DSE, Inc. v. United States

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 11, 1999 Decided March 12, 1999

No. 98-5265

DSE, Inc., d/b/a Dayron,

Appellant/Cross-Appellee

v.

United States of America, et al.,

Appellees

Consolidated with

No. 98-5368

Appeals from the United States District Court

for the District of Columbia

(No. 98cv00620)

Kenneth A. Martin argued the cause and filed the briefs

for appellant/cross-appellee.

Brian J. Sonfield, Assistant United States Attorney, ar-

gued the cause for the federal appellees. With him on the

brief were Wilma A. Lewis, United States Attorney, Mark E.

Nagle and R. Craig Lawrence, Assistant United States Attor-

neys, Glenn P. Harris, Trial Attorney, United States Small

Business Administration, and Ralph Avery, Litigation Attor-

ney, United States Department of the Army.

Michael R. Charness and John G. Horan were on the

briefs for appellee/cross-appellant. Donald J. Kissinger, Jr.

entered an appearance.

Before: Wald, Henderson and Garland, Circuit Judges.

Opinion for the Court filed by Circuit Judge Wald.

Wald, Circuit Judge: Dae Shin Enterprises, Inc. ("DSE")

brought a disappointed bidder action in the district court

against the United States of America, seeking to enjoin

performance of a procurement contract between the United

States Army (the "Army") and the successful bidder, AMTEC

Corporation ("AMTEC"). In support of its claim for injunc-

tive relief, DSE alleged that a formal size determination of

the Small Business Administration (the "SBA"), which found

AMTEC to be "small" under its applicable regulations, was

arbitrary and capricious in violation of the Administrative

Procedure Act. See 5 U.S.C. s 706(2)(A). The district court

granted a temporary restraining order and, after a series of

evidentiary hearings, held that the SBA's actions were arbi-

trary and capricious. Accordingly, the district court granted

a preliminary injunction and remanded the matter back to the

SBA. In deliberating upon the appropriate injunction bond,

the court took note of DSE's limited financial resources, the

potential burden on the Army under its contract with

AMTEC to provide compensation for any delay, and

AMTEC's failure to provide sufficient documentation to the

SBA. After balancing the prospective hardships, the court

directed DSE to post a minimal bond and declared that

AMTEC, who had intervened in the litigation and was

deemed the party at fault, should not be entitled to compen-

sation from the Army for any delay in the beginning of

performance under the contract.

On remand, the SBA again found AMTEC to be a small

business entity. Thereafter, the district court issued an

order which dissolved the preliminary injunction and upheld

the SBA's size determination. All other aspects of its previ-

ous order, including its assessment of the bond amount, were

left in place. DSE appeals from this decision, alleging that,

in several different respects, the SBA failed to follow its own

regulations and adjudicatory precedent. This unexplained

departure, it claims, was arbitrary and capricious, requiring

us to set aside the SBA's size determination and to suspend

performance of the contract. AMTEC filed a cross-appeal,

contending that the district court lacked the authority to issue

its no compensation order as the Tucker Act, see 28 U.S.C.

ss 1346, 1491, grants exclusive jurisdiction to adjudicate mon-

etary claims founded upon a federal procurement contract to

the United States Court of Federal Claims. Because the

SBA's size determination constituted a reasonable application

of the agency's regulations and accords with its previous

decisions, we agree with the district court that the SBA's

action was not arbitrary and capricious and that dissolution of

the preliminary injunction properly followed. As for the no

compensation declaration, the record reveals that the court

entered it in conjunction with setting the appropriate securi-

ty, as required by Rule 65(c) of the Federal Rules of Civil

Procedure, to accompany the preliminary injunction. We

affirm the district court's interlocutory order dissolving the

preliminary injunction, of which the bond formed an inextrica-

ble part, but decline to opine as to the effect this finding may

have in some speculative action on the contract brought in the

Court of Federal Claims.

I. Background

On September 16, 1997, the Army issued a solicitation for

bids to produce a detonation fuse styled as the M550 Escape-

ment Assemblies, an essential component of its M-918 40

millimeter Projectile. The Army designated Solicitation No.

DAAA09-97-R-0264 a total small business set-aside, and

assigned it Standard Industrial Classification ("SIC") Code

3483. Under SBA regulations, a bidding company can qualify

as "small" for purposes of SIC Code 3483 if it has fewer than

1500 employees. See 13 C.F.R. s 121.201. The Army an-

nounced its intention to award the contract to AMTEC on

January 21, 1998. Two days later DSE, a disappointed

bidder next in line for the award and the incumbent producer,

filed a protest with the contracting officer. Therein, it al-

leged that AMTEC did not qualify as a small business entity

under SIC Code 3483, and that AMTEC's November 12, 1997

self-certification as small was erroneous. The Army contract-

ing officer forwarded this challenge to the SBA's Office of

Government Contracting Area Office (the "Area Office") for a

formal size determination.

The Area Office reached a decision on February 9, 1998

(the "First Size Determination"). Based on the information

provided by AMTEC in response to the SBA's formal re-

quest, the Area Office determined that AMTEC and its

affiliates had fewer than 1500 employees at the time of

AMTEC's self-certification. The SBA notified the Army of

its decision, and the contracting officer awarded the contract

to AMTEC. After filing an unsuccessful protest with the

General Accounting Office, DSE brought suit in the U.S.

District Court for the District of Columbia against the United

States seeking a temporary restraining order against perfor-

mance of the contract, a preliminary and a permanent injunc-

tion, a determination that AMTEC was a large business

entity, and award of the production contract. In this action,

DSE maintained that the SBA's First Size Determination was

arbitrary and capricious for failing to count the personnel of

various alleged affiliates in assessing the total number of

AMTEC employees. On March 12, 1998, the Army ordered

AMTEC to stop performance on the contract pending the

outcome of the litigation. AMTEC then moved to intervene

pursuant to Rule 24 of the Federal Rules of Civil Procedure,

and the district court granted its motion.

