [itself] as a start-up, giving [sic] the existence of [its] relationship to the established large business B & R." VA00702.
Fifth, the CVE stated that it "reviewed the exhibits provided [by CS360] including [sic][its] relationship with B & R and of [sic][its] efforts to build [its] business." VA00702. Without further explanation, CVE asserted that CS360's "intertwinement with B & R ... continues to demonstrate to CVE a relationship impeding independent judgment and threatened economic risk." VA00702. The CVE apparently found CS360's specific examples of its efforts to develop a separate business concern insufficient. Although it conceded that those examples "include[d] several low dollar contracts and proposals that are arguably consistent with a start-up business," the CVE noted that "absent from [CS360's] submission are any of the multi-million dollar bids that it ha[s] sought with VA that ... [CS360] cannot conceivably have garnered the resources to perform without B & R having a significant role." VA00702.
Ultimately, the CVE "conclude[d] that [CS360's] arguments and exhibits fail to substantiate [its] claim that [a service-disabled veteran] controls both the day-to-day management and administration of business operations and strategic policy setting of [CS360]." VA00703. The CVE characterized an unidentified universe of remarks regarding CS360's claims to eligibility as "conclusory" and suggested, without further explanation, that "[t]he results of the site examination of [CS360] and the statements made by B & R/CS360 owners/employees on April 26, 2010, bolster CVE's conclusions." VA00701, VA00703. On these grounds, the CVE denied CS360's application for inclusion in the VetBiz VIP database and informed CS360 that its "profile [would] remain out of public view." VA00703.
CS360 commenced this action on January 12, 2011. See Compl., ECF No. [1]. Count I of the Complaint alleges that the VA violated the Administrative Procedure Act because its denial of CS360's application for inclusion in the VetBiz VIP database was arbitrary and capricious. Id. ¶¶ 47-48. Count II alleges that the VA violated the Due Process Clause of the Fourteenth Amendment of the United States Constitution because CS360 "has a property interest in the economic benefits
CS360 filed its Motion for Summary Judgment on July 7, 2011, and the VA filed its Motion to Dismiss the same day. See PL's Mot. For Summ. J. & Mem. of P. & A., ECF No. [13]; Def.'s Mem. in Supp. of its Mot. for Summ. J. & to Dismiss ("Def.'s MTD Mem."), ECF No. [15-2]. The parties proceeded to brief both motions in accordance with the schedule set by the Court. See PL's Cross Opp'n to Def.'s Cross Mot. for Summ. J. & Opp'n to Dismiss ("Pl's MTD Opp'n"), ECF No. [18]; Def.'s Opp'n to Pl's Mot. for Summ. J. ("Def.'s MSJ Opp'n"), ECF No. [19]; Def.'s Reply ("Def.'s MTD Reply"), ECF No. [23]; Pl.'s Cross Reply to Def.'s Cross-Opp'n to Pl.'s Cross-Mot. for Summ. J., ECF No. [24]. Both motions are now fully briefed and ripe for a decision. In an exercise of its discretion, the Court finds that holding an oral argument on the motions would not be of assistance in rendering a decision. See LCvR 7(f).
CS360 asserts three claims in this action, each of which challenges, in one way or another, the VA's decision to deny CS360's application to be included in the VetBiz VIP database identifying businesses eligible to participate in the veteran-owned small business program managed by the VA. Count I of the [1] Complaint alleges that the VA violated the Administrative Procedure Act because the CVE's denial of CS360's application was arbitrary and capricious. Count II alleges that the VA violated the Due Process Clause of the Fourteenth Amendment of the United States Constitution. Count III alleges that the VA is without statutory authority to issue the regulations at issue in this case. On Count I, the Court finds that the VA has failed to provide a satisfactory contemporaneous explanation for its decision to deny CS360's application and concludes that the best course is to
Count I alleges that the VA violated the Administrative Procedure Act ("APA") because its denial of CS360's application for inclusion in the VetBiz VIP database was arbitrary and capricious. Compl. ¶¶ 47-48. The Court concludes that the VA has failed to provide a satisfactory contemporaneous explanation for its decision to deny CS360's application and concludes that the best course is to
Under the "arbitrary or capricious" standard, the reviewing court must "set aside agency action, findings, and conclusions found to be ... arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. § 706(2)(A). CS360, as the party challenging
Agency action must generally be affirmed on the grounds originally stated by the agency; a reviewing court may not attempt to supply "a reasoned basis for the agency's action that the agency itself has not given." Motor Vehicle Mfrs. Ass'n of the U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983). Nor may counsel's "post hoc rationalizations," offered for the first time on judicial review, substitute for an agency's obligation to articulate a valid rationale in the first instance. El Rio Santa Cruz Neighborhood Health Ctr., Inc. v. U.S. Dep't of Health & Human Servs., 396 F.3d 1265, 1276 (D.C.Cir.2005). Consistent with these principles, judicial review is typically confined to the administrative record before the agency at the time the decision was made. Envtl. Def. Fund, Inc. v. Costle, 657 F.2d 275, 284 (D.C.Cir.1981).
