Supreme Court Will Hear Government Contracts Case on Veteran Business Preferences

by McGuireWoods LLP

Well, it doesn’t happen very often, but the Supreme Court has agreed to hear a government contracts case! The Supreme Court granted certiorari on June 22, 2015, and will hear an appeal from the Court of Appeals for the Federal Circuit in Kingdomware Technologies, Inc. v. United States.

The case involves the intersection of three authorities: (i) the well-known “Rule of Two” for determining if a procurement action should be set aside for small businesses; (ii) the Veterans Administration’s (VA’s) use of Federal Supply Schedules (which are exempt from the small business set-aside requirements of FAR Part 19 and therefore exempt from the Rule of Two analysis), and (iii) the Veterans Benefits, Health Care and Information Technology Act of 2006, in which Congress appears to have mandated a Rule of Two determination specifically applicable to the VA in favor of veteran-owned small businesses. Added to the mix are numerous sustained Government Accountability Office (GAO) protests finding against the VA and suggesting corrective action – each of which the VA ignored – and a Federal Circuit decision with a stinging dissent. In the normally mundane world of government contracts, this qualifies as high drama.

It has long been understood that the Rule of Two is not applicable to purchases under Federal Supply Schedules. FAR 8.404(a); FAR 19.502-1(b); FAR 19.1404(c). Therefore, agencies are not required to make any determination about the existence of responsible small businesses for a particular requirement if the agency is satisfying the requirement through a Federal Supply Schedule (FSS) purchase.

Congress, though, passed the Veterans Benefits, Health Care and Information Technology Act of 2006, which includes an apparent mandate that the VA “for purposes of meeting the goals under subsection (a), and in accordance with this section, a contracting officer of the Department shall award contracts on the basis of competition restricted to small business concerns owned and controlled by veterans” after a Rule of Two analysis limited to veteran-owned small businesses has been completed. 38 USC § 8127. After years of seeing the VA, and the government in general, fail to meet goals set for contracting with veteran-owned firms, most cheered this new law and many no doubt believed that the law made the Rule of Two applicable as a precursor even to FSS purchases by the VA. The VA, however, did not interpret the statute that way and, in implementing regulations, made it clear that its FSS purchasing would continue to be exempt from any set-aside requirements, including any Rule of Two analysis.

Ultimately, the VA’s view was challenged, and in 2011 the GAO ruled in Aldevra, B-405271 (Oct. 11, 2011) that the VA was wrong. The GAO recommended in the context of that protest that the VA engage in market research to determine if two or more responsible veteran-owned small businesses could perform the requirement, and if so, to set aside the procurement for competition limited to such firms. In a somewhat unusual (but not unprecedented) move, the VA ignored the GAO’s recommendation and continued to make purchases through Federal Supply Schedules without any analysis of whether veteran-owned small businesses were likely to offer to satisfy the agency’s requirements.

While the GAO continued to rule in favor of protestors, and the VA continued to ignore those rulings, Kingdomware Technologies, Inc., a certified service-disabled veteran-owned small business, took its case to the Court of Federal Claims. The Court of Federal Claims granted summary judgment in favor of the VA, finding that the statute was “goal-setting” in nature and that the phrase “for purposes of meeting the goals under subsection (a)” created an ambiguity as to the meaning of the phrase “shall award.” In light of the ambiguity, and the fact that the statute is silent as to implications for FSS purchases, the court ruled that the VA’s interpretation of the statute was reasonable and its implementation of the statute was entitled to deference.

Kingdomware appealed to the Federal Circuit, which last year affirmed the Court of Federal Claims decision in favor of the VA. In a surprise to most observers, the Supreme Court granted cert and will rule next year on this somewhat arcane government contracts issue.

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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