“Rule of Two” Cheat Sheet

Merle M. DeLancey Jr.

June 2021 marked the five-year anniversary of the Supreme Court’s Kingdomware decision[1], which is best known for broadly interpreting the so-called “Rule of Two” requirement flowing from the Veterans Benefits, Health Care, and Information Technology Act of 2006 (the “VBA”). The Rule has been criticized for delaying Department of Veterans Affairs (“VA”) procurements and increasing the prices the government pays for goods and services. However, the importance of the Rule’s purpose—to prioritize and increase the government’s use of small businesses owned by veterans—cannot be credibly challenged.

Over the past five years, the Federal Circuit, Court of Federal Claims, and Government Accountability Office (“GAO”) protest decisions have created some bright-line rules interpreting the VBA’s Rule of Two. After a brief summary of the Rule of Two, this post lays out these bright-line rules, and concludes with predictions regarding future VBA Rule of Two protests.

The Rule of Two

In Kingdomware, the Supreme Court interpreted Section 8127(d) of the VBA (38 U.S.C. §§ 8127–8128) to mean that the Rule of Two is mandatory and applies to all VA procurements, including the federal supply schedule procurement at issue in Kingdomware. A VA contracting officer is required to set aside a procurement if she has a “reasonable expectation” that two or more responsible service-disabled veteran-owned small businesses (“SDVOSB”) or veteran-owned small businesses (“VOSB”) are capable of performing the requirements being procured at a fair and reasonable price that offers best value to the government.

Even if only one SDVOSB submits an offer, the VBA gives a contracting officer discretion to make a sole source award to the SDVOSB or VOSB provided that the offeror satisfies the capability to perform at the reasonable price requirements above and the value of the procurement exceeds the simplified acquisition threshold (currently $250,000) but is less than $5,000,000. 38 U.S.C. § 8127(c).

After Kingdomware, to comply with the VBA’s Rule of Two requirements, the VA implemented a tiered or cascading evaluation process. Under the tiered evaluation, all categories of offerors can submit proposals, but SDVOSB proposals are considered first, then VOSB proposals, followed by all other small businesses, and then large businesses. Each tier is given a preference over the next, moving down the tiers if an award could not be made at the tier above.

Rule of Two Decisions Establishing Bright-Line Rules

Thus far, the following bright-line rules have been established through bid protest decisions:

      • The VA’s Tiered or Cascading Evaluation Methodology Complies with Procurement Statutes and Regulations. Land Shark Shredding, LLC v. United States, 842 Fed.Appx. 594 (Fed. Cir. 2021).
      • Only SDVOSBs or VOSBs Have Standing to Protest Procurement Decisions Involving the First or Second Tiers of a Tiered Evaluation. Bluewater Management Group, LLC, B-418831, Sept. 2, 2020, 2020 CPD ¶ 280.
      • The Rule of Two Requires Award to an SDVOSB Only When Offered Price Is Reasonable:
        • Land Shark Shredding, LLC v. United States, 842 Fed.Appx. 594 (Fed. Cir. 2021) (SDVOSB not required where it proposed more than five times the price of non-SDVOSB awardee).
        • Veteran Shredding, LLC v. United States, 146 Fed.Cl. 543 (2019) (assessment of reasonable prices can include comparison to non-SDVOSB or VOSB proposed prices).
      • The VBA’s Rule of Two Prioritizing Awards to SDVOSBs and VOSBs Takes Precedence Over the Javits-Wagner O’Day Act AbilityOne Requirements. PDS Consultants, Inc. v. United States, 907 F.3d 1345 (Fed. Cir. 2018).
      • Award to SDVOSB Not Required When Only One Responsive SDVOSB Proposal Submitted. Veterans Contracting Group, Inc. v. United States, 137 Fed.Cl. 435 (2018); see also 38 U.S.C. § 8127(c) (contracting officer “may” make award to sole SDVOSB offeror).
      • Common Ownership of SDVOSBs Does Not Satisfy Rule of Two. AeroSage LLC, B- 414314, B- 414314.2, May 5, 2017, 2017 CPD ¶ 137.
      • The Rule of Two Applies to the Procurement of Goods and Services, Not Real Property Leases. Cross & Company, LLC, B-417971, Dec. 20, 2019, 2019 WL 7019035.
      • The VBA Rule of Two Does Not Apply to Other Agency Procurements Unrelated to the VA. American Relocation Connections LLC, B-416035, May 18, 2018, 2018 CPD ¶ 174.
      • Does the Rule of Two Apply to Printing? Maybe.
        • According to GAO, the VBA’s Rule of Two applies to non-VA solicitations on behalf of the VA. Veterans4You, Inc., B-417340, B-417340.2, June 3, 2019, 2019 CPD ¶ 207. However, in a subsequent protest of a nearly identical solicitation, the Court of Federal Claims disagreed with GAO’s holding and held that printing fell within the Government Publishing Office’s (“GPO”) printing mandate. Veterans4You, Inc. v. United States, 145 Fed.Cl. 181 (2019).

Takeaways

Notwithstanding the bright-line rules above, contractors should expect future protests regarding the interpretation of VBA requirements and the Rule of Two. Additional protests are likely when other agencies conduct procurements on behalf of the VA. For example, if the Army Corp of Engineers conducts a procurement on behalf of the VA for renovations of a VA hospital, do the VBA and Rule of Two apply to the Army? The issue becomes more complex when the agency conducting the procurement on behalf of the VA is doing so pursuant to a federal statute like GPO’s printing mandate in the Veterans4You litigation.

Protests also are likely concerning contracting officers’ decisions to set aside (or not) procurements for SDVOSBs or VOSBs. These protests are the most common because, in part, they are relatively inexpensive to prepare. Unfortunately, contractors/offerors cannot take steps to prevent such protests because they concern actions or inactions by the contracting officer. Perhaps the best advice is for other-than-small (i.e., large) contractors to make sure they have a vetted cadre of SDVOSBs with which to team or subcontract to avoid being shut out of a procurement.


[1] Kingdomware Technologies, Inc. v. United States, 136 S. Ct. 1969 (2016).

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