Avoiding Those MBE/WBE Certification Boobytraps

In company formation process, astute business owners secure legal advice when forming the company. However, corporate counsel unfamiliar with certification standards can accidentally set an applicant up for Minority / Women Business Enterprise (MBE/DBE) certification failure. The following article addresses the major booby traps which pertain to certification standards.

1. Size: Are You Chicken Little or Really Big Daddy?

The first threshold for Minority or Woman Business Enterprise (M/WBE) certification is proof your business qualifies as “small” under Small Business Administration (SBA) standards. These standards vary by industry and are reflected either in gross revenue dollars (i.e. for construction and sales), or in total number of full time employees (i.e. for manufacturing), averaged over a three year period. Current size standards may be found on the internet through Google, “NAICS Size Standards”.

While this sounds straightforward, the certification guidelines permit the reviewing agency to look at all of your ownership interests and pool that information. Thus if an applicant owner holds an ownership interest in several companies, the gross revenues or total employees of all companies are added together to determine size. Similarly, if your company is partially owned by a much larger corporation, under certain circumstances the gross revenues or total employees of the larger company are lumped in. This determination is based on an “affiliation” analysis, which reviews whether the larger company: (a) owns a significant interest in the smaller one, (b) shares mutual directors, officers or key employees; (c) shares office space or management duties; and/or (d) whether the smaller company is captive to the larger by virtue of its total book of business.

2. Capitalization: Show Me The Money!

The second element requires proof that the minority or woman applicant truly “owns” 51% or more of the business. Ownership is more than just the certificate of ownership shares. Proof requires evidence that the applicant paid a “fair market” value to acquire those shares from the applicant’s individually owned funds. Thus capitalization from a joint checking account, without proof of the fund origins into that account, is viewed as only a pro-rata investment by the applicant. Acquisition by gift, or through trust funds, can also present major obstacles. The best avenue is to evidence the capitalization through clearly established records showing funds solely belonging and originating through the applicant/owner.

3. Don’t Trust in Trusts

While trust ownership is common in normal business settings, trust ownership in the MBE/WBE context can be problematic. The primary issue is who controls the trust? If multiple individuals have decision making authority in the trust, you most likely have “control” problems for purposes of MBE/WBE certification compliance.

4. Control: Who’s Pulling The Strings?

The final element – and the one which poses the major obstacles to most applicants – is proof of control over major business decisions of the company. This runs the gamut from analyzing the applicant’s qualifications in their particular industry, to who holds applicable required licenses, to knowledge about sales and estimating, equipment, etc. At a minimum, the applicant must possess sufficient knowledge to make meaningful hiring decisions and to exercise intelligent oversight over their employees.

More problematic, most businesses are established with a standard model appointing a group of directors, who then appoint a group of officers to control the company’s day to day management decisions. Each director and officer typically has one vote, meaning they can theoretically outvote an owner/director or officer in certain circumstances. This may immediately disqualify an applicant. Instead, a potential M/WBE candidate is encouraged to set up company by-laws or operating agreements with cumulative voting; i.e. giving the 51% or more owner the right to always control the votes based on voting power commensurate with ownership shares.

Finally, the M/WBE applicant must consider implementing check writing limitations for key employees not to exceed certain defined limits without securing the M/WBE owner’s written authorization.

5. Side Agreements – Are You Crazy?

In some instances, potential owners have agreed to verbal or side agreements which modify those factors showing compliance with the above ownership and control factors. In a single word, this constitutes “FRAUD”. If you misrepresent facts in the application process, the government retains a powerful legal right to punish you under contract, ordinance, state and federal False Claims Acts or clauses. Penalties under these clauses and/or contracts range from forfeiture of all monies paid to your company under any contract awarded under the false representation, to disbarment from doing further government business, to jail time. Thus the advice is: No Side Agreements. Either you legitimately qualify, or face the consequences!

