Diamond Quality Construction Enterprises, Inc., No. MSB-523 (September 1, 1995)
Docket No. MSBE-95-3-30-7
                    UNITED STATES OF AMERICA
                  SMALL BUSINESS ADMINISTRATION
                 OFFICE OF HEARINGS AND APPEALS
                        WASHINGTON, D.C.
_______________________________
                               )
IN THE MATTER OF:              )
                               )  Docket No. MSBE-95-3-30-7
Diamond Quality Construction   )
Enterprises, Inc.              )
_______________________________)
                           APPEARANCES
For the Petitioner:                 For the Agency:
James C. Stearns, Esq.              John T. Spotila, Esq.
Porter, Wright, Morris & Arthur     General Counsel
1233 20th Street, NW                Robinson S. Nunn, Esq.
Suite 400                           Agency Representative
Washington, DC 20036                Small Business Administration
                                    409 3rd Street, SW
                                    Washington, DC 20416
                             DIGEST
In 8(a) cases, discovery is permitted only if an administrative
law judge first determines that the applicant has "made a
substantial showing, based upon credible evidence, and not mere
allegation, the Agency determination in question may have
resulted from bad faith or improper behavior."
13 C.F.R. Section 124.210(h)(3)(i).
A motion for discovery based upon information and belief, not
credible evidence, does not meet the standard for discovery
established by 13 C.F.R. Section 124.210(h)(3)(i).
An unsubstantiated claim that the SBA systematically excludes
individuals with disabilities cannot establish a prima facie case
of arbitrary and capricious action.
An applicant for the 8(a) program, who is claiming social
disadvantage based upon a physical handicap, must present clear
and convincing evidence of having suffered discrimination by
others because of his handicap.  A claim that it is more
difficult to compete as a handicapped business does not reach a
clear and convincing standard without additional evidence
supporting personal discrimination against the applicant.  Doe v.
Heatherly, 671 F.Supp. 1081, 1083 (D.Md. 1987).
                         FINAL DECISION
                        September 1, 1995
ARKOW, Administrative Law Judge:
     Petitioner Diamond Quality Construction Enterprises, Inc.
(Diamond) challenges a decision by the Respondent U.S. Small
Business Administration (SBA) denying it entry into the 8(a)
program[1]  because the individual who owns and controls the
firm, Mr. David Reitz, failed to demonstrate he is socially
disadvantaged due to physical handicap discrimination.  Diamond
claims the SBA's conclusion is arbitrary, capricious, and
contrary to law.  Diamond also requests an order allowing
discovery of SBA's treatment of other 8(a) applications in cases
involving physical handicap.  For the reasons set forth below, I
disagree with Diamond's claim and deny both its appeal and
request for discovery.
                          Jurisdiction
     Jurisdiction on appeal is properly based on 15 U.S.C.
Section 637(a)(9) and 13 C.F.R. Parts 124 and 134.  The appeal
was timely filed under 13 C.F.R. Sections 124.210(b) and
134.11(a)(7).
                             Issues
     Whether Diamond's request for an order allowing discovery,
under 13 C.F.R. Section 124.210(h)(3), of the SBA's treatment of
applications for admission into the 8(a) program by individuals
with physical disabilities, should be granted.
     Whether Diamond, which claims to be a socially and
economically disadvantaged firm by reason of the physical
handicap of its President, Mr. David Reitz, established its
eligibility for admission into the 8(a) program by clear and
convincing evidence.  13 C.F.R. Section 124.105(c).
     Whether the action of the SBA denying Diamond entry into the
8(a) program is arbitrary, capricious, or contrary to law.
15 U.S.C. Section 637(a)(9)(C), 13 C.F.R. Section 124.210(h)(1).
                              Facts
     On August 31, 1994, Diamond applied for admission into the
8(a) program.  The basis for the application is that Diamond is
owned and controlled by Mr. David Reitz, a socially and
economically disadvantaged physically handicapped individual.
The SBA denied the application on November 29, 1994.  On
January 12, 1995 Diamond requested the SBA reconsider its denial
of the application.  The SBA denied the reconsideration request
on February 21, 1995.  Diamond appealed the denial of the
reconsideration request on March 30, 1995.