When the Area Office became apprised that AMTEC may

have had additional and undisclosed affiliates, it initiated

another size protest. On April 16, 1998, the SBA concluded

that AMTEC still qualified as a small business entity (the

"Second Size Determination"). On April 23, 1998, after hear-

ing oral argument, the district court granted a temporary

restraining order and directed DSE to post a $5,000 bond.

See 4/22/98 Transcript ("Tr.") at 94-103. Further evidentiary

hearings followed, including extensive discussions as to the

propriety of requiring DSE to post an additional bond. The

court repeatedly expressed its view that DSE had performed

a public service by coming forward, and that it would be

unfair to saddle it with any additional monetary burden. In

response, the government contended that any blame lay on

AMTEC's shoulders, and that the Army needed protection

against any future claims for the delay. See 4/30/98 Tr. at

95-111. On May 6, 1998, the court issued a preliminary

injunction against performance on the contract, and ordered

that "no compensation is due to AMTEC Corporation for any

delay in the beginning of performance in the procurement

contract because of the Court's finding that the delay in this

matter is the fault of AMTEC's inadequate disclosures...."

DSE, Inc. v. United States, No. 98-0620 (D.D.C. May 6, 1998)

(order granting preliminary injunction) (the "No Compensa-

tion Order").

In the memorandum opinion that accompanied the prelimi-

nary injunction, the district court found the SBA's Second

Size Determination arbitrary and capricious and contrary to

law, remanding the matter back to the SBA. The court

based this conclusion on two separate grounds. First, it

reasoned that the SBA "did not have all the necessary

information before it when it made the determination." DSE,

Inc. v. United States, No. 98-0620, at 11 (D.D.C. May 6,

1998). Although the SBA relies heavily upon an applicant's

voluntary disclosures when assessing size, AMTEC's Presi-

dent had testified that he was largely unfamiliar with both the

SBA regulations governing affiliation and the extensive com-

mercial holdings of those who owned AMTEC. The SBA

itself had already concluded that the disclosures made in

conjunction with the First Size Determination were inade-

quate. When AMTEC failed to divulge pertinent information

concerning two asset acquisitions that it completed during the

interlude between its self-certification and receipt of the

contract award, the court suspected that those underlying the

Second Size Determination were equally insufficient.

While the SBA had been unaware of AMTEC's acquisitions

at the time of its Second Size Determination, the agency

insisted in its testimony before the court that they were

irrelevant. While SBA regulations give present effect to

"agreements in principle" which exist as of the date of self-

certification, SBA officials asserted that they lacked the au-

thority to investigate events occurring after that date. Re-

jecting this contention, the district court concluded that agen-

cy regulations not only permitted but required it to examine

these transactions. Finding that the SBA erred in failing to

investigate whether AMTEC had agreements in principle to

acquire these companies as of the relevant date, the court

remanded the matter to the agency for it to undertake that

investigation.

On June 4, 1998, the SBA again found AMTEC to have

been a small business as of the date of its self-certification

(the "Third Size Determination"). After carefully reviewing

the additional documentation submitted by AMTEC, the SBA

concluded that there were no "unexecuted but final agree-

ments" or "agreements in principle" in existence on Novem-

ber 12, 1997. With respect to each of the subsequent acquisi-

tions, the SBA found that they had merely been in the

negotiation stage as of that day; a number of unsettled

material terms and conditions separated the parties, and the

evidence was insufficient to establish that AMTEC had ac-

quired any negative control over the targeted companies.

Acknowledging the district court's determination that it had

discretion to consider events occurring after a firm's self-

certification, the SBA declined, on the facts before it, to

exercise that discretion.1 After a subsequent evidentiary

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1 The SBA justified this conclusion by noting that: (i) it had not

uncovered any evidence that AMTEC had acted fraudulently in its

self-certification, nor that AMTEC had attempted to circumvent

SBA regulations by postponing the acquisitions until after its self-

certification; and (ii) the Army had conveyed its view that any

further delays in awarding the contract would undermine national

hearing, the district court issued a June 18, 1998 Order which

upheld the Third Size Determination, dissolved the prelimi-

nary injunction, and left all other aspects of its May 6, 1998

Order in place. DSE, Inc. v. United States, No. 98-0620, at 4

(June 16, 1998) (order dissolving preliminary injunction)

("DSE II"). DSE appeals from this Order, and AMTEC has

lodged a cross-appeal.

II. Discussion

A.Preliminary Issues

As an initial matter, AMTEC challenges this court's juris-

diction to hear DSE's claim on the grounds that DSE failed to

exhaust administrative remedies available at the agency level.

Pointing to SBA regulations, AMTEC observes that DSE had

another level of administrative review available to it when it

"abandoned" the administrative regime in favor of a judicial

remedy--namely an appeal of the Area Office's size determi-

nation to the SBA Office of Hearings and Appeals ("OHA").

Because the necessity of exhaustion rests largely upon the

statutory and regulatory framework that structures an agen-

cy's administrative procedure, we briefly delineate the gov-

erning regime before turning to the question of jurisdiction

that it determines.

