The Procurement System Would Have Broken Einstein's Brain: Government Contracting After Kingdomware
Volume 226 Issue 3 2018
[T]his is a new kind of provision, this mandatory set-aside; isn’t that true? So we don’t have any -- any logic. We don’t have any experience at all.1
I. Introduction
The rarity of a Supreme Court decision dealing with a bid protest warrants attention when one occurs.2 Indeed, in the last thirty years, only one Supreme Court decision involved a bid protest.3 The Supreme Court recently decided Kingdomware Technologies, Inc. v. United States.4 The Court held that the Rule of Two set-aside provision at 38 U.S.C. § 8127(d) imposed a mandatory, rather than permissive, duty on the Department of Veterans Affairs (VA) to set aside procurements for small businesses.5 This statute addressed set-asides by the VA to veteran-owned small business (VOSB) and service-disabled veteran-owned small business (SDVOSB) concerns.6 In reversing the Court of Appeals for the Federal Circuit, the Supreme Court disagreed that 38 U.S.C. § 8127(d) allowed contracting officer discretion in determining whether to set aside a procurement for small businesses.7 The decision holds high importance: During fiscal year 2012, the year of the Government Accountability Office (GAO) opinion in this case,8 the VA completed approximately $3.4 billion in contract actions with SDVOSB concerns and $6.1 billion with other small businesses, to include VOSBs.9
Relevant to Judge Advocate practice, Kingdomware, while not directly applicable to DoD procurements, signifies the need to correctly provide contracting advice in order to minimize bid protest litigation and thus, avoid procurement delays.10 Government contracting practitioners likely assume that a 2010 amendment to the Small Business Act11 removed mandatory small business set-asides under multiple award contracts.12 However, this article demonstrates that the Kingdomware decision applies beyond the VA and affects current Army contracting practices regarding set-asides.13 This article shows that the legal rationales behind Kingdomware should be applied to the Small Business Act.
Although the Kingdomware decision involved the VA Act Rule of Two, the decision and its reasoning apply in other contexts. Beyond the VA, Kingdomware applies to analyzing set-asides under the Small Business Act. Furthermore, its rationales require mandatory set-asides under the Small Business Act Rule of Two such that federal agencies must award contracts to small businesses in every acquisition meeting the Rule of Two.14
Two approaches exist for set-aside provisions and their relationship to goals for set-asides.15 One approach holds that set-aside provisions allow contracting officer discretion to consider agency contract achievements vis-à-vis contracting goals in considering restricted competition.16 The second approach holds that contracting officers do not have discretion to determine set-asides, and contracting goals do not affect the requirement to set-aside a contract.17
This article addresses how the Kingdomware decision affects set-asides by agencies when awarding contracts under the Small Business Act.18 It also focuses on whether Kingdomware affects the Small Business Act to require mandatory set-asides and to require contract award to small businesses in all acquisitions meeting the Rule of Two.
First, this article discusses Kingdomware’s procedural history. The procedural history begins by providing context to the issues raised in the decisions by the GAO, the Court of Federal Claims (COFC), and the Court of Appeals for the Federal Circuit (CAFC). After examining the procedural history, this article examines the Supreme Court’s decision.
Second, this article analyzes the relevant contracting statutory framework. It analyzes the Small Business Act’s statutory structure, history, amendments, and Rule of Two. Then, the statutory structure of the Competition in Contracting Act relevant to the Small Business Act is addressed. Finally, it analyzes the Kingdomware decision and its result of requiring the Rule of Two to apply in all procurements.
Although the Kingdomware decision only applied to the VA Act Rule of Two, the decision should logically be extended to the Small Business Act Rule of Two and applied in all domestic procurements.19 First, the plain meaning of 15 U.S.C. § 644(j) supports mandatory set-asides in all procurements meeting the Rule of Two. Second, even if ambiguity exists in the Small Business Act, Chevron deference supports mandatory set-asides in all procurements meeting the Rule of Two.20 Finally, Kingdomware affects the 2015 GAO Aldevra decision to result in mandatory set-asides for domestic procurements meeting the Rule of Two.
