In a matter of keen interest to the small business community, last month the Supreme Court, granted certiorari in Kingdomware Technologies, Inc. v. United States. The Court’s decision will hopefully bring some closure to the long-running dispute between the Department of Veterans Affairs (“VA”) and veteran-owned businesses over the VA’s refusal to set aside procurements under the so-called “Rule of Two.”
The controversy began in October 2011, when the Government Accountability Office (“GAO”) issued the first of many decisions sustaining a protest challenging the VA’s use of Federal Supply Schedule (“FSS”) procedures to procure items, in lieu of setting aside the procurement for service-disabled veteran-owned small business concerns. At the center of this saga is the proper construction of the Veterans Benefits, Health Care, and Information Technology Act of 2006, which provides, in relevant part:
(d) Use of Restricted Competition.— Except as provided in subsections (b) and (c), for purposes of meeting the goals under subsection (a), and in accordance with this section, a contracting officer of the Department 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 two or more small business concerns owned and controlled by veterans will submit offers and that the award can be made at a fair and reasonable price that offers best value to the United States.
38 U.S.C. § 8127(d) (emphasis added). In what appeared – at the time at least – to be a straightforward ruling, and win for veteran-owned businesses, GAO held that neither the VA Act nor the implementing regulations afforded the VA the discretion to conduct a FSS procurement without first applying the Rule of Two to decide whether the acquisition should be set aside. See Aldelvra, B-405271, 405524, Oct. 11, 2011, 2011 CPD ¶ 183.
Yet, much to the dismay of veteran-owned businesses, and notwithstanding pointed questioning from Congress (keep in mind that, by statute, instances of an agency’s refusal to fully implement a GAO recommendation must be documented in the Office’s Annual Report to Congress), the VA continued – time and time again – to order off of the FSS without first applying the Rule of Two. GAO, in turn, continued sustaining protests, including sixteen alone in fiscal year 2013.
Frustrated by the series of pyric victories at GAO, one of the meritorious protesters, Kingdomware Technologies, Inc., took its case to the U.S. Court of Federal Claims. Unlike GAO, the Court sided with the Government, buying into the VA’s argument (after applying Chevron deference and finding the statute facially ambiguous) that the Rule of Two had to be interpreted in light of its goal-setting provisions. Judge Firestone found that, when viewed in this context, the Act did not require the VA to apply the Rule of Two before ordering against the FSS. In support of the ruling, Judge Firestone noted that the VA had consistently applied this construction and that it was not in conflict with the Act and the applicable regulations.
Over a strongly-worded dissent penned by Judge Reyna (which, interestingly, chimed in on the lack of deference given to repeated GAO recommendations repudiating the Agency’s position), the Federal Circuit affirmed, albeit on slightly different grounds. According to the majority opinion, as a threshold matter, the Act was not ambiguous on its face in that Congress had indicated, in no uncertain terms, that for purposes of meeting the small business contracting goals set by the Secretary, the Rule of Two had to be used. In the Federal Circuit’s view, however, this meant that the VA need not perform a Rule of Two analysis for every contract, as long as the underlying goals are ultimately satisfied.
In late June, the Supreme Court announced that it would weigh in on the matter, certifying the following question: “Whether the Federal Circuit erred in construing 38 U.S.C. § 8127(d)’s mandatory set-aside restricting competition for Department of Veterans Affairs’ contracts to veteran-owned small businesses as discretionary.”
It will be interesting to see how the Supreme Court rules and whether, if it adopts the reasoning of the U.S. Court of Federal Claims and Federal Circuit, Congress will come to the aid of veteran-owned businesses. Stay tuned! We will provide further updates once the Supreme Court hears the case next term.
This post first appeared in the Government Contracts Blog.