Kingdomware: Supreme Court Requires Many More VOSB Set-Asides

By David L. Hayden and Jackson W. Moore

On June 16, 2016, the United States Supreme Court ruled that the Department of Veterans Affairs (VA) must apply the “Rule of Two” in all contracting decisions in Kingdomware Technologies, Inc. v. United States, 136 S.Ct. 1969 (2016). The Veterans Benefits, Health Care, and Information Technology Act of 2006 (Act) requires the Secretary of Veterans Affairs to set annual goals for contracting with service-disabled and other veteran-owned small businesses. In a separate provision, the Act provides that contracting officers “shall award contracts” by restricting competition to veteran-owned small businesses (VOSBs) if both (1) the officer reasonably expects that at least two such businesses will submit offers and (2) the award can be made “at a fair and reasonable price that offers best value to the United States.” 38 U. S. C. § 8127(d). Until June 16, 2016 the VA applied the Rule of Two only for contracts necessary to satisfy its annual goals.

In Kingdomware, the VA procured an Emergency Notification Service for four medical centers for a one-year period, with an option to extend the agreement for two more years, from a non-VOSB. The VA did so through the Federal Supply Schedule (FSS), a streamlined method that allows government agencies to acquire particular goods and services under pre-negotiated terms. The VA and the non-VOSB ultimately entered into two one-year agreements, extending from 2012 through 2013.

Kingdomware Technologies, Inc. (Kingdomware), a service-disabled VOSB, filed a bid protest with the Government Accountability Office (GAO), alleging that the VA was obligated to employ the Rule of Two in this and several other contracting awards, even though doing so was not necessary to satisfy the VA’s annual contracting goals. The GAO ultimately deemed the VA’s actions unlawful. However, the VA declined to follow the GAO’s nonbinding recommendations. Kingdomware therefore filed suit in the U.S. Court of Federal Claims, seeking to force the VA to apply the Rule of Two in similar contracting cases. The Court of Federal Claims disagreed with Kingdomware and the GAO, ruling that the Act only requires the VA to employ the Rule of Two for those contracts necessary to fulfill its annual goals. Upon appeal, a divided Federal Circuit affirmed the Court of Federal Claims opinion. See Kingdomware Technologies, Inc. v. United States, 754 F. 3d 923 (2014). In a dissenting opinion, Judge Jimmie Reyna argued that the Act’s mandatory language requires the VA to apply the Rule of Two in every instance of contracting. Id. at 935.

Kingdomware appealed the Federal Circuit case to the U.S. Supreme Court. There, the Justices unanimously reversed the Federal Circuit ruling and held that the VA must use the Rule of Two when awarding any contract, even if the VA could otherwise satisfy its annual minimum contracting goals. The Court adopted Judge Reyna’s arguments regarding the Act’s mandatory language, affirming that “Congress’ use of the word ‘shall’ demonstrates that § 8127(d) mandates the use of the Rule of Two in all contracting before using competitive procedures.” 136 S.Ct. at 1977. Congress specifically chose the word “shall” to connote a requirement, as opposed to “may,” which “implies discretion.” Id. Thus, according to the Court’s holding, the VA must utilize the Rule of Two for every contract.

The VA argued that FSS task and delivery orders are not “contracts” under the Act. The Court disagreed, holding that “[w]hen the [VA] places an FSS order, that order creates contractual obligations for each party and is a ‘contract’ within the ordinary meaning of that term.” Id. Therefore, the VA cannot avoid employing the Rule of Two by placing an order through the FSS.

The Supreme Court’s Kingdomware decision will drastically alter the VA procurement landscape. Currently, the VA awards only 10 to 12 percent of its contracts to VOSBs and issues 85,000 orders through FSS each year. By extending the Rule of Two to all contracts, including all FSS orders, the VA will create substantial opportunities for VOSBs to compete for contracts. Although the VA may not immediately implement the Supreme Court’s ruling, VOSB contractors can independently enforce the decision by filing a bid protest with the GAO and Court of Federal Claims.