Down-Sizing the 'Little Guy' Myth in Legal Definitions

• Author: Mirit Eyal-Cohen
• Position: Assistant Professor of Law, University of Pittsburgh School of Law
• Pages: 1041-1099

1041

Down-Sizing the “Little Guy” Myth in

Legal Definitions

Mirit Eyal-Cohen

ABSTRACT: What is a “small business” in the eyes of the law? There is not

one standard definition. Current legal definitions of a firm’s size are

inconsistent and overinclusive. They vary from one area of the law to

another and within various sections of the same law. They create a skewed

picture and result in data distortion that reinforces favoritism toward small

entities, as studies on the contribution of small businesses to the economy are

greatly dependent on these studies’ delineation of the term “small.” In this

time of huge deficits and rise in economic inequality, a lot of money is being

spent based on the entrenched belief that small firms are the essence of our

economy, which is not necessarily true. Therefore, this Article argues that the

current focus on size in many legal definitions is a waste of both time and

money.

This Article provides a comprehensive survey of legal definitions of small

entities and the policy considerations that underlie these delineations. This

Article concludes that the historical emphasis on magnitude no longer

functions effectively. Current legal demarcations concentrated on

“smallness” generate undesirable distributional effects, produce inefficient

allocation of government resources, and defeat policy considerations of

promoting entrepreneurship and economic growth. The recent proposal to

integrate the Small Business Administration with other federal commerce

and trade agencies into one super pro-business agency is yet one more ste p

toward this proposed shift from a size-centered to a goal-driven approach.

I. INTRODUCTION .................................................................................... 1043

 Assistant Professor of Law, University of Pittsburgh School of Law. I thank Steven

Bank, Ilan Benshalom, Pat Chew, David Herring, Bernard Hibbitts, Eric Jensen, Anthony

Infanti, Assaf Likhovski, Jules Lobel, Orly Lobel, Michael Madison, Lu-In Wang, Rhonda

Wasserman, as well as participants from the Case Western Reserve University School of Law

faculty workshop and the University of Pittsburgh Junior Faculty workshop. A special thanks to

Peter Oh for his valuable advice through the process of writing this Article. I also thank

Associate Director of Public Services at Barco Law Library Marc Silverman and research

assistants Jeremy Rivet and Tara Tighe for their research support. Finally, this Article would not

have been possible without the encouragement of my loving husband, Tamir, to whom this

Article is dedicated.

1042 IOWA LAW REVIEW [Vol. 98:1041

II. POLICY CONSIDERATIONS .................................................................... 1047

A. FREE ENTERPRISE ........................................................................... 1047

B. ENTREPRENEURSHIP ....................................................................... 1051

C. EMPLOYMENT EXPANSION .............................................................. 1057

D. OTHER CONSIDERATIONS ................................................................ 1060

III. CURRENT DEFINITIONS OF “SMALL” .................................................... 1065

A. SECURITIES LAW ............................................................................. 1065

B. HEALTHCARE ................................................................................. 1068

C. LABOR AND EMPLOYMENT .............................................................. 1072

D. PATENT LAW.................................................................................. 1076

E. GOVERNMENT CONTRACTING LAW .................................................. 1078

F. INTERNAL REVENUE CODE .............................................................. 1081

IV. DISAPPROVAL OF CURRENT SIZE CRITERIA .......................................... 1086

A. THE FOCUS ON SIZE DEFEATS OUR POLICY CONSIDERATIONS ............ 1087

B. CURRENT EMPHASIS ON SIZE GENERATES UNDESIRABLE

DISTRIBUTIONAL EFFECTS ............................................................... 1090

C. PRESENT FOCUS ON SIZE CREATES DATA DISTORTION AND

INEFFECTIVE ALLOCATION OF RESOURCES ........................................ 1095

V. CONCLUSION ....................................................................................... 1097

2013] DOWN-SIZING THE “LITTLE GUY” MYTH 1043

I. INTRODUCTION

Small business represents the essence of the free-enterprise system and

the American dream.1 In recent years, there has been a growing interest in

examining the degree to which small businesses contribute to economic

growth.2 Small entities are regarded as the job engine of the U.S. economy

and are viewed as the source of entrepreneurship and innovation.3 In his

2012 State of the Union Address, President Obama stated:

[W]e should support everyone who’s willing to work, and every

risk-taker and entrepreneur who aspires to become the next Steve

Jobs.

After all, innovation is what America has always been about. Most

new jobs are created in start-ups and small businesses. So let’s pass

an agenda that helps them succeed. Tear down regulations that

prevent aspiring entrepreneurs from getting the financing to

grow.4

But just what is a “small” business? Depending on where one looks in

U.S. laws, the definitions vary, and they differ from one section to another.5

During the nineteenth century, a personal relationship between the owners

of a firm and their employees was one of the main characteristics that courts

looked for when identifying an entity as a small business.6 Without a clear

definition, other courts resorted to the “I will know it when I see it”

1. See generally Mirit Eyal-Cohen, Why Is Small Business the Chief Business of Congress?, 43

RUTGERS L.J. 1 (2012) (reviewing at length these justifications and their effect as positive

feedbacks that reinforce the path dependence of small-business preferences, and concluding

that these justifications reflect today’s small-business culture of continuously reinforcin g

glorification of these entities and the expansion of their preferen tial legal treatment).

2. In this Article the term “small business” is used in its singular form to denote the

concept and values attributed to this term, whereas the plural “sma ll businesses” is used when

describing routine actions of small firms.

3. See infra Part II.B.

4. President Barack Obama, State of the Union Address (Jan. 24, 2012), available at

http://www.whitehouse.gov/the-press-office/2012/01/24/remarks-president-state-union-address.

5. See M

ATTHEW KNITTEL ET AL., U.S. DEP’T OF THE TREASURY, METHODOLOGY TO

IDENTIFY SMALL BUSIN ESSES AND THEIR OWNERS 2 (2011), available at http://www.treasury.gov/

resource-center/tax-policy/tax-analysis/Documents/OTA-T2011-04-Small-Business-Methodology-

Aug-8-2011.pdf (“[A] consensus does not exist regarding the specific attributes that distinguish

small businesses from other firms.”); Martin A. Sullivan, The Myth of Mom-and-Pop Businesses, TAX

ANALYSTS (Sept. 12, 2011, 9:42 AM), http://www.taxanalysts.com/taxcom/taxblog.nsf/Permalink/

UBEN-8LMHY5?OpenDocument (“What exactly is a small business? There is no one answer.”) ;

infra Part III.

6. See, e.g., Andrews Bros. Co. v. Youngstown Coke Co., 86 F. 585, 591 (6th Cir. 1898)

(“[For] small business corporations, . . . the personnel of the members is a matter of some

importance, and is the only feature which particularly distinguishes these associations from

ordinary corporations.”).