For many Veterans and Service-Disabled Veterans attempting to do business with the Department of Veterans Affairs, the hope outlined in the Veterans Benefits, Health Care, and Information Technology Act of 2006 (the “Act”) has largely been elusive.  The Act called for the VA to give “priority to [] small business concern[s] owned and controlled by veterans” when soliciting work.  As the program developed, it was left to the VA to devise a system to verify companies as veteran owned small businesses (“VOSBs”) and service-disabled veteran owned small businesses (“SDVOSBs”), the latter of which were to receive first priority in contracting opportunities with the VA.  The verification system that took root in 2010 has frustrated many a veteran, as it has prevented legitimate companies from obtaining verified status and resulted in many others to lose their status.  In an important decision published last week, which we argued, the Court of Federal Claims has attempted to right the ship.

Miles Construction, LLC v. United States, No. 12-597C (2013) involved a construction contract set aside for SDVOSBs.  Our client, Miles, a verified SDVOSB, was the prospective awardee.  A competitor protested the award, raising issues of control by the minority shareholder of Miles, a non-service disabled company.  While the VA decided that the issues raised by the protestor had no merit, it nonetheless upheld the protest following an independent review of Miles’ governing documents.  According to the VA, three provisions of Miles’ operating agreement violated the VA’s verification regulations.  The most important provision involved a “right of first refusal.” That provision required the service-disabled veteran to offer the minority shareholders of Miles the right to purchase the veteran’s shares prior to any sale.  The VA took the position that such a provision denied the service-disabled veteran unconditional ownership, a prerequisite to verification.  On that basis, not only did the VA sustain the protest, eliminating Miles from competition, but it also removed Miles from its verified list of SDVOSB companies.  Miles would not be eligible for any further contracts set aside for such concerns.  Following our challenge of this decision on behalf of Miles, the court saw it differently.

The court determined that the VA’s interpretation of its own regulations was arbitrary and capricious.  While the regulations did, in fact, require “unconditional ownership” by the service-disabled veteran, that requirement did not preclude standard “right of first refusal” language.  The court concluded that such provisions fall within the ambit of “normal commercial practice” and do “not affect the veteran’s unconditional ownership.”  Further, the court found that Miles was not provided with an adequate opportunity to respond to the allegations that led to the VA sustaining the protest.  On this point, the court opined that “[a]n agency should not act without affording the entity whose award or projected award is protested with notice of an alleged defect and an opportunity to respond.”  Calling such a position lacking in “basic procedural due process,” the Court held that the VA’s decision to sustain the protest was “plainly erroneous.”

Miles is a major victory for veterans and service-disabled veterans, who have been stung by a lack of common sense and fair play at the hands of the very agency that is supposed to be there to assist them.  Many have questioned the VA’s position on “rights of first refusal,” including members of Congress.  Now, a court has ruled that such provisions in an SDVOSB’s operating agreement cannot, in and of themselves, prevent one from being verified by the VA.  The ruling makes practical sense and is certainly consistent with the governing regulations.  As the decision is extremely important to SDVOSBs, expect to see further comment from us in the days and weeks to come.

Edward T. DeLisle is a Partner in the firm and a member of the Federal Contracting Practice Group.