Cs-360, LLC v. U.S. Department of Veteran Affairs

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
CS-360, LLC,
Plaintiff,
V' civil Aca@n N@. 1 1-00078 (CKK)
U.s. DEPARTMENT oF vETERAN
AFFAIRS,
Defendant.
MEMORANDUM OPINION
(March 6, 2012)
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 l
of the [l] Complaint alleges that the VA violated the Administrative Procedure Act because its
denial of CS360’S application was arbitrary and capricious. Count ll 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 IIl
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 Judgrnent and GRANT-IN-
PART and DENY-lN-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 REMAND the action to the VA for
further consideration and explanation On Counts ll and lll, the Court concludes that CS360 has
failed to state a plausible claim for relief. Accordingly, those claims shall be DISMISSED.
I. BACKGROUND
Unless otherwise noted, the following background is derived from the certified
administrative record filed by the VA in this action.
A. Service-Disabled Veteran-Owned Small Businesses and the VA’s VetBiz
Vendor Information Pages Database
Congress enacted the Veterans Benefits, Health Care, and Information Technology Act of
2()06, Pub. L. No. l09-46l, §§ 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. § 8l27(a). To this end, Congress conferred upon the VA the authority to set aside certain
govemment 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. [d. § 8l27(f).
Responding to this statutory command, the VA maintains the VetBiz Vendor lnformation
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.l, which is accessible at
http://www.VetBiz.gov. By statute, "[a] small business concem 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 database of veteran-owned businesses maintained by the
Secretary [ofthe VA]." 38 U.S.C. § 8l27(e).
B. CS360’s Application for Inclusion in the VetBiz VIP Databasie
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.l l(a). T0 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. VAOOOOl,
VA00OO6. On February l, 201 O, the CVE notified CS36O that its application had been received
and was being processed. VAOO0O4. While the application was under review, CS36O was listed
in the VetBiz VIP database on the basis of self~reporting but, despite this listing, CS36O had not
been verified, certified, or licensed as an eligible SDVOSB during this interim period.
C. The Third-Party Protest of CS360’s Eligibility
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. VAOOOZZ. CS36O competed for the Lexington
Contract and was found to be the apparent low bidder on January 27, 201(). 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. §
8l9.307(c). On January 29, 2010, the fourth lowest bidder on the Lexington Contract filed a
protest challenging CS360’s SDVOSB eligibility. VA00O34-00036. The essential thrust of the
protest was that CS36O 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").
VAOOO35.
By regulation, the OSDBU is responsible for deciding whether to sustain a third-party
protest of this kind. 48 C.F.R. § 8l9.307(c). On March 3, 20l0, the OSDBU formally notified
CS3 60 of the protest and directed CS3 60 to submit evidence demonstrating that it is
unconditionally owned and controlled by a service-disabled veteran. VA00058-00()6l.
On March 9, 2010, CS3 60 responded with a written submission and supporting
documentation. VAOOO69-OOl79. At the time of CS360’s submission, two service-disabled
veterans, Walter A. Davis ("Davis") and J ames 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 5 l% interest. VAOO092, VA00l3 l. Meanwhile, six non-veterans held interests that
combined to reflect the remaining 49%--namely, William R. Britt ("Britt"), David P. Vocci
("Vocci"), Edward E. l\/Ieadows ("Meadows"), Dana M. Borowy ("Borowy"), Benjamin L. Cox
("Cox"), and Gabriel R. Velicu ("Velicu"). VA00l3 l. In its written submission, CS36O argued
that it met the ownership requirement for SDVOSB eligibility because Davis and Blanco
collectively held a majority interest in the company. VAO0069. Similarly, CS36O argued that it
met the control requirement because Davis held the highest position in CS36O and because Davis
and Blanco could together guide the decisions of the company under the terms of CS360’s
Operating Agreement. VAO0070. At that time, Section 4.0l(a) of CS360’s Operating
Agreement provided that a five-person Executive Committee comprised of two service-disabled
veterans (Davis and Blanco) and three non-veterans (Britt, Meadows, and Vocci) would manage
and direct the company by majority vote. VAOOI 03. However, Section 4.()l(a) also
contemplated that Davis and Blanco could override the will of the three non-veterans on the
Executive Committee, providing that "in cases in which the Managing Members are in
agreement the decision of the Managing Members shall govern." VAOOl03. Finally, CS3 60
denied that it had an improper relationship with B&R, claiming that any "developmental
assistance" provided by B&R to CS36O was in "strict compliance" with a Mentor-Protégé
Agreement approved by the U.S. Department of Honieland Security ("DHS"). VAOO070.
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.
VAOO37l -00382. According to the written report, the contractor reviewed documentation and
interviewed four individuals in connection with the examination. VA003 72, VA()O380-00382.
Based upon its review, the contractor concluded that CS3 60 had failed to establish that Davis and
Blanco unconditionally owned and controlled the company. VA003 72. ln terms of ownership,
the contractor found that (l) the equity section of CS360’s balance sheet identified six
individuals who provided capital contributions to CS36(), 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. VA003 72-00374. In terms of control, the
contractor took into account that (l) 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 perfonned
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. VA003 74.
