Xotech, LLC v. United States

United States Court of Appeals
for the Federal Circuit
______________________

XOTECH, LLC,
Plaintiff-Appellant

v.

UNITED STATES,
Defendant-Appellee
______________________

2019-1743
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Appeal from the United States Court of Federal Claims
in No. 1:18-cv-01483-NBF, Senior Judge Nancy B. Fire-
stone.
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Decided: February 26, 2020
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W
ILLIAM T. WELCH, McMahon, Welch & Learned,
Reston, VA, argued for plaintiff-appellant.

ERIC LAUFGRABEN, Commercial Litigation Branch,
Civil Division, United States Department of Justice, Wash-
ington, DC, argued for defendant-appellee. Also repre-
sented by J
OSEPH H. HUNT, ALLISON KIDD-MILLER, ROBERT
EDWARD KIRSCHMAN, JR.; BEVERLEY E. HAZLEWOOD, Office
of General Counsel, United States Small Business Admin-
istration, Washington, DC; W
AYNE T. BRANOM, III, Con-
tract and Fiscal Law Division, United States Army Legal
Services Agency, Fort Belvoir, VA.
Case: 19-1743 Document: 34 Page: 1 Filed: 02/26/2020

XOTECH, LLC v. UNITED STATES 2
______________________

Before LOURIE, TARANTO, and STOLL, Circuit Judges.
LOURIE, Circuit Judge.
XOtech, LLC (“XOtech”) appeals from a decision of the
United States Court of Federal Claims (“the Claims Court”)
affirming the Small Business Administration Office of
Hearings and Appeals’ determination that XOtech is not
eligible to compete for government contracts set aside for
service-disabled-veteran-owned contractors. See XOtech,
LLC v. United States, 142 Fed. Cl. 313 (2019) (“Decision”).
Because we agree with the Claims Court that service-disa-
bled veterans do not control “all decisions” of XOtech as re-
quired by 13 C.F.R. § 125.13(d), we affirm.
B
ACKGROUND
I
“In an effort to encourage small businesses, Congress
has mandated that federal agencies restrict competition for
some federal contracts.” Kingdomware Techs., Inc. v.
United States, 136 S. Ct. 1969, 1973 (2016). To that end,
the Small Business Act requires many federal agencies to
set aside contracts to be awarded to certain categories of
small businesses. Service-disabled-veteran-owned
(“SDVO”) small businesses are one such category. 15
U.S.C. § 644(g)(1)(B). SDVO status is highly beneficial in
competing for government contracts because it permits
designated contractors to compete for government business
against fewer competitors. In order for a business to be
eligible to compete for SDVO contracts, service-disabled
veterans (“SDVs”) must own and control the business. See,
e.g., 15 U.S.C. §§ 632(q)(2), 637(d)(3)(E).
The Small Business Administration (“SBA”) has prom-
ulgated regulations establishing criteria for determining
whether SDVs own and control businesses having various
corporate forms. See 13 C.F.R. §§ 125.12, 125.13. For a
Case: 19-1743 Document: 34 Page: 2 Filed: 02/26/2020