In order to avoid a finding that the challenged agency action was arbitrary or capricious, the "agency must [have] examine[d] the relevant data and articulate[d] a satisfactory explanation for its action." PPL Wallingford Energy LLC v. Fed. Energy Regulatory Comm'n, 419 F.3d 1194, 1198 (D.C.Cir.2005) (quoting Motor Vehicle Mfrs. Ass'n, 463 U.S. at 43, 103 S.Ct. 2856) (internal quotation marks omitted). In articulating the reason for its action, the agency "must have provided a `rational connection between the facts found and the choice made.'" Int'l Union, United Mine Workers of Am. v. Mine Safety & Health Admin., 626 F.3d 84, 90 (D.C.Cir.2010) (quoting Motor Vehicle Mfrs. Ass'n, 463 U.S. at 43, 103 S.Ct. 2856). An agency's decision may be said to be arbitrary or capricious if any of the following apply: (i) its explanation runs counter to the evidence before the agency or is so implausible that it could not be ascribed to a difference of view or the product of agency expertise; (ii) the agency entirely failed to consider an important aspect of the problem or issue; (iii) the agency relied on factors which Congress did not intend the agency to consider; or (iv) the decision otherwise constitutes a clear error of judgment. Motor Vehicle Mfrs. Ass'n, 463 U.S. at 43, 103 S.Ct. 2856; accord Jicarilla Apache Nation v. U.S. Dep't of Interior, 613 F.3d 1112, 1118 (D.C.Cir.2010).
This standard of review is highly deferential to the agency; a court need not find that the agency's decision is "the only reasonable one, or even that it is the result [the court] would have reached had the question arisen in the first instance in judicial proceedings." Am. Paper Inst., Inc. v. Am. Elec. Power Serv. Corp., 461 U.S. 402, 422, 103 S.Ct. 1921, 76 L.Ed.2d 22 (1983). That is, it is not enough for the agency decision to be incorrect; so long as it has some rational basis, the court is bound to uphold the decision. Hosp. of Univ. of Pa. v. Sebelius, 634 F.Supp.2d 9, 13 (D.D.C.2009) (citing Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971)). At bottom, the reviewing court is not entitled to substitute its judgment for that of the agency. Overton Park, 401 U.S. at 416, 91 S.Ct. 814.
