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.

President Obama signed the National Defense Authorization Act for Fiscal 2013 ("NDAA") into law on January 2, 2013. The NDAA authorized the SBA to establish mentor-protégé programs for all small business concerns ("SBC")—not just socially and economically disadvantaged concerns certified to participate in the 8(a) Business Development Program. Over 2 years later, the SBA finally proposed a rule that would implement a mentor-protégé program allowing all small businesses the opportunity to benefit as a protégé to an approved mentor.

The SBA determined that a single set of mentor-protégé rules, applicable regardless of any other special SBC-status, would facilitate clarity and consistency among the contracting community. If a final rule is implemented along the lines of the "universal" program proposed, HUBZone SBCs, Veteran Owned and Service-Disabled Veteran Owned SBCs, Woman and Economically Disadvantaged Woman Owned SBCs, and other SBCs will have access to a mentor-protégé virtually identical to the 8(a) mentor-protégé program. Among other things, all approved mentor-protégé participants can joint venture and be considered "small" for purposes of small business set-aside contracts provided the protégé is small, mentors can have an equity interest in the protégé, mentors can provide bonding capacity for contracts, and mentors can provide business development assistance. Except for the Department of Defense Mentor-Protégé Program, all mentor-protégé programs currently in effect at other executive agencies will have one year from the date SBA’s final rule is published to have the SBA approve their mentor-protégé programs.

Another way the SBA proposes expanding mentor-protégé access is by removing barriers to being approved as a protégé. Currently, a SBC cannot be a protégé if its average annual receipts exceed one-half the size standard of its primary NAICS Code. If it cannot qualify based on this, then a SBC can only qualify as a protégé if it has never received an 8(a) contract or is within the business-development stage of the 8(a) Business Development program. These two latter eligibility factors would be removed as mentor-protégé access is expanded to all SBCs. However, the SBA has determined that any firm that is small relative to its NAICS Code should be able to participate in federal contracting as a protégé.

The SBA’s proposed universal mentor-protégé program would add additional certification and reporting requirements aimed at ensuring the approved mentor-protégé relationship is serving its purpose and is program-compliant. It would also add the requirement that any concern seeking approval as a protégé be certified by SBA as a small business concern. Also, 8(a) firms who are approved as protégés would be subject to size protests the same as other SBCs.

The full details of the SBA’s proposed rule are attached here. Comments on it are due to SBA April 6, 2015.

Service-Disabled Veteran Owned ("SDVO") contracts are one of several types of "set-aside" contracts which permit qualified entities to compete for federal government contracts on other than "full and open" competition terms. SDVO contracts are taking their place among small business set-asides, 8(a) set-asides, and HUBZone set-asides. With submission of its initial offer for a SDVO Small Business Concerns ("SBC") contract set-aside, a concern must certify that:

     

  • it is a SDVO SBC
  •  

  • it is "small" as defined by the NAICS code assigned to the procurement
  •  

  • it will comply with the percentage of work requirements set forth in 13 CFR 125.6
  •  

  • if a joint venture, that both members of the joint venture are small; and
  •  

  • if applicable, it is an eligible nonmanufacturer.

Even if a SDVO meets all of the foregoing on a particular procurement, it must still consider the Small Business Administration’s ("SBA") rules on affiliation, all of which can apply to render a "technically" compliant SDVO as "other than small" and therefore ineligible for the award of SDVO contracts. Whether a SDVO wants to ensure it has not run afoul of the rules prohibiting affiliation between SBCs or a SDVO competitor wants to successfully challenge the SDVO status of a competitor, the SDVO needs to be familiar with the rules by which the SBA determines entities to be affiliated.

For example, a SDVO that is deemed unduly reliant upon a subcontractor for performance of the vital or primary functions of a contract may be deemed to be affiliated with the subcontractor. If the average annual receipts of the SDVO and this "ostensible" subcontractor exceed the applicable size limitation, the SDVO will be deemed ineligible for the SDVO contract. More basic still could be a finding of affiliation based on the "newly organized concern" or shared ownership rules.

Affiliation with a subcontractor may also be found even though a subcontractor is not performing the vital or primary functions of a contract. While bonding assistance alone by a subcontractor generally does not create affiliation between a SBC and a subcontractor, when coupled with other performance assistance, it could result in a finding of affiliation. Other indicia of "assistance" include, but are not limited to, bid preparation by the subcontractor rather than the prime SDVO; the loan of equipment to the SDVO by a subcontractor; office sharing by the SDVO and a subcontractor; and payroll, bookkeeping, and other "back office" assistance by the subcontractor. The proximity of the SDVO’s offices may also come into play when affiliation with a subcontractor is examined. For instance, where a SDVO SBC has been located 1100 miles away from the site of contract performance has been determined by the SBA to render the SDVO unduly reliant upon a subcontractor because the SDVO is too remote to provide meaningful, day-to-day management of the project. However, an SDVO’s location 100 miles away from the site of contract performance has been deemed not too remote.

Whether affiliation exists to render your SDVO or a competitor’s SDVO ineligible for a particular procurement or ineligible generally for the SDVO program is very fact-specific. To minimize the risk of being declared "other than small" SDVOs should carefully review all rules by which the SBA examines allegations of affiliation.