US Supreme Court rules that VA must use rule of two for all acquisitions

On June 16, 2016, the Supreme Court unanimously ruled that the Department of Veterans Affairs (VA) must limit all competitive procurements [including those using GSA/Federal Supply Schedules (FSS)] to Veteran-Owned Small Businesses (VOSBs)/Service Disabled (SD) VOSBs, so long as the “Rule of Two” is satisfied. This appears to end the dispute between the VA and several SDVOSB/VOSB companies which began after Congress passed the Veterans Benefits, Health Care, and Information Technology Act of 2006 (VA Act). Often called “Vets First,” the intention of the Legislation was to award VA contracts to SDVOSBs and VOSBs when feasible, before awarding to non-SDVOSBs/VOSBs. It states in part, “… (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 awards can be made at a fair and reasonable price that offers best value to the United States.” (Subsection (a) requires the VA Secretary to set annual goals and Subsections (b) and (c) permit VA to make sole source awards.)

Beginning in 2011, the Government Accountability Office (GAO) sustained a series of protests filed against VA by SDVOSBs. In the first protest filed by Aldevra, the GAO stated that the sole issue is whether VA had to use the Rule of Two when ordering supplies from the FSS. Noting that nothing in the VA Act authorized a deviation for certain types of procurements, the GAO decided in Aldevra’s favor. VA issued a memo to all VA contracting offices stating that GAO’s recommendation and its interpretation of the Act should not be followed resulting in several similar protests being filed.

Eventually, one former GAO protester, Kingdomware Technologies, Inc., filed a complaint in the Court of Federal Claims (CoFC) after the VA again used the FSS without conducting a Rule of Two analysis. The issue before the CoFC was one of statutory interpretation, i.e., “whether the terms of the 2006 Act mandate that VA set-aside every acquisition for SDVOSBs or VOSBs if two or more SDVOSBs or VOSBs can provide a fair and reasonable price for the contract before meeting its requirements using the FSS.” Here, VA argued that the Act is only a goal-setting statute and that nothing in the Act restricts VA’s discretion to order against the FSS. The Court agreed with VA.

The CoFC’s decision rested primarily on two points:

  1. Deference shown to an Agency in interpreting its own regulations. Concluding that the “goal setting” language was “at best” ambiguous as to whether it mandates a preference for SDVOSB/VOSBs in all VA procurements, deference should be given to the Agency’s reasonable and rational interpretation.
  2. Legislative history of the Act. Interestingly, the VA noted in the preamble that it rejected a revision to the VAAR which implemented the Act that would have expressly stated that SDVOSB/VOSB preference provisions don’t apply at the FSS order level.  They said that since those rules don’t apply to FSS orders, it wasn’t necessary to add that language to the regulation.

This decision was upheld on appeal at the US Court of Appeals for the Federal Circuit (CAFC), 2-1. Again, the majority cited the preamble to the VAAR which expressly stated that the Rule of Two “does not apply to FSS task or delivery orders.” However, the dissent viewed the goal setting language as “prefatory” and the “shall” imperative unambiguous, concluding that the VA need not be shown deference in its interpretation. (“Statements made in a preamble as part of the notice and comment process cannot override the unambiguous language of the regulations themselves.”)

At the Supreme Court, the VA argued that the Rule of Two only applied when the VA awarded “new contracts on the open market,” and that it did not apply to orders place under pre-existing FSS or other IDIQ contracts. In addition, they detailed the burden imposed by employing the Rule of Two every time the VA needed to order supplies off the FSS and the impact on Veterans. They conceded that “VA contracting officers thus must always consider VOSB set-asides when they award new contacts,” but not when “placing an order under a pre-existing FSS contract.”

The Supreme Court’s 8-0 decision reiterated the CAFC dissent’s points that the text of the Act is unambiguous and requires the Rule of Two be applied in all contracts without an exception for FSS awards and is not dependent upon whether its goals have been met. While the Supreme Court said that the VA originally made the argument that the Rule of Two was to be employed to meet the annual goals but changed its arguments now, the Court nevertheless went on to address that argument. It explained that the lower Court’s interpretation of the prefatory clause “for purposes of meeting goals” would result in an anomaly, i.e., the VOSB preference in contract awards would have to cease once the goals were met.

Next, it dismissed the VA’s (new) argument that orders under pre-existing FSS contracts were exempt since the orders were not “contracts.”

Finally, without ever addressing the “burden” argument, the Court addressed the issue of deference which should be shown the Agency in its interpretation of the Act’s language. Taking the opposite position from the lower Courts, the Supreme Court declared that the statute is unambiguous and, therefore, no deference was owed to the VA’s interpretation. The Court held that the Rule of Two is not limited to those contracts necessary to fulfill the Secretary’s goals and that it applies to FSS orders.

For more information on anything in this article, or other issues in Federal Contracting, please contact Ferlise and Associates at (732) 380-7739.

