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Palladian Partners, Inc. v. United States

United States Court of Appeals, Federal Circuit

April 22, 2015

PALLADIAN PARTNERS, INC., Plaintiff-Appellee
UNITED STATES, Defendant-Appellant

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[Copyrighted Material Omitted]

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Appeal from the United States Court of Federal Claims in No. 14-cv-00317C, Judge Marian Blank Horn.

DANIEL E. CHUDD, Jenner & Block LLP, Washington, DC, argued for plaintiff-appellee. Also represented by DAMIEN C. SPECHT, CHARLES L. CAPITO, III.

DOMENIQUE GRACE KIRCHNER, Commercial Litigation Branch, Civil Division, United States Department of Justice, Washington, DC, argued for defendant-appellant. Also represented by STUART F. DELERY, ROBERT E. KIRSCHMAN, JR., DEBORAH A. BYNUM.

Before Lourie, Moore, and O'Malley, Circuit Judges.


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O'Malley, Circuit Judge.

This case involves a pre-award bid protest. On February 28, 2014, the National Institute on Drug Abuse (" NIDA" ), an institute within the National Institutes of Health (" NIH" ), issued Request for Proposal (" RFP" ) No. N01DA-14-4423 for the " NIH Pain Consortium Centers of Excellence in Pain Education Coordination Center" (" the solicitation" ). NIDA initially issued the solicitation as a small business set-aside under North American Industry Classification System (" NAICS" ) code 541712, " Research and Development in the Physical, Engineering, and Life Sciences (except Biotechnology)," which limits offerors to small businesses with 500 employees or fewer. A prospective offeror appealed the NAICS code designation to the United States Small Business Administration (" SBA" ) Office of Hearings and Appeals (" OHA" ), and OHA ordered NIDA's contracting officer to amend the solicitation to change the NAICS code designation to 541611, " Administrative Management and General Management Consulting Services."

Palladian Partners, Inc. (" Palladian" ) filed suit in the Court of Federal Claims seeking declaratory and injunctive relief to enjoin NIDA from accepting and evaluating proposals under the new code, which rendered Palladian ineligible to compete. The Court of Federal Claims granted Palladian's motion for judgment on the administrative record, finding that the contracting officer's NAICS code amendment was arbitrary and capricious. Specifically, the court found that NAICS code 541611 did not best describe the statement of work for the solicitation. Based on this conclusion, the court remanded for NIDA to make a " proper NAICS code selection, given the current statement of work, or to determine how otherwise to proceed." Palladian Partners, Inc. v. United States, 119 Fed.Cl. 417, 459 (2014).

The United States appeals from the Court of Federal Claims' final judgment which sustained Palladian's preaward protest and entered a permanent injunction against the receipt and review of proposals for the solicitation under NAICS code 541611. Among other things, the government

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argues that the court should have dismissed Palladian's suit for failure to exhaust administrative remedies with OHA. Because we agree that Palladian failed to exhaust its administrative remedies, and because this failure warrants dismissal of Palladian's protest, we reverse.


The Small Business Act, 15 U.S.C. § § 631, et seq., (" the Act" ) was designed to set aside certain contracts for the benefit of small business concerns. Congress created the Small Business Administration (" SBA" ) to carry out the policies of the Act, and gave SBA authority to " specify detailed definitions or standards by which a business concern may be determined to be a small business concern." 15 U.S.C. § 632(a)(2)(A); see also 15 U.S.C. § 637(b)(6) (SBA is empowered " to determine within any industry the concerns, firms, persons, corporations, partnerships, cooperatives, or other business enterprises which are to be designated 'small-business concerns' for the purpose of effectuating the provisions of this chapter" ). SBA was authorized to engage in rulemaking and its regulations " have the force and effect of law." Otis Steel Prods. Corp. v. United States, 316 F.2d 937, 940, 161 Ct.Cl. 694 (Ct. Cl. 1963) (" Since the Administrator was specifically authorized to define a small business concern, these regulations have the force and effect of law." ).

SBA uses the North American Industry Classification System (" NAICS" ) to determine which entities qualify as small business concerns. The Office of Management and Budget assigns NAICS codes to various industry sectors, and SBA determines which firms qualify as small businesses " to assure that a fair proportion of government contracts for goods and services are performed by such entities in each industry category." Advanced Sys. Tech., Inc. v. United States, 69 Fed.Cl. 474, 476 (2006) (citing 15 U.S.C. § § 637(b)(6), 644(a)). To do so, SBA specifies the maximum number of employees or maximum annual receipts which a company may have in order to qualify as a small business within a particular NAICS code. See 13 C.F.R. § 121.201 (providing size standards for specific industries by either annual revenue or number of employees).

SBA's regulations instruct that the procuring agency's contracting officer " designates the proper NAICS code and corresponding size standard in a solicitation, selecting the single NAICS code which best describes the principal purpose of the product or service being acquired." 13 C.F.R. § 121.402(b). The NAICS code assigned to a solicitation limits the small businesses that may submit bids to those that qualify under the size standard associated with that particular NAICS code. By regulation, the contracting officer's choice of NAICS code and corresponding size standard " is final unless timely appealed" to the SBA's OHA. 13 C.F.R. § 121.402(d).

The regulations provide that the " OHA appeal is an administrative remedy that must be exhausted before judicial review of a NAICS code designation may be sought in a court." 13 C.F.R. § 121.1102. OHA's decision in a NAICS code appeal is " final" and " may not be reconsidered." 13 C.F.R. § 134.316(d) & (f). If OHA grants the appeal and changes the NAICS code, " and the contracting officer receives OHA's decision by the date offers are due, the contracting officer must amend the solicitation to reflect the new NAICS code." 13 C.F.R. § 134.318(b). With this framework in mind, we turn to the solicitation at issue.