1.The Regulatory Framework

The Small Business Act (the "Act") grants the SBA broad

authority to craft general criteria for establishing which

entities qualify as small business concerns, as well as to make

particularized size assessments. See, e.g., 15 U.S.C.

s 632(a)(2)(A) ("the Administrator may specify detailed defi-

nitions or standards by which a business concern may be

determined to be a small business concern"); 15 U.S.C.

s 637(b)(6) ("It shall also be the duty of the Administration

and it is empowered, whenever it determines such action is

necessary--(6) to determine within any industry the concerns,

__________

security by jeopardizing the readiness of American military person-

nel. See Size Determination of AMTEC Corporation, No. 4-1998-

20(r), at 2 (June 4, 1998) (the "Third Size Determination").

firms ..., or other business enterprises which are to be

designated 'small-business concerns' for the purpose of effec-

tuating the provisions of this chapter."). The Act further

directs that other federal agencies "shall accept as conclusive

the Administration's determination as to which enterprises

are to be designated 'small-business concerns'...." 15 U.S.C.

s 637(b)(6). The implementing regulations promulgated by

the SBA establish applicable size standards on the basis of

Standard Industrial Classification codes, each of which de-

scribes a particular economic sector and then specifies the

maximum number of employees or annual receipts that a

concern (and its affiliates) within that sector can have and still

be considered small. See 13 C.F.R. s 121.201. In the gov-

ernment procurement context, the codes correspond to the

principal purpose of the product or service being sought. See

13 C.F.R. ss 121.107, 121.201.

The SBA regulations grant initiating authority to agency

contracting officers, directing them to select the appropriate

SIC code by considering which description of activity best

describes the subject matter of the procurement. See 13

C.F.R. s 121.402(b). When submitting an initial offer or bid

for a small business set-aside, a concern must include written

self-certification that it qualifies as small under the specified

SIC code as of the date of the submission. See 13 C.F.R.

ss 121.404-.405. "A contracting officer may accept a con-

cern's self-certification as true for the particular procurement

involved in the absence of a written protest by other offerors

or other credible information which causes the contracting

officer or SBA to question the size of the concern." 13

C.F.R. s 121.405(b).

Any disappointed offeror can make a size protest in connec-

tion with a particular procurement under the Small Business

Set-Aside Program. See 13 C.F.R. s 121.1001(a)(1)(i). To

avail itself of SBA review, the disappointed bidder must file a

grievance with the contracting officer, setting out "sufficiently

specific" allegations "to provide reasonable notice as to the

grounds upon which the protested concern's size is ques-

tioned," 13 C.F.R. s 121.1007(b), within five days of receiving

notice of the identity of the prospective awardee. See 13

C.F.R. ss 121.1003, .1004(a)(2). The contracting officer

"must forward the protest to the SBA Government Contract-

ing Area Officer serving the area in which the headquarters

of the protested concern is located...." 13 C.F.R. s 121.1003.

Upon receiving a specific size protest, the SBA will contact

the prospective awardee, providing a copy of the protest as

well as the requisite SBA documents which must be filled out

and returned within three working days. See 13 C.F.R.

s 121.1008. If the awardee fails to make a timely response,

the SBA may employ a negative inference that the missing

information would reveal the firm to be other than small. See

13 C.F.R. s 121.1008(d). Where the awardee provides a

timely response, the SBA Regional Office "will make a formal

size determination within 10 working days, if possible" of

receiving the original protest. 13 C.F.R. s 121.1009(a).

There is no appeal as of right from a formal size determina-

tion. See 13 C.F.R. s 121.1101. An individual adversely

affected by an Area Office's decision, however, may file a

petition seeking an appeal. See 13 C.F.R. s 134.302. In the

context of a pending procurement, that individual must seek

an appeal with the OHA within fifteen days from the formal

size determination's release, see 13 C.F.R. s 134.304(a)(1),

following which the prospective awardee has ten days to file

an opposition to the appeal petition. See 13 C.F.R.

s 134.309(b). "It is within the discretion of the [OHA Judge]

whether to accept an appeal from a size determination." 13

C.F.R. s 134.303. See also 13 C.F.R. s 121.1101 ("OHA ...

may, in its sole discretion, review a formal size determination

made by a SBA Government Contracting Area Office....").

If the OHA accepts an appeal, its decision, upon issuance,

constitutes the final decision of the SBA. That determination

"becomes effective immediately and remains in full force and

effect unless and until reversed by OHA." 13 C.F.R.

s 121.1009(g)(1).

2.Exhaustion

Under the Administrative Procedure Act (the "APA"), a

party can seek judicial review from a final agency action

without pursuing an intra-agency appeal unless required to do

so by statute or by regulation. See generally Darby v.

Cisneros, 509 U.S. 137 (1993); see also Sendra Corp. v.

Magaw, 111 F.3d 162, 166 (D.C. Cir. 1997) ("Parties therefore

do not have to seek rehearing before they commence an

action for judicial review, unless there is a statute requiring

them to do so...."). As Darby makes abundantly clear, "an

appeal to 'superior agency authority' is a prerequisite to

judicial review only when expressly required by statute or

when an agency rule requires appeal before review and the

administrative action is made inoperative pending that re-

view." Darby, 509 U.S. at 154. By explicit terms, section

10(c) of the APA "has limited the availability of the doctrine

of exhaustion of administrative remedies to that which the

statute or rule clearly mandates." Id. at 146. See 5 U.S.C.

s 704 ("agency action otherwise final is final for the purposes

of this section whether or not there has been presented or

determined ..., unless the agency otherwise requires by rule

and provides that the action meanwhile is inoperative, [ ] an

appeal to superior agency authority").

In an action brought under the APA, our inquiry is two-

fold. First, we examine the organic statute to determine

whether Congress intended that an aggrieved party follow a

particular administrative route before judicial relief would

become available. If that generative statute is silent, as is

the Small Business Act, we then ask whether an agency's

regulations require recourse to a superior agency authority.

