The Emmes Corporation, No. 3730 (January 29, 1993).
Docket No. SIZ-92-11-20-138

                    UNITED STATES OF AMERICA

                 SMALL BUSINESS ADMINISTRATION

                 OFFICE OF HEARINGS AND APPEALS

                        WASHINGTON, D.C.

SIZE APPEAL OF:                    )
                                   )
The Emmes Corporation              )
                                   )
     Appellant                     )
                                   )
Re:  Statistics and Epidemiology   ) Docket No. SIZ-92-11-20-138
     Research Corporation          )
                                   )
Solicitation No.                   )
NHLBI-HC-92-12                     )
Department of Health and           )
Human Services                     )
Bethesda, Maryland                 )

                             DIGEST
                                
Where certain faculty of a university control and operate a firm
that provides consulting services similar or identical to those
provided by the university, the firm and the university will be
found to be engaged in the same field of operations, and where
such faculty members are responsible for managerial decisions
regarding the university's participation in contracts for such
services and perform services under those contracts as well as
under contracts awarded to their own firm, the firm and the
university will be found to be affiliated based upon interlocking
management and common employees as well as that identity of
interests which necessarily derives from the employment relation
ship between the firm's principals and the university.

                            DECISION

                        January 29, 1993

PHILLIPS, Administrative Judge, Presiding:

Jurisdiction

This appeal is decided under the Small Business Act of 1958, 15
U.S.C. 631 et seq., and the regulations codified at 13 CFR Part
121.

Issue

Whether Statistics and Epidemiology Research Corporation (SERC)
is affiliated with the University of Washington (University).

Facts

On June 4, 1992, the National Institutes of Health issued
Solicitation No. NHLBI-HC-92-12 entitled "Peripheral Arterial
Disease: A Pilot Study to Evaluate Treatment and Preventive
Strategies for Atherosclerotic Cardiovascular Disease -- Clinical
Coordinating Center" under Standard Industrial Classification
code 7379, "Computer Related Services, Not Elsewhere Classified,"
to which a $12.5 million average annual receipts size standard
applies. The solicitation requires that the contractor establish
a center in which to coordinate the study of treatment and
prevention strategies and assist in the study's design and
execution and in the gathering of data and the preparing of
reports. Proposals were due on July 21, 1992. Upon notification
on October 22, 1992, that SERC had been selected as the apparent
successful offeror, The Emmes Corporation (TEC) filed a timely
size protest on October 27, 1992, alleging as follows:

     ...[T]he officers and directors of SERC control SERC. In
     addition, those officers and directors, who are employed by
     the University, are controlled by the University.
     Furthermore, the work to be performed by SERC is identical
     to the work performed by the University, and when such work
     is performed by the University it is done through the
     employees who also own and manage SERC. Under these
     circumstances, the University effectively controls SERC, and
     the University and SERC have an identity of interest. Put
     another way, we believe SERC is acting as a surrogate for
     the University, bidding on this set-aside procurement
     because the University itself would be ineligible to do so;
     were this not a set-aside procurement, we
     believe the University, acting through the same employees
     who own, manage, and are acting for SERC in this
     procurement, would have submitted a bid in its own name.
                                
In a footnote to this argument, TEC distinguished this situation
from that addressed in Size Appeal of University Medical
Associates, No. 3561 (1991), in which we declined to find
affiliation between doctors engaged in a medical practice
conducted in leased university facilities and the university or
its medical school in which one of these doctors, who owned the
controlling share of the practice, served as a department head
and in which the remaining doctors held faculty positions under
his supervision. TEC argued that, unlike the instant case,

     the work to be performed by the university employees [in
     Medical Associates] as owners and managers of a private
     company was different from the work they performed for the
     University. In contrast, SERC is performing the identical
     work that its owners and managers perform as employees of
     the University. This distinction merely emphasizes the
     identity of interest between SERC and the University.
     
