Supreme Court Clarifies Broad Scope of the “Rule of Two” in VA Contracting
Veteran-owned small businesses scored a win at the Supreme Court with a unanimous ruling in Kingdomware Technologies, Inc. v. United States. The case involved a law that requires the Department of Veterans Affairs (the “VA” or the “Department”) to restrict competition to service-disabled or veteran-owned small businesses when a contracting officer determines that “at least two of these businesses will submit offers and that the award can be made at a fair and reasonable price that offers best value to the United States.” That requirement is known as the “Rule of Two.” In Kingdomware, the Court held that the Rule of Two covers orders under the Federal Supply Schedule (“FSS”), and that it continues to apply even after the Department has reached its statutorily mandated annual goal of contracting with service-disabled and veteran-owned small businesses.
The underlying contract involved emergency notification systems for VA medical centers. The Department ordered services from a non-veteran-owned company from the FSS, and Kingdomware filed a bid protest at the GAO. The GAO recommended that the Department take corrective action and conduct market research to determine whether the procurement triggered the Rule of Two, but the Department declined to do so, relying on its position that the Rule of Two did not apply to FSS orders. Kingdomware then sued in the Court of Federal Claims. The court granted summary judgment for the Department, and the Federal Circuit affirmed, holding that the Department need not apply the Rule of Two after reaching the annual statutory contracting goals. The Supreme Court granted certiorari last summer, and we previewed the issues on this blog.
In reversing the Federal Circuit, the Supreme Court emphasized the clarity of the statute at issue: “[38 U.S.C.] Section 8127(d) unambiguously requires … that ‘a contracting officer of the Department shall award contracts’ to a veteran owned small businesses using restricted competition whenever the Rule of Two is satisfied,” subject to two narrow statutory exceptions. The Court also examined—and rejected—the Department’s position that the Rule did not apply to FSS orders, even though the Department had technically forfeited that argument by failing to raise it in the lower courts. In its analysis, the Court dismissed the Department’s contention that orders under the FSS were qualitatively different than other contracts, in that they involve only the purchase of small, “mundane” items like “griddles or food slicers.” The Department had argued that applying the Rule of Two for such purchases would slow down the VA’s procurement process. The Court disagreed, and noted that, as in this case, the VA often uses the FSS for complicated multi-year procurements.
The decision clarified the scope of the Rule of Two, but it does not explain precisely how much contracting officers must do to meet their obligations under the Rule. The Court included a footnote explaining that it did not need to “decide today precisely what sort of search for veteran-owned small businesses the Department must conduct to comply with the Rule of Two.” In particular, the Court declined to require contracting officers to complete a “broader search” for service-disabled and veteran-owned small businesses, but it also declined to approve a simple search of businesses listed in the FSS. We expect these unsettled questions to provide fertile ground for protests of the proper application of the Rule of Two in the coming year.