     The SBA denied the reconsideration request because Diamond
did not present sufficient evidence to establish Mr. Reitz was
socially and economically disadvantaged because of his physical
handicap.  Specifically, in rejecting a claim Mr. Reitz was
denied educational opportunities at continuing education courses,
the SBA reasoned, merely because current training methodologies
failed to consider Mr. Reitz' particular handicap, does not
require a conclusion that such failure was the result of personal
discrimination against Mr. Reitz due to his physical handicap.
     Diamond, which was established in 1985 by Mr. Reitz,
specializes in the roofing of commercial and historical
buildings.  A number of roofing material manufacturers license
Diamond to install their products.  Licensing is necessary,
although not legally required, to be successful in the roofing
business because a license validates a manufacturer's warranty.
     Diamond is a family operated business.  Its organizational
chart shows Mr. David Reitz as the President and acting marketing
chief.  Mrs. Michele Reitz, David's wife, is in charge of company
finances.  Mr. Edward Reitz, David's brother is operations
manager, project manager, and in charge of safety, quality
control, and company work crews.
     Mr. Reitz was in a serious accident in July of 1988.  His
truck was forced off the highway, overturned, and caught fire.
As a result, his right hand, fingers, and forearm were sheared
off.  Both his left arm and the remaining parts of his right arm
were severely burned and remain badly scarred.  These injuries
severely limit his ability to engage in the roofing business.  He
has difficultly maintaining his balance, adjusting to hot
temperatures, and using tools commonly used in the roofing
business.  Further, Mr. Reitz must wear long sleeve shirts for
both health and cosmetic reasons.  Mr. Reitz' physical
limitations hampers his ability to participate in social and
athletic activities which are a valuable source of potential
clients.
     Mr. Reitz' bids for contracts must account for his
disability because he works more slowly at jobs than his
competitors and must hire another worker to assist him.  This
reduces Diamond's profits.  It also takes him a longer time to
train new workers because it is difficult or impossible to
demonstrate required building techniques with only one arm.
     To be competitive in the commercial roofing industry, a
roofer must have a manufacturer's license.  In order to be
licensed, a roofer must attend a manufacturer's training course
which covers such topics as how to install the roofing materials.
In virtually identical affidavits, Mr. Eric Haberstumpf and
Mr. Edward Reitz state they attended training courses with
Mr. David Reitz and these courses did not provide for students
with Mr. Reitz' handicap.  They stated the techniques taught at
these classes cannot generally be accomplished with one arm.
Mr. Reitz' particular handicap was not taken into account in
these classes.  This, they both opine, makes it difficult for
Mr. David Reitz to transfer these newly learned roofing
techniques to his crews.
     In 1991, the Philadelphia Naval Shipyard awarded Diamond a
contract to re-roof one of its buildings.  Diamond claimed it had
a difficult time performing the contract because of what it
believes was physical handicap discrimination by government
workers.  The job superintendent frequently reported job condi-
tions to crew members instead of Mr. Reitz and the contracting
officer frequently refused to cooperate with Mr. Reitz' requests
for information and "lost" change orders Diamond submitted to the
government, which made performance of the contract more
difficult.  Government workers subjected Mr. Reitz to comments
such as, "I want you to finish this project, get off this base
and never see your face again."  Mr. Reitz was threatened with
adverse actions regarding bonding, removal from the solicitor's
list, as well as a general bar from future government contracts.
After completion of the job, Diamond received a letter from a
Supervisory Contract Specialist at the shipyard which commended
Diamond for its performance.  The letter noted that Diamond's
"cooperation on change orders and innovative ideas on problem
solving has been exemplary" and that Diamond's "performance has
truly been OUTSTANDING!"  Letter from A. Randazzo to Diamond of
January 5, 1995.
     In 1994, Diamond received a quote for a performance bond at
a rate of 2.5%.  It covered a single job of up to $250,000 and
multiple jobs totaling no more than $500,000 from an "A" rated
company.  In 1992, a competitor of Diamond, Tri-State Design
Construction Co., Inc., sent an estimate of a job to a prospec-
tive customer.  The estimate quotes a charge of 1.5% for a bond.