The protest was referred to the Seattle Regional Office, which
issued a determination on November 10, 1992, finding that no
affiliation exists between SERC and the University. The Regional
Office based this conclusion on the following evidence and
analysis. SERC was incorporated in 1979 and has identified the
following as its present officers and directors, all but one of
whom (Nasco/Egnew) own 2.5 percent each of SERC's stock:

     Paula Diehr              Pres/Director
     Richard A. Kronmal       Vice President
     Elaine Nasco-Egnew       Secretary
     Alfred P. Hallstrom      Treasurer
     Janet R. Daling          Director
     Thomas R. Fleming        Director
     James L. Gale            Director
     Maureen Henderson        Director
     Donald C. Martin         Director
     Nayak Lincoln Polissar   Director
     
Although the Regional Office did not acknowledge this fact in its
determination, the record reveals that all but Henderson and
Polissar 1/ are also employed as professors in the University's
Departments of Epidemiology or of Biostatistics in the School of
Public Health and Community Medicine. Henderson is employed by
the University's Fred Hutchinson Cancer Research Center (Research
Center), and Polissar is described as "self employed." The
Regional Office further noted that the rest of SERC's stock is
divided equally among the remaining 31 stockholders and that this
"diversity of ownership" vests control of the corporation in its
officers and directors, citing 13 CFR 121.401(c)(3) in support.
Although the Regional Office did not address this fact, the
record indicates that all but five of these 31 individuals are
also employed by the University or the Research Center. 2/ The
Regional Office did, however, note that four of the five depart-
ments in the University's School of Public Health and Community
Medicine, including the Departments of Epidemiology and of
Biostatistics, are chaired by SERC shareholders, but concluded
that no common control through common management derives from
this fact since neither they nor any member of the University's
governing Board of Regents serves as an officer or director of
SERC. It noted further, with respect to the issue of common
management, that

     [t]he management of SERC do not serve in any position of
     control or authority within the Department of Epidemiology,
     or the School of Public Health and Community Medicine of the
     University of Washington. Further, the school is one of
     sixteen separate schools and colleges which comprise the
     University of Washington and the officers, directors,
     stockholders and employees of SERC are not in a position of
     control or authority within these schools or colleges. As
     such, these individuals cannot be construed as having
     management or key employee positions within the University
     of Washington pursuant to 13 CFR 121.401(h) [concerning
     affiliation through common management].
                                     
With respect to that control which TEC argued that the University
may exert over SERC's officers and directors as their primary
employer, the Regional Office erroneously and inexplicably
observed that

     [t]he employment contract between the faculty and the
     University of Washington allows each member to perform one
     hour of outside consulting work per week, or 52 hours
     annually. Accordingly, advising the Department Chair [of
     such work] is necessary, but does not constitute control as
     the notification is to ensure there are no scheduling
     conflicts between the consulting and school
     responsibilities.... [Emphasis added.]
     
In contrast to this assertion, however, the record reveals that
SERC stated as follows on this issue of outside employment in its
response to the protest: "University guidelines allow each
faculty member to spend up to one day a week in outside
consulting with the approval of their [sic] department chair or
dean." Emphasis added.

Although SERC admitted that "the University of Washington is
extensively involved in providing statistical and clinical
coordinating center support for the federal government under both
grant and non-set-aside contract mechanisms," the Regional Office
failed to mention this fact in its determination. Instead, it
disposed of the issue of common employees (as opposed to common
management) by comparing SERC's and the University's respective
fields of operation as follows:

     Statistics & Epidemiology Research Corporation (SERC)
     operates as a consulting service specializing in the study
     of statistics of disease and the development of Epidemiology
     research software. The University of Washington is a
     recognized institution of higher learning founded in 1861.
     The role of the University is to create, preserve and
     disseminate knowledge. The School of Public Health and
     Community Medicine was established in 1970 and its objective
     is the training of future public health personnel and the
     promotion of public health practices. SERC and the
     University of Washington are not in the same or related
     industry or field of operations.
     
Absent coincident fields of operation, the Regional Office
determined that no affiliation based on common employees was
possible between SERC and the University.

