Earlier this year, we wrote about an interesting issue brewing in federal contracting: whether the logic behind the Supreme Court’s June 2016 decision in Kingdomware Technologies means that the Small Business Act’s rule of two is mandatory for acquisitions under Federal Supply Schedules. In other words, does the Small Business Act require agencies to set aside orders under the FSS when two or more small business are likely to submit competitive offers?

The SBA believes that the rule of two (see FAR 19.502-2) is mandatory for such orders. GAO has disagreed, saying instead that the Small Business Jobs Act of 2010 and the exclusion of FSS contracts from the application of FAR Part 19 (see FAR 8.405-5(a)(1)(i)) make the small business rule of two discretionary for these orders.

This conflict—GAO believing the Small Business Act’s rule of two is discretionary for orders placed under multiple-award contracts; SBA believing it is mandatory—has existed for several years. But now the SBA is using the Supreme Court’s recent decision to bolster its case: according to a recent SBA internal memorandum, Kingdomware requires the small business rule of two to be given mandatory effect, at least with respect to orders valued between $3,500 and $150,000.

Kingdomware involved the scope of a VA-specific procurement statute, 38 U.S.C. § 8127(d), which required the VA to set aside contracts for SDVOSBs or VOSBs whenever two or more veteran-owned companies would submit an offer at a fair and reasonable price. The VA opposed the application of this provision to FSS orders, saying that orders are not “contracts” and therefore the statutory rule of two did not apply. The Supreme Court unanimously disagreed with the VA’s interpretation, holding that FSS orders are, in fact, contracts and that the 2006 VA Act’s rule of two is mandatory even when the VA wishes to use the FSS.

The SBA jumped on this decision, and wrote in October 2016 that Kingdomware’s rationale “should be applied broadly to similarly worded Federal statutes.” This includes the Small Business Act’s rule of two, which says that “[e]ach contract for the purchase of goods and services that has an anticipated value greater than [$3,500 but less than $150,000] shall be reserved exclusively for small businesses” if two or more small businesses will submit competitive offers. 15 U.S.C. § 644(j); see also 80 Fed. Reg. 38294 (July 2, 2015) (increasing dollar amounts). Because “FSS orders are unmistakably ‘contracts’ under the common law and the Federal Acquisition Regulation,” the SBA believes that FSS orders between $3,500 and $150,000 must be set aside for small businesses, in accordance with the Small Business Act.

Given its interpretation, the SBA’s memorandum urges its Procurement Center Representatives (“PCR”) to evaluate contracts to increase small business participation:

The policies and goals established by law are clear, and agencies have the requisite tools to receive best value at fair market prices exclusively from SBCs when appropriate, regardless of the mechanism the agency chooses to utilize to acquire those goods or services. Therefore, PCRs should, to the extent possible, review requirements between $3,500 and $150,000 which have not been unilaterally set-aside for SBCs, regardless of which mechanism the agency chooses to obtain said requirement, in order to determine if small businesses can reasonably compete for these opportunities. PCRs should endeavor to use their full authority to review contracts and orders to encourage small business participation.

GAO and the Court of Federal Claims will ordinarily afford the SBA “great deference” as to the interpretation of small business statutes and regulations, so SBA’s stance could impact any future protest decisions. The SBA’s interpretation, moreover, effectuates Congress’s broad policy “that the Government should aid, counsel, assist, and protect the interests” of small business concerns and “ensure that a fair proportion of the total purchases and contracts for property and services for the Government are placed with” small businesses. GAO’s past interpretation of the Act (which, again, holds that the rule of two is discretionary for FSS orders) seems to run counter to this purpose, by potentially minimizing the instances under which small businesses get first dibs on federal contracts.

The question of whether the Small Business Act’s rule of two is mandatory or discretionary for FSS orders promises to percolate over the coming weeks and months. And because the federal government buys billions of dollars’ worth of goods and services through FSS contracts, its resolution will be tremendously important to small businesses.