The “Rule of Two” – How does this Small Business Supreme Court Decision Affect You?

In June, the SDVOSBs (Service-Disabled Veteran Owned Small Businesses) and VOSBs (Veteran Owned Small Businesses) won big with the Supreme Court decision to unanimously rule the VA’s “rule of two” as mandatory and applying to all VA procurements–including GSA Schedule orders. The ruling, Supreme Court’s decision in Kingdomware Technologies, Inc. v. United States, No. 14-916 (2016), means the VA is required to truly put “veterans first” in all procurement actions. The “rule of two” small business Supreme Court decision resulted in a huge win for SDVOSBs and VOSBs.

Kingdomware Technologies is a service disabled veteran owned business that provides web, software, and technology solutions, specializing in providing web, client, network and mobile applications solutions for government, industry and nonprofits since 1993. They have fought long and hard, along with many veterans’ advocates and the case has certainly been an uphill battle over the VA’s “rule of two” which began back in 2006 when Congress passed the VA Act.

The Act included a provision requiring the VA to restrict competitions to veteran owned firms so long as the “rule of two” was satisfied. This two-competitor benchmark is commonly referred to as the “rule of two” for the basis of of competition and is restricted to small businesses owned and controlled by veterans. This is what the “rule of two” small business decision was all about. Upon completion of a market study confirming the benchmark is satisfied, competition restricted only to VOSBs and SDVOSBs and supersedes the norm of full and open competition. If the contracting officer has a reasonable expectation that two or more of the small businesses are owned and controlled by veterans, they can submit offers and the award can be made at a fair and reasonable price that best benefits the value to the United States.

It started back in 2011, Aldevra, B-405271 (Oct. 11, 2011). when the first issue arose when the VA attempted to purchase supplies for a VA Medical center through the GSA Schedule on an unrestricted basis.  Aldevra, a SDVOSB, filed a protest with the Government Accountability Office (GAO), arguing that before using the GSA Schedule, the VA should have conducted market research to determine whether two or more offers would be received from eligible SDVOSBs, and if so, they should have set-aside the competition for SDVOSBs.

In this particular case, the VA conceded that two or more SDVOSBs could meet the requirement.  Under these circumstances, the GAO held that the procurement must be set aside for SDVOSBs. The VA refused to abide by the GAO’s decisions. The GAO decisions are really just recommendations, and while most agencies follow the GAO’s recommendations, however, they are not legally required to do so.

During the fall of 2012, Kingdomware took the VA to federal court. A different outcome was reached when the The U.S. Court of Federal Claims Court ruled in favor of the VA.  Relying on the phrase “goal setting in nature”, the Court concluded that the VA did not follow the “rule of two,” but the VA did meet the agency-wide goals for SDVOSB and VOSB contracting.

In June 2014, Kingdomware appealed to the U.S. Court of Appeals for the Federal Circuit. The Federal Circuit majority ruled the VA Act’s “rule of two” was a goal-setting requirement, and that the VA need not apply the “rule of two” so long as its SDVOSB and VOSB goals are met.  In quick disagreement, Judge Jimmie Reyna noted that the statute uses the mandatory word “shall” and disputed the phrase “for purposes of meeting the goals under subsection (a)” was merely “prefatory language” that explained the general purpose of the statute, but did not vary the statute’s obligatory temperament.

The Supreme Court’s “rule of two” small business decision came after the Court recounted the history of the VA Act and the “rule of two” and the Kingdomware case, specifically. The Court examined and determined they had jurisdiction to consider the case. After review, the Court rejects the Government’s argument that the Court should defer to the VA’s interpretation of the VA Act.  The Court simply states that “we do not defer to the agency when the statute is unambiguous, thus we decline the Department’s invitation to defer to its interpretation.” In conclusion, the court rules:

We hold that the Rule of Two contracting procedures in [Section] 8127(d) are not limited to those contracts necessary to fulfill the Secretary’s goals under [Section] 8127(a).  We also hold that [Section] 8127(d) applies to orders placed under the FSS.  The judgment of the Court of Appeals for the Federal Circuit is reversed, and the case is remanded for further proceedings consistent with this opinion.

For SDVOSBs and VOSBs, the Supreme Court’s Kingdomware decision is a huge win. Since the VA Act was adopted, the VA has taken the position that it may order off the GSA Schedule without prioritizing veteran-owned businesses. Well, that’s about to change.

If you have questions about the”rule of two” small business decision and how it may affect your contracts, contact KDuncan. KDuncan & Company LLC (KDC) is a Licensed Certified Public Accounting and Financial Services firm that provides support to agencies of the federal government and government contractors.

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KDuncan & Company is dedicated to providing knowledge and support for small government contractors about concerns regarding government contracting. For questions on areas such as as cost proposals, accounting systems, DCAA compliance, and incurred cost audits, reach out to KDuncan & Company.

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