Veterans Contracting Group, Inc. v. U.S.

• Decision Date: 02 April 2019
• Docket Number: 2018-1409
• Citation: 920 F.3d 801
• Parties: VETERANS CONTRACTING GROUP, INC., Plaintiff-Appellant v. UNITED STATES, Defendant-Appellee
• Court: U.S. Court of Appeals — Federal Circuit

920 F.3d 801

VETERANS CONTRACTING GROUP, INC., Plaintiff-Appellant

v.UNITED STATES, Defendant-Appellee

2018-1409

United States Court of Appeals, Federal Circuit.

Decided: April 2, 2019

Joseph Anthony Whitcomb, Whitcomb, Selinsky, McAuliffe, PC, Denver, CO, argued for plaintiff-appellant. Also represented by Andrew R. Newell.

Steven Michael Mager, Commercial Litigation Branch, Civil Division, United States Department of Justice, Washington, DC, argued for defendant-appellee. Also represented by Joseph H. Hunt, Robert E. Kirschman, Jr., Allison Kidd-Miller, Kara M. Westercamp.

Before Lourie, Dyk, and Hughes, Circuit Judges.

Dissenting opinion filed by Circuit Judge Dyk.

Hughes, Circuit Judge.

Veterans Contracting Group, Inc., appeals from a decision of the United States Court of Federal Claims holding that the Department of Veterans Affairs did not act arbitrarily or capriciously when it cancelled a roof replacement solicitation set aside for service-disabled veteran-owned small businesses. Because the contracting officer acted rationally in requesting cancellation based on the record before him, we affirm.

I

A.

The government sets aside certain contracting opportunities for service-disabled veteran-owned small businesses (SDVOSBs). See Kingdomware Techs., Inc. v. United States , ––– U.S. ––––, 136 S.Ct. 1969, 1973, 195 L.Ed.2d 334 (2016). Two agencies are responsible for managing procurements on SDVOSB set-aside contracts: the Department of Veterans Affairs (VA) and the Small Business Administration (SBA). The VA regulates its own procurements, while the SBA regulates the procurements of all other agencies. Although the VA and the SBA systems overlap in many respects, they are governed by different statutory provisions. See 38 U.S.C. § 8127 (VA) ; 15 U.S.C. § 657f (SBA). This appeal concerns the system run by the VA.

Under VA regulations, a business may only compete for SDVOSB set-aside contracts if it has registered with the VA’s Center for Verification and Evaluation. See 38 U.S.C. §§ 8127(e) – (f) ; 38 C.F.R. §§ 74.11, 74.20. If the Center determines that a business qualifies as an SDVOSB, it adds that business to a centralized database called VetBiz. See 38 U.S.C. §§ 8127(e) – (f) ; 48 C.F.R. § 804.1102 ; 38 C.F.R. §§ 74.11, 74.20. During procurement, contracting officers can only consider bids submitted by businesses listed on VetBiz. See 38 U.S.C. § 8127(e) ; 48 C.F.R. § 804.1102. If the business is not in the database when bidding closes, the contracting officer cannot consider its bid. See 38 U.S.C. § 8127(e) ; 48 C.F.R. § 804.1102.

A business is eligible to compete for SDVOSB contracts if one or more veterans "unconditionally" own a majority interest in the company. See 38 C.F.R. § 74.2(a) (VA) ; see also 13 C.F.R. § 125.12 (SBA). In 2017, the VA and the SBA applied different definitions of "unconditional" ownership.¹ According to the VA, ownership was unconditional if it was free from "arrangements causing or potentially causing ownership benefits to go to another." See 38 C.F.R. § 74.3(b) (2017). The VA exempted arrangements conditioned "after death or incapacity" from this limitation. See id. The SBA, on the other hand, disallowed any limitations on a veteran’s ownership interest—including those premised on death or incapacity. See Matter of The Wexford Grp., Int’l, Inc. , SBA No. SDV-105, 2006 WL 4726737, at *6, *9–10 (June 29, 2006).

Even after the Center makes the initial determination that a business qualifies as an SDVOSB, eligibility continues to remain relevant. Verified businesses have an ongoing obligation to maintain their status, and the Center may remove any business which fails to comply with this obligation. See 38 C.F.R. §§ 74.15(b), (e). Generally, a business is entitled to notice and an opportunity to respond before the Center effects removal. See id. § 74.22. The regulations existing in 2017, however, provided for one narrow circumstance under which the VA had to immediately remove a business from VetBiz: upon notice from the SBA that it has found the business ineligible to compete in its system. See id. § 74.2(e) (2017). The regulation provided the Center with no discretion with respect to removal in this scenario. See id.

B.

Ronald Montano, a service-disabled veteran, owns 51% of Veterans Contracting Group, Inc. (VCG). His ownership interest is subject to limitations in the event of his death or incapacity. In 2013, the Center determined that VCG qualified as an SDVOSB under the VA system and added VCG to VetBiz. The Center reaffirmed VCG’s status each year until 2017.

