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Government Contractors

Kingdomware and its Impact on Small Business Contracting

By: John Ford, Senior Consultant, Government Contractor Services Group

In a rare move, on June 16, 2016, the Supreme Court (“the Court”) issued a decision in a bid protest, Kingdomware Technologies, Inc. v. U.S., No 14-916, that can affect the way the government, particularly the Department of Veterans Affairs (“VA”), contracts with small business concerns. This case dealt with the issue of whether the Rule of Two in the Veterans Benefits, Health Care, and Information Technology Act of 2006 (“the Act”) applies to orders issued against General Services Administration’s Federal Supply Schedules (“FSS”) contracts. The Court held that it does.

For purposes of this decision, the portion of the Act that was in dispute was 38 U.S.C. §8127. That section has several paragraphs. Subsection (a) states that in order to increase contracting and subcontracting opportunities for small businesses owned and controlled by veterans and service disabled veterans, the Secretary is to establish annual contracting goals for each category. Subsection (d) states in part that:

“…for purposes of meeting the goals under subsection (a), and in accordance with this section, a contracting officer of the Department shall award contracts on the basis of competition restricted to small business concerns owned and controlled by veterans if the contracting officer has a reasonable expectation that two or more small business concerns owned and controlled by veterans will submit offers and that the award can be made at a fair and reasonable price.”

When the VA published final rules on December 8, 2009, which marked the implementation of the Act, the VA stated in response to a public comment, “…this rule does not apply to FSS task or delivery orders. . . . part 8 procedures in the FAR will continue to apply to VA FSS task/delivery orders. Further, VA will continue to follow GSA guidance regarding applicability of . . . part 19 of the FAR . . . which states that set-asides do not apply to FAR part 8 FSS acquisitions.” The VA followed this policy when it issued an order against an FSS contract for which Kingdomware was an offeror but did not get the award. Kingdomware then protested the award to the Government Accountability Office (“GAO”), which sustained the protest. However, the VA did not accept the GAO recommendation and Kingdomware responded by filing a protest with the Court of Federal Claims (“COFC”), which issued a judgment for the VA. Kingdomware then appealed to the Court of Appeals for the Federal Circuit (“Fed. Cir.”) which sustained the COFC, holding that the rule of two only applied if the VA had not met its annual contracting goals. Kingdomware then sought review by the Supreme Court.

In a unanimous decision, the Supreme Court reversed the Fed. Cir. The Court held that the use of the word “shall” in the Rule of Two made it a mandatory requirement that applies whenever the VA intends to issue a contract even if the VA has met its annual contracting goals. Further, the Court rejected the government’s argument that the Act only applies when the VA will issue a contract. Therefore, the Act does not apply to orders under FSS contracts because they are not contracts. The Court disagreed and explicitly held that FSS orders are contracts. Therefore, the Rule of Two applies when the VA intends to issue an order against an FSS contract.

While small business contractors may hope that this decision opens more opportunities for them to get FSS orders, that hope is not fully justified by the decision. The Court was interpreting the wording of the Act which applies only to the VA. Thus, the decision will only have a direct impact on those Veteran-Owned Small Businesses (“VOSBs”) and Service-Disabled Veteran-Owned Small Businesses (“SDVOSBs”) who are qualified to do business with the VA. Moreover, the decision only dealt with orders. It did not address the question of whether the Rule of Two applied when the VA intended to issue a Blanket Purchase Agreement (“BPA”) against an FSS contract. From the reasoning employed by the Court applying the Rule of Two (i.e., orders are contracts), it would seem that the Rule of Two would not apply to BPAs which clearly are not contracts.

For agencies that do not have special contracting authority as the VA does, which must follow the Federal Acquisition Regulation (“FAR”), it should be noted that none of the statutes authorizing set asides for various types of small business concerns currently contains a mandatory rule of two. Instead, under the current small business contracting scheme, the Rule of Two is a regulatory requirement. FAR 19.502-2 mandates that acquisitions exceeding the simplified acquisition threshold (“SAT”) must be set aside when the Rule of Two applies. Also, FAR 13.003 states that acquisitions above $3,500 but not exceeding the SAT are reserved exclusively for small business concerns. Despite these mandatory regulatory requirements for awards to small business concerns, FAR 8.404, which is based upon GSA‘s view of the applicability of the Rule of Two to FSS orders, states that these requirements do not apply to “BPAs or orders placed against Federal Supply Schedules contracts.” Because there is no statute to contradict this assertion, it appears that agencies can continue to refuse to set aside orders under FSS contracts for small business concerns, although the conditions expressed in FAR 13.003 and 19.502-2 are present. However, in light of the Kingdomware decision, hopefully GSA will rethink its position and allow at least some limited application of the Rule of Two to orders against FSS contracts.

There may be an unexpected consequence to the Kingdomware decision. That is in regard to size protests.

Under the SBA’s size protest regulations found at 13 CFR §121.1004, a size protest must be filed within five (5) business days after the protester is informed of the identity of the awardee of “(i) [t]he contract; or (ii) [a]n order issued against a Multiple Award Contract if the contracting officer requested a new size certification in connection with that order.” Traditionally, the SBA has not treated orders under FSS contracts as contracts. This is consistent with the view of the GSA that the Rule of Two in FAR 19.502-2 does not apply to orders under FSS contracts. It appears that (ii) above was also based, in part, on GSA’s view on the applicability of the Rule of Two to FSS orders. Now that the Court has explicitly held that such orders are contracts, the SBA should re-examine its position. Moreover, the Court’s reasoning in regard to orders being contracts would be equally applicable to other multiple award contracts (“MACs”).

The significant thing about this potential change in attitude towards orders being contracts is that a protester might be able to challenge a contractor’s size as a small business in regard to the basic contract, instead of in regard to an order if no recertification of size status has been requested in accordance with 13 CFR §121.404(g).

Under the SBA’s regulations, a contractor that qualifies as a small business at the time of contract award is generally considered small for the life of the contract. Because of the limitations on who can file a size protest, it has been difficult for offerors who receive a multiple award contract to file a size protest against an award to another putative small business. Further, the information needed to file a size protest may not be available at the time of contract award. Therefore, it may only be when an order is issued against an FSS or other MAC that a contractor may be an interested party or have the information to file a size protest. In this case, the protest would be a challenge to the awardee’s qualifications as a small business when the basic contract was awarded. Whether this effort would be successful is unknown. However, the Court’s holding that an order against an FSS contract is a contract opens up this possibility. Moreover, there is precedent for this type of retroactive challenge. Under the Fulford Doctrine, a defaulted contractor may make an otherwise untimely challenge to the default termination when the government attempts to assess excess reprocurement costs against the contractor.

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