II. Decisions Background
A. Procedural History of Kingdomware
The procedural history of Kingdomware involved several decisions below the Supreme Court, with decisions by the GAO, COFC, and CAFC. This article discusses each in turn.
1. The GAO Decision in Kingdomware
Kingdomware Technologies, Inc. (Kingdomware) filed a bid protest at the GAO after the VA awarded a contract to a non-VOSB.21 Kingdomware alleged that the VA had violated 38 U.S.C. § 8127 by using the Federal Supply Schedule (FSS) without applying the Rule of Two.22 Specifically, Kingdomware alleged, the VA Act Rule of Two required a contracting officer to restrict competition to veteran-owned small businesses when its conditions are met.23 The Rule of Two requires a contracting officer to award contracts, on a restricted basis, to small businesses when there is a reasonable expectation that two or more small businesses will submit offers, and that award can be made at a fair and reasonable price.24
The GAO sustained Kingdomware’s protest.25 The GAO reasoned 38 U.S.C. § 8127’s plain language mandated the agency to conduct a set-aside, and the mandate applied to FSS acquisitions.26 The GAO Kingdomware decision incorporated reasoning set forth in the Matter of Aldevra, 27 a 2012 GAO opinion that interpreted the VA Act Rule of Two.28 The 2012 GAO Aldevra decision noted, without resolving, the VA’s argument that the agency could consider its current contract achievements relative to small business contracting goals.29 Instead, the GAO found 38 U.S.C. § 8127(d)’s plain language mandated the VA to use set-asides when the procurements met the requirements under the VA Act Rule of Two.30
Ultimately, the GAO found the VA Act unambiguous and declined to extend Chevron deference.31 Chevron deference arises when a tribunal defers to an agency’s construction of a statute after the tribunal finds ambiguity when interpreting a statute.32 In Kingdomware, the GAO declined to apply Chevron deference because the GAO found the statute unambiguous.33 Analyzing the statute’s plain meaning, the GAO noted the importance of the mandatory term (“shall”) relative to introductory phrases describing purposes of meeting set-aside goals.34 Of note, the GAO recognized that the VA had not performed notice-and-comment procedures, and thus had no agency rules for deference.35
2. Court of Federal Claims Decision in Kingdomware
Kingdomware also filed a bid protest with COFC.36 After the GAO sustained Kingdomware’s protest, the VA notified the GAO that it would not follow the GAO decision.37 Kingdomware sought injunctive relief to compel the VA to comply with the VA Act.38 Contrasting with the GAO decision, the COFC Judge denied Kingdomware’s bid protest.39 Significantly, COFC reasoned that analogy to the Small Business Act40 was “misplaced” and not applicable to the Kingdomware set-aside occurring under the FSS.41
The COFC found the VA Act Rule of Two set-aside clause ambiguous based on its goal-setting nature.42 The court applied Chevron’s two-pronged analysis,43 and found that the VA Act satisfied the first prong.44 The court found the VA Act failed Chevron’s second prong and declined to grant Chevron deference.45 Although declining Chevron deference, the court deferred to the VA’s agency-level interpretation of the VA Act.46 The court departed from the GAO’s interpretation of the VA Act, and found that the VA’s interpretation of the VA Act was entitled to deference.47
3. United States Court of Appeals for the Federal Circuit Decision in Kingdomware
a. Majority Opinion
Kingdomware filed an appeal with CAFC.48 A divided panel of the court affirmed in favor of the VA.49 The Court of Appeals for the Federal Circuit reviewed the COFC decision without deference to the lower court, and analyzed the VA Act under Chevron.50 The Court of Appeals for the Federal Circuit found that the VA Act Rule of Two was not ambiguous.51
The court reasoned that the statute clearly reflected Congress’s intent to directly tie the mandatory Rule of Two to the achievement of small business set-aside goals.52 Concerning the VA Act Rule of Two’s prefatory clause, CAFC construed the statute by giving effect to each word in the statute.53 Interpreting the statutory scheme as a whole, the court linked the Rule of Two mandate to the goals in the VA Act.54 The court found the VA did not need to perform a Rule of Two analysis for every contract, as long as its set-aside goals were met.55
b. Dissent by Judge Reyna
In the dissent, Judge Reyna criticized the statutory construction by the majority.56 Judge Reyna posited that 38 U.S.C. § 8127(d) clearly provided an imperative to conduct a Rule of Two analysis in every VA procurement.57 The dissent reasoned that the prefatory language could not limit the statute’s operative clause.58
Judge Reyna offered practical reasoning to require the VA to conduct Rule of Two set-asides in every procurement.59 Referring to Federal Acquisition Regulation (FAR) Part 19.502-2, he highlighted the VA’s existing obligation to conduct a Rule of Two analysis in nearly every acquisition exceeding the micro-purchase threshold.60 He countered the majority’s argument that the VA could consider agency contract achievements vis-à-vis contracting goals in considering whether to restrict competition.61 In support, the dissent highlighted FAR 19.502-6(f) to effectively require set-asides even if small businesses already received a fair proportion of agency contracts.62
