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.

Hubzone Contracts Take Set-Aside Priority Over 8(a) Program

In Mission Critical Solutions v. United States, COFC No. 09-864 C (March 2, 2010), the Court of Federal Claims has determined that the HUBZone program takes priority over the 8(a) program.

Mission Critical Solutions ("MCS") was certified as both an 8(a) and HUBZone small business. In 2008, the Department of the Army awarded MCS a one-year sole-source 8(a) contract for just under $3.5 million to provide information technology ("IT") services. For the follow-on requirement, which was valued (including options) at approximately $10.5 million (in excess of the applicable $3.5 million ceiling on sole-source contracts), the Army determined it could not make award to MCS. However, the Army decided it could make a sole-source 8(a) award to Copper River Information Technology, LLC ("Copper River"), an Alaska Native Corporation, if the SBA would approve Copper River as the IT provider for the requirement. SBA accepted the requirement on behalf of Copper River under its 8(a) program and the Army made the award.

MCS protested the sole-source 8(a) award to Copper River to the GAO. MCS argued that the Army was required to compete the requirement as a HUBZone business set-aside. The GAO sustained MCS’s protest. However, the Office of Management and Budget ordered that executive agencies disregard the GAO’s ruling until the Office of Legal Counsel of the United States Justice Department ("OLC") reviewed the matter. After the OLC declared its disagreement with GAO, the Army took the position that it had no authority to take any action inconsistent with the OLC’s position. Thus, MCS’s request for protest costs and a second protest against the award were denied by GAO as "academic", because the Army had stated its position that GAO recommendations could not be followed in the matter. MCS took its protest to the Court of Federal Claims.

Chief Judge Emily Hewitt sided with MCS and declared the Army’s award to Copper River under the 8(a) program not in accordance with law. The Army’s argument that there is parity between the 8(a) and HUBZone requirements was rejected. Judge Hewitt found that the HUBZone statute mandates set-asides for competition among HUBZone concerns whenever there is a reasonable expectation that at least 2 qualified HUBZone firms will submit offers and award can be made at a reasonable price. The plain language of the HUBZone statute at 15 USC § 657a(b)(2) requires such set-asides "[n]otwithstanding any other provision of law". Moreover, whereas contracting officers "may" decide to award contracts under the 8(a) program when the HUBZone statutory set-aside criteria are not met, there is no such discretion for contracting officers when the HUBZone statutory are met. Judge Hewitt enjoined the Army from awarding the IT support services contract without first determining whether the "rule of two" is met "such that the contract opportunity at issue in this case must be awarded on the basis of competition among qualified HUBZone small business concerns."