Back in 2013, we reported that the Department of Veterans Affairs (“VA”) is not required to give veteran-owned small businesses (“VOSBs”) or service-disabled veteran-owned small businesses (“SDVOSBs”) preference for all contracts.  In Kingdomware Technologies, Inc. v. United States (“Kingdomware”), the United States Court of Federal Claims accepted the VA practice of purchasing off the Federal Supply Schedule (“FSS”) without first considering set-aside contracts for VOSBs or SDVOBs.  Last month, the U.S. Court of Appeals for the Federal Circuit upheld the precedent-setting Kingdomware decision. The 2-1 decision explains why the VA can refuse to set aside contracts for veteran-owned contractors despite small business goals required by law.

The dispute revolves around section 8127(d) of the Veterans Act of 2006, which provides that a contracting officer of the VA shall award contracts to VOSBs if the contracting officer reasonably expects offers from two or more VOSBs. This “Rule of Two” is a form of restricted competition meant to give VOSBs an opportunity to compete for set-aside contracts,  but veteran-owned status does not guarantee an award. Section 8127(d) expressly prefaces that contracting officers “shall” award contracts using the Rule of Two “for the purposes of meeting the goals under subsection (a) [i.e., the VA’s goals for participation in VA contracts by VOSBs and SDVOSBs].” The Federal Circuit held that this statutory language clearly expresses Congress’ intent to require restricted competition only when necessary to meet set-aside goals, and that the VA’s decision was entitled to Skidmore deference. The Rule-of-Two mandate cannot be divorced from the VA’s goal-setting authority.

As Judge Reyna points out in his dissent, however, the court may be giving too much weight to the prefatory language in section 8127(d), and the use of the word “shall” could require use of restricted competition under the Rule of Two. Ignoring the mandate in section 8127(d) expands the VA’s discretion when it comes to applying Rule-of-Two analyses, potentially undermining congressional intent. Moreover, the VA’s regulations do not use the prefatory language tying mandatory set-asides to goal-setting, other than in the non-controlling preamble to the regulations. In effect, the majority’s decision gives the VA the discretion to ignore mandatory set-aside requirements once it meets its small business contracting goals.

What does this mean for veteran-owned contractors? That veteran-owned status is no guarantee of a set-aside award, at least not where the VA is concerned.

The opinions can be read here (PDF). The case is Kingdomware Technologies, Inc. v. United States, No. 2013-5042, before the U.S. Court of Appeals for the Federal Circuit.