Separate from the VA Act, Judge Reyna had concerns about the majority’s rationale and its implications for the Small Business Act.63 Judge Reyna highlighted that the majority’s decision would render unnecessary the existing FAR Small Business Act goals.64
B. Supreme Court Decision in Kingdomware
Kingdomware petitioned the Supreme Court for certiorari.65 Notably, the government modified its argument when it filed its brief to the Court,66 as compared to the arguments made to lower level courts.67 Previously, the government argued that the VA Act afforded the contracting officer with discretion to determine set-asides as needed to meet agency goals.68
Although the government’s argument to the Supreme Court conceded the mandatory nature of the statute, the government shifted its argument to another area.69 Instead of focusing on the statute’s mandatory or discretionary nature, the government focused on the situations requiring application of the VA Act Rule of Two.70 The government argued that the VA Act Rule of Two applied only to situations when new contracts were awarded on the open market. 71 By arguing an open-market difference for simplified acquisitions, sealed bidding, and contracting by negotiation, the government distinguished these situations from orders placed under pre-existing FSS contracts.72
In a unanimous opinion, the Supreme Court rejected the government’s arguments and reversed the decision of the COFC.73 The Court concluded the statute required the VA to use the Rule of Two even when the VA would otherwise meet its set-aside goals.74 The Court held that 38 U.S.C. § 8127 was mandatory and not discretionary. 75 In holding 38 U.S.C. § 8127(d) unambiguously required the VA to use the Rule of Two before contracting under competitive procedures,76 the Court declined to apply Chevron deference.77
III. Analysis of the Small Business Act Rule of Two Applying to Procurements
Although Kingdomware addressed the VA Act Rule of Two, the Supreme Court’s decision influences the Small Business Act Rule of Two78 as previously interpreted through GAO and court decisions.79 The following section addresses how the Small Business Act amendment history, statutory structure, and context relative to CICA80 support set-asides when the Rule of Two is met.
A. The Small Business Act Amendment History and Statutory Structure Support Set-Asides
The Small Business Act’s amendment history and statutory structure support small business set-asides when the Rule of Two is met. In 1953, Congress enacted the Small Business Act.81 Importantly, the legislation aimed to assist and protect the interests of small business concerns by ensuring they received a “fair proportion” of the total government contracts.82 A national defense rationale for the Small Business Act posits that broad-based and dispersed industry in which many small businesses nation-wide contribute strength and health to the economy.83 The next section examines the Small Business Act amendment history and structure, which support mandatory set-asides when the Rule of Two is met.
1. The Small Business Act History of Amendments Supports Mandatory Set-Asides
Several amendments to the Small Business Act occurred between its enactment in 1953 and its current form.84 In 1978, amendments to the Small Business Act directed procurement goals for federal agencies on an annual basis.85 Ten years later, Congress amended the goals to mandate a twenty percent government-wide goal for small business participation in all prime contracts awarded.86
Later amendments to the Small Business Act resulted in requiring set-asides. In 1994, the Federal Acquisition Streamlining Act (FASA)87 amended the Small Business Act at 15 U.S.C. § 644(j) and mandated small business set-asides within a fixed price range.88 Thereafter, the Small Business Act has provided at 15 U.S.C. § 644(j) for small business set-asides between the micro-purchase threshold and the simplified acquisition threshold.89 Importantly, on the date of the passage of FASA, the President issued a memorandum to the heads of executive departments and agencies.90 The memorandum addressed the fair proportion policy in awarding government contracts to small businesses, and the priority to encourage small business participation in federal procurements.91
Following major reforms of FASA, the 1996 Federal Acquisition Reform Act (FARA) did not substantively change 15 U.S.C. § 644.92 In the following year, the Small Business Reauthorization Act of 1997 increased contracting goals, last modified in 1988, from twenty percent to twenty-three percent.93 Because no exceptions were ever enacted to the Small Business Act’s Rule of Two, the amendment history supports concluding that set-asides must occur when the Rule of Two is met. The next section addresses the structure of the Act.