The Regional Office noted that SERC has ten employees and
"operates from leased facilities that are not owned by the
University" and concluded its analysis as follows:

     Review of the documentation supplied, including the sole
     subcontract between SERC and the University of Washington,
     revealed that SERC revenues are garnered from a variety of
     sources. The subcontract between SERC and the University of
     Washington equates to 3% of revenues in the last 12 months.
     Other earnings in this same period are for consulting, which
     comprise 17% of revenue; software sales, which comprise 42%
     of revenue; and dedicated contracts solicited, negotiated
     and awarded to SERC, which comprise 44% of revenue. SERC is
     determined as not being dependent upon the University of
     Washington for its livelihood pursuant to 13 CFR 121.401(k)
     [concerning affiliation through contractual relationships].
     This decision is consistent with S8A Office of Hearings and
     Appeals (OHA) Size Appeal SIZ-91-12-13-157, dated 12/31/91.
     [Size Appeal of University Medical Associates, supra.]
     
Although the Regional Office did not address the identity of
interest issue raised by TEC as it relates to bidding decisions,
the record also contains the following information submitted by
SERC in response to this issue:

     The decision to bid on this proposal was made by the
     Principal Investigator, Kathryn Davis, Ph.D., and SERC. The
     Department of Biostatistics was not consulted until the
     decision had been made. University guidelines allow each
     faculty member to spend up to one day a week in outside
     consulting with the approval of their department chair and
     dean. After Dr. Davis decided to apply, she informed the
     Chairman of Biostatistics of her intent and was given
     permission to perform the outside consulting work. The
     permission only concerned Dr. Davis and her professional
     obligations to the University. The University was not asked
     for and indeed could not give permission for SERC to do this
     work since the University of Washington and SERC are
     separate entities. With the exception of Dr. Davis, who was
     working as a consultant to SERC outside of the University,
     no technical skills of the department staff or University
     resources were used in the development of the proposal.
     
     It is true that the University of Washington is extensively
     involved in providing statistical and clinical coordinating
     center support for the federal government under both grant
     and non-set-aside contract mechanisms. This is also true of
     SERC. If this procurement had not been a small business set-
     aside, Dr. Davis could have chosen to respond through the
     University, but in that case her proposed staff would have
     been completely different, as would the proposed office
     space, computing facilities, and equipment. 3/ [Footnote
     added.]
     
     The resources of the University are not at the disposal of
     SERC, and neither are the resources of SERC at the disposal
     of the University. We maintain strict separation of all our
     activities and expenses. The University of Washington has
     strict regulations to prevent use of the University
     resources for other than legitimate University business.
     
TEC filed a timely appeal of the Regional Office determination,
which it had received on November 13, on November 20, 1992. TEC
articulates three bases for alleging error in the Regional Office
determination:

     First, in analyzing the common management between SERC and
     the University, Region X [the Seattle Regional Office]
     discussed only the management of the University as a whole.
     Region X failed to recognize the significant management and
     control exercised within individual schools and departments
     of the University. Second, Region X erroneously found that
     SERC and the University are not in the same or related
     industry. In fact, the University and SERC are both engaged
     in providing coordinating center consulting services under
     federal contracts and grants. Third, Region X failed to
     address EMMES' assertion that SERC and the University have
     an identity of interest.
     
With respect to the common management issue, TEC argues that the
Regional Office's erroneous focus on the management of the
University as a whole obscured the issue of common control
addressed in 121.401(h):

     Affiliation through common management. Affiliation generally
     arises where officers, directors, or key employees 4/ serve
     as the majority or otherwise as the controlling element of
     the board of directors and/or the management of another
     concern. [Footnote added.]
     
TEC contends that SERC's officers and directors, in whom control
of the corporation resides, "constitute...the management of the
University, or...key employees of the University" and argues
that, contrary to the Regional Office's finding concerning the
University's field of operations, "the University engages in a
wide range of activity apart from its education function" and
that in order to assess the questions of common management and
common employees in this case properly, the Regional Office was
required to focus on the University's "coordinating center
consulting services."

In support of this argument, and its implications for the issue
of common management, TEC contends that

     because of the size and breadth of the University and its
     resources, the management of the University's activities is
     not centralized. The many schools in the University, and the
     various departments within those schools, necessarily must
     operate on a fairly autonomous and independent basis. For
     example, the members of the Department of Biostatistics and
     Epidemiology (1) decide which coordinating center consulting
     business the University should pursue, (2) prepare bids and
     proposals to seek such business, and (3) provide the
     consulting services when the University is awarded such
     business. While the members of these departments may not
     control or manage the University as a whole, they do control
     and manage the University's coordinating center consulting
     business.
                       
