When is a small business not a small business? Often enough to provide continuing controversy in government contracting and to require a special federal adjudicative body to examine the question. Now a court ruling opens the way for real small businesses to collect heavy damages from firms simply masquerading in the cloak of smallness.

The issue is controversial because the Small Business Administration has different definitions of small for different industries -- and only firms that meet the definition can win those government contracts specifically set aside for small business.

When there are challenges, the agency's Size Appeals Board weighs the issue. That's what happened when the Pentagon set aside a food service contract at West Point for small companies. The bidder who came in second cried foul, insisting that the low bidder was not really a small business.

The Size Appeals Board agreed. Then the losing bidder did something unusual: It sued the low bidder under state law, claiming damages for fraud, misrepresentation and interference with its business. That opened the possibility of getting a large damage award. The trial court threw out the suit, saying that because the set-aside program is a federal matter, there is no room for state litigation. But on Dec. 30, the U.S. Court of Appeals in Denver called the trial court judge wrong and put the case back on track.

The Denver judges said they saw no reason to make an exception when the alleged fraud involves an SBA program. Since Congress has said nothing about whether the Size Appeals Board procedure should be the only route open to a disappointed bidder, the key question is whether allowing state litigation would run counter to the aim of the federal program.

That aim is to help small business. The judges explained in Integrity Management v. Tombs & Sons that as they saw it, the possibility of a liability suit would actually help achieve that objective by discouraging businesses that are too big from getting in the way of small firms that are supposed to win the contracts. The judges thought their ruling unlikely to encourage an end run around SBA procedures, because they rated the complaining company's chances of winning as slim without a ruling from the Size Appeals Board that the low bidder was in fact unqualified.

In other cases, courts ruled that:

The Environmental Protection Agency can go on fishing expeditions. An Alaska company challenged a subpoena from the agency issued under the Toxic Substances Control Act, asking for a listing of all chemicals stored or used at a water treatment plant.

The company says there's no evidence of a toxic problem at the site, and suggests that what EPA is really looking for is violations of the Clean Water Act. The agency has no subpoena power under the water pollution statute. But the U.S. Court of Appeals in San Francisco refused to get into the allegations, ruling that all EPA needs in the merest "suspicion" to subpoena data under the toxic substances law.

(EPA v. Alaska Pipeline, Jan. 5)

Federal courts have no business helping states collect more taxes.

The U.S. Court of Appeals in Cincinatti threw out an action by a citizen group trying to force Kentucky revenue officials to increase the assessment on oil, gas and coal land that was being taxed on the basis of its agricultural value.

The Federal Tax Injunction Act tells federal courts not to get invloved with revenue issues -- a prohibition the trial court jduge read to bar only actions that would interfere with a state's raising money, an so presenting no problem when the aim of the litigation was to boost the tax take. But the appellate judges said the statute cuts both ways, and told the citizens to take their complaint to the state tax appeals board.

(In re Gillis, Jan. 5)

A mere appearance of impropriety is no reason to make a lawyer drop a case.

The five-year-old U.S. Court of Appeals for the Federal Circuit recently adopted that rule, borrowing it from the U.S. Court of Appeals in New York. The rule gives the green light to lawyers who successfully handled a patent application for an invention now handling the case for a company that wants to get the patent declared invalid. In the interval, the original owner of the patent sold the rights to another company. Since the lawyer have done no legal work for the present owner, the appellate judges see nothing wrong with them opposing that company in court.

Moskowwitz covers legal affairs for McGraw-Hill World News.