A. The Solicitation

The National Institutes of Health (" NIH" ) operates twelve Centers of Excellence

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in Pain Education (" CoEPEs" ) to " develop pain management training and educational resources for medical, dental, nursing, and pharmacy students to advance the assessment, diagnosis, and safe treatment of pain." Palladian, 119 Fed.Cl. at 420-21. On February 28, 2014, NIDA published the solicitation at issue as a total small business set aside. The purpose of the solicitation was to fund a " Coordination Center," operated by the contractor, " to facilitate the activities of the CoEPEs." Id. at 421.

The solicitation identified seven tasks the contractor was required to perform. Specifically, it provided that the contractor would: (1) prepare and submit monthly progress reports; (2) " maintain, host and manage an interactive online communication portal" for NIH, the contractor, and the CoEPEs to use; (3) " coordinate the process by which CoEPEs submit their materials to be used in the development of cases," " facilitate NIH Pain Consortium evaluation of proposed cases and other materials to be produced," " use the materials submitted by the CoEPEs to create" interactive pain treatment scenarios with graphics and embedded videos, " proofread, edit, and program" the scenarios, " advise and suggest ways to improve the cases, when applicable," and " program, format and code" portions of the NIH website; (4) " facilitate the evaluation of the impact of these training materials" and the " dissemination of the results of these evaluations; " (5) " organize teleconferences," " summarize these meetings in writing," and post such summaries on the website; (6) post videos through a special YouTube channel; and (7) obtain additional content for case studies. Id. at 422-23.

NIDA's contracting officer, Kenneth E. Goodling, selected NAICS code 541712, " Research and Development in the Physical, Engineering, and Life Sciences (except Biotechnology)," for the solicitation. To qualify under this code, a business must have fewer than 500 employees. Palladian alleges that it qualified as a small business under this code and size standard.

B. Initial OHA Appeal

SBA's regulations provide that " [a]ny interested party adversely affected by a NAICS code designation may appeal the designation to OHA." 13 C.F.R. § 121.1103(a)(1). " An appeal from a contracting officer's NAICS code or size standard designation must be served and filed within 10 calendar days after the issuance of the solicitation or amendment affecting the NAICS code or size standard." 13 C.F.R. § 121.1103(b)(1).

On March 10, 2014, a prospective offeror--Information Ventures, Inc.--filed a timely OHA Appeal. Upon receipt of the appeal, OHA issued a notice and order instructing the contracting officer to amend the solicitation to notify potentially interested parties of the appeal. The order indicated that any response to the appeal must be filed with OHA and received no later than March 25, 2014. Pursuant to that order, and consistent with SBA regulations, NIH amended the solicitation to notify all potential offerors--including Palladian--of the OHA appeal. Palladian did not respond to or seek to participate in the appeal.

In its appeal, Information Ventures argued that the contracting officer erred in selecting NAICS code 541712, because the tasks identified in the solicitation were unrelated to research and development. According to Information Ventures, " with the exception of Task 3--which contains some work properly viewed as information technology, such as developing a website--all of the tasks fit squarely within NAICS code 541611," " Administrative Management and General Management Consulting

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Services." NAICS Appeal of: Info. Ventures, Inc., SBA No. NAICS-5544, 2014 WL 1395651, at *3 (Apr. 2, 2014) ( IV OHA Appeal ).

On March 20, 2014, NIH contracting officer Goodling filed a response, defending his selection of NAICS code 541712. Specifically, he argued that:

The primary purpose of the solicited contract and the majority of the anticipated cost of the contract will be in the implementation of Task 3 of the Statement of Work. The Contractor will use materials researched and submitted by the CoEPEs to develop the online case-scenarios. Further, the Contractor will perform additional research, program, format and code as needed to develop the website on the NIH Pain Consortium page for research support in disseminating health based information.

Palladian, 119 Fed.Cl. at 427. Goodling explained that the contractor would be responsible for the " R& D [Research & Development] creation of the two predominant products in the contract:" the case-based scenarios and the website to host them. Id.

On April 2, 2014, OHA granted the appeal, concluding that the contracting officer " clearly erred in assigning NAICS code 541712" because the solicitation " does not call for research and development." IV OHA Appeal, 2014 WL 1395651, at *5. OHA found that the contractor would have " little, if any, substantive role in any research" and would instead be coordinating among entities that were engaging in research. Id. OHA agreed with Information Ventures that NAICS code 541611 was the most appropriate for the solicitation. In reaching this conclusion, OHA noted that it has affirmed use of NAICS code 541611 " in situations where a contractor will 'assis[t] with the administration and management' of an important program." [WL] at *7 (citations omitted). OHA found that the " instant contractor will perform precisely such work, acting as the 'Coordination Center,' assisting with administrative matters, and managing communications and interactions between NIH and the CoEPEs." Id.

Because OHA's decision issued before the close of the solicitation, it informed the contracting officer that he " MUST amend the RFP to change the NAICS code designation from 541712 to 541611." Id. OHA concluded by stating that " [t]his is the final decision of the Small Business Administration." Id. Pursuant to OHA's decision, the contracting officer amended the solicitation to change the NAICS code to 541611, " Administrative Management and General Management Consulting Services," which has a size standard of $14 million average annual receipts. ...

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