On January 5, 2017, VCG learned that it was the lowest bidder on an SDVOSB set-aside contract issued by an agency working with the SBA. The second lowest bidder filed a bid protest challenging VCG’s eligibility to compete for the contract. The SBA ultimately determined that, because of the limitations on his ownership interest in the event of his death or incapacity, Mr. Montano did not "unconditionally" own his interest in VCG. As a result, VCG did not qualify as an SDVOSB under the SBA system. The SBA informed the VA of its decision on July 18, 2017. Because VA regulations required the Center to remove any business found ineligible in an SBA proceeding, see 38 C.F.R. § 74.2(e) (2017), the VA removed VCG from VetBiz on July 21, 2017.

Before VCG’s removal from VetBiz, the VA had issued solicitations for bids in two SDVOSB set-aside contracts, one for a roof replacement and one for a relocation effort. The application deadline for the roof replacement solicitation was July 28, 2017. The application deadline for the relocation contract was August 2, 2017.² Realizing that bidding might close on these solicitations before it finished litigating its status as an SDVOSB, VCG sent the VA a letter on July 26, 2017, expressing its intent to seek a preliminary injunction. Although VCG’s letter repeatedly referenced the relocation solicitation, it failed to mention the roof replacement solicitation.³

On July 28, 2017, hours before the 9:00 am deadline on the roof replacement solicitation, VCG filed a bid protest in the Court of Federal Claims. VCG did not request a temporary restraining order or injunctive relief in its complaint.

That same day, the contracting officer opened bids for the roof replacement solicitation. The lowest responsive bidder had proposed a cost 30% higher than the government’s estimate. VCG had submitted a bid closer to the government’s projected cost, but the contracting officer could not consider its bid because VCG was not listed in the VetBiz database on the day bidding closed. See 38 U.S.C. § 8127(e). Given the absence of any reasonable bids, the contracting officer drafted an email on August 1, 2017, recommending cancellation and reposting of the solicitation.

On August 5, 2017, five days after the contracting officer sought cancellation, VCG moved for a preliminary injunction on the roof replacement solicitation. On August 11, 2017, the VA informed the Court of Federal Claims of its intent to cancel the solicitation pursuant to 48 C.F.R. § 14.404-1(c)(6), which permits cancellation when "[a]ll otherwise acceptable bids received are at unreasonable prices." The VA finalized cancellation on August 22, 2017. Hours later, the Court of Federal Claims granted VCG a preliminary injunction restoring it to VetBiz.⁴ See Veterans Contracting Grp., Inc., v. United States , 133 Fed.Cl. 613, 624 (2017) ( VCG I ). In its decision, the court specifically declined to address relief related to the roof replacement solicitation "[b]ecause the government has stated that the roofing solicitation is in the process of being cancelled and reissued," thereby rendering VCG’s "claim with respect to that solicitation ... moot." Id. at 624 n.11.

The Court of Federal Claims ultimately made the injunction permanent. See Veterans Contracting Grp., Inc., v. United States , 135 Fed.Cl. 610, 619 (2017) ( VCG II ). The court reasoned that, because the SBA and VA regulations had differed at that time on whether contingencies for death or incapacity would disqualify a business from SDVOSB status, the VA had acted arbitrarily and capriciously when it applied 38 C.F.R. § 74.2(e) in a mechanical manner. See id. at 618–19. The court, however, rejected VCG’s claim that the contracting officer had acted arbitrarily and capriciously in cancelling the roof replacement solicitation.⁵ See id. at 619–20. It noted that the contracting officer had followed normal procurement procedures. Id. at 619. Based on the information available to him at the time, he rationally determined that the government had not received any reasonable bids. Id. Because he could not have known that the Center had improperly removed VCG from VetBiz, the court held that the contracting officer’s decision to cancel the solicitation was not arbitrary or capricious. See id. at 619–20.

VCG appeals the denial of its claim that the cancellation of the roof replacement solicitation was arbitrary and capricious. We have jurisdiction under 28 U.S.C. § 1295(a)(3).

II

We review the legal determinations of the Court of Federal Claims de novo and any underlying factual findings for clear error. Palladian Partners, Inc. v. United States , 783 F.3d 1243, 1252 (Fed. Cir. 2015). In a bid protest, we follow Administrative Procedure Act § 706 and set aside agency action "if it is arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." Id. A procurement decision fails under § 706 if "(1) the procurement official’s decision lacked a rational basis; or (2) the procurement procedure involved a violation of regulation or procedure." Id. (internal quotation marks omitted) (quoting Savantage Fin. Servs. v. United States , 595 F.3d 1282, 1285–86 (Fed. Cir. 2010) ).

A.

We first address whether the contracting officer’s decision to cancel the roof replacement solicitation lacked any rational basis.⁶ VCG contends that the VA should have held the solicitation open pending resolution...