Legal Issues: Court Decision Expands Application of Non-Manufacturer Rule By Jennifer L. Andrews PilieroMaza PLLC The non-manufacturer rule requires non-manufacturer recipients of small business set-aside contracts for manufactured products to supply the products of domestic small manufacturers or processors. In the past, the Small Business Administration’s Office of Hearings and Appeals (OHA) has limited the application of the non-manufacturer rule to procurements solely for manufactured goods, and not to procurements that include services. A recent decision by the U.S. Court of Federal Claims, however, has expanded the application of the rule to contracts for manufactured goods that also require the provision of some services. The non-manufacturer rule began as an SBA regulation aiming to protect small businesses. The rule seeks to prevent small businesses from being used as fronts to bid on small business set-aside contracts but to furnish the supplies of a large business. In 1988 Congress codified the current rule as a separate section of the Small Business Act. See Business Opportunity Development Reform Act of 1988, Pub. L. No. 100-656, 102 Stat. 3853 (1988); 15 U.S.C §637(a)(17). After Congress codified the rule, the SBA revised its regulation to comport with the broad wording of the statute and removed language that previously exempted construction and services contracts from the non-manufacturer rule. Recently the case of Rotech Healthcare Inc. v. United States, 71 Fed. Cl. 393 (2006), the Court of Federal Claims held that the plain language of the statute codifying the non-manufacturer rule does not support OHA’s narrow interpretation of the rule. Under the statute, the non-manufacturer rule applies to “any procurement contract for the supply of a product.” (emphasis added) See 15 U.S.C. §637(a)(17). The court found no congressional intent to warrant OHA’s narrow application of the rule to procurements solely for manufactured goods. The court noted that Congress had at its disposal OHA’s decisions applying the rule at the time the statute was created, and it chose not to use statutory language which would have limited application of the rule to contracts solely for the supply of manufactured goods. Thus, the court held that the plain language of the statute clearly and unambiguously provides that the non-manufacturer rule applies to all supply contracts, whether they include some level of services or not. In order to determine whether a mixed-purpose contract for the supply of goods and services should be classified as a supply contract and subject to the non-manufacturer rule, the court compared the dollar value of the supply versus services portions of the contract. It noted that the SBA applies this comparison analysis when determining the size standard applicable to a procurement and that courts apply the same analysis to determine the principal purpose of contracts governed by the Service Contract Act or the Walsh-Healy Act. The court adopted the this comparison approach to determine whether a mixed-purpose contract is subject to the non-manufacturer rule. In Rotech, the majority of the line items in the two RFPs at issue were for manufactured products. Additionally, the line items that were strictly for services were designated as no-cost items. While the court recognized that the cost of the products included the cost of services that would accompany them, there was no evidence in the record to establish the relative size of the service costs or to show that they were more than incidental. Thus, the court concluded that the two mixed-purpose RFPs in Rotech were properly classified as supply contracts and were subject to the non-manufacturer rule. The court also rejected the argument that the NAICS codes assigned to the contract are dispositive of whether the contract is for supplies or services. While the NAICS code assigned to the contract is one element the courts may consider when determining the nature of the procurement, the NAICS code itself does not dictate whether the contract is subject to the non-manufacturer rule. Indeed, NAICS codes may be erroneously assigned. The text of the solicitation should be examined to determine whether the non-manufacturer rule is applicable. In sum, Rotech has expanded the scope of the non-manufacturer rule to apply to contracts for the supply of manufactured goods that also require the provision of some services. Small business manufacturers should benefit from this decision because non-manufacturers are required to use their products in the performance of more contracts. Additionally, small business non-manufacturers may need to re-evaluate their source of manufactured goods in order to ensure that they are in compliance with the non-manufacturer rule. (Jennifer L. Andrews, an associate with the Washington law firm PilieroMazza PLLC, can be reached at jandrews@pilieromazza.com.)