SDVOSBs Take It On The Chin: Federal Circuit Denies Kingdomware Appeal

In a crushing blow to SDVOSBs, the U.S. Court of Appeals for the Federal Circuit has denied the appeal of a lower court decision allowing the VA to procure goods and services using the Federal Supply Schedule without first considering whether SDVOSBs can satisfy the requirement.

Rejecting well-stated objections by a dissenting judge, a two-judge majority held that the purpose of the “Veterans First” rule is to ensure that the VA meets its SDVOSB goals, and that so long as the VA meets its SDVOSB goals, it is free to procure services and supplies from the Federal Supply Schedule without first considering a SDVOSB procurement.

The Court’s decision in Kingdomware Technologies, Inc. vs. United States, No. 2013-5042 (2014) is the latest (and possibly last) in a long-running battle between SDVOSBs and the VA over the SDVOSB preferences adopted by Congress as part of the Veterans Benefits, Health Care and Information Technology Act of 2006.  Because it has been awhile since the last decision in this battle, I have summarized the relevant history before diving into the particulars of the Federal Circuit’s decision.

The Aldevra Cases and Court of Federal Claims Decision

In late 2011, the GAO issued its decision in Aldevra, B-405271 (Oct. 11, 2011).  In the initial Aldevra decision, the GAO held that the VA had violated the law by procuring supplies using the FSS without first conducting market research to determine whether two or more offers would likely be received from eligible SDVOSBs under the so-called “Rule of Two.”

SDVOSBs, understandably, were overjoyed by the first Aldevra decision.  But that joy quickly evaporated when the VA refused to follow the GAO’s recommendation.  The VA continued ordering from the FSS without first applying the Rule of Two, and the GAO kept sustained bid protests complaining about the practice.  In December 2011, the GAO sustained a protest filed by Kingdomware Technologies, in Kingdomware Technologies, B-405727 (Dec. 19, 2011).  Additional “sustain” decisions followed in early and mid-2012.

But in November 2012, the U.S. Court of Federal Claims reached the opposite conclusion.  In Kingdomware Technologies, Inc. v. The United States, No. 12-173C (2012), Judge Nancy Firestone ruled that the VA had appropriately procured an Emergency Notification Service using the FSS without applying the Rule of Two for SDVOSBs.  Among other reasons underlying the decision, Judge Firestone’s opinion stated that the 2006 statute is “goal setting in nature” and therefore does not necessarily mandate SDVOSB preferences for all VA acquisitions.

Following Judge Firestone’s ruling, the GAO discontinued hearing protests challenging the VA’s failure to apply the Rule of Two.  The GAO suggested that it stood by its opinion, but that Judge Firestone’s decision gave the VA justification to continue ignoring GAO recommendations, making it pointless for the GAO to decide additional protests on the issue.

The Federal Circuit’s Decision

Kingdomware appealed Judge Firestone’s decision to the Federal Circuit.  The case was heard by a three-judge panel consisting of Chief Judge Sharon Proust, Judge Raymond Clevenger, and Judge Jimmie Reyna.

On June 3, 2014, the Federal Circuit issued a ruling upholding Judge Firestone’s decision.  Judges Proust and Clevenger decied in favor of upholding Judge Firestone’s decision; Judge Reyna dissented.

Like the decisions of the GAO and Court of Federal Claims before it, the Federal Circuit’s decision focused on the language of the 2006 VA statute.  Although various parts of the statute were discussed, the primary focus was on the language of 38 U.S.C. 8127(d), which states:

(d) Use of Restricted Competition.— Except as provided in subsections (b) and (c), 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 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.

A second subsection of the same statute, 38 U.S.C. 8127(i) specifies that when the VA is implementing the Rule of Two under 38 U.S.C. 8127(d), the VA is to prioritize SDVOSBs first.  The established order of preference was not in dispute; the question was whether the Rule of Two (and the SDVOSB preference under the Rule of Two) applies when the VA procures goods and services using the FSS.

The two-judge majority held that 38 U.S.C. 8127(d) does not require the VA to apply the Rule of Two before it uses the FSS.  The majority wrote that Congress did not “speak directly” to the question of whether the FSS is an exemption from the Rule of Two.  Therefore, the majority wrote, it was appropriate to grant deference to the VA’s interpretation of its statutory mandate.

