The Supreme Court’s June 2016 decision in Kingdomware Techs., Inc. v. United States, No. 14-916 (June 16, 2016), may significantly impact the meaning of the term “government contract” for years to come.

The case centered on a project for the Department of Veteran Affairs. When VA continually fell behind in achieving its three percent goal for contracting with service-disabled veteran-owned small businesses, Congress enacted the Veterans Benefits, Health Care, and Information Technology Act of 2006. See 38 U.S.C. §§ 8127 & 8128. The Act includes a mandatory set-aside provision that requires competition to be restricted to veteran-owned small businesses if the government contracting officer reasonably expects that at least two such businesses will submit offers and that the “award can be made at a fair and reasonable price that offers best value to the United States.” This is an iteration of the well-known “Rule of Two.”

When it published regulations implementing this statutory requirement, VA took the position that the set-aside requirements in § 8127 “do not apply to [Federal Supply Schedule] task or delivery orders.” 74 Fed. Reg. 64619, 64624 (2009). The Kingdomware case posed a direct challenge to this interpretation.

The case began in 2012 when VA sought to implement an Emergency Notification Service for four of its medical centers. VA sent a request for a price quotation to a non-veteran-owned company that held a Federal Supply Schedule contract. The company responded with its price quotation. VA accepted.

Kingdomware Technologies challenged the award by filing a bid protest with the GAO, arguing that VA could not have awarded the contract without first having checked whether at least two veteran-owned small businesses could perform the work at a fair and reasonable price. GAO agreed with Kingdomware, but VA declined to follow GAO’s recommendation. Kingdomware then brought its protest to the Court of Federal Claims, which granted VA’s motion for summary judgment. The Federal Circuit affirmed.

VA’s position at the Supreme Court was based on its interpretation of the applicable statutory language. VA argued that it did not need to apply the Rule of Two because it had already met its minimum goals for contracting with veteran-owned businesses.

The Court rejected VA’s interpretation, holding that the statute requires VA to apply the Rule of Two before awarding any contract, even it has already met its stated small-business contracting goals. According to the Court, the use of the mandatory word “shall” in § 8127(d) allows for no other interpretation.

The Court’s opinion in Kingdomware also addresses the government’s argument that a task order issued under an existing Federal Supply Schedule contract is not a “contract” subject to the Rule-of-Two requirement in section 8127(d). The Court’s analysis may be dismissed as dicta because VA did not raise the issue in the Court of Federal Claims or the Federal Circuit. Even so, it may be the more important lesson of the case.

In the Court’s words, “[w]hen the Department [of Veterans Affairs] places an FSS order, that order creates contractual obligations for each party and is a ‘contract’ within the ordinary meaning of that term.” Any instrument that creates “mutually binding obligations” is a “contract,” which may have broader implications for the private sector. Given the Court’s broad definition, what is the difference between a “contract” and a “grant” or a “cooperative agreement”?

More on how the Supreme Court approaches government contracts—

Universal Health v. Escobar—contractor liability under the False Claims Act (June 20, 2016)

KBR v. US ex rel. Carter—statutes of limitation applicable to qui tam claims under False Claims Act (June 26, 2015)

Salazar v. Ramah Navaho Chapter—appropriations as a limit on government liability for breach of contract (June 26, 2012)