Will The Supreme Court Put “Veterans First” In The Kingdomware SDVOSB Case?

Is the Department of Veterans Affairs required to prioritize service-disabled veteran-owned small businesses (“SDVOSBs”) when it buys supplies and services?  That, essentially, will be the question before the Supreme Court when it takes up the case of Kingdomware Technologies, Inc. vs. United States.  On June 22, the Supreme Court agreed to hear the case.

The Supreme Court’s decision in Kingdomware will end a long-running battle between the VA and various SDVOSBs, which have accused the VA of creating loopholes to avoid a statutory contracting preference for veterans.  Hopefully, the Court will get it right.  As a matter of policy and law, the underlying decision of the U.S. Court of Appeals for the Federal Circuit is fundamentally flawed.

The VA Act and the GAO Cases

The Veterans Benefits, Health Care and Technology Act of 2006 (the “VA Act”) directed the VA to prioritize SDVOSBs and VOSBs in agency contracting.  The VA Act directed the VA to establish annual goals for contracting with SDVOSBs and VOSBs.  The VA Act then establishes a contracting preference for SDVOSBs and VOSBs, codified at 38 U.S.C. § 8127(d):

(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.

Elsewhere, the statute specifies that SDVOSBs are to be given top priority under this “rule of two” process; VOSBs have the second highest-priority.

The SDVOSB and VOSB priorities created under the VA Act were widely viewed as a “Veterans First” policy under which veteran-owned businesses would be preferred for all VA procurements.  The only problem: the VA didn’t see it that way.

Instead of applying the “rule of two” across the board, the VA took the position that it could buy goods and services using the Federal Supply Schedule without first considering SDVOSBs or VOSBs.  The VA’s position enabled the VA to circumvent SDVOSBs and VOSBs whenever goods or services were available on the FSS.

Inevitably, bid protests came.  The first to result in a published decision was the protest of Aldevra, a SDVOSB based in Michigan.  In 2011, Aldevra filed two bid protests with the U.S. Government Accountability Office (“GAO”), complaining that the VA had violated the law by seeking to procure certain kitchen equipment off the FSS, without first applying the “rule of two.”

In Aldevra, B-405271, B-405524 (Oct. 11, 2011), the GAO held that “[w]e see nothing in the VA Act or the [VA Acquisition Regulations] that provides the agency with discretion to conduct a procurement under FSS procedures without first determining whether the acquisition should be set aside for SDVOSBs.”  The GAO wrote that the law was “unequivocal; the VA ‘shall’ award contracts on the basis of competition restricted to SDVOSBs where there is a reasonable expectation that two or more SDVOSBs will submit offers and award can be made at a fair and reasonable price.”  The GAO sustained Aldevra’s protests and recommended that the VA cancel its solicitations and re-solicit its requirements using a SDVOSB set-aside if appropriate.

The VA refused.

Although the GAO’s decisions are technically “recommendations,” procuring agencies almost always follow them.  Not this time.  The VA stuck to its guns and continued to insist that it had the right to procure goods and services from the Schedule without first applying the “rule of two” preference for SDVOSBs and VOSBs.

Two months after the Aldevra decision was issued, Kingdomware Technologies got into the action for the first time.  Kingdomware, a Maryland-based SDVOSB, filed a protest complaining that the VA had failed to apply the “rule of two” in a solicitation seeking subscription and support services at the VA San Francisco Medical Center.  In Kingdomware Technologies, B-405727 (Dec. 19, 2011), the GAO sustained Kingdomware’s protest.  The GAO again recommended that the VA re-solicit its requirement; again, the VA ignored the GAO’s recommendation.

Over the ensuing months, the GAO sustained several more protests and the VA kept refusing to implement the GAO’s recommendations.  Finally, Kingdomware took the VA to federal court.  Unlike the GAO, the Court of Federal Claims has the authority to issue injunctions; the VA could not simply ignore the Court if it ruled in Kingdomware’s favor.  But unfortunately for Kingdomware—and SDVOSBs everywhere—that didn’t happen.

The COFC and Federal Circuit Decisions

In Kingdomware Technologies, Inc. v. United States, No. 12-173C (Fed. Cl. 2012), Judge Nancy Firestone held that the VA had reasonably interpreted the VA Act.  Judge Firestone held that the VA Act must be construed in light of its “goal-setting provisions” and thus the statute is “at best ambiguous” as to whether it mandates a preference for SDVOSBs and VOSBs for all VA procurements.”  Judge Firestone acknowledged that the 2006 VA Act uses the phrase “shall award” in one place, but held that this phrase “must be read in connection with the other terms in the 2006 Act, which demonstrate that the Act is goal-setting in nature.”