2. The Statutory Structure of the Small Business Act Supports Mandatory Set-Asides
Significant to considering Kingdomware’s effect on the Rule of Two, the Small Business Jobs Act of 2010 amended the Small Business Act by adding 15 U.S.C. § 644(r) for the context of a multiple award contract.94 Currently in effect, the plain language of section 644(r) makes no reference to section 644(j).95 Notably, in the context of multiple award contracts, section 644(r) provides operative discretionary language (“may”), in contrast with section 644(j), which provides mandatory language (“shall”) for all contexts.96
Internal to the Small Business Act, a statutory provision supports the FAR’s regulatory implementation of the Rule of Two.97 The statute requires small business concerns to receive a “fair proportion” of government contracts, and thus supports the FAR Rule of Two.98 Significantly, and noted by Judge Reyna’s dissent to the CAFC Kingdomware opinion, the Small Business Act’s Rule of Two pre-dates the FAR.99 The Small Business Act’s fair proportion standard existed in its initial 1953 statute,100 and not until 1984 did the FAR implement the Small Business Act’s existing fair proportion requirement.101 The FAR’s Rule of Two requires a contracting officer to determine whether a reasonable expectation exists of obtaining offers from two or more responsible small business concerns.102 The FAR’s Rule of Two also requires competitive offers in terms of market prices, quality, and delivery.103
Consistent with Judge Reyna’s dissent to the CAFC Kingdomware opinion, the FAR’s Rule of Two arises under two situations where a contracting officer must apply its analysis.104 For acquisitions exceeding $3,500, but not over $150,000, a contracting officer must apply the Rule of Two.105 In this range, the contracting offer must automatically set aside the acquisition for small business concerns unless the Rule of Two is not met.106 If the Rule of Two is not met, the contracting officer can solicit the acquisition on an unrestricted basis.107 For acquisitions over $150,000, a contracting officer must apply the Rule of Two and conduct set-asides for small businesses when the Rule of Two is met.108
Because of the Small Business Act’s statutory structure, no exceptions allow deviation from applying the Rule of Two. In addition to the statutory structure of the Small Business Act and the implementing FAR provisions of the Rule of Two, other sources relate to applying the Rule of Two. External to the Small Business Act, CICA supports concluding that the Rule of Two applies in all domestic procurements where the rule is met.
The next section analyzes how CICA’s statutory framework and its relationship with the Small Business Act support mandatory set-asides in procurements meeting the Rule of Two.
B. The Competition in Contracting Act Framework and the Small Business Act
The Competition in Contracting Act’s statutory framework and its relationship with the Small Business Act support mandatory set-asides in procurements meeting the Rule of Two. Since Congressional enactment in 1984, CICA has provided a statutory framework for government contracting competition requirements.109 It requires federal agencies to accomplish full and open competition when procuring property or services.110 It allows that a separate federal statute may expressly authorize deviating from its default rule to accomplish full and open competition,111 and internally provides statutory exceptions.112
Relevant to Kingdomware’s effects, CICA contains an exception allowing for full and open competition after exclusion of sources.113 Within this exception, CICA expressly invokes the Small Business Act.114 Within CICA’s overall statutory structure, internal references link the Small Business Act to exemptions from certain requirements.115 For example, a contracting officer does not need to provide separate written justification or determination and findings to support certain small business set-asides.116 Thus, CICA’s statutory framework and its connection to the Small Business Act support mandatory set-asides in all procurements meeting the Rule of Two. The next section analyzes how Kingdomware affects the Rule of Two’s application in all procurements.
