Takeaways

The Federal Circuit found that the VA must award contracts based on competition restricted to veteran-owned small business where there is a reasonable expectation that two or more such businesses will submit offers (Rule of Two).
It further found that the VA’s Rule of Two takes priority over older and less-specific statutory procurement mandates, including AbilityOne.
The decision will further change the VA’s procurement landscape by providing expanded contract opportunities to veteran-owned small businesses.

In the recent decision PDS Consultants Inc. v. United States, __ F.3d __ (Fed. Cir. 2018), the Federal Circuit sided with veteran-owned small businesses in ruling that the Veterans Benefits, Health Care, and Information Technology Act of 2006 (VBA), mandating that the VA “shall award contracts” on the basis of competition restricted to veteran-owned small businesses (VOSBs) and service-disabled veteran-owned small businesses (SDVOSBs) where the requirements of the Rule of Two are met, takes precedence over the Javits-Wagner-O’Day Act’s (JWOD) competing mandate, that all agencies purchase products and services from the AbilityOne procurement list.

Congress enacted JWOD in 1938 to provide employment opportunities for the blind, and later amended it in 1971 to provide employment opportunities for “other severely disabled” individuals. To effectuate its purpose, JWOD established AbilityOne—the Committee for Purchase from People Who Are Blind or Severely Disabled. Among other things, AbilityOne is tasked with creating and maintaining a procurement list which identifies products and services produced by nonprofit entities that employ individuals who are blind or severely disabled. The JWOD generally requires that federal agencies procure products and services from the nonprofit entities identified in the AbilityOne list.

Congress first enacted the VBA in 2003, amending the Small Business Act, to provide employment opportunities for the veterans. Congress amended the VBA in 2006, adding mandatory language regarding the Rule of Two, requiring that “the [VA] shall award contracts on the basis of competition restricted to small business concerns owned and controlled by veterans” where the VA “has a reasonable expectation that two or more [such concerns] will submit offers,” and “the award can be made at a fair and reasonable price that offers best value to the United States.” While the 2003 VBA expressly subordinated itself to other procurement mandates, including JWOD’s mandate, the 2006 amendment removed this exception and, on its face, required that the VA apply the Rule of Two in all procurements.1

In Kingdomware Technologies v. United States, 136 S. Ct. 1969 (2016), the Supreme Court unanimously held that “[e]xcept when the [VA] uses the noncompetitive and sole-source contracting procedures in subsections (b) and (c), § 8127(d) [of the VBA] requires the [VA] to use the Rule of Two before awarding a contract to another supplier.” Because Kingdomware only addressed the VA’s purchase of services through the GSA Federal Supply Schedule (FSS), the Supreme Court did not definitively resolve the question of whether the VBA’s Rule of Two mandate took priority over myriad other statutory mandates for set-asides applicable to the VA.

Following Kingdomware, the VA issued a policy memorandum seeking to reconcile the competing mandates of the VBA and the JWOD, which stated that the Rule of Two “does not apply” when the VA procures products and services from a “mandatory source,” such as a source listed by AbilityOne. The memorandum, however, also explained that the VA would apply the Rule of Two before proposing new items to be added to the AbilityOne list. In February 2016, PDS Consultants initiated a bid protest at the U.S. Court of Federal Claims (COFC) challenging the award of a contract to Industries for the Blind under the Ability One program. The COFC ruled that under the Supreme Court’s interpretation of the VBA in Kingdomware, the VA was required to apply the Rule of Two in all procurements taking place after 2006.

The government and Industries for the Blind appealed the decision to the Federal Circuit, where the court sided with PDS and affirmed the lower court’s decision. There the court reconciled the VBA with the JWOD by applying a “basic tenet of statutory construction” that “a specific statute takes precedence over a more general one.” Because JWOD is a general statute that applies to all agencies, whereas the VBA is a specific statute that applies to the VA only, the Court held that the VBA’s Rule of Two “override[s] the more general contracting requirements of the JWOD” where the two statutes conflict. The court also noted that “when two statutes conflict, the later-enacted statute controls.” Because the VBA was enacted more than 30 years after the JWOD was last amended, the Court reasoned that this tenet of statutory construction also supported the holding that the VBA took precedence over the JWOD. In conclusion, the court stated that “where a product or service is on the [AbilityOne] List and ordinarily would result in the contract being awarded to a nonprofit qualified under the JWOD, the VBA unambiguously demands that priority be given to veteran-owned small businesses.”

The Federal Circuit’s holding in PDS Consultants will continue to shift the VA procurement landscape in favor of veteran-owned small businesses. It also shows the VA’s apparent resistance to apply the VBA Rule of Two in light of the Kingdomware decision. Given this apparent resistance, VOSB and SDVOSB contractors may need to continue to enforce their rights through the bid protest process.

*We would like to thank Senior Law Clerk Toghrul Shukurlu for his contribution to this alert.


1 The VBA has two express exceptions to the Rule of Two not relevant here. See 38 U.S.C. § 8127(b)-(c) (authorizing the VA to award contracts below the simplified acquisition threshold, and above the threshold but below $5 million, to veteran-owned small business concerns without competitive procedures).