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Kingdomware Techs., Inc. v. United States

United States Court of Appeals, Federal Circuit

June 3, 2014

KINGDOMWARE TECHNOLOGIES, INC., Plaintiff-Appellant,
v.
UNITED STATES, Defendant-Appellee

Appeal from the United States Court of Federal Claims in No. 12-CV-0173, Judge Nancy B. Firestone.

LAUREN B. FLETCHER, Wilmer Cutler Pickering Hale and Dorr LLP, of Washington, DC, argued for plaintiff-appellant. With her on the brief were AMY K. WIGMORE, GREGORY H. PETKOFF, AMANDA L. MAJOR, JOSEPH GAY, and CARLA J. WEISS, of Washington, DC.

ROBERT C. BIGLER, Trial Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for defendant-appellee. With him on the brief were STUART F. DELERY, Assistant Attorney General, BRYANT G. SNEE, Acting Director, and PATRICIA M. MCCARTHY, Assistant Director.

GENE C. SCHAERR, Winston & Strawn LLP, of Washington, DC, for amicus curiae American Legion. With him on the brief was EIMERIC REIG-PLESSIS.

Before PROST, Chief Judge,[*] CLEVENGER, and REYNA, Circuit Judges. Opinion for the court filed by Circuit Judge CLEVENGER. Dissenting opinion filed by Circuit Judge REYNA.

OPINION

Page 924

Clevenger, Circuit Judge .

This is an appeal from the final judgment of the United States Court of Federal Claims (" Court of Federal Claims" ) on a matter of statutory construction. The Court of Federal Claims ruled in favor of the United States, Kingdomware Techs., Inc. v. United States, 107 Fed. Cl. 226 (Fed. Cl. 2012), and Kingdomware Technologies, Inc. (" Kingdomware" ) appeals. For the reasons set forth below, we affirm the

Page 925

final judgment of the Court of Federal Claims.

I

Kingdomware is owned and controlled by a service-disabled veteran. The Department of Veterans Affairs (" VA" ) certified Kingdomware as a service-disabled veteran-owned small business in September 2010 and recertified Kingdomware in September 2012.

It has long been the policy of the United States to promote small businesses, including small businesses owned and controlled by veterans. Congress has expressed this policy through the Small Business Act, 15 U.S.C. ch. 14A, and stated its expectation that small businesses generally will receive " a fair proportion of the total purchases and contracts for property and services for the Government . . . ." 15 U.S.C. § 644(a)(3). Veteran-Owned Small Businesses (" VOSBs" ) and Service-Disabled Veteran-Owned Small Businesses (" SDVOSBs" ) are expressly recognized in the Small Business Act. Id. § 632(q).

The policy directive to promote small businesses lies within the statutes and regulations that guide Government contract formation. The general policies and procedures for Government contracting are contained in the Federal Acquisition Regulation (" FAR" ), 48 C.F.R. ch. 1, which implements the Office of Federal Procurement Policy Act of 1974, 41 U.S.C. ch. 71. Certain agency-specific contract regulations are established agency by agency, and contract regulations specific to the VA are stated in the Veterans Affairs Acquisition Regulation (" VAAR" ), 48 C.F.R. ch. 8.

The overarching policy of the FAR generally demands that " [c]ontracting officers shall provide for full and open competition." 48 C.F.R. § 6.101(b). The Federal Supply Schedule (" FSS" ) exists as one of the tools for achievement of the overarching policy. The FSS was established by the General Services Administration (" GSA" ) to provide Government agencies with a " simplified process for obtaining commercial supplies and services at prices associated with volume buying." Id. § 8.402(a). FSS contractors agree to provide goods and services on the FSS at stated prices for given periods of time, thus permitting agencies to buy supplies and services directly from the FSS, rather than using traditional full and open competition contract tools for such purposes. FSS contracts are deemed to satisfy the conditions of full and open competition. Id. § 8.404(a).

Unless otherwise specified by statute or regulation, an agency has wide discretion to decide the method of contracting to use, including the FSS. Tyler Constr. Grp. v. United States, 570 F.3d 1329, 1334 (Fed. Cir. 2009). The FAR specifies as a matter of contracting priority that an agency is encouraged to obtain goods and services from FSS contractors before purchasing from commercial sources, which include privately owned VOSBs and SDVOSBs. 48 C.F.R. § 8.004. The GSA considers its FSS program to be " the premier acquisition vehicle in government," accounting for 10% of overall procurement spending. For Vendors -- Getting on Schedule, General Services Administration (May 29, 2014), http://www.gsa.gov/portal/content/198473.

