The Rule of Two and what Star Wars can teach us about federal procurement policy

If you ask the internet what the "Rule of Two" is, you will learn something about Star Wars.[1] In the Star Wars Universe, the Rule of Two means that only two Sith Lords can exist at any given time. Apparently, there's always (and only!) a master Sith and an apprentice Sith. It's not actually important to dwell on the nuances of the Star Wars Rule of Two other than to observe its premise: limiting competition among a smaller pool of participants advances a broader structural goal.

If, however, you are operating in the government-contracting universe instead of the Star Wars Universe, the Rule of Two has a very different meaning.[2] In govcon parlance, the Rule of Two means that a contracting officer can set aside a contract for small businesses if there is a "reasonable expectation" that at least two responsible small businesses will bid and that the award will reflect fair market prices.

Like the Star Wars rule, the government-contracting Rule of Two operates on the theory that limiting competition among a smaller pool of participants will advance a broader structural goal. In the case of the govcon Rule of Two, the broader structural goal is increasing procurement opportunities for small businesses and achieving a more diverse supplier base.

A weird dynamic, though, in the federal contracting policy landscape is that most of the practical application of the Rule of Two is kind of... made up. Formally, under the relevant statute, the Rule of Two clearly applies to contracts under the simplified-acquisition threshold. But for contracts above the simplified acquisition threshold, Congress has explicitly punted the choice about whether and how to apply the Rule of Two to the Executive Branch.[3]

When considering (1) the option of requiring the Rule of Two, or (2) the option of not requiring the Rule of Two, Congress chose (3) a third option of requiring the White House to "by regulation, establish guidance under which Federal agencies may, at their discretion" apply the Rule of Two. Not to be too dismissive of what is surely a policy thicket, but understand that if a Rule only requires additional rulemaking to come up with guidance about how to exercise discretion, it's not really a Rule: it's just a suggestion.

For its part, though, the Executive has tended to favor the Rule of Two, at least to a degree. On its face, the FAR suggests that the Rule of Two applies to "any acquisition." But that language is sort of incomplete. Because, for example, the Rule of Two does not apply to orders placed against the Federal Supply Schedules. And, although a contested point,[4] it seems to be that—absent some formal policy change—the Rule of Two is also not mandatory for orders placed against other multiple award contracts, including the big governmentwide acquisition contracts.

The extent to which the Rule of Two applies has kept lawyers and advocates busy over the years. But the debate hasn't really changed whether contracting officers can apply the rule. As we've written before, contracting officers will absolutely set aside contracts for small businesses under the Rule of Two when they want to. And GAO will generally defer to those decisions.

Recently, though, an Office of Federal Procurement Policy memorandum published in January 2024 has brought the Rule of Two back into focus. Among other things, the memorandum states that:

Except for orders citing an exception to competition (FAR § 16.505(b)(2), exceptions to fair opportunity, or agency procedures that reflect an appropriate exception), agencies should set aside orders over the micro-purchase threshold (MPT) for small business contract holders when the contracting officer determines there is a reasonable expectation of obtaining offers from two or more small business contract holders under the multiple-award contract that are competitive in terms of market prices, quality, and delivery.

In other words, the memorandum suggests that agencies should be applying the Rule of Two to orders on multiple-award contracts.

Now, as I read it, the memorandum doesn't actually change the legal situation described above. The memo uses the word "should" a lot. And as lawyers will be quick to point out, "should" is not the same as "shall" or "must." I should exercise every morning. But I don't.[5]

Still, despite the fact that the memorandum effectively tells COs to eat their vegetables, boy howdy do people have strong opinions about this memorandum. Here's an example quote from an industry type published in the beltway news:

This memo upends over 30 years of established policy. OMB ruled several years ago that the rule of two would be applied at the contract, not task order level. There was also language in the legislative report accompanying the Federal Acquisition Streamlining Act (FASA) that made it clear that the increase in the small business acquisition threshold included in that bill did, in no way, change the procurement preferences outlined in FAR 8.4... Government contractors have invested millions in indefinite delivery, indefinite quantity (IDIQ) contracts as they are fast and easy ways to buy. Where should those businesses go to get their money back? This administration touts transparency, but this is a major, substantial policy shift that no one outside of OMB or SBA apparently knew about. How can industry think that the administration is serious about transparency and wanting to work as partners when it changes the rules without even going through a rule making before doing it? How can OMB people who have worked with industry for years look them in the eye anymore?