Where an intra-agency appeal is discretionary, Darby teaches

that "[c]ourts are not free to impose an exhaustion require-

ment as a rule of judicial administration where the agency

action has already become 'final' under s 10(c)." 509 U.S. at

154.

AMTEC attempts to read SBA regulations as creating a

mandatory appellate procedure, arguing that an aggrieved

party cannot obtain a "final" agency decision without pursu-

ing an appeal to the OHA.2 The SBA regulations, however,

__________

2 Counsel for the SBA took a contrary position at oral argument,

expressing the agency's belief that an OHA appeal is not a precon-

dition to seeking judicial relief. In the SBA's opinion, DSE had

cannot bear that construction. A decision from the OHA is

final upon issuance, whether it declines to exercise the OHA's

power of review or instead replaces an Area Office's size

determination with a formal ruling. See 13 C.F.R.

s 134.316(b) ("The decision [of the OHA] is the final decision

of the SBA and becomes effective upon issuance."). Never-

theless, an Area Office decision can become final without

receiving the OHA's imprimatur: "Unless OHA accepts a

petition for review of a formal size determination, the size

determination made by a SBA Government Contracting Area

Office ... is the final decision of SBA." 13 C.F.R.

s 121.1101. Moreover, as Darby makes relevant, the filing of

an appeal petition with the OHA does not render a size

determination inoperative. Rather, a decision by the Area

Office "becomes effective immediately and remains in full

force and effect unless and until reversed by OHA." 13

C.F.R. s 121.1009(g)(1) (emphasis added). Since that deci-

sion is not rendered inoperative by a pending appeal to a

"superior agency authority," a disappointed bidder need only

make an initial size protest. Then, having exhausted the

administrative remedies made necessary by SBA regulations,

it can proceed in the federal courts seeking relief under the

APA. Because DSE did just that, its claim is properly before

us.

B.The Small Business Administration's Third Size Deter-

mination

DSE challenges the legality of the SBA's Third Size Deter-

mination on four separate grounds, broadly alleging that the

agency failed to adhere to its own precedent in assessing the

number of AMTEC employees. DSE further contends that

the district court erred in finding the Third Size Determina-

tion not arbitrary and capricious. We review the disputed

agency action de novo, and "proceed as if the [agency's]

decision had been appealed to this court directly." Dr

Pepper/Seven-Up Cos. v. FTC, 991 F.2d 859, 862 (D.C. Cir.

1993). Although the district court's decision on DSE's APA

__________

exhausted the necessary administrative remedies before bringing

this suit.

claim is not entitled to any particular deference, the agency's

interpretation and application of its own regulations does

merit our deference. In assessing the SBA's compliance with

the prevailing APA standards, see 5 U.S.C. s 706(2)(A), our

mantra is by now familiar. We ask whether the SBA's

actions have been arbitrary or capricious, examining whether

it has acted consistently with its previous applications of the

governing regulations and whether the application of its

general regulative doctrines to the specifics of this case has

been reasonable. See Troy Corp. v. Browner, 120 F.3d 277,

281 (D.C. Cir. 1997); Choctaw Mfg. Co. v. United States, 761

F.2d 609, 616 (11th Cir. 1985) (in disappointed bidder action,

legality of agency action assessed by asking whether arbi-

trary and capricious). Finding the SBA's Third Size Deter-

mination to constitute a reasonable application of the agency's

regulations that accords with its previous decisions, we reject

each of DSE's contentions in turn.

1.Acquisitions After the Self-Certification

DSE first contends that the SBA Area Office's size deter-

mination was arbitrary and capricious in its refusal to give

"present effect" to three acquisitions consummated in the

two-month period following AMTEC's self-certification as

small. In particular, DSE alleges that the SBA departed

from both its own regulations and past precedent when it

decided against including the employees of Allied Molded

Products, Inc. ("Allied Molded"), Actown-Electrocoil, Inc.

("Actown"), and AEIC, Inc. ("AEIC") in assessing AMTEC's

size. In DSE's view, the chronology of events surrounding

these transactions reveal that AMTEC had reached what the

SBA terms an "agreement in principle" to conclude each of

the relevant acquisitions as of November 12, 1997. Mindful

of our duty to take into account the agency's expertise in

making such assessments, we cannot agree.

The SBA uses the date of self-certification as the general

baseline against which to measure a firm's size. See 13

C.F.R. s 121.404 ("Generally, SBA determines the size status

of a concern (including its affiliates) as of the date the concern

submits a written self-certification that it is small to the

procuring agency as part of its initial offer including price.").

In addition to two enumerated exceptions to this background

principle, neither of which applies here, SBA regulations also

provide for giving "present effect" to certain transactions,

treating them as if they had occurred prior to the date of self-

certification. The relevant provision appears as a part of the

elaborate standards the SBA uses in determining whether or

not associate entities qualify as affiliates for purposes of

assessing size. 13 C.F.R. s 121.103 provides that:

(a) General Principles of Affiliation. (1) Concerns

are affiliates of each other when one concern controls or

has the power to control the other, or a third party or

parties controls or has the power to control both.

(2) SBA considers factors such as ownership, manage-

ment, previous relationships with or ties to another con-

cern, and contractual relationships, in determining

whether affiliation exists....

(d) Affiliation arising under stock options, convertible

debentures, and agreements to merge. Since stock op-

tions, convertible debentures, and agreements to merge

(including agreements in principle) affect the power to

control a concern, SBA treats them as though the rights

granted have been exercised.... SBA gives present

effect to an agreement to merge or sell stock whether

such agreement is unconditional, conditional, or finalized

but unexecuted. Agreements to open or continue negoti-

ations towards the possibility of a merger or a sale of

stock at some later date are not considered 'agreements

in principle' and, thus, are not given present effect.

