Joseph T. Schuler, Esq. & Diana Plue, Esq., Sheats & Bailey, PLLC
New York State has set guidelines for State Agencies to utilize Minority and Women owned businesses (“MWBE”) at certain rates when awarding government contracts. NYS reached its goal of 30% utilization in 2021. That statistic, however, fails to illustrate the realities of the MWBE program.
NYS has a 30% utilization goal to help MWBE businesses, but NYS is making it difficult to become and remain certified. There has been a drastic increase in recertification denials over the last eight (8) years. Recertification denials have increased each year and nearly doubled since 2019. NYS has made the certification and especially the recertification process increasingly complicated. Businesses are finding it harder to obtain and keep their certifications.
Upon denial, a hearing on appeal offers hope to many companies. The NYS Division of Minority and Women Business Development (“Division”) would not generally consider evidence introduced during the appeal explaining the woman-owner’s qualifications. A recent Appellate decision, however, has ruled that NYS law requires the Division to consider all testimony and evidence presented on appeal. Matter of Scherzi Sys., LLC v. White, 197 A.D.3d 1466.
The Division originally denied the company’s WBE recertification based on the husband, Mr. James Scherzi’s, minority ownership interest and involvement in operations. The Division found Mrs. Dana Scherzi did not make decisions pertaining to the operation of the business, hold adequate managerial experience or technical competence to be able to operate a software business, and failed to show she contributed money, property, equipment or expertise proportionate to her equity interest in the business.
Upon initial appeal before the Administrative Law Judge, Dana and James Scherzi testified about Dana’s role and contributions towards the company. After hearing the evidence, the administrative law judge recommended the original denial be overturned. The Division’s Director instead upheld the original denial, limiting consideration of the facts to those materials provided in support of the application and disregarding the hearing testimony. Dana appealed the Director’s determination to NYS’s Third Appellate Department, arguing the determination should be annulled because the Director refused to consider testimony introduced at the administrative hearing when assessing the regulatory factors for MWBE Certification.
The record from the hearing in the Scherzi appeal shows her husband originally started the company to do freelance work, but he did not have high aspirations for it, claiming he “never wanted to run a company.” The company took off once Dana Scherzi left her career in Corporate IT to join it. Her contribution in the form of expertise showed she contributed in proportion to the required 51%, but this was only resolved after a hearing, appeal, remand, and finally, a successful hearing.
This issue was the limited scope of review in appeal hearings. The Director denied certification after determining “testimony at the hearing, that was not part of the application, [wa]s insufficient to meet the substantial evidence standard, as it would be improperly considered facts not in evidence; and, therefore, irrelevant.” Matter of Scherzi Sys., LLC v. White, 197 A.D.3d 1466. The Third Department reversed, however, finding it is not only appropriate for an agency to consider the testimony offered at an administrative hearing, but the agency is required to consider the record as a whole pursuant to the State Administrative Procedure Act § 306(1) and CPLR § 7803(4). That is particularly the case where “the hearing testimony at issue did not constitute new evidence previously unavailable at the time of the application but, instead, served to explain and clarify technical terms and documentation.”
The Scherzi case also confirmed that the woman-owner’s equity contribution to the Company did not have to be monetary to establish her proportionate ownership interest. Contributions in the form of expertise that directly grows the business may be sufficient to justify ownership interest. The Director was wrong not to consider the testimony regarding how her expertise grew the business. The court also implied a company should not be automatically disqualified from WBE Certification simply because a woman owner shares some managerial tasks.
The Court’s decision has strengthened the appeal process by affirming an applicant’s right to explain and expand on the application material in the appeal hearing and requiring the Division to consider all testimony and evidence presented on appeal. The Court’s decision is also important for confirming that ownership interests can be acquired by means other than a monetary contribution. Applicants whose initial application or recertification application have been denied should appeal the decision by requesting a hearing rather than submitting papers only.
While this subtle change in the law is recent, the appeals process seems to have been broadened to admit more explanatory testimony. For those dismayed at the abuse of the MWBE system, this change should ensure that genuine women-owned enterprises can prove their eligibility. The MWBE certification process is ever-changing and has many twists and turns.
The attorneys at Sheats & Bailey, PLLC are experienced with these processes, and always ready to lend a hand to applicants facing certification, recertification, or appeal. For more information or assistance navigating the MWBE landscape contact Diana Plue at Sheats & Bailey, PLLC, Tel: (315) 676-7314.
The information provided in this article is not intended to serve as specific legal advice for any particular situation. Competent legal and experienced counsel should be consulted.