The Rule of Two survived. But it's still primed for legal and legislative battles.
Part one of a three-part series on the FAR Overhaul of Part 19 on Small Business
The Rule of Two survived the FAR Overhaul! That’s the headline coming out of Friday’s release of the overhaul of FAR Part 19 on Small Business. And it shouldn’t be overshadowed by the many, many policy changes elsewhere in the overhaul—so many that I need three separate articles to cover all of them. The Rule of Two is really important to small businesses. Its survival was important enough for the White House to publish a press release on how the FAR Overhaul “reduces the burden on small businesses seeking contracts while preserving important policies requiring agencies to set aside new contracts when there are two or more competitive small businesses capable of performing the work.”
Many congratulations to the small businesses and their advocates who pushed for preserving the Rule of Two, the requirement that an award be set aside for small businesses if there are two or more qualified small businesses that would submit competitive offers. I was initially skeptical that the Rule would remain. But I came around once I saw the about-face on mandating best-in-class contracts, showing that the Overhaul drafters were paying attention to public sentiment.
In all the celebration, though, don’t miss the FAR’s blatant attempt to overturn the U.S. Supreme Court, the Chief Judge of the Court of Federal Claims, and the will of public commenters. I say blatant because it’s the first item in the Overhaul’s accompanying guidance, as well as in two words from that White House press release: “new contracts.” The Overhaul’s Rule of Two uses those same two words—new contracts—in place of the Rule’s prior term, “acquisitions,” in the attempt to exclude task orders from the Rule of Two. The theory is that task orders aren’t contracts, so they aren’t covered by the Rule of Two.
And to top it off, the Overhaul also attempts to insulate task-order set-aside decisions from GAO and judicial review.
I don’t think that’s going to work. Someone is going to sue, and the courts are going to review the set-aside decision anyway. The Supreme Court ruled on task-order set-asides in the Kingdomware case from 2016. Justice Clarence Thomas issued a unanimous decision that a task order is a “contract” for the purposes of the VA’s Rule of Two. I worked on that case, so I was at the court for oral arguments. It was clear that all the justices were skeptical of the government trying to make a distinction between task orders and contracts for the Rule of Two.
And that was before the Supreme Court’s Loper Bright case, which requires agencies to ground their policies in legislative language. The FAR Overhaul doesn’t have a reliable statutory argument for the task-order exclusion. I’ve heard the argument repeatedly, and it boils down to claiming that the discretion in choosing how to do something is the same as having discretion to not do it at all. Consider this ridiculous scenario—based on actual events.
Dad: Hey kiddo, I need you to help clean the house. I’ll give you the choice. You have the discretion to sweep the floors, vacuum the rug, and put away laundry.
Teenage daughter: [Scrolling YouTube Shorts] OK, Dad. I get it.
Dad: [Three hours later] Wait, the floor is still dirty, the rug has fur all over it, and the laundry is still out. Did you do anything?
Teenage daughter: Not at all! You gave me the discretion, remember?
I’m not the only one who finds this ridiculous. Judge Matthew H. Solomson—now the Claims Court’s chief judge—ruled in Tolliver (2020) that the government needed to apply the Rule of Two before deciding whether to use a multiple-award contract. Judge Solomson wrote, as applied to the scenario, just because you decide not to sweep the floors doesn’t mean you also get out of putting away the laundry:
[T]he fact that an agency has the discretion to partially set-aside “a portion” of a multiple award contract for small business does not lead to the ineluctable conclusion that having decided not to engage in a partial set-aside, an agency may thereafter dispense with the Rule of Two.
This Rule-of-Two saga goes back to the GAO’s Delex ruling from 2008, which found that the Rule of Two applies to task orders. Congress then passed a law in 2010 purporting to side with the small-business position in Delex. But the law is poorly written—notice how “or put away laundry” would have made more sense? So that 2010 law has spawned a half-dozen GAO protests—most of which I was personally involved in—plus the Supreme Court case and Chief Judge Solomson’s recent decision. Last year, SBA tried to clear up matters by pointing to another law, one that requires that agencies issue enough set-asides so that a “fair proportion of total purchases” in each industry go to small businesses. SBA reasoned that task orders are “purchases.” But implementing that whole law would require SBA to figure out what a fair proportion looks like, and then look at whether small businesses are getting a fair share of task orders for each NAICS. SBA hasn’t done that analysis.
