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.