                     Position of the Parties
     Diamond contends that the SBA systematically excludes
individuals with disabilities, which creates a prima facie case
of arbitrary and capricious action.  It bases this argument on
its information and belief, because Diamond claims it does not
have access to the pertinent files of the SBA.  It believes
access to the pertinent files would support its argument.  It
asserts that it is only aware of two cases where a disabled
person was admitted into the 8(a) program.  In this regard,
Diamond requests discovery of the SBA's files in an attempt to
validate that belief.
     Diamond also argues that, regardless of whether the SBA
systematically excludes the handicapped from the 8(a) program, it
acted arbitrarily and capriciously in denying Diamond's
application because Diamond established the social and economic
disadvantage of Mr. Reitz.
     In its answer, the SBA asserts that Diamond failed to
establish its eligibility for the 8(a) program by clear and
convincing evidence under current regulations dealing with the
eligibility of handicapped individuals, which have been upheld by
the courts.  The answer further asserts, the SBA's conclusion
that Diamond did not present clear and convincing evidence to
support its claim of eligibility was reasonable.[2]
                           Discussion
1.   Discovery motion.
     Diamond seeks to discover information relevant to whether
the SBA systematically discriminated against those with physical
handicaps in order to establish what it believes would be a prima
facie case of arbitrary and capricious action.  In 8(a) cases,
discovery is permitted only if an administrative law judge first
determines that the applicant has "made a substantial showing,
based upon credible evidence, and not mere allegation, the Agency
determination in question may have resulted from bad faith or
improper behavior."  13 C.F.R. Section 124.210(h)(3)(i).
     Diamond bases its motion on its information and belief, not
credible evidence.  The fact that Diamond states it is aware of
two cases where individuals with disabilities have been admitted
into the 8(a) program and is also aware of several others who
were denied entry into the 8(a) program are mere allegations and
do not meet the required standard for discovery.  Decisions in
other cases generally would not be relevant in deciding this
matter because each case must be decided on its own merits.
Further, an unsubstantiated claim that the SBA systematically
excludes individuals with disabilities cannot establish a prima
facie case of arbitrary and capricious action.  Accordingly, the
discovery motion is without merit because Diamond has not made a
substantial showing, based upon credible evidence, and not a mere
allegation, that it is entitled to discovery.[3]
2.   Eligibility for admission into the 8(a) program.
     To be accepted into the 8(a) program upon a claim of
physical handicap discrimination, Diamond must establish, by
clear and convincing evidence, that Mr. Reitz, who controls and
manages Diamond, is socially disadvantaged.  13 C.F.R.
Section 124.105(c).  To establish social disadvantage, Diamond
must demonstrate that Mr. Reitz personally suffered social
disadvantage in American society, rather than merely establishing
that handicapped persons, as a group, could be considered
socially disadvantaged.  Further, the social disadvantage "must
be chronic and substantial, not fleeting or insignificant."  Id.
at Section 124.105(c)(1)(ii)-(iv).
     The clear and convincing standard of proof for establishing
claims of social disadvantage by persons who are not presumed to
be socially disadvantaged under 13 C.F.R. Section 124.105(b)(1)
has been repeatedly upheld.  See e.g., Central States
Construction Co. v. Small Business Administration, 770 F.Supp.
1447 (D.Kan. 1991) and Fagan v. U.S. Small Business
Administration, 783 F.Supp. 1455 (D.D.C. 1992), aff'd, 19 F.3d 684 (1992).  Those who
claim social disadvantage by reason of physical handicap are not
presumed to be socially disadvantaged.  Compare 13 C.F.R.
Section 124.105(b)(1) with 13 C.F.R. Section 124.105(c)(1).
     Clear and convincing evidence is an evidentiary standard
that is more stringent than the preponderance of evidence
standard and less stringent than proof beyond a reasonable doubt.
This characterization, however, does not define it.  A generally
accepted definition of clear and convincing is evidence which
produces, in the mind of the trier of fact, an abiding conviction
that the truth of the factual contentions is highly probable.
Colorado v. New Mexico, 467 U.S. 310 (1984).  It does not mean
evidence which unequivocally proves a point or dispels all
reasonable doubt.  Yet it is greater than a preponderance of the
evidence which requires proof that the existence of a fact is
more probable than its nonexistence.  United States v.
Mastrangelo, 561 F.Supp. 1114, 1119-20 (E.D.N.Y. 1983).
