THE RULE OF TWO: How Does It Apply To Multiple-Award Contracts?

35 Nash & Cibinic Rep. NL ¶ 20

Nash & Cibinic Report \| April 2021

The Nash & Cibinic Report

Competition & Award

Vernon J. Edwards

¶ 20. THE RULE OF TWO: How Does It Apply To Multiple-Award Contracts?

Suppose that an agency wants to conduct an acquisition of services that is expected to exceed the simplified acquisition threshold and so begins acquisition planning. How should it proceed? An agency has several options these days, including:

• award a new contract;
• modify one of its existing contracts;
• issue an order against one of its own single-award IDIQ contracts;
• issue an order against one of its own multiple-award IDIQ contracts;
• issue an order against one of its own basic agreements;
• issue an order against one of its own a basic ordering agreements;
• issue an order against a General Services Administration Federal Supply Schedule contract (see FAR Subpart 8.4);
• issue an order against a blanket purchase agreement under a GSA FSS contract; and
• issue an order against a Government-wide Acquisition Contract (GWAC).

The conduct of any of those procedures would be an “acquisition” as defined in FAR 2.101. That raises a question: When pondering how to conduct an acquisition, when and how must the agency apply the small business set-aside “Rule of Two”?

The Small Business Set-Aside Rule of Two

The “Rule of Two” for acquisitions expected to exceed the simplified acquisition threshold is stated at FAR 19.502-2(b), as follows:

The contracting officer shall set aside any acquisition over the simplified acquisition threshold for small business participation when there is a reasonable expectation that—

(1) Offers will be obtained from at least two responsible small business concerns; and

(2) Award will be made at fair market prices. Total small business set-asides shall not be made unless such a reasonable expectation exists (see [FAR] 19.502–3 for partial set-asides). Although past acquisition history and market research of an item or similar items are always important, these are not the only factors to be considered in determining whether a reasonable expectation exists. In making research and development small business set-asides, there must also be a reasonable expectation of obtaining from small businesses the best scientific and technological sources consistent with the demands of the proposed acquisition for the best mix of cost, performances, and schedules. [Emphasis added.]

FAR 19.502-2(b) is clear that an agency must perform a Rule of Two analysis before preparing and issuing a solicitation for a new contract. FAR 8.404(a) is clear that agencies need not apply the Rule of Two before proceeding under a GSA Federal Supply Schedule. But other acquisitions raise questions. For instance, what if an agency is thinking about issuing an order against a multiple-award task order contract (MATOC)? Must the agency make a Rule of Two determination before deciding to proceed under that contract? Would it make a difference if the MATOC includes no small business contractors or if it includes two or more small business contractors?

The question is not whether to set aside an order under the MATOC, but whether to use the MATOC in the first place. On the one hand, it seems reasonable that if the MATOC was awarded for the acquisition of specific services by a specific agency during a specific period, and if each such requirement is within the scope of that contract, then it should not be necessary to conduct a Rule of Two analysis before placing an order. On the other hand, however, one agency might award a MATOC to serve as GWAC for use by other agencies, with no specific requirements or users in mind, but with the expectation that other agencies with various requirements of a general kind will use it from time to time. What if a prospective user agency is thinking of using one of those GWACs, one that includes no small business contractors, and the user agency’s small business specialist or the Small Business Administration’s procurement center representative says that two or more responsible small businesses are available and interested? What then? Must the user agency perform a Rule of Two analysis before deciding to use the GWAC or can it just ignore the Rule of Two?

Late in 2020, the U.S. Court of Federal Claims and the Government Accountability Office were presented with protests against the decision to conduct acquisitions under MATOCs without first applying the Rule of Two. They reached different conclusions.

The Court Of Federal Claims’s Tolliver Decision

In Tolliver Group, Inc. v. U.S., 151 Fed. Cl. 70 (2020), the Court of Federal Claims decided two protests against the Army’s decision to acquire services from large businesses under a MATOC without first applying the Rule of Two. The Army had set aside two competitive acquisitions for support services under a GSA FSS contract for small businesses. Its contractor selection decisions were protested, and the Army said it would take corrective action. Instead, the Army cancelled the GSA FSS solicitations and issued orders for the services to large businesses under a newly awarded Army MATOC.

The two small businesses that had protested the Army’s contractor selections under the GSA FSS contract filed protests at the Court of Federal Claims that (1) the Army’s decisions to cancel the solicitations against the GSA FSS contract were arbitrary and capricious and (2) the Army should have applied the Rule of Two before proceeding to acquire the services under the MATOC. The Government responded that (a) the Army had the discretion to cancel the solicitations and did so reasonably; (b) 10 USCA § 2304c(e) bars protests “in connection with the issuance or proposed issuance of a task order” except in circumstances not present in the case at hand; and (c) pursuant to 15 USCA § 644(r)(2) and FAR 16.505(b)(2)(i)(F), the decision to proceed under the MATOC was discretionary and not subject to the Rule of Two. FAR 16.505(b)(2)(i)(F) states:

In accordance with section 1331 of Public Law 111-240 (15 U.S.C. 644(r)), contracting officers may, at their discretion, set aside orders for any of the small business concerns identified in 19.000(a)(3). When setting aside orders for small business concerns, the specific small business program eligibility requirements identified in [FAR] part 19 apply.