     It argues further that
     
     ...[t]he persons who control and manage the University's
     coordinating center consulting business are the same persons
     who control SERC. The SERC officers, directors, and
     shareholders are the same persons who pursue, prepare
     proposals for, and perform the University's coordinating
     center consulting business. Indeed, we believe that the SERC
     officers, directors, and shareholders would not
     independently pursue any federal coordinating center
     consulting business if the University were eligible to do
     so, i.e., if the procurement were not a small business set
     aside. But, where, as here, a procurement is set aside for
     small business, so that the University cannot compete, the
     University employees will seek the business through SERC.
     
     Thus, SERC and the University share common management
     because the persons who control SERC also control and manage
     the coordinating center consulting activities of the
     University. Similarly, the persons who control SERC are the
     key University employees with respect to the University's
     coordinating center consulting activities....
     
TEC has provided the following information on prior procurements
to verify both that the University is engaged in the same field
of operations as SERC and that the same persons are responsible
for managing activities in that field for SERC and for the
University:

     [T]he University's Fred Hutchinson Cancer Research Center
     recently received a $140 million award to provide such
     services for the Women's Health Initiative. Ross Prentice,
     the Incorporate of SERC and a shareholder and former
     director of SERC, is the University's Principle [sic]
     Investigator for that contract. The University also has
     provided such services in connection with a 1990 NIH study
     entitled "Cardiac Arrhythmia Suppression Trial," for which a
     SERC Director, A. Hallstrom, served as the Principle [sic]
     Investigator (contract No. 5NOlHC65042-13, $.8 million in FY
     '90); and a 1989 NIH study entitled "Balloon Valvuloplasty
     Registry," for which Kathryn Davis, a SERC employee, was the
     Principle [sic] Investigator (contract No. SNOlHV7800-07,
     $.8 million in FY '89)....
     
On much the same factual basis, TEC also continues to argue that
an identity of interest exists between SERC and the University
and complains that this aspect of its protest was nowhere
acknowledged or addressed in the Regional Office determination.
Noting that the regulation governing this issue 5/ proceeds by
example rather than by definitional criteria, TEC argues that

     [t]hese examples show that an identity of interest exists
     between two concerns when (1) the decisions of either
     concern would inherently effect [sic] the decisions or
     interests of the other concern or of a third party, or (2)
     benefits accruing to either firm would result in benefits to
     the other concern or a third party. Further, these examples
     demonstrate that an identity of interest need not be
     financial.
     
In addition to arguing that "SERC is, in effect, acting as a
surrogate for the University by bidding in a small business set
aside procurement solely because the University is ineligible to
do so," TEC argues that
                  
     even if SERC and the University could compete against each
     other (in non-set-aside procurements) for the same
     coordinating center consulting contracts, both concerns
     would benefit. In the bidding process, the same persons
     would be preparing the bids and proposals for both SERC and
     the University. The resources of the University -- in whose
     employ the SERC officers and directors presumably gained the
     experience and expertise that enabled them to establish SERC
     in the first place -- would unavoidably be available to
     SERC. If either SERC or the University were to win the
     contract, both would benefit from the increased prestige of
     employing persons who successfully perform the work, and the
     increased job satisfaction of the SERC/University employees.
     [Footnote omitted.]
     
     ...[T]he University would [also] accrue the additional
     benefits of increased opportunities for employment of the
     University's graduate students, and increased prospects for
     publication by faculty members.
     
     Under these circumstances, it is apparent that the decisions
     of SERC or the University inherently affect both concerns,
     and the activities of SERC and the University inherently
     benefit each other. This leads to the inescapable conclusion
     that SERC and the University have an identity of interest,
     and must be treated as affiliates.
     
On December 4, 1992, TEC filed a request to conduct discovery
regarding SERC and its relationship to the University. That
request was denied by order dated December 30, 1992 because it
was determined that no genuine dispute of decisional significance
exists as to the facts of this case and that the controversy
instead concerns the regulatory implications of those facts with
respect to the issue of affiliation.

The contract was awarded to SERC on November 17, 1992. SERC has
filed no response to TEC's appeal.

