Federal Circuit Permits the Department of Veterans Affairs to Ignore the Rule of 2 for FSS Orders


A recent Federal Circuit decision could have substantial implications on whether the Department of Veterans Affairs (“VA”) choses to set aside work for veteran-owned small businesses (“VOSBs”) and service-disabled, veteran-owned small businesses (“SDVOSBs”) when ordering goods and services off of a Federal Supply Schedule (“FSS”).

Under applicable statutory and regulatory authority, the VA is obligated to award contracts of a certain dollar threshold on the basis of a competition restricted to small business concerns owned and controlled by veterans if the contracting officer has a reasonable expectation that: (1) two or more small business concerns owned and controlled by veterans will submit offers and (2) award will be made at fair market prices. This so-called “Rule of 2” is similar to Rule of 2 requirements that apply to other agencies to set aside work to small businesses. One significant difference, however, is that the VA’s Rule of 2 contains no exception for FSS orders.

Under the Federal Acquisition Regulation (FAR), agencies may (but are not required to) consider setting aside FSS orders when there is a reasonable expectation that the Rule of 2 will be met. In contrast, the VA’s regulations and statutory requirements do not contain any such exception for FSS orders.  Such a lack of a carve out led the U.S. Government Accountability Office (GAO) to conclude that the VA is obligated to consider whether the Rule of 2 is met before it can place FSS orders.

Disagreeing with the GAO, the U.S. Court of Appeals for the Federal Circuit, in Kingdomware Techs. Inc. v. United States, recently held that the VA did not have to consider the Rule of 2 before placing a FSS order if it had already met its aspirational contracting goals for contracting with VOSBs and SDVOSBs. The Federal Circuit determined that since the applicable statute required the Rule of 2 “for purposes” of meeting the VA’s contracting goals, such language would be meaningless if the VA were required to continue following the Rule of 2 even after it had met its goals.

The decision left much unsettled regarding how the VA would actually follow it. It is unclear whether (and even how) the VA would be able to determine if it was currently in compliance with its contracting goals prior to placing a FSS order. It is not even clear whether the Federal Circuit judged the VA to have satisfied its contracting goals based on its current contracting results, its current pro-rated contracting results, its contracting results at the time of the litigation, or the prior year’s results.

Given the uncertainty regarding how the VA would be able to determine its current contracting progress, there may be a strong likelihood that the VA simply treats the decision as a carte blanche license to place FSS orders without following the Rule of 2. Such a position would be consistent with the VA’s practices over the last few years, in which it has consistently disregarded the GAO decisions. Such an outcome would result in fewer opportunities for SDVOSBs and VOSBs with federal supply schedules.


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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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