DOC Study of WOSB Federal Contracting Program

In 2015, the SBA requested a new study from the Department of Commerce (DOC) of the Women-Owned Small Business (WOSB) Federal Contracting Program which resulted in a revised list of the North American Industry Classification System (NAICS) industry groups in which WOSBs are underrepresented/substantially underrepresented. The study found a total of 21 four-digit industry groups that are eligible for Federal contracting (some NAICS sectors are not eligible for Federal contracts under SBA regulations) in which WOSBs are underrepresented (and therefore open only to Economically Disadvantaged (ED) WOSBs for set-aside/sole source awards) and found an additional 92 industry groups in which WOSBs are substantially underrepresented (and therefore open to both EDWOSBs and WOSBs for set-aside/sole source awards). This total of 113 NAICS industry groups is an increase of 30 from the former list of 83 industry groups – some of which were deleted and replaced with other codes. This new list of NAICS codes went into effect in March of this year. The full six-digit NAICS code lists can be found through these SBA website links: EDWOSB and WOSB .

SBA has published its full analysis of the DOC study in the related Federal Register notice that discusses which NAICS codes are no longer designated for use under the WOSB program, as well which NAICS codes are being newly designated for use under the program. Read the DOC WOSB Federal Contract Program report.

For more information on the WOSB program, please contact our office.

Vic Ferlise inducted into CECOM Hall of Fame

Victor Ferlise, the founding partner of Ferlise and Associates, was formally inducted into the Communications-Electronics Command (CECOM) Hall of Fame on April 7th 2016.

Victor was recognized as the first-ever civilian to fill the role of Deputy to the Commanding General of CECOM, assuming the position in 1992 until his retirement from federal service in 2007. Victor oversaw the development of the Team Fort Monmouth concept and transitioned it into the Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance, or “Army Team C4ISR” concept.

Other inductees from the inaugural class, include former commanders retired Lt. Gen. Emmett Paige Jr. and retired Maj. Gen. Robert Morgan; former Civilian Executive Assistant/ Deputy to the Commander of Tobyhanna Army Depot Mason C. Linn; and nuclear physicist and world-renown authority on nuclear-radiation technology Dr. Stanley Kronenberg.

“This Hall of Fame is only a small token, a small placeholder where we recognize in such a small way, larger contributions for a greater good,” said Maj. Gen. Crawford, the current CECOM Commander at Aberdeen Proving Ground.

F&A to attend the AUSA Global Force Symposium in Huntsville Alabama

Victor Ferlise, Michael Ferlise and Frank Faraci will be attending the upcoming AUSA Global Force Symposium in Huntsville Alabama from March 14th through the 16th.

The featured command at the symposium will be the Army Materiel Command (AMC).  AMC is the Army’s premier provider of materiel readiness – technology, acquisition support, materiel development, logistics power projection, and sustainment – to the total force, across the spectrum of joint military operations.  If a Soldier shoots it, drives it, flies it, wears it, eats it or communicates with it, AMC provides it.

F&A to attend National Veterans Small Business Engagement in Pittsburg

Victor Ferlise, Michael Ferlise and Wendy McCutcheon will be attending the upcoming  National Veterans Small Business Engagement (NVSBE) in Pittsburg.  NVSBE is the premier event for Veteran-Owned Small Businesses and Service-Disabled Veteran-Owned Small Businesses to connect with Procurement Decision Makers, program specialists, and contracting experts from the federal and commercial marketplaces.

Former VA TAC counsel joins F&A

We are pleased to announce that John Reynolds, Esq. has joined the team!

Prior to joining Ferlise and Associates in November 2015, John was an attorney for the Department of Veterans Affairs (VA), Office of General Counsel. In that capacity, he served as a legal advisor on a wide variety of Information Technology related contract actions in support of the VA Technology Acquisition Center in Eatontown N.J. as well as other VA contracting offices.

Before his time with the VA, John was an Attorney-Advisor in the Office of General Counsel, U.S. Army Communications-Electronics Command, Ft Monmouth, N.J. During that period, John’s workload included: Business Law Division supervisor, public sector Labor/Equal Employment Opportunity actions; Foreign Military Sales; environmental law, ethics guidance, Freedom of Information Act/Privacy Act guidance, Congressional inquiry responses, Anti-Deficiency Act and AR 15-6 investigations, construction contracting, fiscal law, operational/administrative law, major complex pre and post-award contractual actions including disputes, U.S. Government Accountability Office and Contracting Officer level protests, Alternative Dispute Resolution, Armed Services Board of Contract Appeals actions and numerous high dollar critically needed ‘best value’ source selections.

John has received numerous civilian awards and decorations, most notably the Army Materiel Command’s (AMC) 2004 Joyce I. Allen Attorney of the Year award and AMC’s 2006 Team Project Award. John also served as a Captain in the U.S. Army Judge Advocate Corps from 1977 to 1981.

Welcome aboard John!