 

© Denise E. Farris. Esq. Farris Law Firm LLC. 20355 Nall Avenue, Stilwell, KS 66085 Email: dfarris@farrislawfirm.com. (August 3, 2017). All rights reserved. This article may not be reprinted nor reproduced in any manner without prior written permission by the authors

This article provides general coverage of its subject area. It is provided free, with the understanding that the authors, sponsors and/or publishers do not intend this article to be viewed as rendering legal advice or service. If legal advice is sought or required, the services of a competent professional should be sought. The authors, sponsors and/or publishers shall not be responsible for any damages resulting from any error, inaccuracy or omission contained in this publication.

WHAT’S NEW 2015

Edit5A lot has been going on in the Farris Law Firm LLC since our last “What’s New” column.  Just a quick recap includes the following honors  received by the Firm, including:

  • 2013-2015 Martindale-Hubbell’s List of Preeminent Women Lawyers
  • 2013-2015  Martindale-Hubbell’s List of “AV” Rated Law Firms
  • 2013-2015  KC Business Journal “Best of the Bar”
  • 2013-2015  KC Business Magazine’s “SuperLawyers”
  • 2013-2015  KC Business Magazine’s Top 100 Attorneys MO/KS
  • 2013-2015  KC Business Magazine’s Top 50 Female Attorneys MO/KS
  • 2014  Equus Magazine’s “Leaders in Equine Law”

As always, these recognitions are great but it’s our long term client relationships that matter the most!

The firm continues its practice in business, commercial construction and equine law with an emphasis on government contracting, minority and women business certifications, and risk management through good documentation.  The equine law practice includes veterinary law and a special emphasis on the regulatory rules governing animal pharmaceutical compounding. And we continue to offer dispute resolution services through our sister company, Perspectives Dispute Resolution, LLC.

I want to give a special thanks to Lori Hemphill for her assistance in giving the Firm’s web page a much-needed facelift.  Watch for the publication of a number of new articles on the Legal Pad sites; and most importantly, thanks for your continued business!

Denise E. Farris, Esq.

 

Missouri Affirmative Action Programs Under Attack!

In the recent case of Behavioral Interventions Inc v Mo Office of Administration pending in the U.S. District Court, Western District of Missouri, the State of Missouri’s affirmative action program was challenged as unconstitutional where the program allegedly:

  1. Employed goals irrelevant to availability of qualified MBE/WBE firms;
  2. Did not utilize a fair waiver system;
  3. Was based on stale data, where the state’s underlying disparity study was 15 years old;
  4. Did not contain size standards or graduation requirements;
  5. Contained no race-neutral measures.

Following several months of briefing, the court issued an injunctive order temporarily suspending the State’s program until trial in May 2005. The case was ultimately settled in May by the State’s revision of the program.

Impact of Challenges

Although prejudice still exists, the above challenge reflects a growing frustration by white male business owners who feel they can no longer effectively compete against incentives favoring minority and women owned businesses. This frustration has resulted in a growing number of legal challenges raised throughout the country. The challenges serve as a wake-up call to governmental entities and MBE/WBE participants that its time to review the local program and, where necessary, bolster its constitutional safeguards.

Constitutional Parameters for Valid Affirmative Action Programs
The 1989 Supreme Court case of City of Richmond versus J.A. Croson, identified the parameters for a constitutionally valid affirmative action program at the local and state level. Specifically, to pass muster, the government must prove:

  1. It has a compelling interest in creating the program, AND
  2. The program as designed and implemented is narrowly tailored to address that interest.

The same standard for federal programs was adopted in the recent 2000 – 2002 three-part series of challenges known as Adarand Constructors v. Pena.


Proof of “Compelling Government Interest”

A “compelling government interest” is established through statistical proof of past discrimination against specific groups. These studies, now known as Croson Studies, analyze: (1) specific identification of MBE/WBE firms in that particular region; (2) the scopes and magnitudes of work they can perform; and (3) the forms of discrimination they have earlier encountered in terms of educational opportunities; business formation; credit and finance; bonding; and job procurement. The Croson Studies, thus become the underpinning for any constitutionally valid program.