By Congressional design, "[a] small business concern may be awarded a contract [set aside for SDVOSBs] only if the small business concern and the veteran owner of the small business concern are listed in the [VetBiz VIP] database." 38 U.S.C. § 8127(e). To be eligible for inclusion in the database, a business must be both "owned" and "controlled" by a service-disabled veteran. Id. § 8127(f)(4)(A); 38 C.F.R. § 74.1. In this case, in denying CS360's application for inclusion in the VetBiz VIP database, the VA's CVE determined that CS360 had established the ownership prong of the eligibility analysis, but found that it had not established that Davis exercised sufficient "control" over the company. VA00532, VA00703. Under the control prong, when the applicant is a limited liability company like CS360, a service-disabled veteran must control "both the day-to-day management and long-term decision-making authority" for the company. 38 C.F.R. § 74.4(a). For the reasons set forth below, the Court concludes that the VA has failed to provide a satisfactory contemporaneous explanation for its decision to deny CS360's application on this basis and concludes that the best course is to
This Court's review function under the APA is limited to "final agency action." 5 U.S.C. § 704. Nonetheless, where, as here, the agency's decision comes to the Court upon a denial of a request for reconsideration, the party seeking review generally may "challenge that denial as well as the agency's original order." Clifton Power Corp. v. Fed. Energy Regulatory Comm'n, 294 F.3d 108, 110 (D.C.Cir.2002). Consistent with this approach, before this Court, both CS360 and the VA have addressed the propriety of the CVE's decision to deny CS360's application for inclusion in the VetBiz VIP database with reference to both the Initial Determination denying the application and the Final Decision denying CS360's Request for Reconsideration. However, complicating the Court's review is the uncertain relationship between the Initial Determination and the Final Decision. Indeed, it is not clear from the Final Decision whether the CVE intended to retain, abandon, or modify certain grounds for denying CS360's application that were articulated in the Initial Determination. In short, the precise grounds upon which the VA actually intended to rely are not free from doubt. Two examples will suffice.
Second, in denying CS360's application in the Initial Determination, the CVE relied in part upon Section 4.03 of the Second Amended Operating Agreement, which provides that "[t]he Managing Member may delegate to any Administrator or other agent such power and authority as the Managing Member deems advisable, subject to the authority of the Managing Member." VA00569-00570. In the Initial Determination, the CVE found that this provision "on its face raises the issue of control where it provides that the Managing Member may delegate to any Administrator or other agent power and authority as the Managing Member may deem advisable including (without limitation) the power and authority to manage the day-to-day operations of the Company." VA00533. In its Request for Reconsideration, CS360 argued that the provision was designed "merely to allow [the Managing Member] to appoint individuals to perform certain functions for CS360" and that "[s]uch appointments are at all times revocable and subject to [the Managing Member's] authority." VA00540-00541. In addition, Davis represented that he "ha[d] not made any designation under the authority granted to [him] by Section 4.03." VA00541. Meanwhile, the Final Decision does not indicate, one way or another, whether the CVE continued to believe that Section 4.03 of the Second Operating Agreement continued to supply an independent basis for the denial of CS360's application. Accordingly, the Court is left in the dark as to whether this consideration remained a basis for the agency's ultimate decision.
In exercising its judicial review function, this Court's task is to determine whether the VA "examine[d] the relevant data and articulate[d] a satisfactory explanation for its action." PPL Wallingford, 419 F.3d at 1198 (quoting Motor Vehicle Mfrs. Ass'n, 463 U.S. at 43, 103 S.Ct. 2856) (internal quotation marks omitted). But given the uncertain relationship between the Initial Determination and the Final Decision, it is not even clear to this Court precisely what the VA's explanation is for its ultimate action. Absent clarification, the Court is
Likewise, several of the grounds cited by the CVE as a basis for denying CS360's application for inclusion in the VetBiz VIP database are described in such generalized and ambiguous terms that the Court is essentially left to guess as to the precise basis for the agency's decision. Here, three examples will suffice.
First, the CVE's Final Decision states that CS360's efforts to modify its operating documents to address the concerns raised by the agency "evince an intent solely to bring CS360 within the letter of the regulation as opposed to having real meaning or purpose." VA00701. In support, the CVE claimed that CS360's Second Amended Operating Agreement "continues to contain indicators of impropriety," VA00701, but the CVE neither identified with any meaningful measure of clarity what those "indicators" might be nor articulated how they were evidenced by the record before the agency. So far as the Court can tell, the only specific "indicator" relied upon by the CVE in its Final Decision is the timing of CS360's amendments, a matter addressed below. To the extent the CVE intended to rely on other "indicators of impropriety," it has not identified them in such a manner that would allow this Court to take them into account in evaluating the soundness of the Final Decision. Indeed, the CVE's chosen approach is particularly problematic because the CVE concedes in the Final Decision that "business re-organization is normally squarely within the province of the owners." VA00701. And yet the CVE's Final Decision makes no meaningful attempt to explain, with specifics relevant to CS360, why CS360's efforts fall outside the normal case.