     In addition, Diamond must show a nexus between a claim of
social disadvantage and the negative impact it has had on
Mr. Reitz' entry or advancement in the business world.  This
nexus may be shown by any relevant evidence, but the SBA
regulations particularly emphasize evidence of discrimination in
education, employment, and business history when it is relevant.
Id. at Section 124.105(c)(1)(v).  The 8(a) applicant, however,
need not prove all of these emphasized criteria.  Matter of
Informed Decision Services, Inc., SBA No. 518 (1995).
     Diamond believes it has established its eligibility through
three instances of alleged discrimination:  The denial of
educational opportunities, interference in the performance of a
government contract, and financial discrimination against its
business.  These beliefs are not supported in the record.
     Mr. Reitz' inability to accomplish tasks as well, if at all,
as those not suffering similar limitations, is an unfortunate
result of the nature of his handicap rather than discrimination
by others.  Mr. Reitz' disability hampers him from doing many of
the things other people in the business world do to help their
businesses, such as promoting his business and performing job
related tasks efficiently, putting him at a competitive
disadvantage.  This does not amount to discrimination or
prejudice by others against him because of his handicap.[4]
     The SBA and the federal courts have consistently held that
the inequality suffered "in competitive position is an
unfortunate result of the nature of the handicap itself, rather
than of society's attitude toward it."  Doe v. Heatherly, 671
F.Supp. 1081, 1083 (D.Md. 1987) as quoted in Matter of MJB, Inc.,
SBA No. 444 (1993).  See also, Matter of PC Partners, Inc., SBA
No. 424 (1993).  Accordingly, evidence of the extent of
Mr. Reitz' physical handicap alone cannot be used to support
Diamond's claim that Mr. Reitz suffers discrimination because of
his handicap.  Having made this distinction, I will examine the
alleged instances of discrimination in their proper context.
     The fact that the curriculum in continuing education courses
does not take into account individuals with Mr. Reitz' disability
does not necessarily mean he was denied educational opportunities
because of his disability.  There is no evidence in the record
that Mr. Reitz was ever denied permission to attend a continuing
education course or that he was ever denied a manufacturer's
license because of his disability.  In sum, Mr. Reitz had
educational opportunities and took advantage of them.  Merely
because the courses did not address his particular disability
does not establish the type of discrimination contemplated by
13 C.F.R. Section 124.105.
     Diamond's claim that it paid more for bonding than one of
its competitors because of Mr. Reitz' disability is not supported
by the evidence and is nothing more than speculation and
conjecture.  The evidence shows disparate rates given two years
apart to different firms without any showing of the extent of the
coverage or how the rates were computed.  It is, therefore,
meaningless to establish that the reason for the difference is
discrimination due to Mr. Reitz' disability.  Without a showing
of the reasons for the rate difference, such as an increase in
rates to Diamond after Mr. Reitz' accident or that Diamond and
the other firm were identical in the risk factors considered in
establishing the rates except for Mr. Reitz' condition, the SBA
cannot be faulted for concluding Diamond has not established this
to be a discriminatory act.
     Diamond's conclusion, that the conduct of a number of
government employees at the Philadelphia Naval Shipyard
interfered with Diamond's performance of a government contract
and was motivated by Mr. Reitz' handicap, is nothing more than
mere supposition.  Nowhere in the record is there any evidence
that those employees' actions can, in any way, be attributed to
an animus towards Mr. Reitz because of his handicap.  For example, there is no evidence that these individuals referred to
Mr. Reitz in a derogatory manner by name-calling, joked about his
condition, or alleged poor performance on the job because of his
handicap.
     Furthermore, nowhere in the record is there evidence that
the actions of the government employees were improper, unjusti-
fied, or actually interfered with the performance of the
contract, rather than legitimate requirements in the administra-
tion of the contract.  On the other hand, the Supervisory
Contract Specialist's conclusion that the job was done in an
outstanding manner, even with change orders and other problems
with the job, belies the claim of discrimination.  It was,
therefore, reasonable for the SBA to conclude that this was not
an established incident of discrimination.
     Even if the SBA was incorrect in its conclusion that this
was not discrimination of the type envisioned by its regulations,
this one incident alone, on one job, cannot be used by itself to
establish eligibility for the 8(a) program.  Diamond must
establish that the discrimination was chronic and substantial,
which requires proof of more than one isolated incident.
