In a huge defeat for service-disabled veteran-owned small businesses (SDVOSBs), on November 29th the Court of Federal Claims (CoFC) ruled that the Department of Veterans Affairs (VA) acted reasonably in determining that it need not set aside Federal Supply Schedule (FSS) contracts for SDVOSBs.
This decision, issued by Judge Nancy Firestone, follows two Government Accountability Office (GAO) decisions that followed the same fact pattern: Aldevra and Kingdomware. In both instances, the GAO sustained the protests on the grounds that under the Veterans Benefits, Health Care, and Technology Act (the “Act”), the VA should have conducted market research to determine whether an FSS solicitation should be issued as an SVOSB set-aside . (Aldevra, B-406205, March 14, 2012; Kingdomware Technologies, B-406507, May 30, 2012).
In order for Judge Firestone to overturn the VA’s decision not to set aside an FSS acquisition for SDVOSBs, the plaintiffs bore the heavy burden of demonstrating that the VA acted “arbitrarily, capriciously, or contrary to law.” As federal government contractors who have been involved in disputes with the government know, this is an incredibly difficult standard to meet. And here, according to Judge Firestone, Kingdomware did not.
Chevron Deference
Judge Firestone analyzed the VA’s decision using Chevron deference. (Chevron, U.S.A. v. National Resources Defense Council, 467 U.S. 837 (1984)). Chevron deference is the standard used by a court to determine whether to grant deference to an agency’s interpretation and application of its own statute (a statute created to apply to the agency). The decision to grant deference is based on a two-part test.
First, the court will determine whether Congress spoke directly to the question at issue. If so, that is the end of the matter, as the court must give effect to an unambiguous interpretation provided by Congress. This makes sense given that while the legislature writes the law, the judiciary interprets it. If the law is clear, the judiciary cannot assign another meaning.
If, however, Congress has not spoken to the precise issue at hand, the judiciary proceeds to the second step. It must determine whether the agency has assigned a permissible definition to the law. This definition must be reasonable.
Chevron Deference Applied to Kingdomware
Because in this instance, the VA was interpreting and applying its own statute, Chevon deference applied. Thus, Judge Firestone proceeded with applying its two-step test.
As it relates to the first step, Judge Firestone found that Congress had not spoken directly to the issue of whether the VA was required to conduct mandatory procurements for SDVOSBs under the “Rule of Two.” The “Rule of Two” under the Act provides that a contracting officer must have a reasonable expectation that an award can be made to two or more SDVOSBs at a fair and reasonable price. A contracting officer will conduct market research, such as by searching through small business databases, to determine whether the Rule of Two is satisfied.
Judge Firestone found that Congress had not addressed the mandatory nature of the Rule of Two. In noting that “the 2006 Act must be construed in light of its goal-setting provisions,” she found that “the statute is at best ambiguous as to whether it mandates a preference for SDVOSBs and VOSBs for all VA procurements.”
This is the part of the decision that most SDVOSBs have trouble understanding – after all, the statute contains mandatory “shall” language. Nonetheless, Judge Firestone held that the phrase “shall” must be read in connection with the other terms in the 2006 Act. On the whole, these terms demonstrate that the Act is goal-setting in nature. Thus, that the term “shall” does not clearly show that the VA must conduct set-asides for SDVOSBs under the Rule of Two.
Because Judge Firestone concluded that the Act was not unambiguous, she proceeded to the second step, which was to determine whether the VA assigned a permissible definition to the applicable provision. In applying the “substantial deference” afforded to an agency’s application of its own statute, Judge Firestone held that the VA’s interpretation was reasonable. In a lengthy analysis, Judge Firestone pointed to the VA’s consistent application of this interpretation, as well as the fact that this interpretation does not conflict with the rest of the Act or the VA Acquisition Regulation.
So What Now?
SDVOSBs across the board had expected Judge Firestone’s decision to establish once and for all that the VA must conduct set-asides under the Rule of Two. This, of course, did not happen. Going forward, what can SDVOSBs do?
First, Kingdomware might choose to appeal the decision before the U.S. Court of Appeals for the Federal Circuit. Several sources confirm that Kingdomware is contemplating this option. While this is a costly alternative, given the broad sweeping effect of the decision, the benefit is worth it. Further, veterans organizations will surely want to get involved (and perhaps chip in for cost). Given the high profile, this is also a perfect pro bono case for a large law firm.
Second, SDVOSBs may choose to accept the decision. Given the backlash from the veteran community, however, this likely will not happen. This decision affects hundreds, if not thousands, of veteran-owned businesses. No matter what, they will stand behind Kingdomware in its push forward.
Third, SDVOSBs can attempt to obtain legislative clarification of the meaning of the word “shall” as it relates to the Rule of Two, or push for an amendment to clarify. This might actually be the most viable solution, as it is not as though Judge Firestone came to her decision lightly. She carefully analyzed the history of the Act, as well as the VA’s tradition of implementation and interpretation. Given the substantial deference given to agency interpretation of its own statute, it may be difficult to receive a more favorable decision at the U.S. Court of Appeals. If Congress did intend for the statute to mandate set-asides, it could verify that intention.
Time will dictate this decision’s impact. Clearly, however, it stands to be one of the most important decisions affecting veteran-owned businesses. Stay tuned to this blog for updates on how it plays out over the next months.
A copy of the Kingdomware decision may be accessed here.