Many local and state governments implemented these studies in the years following the 1989 Croson decision. The studies identified many instances of past discrimination. However significant, recent decisions hold that these early Croson studies cannot perpetually justify the programs – in other words, the statistical studies must be repeated at regular intervals to ensure the data is fresh. While there is no litmus test on how long studies are deemed valid, the cases suggest the study should be updated on a regular basis every seven to ten years, at a minimum. This suggests that many local and state governments should implement steps now to review and update their older Croson studies.


Proof that a Program is “Narrowly Tailored”

The government must additionally prove the program is “narrowly tailored” to remedy past discrimination. Croson and Adarand identify “narrow tailoring” as requiring analysis of whether the program:

  1. Is more than mere “racial balancing”
  2. Is based on the number of local qualified minorities and women owned firms, in that region, who are capable of performing the work required in each particular contract;
  3. Is not over inclusive by presuming discrimination against certain minorities;
  4. Is not under inclusive by omitting race neutral measures designed to assist small business in general;
  5. Does not implement mandatory quotas.

SUMMARY
What do these challenges mean? Local governments should be reviewing their disparity studies to ensure the data is fresh. If not, the studies should be immediately updated. Local minority and women owned firms who have not previously certified as such, should do so. Otherwise the government cannot rely on accurate “availability” data. Certifications should detail ALL scopes of work that firm is capable of performing. Women minorities should double certify both as minority-owned firms as well as women-owned firms. Small businesses who are not MBE/WBE should also be involved in reviewing and familiarizing themselves with the race neutral business assistance services these programs typically have. Bottom line is, affirmative action will continue to be around. By all parties’ active participation, the programs can and should operate in a fair manner.


DISCLAIMER

This article provides general coverage of its subject area. It is provided with the understanding that the author, publisher and/or publication do not intend this article to be viewed as rendering legal advice or service. If legal advice is sought or required, the services of a competent professional licensed in your state should be sought. The author and the publisher shall not be liable for any damages resulting from any error, inaccuracy or omission contained in this publication.

 

© Denise E. Farris (May 2005). All rights reserved. This article may not be reprinted nor reproduced in any manner without the express permission of the author, who can be contacted at: Denise Farris, Farris Law Firm, L.L.C., 20355 Nall, Stilwell, KS 66085. Tel: 913-685-3192. Fax: 913-685-3292. Email: dfarris@farrislawfirm.com.

Key Events in 2012

The firm witnessed a number of changes and key events in 2012, including an office relocation and receipt of several prestigious national recognitions. The awards included:

  • Martindal Hubbell national Preeminent Women Lawyers listing
  • Farris Law Firm LLC and Denise Farris “AV” rating for 10th year in a row, representing highest expertise and ethics thru peer review ratings
  • Kansas City Business Journal “Best of the Bar”, 5th year
  • KC Magazine “Missouri / Kansas Superlawyers”
  • Enterprising Woman “Small Business Owner of the Year, Up to $1 Million”

The firm additionally worked with animal pharmaceutical manufacturer Boehringer Ingelheim Vetmedica, Inc. in providing a national educational series to BIVI’s pharmaceutical sales representatives and veterinary users on liability risk management in large and small animal practices, as well as recent regulatory and legal developments related to animal pharmaceutical compounding. The topic was picked up by participants in Missouri and Kansas’ Animal Health Corridor, with Denise co-chairing a highly interactive, sometimes fractious, but educational exchange at the regional Animal Health Summit on March 8, 2012 at Johnson County Community College in Overland Park, Kansas.

Denise continued her volunteer work with various representatives of Kansas’ small business community in efforts to pass legislation re-enacting Kansas Small Business preference program, which expired per sunset provisions several years ago. A race and gender neutral program, proponents argued that its implementation – which would require the State to allocate a percentage of its annual procurements to restricted bidding competition among the State’s small businesses – would continue to prime the pump for the state’s economic recovery. Briefs submitted to the Commerce Committee identified statistics showing that increased procurement opportunities for small business result in additional hires, additional purchases, and additional taxes at the sales, city, county and state levels. While the bill did not pass this go-around, the dialogue generated continues to merit serious consideration for Kansas citizens and business owners.

