Column: The importance of intervening at OHA in challenges to NAICS codes

by Michelle Litteken, government contracts attorney, PilieroMazza PLLC

Small businesses are well aware of the importance of a North American Industry Classification System (NAICS) code.

The code an agency selects can render a contractor ineligible to compete.

However, contractors may not be aware of the need to intervene in a NAICS code challenge at the Small Business Administration’s Office of Hearings and Appeals (OHA) if they want the ability to challenge subsequent NAICS code designations for that procurement.

A recent decision from the Federal Circuit reminded small business contractors of the need to exhaust administrative remedies—including intervening in protests at OHA—before challenging a NAICS code designation in court. The decision also clarified whether the Court of Federal Claims has jurisdiction to review OHA decisions.

OHA protest and court case

Palladian Partners Inc. v. Unites States, No. 2014-5125 (Fed. Cir. Apr. 22, 2015), involved a pre-award bid protest of a contract.

The agency initially issued the solicitation as a small business set-aside under a NAICS code that limited offerors to business with 500 employees or fewer. A potential offeror appealed the NAICS code to OHA, and, following standard practice, the contracting officer amended the solicitation to notify potentially interested parties of the appeal. OHA granted the appeal and ordered the agency to change to a different NAICS code.

Then, before the close of the solicitation, Palladian Partners appealed the new NAICS code designation to OHA. The new NAICS code rendered Palladian ineligible to compete, and the company argued for a different code.

OHA dismissed Palladian’s appeal, stating that Palladian was “barred from relitigating issues already decided” in the earlier NAICS appeal. OHA explained that if Palladian had wanted to challenge the NAICS code, it should have intervened in the first appeal.

Court of Federal Claims

While Palladian’s OHA appeal was pending, the company filed a protest at the Court of Federal Claims, arguing that the newly assigned NAICS code did not best describe the statement of work. The federal claims court agreed, finding that the contracting officer “blindly accept[ed] the NAICS code chosen” by OHA and failed to exercise discretion to determine the proper code for the solicitation. The federal claims court sustained the protest and remanded the case to the agency to make a proper NAICS code selection. The Government appealed to the U.S. Court of Appeals for the Federal Circuit.

Court of Appeals

The central issue at the U.S. Court of Appeals for the Federal Circuit was whether Palladian was required to exhaust its administrative remedies—by challenging the NAICS code at OHA—before bringing a case at the federal claims court.

SBA’s regulations state that the OHA appeal must be exhausted before a party can seek judicial review of a NAICS code. The federal claims court had reasoned that it would be burdensome to require small businesses to intervene in every NAICS code challenge, and the fact that OHA had reviewed the NAICS code for the procurement was sufficient.

The appeals court disagreed, relying on SBA’s regulations that (1) require any interested person to intervene in an OHA appeal and (2) limit the ability to seek judicial review of OHA decisions to parties who had participated in the OHA proceeding.

The appeals court noted that Palladian was not arguing for the NAICS code that had been initially assigned to the procurement. Palladian was arguing for an entirely different NAICS code. Accordingly, Palladian could not argue that it failed to intervene because it believed the agency would represent its interests.

The appeals court also observed that there was no indication that OHA considered the NAICS code Palladian advocated for during the appeal.

The appeals court reversed the federal claims court decision, based on its judgment that Palladian was required to exhaust its administrative remedies by intervening in the OHA proceeding, which it did not do.

Related issue

In addition, the appeals court made a ruling on a related jurisdictional issue. The appeals court resolved the question of whether the federal claims court has authority to review OHA’s NAICS code designation.

The court explained that because the federal claims court has jurisdiction to review actions “in connection with a proposed procurement,” and a NAICS code designation is such an action, the federal claims court has jurisdiction over such cases.

Presumably, the same reasoning would apply to a size determination or decision relating to eligibility for an SBA program.

Conclusion

Palladian Partners is a decision of which small businesses should be aware. Contractors need to know that they must intervene in an OHA appeal if they want to challenge a NAICS code designation down the road. If the contractor sits on the sidelines, it could be excluded from the procurement and left without a recourse.

Michelle Litteken is an associate with PilieroMazza PLLC, in the Government Contracting practice group. She may be reached at mlitteken@pilieromazza.com.

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Column: The importance of intervening at OHA in challenges to NAICS codes

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