IV. Analysis of Kingdomware and How the Rule of Two Applies to Procurements
Although Kingdomware addressed the VA Act Rule of Two, the decision supports arguments that the Small Business Act Rule of Two applies in domestic procurements to require set-asides. Since an open FAR case may result in future changes to this issue, the following section provides helpful insight to the relevant statutory interpretation.117 First, the plain meaning of 15 U.S.C. § 644(j) supports mandatory set-asides in all procurements meeting the Rule of Two. Second, even if ambiguity exists in the Act, Chevron deference supports mandating set-asides in all procurements where the Rule of Two is met. Finally, Kingdomware affects the GAO Aldevra decision to result in mandatory set-asides in all procurements meeting the Small Business Act Rule of Two.
A. The Plain Meaning of the Small Business Act Results in Mandating Set-Asides in All Procurements Meeting the Rule of Two
The Kingdomware decision emphasized the plain meaning of the statute. This section analyzes how Kingdomware’s statutory construction analysis affects the Rule of Two.
1. The Plain Meaning of Section 644(j) Mandates Set-Asides in All Procurements
The Kingdomware decision established that a court (and the GAO) will afford a high degree of weight toward statutory construction to resolve how to apply the Rule of Two.118 Notably, the filings in Kingdomware focused on statutory construction as the main issue in deciding the mandatory nature of the VA Act Rule of Two.119 Similarly, the Small Business Act’s Rule of Two requires assessing the plain reading of the underlying statute before addressing collateral policy or regulatory concerns, such as contracting inefficiency.120
The plain language of 15 U.S.C. § 644(r) makes no reference to 15 U.S.C. § 644(j).121 Neither section refers to the other by expressly establishing an exception dependent on the other.122 Notably, 15 U.S.C. § 644(r) provides operative discretionary language (“may”), in contrast with 15 U.S.C. § 644(j) providing mandatory language (“shall”).123 Kingdomware’s reasoning provided that usage of “shall” imposes a mandatory duty when the statute distinguishes between the terms “may” and “shall.”124 Therefore, 15 U.S.C. § 644(j)’s plain meaning provides a mandate unaffected by 15 U.S.C. § 644(r)’s discretionary language.125
Since the plain meaning of 15 U.S.C. § 644(j) mandates set-asides in all procurements meeting the Rule of Two, the next section analyzes how 15 U.S.C. § 644(r) affects set-asides.
2. 15 U.S.C. § 644(r) Does Not Affect Set-Asides Required by 15 U.S.C. § 644(j)
Enactment of 15 U.S.C. § 644(j) provided statutory authority to ensure small business concerns receive a “fair proportion” of government contracts.126 Analyzed in Section IIIA, supra, the Small Business Act’s “fair proportion” standard existed from the initial passage of the 1953 Small Business Act.127 Prior-in-time enactment of 15 U.S.C. § 644(j) created a statutory mandate, and later-in-time enactment of 15 U.S.C. § 644(r) did not affect 15 U.S.C. § 644(j)’s priority, especially because neither section refers to the other.128 Furthermore, the nature of 15 U.S.C. § 644(r) provides discretionary authority for promulgating FAR provisions that address multiple award schedule contracts.129 The absence of any mention within either 15 U.S.C. § 644(j) or 15 U.S.C. § 644(r) supports the overall point that the mandate of 15 U.S.C. § 644(j) remains in effect.130 Each section exists independently of the other without affecting the overall structure of the Small Business Act.131
3. The Small Business Act Section 644(r) Does Not Affect Section 644(j)
An important point for Kingdomware’s application to the Small Business Act arises from the nature of the plain mandate at 15 U.S.C. § 644(j). Neither 15 U.S.C. § 644(j) nor 15 U.S.C. § 644(r) contains an express exemption to allow deviation from the statute’s plain mandate.132 Because the Act requires agencies to apply the Rule of Two in all cases, it equally applies to multiple award contracts.133 In the alternative, should the statute prove ambiguous, the next section addresses Chevron analysis.
