SBA Considers Potential Consequences of Kingdomware Technologies Supreme Court Decision
As we discussed in a recent post, the Supreme Court’s decision in Kingdomware Technologies, Inc. v. United States left a number of questions unanswered regarding the implementation of set-aside requirements for veteran-owned small businesses under Federal Supply Schedule (“FSS”) contracts. The decision has already had repercussions outside the set-aside context, with the Court of Appeals for the Federal Circuit recently applying Kingdomware’s reasoning in Coast Professional, Inc. v United States to confirm bid protest jurisdiction under the Tucker Act for orders placed under FSS contracts.
Congressional testimony subsequent to Kingdomware also now confirms that a number of agencies are considering whether the Supreme Court’s decision has broader implications for other small business programs. Specifically, the U.S. Small Business Administration (“SBA”) has publically recognized that the Supreme Court’s reasoning may extend beyond a relatively narrow statute governing U.S. Department of Veterans Affairs (“VA”) set asides and require significant changes to long-standing principles established under the Small Business Act. As result, the VA’s and the SBA’s interests may no longer be aligned as the agencies attempt to reconcile currently differing implementations of related set-aside programs.
The statute at issue in Kingdomware requires a VA contracting officer to set aside “contracts” for veteran-owned small businesses if the contracting officer has a reasonable expectation that (i) two or more veteran-owned small businesses will submit offers in response to a solicitation and (ii) an award can be made at a fair and reasonable price. Contrary to prior interpretations, the Supreme Court concluded that this standard—commonly known as the Rule of Two—must be applied to orders for supplies or services placed under existing FSS contracts.
The Supreme Court reasoned that orders, which are intimately tied to FSS contracts but separately establish a mutually binding legal relationship, are covered by the ordinary meaning of the term “contracts” as this term is used in the statute governing VA set asides, expanding the perceived reach of VA set asides prior to the Supreme Court’s decision. The Supreme Court also highlighted that orders are explicitly covered by the Federal Acquisition Regulation’s (“FAR”) definition of the term “contract.” Accordingly, based on the plain meaning of the statute, the Supreme Court found no reason to exempt FSS orders from set-aside requirements applicable to “contracts”—a conclusion that, under recent VA guidance, may ultimately be interpreted to extend to orders placed under other non-FSS, multiple award contracts.
Although Kingdomware’s holding is technically limited to the statute governing VA set asides, the Supreme Court’s reasoning may have implications for long-standing principles established under the Small Business Act. Both statutes contain references to “contracts” that are not explicitly defined to exclude orders. Moreover, the Rule of Two originated in regulatory implementations of the Small Business Act and now appears in a number of the Small Business Act’s provisions. Specifically, the Rule of Two was established by agencies as a mechanism by which they could satisfy their obligation under the Small Business Act to set aside “any award or contract” when determined “to be in the interest of assuring that a fair proportion of the total purchases and contracts for property and services for the Government are placed with small-business concerns.” Now, variants of Rule of Two have been expressly incorporated into statutory provisions governing automatic set asides for certain low-value “contract[s],” as well as authorities allowing contracting officers to set aside a “contract,” a “contract opportunity,” or “contracts” for Section 8(a), HUBZone, women-owned, or service-disabled, veteran-owned small businesses.
Given the similarities between the statute governing VA set asides and the Small Business Act, the Supreme Court’s position that orders are covered by the ordinary meaning of the term “contracts” could have implications for how set-aside requirements relating to multiple award contracts are implemented under the Small Business Act. In addition, other long-standing principles established under the Small Business Act that stem from mandatory statutory provisions referencing a “contract” or “contracts”—including provisions governing size and status certifications, limitations on subcontracting, the nonmanufacturer rule, bundling, and subcontracting plan requirements—may be subject to new interpretations, or have their existing interpretations strengthened, if orders are deemed to be covered by the term “contracts.” In particular, a conclusion that size and status certification requirements apply on an order-by-order basis could be especially disruptive given that the SBA has generally taken the position that after initial certification contractors are deemed to be small businesses for each order placed under a multiple award contract, even if the contractor would no longer be considered a small business for new contracts, unless a contracting officer requests a size certification in connection with a particular order or another exception applies.
However, differences between the statute governing VA set asides and the Small Business Act may ultimately lead the SBA and judicial bodies to conclude that the Supreme Court’s reasoning in Kingdomware should not be applied to the Small Business Act. Specifically, new provisions added to the Small Business Act in 2010 call for regulations under which agencies may, “at their discretion,” (i) set aside part or parts of a multiple award contract, (ii) reserve one or more multiple contract awards, or (iii) set aside orders placed under multiple award contracts. Prior to Kingdomware, these provisions were interpreted by the U.S. Government Accountability Office to provide contracting officers with discretion to set aside orders placed under FSS and other multiple award contracts, superseding a prior decision that found order set asides to be mandatory pursuant to more general set-aside requirements established under the Small Business Act.
The SBA Office of Hearings and Appeals similarly found that these provisions precluded an interpretation of the Small Business Act to cover orders under FSS contracts with respect to a statutory provision providing that the submission of a bid or proposal for a “contract” is deemed to be an affirmative, willful, and intentional certification of small business size and status. Pursuant to this interpretation, a contractor would generally be permitted to rely on its initial certification for an FSS or other multiple award contract when pursuing orders placed under that contract, unless an exception identified in current SBA regulations applies. According to the SBA Office of Hearings and Appeals, the 2010 provisions confirm that Congress is “fully capable” of distinguishing between orders and contracts, at least with respect to more recent requirements established under the Small Business Act.
Both the U.S. Court of Federal Claims and the SBA Office of General Counsel have suggested, however, that the three options referenced in the 2010 provisions can be interpreted to supplement or be used to carry out more general set-aside requirements established under the Small Business Act. In other words, the provisions arguably only provide contracting officers with the discretion to choose among one of three options in place of, or as an alternative to, a standard Rule of Two analysis. A Senate report underlying a precursor bill including these provisions—but omitting a reference to agency “discretion”—merely indicates that the provisions were intended to “provide clear direction” by authorizing set asides “in multiple award contracts.” In establishing the regulations implementing the provisions, initially referencing the Senate report, the SBA maintained that set asides of multiple award contracts are still required under the 2010 amendments if the Rule of Two can be met after conducting market research; however—contrary to other potential interpretations—contracting officers have discretion to use any or none of the three options available if market research is inconclusive.
Ultimately, to the extent that orders are not deemed to be covered by the ordinary meaning of the term “contract” as this term is used in the Small Business Act, a determination of whether Kingdomware’s reasoning should be applied to the Small Business Act will likely depend on a detailed analysis of approximately sixty years of history underlying multiple statutory amendments and regulations. Such an analysis would be complicated by the fact that, unlike the statute governing VA set asides, the Small Business Act originally established requirements underlying agency set-aside procedures well before the prevalence of multiple award contracts. In addition, Congress continually made modifications to the Small Business Act in the context of a detailed regulatory regime that contained clear interpretations of the Small Business Act—at times explicitly claiming to leave untouched parts of the FAR that excluded FSS orders from Rule of Two requirements.
As a result, different analyses of the Small Business Act’s various references to “contracts” could lead to conflicting narratives regarding Congress’s intent. Interested parties may be waiting for some time before Kingdomware’s potential implications for the Small Business Act are fully understood.