The court decided that (1) the agency’s decisions to cancel the solicitations had not been justified and were thus arbitrary and capricious; (2) the protests were not in connection with the issuance of task orders, but were protests against violations of law and regulation, and so were not barred by 10 USCA § 2304c(e) and were within the court’s jurisdiction; and (3) that 15 USCA § 644(r)(2) and FAR 16.505(b)(2)(i)(F) did not excuse the Army from applying the Rule of Two before deciding to proceed under the MATOC.

[W]here the FAR intends to make the Rule of Two entirely inapplicable to the selection of a particular procurement vehicle, the FAR knows how to do so. See FAR 8.404(a) (“Use of Federal Supply Schedules”) (providing that FAR “Parts 13 (except 13.303-2(c)(3)), 14, 15, and 19 (except for the requirements at 19.102(b)(3) and 19.202-1(e)(1)(iii)) do not apply to BPAs or orders placed against Federal Supply Schedules contracts (but see [FAR] 8.405-5)”). Accordingly, there is no requirement for an agency to apply the Rule of Two prior to an agency’s electing to use a FAR Part 8 FSS procurement, although the agency has the discretion to set-aside such procurements after deciding to utilize FAR Part 8, just as the Army did here with respect to the [cancelled solicitation]. See FAR 8.405-5(a) (“Although the preference programs of part 19 are not mandatory in this subpart, in accordance with section 1331 of Public Law 111-240 (15 U.S.C. 644(r))—(1) Ordering activity contracting officers may, at their discretion—(i) Set aside orders for any of the small business concerns identified in 19.000(a)(3)”).

In contrast, no provision similar to FAR 8.404(a)—exempting the selection of an FSS procurement from FAR Part 19—exists in FAR part 16, generally, or FAR 16.5, in particular.

The court enjoined the Army from cancelling the GSA FSS solicitations and proceeding under the MATOC until it first complied with law and regulation. (Ralph discussed the court’s jurisdictional holding in Court of Federal Claims Jurisdiction: Parsing the Statutes and Regulations, 35 NCRNL ¶ 9.) The Government has appealed the court’s decision to the U.S. Court of Appeals for the Federal Circuit. The parties’ briefs are due on April 26, 2021.

The Government Accountability Office’s ITility Decision

Less than a month after the Tolliver decision, the GAO issued a very different decision in ITility, LLC, Comp. Gen. Dec. B-419167, 2020 CPD ¶ 412. In that case, the Department of Homeland Security had procured support services from ITility, LLC, under a DHS MATOC task order that had been set aside for service-disabled veteran-owned small businesses. But when the time came to award a new contract the DHS decided to proceed under the GSA’s Alliant 2 GWAC. The DHS could not set the acquisition aside for small businesses under Alliant 2, because the small business contract awards under that GWAC had been “vacated” as a result of a bid protest filed at the Court of Federal Claims, and there were no small business parties to the contract.

ITility, which was not a party to Alliant 2, backed by the SBA, protested that the DHS had been required to comply with the Rule of Two before deciding to proceed under the GWAC. The DHS argued that 15 USCA § 644(r)(2) and FAR 16.505(b)(2)(i)(F) made the Rule of Two inapplicable to its decision to acquire the service under Alliant 2. Here is how the GAO described the protest and its own initial response:

ITility protests the issuance of the unrestricted task order to EIS, arguing that, pursuant to 15 U.S.C. § 644(a) and FAR 19.502-2, the agency was required to set aside the requirement for small business concerns. ITility argues that reasonable market research would have shown that numerous small business concerns, such as ITility, are capable of and interested in performing this requirement at reasonable prices. DHS answered that it conducted a reasonable analysis with respect to whether the procurement should be set aside for small business concerns, and complied with statutory and regulatory set-aside requirements. During the development of the protest, our Office requested that the parties address whether in fact DHS was required to conduct such a set-aside analysis prior to issuing the task order [Request for Quotations]. Specifically, we asked the parties to address whether a set-aside analysis was mandatory or discretionary in light of the statutory provisions of 15 U.S.C. § 644(r), its implementing regulations, and our prior decisions interpreting those authorities.

In light of the issues presented, our Office also invited the Small Business Administration (SBA) to provide its views on these issues, pursuant to 4 C.F.R. § 21.3(j). ITility and SBA maintain that the small business set-aside requirements are mandatory and must be applied prior to placing the work under a multiple-award contract and proceeding with an unrestricted task order. In contrast, DHS argues that this analysis is discretionary under these circumstances.

Was ITility protesting the DHS’s decision not to set aside the task order or its prior decision to proceed under the MATOC? The DHS argued that 15 USCA § 644(r)(2) and FAR 16.505(b)(2)(i)(F) made the Rule of Two inapplicable to its prior decision. ITility and the SBA argued that those rules did not apply to the prior decision, only to the decision whether to set the order aside, and asserted that the prior decision was subject to the Rule of Two, citing Tolliver.