Denise also continued her work with the national organization of Women Impacting Public Policy on federal procurement issues, in particular removal of contract caps limiting the Women Owned Small Business, or 8M program. Denise also worked with a group of community players in hosting the region’s first Access to Capital conference focusing on the role of angel investors and venture capital infusions for start-up high growth businesses. Held at the Kauffman Center, with representatives from all federal elected offices in attendance, the conference generated lively dialogue and audience interaction through a “Dolphin Tank” format of capital request presentations by various small business owners, panel feedback, and the formation of business relationships as a result.

 

key-events-2012-photo1Josh Rowland, Lead Bank; Ann Sullivan, WIPP; Danielle Evers and Don Graves,
White House – President’s Council on Jobs & Competitiveness

 

key-events-2012-photo2Ann Sullivan, WIPP Governmental Relations Liaison with Don Graves, White House –
President’s Council on Jobs & Competitiveness

key-events-2012-photo3Amy Millman, Springboard Enterprises; Josh Rowland, Lead Bank;
with WIPP Executive Director Barbara Kasoff

 

Finally, in March 2012, the office closed its downtown location and consolidated all operations into the Stilwell, KS location. Please note the Firm’s current address:
FARRIS LAW FIRM, LLC
20355 Nall Avenue
Stilwell, KS 66085
Tel: 913-766-1262
Email: dfarris@farrislawfirm.com

Women’s Equity in Contracting Act

In 2000, President Bill Clinton signed into law the federal Women’s Equity in Contracting Act, known as the “8(m) Program”.

In 2007, the bi-partisan passed legislation still had not been implemented in federal procurement by any agency. From 2007 thru the current date, Farris Law Firm owner Denise Farris worked with the national organization of Women Impacting Public Policy (WIPP) to draft public comment, congressional testimony, and committee participation aimed at effective Small Business Administration rule implementation for the Act. This involvement included service on the Small Business Advisory Committees for the U.S. House of Representatives under Representative Nydia Velasquez, and the U.S. Senate for Senators Olympia Snowe and John Kerry.

On March 10, 2011, members of WIPP, the Obama Administration, Small Business Administration, and various governmental and private contracting entities met in Washington DC to celebrate the final rule implementation for the new 8m program.

The new program establishes a utilization goal of 5% for women owned businesses providing goods or services in 83 categories at the federal level. These can be located at http://www.sba.gov/sites/default/files/files/gc_wosb_naics_grids.pdf

The actual program began April 1, 2011 and features a strong emphasis on encouraging Joint Ventures and Mentor/Protégé agreements on federal procurements.

Detailed information can be found at www.sba.gov\wosb.

d fARRIS WIPP DC2    D Farris 8m WIPP DC

Denise Farris at the Give Me 5% Reception
March 10, 2011

“BEST OF THE BAR – CONSTRUCTION LAW”

FARRIS RECOGNIZED AMONG BUSINESS JOURNAL’S “BEST OF THE BAR – CONSTRUCTION LAW”

In October 2009, Farris Law Firm founder Denise Farris was recognized by a survey of her peers as one of Kansas City’s “Best of the Bar – Construction Law”.  The annual survey, conducted by the Kansas City Business Journal, acknowledges attorneys who have developed a reputation of excellence in both legal expertise as well as professionalism in their areas of practice.  Click here for more information.

New Books!

Denise Farris recently authored a chapter, “Socio-Economic Issues in Federal Government Contracting”, included in the American Bar Association Publication Federal Government Contracting, 2d edition (2010).  Copies of this informative treatise can be obtained through the American Bar Association’s Store, located here.   Denise’s contributions are noted here.

 

Denise was also interviewed and described in the new publication, The Happy Lawyer – Making a Good Life in the Law by  Nancy Levit and Douglas Linder (2010). Denise was noted for combining a litigation and consulting practice over her twenty years in contract law focused on commercial construction and equine law niches.  For book copies, click here.