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. VA0038l. ln addition, Meadows indicated that CS36O
was formed to solicit contracts from the VA and other agencies that were unavailable to B&R
because it was not eligible for SDVOSB status and expressed his understanding that Davis and
Blanco’s ownership interests would be reduced as the company became more profitable
VAO0380. l\/Ieanwhile, all four interviewees consistently indicated that Davis reported to the
office every day and had meaningful responsibilities, while Blanco reported to the office one day
a week and was otherwise occupied with a separate entity that he owned VAOO380-()O3 82.
On April 30, 20l0, the OSDBU issued its final determination sustaining the third-party
protest. VA00383-0O387. 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 CS36O had failed to establish its eligibility for SDVOSB status. VAO0383.
The basis for the OSDBU’s decision was narrow. As an initial matter, the OSDBU conceded
that CS36O 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 CS36O failed to show that Davis and Blanco met the
control requirement for a single reason. VA00386. Specifically, the OSDBU concluded that
Section 4.0l(a) of the Operating Agreement could allow non-veterans to control the decisions of
CS36O because the three non-veteran members of the Executive Committee could join with
either Davis or Blanco to override the will of the other. VAOO387. For this reason, the OSDBU
found that CS36O failed to demonstrate its eligibility and informed the company that its profile
would be removed from the VetBiz VIP database. VAOO387. From that point forward, CS36O
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. § 8l9.307(c)(3).
D. CS360’s Attempts to Remedy the Problems Identified by the OSDBU
On May 6, 2010, CS36O responded in writing to the OSDBU’s decision to sustain the
third-party protest. VA00390-O()39l. included with CS360’s letter was a First Amended
Operating Agreement, effective as of May 6, ZOl(), and a redline to the prior version. VA003 92-
00479. According to CS360’s letter, the First Amended Operating Agreement was designed to
"resolve the concerns" identified by the ODSBU. VA00390. Specifically, Section 4.0l(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." VAOO45l.
CS3 60 did not stop there. On May l2, 2012, it executed a Second Amended Operating
Agreement making additional changes to its management structure. VAOO480-0()523. 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 5 l % ownership interest in CS36(), with six non-veterans (Borowy,
Britt, Cox, Meadows, Velicu, and Vocci) holding the remaining 49%. VAOOSZZ. Under Section
4.0l(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." VAOO495.
On May 2l, 2010, CS36O sent a copy of the Second Amended Operating Agreement to
the OSDBU along with a two-page letter.l VAO0524-00525. ln its letter, CS36O took the
position that the Second Amended Operating Agreement "placed all decision-making powers
with Walter Davis . . . who now owns 5l% of the company." VA00524. According to CS360,
the Second Amended Operating "addressed and rectified" the OSDBU’s concerns and CS36O
"request[ed] a determination that [it] ha[d] demonstrated to the VA that it ha[d] overcome the
reasons for the initial ruling of ineligibility." VA00524.
On June 2l, 2010, the OSDBU responded to CS360’s submissions. VAOO530-0O53 l.
The OSDBU simply noted that, by regulation, its decision sustaining the protest was final and
that the changes made by CS3 60 to its management structure would be considered in connection
with CS360’s application for inclusion in the VetBiz VIP database, which remained pending
VAOO530-OO53 l.
l While the record is not clear, CS36O also may have sent a copy of the Second Amended
Operating Agreement to the OSDBU on May l2, 20lO.
8
E. The CVE Denies CS360’s Application for Inclusion in the VetBiz VIP
Database
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, 20l0 (the "lnitial
Deterinination"). VAOO532-00537. 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 CS36O 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 4.0l(a) of the Operating Agreement could
allow non-veterans to control the decisions of CS3 60 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." VAOO533. 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]." VAOO533.
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 4.0l(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 concem, it appears that the CVE mistakenly
relied upon the First Amended Operating Agreement, which includes the quoted language, and
not the Second Amended Operating Agreement, which does not. VA00452, VAO0569.
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 Deterrnination 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
lO
full-time employee, . . . the inexorable conclusion is that CS36O cannot perform any contract
without B&R agreeing and providing very nearly all the resources necessary to perform any
work." VAOO534. ln 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 concem is actually run on a daily basis," the CVE concluded that
CS36O was created as a "sham" entity designed to solicit contracts set aside for SDVOSBs on
B&R’s behalf VAOO533-0O534. ln support of this conclusion, the CVE cited the following: (l)
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." VA00533-0O534. Based on this record, the CVE found that "[t]he purpose for creating
CS36O was solely to bring to life a SDVOSB for B&R to seek work from VA and possibly other
agencies on SDVOSB set-asides." VAOO534.
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 CS36O and B&R, and approved by DHS, did not warrant a
different result. VAOO534-0O535. lnitially, 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. VAOO535 (citing 48 C.F.R. §§ 8l9.7l0l-
819.7115). In any event, the CVE found that the Mentor-Prote'gé Agreement "does not support
ll
control" because "[t]he obvious intent . . . is to attempt to create a paper record justifying B&R
providing all the resources necessary for [CS360’s] operations." VAO0534-00535. In support of
its conclusion as to the "obvious intent" of the Mentor-Protégé Agreement, the CVE cited the
following: (l) the relationship between CS36O and B&R went beyond "merely hiring some of
the mentor’s employees on a temporary basis," and instead involved "B&R provid[ing] all but
one person as key personnel and [being] responsible for virtually the entire operation of the
protégé"; (2) the site examination indicated that "no training is provided as all the employees
work for B&R and Mr. Davis evidently does not require training as he was selected to be the
[service-disabled] veteran because of his expertise"; (3) B&R charged CS36O for all of the
resources provided with the exception of a rent-free apartment used by Davis; and (4) there was
no evidence that CS36O was "separately developing a business operation." VA00535 (emphasis
in original). On this basis, the CVE concluded that "B&R [was] solely funding [CS360] and
then paying itself back for the use of these resources," thus "evidenc[ing] a sham transaction and
organization." VAO0536.