The FAR explicitly states that an agency placing an order against the FSS is exempt from requirements of the small business set-aside programs under FAR part 19. See 48 C.F.R. § § 8.404(a), 8.405-5(a), 19.502-1(b). This exemption does not affect the VA's obligation under 48 C.F.R. § 19.502-1(a) otherwise to set aside contracts for competition among small businesses. " Although GSA awards most

Page 926

[FSS] contracts, it may authorize other agencies to award schedule contracts and publish schedules." Id. § 38.101(d). GSA has specifically delegated authority to the VA to procure medical goods and services under the VA Federal Supply Schedule Program. Id. § 38.000. For other goods and services, the VA uses the GSA FSS program. As a matter of policy, the VA encourages VOSBs and SDVOSBs to participate in the FSS program. Press Release, Dept. of Veterans Affairs, Statement on VA Veteran-Owned Small Business Contract (Oct. 28, 2011). Purchasing goods and services through the FSS is important to the VA and to VOSBs: in 2011, the VA used FSS contracts for 20% of its total spending, and 13% of these FSS expenditures went to VOSBs. Kathleen Miller, Dispute Simmers Between VA and Veteran-Owned Small Businesses, Wash. Post, Nov. 14, 2011, at A20.

II

In 1999, Congress amended the Small Business Act to establish an aspirational Government-wide goal of awarding 3% of Government contracts to SDVOSBs. 15 U.S.C. § 644(g). History shows this 3% goal was not satisfied. For the 2001 fiscal year, SDVOSBs received but 0.24% of federal contract funds. The State of Veterans' Employment: Hearing Before the H. Comm. on Veterans Affairs, 108th Cong. 92 (2003) (statement of Angela B. Styles, Adm'r Fed. Procurement). And the VA awarded only 0.1% of its contracts to SDVOSBs in 2000, 0.2% in 2001, and 0.6% in 2002. H.R. 1460, The Veterans Entrepreneurship Act of 2003; H.R. 1712, The Veterans Federal Procurement Opportunity Act of 2003; and H.R. 1716, The Veterans Earn and Learn Act: Hearing Before the Subcomm. on Benefits of the H. Comm. on Veterans Affairs, 108th Cong. 9 (2003) (statement of Leo Mackay, Deputy Sec'y of Veterans Affairs).

Congress again amended the Small Business Act in 2003 to focus on SDVOSBs. The 2003 Act grants discretionary authority (" a contracting officer may award" ) to contracting officers, Government-wide, to award sole-source contracts of restricted dollar amounts to SDVOSBs when the contracting officer estimates receipt of a fair and reasonable price, and otherwise to award contracts on the basis of competition restricted to SDVOSBs " if the contracting officer has a reasonable expectation that not less than 2 small business concerns owned and controlled by service-disabled veterans will submit offers and that the award can be made at a fair market price." 15 U.S.C. § 657f. The discretionary authority to award contracts beyond the limited dollar amount specified for sole-source contracts requires satisfaction of the Rule of Two, a procedure well-known throughout the Government in connection with award of contracts set aside for competition restricted to small businesses.

History again showed a failure to achieve the goal of the Small Business Act to award 3% of Government contacts to SDVOSBs: only 0.605% of Government contracts went to SDVOSBs in 2005. H.R. Rep. NO. 109-592, at 16 (2006) (" H.R. Rep." ). Consequently, in 2006 Congress returned to the subject of preferences for businesses owned and controlled by veterans, enacting a statute specifically and only directed to the VA. While the Small Business Act and previous amendments contained provisions relating only to SDVOSBs, the 2006 Veterans Act expanded the reach of the small business provisions to include both VOSBs and SDVOSBs.

In particular, Congress mandated that the Secretary of the VA " shall" establish a goal for each fiscal year for participation in

Page 927

VA contracts by VOSBs, and " shall" establish a goal for participation in VA contracts by SDVOSBs which " shall not be less" than the Government-wide goal set by the Small Business Act, which remained at 3%. 38 U.S.C. § 8127(a).

