In a decision issued last year but only publicized recently, the Small Business Administration ruled that Federal Prison Industries cannot win service contracts set aside for small businesses.

The decision, reached in February 2005, came from the Office of Government Contracting of an SBA area office covering several states in the mid-Atlantic. It resolved protests by two companies alleging that a contract for electronics recycling and disposal was improperly awarded to FPI, also known as UNICOR.

FPI is a congressionally established corporation that employs prison inmates and receives certain preferences in federal procurements.

The protests lodged by Global Investment Recovery Inc. and Creative Recycling Solutions Inc. alleged FPI was ineligible to win the work because it was neither a for-profit business nor classified as small under the rules of the Federal Acquisition Regulation.

In the decision, SBA officials rejected FPI's argument that the 2004 Consolidated Appropriations Act and the FAR included special provisions allowing FPI to compete for small business set-aside contracts, concluding the prison group was not eligible when the set-aside is a service contract.

"The way that the decision was written was fairly broad," said Amy Laderberg O'Sullivan, a lawyer with the government contracts practice group at Crowell & Moring, and lead counsel on the case for Global Investment Recovery. "It is not limited to this procurement, and it has significant implications for FPI's ability to participate in small business set-asides in general," she said.

The decision received little attention when it was made, in part because protests at SBA's area office level are not publicly announced or made widely available. SBA spokesman Michael Stamler confirmed Monday that area office decisions are not publicly posted or made the subject of press releases, and are routinely distributed only to the companies and contracting officers involved in the case. Appeals of those decisions can be made through SBA's Office of Hearings and Appeals and those rulings are posted in an online database, he said.

A spokesman for FPI said the company did not appeal the decision, and it recently surfaced as the result of a query to a procurement community listserve.

Chris Jahn, president of the Contract Services Association, an industry group, said he was aware of the decision when it came out but was unsure of the effect it had on small businesses competing with FPI for work.

He said the prison group had Defense Department contracts last year worth more than $460 million, noting, "To consider them somehow a small business just doesn't pass the straight face test."

Jahn said his group supports measures presented in both the House and Senate that would require agencies to conduct market research before awarding product or service contracts to FPI, and allow agencies to bypass the prison group if they did not offer a comparable product or service. Under current provisions, FPI performs the comparability assessment.