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.
VAO0536. CS36O was advised that it could request reconsideration of the Initial Determination
and the VA invited CS3 60 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." VAO0536.
F. CS36O Requests Reconsideration of the Initial Determination
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.l3(a). On August 26, 2010, CS36O submitted its thirteen-page Request for Reconsideration.
l2
VAOO538-OO700. As it was invited to do, CS360’s Request for Reconsideration purports to
"provide [the CVE] with additional infonnation relating to CS360’s operations and [to] clarify
certain other information contained in its application." VAO0539. The Request for
Reconsideration is signed by Davis, affirmed under the penalty of perjury, and certified by a
public notary. VAOOSSO. lt responds to each of the four considerations identified by the CVE as
the basis for its Initial Determination.
First, CS36O noted that the language identified by the CVE in Section 4.0l(c) had already
been removed from the Second Amended Operating Agreement before the CVE issued its Initial
Deterrnination and therefore "should not be the basis of any concems." VAOO540.
Second, CS36O 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.” VAO0540-O054l. In
addition, Davis represented that he "ha[d] not made any designation under the authority granted
to [him] by Section 4.03." VA0054l.
Third, CS36O explained why its staffing complement and resources were consistent with
its status as a relatively new company and were sufficient to allow it to effectively exercise
independent judgment. Purporting to correct the CVE’s contention that CS36O maintained only
one full-time employee, CS36O stated that it then had two full-time employees-Davis and Cox,
the latter of whom was employed as a Senior Project Manager. VAOO544. In addition, CS36O
claimed that it had an extant "consulting arrangement" with one individual and previously had
relationships with other consultants and sub-consultants, but that those relationships "were
terminated due to the cost reductions necessitated by CS360’s inability to obtain verification as a
13
SDVOSB.” VAOO544. According to CS360, 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 CS36O until such
time as it has the work to justify the staffing." VAOO544. Moreover, CS3 60 disclaimed any
intention to "rely on B&R to provide these resources," contending 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."
VAOO544.
Fourth, CS36O responded to the CVE’s claim that it was formed solely as a "sharn" to
permit B&R to obtain contracts set aside for SDVOSBs. CS3 60 sought to refute several of the
grounds cited by the CVE for reaching this conclusion. Without disputing that the minority non-
veteran owners of CS36O were also employees of B&R, CS36O asserted that only three of the six
non-veterans that made capital contributions to CS36O (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, CS3 60 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." VAOO542. In any event, CS3 60 took
the position that capital contributions have "no impact" on the control of CS3 60 because the
l4
Second Amended Operating Agreement makes it clear that Davis controlled the decisions of the
company regardless of capital contributions. VAOO542. On this point, CS36O 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." VAOO542, VAO0567. Furtherrnore, as
described above, CS3 60 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." VA00533-0O544.
Turning to the CVE’s treatment of the Mentor-Protégé Agreement between CS36O and
B&R, CS36O conceded that "the VA is not obligated to recognize the Mentor-Protégé
Agreement approved by DHS." VA00545. Nonetheless, CS36O argued that it was improper "to
characterize the Agreement as a sham when the Agreement was approved by the DHS."
VA00545. Responding to the CVE’s contention that CS36O should have sought approval
through the VA’s procedures, CS36O noted that "the program was not available at the time the
process was initiated with the DHS." VA00545. More generally, CS36O claimed that the CVE
had mischaracterized the relationship between CS36O and B&R, contending that "B&R’s
primary assistance to CS36O has been in assisting in preparing proposals for the purpose of
acquiring contracts and enhancing CS360’s ability to develop its own business operation."
VA00545. Again, it asserted that "B&R has not been and will not be responsible for the
servicing of contracts." VA00545. CS36O also denied that B&R provided no training to Davis,
claiming that, despite Davis’ expertise in other areas, B&R was providing Davis "with training
related to the administration and management of a construction business," including "training
15
and direction in business software, business accounting, project management software, proposal
writing and job safety programs." VA00545. CS36O also contended that "B&R does not, and
has never, charged CS36O for rent, support personnel, and office expenses," and "does not
recover any profit from this arrangement." VAO0546. Finally, CS36O denied that there was no
evidence that it was developing a separate business operation and, in support, it outlined five
specific examples of CS360’s "efforts to develop its business, including in areas that are outside
of the usual areas of operation of B&R." VA00547. According to CS360, these areas include
"civil, general construction, and project management projects.” VA00547.
G. The CVE Denies CS360’s Request for Reconsideration
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.l3(b). On November 2, 2010, the CVE denied CS360’s Request for
Reconsideration (the "Final Decision"), concluding that CS3 60 did "not satisfy the
requirements" for inclusion in the VetBiz VIP database. VA0070l-0O704. 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." VAO()70l. 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." VA0070l. ln particular, the
CVE expressed concem that the provisions governing Managing Members were "revised" and
one Managing Member (Blanco) was removed "wholesale" on such a short timeframe.
l6
VAO070l. 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 CS36O within the letter of the regulation as opposed to having real meaning or business
purpose." VAO070l.
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 concem with nearly half a million dollars and relinquish total control over that
concem, including long-terrn or strategic policy, and its profit." VA00702. Without providing
any particulars, the CVE then stated that it "will go beyond the fonnalities of business ownership
and titles and examine how the applicant concern is actually run." VA00702.
Third, the CVE stated, in a single sentence, that "[i]rrespective of whether the start-up
capital was fumished 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 CS36O "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 govemment report criticising SDVOSBs with limited resources,
but did not explain how the report might relate to CS36O in particular. VAOO702. Finally, the
CVE contended that CS36O "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.
l7
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." VAO0702. The CVE apparently found CS360’s specific examples of its efforts to develop
a separate business concem 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 gamered the resources to
perform without B&R having a significant role." VAO0702.
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&IUCS3 60
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 CS36O that its "profile [would] remain out of public view." VA00703,
H. The Commencement of this Action
CS36O commenced this action on January 12, 2011. See Compl., ECF No. [1]. Count l
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
18
capricious. Id. 1111 47-48. Count ll alleges that the VA violated the Due Process Clause of the
Fourteenth Amendment of the United States Constitution because CS36O "has a property interest
in the economic benefits that VA-approved status would bring" and the VA "deprived [CS360]
of that SDVOSB status with no procedure or process for independent review of the decision."
Id. 11 50. Count ll also alleges that the VA’s use of "inflammatory language" in its denial
decisions "constitutes a deprivation of [CS360’s] property or the liberty to enjoy rights which [it]
would otherwise enjoy." Id. 11 51. Finally, Count lll alleges that the SBA, and not the VA, has
the exclusive authority to certify SDVOSBs and that the VA has "no statutory authority to issue
regulations . . . to certify SDVOSBS." Id. 11 53.
CS36O 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
l\/ITD 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. ln 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).
II. DISCUSSION
CS3 60 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
19
program managed by the VA. Count l of the 111 Complaint alleges that the VA violated the
Administrative Procedure Act because the CVE’s denial of CS360’s application was arbitrary
and capricious Count ll alleges that the VA violated the Due Process Clause of the Fourteenth
Amendment of the United States Constitution. Count lll alleges that the VA is without statutory
authority to issue the regulations at issue in this case. On Count l, 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 REMAND the action to the VA for
further consideration and explanation. On Counts ll and lll, the Court concludes that CS3 60 has
failed to state a plausible claim for relief Accordingly, those claims shall be DISMISSED.
A. Count I: Violation of the Administrative Procedure Act
Count l 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. 1111 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 REMAND the action to the VA for further consideration and
explanation.
1. Legal Standard
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
the agency action, bears the burden of proof. Abington Crest Nursing & Rehab. Cir. v. Sebelz`us,
575 F.3d 717, 722 (D.C. Cir. 2009) (citing Cz`ty ofOlmstea’ Falls v. Fed. Aviatz`on Admin., 292
F.3d 261, 271 (D.C. Cir. 2002)). ln assessing the merits of CS360’s challenge, the Court begins
20
with the presumption that the VA’s action was valid Grid Radio v. Fed. Commc ’ns Comm ’n,
278 F.3d 1314, 1322 (D.C. Cir.), cert denied, 537 U.S. 815 (2002).
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. [ns. Co., 463 U.S. 29, 43 (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 Rz`o Scmta Cruz Neighborhooa’ 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 Funa’, Inc. v. Costle, 657 F.2d 275, 284 (D.C. Cir. 1981).
ln 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. Fea’. Energy Regulatory Comm ’n, 419 F.3d
1194, 1198 (D.C. Cir. 2005) (quoting Motor Vehicle Mj‘rs. Ass ’n, 463 U.S. at 43) (internal
quotation marks omitted). ln articulating the reason for its action, the agency "must have
provided a ‘rational connection between the facts found and the choice made."’ Int ’l Unz'on,
United Mz'ne Workers ofAm. v. Mine Safety & Health Admin., 626 F.3d 84, 90 (D.C. Cir. 2010)
(quoting Motor Vehz'cle Mfrs. Ass ’n, 463 U.S. at 43). 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
21
the agency to consider; or (iv) the decision otherwise constitutes a clear error of judgrnent.
Motor Vehicle Mfrs. Ass ’n, 463 U.S. at 43; accord Jz'carilla Apache Nation v. U.S. Dep ’i 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 court1 would have
reached had the question arisen in the first instance in judicial proceedings" Am. Paper lnst.,
Inc. v. Am. Elec. Power Serv. Corp., 461 U.S. 402, 422 (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. ofUniv. of Pa. v. Sebelius, 634 F. Supp. 2d 9, 13 (D.D.C. 2009)
(citing Cz`tz`zens to Preserve Overton Park, Inc, v. Volpe, 401 U.S. 402, 416 (l971)). At bottom,
the reviewing court is not entitled to substitute its judgment for that of the agency. Overion
Park, 401 U.S. at 416.
ln evaluating agency action under the "arbitrary or capricious" standard, the reviewing
court must take "due account . . . of the rule of prejudicial error.” 5 U.S.C. § 706. Just as the
burden of establishing that the agency action is arbitrary or capricious rests with the party
challenging agency action, so too must that party establish that the errors ascribed were
prejudicial. jicarilla Apache Nation, 613 F.3d at 1121 (citing PDK Labs. Inc. v. U.S. Drug
Enforcement Agency, 362 F.3d 786, 799 (D.C. Cir. 2004)). The question of whether an error was
prejudicial is necessarily contextual, and courts must proceed with a case-specific application
based upon an examination of the entire record Jicarilla Apache Nation, 613 F.3d at 1121.