The Veterans Act of 2006, codified at 38 U.S.C. § 8127, gives contracting officers in the VA certain specific tools in subsections (b), (c), and (d) for achieving the goals to be set by the Secretary. As the House Report accompanying the statute explained: " [g]iven this new set of acquisition tools, there should be no reason for VA not to meet the veteran and service-disabled veteran small business contracting goals." H.R. Rep., at 16.

For VA acquisitions for amounts less than what is called the simplified acquisition threshold (currently $150,000), § 8127(b) states that " a contracting officer [of the VA] may use procedures other than competitive procedures." Contracts under $150,000 can thus be sole-sourced to VOSBs and SDVOSBs without regard to the marketplace competitiveness of the price. Second, for contracts worth $150,000 up to $5,000,000, VA contracting officers " may" use procedures other than competitive procedures to grant sole-source contracts to VOSBs and SDVOSBs if the particular business concern (1) " is determined to be a responsible source with respect to performance of such contract opportunity" ; and (2) " in the estimation of the contracting officer, the contract award can be made at a fair and reasonable price that offers best value to the United States." 38 U.S.C. § 8127(c). The authority given to VA contracting officers in subsections (b) and (c) of § 8127 is expressly " for purposes of meeting the goals under subsection (a)." Third, Congress also authorized use of restricted competition procedures by VA contracting officers. Thus, in addition to the non-competitive methods authorized in subsections (b) and (c), Congress specified as follows in subsection (d):

(d) USE OF RESTRICTED COMPETITION. -- Except as provided in subsections (b) and (c), for purposes of meeting the goals under subsection (a), and in accordance with this section, a contracting officer of the [VA] shall award contracts on the basis of competition restricted to small business concerns owned and controlled by veterans if the contracting officer has a reasonable expectation that two or more small business concerns owned and controlled by veterans will submit offers and that the award can be made at a fair and reasonable price that offers best value to the United States.

Id. § 8127(d) (reciting the Rule of Two within the " if" clause).

As an assist for achieving the goals under subsection (a), Congress ordered the VA in subsection (i) to give contracting priority to SDVOSBs and VOSBs over other small business entities. Id. § 8127(i). Thus, SDVOSBs and VOSBs enjoy primary opportunities over other small businesses.

The VA promulgated regulations for § 8127(d). Unlike that subsection, which does not distinguish between VOSBs and SDVOSBs, the VA provided a separate regulation for each group, repeating in each regulation the statutory language that the contracting officer shall award contracts according to the Rule of Two. 48 C.F.R. § 819.7005 (providing for SDVOSBs); § 819.7006 (providing for VOSBs). The regulations further specify that contracting officers must give preference to SDVOSBs over VOSBs, and if only one SDVOSB makes an offer at a fair and reasonable price, the contracting officer " should make" the award to that offeror (thus converting the Rule of Two to a Rule of One).

Page 928

Id. § 819.7005. If no acceptable offer is made by a SDVOSB, the contracting officer " shall" withdraw the SDVOSB set-aside and process the procurement as a VOSB set-aside. Id. If only one VOSB makes a fair and reasonable price offer, the contract officer " should make" the award to that offeror, and if no acceptable offer is made, the contracting officer " shall" process the procurement under other small business set-aside programs. Id. § 819.7006. In the preamble to the regulations, the VA expressed its view that 38 U.S.C. § 8127(d) " does not apply to FSS task or delivery orders" and that the VA would " continue to follow GSA guidance regarding applicability of 48 CFR part 19 of the FAR, Small Business Programs, which states that set-asides do not apply to FAR part 8 FSS acquisitions." 74 Fed. Reg. 64,619, 64,624 (Dec. 8, 2009). In practice, the VA has continuously and consistently interpreted § 8127(d) as not affecting its authority to place orders under the FSS, and as granting it the flexibility to achieve the subsection (a) goals by any of the three § 8127 methods.

History has proven true the prediction made in the legislative history of ยง 8127. The 2006 Act did not become effective until 180 days after its enactment on December 22, 2006, and as a result was not fully implemented until the 2008 fiscal year. For that year and thereafter, the Secretary set goals well beyond the previous 3% ...


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