B. Even if Ambiguity Exists in the Small Business Act, Chevron Deference Supports Mandatory Set-Asides in All Procurements Meeting the Rule of Two
Even if 15 U.S.C. § 644(r) affects the plain meaning of 15 U.S.C. § 644(j), Chevron deference supports mandatory set-asides in all procurements meeting the Rule of Two. Described earlier in Section I, Chevron deference arises when a tribunal defers to an agency’s interpretation of a statute if the tribunal finds ambiguity in the statute. 134 In the context of the Small Business Act, the Small Business Administration (SBA) provided Federal Register comments upon the amendment adding 15 U.S.C. § 644(r).135
The SBA clearly announced that the addition of 15 U.S.C. § 644(r) did not change the mandatory requirement of a set-aside if the Rule of Two is met.136 Rather than shifting analysis to the FAR provisions that depend on 15 U.S.C. § 644(r), the Chevron analysis properly begins with the agency interpretation of the statute.137
The SBA’s Federal Register comments provide the SBA’s interpretation of the statute, and deserve priority before considering conflicting FAR provisions. Notably, the SBA stated that proceeding to 15 U.S.C. § 644(r)’s multiple award contract authority would be permissible only when the Rule of Two could not be determined through market research.138 Thus, the SBA clearly announced the proper statutory interpretation requires mandatory set-asides.139 Therefore, if a court views the Small Business Act as ambiguous, it should defer to the SBA’s interpretation of the statute and require set-asides when the Rule of Two is met.
C. Kingdomware Affects the 2015 GAO Aldevra Decision and Results in Mandatory Set-Asides in Domestic Procurements Meeting the Rule of Two
The Kingdomware decision affects the analysis of the 2015 GAO Aldevra decision that denied a protest under the Small Business Act’s Rule of Two.140 Although the Army prevailed against that protest, Kingdomware occurred after the 2015 GAO Aldevra decision and applies to future cases involving the Small Business Act.141
The Kingdomware decision affects the 2015 GAO Aldevra decision by providing increased support to the position the SBA took before the GAO.142 The SBA had joined Aldevra’s position against the U.S. Army and the General Services Administration.143 Kingdomware relied on consistency and coherency when analyzing the VA Act, which supports the SBA’s arguments to the GAO. 144 This reasoning supports the SBA’s “repeal by implication argument” that left the GAO unconvinced.145 Furthermore, this reasoning differs from the Army’s protest response and the Army’s cited statutory construction authority.146
A recent 2018 GAO decision, American Relocation, provided the GAO with an opportunity to address the issue of interpreting 15 U.S.C. § 644(j).147 Different from the 2015 GAO Aldevra decision, the GAO in American Relocation dismissed the protest, rather than denying the protest on the merits.148 In the 2018 American Relocation decision, the GAO noted that interpreting the provisions of 15 U.S.C. § 644(j) was irrelevant due to the contract size in American Relocation.149
In dismissing the protest, the GAO reasoned that an internal SBA memorandum concerning the Supreme Court’s holding in Kindgomware was internal guidance that was not reviewable by the GAO in its bid protest function.150 The GAO also noted that the classification code of the award at issue in American Relocation resulted in dismissing the protest, rather than denying the protest on the merits.151
The above reasons support a conclusion that the logic of Kingdomware continues to affect the 2015 GAO Aldevra decision and results in mandatory set-aside in domestic procurements meeting the rule of two. Additionally, neither the COFC nor CAFC have provided additional decisions on the issue.
V. Conclusion
Kingdomware illustrates the need to correctly provide contracting advice, thereby minimizing bid protests and procurement delays. This article has clearly demonstrated that Kingdomware should apply to the Small Business Act. The case requires mandatory set-asides under the Small Business Act Rule of Two such that agencies should award domestic contracts to small businesses whenever the Rule of Two is met.
Contracting practitioners should not assume that the Small Business Act’s 2010 amendment removes mandatory small business set-asides under multiple award contracts. Since contracting officers follow the FAR rather than interpret statutes, this article provides insight to a practice area that can result in protests and delay procurements notwithstanding contracting officer compliance with the FAR. Importantly, there is an open FAR case on this issue that may result in future changes to this issue.152 Finally, practitioners should heed Kingdomware’s effect on the 2015 GAO Aldevra decision to result in mandatory set-asides in all domestic procurements meeting the Rule of Two.