This summer has seen two notable updates that parties to mentor-protégé joint ventures (MPJVs) should be aware of.
First, buried in a Notice that the U.S. Small Business Administration (SBA) issued on July 22, 2024, is a request for comments regarding updates that involve potential major implications for MPJVs. As most are aware, a joint venture between an SBA-approved mentor and protégé is exempt from standard affiliation rules and, as a result, can pursue work for which only the protégé would qualify. This structure was meant to be an incentive for larger firms to mentor and assist smaller ones. As of this writing, more than 1800 mentor-protégé pairs have found this incentive significant enough to participate in the SBA program. Now, SBA is considering muting this incentive by either eliminating the affiliation exception for MPJVs for (1) multiple award contracts or, alternatively, for (2) contracts or orders with a duration longer than five years. SBA is apparently concerned that MPJVs have been too successful and are winning an inordinate number of such contracts.
If it seems odd to see an agency attempting to tamp down the success of its own program, that is because it is. If implemented, SBA’s proposed changes would significantly limit the potential value of the mentor-protégé program for current and future MPJVs. This is because, as anyone watching the industry knows, more and more work is being awarded through GSA Schedules and government-wide multiple award vehicles that almost always have a duration that is longer than five years. Essentially, SBA would limit MPJVs to one-off awards in a way that no other small business program is limited. Without the exception from affiliation, MPJVs would no longer be eligible for award of multiple award contracts, or contracts or, alternatively, orders with a duration that is longer than five years.
SBA’s concerns appear to be driven by (a) the success of MPJVs on long-term contracts (at the expense of other concerns) and (b) the life of the JV entities extending for significantly longer than the six-year mentor-protégé period. As to the first, SBA’s concern that MPJVs are winning too much work at the expense of standalone small businesses may be valid, but one would hope that it is outweighed by the benefits of the mentor’s work with the protégé. If the benefits of the relationship are falling short, SBA should focus there and not on the success of MPJVs themselves. As to the second possible concern, we are not aware of MPJVs existing in perpetuity. Instead, they exist as long as it takes to complete the work they have committed to completing and then to close out those contracts. That is the minimum the government should expect, rather than putting an artificial cap on their lifespan. SBA’s proposals here are also likely to have negative effects for standalone small businesses. Without MPJVs, agencies may find the small business rule of two difficult to satisfy and, as a result, larger contracts will simply be awarded on a full and open basis. A better solution would be to study what benefits protégé firms are receiving and how long-term protégé outcomes could be improved (if at all). Contracting Officers could also consider capping the number of MPJV awards for particular contracts or creating an MPJV pool if they share SBA’s concerns (which isn’t evident at the moment). Comments are due by September 17, 2024, but SBA did not indicate when it might issue a final rule.
Second, the Eleventh Circuit issued a decision in Yorktown Systems Group Inc. v. Threat Tec LLC regarding a dispute between a mentor and its protégé. Specifically, Yorktown, the mentor, was able to preliminarily enjoin the protégé, Threat Tec, from terminating a subcontract between the MPJV and the mentor for convenience. The lower court found, and the Eleventh Circuit agreed, that the protégé breached its fiduciary duty and could not hide behind the termination for convenience clause to “turn on the mentor” and act in its own interests to cut the mentor out of its share of work. The court went as far as saying the protégé’s actions were “the epitome of disloyalty.” Disputes among mentor and protégé pairs occur, but rarely do they spill over into court. This case serves as a reminder that just because a protégé is in control of an MPJV does not necessarily mean it has the unilateral right to unjustifiably terminate subcontracts between the MPJV and the mentor without repercussions. This case should also serve as a comfort to potential mentors who worry about protégés being given too much power over MPJVs due to SBA’s regulations requiring protégés to have control.
It will be interesting to see how these issues play out in the future.
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