However, where the party challenging agency action fails to show that the agency’s error may
have affected the outcome of the proceedings below, the error is not prejudicial, and it would be
senseless to vacate and remand for further proceedings la’.
22
2. Analysis
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 concem are listed in the 1VetBiz Vll’] 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. la’. § 8l27(f)(4)(A); 38 C.F.R. § 74.1. ln this case, in denying CS360’s
application for inclusion in the VetBiz VIP database, the VA’s CVE determined that CS3 60 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-terrn 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
REMAND the action to the VA for further consideration and explanation.
i. The Relationship Between the Initial Determination and the
Final Decision
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 CS36O
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 Deterrnination denying the
23
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. lndeed, 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 Deterrnination. ln short, the precise grounds upon which the VA
actually intended to rely are not free from doubt. Two examples will suffice.
First, in the Initial Determination, the CVE claimed that Section 4.0l(c) of the Second
Amended Operating Agreement "provides that ‘l\/lanaging 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 concem, it
appears that the CVE mistakenly relied upon the First Amended Operating Agreement, which
includes the quoted language, and not the Second Amended Operating Agreement, which does
not. VA00452, VAO0569. Accordingly, in its Request for Reconsideration, CS3 60 noted that
the language in Section 4.0l(c) had already been removed from the Second Amended Operating
Agreement before the CVE issued its Initial Determination. VA00540. Despite this the CVE
failed to directly address the matter in its Final Decision, although it claimed in passing that "it
was difficult to identify substantive changes from the previous version." VA00701. For this
reason, it is not clear to the Court whether or not the VA still intended to rely upon the cited
language as an independent basis for denying CS360’s application. This is no mere technicality,
24
as such reliance might very well be in error because the record reveals that CS360 had removed
the language and notified the VA of the change prior to the lnitial Deterrnination.
Second, in denying CS360’s application in the lnitial 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 l\/lember."
VA00569-00570. ln the lnitial 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. ln its Request for Reconsideration, CS36O 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. ln addition, Davis represented that he
"ha[d] not made any designation under the authority granted to [him] by Section 4.03."
VA00541. l\/leanwhile, 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.
ln 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) (internal
quotation marks omitted). But given the uncertain relationship between the lnitial Deterrnination
25
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 unable to exercise the role envisioned by
Congress when it enacted the APA.
ii. Generalized and Ambiguous Explanations
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 concems raised by the agency "evince an intent solely to bring CS36O
within the letter of the regulation as opposed to having real meaning or purpose.” VAO070l. ln
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. lndeed, 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." VAO070l.
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.
26
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 lnitial Deterrnination relied in no
small part on the fact that Davis provided no capital contribution in CS360’s formation.
VA00533-00534. ln its Request for Reconsideration CS36O 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. ln 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-terrn or strategic policy, and
its profit." VAO0702. This explanation reduces to little more than the CVE’s conclusory
assertion that CS360’s formation was a "sham."z The CVE’s Final Decision offers no
meaningful measure of detail and cites to no specific evidence, For instance, although the CVE
asserts in broad terms that it will "go beyond the formalities of business ownership and titles and
examine how the applicant concern is actually run," VA00702, the Final Decision provides no
particulars Given the brevity of the agency’s explanation the Court is not in a position to
presume that the CVE’s reference to the expected conduct of "any rational person" is a product
of agency expertise. Despite the highly deferential standard of review, the CVE must provide a
reasoned explanation for its conclusion and this Court is not free to accept the agency’s ipse dixit
that CS36O was formed as a "sham." D&F Afonso Realty Trust v. Garvey, 216 F.3d 1191, 1196
(D.C. Cir. 2000).
2 ln defending its decision before this Court, the VA resorts to similar generalities claiming that
"CS3 60 was drafting the Operating Agreement with the sole purpose of satisfying the VA, not to
establish its business relationship." Def.’s l\/lSJ Opp’n at 5. However, even the VA
characterizes this as an "impression." Ia’.
27
Third, the CVE’s lnitial Deterrnination 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." VAO0702. As an initial matter, implicit in
this phrasing is a concession that the lnitial Deterniination went too far in stating that "B&R
provided all the financing for starting up" CS360.3 VA00553-00534. As the CVE now appears
to acknowledge there is nothing in the record to suggest that any capital was contributed directly
by B&R itself. ln any event, the CVE’s assertion in the Final Decision that the "under1ying
implausibility" remains the same even if the capital was contributed by employees or members
of B&R is so brief and unilluminating that the Court is left in the dark as to what the agency
actually meant by the use of this language. To the extent the CVE intended to suggest that the
"underlying implausibility" is that "it is unreasonable to conclude that any rational person, or
group of persons would personally fund a start-up construction concern . . . and then relinquish
total control over that concem," VA00702, the Court has already found that this cursory
statement fails to provide a sufficiently reasoned explanation To the extent the CVE intended to
rely upon some other "underlying implausibility," it has failed to identify it with sufficient
particularity to permit this Court to exercise its function of judicial review.
iii. New Explanations
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 Ri0
3 Such a conclusion is not entirely free from doubt because, as described above, the VA has been
less than clear in articulating the relationship between the lnitial Determination and the Final
Decision.
