Government Contracts Monitor

The Rule of Two – Is It Used to Fulfill or Define Small Business Participation Goals?

June 16, 2014

In the past few months the Federal Circuit has issued several decisions regarding the Rule of Two. The initial decisions arose in the context of Job Corps Center (JCC) operations contracts – addressing whether or not the Department of Labor (DOL) could use the Rule of Two over and over again to set aside an unlimited number of JCC operations contracts for a tiny group of small businesses, beyond DOL’s fiscal year goals for small business participation in that industry, and generally. See, e.g., Adams and Associates, Inc. v. United States 741 F.3d 102 (Fed. Cir. 2014). In the most recent decision, issued on June 3, 2014, the Court addressed the Rule of Two in connection with whether the Veterans Administration (VA) was required to use the Rule of Two (i) simply to meet its service-disabled veteran-owned small business (SDVOSB) goals – a “fair proportion”, or (ii) with respect to every procurement. Our readers may be surprised at the differing outcomes.

In the JCC operations cases, the plaintiffs, incumbent large business JCC operators, challenged the DOL’s use of the Rule of Two to set aside virtually all future JCC operations contracts for competition solely among small businesses. These cases centered, in part, on whether the Rule of Two are to be used to assist agencies in achieving their small business goals – in the language of the Small Business Act, to achieve a “fair proportion” of small business contracting in each industry category, but no more than a “fair proportion” – or, in every procurement, regardless of whether or not an agency’s goals have been met. While the Federal Circuit ruled that a “fair proportion” determination is required, it did not connect the dots between such a determination and whether or not the agency has met its stated goals and, therefore, should no longer employ the Rule of Two.

In contrast, with respect to the VA procurements, the Federal Circuit, in Kingdomware Technologies, Inc. v. United States, No. 2013-5042 (Fed. Cir. June 3, 2014), determined that the Rule of Two could not be used in a manner that would render the goal-setting provisions of the Small Business Act “superfluous” – which is what would happen if the Agency “were required to apply the Rule of Two for every contract.” Under such an interpretation, the Court opined, “the goal would be whatever number the Rule of Two produces” regardless of the VA’s preference. Thus, the VA cannot be required to “apply a Rule of Two analysis for every contract even after it has met the [SDVOSB] goals.” In short, the Court refused to ignore the statutory language that the Rule of Two mandate is “the required procedure for meeting the goals.”

In the wake of Kingdomware, is it safe to conclude that once an agency meets its specific small business participation goals, the Rule of Two no longer applies to that industry for the remainder of that fiscal year? We will have to wait and see.

Lindsay Simmons is the attorney responsible for the content of this article.

Attorneys

Lindsay Simmons