In its Third Size Determination, the SBA found AMTEC to

have been affiliated with a series of other companies that, like

itself, were owned by North American Fund II, L.P. ("Fund

II"), a venture capital fund. The network of interlocking

companies either owned by Fund II or controlled by those

who control it is elaborate and rather complex. For purposes

of deciding this case, however, we need only point out that as

a result of common ownership and control, the SBA deemed

all companies owned or managed by Fund II and North

American Fund III, L.P. ("Fund III") to be affiliates of

AMTEC. See Third Size Determination at 4-5. The parties

do not contest this finding; instead, their controversy centers

around the acquisition of Actown and AEIC by Fund III, and

of Allied Molded by AMTEC. Because the question of

affiliation is time- and fact-specific, we briefly discuss the

chronology of events surrounding each transaction.

Fund III and each of Actown and AEIC executed a Letter

of Intent on October 23, 1997, in which the parties set forth

their intention to enter into an acquisition agreement by the

end of that year. The companies had begun negotiations

months earlier, after a business search firm contacted Fund

III with information regarding Actown and AEIC. After

Fund III signed a confidentiality agreement that granted it

access to Actown's business information, the companies con-

tinued to negotiate a general structure for the deal and a

proposed purchase price. The Letter of Intent reflected the

agreements that had been reached by October 23rd but, as

the SBA Area Office found, did "not constitute a binding

agreement or an agreement in principle to merge or acquire

stock." Id. at 9. The SBA reached this conclusion based on

the fact that "one key material term, the purchase price of

$20 million, is merely 'contemplated' rather than agreed to,

and is contingent on a number of variables including Fund

III's determination as to [Actown's and AEIC's] financial

prospects, existence of dividend payments, results of environ-

mental studies, and adverse changes in the businesses." Id.

The Letter of Intent also failed to resolve the liabilities that

Fund III would incur upon closing, the impact of the acquisi-

tion upon Actown's employees, the negotiation of employment

agreements, the method of financing, and the amount of

equity and subordinated debt that Fund III would commit.

The acquisition was expressly made contingent upon reaching

a mutually acceptable agreement on these terms. Finally, as

the SBA emphasized, the parties could walk away from the

negotiations and terminate the Letter of Intent at any point

during the process of due diligence without incurring any

liability. Id. Negotiations continued during November, De-

cember and January, and the transaction was not consummat-

ed until January 13, 1998.

Turning to the acquisition of Allied Molded, the parties

began negotiations in October of 1997 and signed a Letter of

Intent during the week that followed AMTEC's self-

certification. This letter did contain a proposed price, but it

was contingent upon various stated assumptions that AMTEC

would have to verify. In addition to due diligence and

environmental impact studies, the letter also noted that a

number of significant issues remained outstanding--e.g., non-

competition agreements, representations and warranties, con-

ditions and indemnifications--and were to be the subject of

further negotiations. Finally, the letter granted AMTEC the

right to walk away at any point in time without incurring

liability. In its Third Size Determination, the SBA concluded

that "this letter is sufficiently nonbinding and tentative as to

the material terms that it does not constitute an agreement to

merge or acquire stock which SBA would give present effect

under the regulation." Similarly, it held that the letter did

not signify an "agreement in principle" as final agreement

was "contingent on the acquiring [company's] due diligence

and other variables ...," and was not enforceable. Id. at 10.

The parties reached final agreement in December, executing

a Purchase and Sale contract on December 30, 1997.

With respect to each acquisition, DSE alleges that the

SBA's Third Size Determination was arbitrary and capricious

in its conclusion that there were neither agreements nor

agreements in principle in place as of AMTEC's November

12th "small" self-certification. Drawing upon a series of

previous SBA decisions, DSE alleges that agency practice can

be distilled into a two-pronged rule: the SBA gives present

effect to an acquisition agreement unless (i) a final agreement

rests on conditions that are unusual, incapable of fulfillment,

speculative or conjectural; or (ii) the probability that the

transaction would ever be consummated is extremely low.

We do not believe, however, that the SBA's cases can plausi-

bly be read to state such a "rule." DSE's attempted exegesis

rests upon a selective misreading of SBA precedent.

Upon examination, none of the cases cited by DSE resem-

ble the case at bar. In nearly all, the presence of a binding

agreement or an agreement in principle was fully evident.

The only question was whether the SBA would give present

effect to that pre-existing agreement when the transaction it

described would not be consummated until some point in the

future. See, e.g., Size Appeal of Consol. Indus., Inc., No.

4235 (SBA OHA 1997) (giving present effect to option agree-

ment under which large entity could purchase all of Consoli-

dated's stock at a set price); Syro Steel, No. 3800 (SBA OHA

1993) (where Articles of Incorporation, Agreement of Merger,

Agreement and Plan of Merger had all been executed, and

S-4 registration statement filed with the SEC seeking regula-

tory approval of merger, held that binding agreement had

been reached at time of self-certification); Dependable Couri-

er Servs., No. 2110 (SBA OHA 1985) (giving present effect to

a takeover when the companies had executed a Stock Pur-

chase Agreement granting negative control over the target to

the acquiring company and leaving formal completion subject

only to minor contingencies); Mark Wienert, SBA No. 865

(1976) (as Board of Directors had each ratified Principles of

Agreement, leaving only minor and routine conditions prece-

dent to closing, present effect deemed appropriate). Here,

by contrast, we are asked to review the propriety of the

SBA's determination that no "agreement in principle" existed

as to either acquisition by the date of self-certification. Con-

ceptually, this question precedes any inquiry into whether

such an agreement, if found, should be given present effect.