XOTECH, LLC v. UNITED STATES 3
limited liability company (“LLC”), at issue here, one or
more SDVs must directly and unconditionally own at least
51% of each class of member interest for the company to be
owned by SDVs. 13 C.F.R. § 125.12, (a), (c). For an LLC to
be controlled by SDVs, one or more SDVs must (1) control
the company’s long-term decision making, 13 C.F.R.
§ 125.13(a); (2) conduct the company’s day-to-day manage-
ment and administration of business operations, id.; (3)
hold the highest officer position, id. § 125.13(b); (4) serve
as managing members, id. § 125.13(d); (5) have “control
over all decisions of the limited liability company,” id.; and
(6) “meet all super majority voting requirements,” id.
§ 125.13(f). This appeal concerns whether an SDV “con-
trol[s] . . . all decisions” of XOtech under § 125.13(d).
II
XOtech is organized as an LLC under the Georgia Lim-
ited Liability Company Act (“Georgia LLC Act”). Under the
Georgia LLC Act, an LLC may be either member-managed
or manager-managed. G
A. CODE ANN. § 14-11-304(a), (b)
(2019). In a member-managed company, the owners are
the members and possess the “right and authority to man-
age the affairs of the limited liability company and to make
all decisions with respect thereto.” Id. § 14-11-304(a). In a
manager-managed company, management of the company
is vested in one or more managers who have authority to
manage the company as provided in the operating agree-
ment. Id. § 14-11-304(b).
XOtech was originally organized in 2000 as a member-
managed company, with Gary Marullo, an SDV, as the only
member. XOtech was later transformed from a member-
managed company into a manager-managed company,
with Mr. Marullo as the only manager. In 2012, XOtech’s
Operating Agreement was amended to change XOtech from
a single-manager company into a multiple-manager com-
pany.
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XOTECH, LLC v. UNITED STATES 4
Under its current Operating Agreement, XOtech has
four “Members” who are its owners, and each Member’s
voting interest corresponds to their respective ownership
interest. The ownership interests of XOtech’s Members are
as follows:
Member Ownership Percentage
Gary Marullo 90.28%
Kathy Marullo 3.72%
Jena Marullo-Webb 2.00%
Joshua Marullo 4.00%
J.A. 70.
Certain decisions are reserved to Members and require
an affirmative vote of a “Majority Interest,” including “(a)
the sale, exchange, lease or other transfer or disposition of
all, or substantially all, of the Company’s assets outside of
the ordinary course of business, and (b) any reorganization,
merger, liquidation, recapitalization or liquidation of the
Company.” J.A. 89 ¶ 6.03. A Majority Interest consists of
the vote of Members owning a majority of the company, as
well the vote of all “Senior Members.” Mr. Marullo cur-
rently is the only Senior Member. Thus, by virtue of his
90% ownership interest and status as the only Senior Mem-
ber, Mr. Marullo controls all decisions reserved to Mem-
bers, which are the most significant and transformative
decisions affecting the company.
The Operating Agreement also designates three “Man-
agers”: Mr. Marullo, as well as his wife, Kathy, and his son,
Joshua, neither of whom is an SDV. Unless specified oth-
erwise in the Operating Agreement, Managers “have full
and complete authority, power and discretion to manage
and control the business, affairs and properties of the
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XOTECH, LLC v. UNITED STATES 5
Company, to make all decisions regarding such matters
and to take all action necessary or convenient to carry out
the business and affairs of the Company.” J.A. 89 ¶ 6.01.
The Operating Agreement vests authority for several spe-
cific functions in the Managers, including hiring employ-
ees, binding XOtech to contracts, borrowing money,
determining the amount and timing of distributions to
Members, and prosecuting or defending any proceeding in
XOtech’s name. J.A. 89 ¶ 6.01, 92 ¶ 7.01. Each Manager
has equal voting power, and a majority vote of Managers is
required to make a management decision. Thus, any man-
agement decision requires the vote of at least one non-SDV,
and the two non-SDV Managers can make management de-
cisions without Mr. Marullo’s vote.
The number of Managers is determined by a Majority
Interest of Members, and a Manager may be removed at
any time, with or without cause, also by a Majority Interest
of Members. Mr. Marullo therefore has the authority uni-
laterally to set the number of Managers and to remove
Managers at will.
III
In 2017, the Department of the Army issued a Request
for Proposals seeking an SDVO contractor to provide logis-
tics support for various Army Reserve facilities. XOtech
submitted a proposal and ultimately was awarded the con-
tract. An unsuccessful bidder protested the award to the
SBA, challenging, among other things, XOtech’s eligibility
to compete for SDVO contracts. The Director of the SBA’s
Office of Government Contracting determined that XOtech
did not meet the requirements for SDVO status and sus-
tained the protest. Specifically, the Director determined
that, although Mr. Marullo, an SDV, owned XOtech, he
lacked sufficient control over XOtech’s operations because
he required the vote of at least one non-SDV to make man-
agement decisions. The SBA Office of Hearings and Ap-
peals affirmed the Director’s decision. See Matter of:
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XOTECH, LLC v. UNITED STATES 6
XOtech, LLC, SBA No. VET-277, 2018 WL 8786645 (Sept.
14, 2018).
XOtech filed a bid protest in the Claims Court, and
both XOtech and the government moved for judgment on
the administrative record. The court determined that not
all decisions of XOtech are controlled by SDVs because its
Operating Agreement requires Mr. Marullo to have the
vote of at least one non-SDV to make management deci-
sions. Decision, 142 Fed. Cl. at 318. The court also deter-
mined that Mr. Marullo’s ability to remove non-SDV
Managers at will does not give him control over all deci-
sions of XOtech because that removal authority does not
restrict the ability of non-SDV managers to make decisions
before removal, nor does it enable Mr. Marullo to undo
their decisions. Id. at 319. The court thus granted the gov-
ernment’s motion for judgment on the administrative rec-
ord.
XOtech appealed. We have jurisdiction under 28
U.S.C. § 1295(a)(3).
D
ISCUSSION
We review decisions of the Claims Court on cross-mo-
tions for judgment on the administrative record de novo,
applying the same standard of review as the trial court.
Palantir USG, Inc. v. United States, 904 F.3d 980, 989
(Fed. Cir. 2018) (citing Glenn Def. Marine (Asia), PTE Ltd.
