In 1995, J.C. Smith, Inc. was certified by the State of New York as a Women-Owned Business Enterprise (“WBE”). It was in the business of selling, servicing, and renting light construction equipment and supplies. Its president and majority owner was Josephine Smith. 

After Josephine’s death in 2013, her shares were distributed to her 3 children—Joanne, Jeffrey, and Jay—each of whom was involved in the business, together with Jeffrey’s wife. The company remained eligible for WBE status. Joanne was elected CEO.
The company sought recertification in 2014, but the State denied it, claiming it did not meet the eligibility criterion related to women’s control. The State held that the company “failed to demonstrate that the women owners made decisions pertaining to the operation of the business enterprise.” The company sued to overturn the ruling and it was transferred to the Appellate Division in upstate New York.

J.C. Smith Inc. had a high bar to overcome in its suit. The standard applied by the court was whether there was a rational basis for State’s action, or whether it was “arbitrary and capricious” (a very high standard, often used when challenging the rulings of an administrative agency). 

The court stated that even though Joanne was primarily responsible for human resource issues, financial management, accounts receivable, and legal matters, those did not rise to the level of “operational control over the core functions of the business.” Those functions had been delegated to her brother Jeffrey (who was the sales manager and who monitored the performance of the retail locations) and her brother Jay (who met with sales reps and oversaw the purchase of supplies and inventory). Thus, the court found that the State had a rational basis for refusing to recertify the company as a WBE.

This is a particularly harsh ruling, and should be a red flag for contractors looking to fulfill their minority-based (MBE) and women-based (WBE) enterprise goals. Contractors have long understood that just because the company was certified by the State did not mean it performed a “commercially useful function.” If it did not, it might not satisfy a set-aside goal and the contractor could be penalized—through liquidated damages or even default and debarment. In some cases, misrepresenting one’s use of a M/WBE could have criminal ramifications.

Now, it appears that contractors must also perform due diligence to determine whether even a bonafide company performing a commercially useful function has at the helm a complying majority shareholder who maintains “operational control over the core functions of the business.” Contractors beware.

For More Articles on Women-Owned Business Enterprises See: