The Supreme Court and the Rule of Two

In mid-June of this year, the US Supreme Court issued a rare unanimous decision directed at the Department of Veterans Affairs—but that may affect all federal agencies in time as they engage with private contractors for goods and services.

In the case of Kingdomware Technologies, Inc., v. United States, a Maryland supplier sued in the belief that it had been illegally excluded from the procurement procedure for an emergency-notification system for four VA medical centers. Kingdomware is owned by disabled veterans, and thus was eligible for consideration under the so-called Rule of Two. By that rule, a set-aside provision widely followed within the government, if two or more qualified small contractors can respond to the requirements of a given bid, then the contract will be awarded to one of them—a clause known in shorthand as “shall award.”

But at the VA, the rule was more a rule of thumb, it seems, given another bit of procedural streamlining under the Federal Supply Schedule (FSS), which allows an agency to award a noncompetitive bid to a sole source when a contract falls below a specific dollar threshold. So the emergency-notification bid did, and so the VA turned to a supplier of earlier services to fulfill the contract.

Kingdomware objected that the contract violated the “shall award” provision of the Rule of Two. The Government Accountability Office (GAO) concurred, saying that the VA had behaved unlawfully but venturing only a recommendation that the VA reconsider its award. The VA did not, and Kingdomware began legal proceedings.

The case ended on June 16, when the Court, led in the decision by Justice Clarence Thomas, ruled that the Rule of Two is not a suggestion but a mandate. The text of that decision, noting that “the word ‘shall’ usually connotes a requirement, unlike the word ‘may,’ which implies discretion,” further orders the VA to follow the Rule of Two over the FSS in most matters, admonishing that the latter was meant to be used in “contracts concerning complex information technology services over a multiyear period,” not for less challenging applications—in this case, one that the winning bidder completed within two years.

The VA is thus enjoined to apply the Rule of Two to all contract determinations and to award contracts to veteran owned and other small businesses whenever contractors with such qualifications are able to respond to bids.

Already the VA is feeling the implications of this ruling, revamping the assessment process, for instance, for Green Building Initiative certification assessments of VA buildings. Commentators have noted that the likely result of the ruling will be a flourishing of small businesses connected with environmental remediation and sustainable building, enterprises in which the VA—the nation’s largest healthcare system—has been at the forefront.

But students of federal policy also expect that the “shall award” provision, applied when two or more businesses submit offers to provide goods or services at “a fair and reasonable price that offers best value to the United States,” will extend beyond the VA. The Supreme Court decision does not say so directly, naming only the VA specifically, but it stands to reason that similar legal challenges in the future will be judged against this precedent—which, naturally, will eventually affect all federal contracting.

Moreover, the case holds implications for contending definitions of what a contract actually is, at least as distinct from a purchase order. The Court ruled that “an FSS order is a ‘contract’ within the ordinary meaning of that term,” removing a fine distinction that the VA had argued in claiming that it had been following the rules, and holding that a contract is a contract no matter what it might be called.