Discussion

We cannot agree with the Regional Office that no affiliation
exists between SERC and the University and conclude that its
erroneous determination in this regard rests upon a misappre-
hension of the specific facts of this case and the logical
implications of our holdings in previous cases concerning
affiliation in general and affiliation with universities in
particular.

The circumstances indicative of affiliation are these: eight of
SERC's ten officers and directors (in whom its control undeniably
resides) are employed by the University's Research Center or by
its Departments of Epidemiology and Biostatistics. As such, they
provide educational as well as research services to the
University. The Chairmen of the University's Departments of
Epidemiology and Biostatistics (as well as two other departments
in its School of Public Health and Community Medicine) own 2.5
percent of SERC's stock each. Thirty of SERC's remaining 36
stockholders are also employed by the University. Under their
employment contracts with the University, these individuals are
permitted to engage in up to one day of outside consulting work
per week but must obtain "the approval of their department chair
or dean." In addition to operating and performing consulting
services for SERC, its principals make determinations regarding
the University's participation in solicitations for consulting
services and perform those services for the University pursuant
to contracts awarded to the University by the Federal government.

As the regulation at 13 CFR 121.401(i) governing common employees
indicates, "affiliation generally arises where one concern
shares...employees...with another concern, particularly where
such concerns are in the same or related industry or field of
operations." Emphasis added. The qualifier "generally" imposes a
reasonability test 6/ in applying the regulation, but it is

clear from the structure of this provision that firms face a
presumption of affiliation through sharing of employees that is
difficult to surmount where the firms are engaged in the same or
related fields of operation. Nevertheless, we have held that the
mere sharing of one or two employees does not create affiliation.
The lack of a regulatorily significant connection has been
particularly compelling where the employees themselves have not
been officers or directors of either company 7/ but has also been
evident in the so-called "moonlighting" cases, where the owner of
a company is a salaried employee of the alleged affiliate but
there is little more to suggest that the small concern is
otherwise dependent upon the "employer" firm for its continued
existence. 8/ However, this exception has its limits, and those
limits depend upon the scope and implications of the employment
arrangement. Thus, where the scope and size of the compensation
package was significant, and was accompanied by a covenant by the
small business owner not to compete with his employer firm, we
predicated our finding of affiliation in Size Appeal of Caddell
Construction Co., Inc., No. 1990 (1984) on the reliance, lack of
independent economic viability, and inferred power to control in
the employer that attends such arrangements. What we observed in
Caddell is potentially true in all such cases: "[the employer-
affiliate] has the power to control Mr. Caddell by unilaterally
threatening to discontinue or by discontinuing his remuneration."

Where the salaried owner has also occupied a management position
in the employer-affiliate, these joint employment cases have been
decided under the interlocking management rule in 121.401(h) or
under the newly organized concern rule in 121.401(i), the latter
of which bars the principals of one firm from organizing and
operating a new firm in "the same or related industry or field of
operation if the two firms will exchange financial or technical
assistance" or share "other facilities, whether for fee or
otherwise."  9/ "Other facilities" may include joint employees,
and the emphasis in such cases on the sharing of essential
employees indicates that the finding of affiliation could also
have been based on the existence of common employees under
121.401(i). Thus, in Size Appeal of American Systems Engineering
Corporation, No. 2405 (1986) we held that, where the new owners
of a firm created through an employee buy out of a division of
the alleged affiliate continued their employment with the old
firm for three months after the buy out, during which time the
new firm bid on a small business set aside, the firms were
affiliated because of this continuing employment connection and
the financial support it provided to the new firm.

The Regional Office determination here, which concerns the
substantial sharing of vital employees and is at odds with this
line of cases, relies on a gross mischaracterization of the
employment relationship between SERC's principals and the
University and on an analysis of the University's management
structure and field of operations derived from a previous,
inapposite case which, if applied here, would except universities
and their affiliates from a major segment of the affiliation
rules and create a "hands off" policy with respect to universi-
ties and their affiliates that is nowhere sanctioned in the
regulations governing affiliation and size status.