28
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. ln its Request
for Reconsideration, CS360 provided sworn documentation that "[t]he capital contributions have
been placed in a bank account" and that Davis "alone control[s] 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."
Ia’. Before this Court, the VA responds that, while it "found that 11 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 is any citation to the lnitial Deterrnination
or Final Decision addressing Davis’ control over the bank account because indeed, there is none
The Final Decision makes no finding with respect to Davis’ control over the bank account and,
by extension, CS360’s capital base. Nor does the Final Decision explain why this evidence of
control is outweighed by other countervailing considerations
Furtherrnore responding to the lnitial 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 CS36O until such time as it has the work to
justify the staffing." VAOO544. 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
29
to, [sic] to hire even temporarily, any employees to assist in the administrative functions of the
concem 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
iv. The Timing of CS360’s Modifications to its Operating
Documents
ln 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 ln 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 alto gether, and then proceeded to "question how 1CS360] 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" VAO070l. But the CVE’s Final Decision does not
provide an explanation as to why there was "insufficient time" for CS36O to make these changes
or why this sequence of events would necessarily “evince an intent solely to bring CS36O within
the letter of the regulation as opposed to having real meaning or purpose" VAO070l.
Notably, when it sustained a third-party protest as to CS360’s status on April 30, 2010,
the OSDBU raised a concrete concem 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. CS3 60 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 CS36O responded is perhaps unsurprising because the VA’s own
regulations prohibited CS3 60 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
30
C.F.R. § 8l9.307(c)(3). ln 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 CS36O might want to
promptly respond to any concems 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 problem and
then required CS360 to respond to that problem, it must now provide a more fulsome explanation
as to why CS360’s attempts to come into compliance "evince an intent solely to bring CS360
within the letter of the regulation as opposed to having real meaning or purpose" VAO070l.
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 concems within twelve days "evince[s] an intent
solely to bring CS3 60 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
v. The Effect of Capital Contributions on Control
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
31
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."
VA0050l. 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 CS360.4
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 CS3 60 in its Request for Reconsideration. However, in this case the
defects in the VA’s written decisions are so many and so significant that they affect the whole
and preclude the Court from effectively exercising its review function Cf Branijj’Airways, 1nc.
4 ln defending its decision before this Court, the VA cites to 38 C.F.R. § 74.4(i)(2) in support of
the proposition that "the amount of critical financial support provided by a non-veteran is a
legitimate cause for concem about the veteran’s actual control." Def.’s MSJ Opp’n at 5.
However, the provision relied upon by the VA allows the VA to consider whether "[a] non-
veteran or entity, having an equity interest in the applicant or participant provides critical
financial or bonding support . . . which directly or indirectly allows the non-veteran significantly
to influence business decisions of the participant." 38 C.F.R. § 74.4(i)(2) (emphasis added). ln
other words the VA’s regulations appear to suggest that the magnitude of non-veterans’ equity
interest in a company is relevant to control insofar as it is accompanied by the ability to
"influence business decisions."
32
v. Civil Aeronautics Ba’., 379 F.2d 453, 466-67 (D.C. Cir. 1967). Given the ambiguous
relationship between the lnitial Deterrr1ination and Final Decision, the vague and generalized
explanations provided by the CVE on the administrative 1evel, and the new explanations
proffered by the VA before this Court, the Court cannot say with any level of confidence that it
knows the precise grounds for the VA’s decision to deny CS360’s application for inclusion in the
VetBiz VIP database and whether those grounds would hold up under review. Simply put, on
this sparse and disjointed record, the Court cannot find that the VA has "provided a ‘rational
connection between the facts found and the choice made."’ Int’l Union, United Mine Workers of
Arn., 626 F.3d at 90 (quoting Motor Vehicle Mj'rs. Ass ’n, 463 U.S. at 43).
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 ofTransp., 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 REMAND
the action to the VA for further consideration and explanation On remand, the VA shall have
the discretion to reopen the administrative record, to engage in additional fact-finding, to
supplement its explanation, and to reach the same or a different ultimate conclusion See
generally Bean Dredging, LLC v. United States 773 F. Supp. 2d 63, 76 (D.D.C. 2011). The
Court emphasizes that it expresses no opinion, one way or the other, as to the ultimate merits of
the VA’s decision to deny CS360’s application for inclusion in the VetBiz VIP database.
33
B. Count II: Violation of the Due Process Clause of the Fourteenth Amendment
ln Count ll, CS36O 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. 11 50 (emphasis omitted). ln addition, CS36O alleges that
the VA’s use of "inflammatory language" in its denial decision "constitutes a deprivation of
1CS360’s] property or the liberty to enjoy rights which [it] would otherwise enjoy." 1d. 11 51.
The Court concludes that Count ll fails to state a plausible claim for relief. Accordingly, it shall
be DISMISSED.
