Protest challenging (1) the cancellation of one solicitation set aside for SDVOSBs, and (2) the terms of a second solicitation that was open to all small businesses is denied. The protest was premised on a novel interpretation of the Rule of Two. The protester argued that under the Rule of Two, an agency can only consider price reasonableness when determining whether to set aside the procurement for VOSBs. Thus, the protester contended, the agency erred in evaluating the reasonableness of the bids it received in response to the first solicitation set aside for SDVOSBs. The court found that neither the text of the Rule of Two, the caselaw interpreting it, nor the regulations implementing it supported the protester’s interpretation. The protester further argued that even if the agency evaluated the bids of SDVOSBs for reasonableness, that evaluation had to be limited to a price comparison between the SDVOSBs and must not include any outside price data. The court found that this argument was also unsupported.
The Department of Veterans Affairs issued a solicitation for document destruction services in Minneapolis. The solicitation was issued as a 100% set aside for service-disabled veteran-owned small businesses. Five SDVOSBs, including Veteran Shredding, LLC, submitted quotes in response to the solicitation. The VA, however, determined that all the quotes were unreasonably high and thus cancelled the solicitation.
After cancelling the solicitation, the VA conducted market research and issued a sources sought notice to evaluate whether any veteran-owned small businesses could perform the Minneapolis document destruction contract. Based on the information gleaned from this research, the VA determined that it could not expect to receive reasonably priced quotes from two or more veteran-owned small businesses. Accordingly, the VA issued a new solicitation for document destruction services that was simply set aside for small businesses.
Veteran Shredding, which had submitted a quote in response to the first solicitation, did not bid on the second solicitation. Instead, Veteran Shredding filed a protest with GAO challenging the terms of the solicitation. GAO denied the protest. Thereafter, Veteran Shredding filed a protest with the COFC. Veteran asserted that (1) the VA erred in cancelling the first document destruction solicitation, and (2) the decision to set aside the second solicitation for small businesses instead of SDVOSBs violated the Rule of Two and thus was arbitrary. Both Veteran Shredding and the government moved for judgment on the administrative record.
The court first addressed whether Veteran Shedding had standing to protest. The government argued that Veteran Shredding did not submit a bid and thus did not have a substantial chance of receiving award. The court, citing a Federal Circuit case, CGI Fed. Inc. v. United States, 770 F.3d 1346 (Fed. Cir. 2015), disagreed with the government. Even if a protester does not submit a bid, they can be considered a prospective if they were a qualified bidder, that expected to bid, and would have bid but for the unacceptable terms of the solicitation.
In this case, rather than submit a bid, Veteran Shredding filed a GAO protest before the bid deadline, challenging the validity of the solicitation. Since Veteran Shredding sought a change in the solicitation’s terms, the court reasoned, it had shown that it had an economic stake in the solicitation being carried out in accordance with applicable laws and regulations and thus possessed a direct economic interest in the procurement. Although it was a close question, the court found that Veteran Shredding had standing to protest.
The court then turned to the substance of the protest. Veteran Shredding noted that 38 U.S.C. § 8127(d), the statute that codifies the Rule of Two, provides that the VA “shall award” contracts to veteran-owned small businesses when there is a reasonable expectation that two or more veteran-owned businesses will submit offers and award can be made at a reasonable price. Based on the “shall award” language, Veteran Shredding contended that once two or more veteran-owned businesses have submitted bids, the Rule of Two requires that agencies “shall award” the contract to a veteran-owned business. While the rule only applies if the agency has a reasonable expectation of receiving reasonable bid, this does not permit the agency to evaluate the price reasonableness of bids once they have submitted. Rather, Veteran Shredding contended, the agency must simply make an award to one the VOSBs that responded to the solicitation. In other words, Veteran Shredding argued, if the Rule of Two is satisfied, then an agency must make award to a VOSB without considering the reasonableness of the proposed prices.
Proper application of the Rule of Two, Veteran Shredding argued, would have precluded the VA from cancelling the first solicitation. According to the company, the VA erred in considering the reasonableness of the prices proposed by the SDVOSBs in response to that first solicitation. Rather than evaluate for reasonableness, the VA should have just made an award to one of the SDVOSBs. Moreover, Veteran Shredding continued, because the VA had received bids from SDVOSBs in response to the first solicitation, it should not have opened up the second solicitation to all small businesses.
The court rejected this argument. The court noted that the controlling U.S. Supreme Court case on the Rule of Two, Kingdomware Techs v. United States, 136 S. Ct. 1969 (2016), held that the VA is required to restrict competition to SDVOSBs whenever the Rule of Two is satisfied. But Kingdomware did not hold that a contracting officer must then make award to an SDVOSB without considering the reasonableness of the bidder’s prices.
Indeed, the court noted, both the FAR and the VA acquisition regulations’ versions of the Rule of Two indicate that after setting aside the procurement for veteran-owned business under the Rule of Two, a contracting officer must still evaluate proposals to determine whether they are “acceptable.” This acceptability determination, the court reasoned, necessarily involves assessing whether the proposed prices are reasonable.
Still, Veteran Shredding argued, even if the agency were permitted to evaluate the price reasonableness of proposals, the agency can assess reasonableness by only comparing prices from the SDVOSB proposals it received. The agency cannot go outside those proposals and consider other factors—like prices charged by non-SDVOSBs. Simply stated, that agency’s reasonableness evaluation is limited to the bids it received.
Applying this framework, Veteran Shredding argued that when evaluating the reasonableness of the bids received for the first solicitation, the VA had improperly considered the government estimate and prices from the broader document destruction market. The agency should have restricted itself to only comparing the prices from the bids it received.
The court, however, found that nothing in the Rule of Two itself or the Kingdomware decision stated that price, or even technical comparisons, should be conducted within the set aside alone. Rather, the Rule of Two only applies to the determination of when a set aside should be attempted; it does not dictate how the evaluations received form veteran-owned businesses will be evaluated. Thus, the VA did not err by considering sources outside of the prices it received from offerors.
Finally, Veteran Shredding intimated that even if an agency uses a government estimate to evaluate the reasonableness of prices received in set aside, that government estimate should be based on the prices charged by veteran-owned businesses only and not on the broader market. Veteran Shredding argued that including non-VOSBs, which could take advantage of economies of scale, in the estimate did not accurately reflect the reasonableness of VOSB prices. Alas, the court found no legal support for this argument.
Veteran is represented by Joseph A. Whitcomb of Whitcomb Selinsky, PC. The government is represented by Igor Helman, Douglas K. Mickle, Robert E. Kirschman, Jr., and Joseph H. Hunt of the Department of Justice as well as Natica Chapman Neely of the Department of Veterans Affairs.