I think where this is going—and really where it should go in this Loper Bright era—is that Congress needs to act. The FAR is pressing the issue by prioritizing governmentwide contracts. That makes task orders the preferred method for contracting. And it makes the Rule of Two easy to circumvent. Does Congress want small businesses to get prioritized on task orders or not? Are task orders—as SBA argues—“purchases” that need to be set aside so that small businesses get their fair proportion? Or does the preference for task-order contracts overshadow small-business preferences?
The change to task-order rerepresentation isn’t going to matter much
In January, the FAR Council changed the rules around small-business representations for task orders—something they call “rerepresentations” because the small business already represented its size and status at the contract level. And then in the Overhaul, they changed them back. I don’t think this reversal is really going to matter, in part because of a GAO case published last week.
In short, the reversal is in whether multiple-award contract holders need to rerepresent their size and status in three specific scenarios: a small business set-aside order under an unrestricted contract, a socioeconomic set-aside order under a small-business set-aside contract, or a socioeconomic set-aside order under a contract with a different set-aside type. The January rule required these rerepresentations. The Overhaul text does not.
The reason for the January rule was the concern that businesses that grow to be large on multiple-award contracts shouldn’t be allowed to compete for small-business set-asides. But, as a compromise, the January rule didn’t prevent that in every case; rerepresentation isn’t required in most cases. It’s just those three scenarios above.
Maybe the FAR doesn’t think that is as much of a concern anymore. Or maybe those three scenarios were unnecessarily complicated or paperwork-intensive. It doesn’t really matter because that concern about large businesses being treated as small isn’t about representation. It’s about status.
The GAO’s decision last week in Richard Group demonstrates the difference. There’s an obscure VA rule that requires that, for a service-disabled veteran-owned set-aside at the VA, the offeror be small under the contract’s size standard at both offer and award. That’s contrary to the normal SBA rule that only requires that a business be small at the time of offer; it can later grow to be large at the time of award and still get the contract. The VA rule is different.
I’m not going to question whether the VA’s rule is valid; GAO concluded that it was. The point is that, in the two decades since Congress authorized VA set-asides, the rule apparently has never come up in litigation. The GAO decision didn’t cite any prior cases, just the rule itself. The GAO upheld the VA’s decision to disqualify a firm that was small at offer but had grown to be large by the time of the award.
The important part of the case is that there wasn’t a formal rerepresentation. The VA checked SAM.gov and saw that the firm wasn’t small anymore. Case closed—the firm couldn’t get the contract.
The same thing can happen with task-order awards. You don’t need to use a rerepresentation. The SBA’s rule on size for task orders doesn’t mention rerepresentation at all:
Where an order is set-aside for small business under an unrestricted multiple award contract, SBA determines size status for each order placed against the multiple award contract as of the date a business concern submits its initial offer (or other formal response to a solicitation), which includes price, for each order.
All the rule requires is status, not representation. So that means, even after the Overhaul removes rerepresentations in those three scenarios, agencies still can require that businesses be qualified at the time of the order. The agencies just need to check SAM, like the VA did in the Richard Group protest.
Along the same lines, the Part 19 Smart Accelerators encourage this, though in the context of an agency’s discretion to set aside orders. To check a firm’s eligibility for the set-aside, agencies should “Ensure that any offeror is currently designated as eligible in the System for Award Management (SAM.gov) for the specific small business program.” So rerepresentations aren’t necessary; agencies can just check SAM.gov.
One Part 19 Overhaul change you probably didn’t notice
When SBA started requiring service-disabled veteran-owned firms to be certified by SBA for subcontracts, the firms received a one-year grace period to get certified. The Overhaul imposes an SBA-certification requirement for women-owned small businesses and veteran-owned small-business subcontractors. But, this time, there’s no grace period.
Prior to the Overhaul, women-owned businesses and veteran-owned businesses could self-certify their status for subcontracts. Primes could get credit for subcontracting to self-certified firms without checking the firms’ status on SBA’s website. The veteran-owned certification doesn’t even appear in SAM.gov yet.
Now, the Overhaul eliminates the ability for self-certified WOSBs and VOSBs to qualify for subcontracts under those statuses.
That elimination means that—unless the Overhaul creates a grace period after the fact— a subcontracting plan issued using the Overhaul deviation will prohibit the prime contractor from accepting a women-owned or veteran-owned self-certification. Women-owned and veteran-owned subcontractors need to get certified right away. There’s no grace period and no prior notice. There may have been a better way to “reduce the burden” on veteran-owned and women-owned businesses. But, instead, those firms will need to rush to SBA to get their certifications.
With 20 years of Federal legal experience, Sam Le counsels small businesses through government contracting matters, including bid protests, contract compliance, small business certifications, and procurement disputes. His website is www.samlelaw.com.