Opinion ID: 2795702
Heading Depth: 3
Heading Rank: 1

Heading: SBA Regulations Require Exhaustion

Text: SBA’s regulations provide that “[t]he 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 (emphasis added). Consistent with this mandatory language, the Court of Federal Claims has recognized that a challenge to an agency’s assignment of a particular NAICS code “is an administrative remedy which must be exhausted before judicial review of a code designation is permitted.” Rotech Healthcare, Inc. v. United States, 71 Fed. Cl. 393, 407 (2006). Accordingly, if no party had appealed the contracting officer’s NAICS code selection to OHA, it would not have been reviewable in court. Here, Information Ventures timely appealed the contracting officer’s NAICS code determination for the solicitation and OHA issued a final decision. It is undisputed that interested persons, including Palladian, received notice of the pending NAICS code appeal, and had an opportunity to intervene and participate in that proceeding. See 13 C.F.R. § 134.210(b) (“Any interested person may move to intervene at any time . . . .”). Palladian did not do so. By regulation, when OHA issued its NAICS code de- termination for the solicitation, it became a final decision. 13 C.F.R. § 134.316(d) (“The decision is the final decision of the SBA and becomes effective upon issuance.”). The code selected governs later proceedings concerning the same solicitation and is not subject to reconsideration. See 13 C.F.R. § 134.316(f) (“The decision in a NAICS code 20 PALLADIAN PARTNERS, INC. v. US appeal may not be reconsidered.”); see also Integrated Lab. Sys., Inc., SBA No. NAICS-4733, 2005 WL 5714171, at  n.4 (Oct. 6, 2005) (noting that OHA precedent “holds that a decision which determines the correct code for a solicitation controls in the case of later-filed appeals concerning the same solicitation”). According to OHA, “[t]o hold otherwise would permit constant re-litigation of a solicitation’s NAICS code, as successive potential offerors expressed their unhappiness with the codes determined by this Office’s decisions.” Advanced Sys., 69 Fed. Cl. at 480-81. Consistent with these regulations, in Palladian’s subsequent appeal of the same issue, OHA refused to depart from or reconsider its NAICS code decision in Information Ventures. OHA explained that, if Palladian “wished to litigate the issue of what NAICS code should apply to this RFP,” then it should have intervened in the pending appeal. Palladian OHA Dismissal, 2014 WL 1924608, at . In Palladian’s bid protest, however, the Court of Federal Claims rejected the government’s argument that Palladian was required to participate in the pending OHA appeal. Specifically, the court found it would be burdensome to require potential small business offerors to intervene in every SBA NAICS code challenge to the solicitation to preserve the possibility of judicial review. The court noted that, in many instances, intervention would require litigants to file “useless motions in order to preserve their rights.” Palladian, 119 Fed. Cl. at 437. 3 3 The futility exception to the exhaustion requirement applies “in situations in which enforcing the exhaustion requirement would mean that parties ‘would be required to go through obviously useless motions in order to preserve their rights.’” Corus Staal BV v. United States, 502 F.3d 1370, 1379 (Fed. Cir. 2007) (quoting Bendure v. United States, 554 F.2d 427, 431 (Ct. Cl. PALLADIAN PARTNERS, INC. v. US 21 The court was also concerned that small businesses would “be forced to expend significant time and money to involve themselves in potentially costly litigation, in some cases, even before having made the decision of whether or not to submit a proposal.” Id. On appeal, the government maintains that Palladian was “required to either address the merits in the pending OHA NAICS proceeding or accept OHA’s ruling on the appropriate code as dispositive.” Appellant Br. 21. According to the government, the court “undermined the administrative scheme established by SBA and erroneously excused Palladian from exhausting administrative remedies and thereby deprived OHA of a principal purpose of administrative exhaustion, i.e., ‘an opportunity to correct its own [potential] errors.’” Id. at 34 (quoting Weinberger v. Salfi, 422 U.S. 749, 765 (1975)). The government argues that it “reasonably interprets OHA regulations as requiring that an interested party participate in the solicitation’s OHA NAICS code appeal, or be barred from suit.” Appellant Reply Br. 4. In response, Palladian concedes that a “party adversely affected by a NAICS code determination must first file at OHA within 10 days of that determination.” Appellee 1977)). We apply the exception narrowly, however. “The mere fact that an adverse decision may have been likely does not excuse a party from a statutory or regulatory requirement that it exhaust administrative remedies.” Id. As the government notes, Palladian does not attempt to defend the Court of Federal Claims’ suggestion that exhaustion was not required because it would be “useless” or “futile.” Palladian’s suggestion of a different alternative to the original code designation than NAICS code 541611 could have been made to OHA in the context of that appeal, and might well have been deemed persuasive. 