1. CS360 Has Not Stated a Plausible Claim for Relief under the
Fourteenth Amendment
As set forth in the Complaint, CS3 60 brings Count ll solely under "the Fourteenth
Amendment of the United States Constitution." Compl. 11 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 (1997). Notably,
even though the VA raised this very argument in its Motion to Dismiss see Def.’s l\/lTD Mem. at
ll n.3, CS36O neither addressed the argument in its opposition nor sought to amend its
Complaint to correct the obvious infirmity. To the extent CS3 60 believed it could simply amend
its Complaint through its opposition papers it was mistaken See Arbitraje Casa de Carnl)io,
S.A. de C. V. v. U.S. Postal Serv., 297 F. Supp. 2d 165, 170 (D.D.C. 2003) ("[A] complaint may
not be amended by the briefs in opposition to a motion to dismiss") (quotation marks omitted).
Count ll, as it has been set forth in the Complaint, fails to state a plausible claim for relief.
Accordingly, it shall be DISMISSED.
34
2. CS360’s Allegations Would Not State a Plausible Claim for Relief
under the Fifth Amendment
Even assuming, arguendo, that CS36O brought Count ll 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
i. Failure to Provide an Appeal to a Second Decision-maker
ln the first part of Count ll, CS3 60 contends that it has a "property interest in the
economic benefits that VA-approved SDVOSB status would bring" and that the VA "deprived
1CS360] of that SDVOSB status with no procedure or process for independent review . . . , such
as an appeal" to a different decision-maker. Compl. 11 50. ln short, CS36O claims that it was
denied due process because it did not receive "an independent review of the initial denial." Id.§
For at least three reasons the claim must fail.
First, CS3 60 has failed to state a plausible claim that it had a cognizable property interest
in being designated as an SDVOSB. ln this regard, the only argument offered by CS360 is that it
had "a property interest in remaining listed on the V.l.P." because it "had an ongoing business
operating under its placement on the V.l.P." Pl.’s MTD Opp’n at 15. ln making this argument,
CS36O relies upon the United States Court of Appeals for the District of Columbia Circuit’s
decision in Jordan v. United lnsurance Company of Amerz`ca, 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
5 ln its opposition CS36O raises an amorphous universe of other alleged infirmities with the
process it was provided on the administrative level. See Pl.’s MTD Opp’n at 13-16. However,
Count ll of the Complaint is unambiguously confined to a narrow claim that the VA deprived
CS3 60 of due process by failing to provide an appeal to an independent decision-maker. See
Compl. 11 50. The Court limits its analysis accordingly. See Arbitraje Casa de Cambio, 297 F.
Supp. 2d at 170 ("[A] complaint may not be amended by the briefs in opposition to a motion to
dismiss.") (quotation marks omitted).
35
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.
lndeed, 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. 11 25. Even assuming that CS3 60 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
ofHomeland Sec., 637 F.3d 319, 338 (D.C. Cir. 2011) (quoting Bd. ofRegents v. Roth, 408 U.S.
564, 577 (1972)).
Second, to the extent it was required, CS36O was afforded all the process it was due See
Mathews v. Eldridge, 424 U.S. 319, 333 (1976) ("The fundamental requirement of due process is
the opportunity to be heard ‘at a meaningful time and in a meaningful manner."’) (quoting
Ar)nstrong v. Manzo, 380 U.S. 545, 552 (1965)). Even setting aside CS360’s opportunity to be
heard on the third-party protest, CS360 was afforded the opportunity to submit written materials
in support of its initial application; it was afforded the opportunity to engage with the VA’s
representative face-to-face during the onsite examination; CS360 was advised of the basis for the
VA’s initial determination in a written decision; CS36O was afforded the opportunity to request
reconsideration and to submit additional materials in support of that request; CS36O was advised
of the basis for the VA’s final decision in a written decision; and the VA provided a written
explanation for its final decision. Even after this process concluded, CS36O was still free to
request further reconsideration, but it elected not to do so. See 38 C.F.R. § 74.l3(b). Moreover,
CS36O was able to begin the process anew a mere six months later by submitting a renewed
application See id. at § 74.14. And, of course CS360 was afforded the benefit of judicial
36
review under the APA. Under these circumstances to the extent process was required, CS3 60
received all the process to which it was due
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 Verrnont Yankee Nuclear Power Corp. v. Natural Res. Def
Council, ]nc., 435 U.S. 519, 524, 543-44, 549 (1978). That limitation applies equally to informal
adjudications like the one at issue in this case. Pension Benejit Guaranty Corp. v. LTV
Corporation, 496 U.S. 633, 654 (l990). 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.
ii. Inflammatory Language
ln the second part of Count ll, CS360 alleges that the VA’s use of "inflammatory
language" in its decisions resolving CS360’s application "constitutes a deprivation of [CS360’s1
property or the liberty to enjoy rights which [it] would otherwise enjoy." Compl. 11 51. The
claim must fail for at least three reasons First, although the VA’s Motion to Dismiss seeks the
dismissal of Count ll, CS360’s opposition makes no attempt to defend this aspect of Count ll.
Accordingly, the Court shall treat the matter as conceded. See Hopkz`ns v. Women ’s Div., Gen.
Bd. ofGlobal Ministries, 284 F. Supp. 2d 15, 25 (D.D.C. 2003), ajj"d, 98 F. App’x 8 (D.C. Cir.