Second, in concluding that CS360 was created as a "sham" entity designed to solicit contracts set aside for SDVOSBs on B & R's behalf, the CVE's Initial Determination relied in no small part on the fact that Davis provided no capital contribution in CS360's formation. VA00533-00534. In its Request for Reconsideration, CS360 took the position that capital contributions have "no impact" on the control of CS360 because the Second Amended Operating Agreement makes it clear that Davis controls the decisions of the company regardless of capital contributions. VA00542-000543. In its Final Decision, the CVE responded to these arguments simply by asserting that it "finds it unreasonable to conclude that any rational person, or group of persons, would personally fund a start-up construction concern with nearly a half a million dollars and relinquish total control over that concern, including long-term or strategic policy, and its profit." VA00702. This explanation reduces to little more than the CVE's conclusory assertion that CS360's formation was a "sham."
Third, the CVE's Initial Determination relied on its finding that "B & R provided all the financing for starting up" CS360. VA00533-00534. When CS360 disputed this assertion, the CVE responded in its Final Decision that, "[i]rrespective of whether the start-up capital was furnished by B & R ... or individuals employed or otherwise enmeshed with B & R, CVE finds the same underlying implausibility as previously stated." VA00702. As an initial matter, implicit in this phrasing is a concession that the Initial Determination went too far in stating that "B & R provided all the financing for starting up" CS360.
When reviewing an agency's final action under the APA, a reviewing court must disregard "post hoc rationalizations" that were not articulated on the administrative level. El Rio Santa Cruz, 396 F.3d at 1276. Accordingly, equally problematic to the VA's case are the new explanations for its ultimate conclusion that the agency proffers before this Court. For example, Section 3.06 of the Second Amended Operating Agreement provides that "no Member shall have the right ... [to] repayment of its Capital Contributions." VA00542, VA00567. In its Request for Reconsideration, CS360 provided sworn documentation that "[t]he capital contributions have been placed in a bank account" and that Davis "alone controls] the bank account and [has] the authority to write checks out of the bank account." VA00542. According to CS360, this evidences that "no other Member is in a position to withdraw their capital contributions in the event they do not agree with a decision [Davis] make[s] with respect to the operation of CS360." Id. Before this Court, the VA responds that, while it "found that [] Mr. Davis may in fact have signature authority over the official bank account, he could not control what support B & R would be willing to provide or when." Def.'s MTD Reply at 3-4. Conspicuously absent from the memorandum in which the VA makes this argument
Furthermore, responding to the Initial Determination, CS360 argued in its Request for Reconsideration that its staffing levels were "consistent with its start-up nature," its "intention [was] to hire employees to staff particular jobs as work comes in and contracts are awarded," and "[i]t would not make business sense to fully staff CS360 until such time as it has the work to justify the staffing." VA00544. Before this Court, the VA states that "[i]t is not unrealistic for the VA to consider that Mr. Davis had not utilized any of the capital he has stated he had access to, [sic] to hire, even temporarily, any employees to assist in the administrative functions of the concern at the time CS360 was actively bidding on VA contracts." Def.'s MTD Reply at 5. But no such reasoning is found in the VA's contemporaneous written decisions.
In denying CS360's Request for Reconsideration, the CVE relied in part on inferences that it drew from the timing of CS360's modifications to its operating documents. In its Final Decision, the CVE first noted that CS360's Second Amended Operating Agreement modified the provisions governing management of the company and reflected that Blanco had withdrawn from CS360 altogether, and then proceeded to "question how [CS360] could have implemented and/or effected these changes as insufficient time elapsed between the changes in this submission and the version submitted prior to the request." VA00701. But the CVE's Final Decision does not provide an explanation as to why there was "insufficient time" for CS360 to make these changes or why this sequence of events would necessarily "evince an intent solely to bring CS360 within the letter of the regulation as opposed to having real meaning or purpose." VA00701.