22 PALLADIAN PARTNERS, INC. v. US Br. 35. But when a contractor is “adversely affected by a NAICS code determination resulting from an OHA appeal,” Palladian submits that the proper venue is the Court of Federal Claims. Id. at 35-36. Otherwise, as the court observed, the new code “could become completely unreviewable.” Palladian, 119 Fed. Cl. at 437. According to Palladian, as long as any interested party filed an OHA NAICS appeal and OHA rendered a final decision identifying the most appropriate NAICS code, the administrative exhaustion requirement is satisfied. In particular, Palladian argues that the regulation is written in passive voice—“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”—and nothing contained therein provides that “the ability to seek judicial review vests only in those parties that participated in the OHA appeal.” Appellee Br. at 20-21 (quoting 13 C.F.R. § 121.1102). As explained below, on the record here, we disagree. First, Palladian’s argument that the regulations do not specify which parties must exhaust the administrative remedies lacks merit; the regulations do identify the parties that can either initiate or participate in an OHA NAICS code appeal. The regulations provide that “[a]ny person adversely affected by a NAICS code designation” may file an appeal with OHA. 13 C.F.R. § 134.302(b). When a NAICS code appeal is filed, the contracting officer must advise the public of the existence of the appeal and “the procedures and deadline for interested parties to file and serve arguments concerning the appeal.” 13 C.F.R. § 121.1103(c)(1)(ii). And, once the appeal is filed, “[a]ny interested person may move to intervene at any time until the close of record by filing and serving a motion to intervene containing a statement of the moving party’s interest in the case and the necessity for intervention to PALLADIAN PARTNERS, INC. v. US 23 protect such interest.” 13 C.F.R. § 134.210(b). 4 An “interested person” is defined as “any individual, business entity, or governmental agency that has a direct stake in the outcome of the appeal.” Id. By regulation, “[a]ny person served with an appeal petition, any intervenor, or any person with a general interest in an issue raised by the appeal may file and serve a response supporting or opposing the appeal.” 13 C.F.R. § 134.309(a). Accordingly, any interested party can present evidence and arguments for OHA to consider. The regulations make clear that OHA’s decision is the final decision on the NAICS code applicable to a particular solicitation and is not subject to reconsideration by OHA. See 13 C.F.R. § 134.316(d); see also 13 C.F.R. § 134.316(f). We agree with the government that SBA’s regula- tions, taken together, identify the parties who must participate in a pending OHA proceeding if they want to challenge OHA’s NAICS code designation in court. And, by regulation, any interested party who participated in the pending OHA appeal for the solicitation can seek judicial review of OHA’s NAICS code determination. See 13 C.F.R. § 121.1102. The facts of this case underline the importance of assuring that any appeal taken to OHA be all encompassing. As noted, Palladian is not urging a return to the 4 Although the Court of Federal Claims found that requiring intervention would be burdensome on small businesses, there is no indication that the regulations contemplate an onerous procedure. Indeed, at oral argument, the government explained that a party can preserve its right to judicial review by filing a letter with OHA stating whether or not it supports the contracting officer’s original decision. Oral Argument at 5:58-7:20. 24 PALLADIAN PARTNERS, INC. v. US contracting officer’s original code determination; it seeks use of an altogether different code. Palladian, thus, does not contend that it failed to participate because it felt the contracting officer would represent its interests. If Palladian were correct that any code change following an OHA appeal could give rise to a court challenge by third parties, it would seem that, after a remand like that authorized by the Court of Federal Claims here, some other third party could file a protest relying on yet another code designation. The process could be endless. Consistent with SBA regulations, in a recent decision, the Court of Federal Claims held that judicial review was not available where a protester “failed to comply with the specific procedures for challenging a NAICS code or size standard designation.” Lawrence Battelle, Inc. v. United States, 117 Fed. Cl. 579, 588 (2014). Specifically, the court found that, because the protestor “failed to appeal the NAICS code or size standard to SBA within the time allotted, it may not seek review of the NAICS code or size determination in this proceeding.” Id. In reaching that decision, the court recognized that it “does not have authority to ignore the process set forth in the regulations for challenging NAICS code designations.” Id. at 588 n.11. We agree. Where, as here, Congress has specifically delegated rulemaking authority to an agency, courts “lack[] authority to undermine the regime established . . . unless [the] regulation is ‘arbitrary, capricious, or manifestly contrary to the statute.’” See Sebelius v. Auburn Reg. Med. Ctr., 133 S. Ct. 817, 826 (2013) (quoting Chevron U.S.A. Inc., v. Natural Res. Def. Council, Inc., 467 U.S. 837, 844 (1984)). Given these circumstances, we conclude that SBA’s regulations require an interested party to participate in a pending OHA NAICS code appeal, or be precluded from filing suit. As such, Palladian’s failure to participate in the pending OHA appeal was a failure to exhaust its administrative remedies. PALLADIAN PARTNERS, INC. v. US 25