v. United States, 720 F.3d 901, 907 (Fed. Cir. 2013)). Cross-
motions for judgment on the administrative record are gov-
erned by Rule 52.1(c) of the Rules of the United States
Court of Federal Claims. “In deciding these motions, the
[Claims Court] considers ‘whether, given all the disputed
and undisputed facts, a party has met its burden of proof
based on the evidence of record.’” Palantir, 904 F.3d at 989
(quoting A & D Fire Prot., Inc. v. United States, 72 Fed. Cl.
126, 131 (2006)).
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XOTECH, LLC v. UNITED STATES 7
Bid protests are reviewed under the Administrative
Procedure Act. Palantir, 904 F.3d at 989. Therefore, an
agency’s decision may be set aside only if it is “arbitrary,
capricious, an abuse of discretion, or otherwise not in ac-
cordance with law,” or “without observance of procedure re-
quired by law.” Id. (quoting 5 U.S.C. § 706(2)(A), (D)).
On appeal, XOtech makes two principal arguments.
First, XOtech argues that its non-SDV Managers cannot
block any management decision that Mr. Marullo takes be-
cause he has the authority to remove any Managers that
disagree with him and proceed with his decision. Second,
XOtech argues that Mr. Marullo’s inability to prevent non-
SDV Managers from making decisions that he opposes does
not preclude SDVO status because the ability of the non-
SDV Managers to bind XOtech is no different from that of
an ordinary employee to whom decision-making authority
has been delegated. In a business of any appreciable size,
XOtech argues, at least some decision-making authority
must be delegated to employees to conduct day-to-day busi-
ness, which does not in itself alter control of a company for
purposes of SDVO status. And where non-SDV Managers
can be removed at will by an SDV, those Managers are no
different from ordinary employees whose delegated author-
ity can be revoked at any time. Thus, argues XOtech, the
ability of non-SDV Managers who are removable at will to
make management decisions without Mr. Marullo’s vote
does not wrest control over all decisions of Mr. Marullo be-
cause those decisions are merely an exercise of authority
delegated by Mr. Marullo in the same way as with any re-
movable employee.
In response, the government argues that XOtech can-
not satisfy the requirement that SDVs control all decisions
of XOtech because its Operating Agreement requires the
vote of at least one non-SDV to make management deci-
sions. Mr. Marullo’s ability to remove Managers is insuffi-
cient to retain control over all decisions, the government
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XOTECH, LLC v. UNITED STATES 8
argues, because it does not permit him to veto or undo de-
cisions taken by non-SDV Managers.
We agree with the government and the Claims Court
that XOtech is not an SDVO business. To determine who
controls the decisions of a company, we look to the terms of
its governing documents. Here, XOtech’s Operating Agree-
ment vests management authority in three Managers who
have equal voting power, and every management decision
requires a majority vote. J.A. 90 ¶ 6.06–6.08. Since Mr.
Marullo is the only SDV Manager, the vote of at least one
non-SDV is required for any management decision. If any
portion of an LLC’s decision-making authority requires the
vote of a non-SDV, then SDVs cannot be said to control all
decisions of the company. To establish SDV control, one or
more SDVs must be able to independently exercise control
of all decisions, without the consent of any non-SDVs. That
is not the case here.
XOtech concedes that where a governing document re-
quires a supermajority for certain decisions and SDVs do
not control a supermajority of votes, SDVs lack the requi-
site control for SDVO status under 13 C.F.R. § 125.13. Ap-
pellant’s Br. 21. We agree, but that reasoning precludes
SDVO status for XOtech. Here, XOtech’s Operating Agree-
ment requires a simple majority for management decisions,
and SDVs do not control a majority of management voting
power. Thus, SDVs do not control those decisions and lack
the requisite control for SDVO status. In fact, Mr.
Marullo’s lack of control is even more pronounced, for not
only does Mr. Marullo require the vote of at least one non-
SDV to make a management decision, his wife and son—
neither of whom is an SDV—together compose a majority
of Managers who can make decisions even without the vote
of Mr. Marullo.
Moreover, Mr. Marullo’s ability unilaterally to remove
other Managers is insufficient to retain control of all deci-
sions. Until Mr. Marullo actually removes the non-SDV
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XOTECH, LLC v. UNITED STATES 9
Managers, all management decisions require the vote of at
least one non-SDV. Mr. Marullo cannot preempt the non-
SDV Managers from making decisions, and he cannot undo
decisions that they have made even after their removal.
XOtech attempts to minimize the significance of the
authority of non-SDV Managers to make decisions without
Mr. Marullo’s vote by likening them to employees to whom
decision-making authority is delegated. XOtech’s argu-
ment is unavailing. The ability of employees to make deci-
sions during day-to-day operations results from a
delegation of management authority, and the source of that
delegated authority is XOtech’s management structure,
which Mr. Marullo does not independently control. Ulti-
mately, the hiring, firing, and delegation of authority to
employees are decisions reserved to Managers who are not
controlled by SDVs.
The government has established a program to benefit
firms owned by SDVs, and if a firm wishes to obtain the
benefits of that designation, then it must comply with the
rules and structure its business accordingly. In this case,
XOtech at one time presumably qualified for SDVO status
when Mr. Marullo was the sole Manager, but it chose to
amend its governing documents to include non-SDVs as a
majority of Managers and define management authority in
such a way as to require at least one of their votes for man-
agement decisions. As noted, Mr. Marullo has authority to
remove the non-SDV Managers and reassert SDV control
over all decisions of XOtech. But unless and until he has
done so, management decisions require the vote of at least
one non-SDV. Thus, SDVs do not control “all decisions” of
the company, and XOtech is not eligible for contracts set
aside for SDVO contractors.
C
ONCLUSION
We have considered XOtech’s remaining arguments
but find them unpersuasive. For the foregoing reasons, the
judgment of the Claims Court is affirmed.
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XOTECH, LLC v. UNITED STATES 10
AFFIRMED
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