Notably, when it sustained a third-party protest as to CS360's status on April 30, 2010, the OSDBU raised a concrete concern about how Section 4.01(a) of the Operating Agreement could allow non-veterans to control the decisions of CS360 because the three non-veteran members of the Executive Committee could join with either Davis of Blanco to override the will of the other. VA00387. CS360 acted promptly in responding to this concern, modifying its Second Amended Operating Agreement twelve days later, on May 12, 2010. VA00480-00523. The speed with which CS360 responded is perhaps unsurprising because the VA's own regulations prohibited CS360 from submitting offers on contracts set aside for SDVOSBs until it "demonstrate[d] that it has overcome the reasons for the determination of ineligibility." 48 C.F.R. § 819.307(c)(3). In short, the VA created the incentives for fast action. While that is not necessarily inconsistent with a finding that the timing of a company's response might be indicative of "impropriety," the CVE's Final Decision does not, on its face, give any consideration to the possibility that a company similarly situated to CS360 might want to promptly respond to any concerns identified by the agency in good faith in order to preserve its ability to bid on contracts set aside for SDVOSBs. Because the VA identified a
Similarly, the CVE's Final Decision does not provide a satisfactory explanation as to why a period of twelve days would be "insufficient" to make bona fide changes to CS360's operating documents. True, twelve days is not a substantial amount of time, but the process for modifying CS360's operating documents required a relatively small number of people to confer and reach an agreement as to any changes. The CVE has not explained why it is reasonable to conclude that CS360's attempts to speak to the agency's concerns within twelve days "evince[s] an intent solely to bring CS360 within the letter of the regulation as opposed to having real meaning or purpose." VA00701. Given the cursory nature of the explanation provided in the CVE's Final Decision, the Court cannot simply ascribe this to a matter of agency expertise.
Meanwhile, there are aspects of the capital contribution problem that are left unaddressed by the CVE in its written decisions. For example, Section 4.01(a) of the Second Amended Operating Agreement allocates to Davis the responsibility of managing the affairs of CS360, while Section 3.06 provides that "no Member shall have the right ... [to] repayment of its Capital Contributions." VA00542, VA00567. Contrary to what the CVE appears to imply, the interaction of these two provisions does not necessarily mean that the non-veteran members relinquished any meaningful financial interest in CS360. For instance, Section 5.03 of the Second Amended Operating Agreement provides that "all funds of the Company which are available for distribution may from time to time at the discretion of the Managing Member be distributed pro rata to all Members in accordance with their respective Distribution Percentages." VA00501. The CVE has failed to provide an explanation as to why no "rational person" would be willing to fund a start-up company with the expectation of receiving distributions in the future, even where distribution decisions are entrusted to the discretion of the managing member. To the extent the CVE intends to suggest that investment generally must be accompanied by some level of control over a company's affairs, it must explain why it believes that to be the case and indicate how it applies to CS360.
The Court does not intend to suggest that the VA must provide an exceedingly exhaustive explanation with respect to the foregoing matters or that it must individually rebut each and every ground proffered by CS360 in its Request for Reconsideration. However, in this case, the defects in
Where, as here, the district court cannot evaluate the challenged action on the basis of the record presented, and the agency may be able to cure any defects through further action, the proper course is to remand to the agency for additional investigation or explanation. CSI Aviation Servs., Inc. v. U.S. Dep't of Transp., 637 F.3d 408, 416 (D.C.Cir.2011). Here, the Court concludes that the VA has failed to provide a satisfactory contemporaneous explanation for its decision to deny CS360's application and concludes that the best course is to
In Count II, CS360 contends that the VA's process for considering applications for inclusion in the VetBiz VIP database "is in violation of the Fourteenth Amendment of the United States Constitution which prohibits the deprivation of `any person of life, liberty, or property, without due process of law.'" Compl. ¶ 50 (emphasis omitted). In addition, CS360 alleges that the VA's use of "inflammatory language" in its denial decision "constitutes a deprivation of [CS360's] property or the liberty to enjoy rights which [it] would otherwise enjoy." Id. ¶ 51. The Court concludes that Count II fails to state a plausible claim for relief. Accordingly, it shall be
As set forth in the Complaint, CS360 brings Count II solely under "the Fourteenth Amendment of the United States Constitution." Compl. ¶ 50. However, the VA is a federal actor and the Fourteenth Amendment "does not apply to the federal government." United States v. Edwards, 98 F.3d 1364, 1368 (D.C.Cir. 1996), cert, denied, 520 U.S. 1170, 117 S.Ct. 1437, 137 L.Ed.2d 544 (1997). Notably, even though the VA raised this very argument in its Motion to Dismiss, see Def.'s MTD Mem. at 11 n. 3, CS360 neither addressed the argument in its opposition nor sought to amend its Complaint to correct the obvious infirmity. To the extent
Even assuming, arguendo, that CS360 brought Count II under the Fifth Amendment to the United States Constitution, which unlike the Fourteenth Amendment does apply to the VA, the claim would nonetheless fail to state a plausible claim for relief. The Court addresses the two components of the claim in turn.