Central to the Regional Office's determination is its focus on
the University as a whole rather than on its individual schools,
departments or research facilities, and its conclusion, in
consequence, that SERC and the University are neither commonly
managed nor engaged in "the same or related industry or field of
operations," because the University, unlike SERC, is an
"institution of higher learning" whose business is to "create,
preserve and disseminate knowledge." While this analysis appears
to accord with certain language in Size Appeal of University
Medical Associates, supra, that case is inapposite. Furthermore,
the determination is at variance with two prior university
affiliate cases in which both the protested concern and the
university either were or had been involved in similar research
and consulting activities. 10/

In the first such case, Size Appeal of Biossherics, Inc., No.
2025 (1984), a third party had purchased the majority interest in
a research laboratory formerly owned and operated by the
university's research institute, which had retained a minority
interest therein. We specifically examined the organization of
both the university as a whole and its research institute in
order to determine whether affiliation existed based on inter
locking management, the newly organized concern rule or common
employees. With respect to the issue of common employees in
particular, we stated that the only way in which an agreement to
continue to employ laboratory personnel during the first 90 days
of operation could create "power to control" in the university,
would be
     
     if these same employees were shared with the University of
     Utah or UURI, [the University of Utah Research Institute] or
     were also officers, directors, stockholders or key employees
     of the University of Utah or UURI. Since the employees have
     no present connection with the University of Utah or UURI,
     it is found that the employment of former UURI employees
     for at least 90 days is not convincing evidence of control
     by the University of Utah or UURI over [the protested concern].
     [Emphasis added.]
     
In the absence of such common employment or any other proscribed
interconnection between the University or its research institute
and the protested concern, we held in BiosPherics that there was
a "clear line of fracture between [the protested concern] and the
University of Utah and/or UURI" and that no affiliation existed
between them. Emphasis added.

In the second case, Size Appeal of CHT, Inc., No. 2383 (1986), we
examined a concern that had recently been organized by the
faculty of a university to perform testing services previously
performed for the government by the university through its Center
for Human Toxicology. While our finding of affiliation between
this firm and the university 11/ was primarily based on the
firm's lack of facilities for performing the testing as well as
its intention to subcontract the testing back to the university
during the initial stages of the contract and to use the
university's license and its Department of Defense certification
in performing the contract thereafter, we also noted with respect
to the question of common employees that failure to a find
affiliation between the university and the protested concern

     would be inconsistent with the purposes of the small
     business set-aside program inasmuch as CHT would thereby be
     unfairly advantaged. Besides the fact, noted above, that CHT
     hoped to win this procurement despite having no cash,
     laboratories, or testing equipment - by making use of
     University facilities, it also intended to employ
     specialized personnel who had been trained by the University
     (the toxicologist), to trade on the University's past
     performance and DOD drug testing certification, and to enjoy
     a financial "safety net" derived from the University
     salaries which its officers would continue to draw. Clearly,
     these are advantages which no other truly independent small
     business starting up operations in a specialized, high
     technology industry would enjoy.
     
That the Regional Office ignored the reasoning in these cases is
undoubtedly attributable not only to its misplaced reliance on
Size Appeal of Medical Associates but to its mistake concerning
the amount of time that SERC principals are permitted to spend on
outside consulting work. The practical significance of an option
to spend up to 52 days a year working for SERC as opposed to 52
hours a year cannot be denied. Eight of SERC's ten officers and
directors and all but six of its stockholders are employed by the
University. While it is not clear how many of these individuals
perform work similar to that performed by SERC in their capaci-
ties as University employees, congruence need not be absolute in
order to determine that those two entities, in the same field of
operations, share employees pursuant to 5121.401(i) or that it is
reasonable to find them affiliated with one another based on that
fact. The salaries paid to SERC's principals are the "safety
nets" that betoken SERC's reliance upon the University and
provide it with "advantages which no other truly independent
small business starting up operations in a specialized, high
technology industry would enjoy." 12/ Thus, we find that SERC is
affiliated with the University based on common employees.

