The Federal Circuit recently issued a decision in Kingdomware Technologies, Inc. v. US, resolving the two-year dispute concerning whether the Veterans Administration (VA) is required to invoke the “Rule of Two” before awarding a contract using GSA’s Federal Supply Schedule (FSS). In 2012, GAO held that the VA was required to first invoke the Rule of Two and, if satisfied, award a contract. The VA announced that it would not follow GAO’s recommendation, and Kingdomware, a service-disabled veteran-owned small business (SDVOSB), protested at the CFC. The CFC sided with the VA and held that the VA could order from the FSS without invoking the Rule of Two. This week, the Federal Circuit sided with the VA (over a dissent) and held that the VA is not required to first use the Rule of Two.

The statutory question at issue in Kingdomware centers on the 2006 Veterans Benefits, Health Care, and Information Technology Act. The Act requires the VA to set goals for SDVOSB and VOSB participation in VA contracts and provides contracting mechanisms (set-asides and non-competitive procurement procedures) to achieve the goal of increasing SDVOSB and VOSB participation. Congress passed the law after the VA failed to award more than 1% of contracts to SDVOSBs. Under the “Rule of Two”:

a VA 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 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.

The Kingdomware protest began with a January 2012 procurement for an Emergency Notification Service, for which the VA opted to meet its requirement using the FSS. Kingdomware argued that the mandatory language in the statute (“shall award contracts on the basis of competition restricted to small business concerns”) required the VA to conduct the Rule of Two analysis in all procurements. The VA also argued that Kingdomware was ignoring the fact that “shall award” is preceded by language limiting the small business restriction to contracts that the VA is using to meet the Act’s small business goals. In hindsight, this issue was bound to arise; the preamble to the VA regulations promulgated under the Act states that the Act does not apply to FSS task or delivery orders.

The court agreed with the Government, reasoning that the statutory scheme links the set-aside requirement to achieving the goals established by the Act. The Federal Circuit cited the fact that the VA has exceeded the VOSB and SDVOSB goals since the Act was implemented as a reason to not require contracting officers to set aside additional contracts.

In a 12-page dissent, Judge Reyna challenged the majority’s reasoning, beginning with the notion that satisfying the Act’s goal affects the Rule of Two analysis:

The majority guts the Rule of Two imperative of its full force and effect by holding that a Rule of Two analysis is not required for every contract “as long as the goals set forth under subsection (a) are met.” Maj. Op. at 19. Participatory goals, however, are aspirational, and an agency cannot refuse to set aside an acquisition solely because small businesses already receive a fair proportion of the agency’s contracts. In relying entirely on prefatory language to second-guess Congress, the majority becomes policy maker and departs from our duty to enforce the proper interpretation of the statute regardless of our policy views.

Judge Renya explained that that the statutory provision could not be more clear, and the law required a contracting officer to use a set-aside whenever there was a reasonable expectation that the Rule of Two would be satisfied. He also challenged the majority’s statement that the VA was on firm ground in rejecting GAO’s recommendation, citing GAO’s expertise and experience.

The dispute between GAO and the CFC, and the Kingdomware majority and dissent, highlight the notion that close questions have the potential to divide Government contract dispute forums. A division is more likely when policy concerns underlie the legal issues. Although some debate the need for socioeconomic programs, there is a well-established policy to foster and grow SDVOSBs and VOSBs. Under the Federal Circuit’s decision, this goal was not furthered, and the question of whether the VA is required to consider a set-aside before using the FSS has been answered.