In the first part of Count II, CS360 contends that it has a "property interest in the economic benefits that VA-approved SDVOSB status would bring" and that the VA "deprived [CS360] of that SDVOSB status with no procedure or process for independent review ..., such as an appeal" to a different decision-maker. Compl. ¶ 50. In short, CS360 claims that it was denied due process because it did not receive "an independent review of the initial denial." Id.
First, CS360 has failed to state a plausible claim that it had a cognizable property interest in being designated as an SDVOSB. In this regard, the only argument offered by CS360 is that it had "a property interest in remaining listed on the V.I.P." because it "had an ongoing business operating under its placement on the V.I.P." PL's MTD Opp'n at 15. In making this argument, CS360 relies upon the United States Court of Appeals for the District of Columbia Circuit's decision in Jordan v. United Insurance Company of America, 289 F.2d 778 (D.C.Cir.1961), in which the Court of Appeals held that "once a going business has been established on the basis of a license or certificate of authority, property rights attach." Id. at 781. However, the Complaint is devoid of any allegation that CS360 was ever "licensed" or "certified" as an SDVOSB. Indeed, the Complaint is unambiguous that the VA did not even rule upon CS360's application for inclusion in the VetBiz VIP database until June 30, 2010, at which point the application was denied. Compl. ¶ 25. Even assuming that CS360 was temporarily and provisionally listed in the database on the basis of self-reporting, "that, by itself, did not create a constitutionally protected right to continued [inclusion] absent a `legitimate claim of entitlement.'" Menkes v. U.S. Dep't of Homeland Sec., 637 F.3d 319, 338 (D.C.Cir.2011) (quoting Bd. of Regents v. Roth, 408 U.S. 564, 577, 92 S.Ct. 2701, 33 L.Ed.2d 548(1972)).
Second, to the extent it was required, CS360 was afforded all the process it was due. See Mathews v. Eldridge, 424 U.S. 319, 333, 96 S.Ct. 893, 47 L.Ed.2d 18
Third, in recognition that agencies' freedom to fashion their own procedural rules is "the very basic tenet of administrative law," the United States Supreme Court has been clear that a reviewing court may not impose upon the agency procedural requirements beyond those set forth by Congress or the agency itself. Vermont Yankee Nuclear Power Corp. v. Natural Res. Def. Council, Inc., 435 U.S. 519, 524, 543-44, 549, 98 S.Ct. 1197, 55 L.Ed.2d 460 (1978). That limitation applies equally to informal adjudications like the one at issue in this case. Pension Benefit Guaranty Corp. v. LTV Corporation, 496 U.S. 633, 654, 110 S.Ct. 2668, 110 L.Ed.2d 579 (1990). Accordingly, the Court declines CS360's invitation to engraft procedural requirements upon the VA's decision-making process that have not been required by Congress or the VA itself.
For the reasons set forth above, the Court finds that CS360 has failed to state a plausible claim for relief insofar as it alleges that it was denied due process because the VA failed to provide a means for applicants to appeal initial determinations to a second decision-maker.
