Claims Feds Misclassify Small Businesses Dropped

SAN FRANCISCO (CN) - A federal judge dismissed a lawsuit claiming the U.S. government falsely reported that billions of dollars in public contracts for large corporations were going to small businesses.

The American Small Business League sued the U.S. Small Business Administration (SBA) in May, alleging the federal agency fudged numbers in its annual report to make it look like the government met its target of awarding 23 percent of contracts to small businesses.

According to the SBA's 2015 report, the U.S. government doled out $352.2 trillion in contracts last year with 25.75 percent, or $90.7 billion, going to small businesses.

However, the Small Business League says those numbers are false because the SBA improperly excluded "a significant number of contracts" when calculating the total value of prime contracts. The league also claims the SBA wrongly counted huge corporations, including Verizon, Lockheed Martin and Raytheon, as "small businesses" in its report.

In an interview, the league's president and founder, Lloyd Chapman, alleged that more than half of the $90.7 billion in contracts reportedly awarded to small businesses actually went to "Fortune 500 companies."

Chapman stressed how those government contracts can impact the American economy, pointing out that small businesses created more new jobs than large corporations in recent years.

Small enterprises and entrepreneurs created two-thirds of new jobs in 2014 and accounted for 7 million of the 11 million jobs added during the recovery period following the Great Recession of 2007 to 2009, according to the Small Business Administration.

The Small Business Act requires the SBA to create a remediation plan detailing how it will work toward awarding more contracts to small businesses if it fails to meet the 23 percent goal.

In a three-page ruling issued Tuesday night, U.S. District Judge Vince Chhabria found the federal court for the Northern District of California lacks jurisdiction to review the validity of the SBA's annual report because it does not qualify as a "final agency action" under the Administrative Procedure Act.

"The report does not carry penalties for an agency's failure to meet the small business participation goal," Chhabria wrote. "It does not bind agencies to comply with any proposed remediation plan."

Chapman said he was disappointed in the ruling and complained that his side was not given a chance to argue against the government's motion to dismiss in open court.

"We didn't have our day in court," Chapman said. "If we could have gone in and had our oral arguments, that would have been different. The fact that they didn't let us do that is troubling."

Earlier this month, the judge cancelled a hearing on the motion to dismiss scheduled for Oct. 6, stating that he would instead issue a ruling based on written arguments.

Chhabria did not immediately respond to a phone call seeking clarification on why he vacated the hearing, but the judge's brief, three-page ruling indicates he may have viewed the motion to dismiss as a clear-cut matter of law.

The judge cited a 1998 Ninth Circuit ruling, Guerrero v. Clinton, which held the court lacked jurisdiction to require the Director of the Office of Insular Affairs to issue annual reports on the impact of a 1985 compact on Pacific islands, including Hawaii, Guam and the Northern Mariana Islands.

Because Congress passed the law requiring that report be issued every year, the Ninth Circuit found that "Congress, not the judiciary, is in the best position to decide whether it's gotten what it wants."

Chhabria applied that same interpretation to the adequacy of the SBA's annual reports to Congress on government contract spending.

"The upshot is that Congress enacted a statute requiring the Small Business Administration to provide information about the participation of small businesses in federal contracting," Chhabria wrote. "If the Small Business Administration is giving Congress bad information, then Congress can do something about it, either in an oversight or legislative capacity."

SBA spokeswomen Carol Wilkerson and Hannah Kelley-Bell did not immediately respond to phone calls seeking comment.

Chapman said his organization plans to appeal the ruling.

Follow @NicholasIovino

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