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UNITED STATES SUPREME COURT HOLDS VETERANS AFFAIRS MUST SET ALL COMPETITIVE ACQUISITIONS ASIDE FOR VOSBS WHENEVER RULE OF TWO CAN BE MET

The United States Supreme Court issued a slip opinion today in Kingdomware Technologies, Inc. v. United States, 579 U.S. ____ (2016) in which it held the Department of Veterans Affairs (VA) must set every competitive acquisition aside for veteran-owned small businesses whenever the "Rule of Two" is met.

The Small Business Act requires federal agencies establish annual minimum goals for awarding contracts to small business concerns (SBC), including SBCs owned and controlled by veterans. These annual goals are frequently pursued by setting acquisitions aside for competition only by SBCs. In 1999, Congress added a set-aside goal of 3% for SBCs owned and controlled by veterans. However, agencies were failing to meet these goals. Congress responded, in part, by enacting the Veterans Benefits, Health Care, and Information Technology Act of 2006 (the Act).

The Act required that the VA set more specific annual goals for contracting with Veteran Owned Small Businesses (VOSB) and Service-Disabled Veteran Owned Small Businesses (SDVOSB). Under 38 USC §8127(b) and (c), the VA can meet its goals by making non-competitive and sole-source awards to veteran owned small businesses if the awards are less than the simplified acquisition threshold or, if less than $5,000,000, to a VOSB that is a responsible source for the required performance and its price is fair.

At issue in this case was 38 USC §8127(d), which applies to all acquisitions not covered by §§8127(b) and (c) and includes the so-called Rule of Two. It states:

Except as provided in subsections (b) and (c), for purposes of meeting the goals under subsection (a) …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.

In 2012, the VA decided to procure an Emergency Notification Service for some medical centers, and it did not conduct the competition as a set-aside for VOSBs. Instead, the VA sought prices from vendors on the Federal Supply Schedule ("FSS"). Kingdomware Technologies, Inc. protested to the GAO, asserting that §8127(d) did not allow the VA to purchase from the FSS unless the VA determined the Rule of Two could not be met. GAO found for Kingdomware, but the VA did not follow GAO’s recommendation. Kingdomware then sought relief in the Court of Federal claims. However, this time the VA was the winner, as the Court of Federal Claims granted summary judgment to the VA.

The Federal Circuit affirmed the Court of Federal Claims, but its panel was divided. The majority found that §8127(d) only required mandatory application of the Rule of Two to the extent needed to meet the VA’s annual contracting goals for VOSB set-asides. Judge Reyna dissented, opining that the plain language required application of the Rule of Two for all competitive acquisitions by the VA.

The Supreme Court granted certiorari, and Justice Thomas delivered the Court’s opinion that §8127 is mandatory and requires the VA to apply the Rule of Two to all contracting determinations and to award contracts to VOSBs. "The Act does not allow the Department to evade the Rule of Two on the ground that it has already met its contracting goals or on the ground that the Department has placed an order through FSS". Kingdomware Technologies, Inc. v. United States, Slip Op. at p. 8.  Opinion is attached here.

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