Given the fluidity of contemplated and evolving corporate

transactions, which relegates any post hoc examination to a

search for indicia of an agreement, we consider SBA exper-

tise to be at its apex when determining whether an agree-

ment in principle exists. We will not readily substitute our

judgment for that of the agency, see Motor Vehicle Mfrs.

Ass'n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43

(1983), but will defer to its experience provided that the

agency has offered a reasoned explanation for its decision,

and that the result is in accord with material facts contained

in the administrative record. The SBA's Third Size Determi-

nation easily satisfies this standard. With respect to the

acquisitions of Allied Molded, Actown, and AEIC, the SBA

explained that the companies had not reached an "agreement

in principle" because the respective letters of intent failed to

resolve important terms of conditions of the proposed trans-

actions. Since this conclusion is consistent with SBA regula-

tions, see 13 C.F.R. s 121.103(d) ("Agreements to open or

continue negotiations toward the possibility of a merger or a

sale of stock at some later date are not considered 'agree-

ments in principle' and, thus, are not given present effect."),

as well as prior SBA precedent, see Size Appeal of Geosyntec

Consultants, No. 4277 (SBA OHA 1997) (refusing to give

present effect to binding agreement reached four days after

self-certification where target company had rejected a previ-

ous comprehensive bid but parties continued negotiating to-

ward an accord), we will not disturb it.

2.DSE's Additional Claims

DSE's remaining challenges to the SBA's Third Size Deter-

mination are easily disposed of. First, DSE alleges that the

SBA acted unlawfully in utilizing a full-time equivalency

formula3 to count the number of temporary workers used by

AMTEC and its affiliates. The government conceded at oral

argument that the SBA has always rejected the use of

equivalency figures as inconsistent with its regulations requir-

ing that a count include "all individuals employed on a full-

time, part-time, temporary, or other basis," 13 C.F.R.

s 121.106(a), and that "[p]art-time and temporary employees

are counted the same as full-time employees." 13 C.F.R.

s 121.106(b)(2). See, e.g., Atlantic Plastic & Chemical Co.,

No. 1290 (SBA SAB 1979), aff'd on recons., No. 1299 (1979)

(rejecting attempt to measure part-time employees by use of

full-time equivalency formula)4; Golden West Refining Co.,

__________

3 "AMTEC and Deloitte & Touche calculated the number of

[temporary workers] by reviewing the hours for which AMTEC had

been billed by its temporary help services, and dividing by 40 (the

number of hours in a work week)." Third Size Determination at 11.

4 When Atlantic Plastic was decided, the governing regulation,

then 13 C.F.R. s 121.3-2(t), provided that: "Number of employees

No. 2132 (SBA OHA 1985) ("A review of the OHA's and Size

Appeals Board's [ ] decisions concerning 'number of employ-

ees' shows that: the concern cannot count employees on an

equivalency basis but must count as employees all full-time,

part-time and temporary employees...."). It is a settled

tenet of administrative law that an agency cannot depart from

a long-standing policy without providing sufficient explanation

of its rationale for altering course. See Simmons v. ICC, 829

F.2d 150, 156 (D.C. Cir. 1987); Telecommunications Re-

search & Action Ctr. v. FCC, 800 F.2d 1181, 1184 (D.C. Cir.

1986). However, it is equally well settled that the principle of

harmless error applies to judicial review of agency action.

See 5 U.S.C. s 706 ("In making the foregoing determinations

[of whether agency action is arbitrary and capricious] ... due

account shall be taken of the rule of prejudicial error.");

Doolin Sec. Sav. Bank, FSB v. Office of Thrift Supervision,

139 F.3d 203, 212 (D.C. Cir. 1998).

Under the APA, we will not set aside agency action unless

"the party asserting error [can] demonstrate prejudice from

the error," Air Canada v. Department of Transp., 148 F.3d

1142, 1156 (D.C. Cir. 1998), a burden that DSE has conspicu-

ously failed to meet. In the Third Size Determination, the

SBA determined that AMTEC and its affiliates had a total of

1413.19 employees for the twelve months preceding AMTEC's

self-certification as small. See Third Size Determination at

12. Of these, only 44.54 were classified as temporary employ-

ees. See id. In the evidentiary hearings before the district

court, AMTEC introduced additional testimony from its De-

loitte & Touche accountant that counted temporary employ-

ees based on the actual number of individuals used--the same

"head count" method used to measure the number of full-time

and part-time employees. According to the accountant's tes-

timony, AMTEC and its affiliates had 1428.30 employees

__________

means the average employment ... based on the number of per-

sons employed on a full-time, part-time, temporary or other basis

during each of the pay periods of the preceding 12 months." The

regulation currently provides, in almost identical terms, that: "Em-

ployees counted in determining size include all individuals employed

on a full-time, part-time, temporary, or other basis."

during the relevant time period. See 6/15/98 Tr. at 10-13;

DSE II at 3. In other words, an actual head count assigned

fifteen additional employees to AMTEC, but left it well short

of the 1500 allowed for this procurement under SIC Code

3483. Although this information was never presented to the

SBA, DSE did have the opportunity to cross-examine

AMTEC's witness, and to introduce any evidence to the

contrary. DSE failed to provide us with any reason to

believe that it could ever show this revised count to be

erroneous. Accordingly, we find the agency's error to have

been harmless.5 Cf. State of North Carolina v. FERC, 112

F.3d 1175, 1191 (D.C. Cir. 1997) (although FERC utilized

erroneous data, error was harmless as petitioner could not

show that revised data would alter the Commission's projec-

tion).

DSE next contends that the SBA was arbitrary and capri-

cious in its failure to investigate whether the general partners

of North American Company, Ltd.--a limited partnership--

had other commercial interests that should have been consid-

ered affiliates of AMTEC. The record belies this assertion.