13 C.F.R. Section 124.105(c)(iv).  It failed to produce such
proof.
     The determination of the SBA, denying Diamond's 8(a)
application, must be sustained unless a review of the written
administrative record demonstrates the SBA acted arbitrarily,
capriciously, or contrary to law in concluding Mr. Reitz was not
socially disadvantaged.  13 C.F.R. Section 124.210(h)(1).  Such a
review is narrow and does not permit a reviewing authority to
substitute its own judgment for that of the SBA.  The review
should examine whether the SBA considered all of the facts
presented and correctly applied the applicable laws and
regulations to those facts in deciding whether or not to approve
Diamond's 8(a) application.  Then, the review must examine if
there was a clear error of judgment by the SBA in making the
determination before a finding of arbitrary and capricious can be
made.
     A clear error of judgment can be found if the SBA:  Fails to
properly apply the law and regulations to the facts of the case;
fails to consider an important aspect of the problem; offers an
explanation for its determination that runs contrary to the
evidence; or provides an implausible explanation that is more
than a difference in the views of the SBA and the administrative
law judge.  In sum, the SBA must articulate a satisfactory explanation for its action, including a rational connection
between the facts found and its determination.  Motor Vehicle
Mfrs. Ass'n of the United States, Inc. v. State Farm Mut. Auto.
Ins. Co., 463 U.S. 29, 43 (1983).
     The SBA appears to have considered all of the facts
presented by Diamond and correctly applied the laws and
regulations applicable to these proceedings to those facts prior
to reaching its decision denying eligibility.  The SBA acted
reasonably and had a rational basis for reaching its decision
that Diamond has not established, by clear and convincing
evidence, that it is eligible for admission into the 8(a)
program.  Accordingly, the SBA's decision cannot be considered
arbitrary, capricious, or contrary to law.
                           Conclusions
     Diamond failed to establish it is entitled to discovery
under 13 C.F.R. Section 124.210(h)(3).  Accordingly, the request
for an order allowing discovery of SBA's treatment of
applications for admission into the 8(a) program by individuals
with physical disabilities IS DENIED.
     Respondent's February 21, 1995 determination denying 8(a)
program entry to Petitioner, Diamond Quality Construction
Enterprises, Inc. is NOT ARBITRARY, CAPRICIOUS, OR CONTRARY TO
LAW.  See 15 U.S.C. Section 637(a)(9)(C), 13 C.F.R.
Section 124.210(h)(1).
     This is the final decision of the Small Business
Administration and is binding upon all parties, including those
within the employ of the Agency.  15 U.S.C. Section 637(a)(9)(D),
13 C.F.R. Sections 124.210(i), 134.32(a)(4).[5]
                                   ______________________________
                                   Richard S. Arkow
                                   Administrative Law Judge
____________________
[1]  Small Business Act of 1958, Section 8(a), 15 U.S.C.
     Section 637(a) and 13 C.F.R. Parts 124 and 134.  "The 8(a)
     Program is intended to be used exclusively for business
     development purposes to help small businesses owned and
     controlled by socially and economically disadvantaged
     individuals. . . ."  13 C.F.R. Section 124.1(a).
[2]  The answer fails to specifically address the instances of
     discrimination which, Diamond argues, establish its
     eligibility for admission into the 8(a) program.
[3]  Diamond could have requested the information they are
     seeking to discover under the Freedom of Information Act
     (5 U.S.C. Section 552) or could have examined records of
     appeal proceedings and decisions at the SBA Office of
     Hearings and Appeals.  13 C.F.R. Section 134.29.  Decisions
     are also available in the Westlaw and Lexis legal research
     databases.
[4]  See Facts supra pp. 3-4.
[5]  When this appeal was filed on March 30, 1995, no Administra-
     tive Law Judge was assigned to the SBA.  I was assigned to
     the case on May 2, 1995.  The matter was not decided within
     90 days of the filing of the petition because Diamond
     requested and received an extension of time to file an
     amended petition.  The amended petition was filed May 30,
     1995.  On May 15, the SBA was granted an extension of time
     to file its answer, which was timely filed June 29, 1995.
     See 15 U.S.C. Section 637(a)(9)(F); 13 C.F.R. Section
     124.210(j).