Calif. Veteran-Owned Small Biz Losing State Contract to Chinese Conglomerate

California Gov. Gavin Newsom and elected lawmakers frequently tout the state’s contracting with minority-owned, veteran-owned small businesses. California’s dominance in many economic areas is based, in part, on the significant role small businesses play in the state’s $3.1 trillion economy.

But on Friday, a Disabled Veteran Business Enterprise owned California small business is getting the boot by the California Department of Public Health, only to be replaced by a Chinese Conglomerate.

What’s going on with the state doing business with China? Remember when in April 2020 Gov. Newsom approved spending $1.4 Billion on masks from BYD, a Chinese company? BYD was an electric bus manufacturer with no history of making personal protective equipment, but was awarded a no-bid contract by the Newsom administration.

The Globe interviewed John Deterding, Disabled Veteran Business Enterprise (DVBE) owner and CEO of Maclean Health, about this disreputable turn of events.

Ironically, just last week, Gov. Newsom signed Assembly Bill 2019 by Assemblywoman Cottie Petrie-Norris (D-Irvine) which codifies a state goal of 25% of all contracts issued by state agencies be with small, micro and disabled veteran business enterprises (DVBE) for state procurements and related proposes. AB 2019 finds that small businesses and DVBEs not only contribute significantly to the tax base of the State of California, but also account for approximately 7 million employees, or 49 percent of all employment in the state. AB 2019 requires all state department directors to establish a minimum goal of 25% procurement participation for small businesses, DVBEs and microbusinesses combined.

Given the overwhelming support by the business community, this bill cleared the Legislature
without a single “no” vote.

The Governor signed this measure and touted its importance in a press release titled “New Support for Small Businesses and Entrepreneurs Coming to California.” Does the left hand even know what the right hand is doing in California politics? Maclean Health is a Sacramento-based, certified Small Business and DVBE that specializes in providing healthcare products to state and federal government entities.

During the pandemic, Maclean Health was a critically important partner of the California Department of Public Health (CDPH) by providing N-95 masks since 2020 and Covid-19 test kits to ensure the safety of Californians, Deterding told the Globe.

DVBE business Maclean Health, the California small business which has provided the State of California 30,000,000 Covid-19 test kits when the state most needed them, and were difficult to acquire because of supply chain restrictions, will unilaterally have its contract terminated this Friday, and turned over to a Chinese-owned company.

Deterding, owner/CEO of Maclean, is a California native, and Navy veteran. Mr. Deterding says despite his 100% performance record providing the state the Covid test kits, as well as other critical healthcare products, at a fair market price and often below market prices, he received notice in August that his deliveries of test kits and contract were suspended, and would be awarded instead, in a no-bid contract to iHealth, a Chinese-owned company.

He explained that once Covid hit, and the supply chain across the globe was compromised, the state was having difficulty acquiring Covid test kits.

Deterding said by January 2022, the height of the Covid variant Omicron strain, it became  particularly challenging to procure Covid-19 tests for the government due to a global shortage. But Maclean was able to provide the 3.3 million Covid test kits the state needed, at the best market rate of $6.80 per, saving the state tens of millions of dollars. Deterding said at that time, other suppliers could not provide the State a reasonable price because the market price soared to over $10 per test. Maclean was then awarded a contract through March 2023.

“We had a 100% performance rating,” Deterding said. “We never had any issues.”

Deterding said once the market was again saturated with test kits, Maclean Health and the state renegotiated the price and he was again awarded a contract for having the lowest price in the country.

During August pricing discussions with the California Department of Public Health, he was told a “competitor” was willing to price the test kits below Maclean’s lowest price, but was never informed of the award process or selection criteria. Deterding said he was told at that time that “the competitor has ties to the administration.”

By September Maclean Health received a termination letter.

Deterding’s elected state representative, Assemblyman Ken Cooley (D-Sacramento), wrote an eloquent, thoughtful and thorough letter to Dr. Mark Ghaly, Secretary of California Health and Human Services Agency about the Maclean Health DVBE termination. Cooley addressed the termination, acknowledging that although “the state has the power to terminate such contracts, it does not make it right.”

“And it’s the type of conduct that will make people of enterprise and talent, deservedly wary of partnering with California,” Cooley said.

Cooley called the termination “heavy-handed” and “seemingly inexplicable,” especially since Maclean held the state Covid-19 test kit contract, shipping and delivering 30 million Covid test kits to the state with a 100% performance record.

Cooley continues:

“Based on Maclean’s exceptional performance and competitive pricing during that critical period, the Department made the decision to expand its relationship with Maclean and contract for a twelve-month agreement to provide the state up to 100,000,000 test kits between April 2022 and March 2023. Despite the fact that this contract was let under emergency authority that waives many Government Code contracting requirements, the Department chose to award the test kit contract to a California certified small business and DVBE thus recognizing the State’s preference and policy goals in the California Government Code when contracting.”

“That this is a very important California public value and I am very concerned that this move may be a precursor to CDPH ‘walking back’ that very, very right decision.”

Cooley notes that Maclean agreed to deliver between 5 million and 15 million test kits per month, “a herculean obligation that they agreed to at some possible risk to themselves…” Maclean made a personal financial guarantee for their contract performance.

They executed flawlessly on the contract, and were rewarded with termination by the CDPH, and no explanation why.

A source in the Capitol said the CDPH will claim the contract termination with Maclean was only about cost/price. Maclean offered the best price in the country for the test kits, so the price issue is suspect.

Maclean Health has since had to engage a law firm and invoked the contract’s Dispute Resolution Process, but haven’t heard much of anything from the CDPH. As Deterding says in a letter to Dr. Tomas Aragon, Director of the CDPH, the termination of the contract is dubious “and a contravention of public policy, and not in the best interest of the people of California.”

He also says that concerns around the cancellation of the contract “are further aggravated by the fact that, unless there is quick intervention” by the CDPH, “the CDPH now intends to purchase test kits from a large, Chinese-owned company.”

Why would the CDPH break a contract with a Disabled Veteran Business enterprise, native to California, which had performed flawlessly for the state, and award a no-bid contract to a company from China?

At issue is that the Governor’s administration keeps awarding contracts under his 2.5 years of emergency Covid powers (900 days+), which bypass the state bidding process, state code, and any semblance of transparency.

However, when the CDPH awarded the contract to Maclean Health, they did award it to a DVBE, bringing it right back into government code. So the termination of the Maclean contract is particularly egregious, as Assemblyman Cooley notes.

The Globe contacted four employees at the CDPH involved in the Maclean contract. We asked why the CDPH would cancel a contract with a California-owned DVBE contractor and award it to a company in China, especially on the heels of the governor just signing the bill codifying a state goal of 25% of all contracts issued by state agencies be with small, micro and disabled veteran business enterprises for state procurements and related proposes?

We have not heard back from the CDPH.

Gov. Newsom may tout his support for Disabled Veteran Business Enterprises, but his Administration is about to trample a successful small business, and reliable supplier of critical Covid test kits, when the Governor needed them the most.