As required by its regulations, see 13 C.F.R. s 121.103(a)(1),

(4), the SBA examined all of the holdings of North American

Company's managing general partner, the individual who

controlled its activities. See Third Size Determination at 4-8.

Quantrad Sensor, Inc., SBA No. 4255 (SBA OHA 1997), cited

by DSE for the proposition that the SBA should have gone on

to examine the holdings of the other partners as well, does

not provide to the contrary. In Quantrad, the OHA held that

__________

5 DSE further contends that we should not allow the testimony

before the district court to rehabilitate the Third Size Determina-

tion, as "[i]t is a widely accepted principle of administrative law that

the courts base their review of an agency's actions on the materials

that were before the agency at the time its decision was made."

IMS, P.C. v. Alvarez, 129 F.3d 618, 623 (D.C. Cir. 1997). While it is

true that the accountant's testimony had not been presented to the

SBA, we have not utilized his estimations in reviewing the agency's

size determination. The SBA clearly erred. It is equally clear,

however, that its error was harmless. It would be an empty

formality for us to remand the matter back to the SBA, a waste of

time and resources that we decline to order.

the SBA could request information from a general partner-

ship's general partners, not that it was under an obligation to

do so. In fact, in Size Appeal of Interactive Resources, Inc.,

No. 3168 (SBA OHA 1989), relied upon by the Area Office in

Quantrad, the OHA explicitly held that:

In a limited partnership, each partner's liability is limit-

ed, except that of the General Partner. A General

Partner in a limited partnership has all the rights and

powers of a General Partner in a General Partnership.

Thus, a General Partner in a limited partnership is also

presumptively in control of the limited partnership for

purposes of the affiliation regulation.

(Emphasis added). Having examined the holdings of North

American Company's general partner, the SBA was under no

obligation to make any further inquiries.

Finally, DSE alleges that the SBA should have determined

whether a joint venture between North American Company

and another business, Allied Capital Commercial Corporation,

received financial assistance from the SBA. We disagree.

While 13 C.F.R. s 121.103(f)(1) provides that "[p]arties to a

joint venture are affiliates if any one of them seeks SBA

financial assistance for use in connection with the joint ven-

ture," there was no evidence that any SBA funds had been

used in connection with the North American-Allied Capital

project. In testimony before the district court, which oc-

curred prior to the Third Size Determination and at which the

SBA was represented, the controlling partner of North Amer-

ican Company testified that the joint venture in question had

no relationship whatsoever with the SBA. Given the SBA's

general reliance upon the parties' voluntary disclosure of

relevant information, see 13 C.F.R. s 121.405(a)-(b), policed

by "severe criminal penalties for knowingly misrepresenting

the small business size status of a concern ... [or] for

knowingly making false statements or misrepresentations to

SBA," 13 C.F.R. s 121.108, we do not see how it had any

obligation to investigate further.

Accordingly, we conclude that the SBA's Third Size Deter-

mination was not arbitrary and capricious. We also affirm

the district court's interlocutory order dissolving the prelimi-

nary injunction against performance on AMTEC's contract

with the Army.6 See DSE II at 4. As our discussion well

illustrates, the court properly concluded that DSE had little

to no likelihood of prevailing on the merits of its claim.

C.The "No Compensation Order"

Jurisdiction to adjudicate monetary claims founded upon

any express or implied contract with the United States rests

primarily in the United States Court of Federal Claims. See

28 U.S.C. s 1491. Although the federal district courts have

concurrent jurisdiction when the amount in controversy is

$10,000 or less, the Court of Federal Claims has exclusive

jurisdiction over claims exceeding $10,000, see 28 U.S.C.

s 1346(a)(2); 28 U.S.C. s 1491; Auction Co. of America v.

FDIC, 132 F.3d 746, 749 (D.C. Cir. 1997), as well as over

claims "which are subject to sections 8(g)(1) and 10(a)(1) of

the Contract Disputes Act of 1978." 28 U.S.C. s 1346(a)(2).

Since the Contract Disputes Act applies, inter alia, to con-

tracts entered into by an executive agency for the procure-

ment of property, see 41 U.S.C. s 602(a), the Court of Feder-

__________

6 Although the district court did not enter a formal judgment for

the United States in conjunction with its June 16th Order, the court

clearly assumed that the Order fully resolved and terminated the

proceedings before it. See, e.g., 6/9/98 Tr. at 6 ("I got to finish this

thing here."); 6/15/98 Tr. at 28 ("this thing has got to come to a

conclusion."); DSE II at 3 ("In short, the Court has done every-

thing it can to ensure that the Plaintiff received a careful and

accurate decision from the SBA."). Because the plaintiff's Com-

plaint additionally sought a permanent injunction and other equita-

ble relief, this case will not be formally concluded until the court

enters judgment in favor of the United States in accordance with

Rule 58 of the Federal Rules of Civil Procedure. See Fed. R. Civ.

P. 58; United States v. Haynes, 158 F.3d 1327, 1329 (D.C. Cir.

1998) (separate document requirement of Rule 58 must be mechani-

cally applied). In light of our holding that the SBA's Third Size

Determination was not arbitrary and capricious, no further relief is

available to the plaintiff. Accordingly, we will remand the matter to

the district court to take whatever procedural steps are necessary

to render a formal and final disposition.

al Claims has exclusive jurisdiction over monetary disputes

arising out of such contracts. Had the district court's No

Compensation Order sought to render a final adjudication of

AMTEC's potential monetary claims against the government

under their contract, it seemingly would have exceeded this

jurisdictional proscription. Because we do not believe that

the district court's Order had this intention or effect, howev-

er, we need not determine whether it adjudicated what is "at

its essence a contract action." Commercial Drapery Contrac-

tors, Inc. v. United States, 133 F.3d 1, 4 (D.C. Cir. 1998)

(internal quotations omitted). Compare Megapulse, Inc. v.