2004). Second, CS360 has made no attempt to show that the mere use of "inflammatory
37
language" in an internal administrative decision can rise to the level of a constitutional
deprivation. See Mosrie v. Barry, 718 F.2d 1l5l, 1161 (D.C. Cir. 1983) (suggesting that the
deprivation "must involve a removal, extinguishment or significant alteration of an interest.").
Third, the CVE’s lnitial Detennination and Final Decision, which are incorporated into the
Complaint by reference do not actually contain any "inflammatory language." For these three
reasons the Court finds that CS36O has failed to state a plausible claim for relief insofar as it
alleges that CS360 was denied due process because the VA used "inflammatory language" in the
decisions denying CS360’s application
ln 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 ll of the Complaint. Accordingly, Count ll
shall be DISMISSED.
C. Count III: Ultra Vires Regulations
ln Count lll, 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. 11 53. ln 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 lll shall be DISMISSED.
l. The Authority of the VA
CS360 first alleges in broad terms that the regulationsé issued by the VA goveming the
processing of applications for inclusion in the VetBiz VIP database are ultra vires because "[t]he
relevant statute 38 U.S.C.A. §§ 8127, 8128, requires only that . . . the VA simply verify that
each small business concern listed in the database is owned and controlled by veterans" and
6 CS360’s arguments are consistently generalized, focusing on the regulations as a whole and
not any particular regulations
38
"[t]here is nothing in the statute that requires or authorizes the VA to be the entity that actually
certifies the SDVOSBs.” Compl. 11 53. To the contrary, when Congress authorized the VA to set
aside contracts for eligible veteran-owned small businesses it was clear that the VA’s authority
could be exercised "only if the small business concem and the veteran owner of the small
business concem are listed in [a] database of veteran-owned businesses." 38 U.S.C. § 8127(e).
Congress also made it clear that it expected the VA, in the course of creating and maintaining the
VetBiz VIP database to "verif[y] that . . . the small business concern is owned and controlled by
veterans." Id. § 8l27(H(4)(A). This is an express delegation of authority and the VA acted well
within its powers by enacting regulations seeking to enforce this statutory command, See id. §
501(a) ("The Secretary has authority to prescribe all rules and regulation which are necessary or
appropriate to carry out the laws administered by the Department."). Accordingly, Count lll
cannot rest on this basis
2. The Authority of the SBA
CS36O 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. 11 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. § 63 7(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
concem and the veteran owner of the small business concem are listed in [a] database of veteran-
owned businesses." 38 U.S.C. § 8127(e). To this end, Congress expressly and unambiguously
39
required the VA to "maintain a database of small business concems owned and controlled by
veterans and the veteran owners of such business concerns." 1d. § 8127(f)(1). ln so doing,
Congress made it absolutely clear that it expected the VA to "verif[y] that . . . the small business
concern is owned and controlled by veterans." Id. § 8127(f)(4)(A). This is an express delegation
of authority and the VA acted well within its powers by enacting regulations seeking to enforce
this statutory command. See id. § 501(a) ("The Secretary has authority to prescribe all rules and
regulation which are necessary or appropriate to carry out the laws administered by the
Department."). Accordingly, Count lll cannot rest on this basis either.
3. The Role of the OSDBU
Finally, in opposition to the VA’s Motion to Dismiss CS3 60 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 lll. First, Count lll does not
allege a violation of 15 U.S.C. § 644(k), but is instead limited to alleged violations of 15 U.S.C.
§ 657fand 38 U.S.C. §§ 8127-8128. See Comp1.1111 53-54. CS36O cannot amend its Complaint
merely by injecting new claims in the course of briefing a dispositive motion. Arbitraje Casa de
Carnbio, 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
40
limiting and not illustrative Indeed, the statute provides that the OSDBU shall "be responsible
to, and report directly to, the head of 1the1 agency," 15 U.S.C. § 644(k)(3), and CS3 60 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
lll cannot rest on this basis.
For the reasons set forth above the Court finds that CS36O has failed to state a plausible
claim for relief in Count lll. Accordingly, the claim shall be DISMISSED.
III. CONCLUSION
For the reasons set forth above CS360’s 1131 Motion for Summary Judgrnent shall be
GRANTED-IN-PART and DENIED-IN-PART and the VA’s 1151 Motion to Dismiss shall be
GRANTED-IN-PART and DENIED-IN-PART. Specifically, CS360’s 1131 Motion for
Summary Judgment shall be GRANTED insofar as it seeks remand of this action based on the
VA’s failure to provide a satisfactory contemporaneous explanation for its decision to deny
CS360’s application for inclusion in the VetBiz VIP database and the motion shall otherwise be
DENIED. Meanwhile the VA’s 1151 Motion to Dismiss shall be GRANTED insofar as it seeks
the dismissal of Counts ll and lll of the 111 Complaint for failure to state a plausible claim for
relief and the motion shall otherwise be DENIED.
/
/
41
The Court shall REMAND this action to the VA for further consideration and
explanation On remand, the VA shall be free to exercise its discretion to reopen the
administrative record, to engage in additional fact-finding, to supplement its explanation and to
reach the same or a different ultimate conclusion The Court shall require the parties to provide a
Joint Status Report advising the Court of the status of the proceedings on remand by no later than
April 30, 2012.
Date: March 6, 2012
/s/
COLLEEN KOLLAR-KOTELLY
United States District .ludge
42