The emphasis on the University's participation in consulting
services contracts in determining its field of operations also
commands a different result from that reached by the Regional
Office on the issue of common management. Universities are unique
with respect to the question of management. Thus, we must look
beyond the structure of the University as a whole, as we did in
Size Appeal of Biospherics. Inc., supra, 13/ and determine the
locus of management authority with respect to the University's
consulting service activities. This approach is consistent with
the definition of "key employee" in 121.405 in which a "key
employee" is described as an "employee, who, because of his or
her position in the concern, has a critical influence in or
substantive control over the operations or management of the
concern." SERC concedes that Dr. Davis, the employee responsible
for determining SERC's participation in the present solicitation
"could have chosen to respond through the University" had this
not been a small business set aside. SERC principals have served
and continue to serve as the University's principal investigators
on similar consulting contracts awarded to the University. It is
clear, therefore, that, in these capacities, SERC principals are
key employees of the University because they occupy positions in
which they may exercise critical influence over the University's
participation in the consulting services business. To determine
otherwise, would ignore the schizoid nature of most modern
universities, which are active competitors in the market for
research and other consulting services, as well as institutions
of higher learning, and would reinforce their superior competitive
position, the effects of which the small business set aside
program seeks to mitigate for legitimate small businesses. Thus,
because SERC's principals control the decisions of both SERC and
the University concerning participation in solicitations for
coordinating center consulting services, SERC is affiliated
with the University based on common management.

TEC's allegation concerning an identity of interests between SERC
and the University based on their synchronization of bids and the
mutuality of benefits stemming from their respective participa-
tions in consulting services contracts hinges on the fact that
management authority regarding such contracts performed by both
the University and SERC reposes in SERC's principals. We cannot
and will not be insensible to the "practicalities of business
life" 14/ and the fact that, while SERC has independent
decisional authority, it will tend to make those business
decisions that preserve its very vital relationship with the
University and will refrain from competing with the University
for procurements that are not small business set asides. How
could it be otherwise where a single cadre of professionals
constitutes the potential workforce whether the contract is
awarded to the University or to SERC.

The salaries and other professional benefits accruing to SERC's
principals as members of the University's faculty are "safety
nets" that ensnare. This is the element of control implicit in
the concepts of affiliation through common employees and
affiliation through interlocking management. It is the
commonality of interests that underlies what approximates an
alter ego relationship for purposes of determining affiliation
under Part 121, if not according to the letter of the law, at
least according to its spirit. No matter the bona fides of the
entities' corporate structures, no matter the good faith that
attended the creation of the protested concern and the fact that,
as in this case, no conflict of interest exists with respect to
the use of University property for private commercial purposes:
this relationship bespeaks that concert of purpose and effort
which is at the heart of the identity of interest rule. While the
rule has previously been invoked principally in cases involving
familial relationships or common investments, the regulation
proceeds by way of examples, examples that are not exclusive.
Thus, the rule has also been invoked where the majority of a
large firm's assets were purchased by a new firm that functioned
as its predecessor's successor in interest in terms of
contractual obligations, staff and facilities. Given these
circumstances, we held in Size Appeal of Ace-Federal Reporters.
Inc., No. 2814 (1988) that the firms were affiliated and that the
new firm had also succeeded to its predecessor's size status. The
commonality of interests in the present case is equally thorough
and, under the circumstances, we do not deem it improper to
conclude that, in addition to being affiliated under the
regulations governing common employees and common management,
SERC and the University are also affiliated under _121.401(a)(2)
and (d) because of their identity of interests.

It might be argued that this decision will impede the research
process, since many researchers are employed by universities and
this employment might bar their companies from participating in
small business set asides. We do not agree. Our decision here
merely attempts to place firms so intimately and inextricably
involved with universities as to be affiliated with them, on an
equal footing with those other, truly independent research firms
whose small size requires that they be accorded the competitive
advantages of a small business set aside when bidding on Federal
research projects. That is the purpose of the set aside program,
and to ignore the substantial competitive and other financial
benefits which attend a group of researchers in SERC's position
would be to defeat it.

Conclusion

SERC is other than small under the $12.5 million average annual
receipts size standard. The Regional Office determination is
REVERSED. The appeal is GRANTED.

This constitutes the final decision of the Small Business
Administration. See 13 CFR 121.1720.