The GAO denied the protest, and in so doing cited two of its earlier decisions. In Edmond Scientific Co., Comp. Gen. Dec. B-410179, 2014 CPD ¶ 336, the protester had challenged an agency’s decision not to perform a Rule of Two analysis prior to deciding not to set aside a MATOC fair opportunity. Relying on 15 USCA § 644(r), the GAO decided that the Rule of Two did not apply to MATOC fair opportunities. Accord Aldevra, Comp. Gen. Dec. B-411752, 2015 CPD ¶ 339. Thus, in ITility, the GAO found that 15 USCA § 644(r) excused the DHS from complying with the Rule of Two: “15 USCA 644(r) creates an exception for orders placed under an IDIQ contract from mandatory small business set-aside requirements.”

ITility and the SBA argued that the GAO was misapplying 15 USCA § 644(r):

SBA and ITility also argue, however, that our foregoing interpretation of 15 U.S.C. § 644(r) and its implementing regulations is not controlling in this case. Specifically, SBA and ITility argue that Edmond Scientific only involved a discrete challenge whether to set aside an individual order under an IDIQ contract, while this protest challenges “whether the agency properly used a vehicle with no small business competition.” SBA Comments at 10; see also ITility Resp. to Supp. Briefing Req. at 13 (“Critically, GAO was not presented with, and did not decide, the question of whether the agency was required to conduct a Rule of Two analysis prior to its decision to use the [specific IDIQ] contract, since the selection of that contract vehicle was not challenged.”) (emphasis in original).

In support of its argument, the protester cites to a recent decision issued by the United States Court of Federal Claims (COFC), [The Tolliver Grp., Inc. v. United States, 151 Fed. Cl. 70 (2020)], to argue that this case can be distinguished from our decision in Edmond Scientific and should have a different result.

Similar to the court in Tolliver, ITility and SBA attempt to draw a distinction between protests challenging an agency’s decision not to set aside an order when they are filed by an IDIQ contract holder (a contractor that is “inside” the IDIQ), as was the case in Edmond Scientific, and a protester that is not a holder of the underlying IDIQ contract (a contractor “outside” the IDIQ). As addressed above, ITility and SBA both argue that under the facts in this case, because ITility is “outside” the Alliant 2 contract, DHS had no discretion with respect to performing a Rule of Two analysis before issuing the order under the Alliant 2 contract, and is required to set aside the acquisition because there are at least two small businesses outside Alliant 2 capable of doing the work at reasonable prices.

But the argument of ITility and the SBA was of no avail.

We are not persuaded by ITility’s and the SBA’s efforts to distinguish our decision in Edmond Scientific on the basis that the case turned on the fact that the protester was “inside” as opposed to “outside” the IDIQ contract. First, this dichotomy has no basis in the Small Business Act or the FAR. In this regard, this argument would require us to evaluate an agency’s acquisition planning without regard to whether the acquisition is in connection with the issuance or proposed issuance of a task order, but, rather, whether the agency’s acquisition planning preceding its ultimate acquisition approach (e.g., contract versus order) was reasonable. We do not, however, review inchoate acquisitions; rather, we only review specific procurement actions, such as the issuance of a solicitation or proposed award of a contract or order. 31 U.S.C. § 3551(1).

We almost suspect that the GAO simply did not understand ITility’s argument. Or simply ignored it.

Conclusion

We think that in Tolliver the court made the right decision about the need to apply the Rule of Two before deciding to proceed under a MATOC. Our readings of 15 USCA § 644(r) and FAR 16.505(b)(2)(i)(F) lead us to conclude that they address the question of whether to set aside a MATOC fair opportunity, not the question of whether to perform a Rule of Two analysis before proceeding with an acquisition under a MATOC. We are not sure what to think about the GAO’s decision in ITility.

The Rule of Two was a simple mandate when promulgated in 1979, which was a simpler time, before agencies had the variety of procedural choices they have today. When the Federal Acquisition Streamlining Act of 1994 formalized the MATOC contracting practices that had sprouted in contracting offices in various places, no one anticipated the chaotic world that would come into being in the course of the ensuing 20 years. Today’s rules about small business set-asides strike us as exceedingly complex. As one author put it in the title of an article, The Procurement System Would Have Broken Einstein’s Brain, 226 Mil. L. Rev. 197 (2018).

Ideally, a proactive Office of Federal Procurement Policy and FAR Council would get to work and promptly simplify and clarify the regulations in order to resolve the issues now being raised in bid protests, rather than waiting for resolution through case law. But the acquisition policy machinery is passive and moribund. Maybe they are just dazed and confused.

The problem today is to figure out how to apply a rule that has not changed in 41 years to a world in which almost everything else has changed dramatically. We shall await a decision on Tolliver by the Federal Circuit. Maybe it will clear things up. Maybe not. VJE