The majority then focused on the phrase “for purposes of meeting the goals under subsection (a).”  The majority agreed with the VA that the Rule of Two is “the required procedure for meeting these goals.”  The majority continued, “[a]ccordingly, the agency need not perform a VOSB Rule of Two analysis for every contract, as long as the goals under section (a) are met.”  The majority noted that the VA had met (and exceeded) its goals in recent years:

As it stands, there is no reason to compel the Secretary to set aside any contract for a Rule of Two inquiry before using the FSS notwithstanding his goals, as Kingdomware requests.  The VA has consistently met the mandatory goals for procurement from SDVOSBs and VOSBs in each year since the Veterans Act of 2006 went into force, and Kingdomware does not contend otherwise.  The Secretary has complied with his statutory mandate to both set goals and meet them, and accordingly, the VA contracting officer’s decision not to set aside the contracts at issue was not arbitrary, capricious, or contrary to law.

The majority affirmed Judge Firestone’s ruling, and denied Kingdomware’s appeal.

Judge Reyna’s Dissent

Judge Reyna issued a sharp dissent from the majority opinion.  Judge Reyna wrote that “[t]he plain language of the 2006 Veterans Act unambiguously requires VA contracting officers to conduct a Rule of Two analysis in every acquisition and does not exempt task or delivery orders under the [FSS] from this imperative.”  Judge Reyna wrote that the majority’s opinion “guts the Rule of Two imperative of its full force and effect . . ..”

With respect to 38 U.S.C. 8127(d), Judge Reyna stated that “[t]he statutory provision at issue could not be clearer.  It provides that contracting officers ‘shall award contracts’ on the basis of restricted competition whenever the contracting officer has a reasonable expectation that the Rule of Two will be satisfied.”  Judge Reyna pointed out that “the word ‘shall’ is ordinarily the word of command” and that when it is used in a statute, it is usually “mandatory.”

Judge Reyna noted that the GAO “has sustained more than seventeen protests” in connection with the VA’s refusal to follow the Rule of Two before using the FSS.  Judge Reyna wrote that the GAO’s “special expertise” in bid protest matters should have been afforded deference.

Judge Reyna then turned to the majority’s reliance on the “prefatory language” of 38 U.S.C. 8127(d) regarding VA goals.  Judge Reyna wrote that such prefatory language does not limit an agency’s obligation to follow a mandate specified in the same statute.  Judge Reyna also wrote that there is “no evidence in the record to show that VA contracting officers rely on, or have access to” data about the VA’s achievement of its goals when it makes contracting decisions, and “the GAO has explicitly held that an agency’s belief that it has satisfied its small business goals does not affect its obligation to conduct a Rule of Two analysis.”

Judge Reyna concluded that the majority’s opinion “undermines” the purpose of 38 U.S.C. 8127(d) and renders it “superfluous” by interpreting the statute no differently than the VA’s existing Rule of Two obligation under the FAR.  Judge Reyna concluded:

In sum, the majority adopts an untenable construction of the 2006 Veterans Act by holding that the agency need not perform a VOSB Rule of Two analysis for every contract, so long as the goals set under subsection (a) are met.  The majority’s holding deprives the Rule of Two mandate of its force and effect, it impedes congressional objectives regarding set asides, and it renders 8127(d) inoperative and unnecessary.  For these reasons, I dissent.

Where Do SDVOSBs Go From Here?

Under the Federal Circuit’s rules, Kingdomware has the option of petitioning for an “en banc” review of the decision; that is, a re-hearing by the entire Court of Federal Claims.  However, there is no entitlement to an en banc re-hearing, and the Federal Circuit’s rules limit the situations in which en banc rehearings are granted.  I do not know whether Kingdomware intends to request an en banc rehearing.

The only other judicial option would be a request that the U.S. Supreme Court review the Federal Circuit’s decision.  As much as I would love to see the Supreme Court take on the issue, the Supreme Court only accepts a very small fraction of the cases it is asked to hear.  It is likely (although of course not certain) that the Supreme Court would decide not to hear the case.

This means that the Federal Circuit’s decision may be the last judicial word on this subject.  If so, SDVOSBs will need to take their case to Congress, and push for an amendment to the statute to clarify that “Veterans First” really means “Veterans First.”  For SDVOSBs, the battle has been lost, but the war may not be over yet.

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