In sum, Judge Firestone held: “the court respectfully disagrees with the GAO’s interpretation of the 2006 Act in the case at hand, and finds that the VA’s decision not to set aside the ENS contract at issue was not arbitrary, capricious, or contrary to law.”  Judge Firestone awarded summary judgment in favor of the VA.

Kingdomware appealed to the Federal Circuit.  There, a three-judge panel upheld Judge Firestone’s decision on a 2-1 vote.

The majority focused on the statutory 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.”

Judge Jimmie Reyna issued a strong dissent.  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 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.

Will the Supreme Court Put “Veterans First”?

The June 22 announcement that the Supreme Court will hear Kingdomware’s case gives renewed hope that the judicial system may yet get this one right.  As Judge Reyna persuasively argued, the Federal Circuit majority (and Judge Firestone) were wrong on the policy, and wrong on the law.

The VA has a special relationship with all veterans, and especially those who were disabled because of their service.  By imposing the “rule of two,” I believe that Congress intended to require the VA to use SDVOSB and VOSB sources whenever two or more responsible, reasonable SDVOSB or VOSB sources were available.  The Federal Circuit majority allows the VA to depart from this preference any time that its “goals . . . are met.”  But a goal is nothing more than a minimum acceptable standard.  The preference established in the standard requires the VA to do much more than be minimally acceptable; it requires the VA to contract with veteran-owned companies whenever possible.

The majority’s opinion is convoluted and impractical.  For one, who decides whether the VA’s “goals are met,” and when?  Official SBA report cards for each fiscal year ordinarily are not issued until many months after that fiscal year closes.  Are Contracting Officers supposed to use outdated goaling data from previous fiscal years to make set-aside choices?  Or are they supposed to attempt to obtain real-time data about the VA’s current progress toward its goals?  The majority doesn’t say.

What if the VA meets its goals in one fiscal year, but not the next?  In such a case, a “rule of two” preference might apply, for instance, in 2017 but not in 2018.  Or what if the VA is required to use real-time data, and progress toward its goal rises and falls throughout the year?  In this scenario, the “rule of two” might apply to a procurement issued on Monday, but not one issued on Wednesday.  Did Congress really intend the SDVOSB and VOSB preference to be switched on and off like this?

Another problem with the majority’s decision: the “rule of two” set forth in the VA Act is not exactly unique.

The Small Business Act includes a goal setting component for small businesses and various socioeconomic subcategories of small businesses.  For example, the current government-wide goal for small business prime contracting is 23%.  The FAR, in turn, uses a “rule of two” formula to prioritize small business acquisitions.  Under FAR 19.502-2, a contracting officer shall set-aside any acquisition over $150,000 for small businesses where there is a reasonable expectation that offers will be obtained from at least two responsible small businesses at fair market prices.  An even stricter standard is set forth for acquisitions between $3,000 and $15,000.  And yet, although the Government met its 23% small business goal in the last reported fiscal year, no one is contending that the Government is now somehow exempt from the small business “rule of two” under the FAR.  Instead, it is universally understood that 23% is the minimum acceptable threshold and that the “rule of two” continues to apply even in years following those in which the Government met its goals.

Similar “rules of two” are set forth in the FAR to establish when competitive set-asides are appropriate in the 8(a) Program (FAR 19.805-1(a)); HUBZone Program (FAR 19.1305(b)); Women-Owned Small Business Program (FAR 19.1505(b) and (c)) and the SBA’s separate SDVOSB program (FAR 19.1405(b)).  In none of these other “rules of two” is there any hint of a link between the effectiveness of the rule and the agency’s satisfaction (or lack thereof) of its relevant goals.  It is likely that Congress had FAR 19.502-2 and these other “rules of two” in mind when it drafted the VA Act.

Hopefully these policy and legal considerations will be on the Supreme Court’s mind when it takes up the case.  Perhaps now—nearly four years after the first Aldevra decision and seven years after the passage of the VA Act—“Veterans First” will finally become a reality.

This article was originally published by Law360.com on June 23, 2015.

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