In the second part of Count II, CS360 alleges that the VA's use of "inflammatory language" in its decisions resolving CS360's application "constitutes a deprivation of [CS360's] property or the liberty to enjoy rights which [it] would otherwise enjoy." Compl. ¶ 51. The claim must fail for at least three reasons. First, although the VA's Motion to Dismiss seeks the dismissal of Count II, CS360's opposition makes no attempt to defend this aspect of Count II. Accordingly, the Court shall treat the matter as conceded. See Hopkins v. Women's Div., Gen. Bd. of Global Ministries, 284 F.Supp.2d 15, 25 (D.D.C. 2003), affd, 98 Fed.Appx. 8 (D.C.Cir.2004). Second, CS360 has made no attempt to show that the mere use of "inflammatory language" in an internal administrative decision can rise to the level of a constitutional deprivation. See Mosrie v. Barry, 718 F.2d 1151, 1161 (D.C.Cir.1983) (suggesting that the deprivation "must involve a removal, extinguishment, or significant alteration of an interest."). Third, the CVE's Initial Determination and Final Decision, which are incorporated into the Complaint by reference, do not actually contain any "inflammatory language."
In sum, the Court finds that CS360 has failed to state a plausible claim for relief for deprivation of due process under either part of Count II of the Complaint. Accordingly, Count II shall be
In Count III, CS360 alleges that the VA has exceeded its statutory authority by enacting regulations that "for all practical purposes" authorize the VA's OSDBU to "certify" SDVOSBs. Compl. ¶ 53. In this regard, CS360's arguments are three-fold. For the reasons set forth below, the Court finds those arguments unavailing and concludes that CS360 has failed to state a plausible claim for relief. Accordingly, Count III shall be
CS360 first alleges in broad terms that the regulations
CS360 next argues in broad terms that the regulations issued by the VA are ultra vires because the authority to certify SDVOSBs "has already been granted exclusively to the U.S. Small Business Administration (SBA) pursuant to 15 U.S.C. § 657f." Compl. ¶ 53. True, Congress charged the SBA with establishing procedures relating to the verification of SDVOSBs seeking an award of certain sole source contracts. See 15 U.S.C. § 657f(d) (incorporating 15 U.S.C. § 637(m)(5)-(6) by reference). However, through a separate and subsequent enactment, Congress independently authorized the VA to set aside contracts for veteran-owned small businesses and provided that the VA may award such contracts "only if the small business concern and the veteran owner of the small business concern are listed in [a] database of veteran-owned businesses."
Finally, in opposition to the VA's Motion to Dismiss, CS360 argues that the VA has violated 15 U.S.C. § 644(k) by designating the OSDBU as the entity responsible for evaluating applications for inclusion in the VetBiz VIP database. See Pl.'s MTD Opp'n at 16. According to CS360, "the functions of a federal OSDBU are dictated by statute and the VA OSDBU exceeds the authority granted to such offices" because "[n]one of the statutory functions are [sic] even remotely related to acting as a national certification office." Id. There are at least two problems with CS360's reliance upon 15 U.S.C. § 644(k) in support of Count III. First, Count III does not allege a violation of 15 U.S.C. § 644(k), but is instead limited to alleged violations of 15 U.S.C. § 657f and 38 U.S.C. §§ 8127-8128. See Compl. ¶¶ 53-54. CS360 cannot amend its Complaint merely by injecting new claims in the course of briefing a dispositive motion. Arbitraje Casa de Cambio, 297 F.Supp.2d at 170. Second, 15 U.S.C. § 644(k) "established in each Federal agency having procurement powers an office to be known as the `Office of Small and Disadvantaged Business Utilization.'" Although the statute proceeds to identify the powers and responsibilities of such offices, nothing in 15 U.S.C. § 644(k) suggests that those powers are limiting and not illustrative. Indeed, the statute provides that the OSDBU shall "be responsible to, and report directly to, the head of [the] agency," 15 U.S.C. § 644(k)(3), and CS360 has failed to provide any argument, let alone a colorable argument, as to why the Secretary of the VA's delegation of his authority under 38 U.S.C. §§ 8127-8127, is impermissible. Accordingly, Count III cannot rest on this basis.
For the reasons set forth above, the Court finds that CS360 has failed to state a plausible claim for relief in Count III. Accordingly, the claim shall be
For the reasons set forth above, CS360's [13] Motion for Summary Judgment shall be