Lewis, 672 F.2d 959, 969 (D.C. Cir. 1982) (where plaintiff

seeks injunctive relief against the Coast Guard under the

Trade Secrets Act to prevent dissemination of technological

information, mere fact that dispute is contract-related does

not convert it into an action based on the contract) with

Ingersoll-Rand Co. v. United States, 780 F.2d 74 (D.C. Cir.

1985) (plaintiff cannot avoid Contract Disputes Act by claim-

ing that Air Force's decision to terminate its contract was

arbitrary and capricious and in violation of Federal Acquisi-

tion Regulations).

The district court entered the No Compensation Order in

conjunction with its decision to grant a temporary restraining

order and then later a preliminary injunction. In light of the

circumstances surrounding its issuance, we view the No Com-

pensation Order as part and parcel of the preliminary injunc-

tion order itself. Under Rule 65(c) of the Federal Rules of

Civil Procedure, "[n]o restraining order or preliminary injunc-

tion shall issue except upon the giving of security by the

applicant, in such sum as the court deems proper, for the

payment of such costs and damages as may be incurred or

suffered by any party who is found to have been wrongfully

enjoined or restrained." Fed. R. Civ. P. 65(c). The language

"in such sum as the court deems proper" has been read to

vest broad discretion in the district court to determine the

appropriate amount of an injunction bond. See, e.g., Federal

Prescription Serv., Inc. v. American Pharm. Ass'n, 636 F.2d

755, 759 (D.C. Cir. 1980) (discussing the widely recognized

discretion that a district court granting temporary injunctive

relief has with respect to the security requirement of Rule

65(c)); Carillon Importers, Ltd. v. Frank Pesce Int'l Group

Ltd., 112 F.3d 1125, 1127 (11th Cir. 1997) (same). The

district court entered the No Compensation Order in its

exercise of the broad equitable authority granted by Rule

65(c).

An examination of the record reveals that the court had

extensive discussions with the parties as to both the propriety

of requiring DSE to post a bond and the appropriate amount.

Before issuing the temporary restraining order, and again

before issuing the preliminary injunction, the court expressed

its belief that DSE had rendered a public service in challeng-

ing AMTEC's size. See 4/30/98 Tr. at 97-111. Given DSE's

diminutive size and limited financial resources, the court

sought to fashion a way to limit DSE's potential exposure

while simultaneously requiring a bond sufficient to compen-

sate the government in case the award was later found to

have been wrongfully enjoined.7 It ultimately decided to

__________

7 The following exchange exemplifies the court's and the parties'

varying concerns:

U.S.: Then we need a bond, Your Honor.

Court: You need a bond from these people who are going to

get nothing out of this thing maybe?

U.S.: No, Your Honor. If the SBA determines that AMTEC is

again qualified to get the contract and the Army has been

stopped for this long period of time, with damages, AMTEC is

going to submit a claim for $3,000 a day. If we have been

stopped--

Court: And these people have to pay for it after they do a

public service?

U.S.: Your Honor, if it's improvidently issued because they

were small, anyway, if the SBA finds them to be small on the

remand, they're damaged....

Court: This is Alice in Wonderland....

U.S.: Well, if you merely want to remand the decision to the

SBA, the Army will proceed with the contract performance. If

you don't want contract performance to proceed, then we need

balance the equities by requiring DSE to post a $5,000 bond,

and then limiting the government's potential damages as a

result of delay in performance on the contract by declaring

that AMTEC, who it considered to be the party at fault, could

not recover for losses caused by the injunction.

Because the No Compensation Order formed a part of the

preliminary injunction order, and we have jurisdiction under

28 U.S.C. s 1292(a)(1)8 to review the court's interlocutory

order dissolving the injunction, we necessarily have jurisdic-

tion to hear AMTEC's cross-appeal. However, since we do

not believe that the court's declaration in any way constitutes

an adjudication of AMTEC's rights under its procurement

contract, the Tucker Act does not speak to the propriety of

the district court's June 16, 1998 interlocutory order. We

express no opinion as to the effect its declaration will have in

any future litigation between AMTEC and the government,

__________

to be protected from the damages of the delay, in the event

that the SBA finds that they're still small and they should have

been going forward in the meantime. The value of this time is

hurting the Army....

Court: But I don't think these people who are the whistle-

blowers, should have to put up a bond at this stage because I

don't think that they did the wrong thing by coming for-

ward....

Let me point something out to you. There's a problem here.

We see what the problem is and we don't have to use an atomic

bomb here. There was no fraud. Nobody was trying to

deceive. You heard it as I heard it. You heard that the

problem was [AMTEC's President] went ahead and he didn't

know what the heck he was doing, Lansing. He was in a field

that he shouldn't have been in.

U.S.: I understand, Your Honor. I'm just trying to protect an

innocent bystander.

4/30/98 Tr. at 101-06.

8 "[T]he courts of appeals shall have jurisdiction of appeals from:

(1) Interlocutory orders of the district courts of the United States

..., or of the judges thereof, granting, continuing, modifying,

refusing or dissolving injunctions...." 28 U.S.C. s 1292(a)(1).

leaving it to the Court of Federal Claims to adjudicate their

respective rights under the contract should a dispute subse-

quently arise. As AMTEC has offered no other basis for its

cross-appeal, we affirm the district court's order dissolving

the preliminary injunction.

III. Conclusion

For the foregoing reasons, we uphold the Small Business

Administration's Third Size Determination and affirm the

district court's Order dated June 16, 1998. We remand the

matter to the district court for the purpose of entering a

formal judgment for the United States.

So ordered.