I mean. I dunno, y'all. If industry is asking for refunds of bid-and-proposal budgets, you just know folks are mad, I guess.

Meanwhile, others have been openly celebrating the policy direction, even while recognizing its lack of force. Here's an example quote from a law firm that supports small business contractors:

This memo shows that the OMB is committed to increasing small business participation. It predicts that new SBA and FAR rules will be coming soon to put these ideas into practice. For now, OMB is relying on voluntary agency effort to carry out these steps. Let’s hope that many agencies follow them, but that new regulations come out soon.

Ok. Sure. But the White House "predicting" a rule and encouraging "voluntary agency efforts" is a bit odd, right?

The answer is yes, it's odd. And my prediction is that when the proposed rules come out, folks on both sides of the issue will raise alarms.

But in another sense, it's very normal. Because, you see, this sort of posturing is simply the nature of federal procurement policy and, I guess, Star Wars.

Even though the Rule of Two has different meanings in both universes, the principles are the same. We want to encourage competition, but not too much. Mentors want their apprentices to thrive, but not at their expense!

And just like the Galactic Senate in a galaxy far, far away, one shouldn't put too much hope on Congress to clear things up on what the rules should be any time soon...

And, I have to tell you: these battles sure are fun to watch!

[1] Seriously, putting "Rule of Two" into Google and pressing the "I'm Feeling Lucky" button will lead to this article.

[2] Reminded of one of my favorite scenes from the movie "Clerks" about the moral implications of the destruction of the second Death Star in Return of the Jedi and the role of government contractors, I decided to ask ChatGPT what Darth Vader might think of the Rule of Two. Its answer was pretty good:

Regarding Darth Vader's potential stance on the federal Rule of Two, it's a complex consideration. Darth Vader, being a Sith Lord under the Star Wars Rule of Two, embodies the principles of power, ambition, and the overthrow of his master to gain supremacy. This would suggest a preference for systems that consolidate power and foster intense competition, where only the strongest survive. However, the federal Rule of Two's goals of diversity and equitable competition are antithetical to the Sith philosophy, which does not value economic diversity or fairness. Vader might appreciate the strategic aspect of limiting competition to ensure that only the most capable entities (or individuals, in the Sith's case) succeed. Yet, he would likely be against the federal Rule of Two's aim of fostering a diverse and competitive supplier base, as it contradicts the Sith's emphasis on individual power and dominance over collaboration and equitable opportunity. In essence, while Vader might find the concept of limiting competition to ensure quality or supremacy interesting, he would likely oppose the federal Rule of Two's broader goals of fairness, diversity, and economic opportunity for all qualified entities.

So there you have it, folks. Darth Vader would oppose the Rule of Two. Make of that what you will.

[3] There is a pretty notable exception where Congress did weigh in. In 2016, in a case called Kingdomware Technologies, Inc. v. United States, the Supreme Court ruled that the Department of Veterans Affairs must apply the Rule of Two for veteran-owned small business set asides under a VA-specific statute. Many legal scholars have written about Kingdomware, and there's nothing too interesting about the legal analysis to add here. That said, in researching this post, I came across this fascinating study by two economics professors that exploits the 2016 decision as a natural experiment about the effectiveness of the Rule of Two. I will leave it to the curious reader to go down that rabbit hole.

[4] I say it's contested because there is a difference of opinion among the Court of Federal Claims, the SBA, and the GAO about the applicability of the Rule of Two to task orders on multiple award contracts.

[5] A friend encouraged me to mention that, on occasion, I will get on the Peloton. If anyone wants to do a #TeamGovContrActually ride, drop me a note. Yes or yes?