Extracted from Law360
On June 16, 2016, Justice Clarence Thomas issued a unanimous decision for the U.S. Supreme Court in Kingdomware Technologies Inc. v. United States, No. 14-916. This ruling will have a significant impact on the U.S. Department of Veterans Affairs procurement process, but the nature of that impact remains to be seen.
Congress has expressed consistent interest in expanding opportunities for small businesses to contract with the government, particularly small businesses owned and controlled by veterans, and passed the Veterans Benefits, Health Care and Information Technology Act (the “VA Act”) in 2006 in an attempt to meet those small business contracting goals it has so often fallen short of.
The VA Act includes a provision known as the “Rule of Two,” under which a contracting officer “shall award contracts on the basis of competition restricted to small business concerns owned and controlled by veterans if the contracting officer has a reasonable expectation” that at least two veteran-owned small businesses will submit offers and that the “award can be made at a fair and reasonable price that offers the best value to the United States.” 38 U.S.C. §8127(d).
In Kingdomware, the court held that the Rule of Two is a mandatory obligation that applies to all procurements run by the VA, including Federal Supply Schedule orders, regardless of whether the VA has already met the set-aside contracting goals for veteran-owned small businesses. The court’s decision not only resolved the substantive statutory issue at hand, but also announced holdings that will have far-reaching implications for government protests and contract disputes with the government in the future.
The court found that the “shall” language in the Rule of Two imposed a mandatory duty on contracting officers regardless of whether the VA met its contracting goals and that FSS orders create “contractual obligations for each party” and thus are appropriately considered contracts within the meaning of the VA Act. In doing so, the court determined that it did not have to defer to the VA’s reading of the statute because of the statute’s ambiguity. See Chevron U.S.A. Inc. v. National Resources Defense Council Inc., 467 U.S. 837, 843-844 (1984) (establishing deference to an agency’s interpretation of an ambiguous statute).
The court disagreed with the government’s contention that FSS orders are distinct because they are not contracts within the meaning of the statute. This holding is significant. The VA conducts hundreds of thousands of transactions a year, including its purchases from the FSS. As Kingdomware pointed out in its briefing, if the court had ruled that FSS orders were distinct, it would have effectively exempted approximately 60 percent of those purchases from the Rule of Two. Instead, the court closed the loophole, ensuring that the VA has to consider veteran-owned small businesses in all of its procurements.
The court specifically noted that it was not deciding what kind of search for veteran-owned small businesses the VA is required to conduct to comply with the Rule of Two — the VA itself will have to determine how to efficiently change its procedures to comply with the court’s ruling. The most likely outcome is that the VA will seek to utilize the streamlining process of the FSS and utilize the Rule of Two in the context of service-disabled veteran-owned small business companies that are FSS holders. If they are unable to find a suitable bidder, they will then have to open competition to veteran-owned small businesses outside the FSS before opening the competition more broadly.
The decision will also have an impact on outstanding protests. The Government Accountability Office will have to implement the Supreme Court’s ruling in its current and future protests regarding the VA’s use, or nonuse, of the Rule of Two. If nothing else, veteran-owned businesses should apply for an FSS to ensure that they are not excluded from Rule of Two procurements that the VA funnels through the FSS. Either way, the Kingdomware decision provides a significant boost to veteran-owned small businesses looking to expand their contracting opportunities with the government.