                         _______________________________
                         Jane E. Phillips (Presiding)
                         Administrative Judge
                         
                         
                         
                         _______________________________
                         Gloria E. Blazsik (Concurring)
                         Administrative Judge
                         
                         
                         _______________________________
                         G. Stephen Wright (Concurring)
                         Administrative Judge
                           
                         
_______________

     1/   Nasco-Egnew's employment status is not indicated in the
SBA Form 355 submitted by SERC.
     2/   The minutes for SERC's October 6, 1992 Board of
Directors meeting, held subsequent to the date of self
certification, state that "[t]he Board decided to limit who would
be allowed to become a member of SERC, restricting it to persons
holding appointments in the Department of Biostatistics and
Epidemiology" but to permit the "grandfathering" of "all current
members."
     3/   SERC acknowledged that "[s]ome of the stockholders,
board members and officers of SERC have performed biostatistical
consultation for SERC which is similar to some aspects of their
faculty duties."
     4/   The term "key employee" is further defined at 121.405
as follows:

          A key employee is an employee who, because of
          his/her position in the concern, has a critical
          influence in or substantive control over the
          operations or management of the concern.
               
     5/   The regulations at 13 CFR 121.401(a)(2) and (d)
governing identity of interest provide as follows:
                                
          Concerns are affiliates of each other when either
          directly or indirectly
          
                *    *    *    *    *     *    *
                                
          (iii)An identity of interest between or among parties
          exists such that affiliation may be found.

                *     *   *    *    *     *   *

          Identity of interest between and amona persons as
          an affiliation determinant. Affiliation can arise
          between or among two or more persons with an
          identity of interest, such as members of the same
          family or persons with common investments in more
          than one concern. In determining who controls or
          has the power to control a concern, persons with
          an identity of interest may be treated as though
          they were one person.
               
     6/   The previous iteration of this rule, amended as part of
the reorganization of Part 121, stated as follows:

          Control through common management. A concern may
          be found as controlling or having the power to
          control another concern when one or more of the
          following circumstances are found to exist, and it
          is reasonable to conclude that under the
          circumstances, such concern is directing or
          influencing or has the power to direct or
          influence the operation of such other concern.
               
               *    *    *    *    *     *   *

          Common facilities. One concern shares common
          office space and/or employees and/or other
          facilities with another concern particularly where
          such concerns are in the same or related industry
          or field of operation, or where such concerns were
          formerly affiliated. 13 CFR 121.3(vi)(B), 1987
          edition.
               
     7/   Size Appeal of Applied Technical Systems. Inc., No.
2435 (1986) and Size Appeal of International Service corporation,
No. 2296 (1985).
     8/   Size Appeal of National Environmental Waste Systems Inc.,
No. 1719 (1983) and cases cited therein.
     9/   The regulations at 13 CFR 121.401(h) and (j) governing
interlocking management and newly organized concerns
respectively, provide as follows:
               
               
          Affiliation through common management. Affiliation
          generally arises where officers, directors, or key
          employees serve as [the majority or otherwise as
          the controlling element] of the board of directors
          and/or the management of another concern.
              
               *    *    *     *   *     *    *

          Affiliation with a newly organized concern.
          Affiliation generally arises where former
          officers, directors, principal stockholders,
          and/or key employees of one concern organize a new
          concern in the same or related industry or field
          of operation, and serve as its officers,
          directors, principal stockholders, and/or key
          employees, and the one concern is furnishing or
          will furnish the other concern with subcontracts,
          financial or technical assistance, bid or
          performance bond indemnification, and/or other
          facilities, whether for a fee or otherwise.
               
     10/ Size Appeal of University Medical Associates is readily
distinguishable on this point, as is Size Appeal of White Water
Associates, Inc., No. 3532 (1991), in which we declined to find
affiliation between a new firm formed by university employees and
the university because the employees did not "change hats,"
performing for their firm activities similar to those performed
for the university.
     11/ CHT focused on the protested concern's relationship with
the university's research facility rather than its inter
connections with the university as a whole but based its finding
of affiliation between the protested concern and the university
on the fact that the research center, while not an independent
entity, was a subsidiary of the university whose individual
affiliations would thus accrue to the university, as its parent.
     12/ Size Appeal of CHT, Inc., supra, at page 9.
     13/ No interlocking management was found to exist in this
case.
     14/ Size Appeal of Heral Industries Corp., No. 601 (1973).