In a unanimous decision issued today, the U.S. Supreme Court held that the U.S. Department of Veterans Affairs (VA) is required to set-aside contracts for every competitive acquisition, including Federal Supply Schedule (FSS) orders, when two or more eligible veteran-owned concerns will submit offers and an award can be made at a fair and reasonable price.  This ruling effectively increases the number of contracts (whether standalone or FSS orders) that will be set aside exclusively for veteran-owned small businesses (VOSBs) and service disabled veteran-owned small businesses (SDVOSBs) because the VA is statutorily prohibited from competitively awarding contracts to non-VOSB concerns when that requirement can be met.

In 2006, Congress passed the Veterans Benefits, Health Care, and Information Technology Act (VA Act), which established requirements for the VA to meet VOSB contracting goals.  38 U.S.C. §§ 8127-28 (2006).  The “Rule of Two,” at Section 8127(d), requires the VA to set aside competitive contracts for VOSBs if the contracting officer has a reasonable expectation that two or more VOSBs will submit offers and that the award can be made at a fair and reasonable price.

Since 2011, the U.S. Government Accountability Office (GAO) has consistently held that the VA is statutorily required to apply the Rule of Two to any competitive acquisition.  However, as the GAO issues “recommendations,” the VA has publicly disagreed with and declined to follow the GAO’s interpretation of the VA Act.  Accordingly, the GAO notified Congress of the VA’s declination to follow GAO recommendations.

In 2012, Kingdomware Technologies protested the VA’s award of an FSS order for employee emergency notification services to a non-SDVOSB concern at the GAO.  The VA’s market research concluded that at least 20 SDVOSBs would have been able to perform the requirements of the solicitation.  GAO sustained the protest and recommended the VA conduct market research pursuant to the Rule of Two.  The VA argued that the Rule of Two was only required for purposes of meeting VOSB and SDVOSB contracting goals, that such set-asides were otherwise discretionary under FSS acquisitions, and declined to follow GAO’s recommendation.

Kingdomware then sought corrective action and enforcement of GAO’s recommendation at the U.S. Court of Federal Claims (COFC).  COFC held that the statutory requirements were ambiguous and that the VA was entitled to deference in its interpretation of the statute.  Based on COFC’s decision and the VA’s continued position on the meaning of the statute, GAO declined to consider future protests regarding the VA’s interpretation of the VA Act, stating protesters would be unable to obtain meaningful relief.

Kingdomware appealed to the U.S. Court of Appeals for the Federal Circuit, which affirmed COFC’s decision in a 2-1 split panel.  The Federal Circuit pointed to legislative history suggesting that the purpose of the set-asides was to help the VA meet its contracting goals.  The U.S. Supreme Court agreed to hear Kingdomware’s appeal despite its mootness – the awards under appeal were completed in 2013 – because of the likely recurrence and the decision’s impact on future VA contracting.

The Supreme Court reversed the Federal Circuit’s decision, holding that the VA Act is unambiguous in its requirement to apply the Rule of Two for all VA competitive procurements, and that the prefatory clause regarding the VA’s annual contracting goals has no impact on its application.  The Supreme Court also rejected the VA’s contention that the requirement does not apply to FSS orders under “pre-existing FSS contracts.”  Each FSS order constitutes a contract, and Section 8127(d) applies when the VA “award[s] contracts.”  Further, the Supreme Court rejected the VA’s argument that imposing the Rule of Two requirement would “hamper mundane purchases like ‘griddles or food slicers.’”  Not only has FSS contracting evolved well beyond the acquisition of “mundane” purchases, there is still an exception to the application of the Rule of Two for purchases that fall below the simplified acquisition threshold.

VOSBs and SDVOSBs can expect the GAO to resume consideration of protests regarding the VA’s application of the Rule of Two pursuant to the VA Act.  Veteran-owned concerns should be alert to FSS orders placed with non-veteran-owned concerns.  In the meantime, we will wait to see if Congress amends the VA Act to narrow the scope of mandatory set-asides.