Small business subcontracting improvements

The DoD, GSA, and NASA published proposed revisions to the Federal Acquisition Regulations (FAR) on June 10,  2015 in order to implement the changes made by the Small Business Administration (SBA) in its final rule which was published July 16, 2013. The changes stem from the Small Business Jobs Act of 2010 and include amendments to FAR subparts 1.1, 2.1, 15.3, 19.3, and 52.2.

Highlights of the changes include granting the Contracting Officer the authority to require a Small Business (SB) Subcontracting Plan (SP) from those SB awardees who have grown large and are required to rerepresent their size based on the criteria in FAR 19.301-2 provided that the contract contained the FAR Clause 52.219-9 “Small Business Subcontracting Plan.” Also, the new language authorizes Contracting Officers to establish additional SBSP subcontracting goals in terms of total contract dollars (currently, the SB Subcontracting Plan only requires the percentage of dollars planned for subcontracting to small businesses to be based on the total amount of money that will subcontracted. For example, if the total contract value is $1M and the total amount planned to be subcontracted is $250,000, and of that $250,000, $100,000 is planned to go to SBs – then the percentage planned to be subcontracted to SBs is 40%. But, using the total contract value of $1M, the percentage being subcontracted to SBs is only 10%.) It isn’t clear whether the use of the phrase “in addition to the goals established as a percentage of total subcontract dollars” is meant to reflect the establishment of different goals or just allows an additional way to calculate the percentage of the same dollars being spent on subcontracting to SBs.

Another notable change is reflected in the new language in FAR 19.703 in discussing what a prime contractor may rely on to determine whether a subcontractor is small. First, the prime decides what NAICS code is appropriate for the product or service being subcontracted. Then, the prime may accept a subcontractor’s representation of its size/status for that NAICS code if (a) the subcontractor is registered in the System for Award Management (SAM); and (2) the subcontractor represents that the size/status representations made in SAM are current, accurate and complete as of the date of the offer for the subcontract. If the subcontractor is not registered in SAM, the prime can rely on the subcontractor’s written representations that the size/status representations provided with its offer are current, accurate, and complete as of the date of the offer for the subcontract.

In addition, language has been added to the FAR reflecting the SBA’s requirements that an offeror will make assurances in their SBSP to make a good faith effort to “acquire articles, equipment, supplies, services or materials, or obtain the performance of construction work from the small business concerns that the offeror used in preparing the bid or proposal…” and that the offeror “will not prohibit a subcontractor from discussing with the contracting officer any material matter pertaining to payment to or utilization of a subcontractor… .”

For the complete rule and all proposed changes, see The Federal Register, Vol. 80, No. 111, June 10, 2015 which can be accessed at Comments are due by August 10, 2015.

If you would like additional information, please contact us.

WOSB Sole Source Authority

On May 1, 2015, the Small Business Administration (SBA) published a proposed rule to implement Section 825 of the National Defense Authorization Act (NDAA) for 2015. That section of the NDAA included language which grants Contracting Officers the authority to award sole source contracts to Women-Owned Small Businesses (WOSBs) and Economically Disadvantaged Women-Owned Small Businesses (EDWOSBs) in addition to the current authority to set-aside acquisitions for these businesses. Notably, unlike other small business socio-economic categories, WOSB/EDWOSB set-aside/sole source awards will still only be available for certain NAICS codes where women are underrepresented (for EDWOSBs) or substantially underrepresented (for WOSBs). The contracts, including options, cannot exceed $6.5 million for manufacturing and $4 million for all others.

Another significant change to the program is that WOSBs and EDWOSBs must be certified by a Federal Agency, a State government, or a national certifying entity approved by the SBA. However, SBA has said that this requirement will be promulgated by separate rulemaking and will not impact this new authority. In other words, WOSBs/EDWOSBs who are currently self-certified will still be eligible for sole source awards when this new rule goes into effect. Comments are due by June 30, 2015. The complete rule can be accessed at

Please contact us if you would like more information.

F&A now in Huntsville Alabama

We are pleased to announce that Frank Faraci, Esq. has joined the team! Frank is the former Chief, Acquisition Law Division, Legal Office, U.S. Army Aviation and Missile Command, Redstone Arsenal, Alabama. Frank started his government career as a JAGC officer at Redstone Arsenal from 1971-1974 performing duties in military justice, legal assistance, administrative law and labor law. After his military service, he served as an attorney advisor in the MICOM Legal Office at Redstone Arsenal performing duties initially in the areas of labor law, Freedom of Information, and Privacy Act and, finally, in acquisition law in 1978. His legal duties include legal support for major weapon systems acquisitions, services contracts, spare parts contracts and foreign military sales contracts. He served as a branch chief from 2001 until his assignment as Chief of the AMCOM Acquisition Law Division from December 2005 until his retirement. He retired from government service in July 2014 and has over 35 years experience in government acquisition at Redstone Arsenal. Frank has executed the full range of legal support in the acquisition field including requirements generation, source selections, protests, litigations and contract administration. Notably he is the recipient of the Superior Civilian Service Award.

Welcome aboard Frank!