The changes come in response to a court injunction declaring rebuttable presumption for social disadvantage unconstitutional.
TAKEAWAYS
- All pending SBA 8(a) program applications are currently suspended due to an injunction issued by a federal district court in Tennessee.
- Individually owned 8(a) companies that have not already done so will now need to establish social disadvantage through a narrative/evidence process before receiving contract awards.
- Existing 8(a) contracts are not subject to the injunction, and options and modifications can be exercised. Entity-owned 8(a)s are not affected by the court’s injunction.
On July 19, 2023, the U.S. District Court for the Eastern District of Tennessee issued an injunction that prevents the Small Business Administration (SBA) from utilizing a “rebuttable presumption” of social disadvantage for specific minority groups when evaluating applicants’ eligibility for its 8(a) program. The opinion in Ultima Servs. Corp. v. U.S. Department of Agriculture declared the SBA’s rebuttable presumption unconstitutional under the Fifth Amendment of the U.S. Constitution. This ruling departs from the SBA’s longstanding practice of using this presumption to address discriminatory practices and promote equal opportunities.
The SBA issued a press release and interim guidance on August 18, 2023, reaffirming the agency’s support for the 8(a) program and outlining how individuals who used the presumption of social disadvantage to qualify for the program now need to provide a social disadvantage narrative to establish their personal social disadvantage. The SBA also issued a guide to assist companies in writing a social disadvantage narrative. Affected participants cannot receive new contract awards until their social disadvantage narrative is approved by the SBA. Information establishing social disadvantage must be submitted through the certify.sba.gov system.
If your company was accepted into the 8(a) program and established social disadvantage through the process of submitting a narrative and supporting evidence, your company is not directly impacted by this decision and these subsequent program changes. However, if the “rebuttable presumption” was used in your company’s acceptance into the 8(a) program, it is now necessary to submit a social disadvantage narrative in accordance with the SBA’s regulations and new guidance.
The 8(a) Program
The 8(a) program, established under Section 8(a) of the Small Business Act, is a business development program that offers small disadvantaged businesses (SDBs) training, technical assistance and federal contracting opportunities in the form of set-aside and sole-source awards. The program is generally limited to small businesses “unconditionally owned and controlled by one or more socially and economically disadvantaged individuals.”[1]
The 8(a) program has historically included a rebuttable presumption that members of certain minority groups are “socially disadvantaged” while individuals who do not belong to these groups must prove by a preponderance of the evidence that they are socially disadvantaged according to regulatorily defined criteria.[2] The minority groups that previously received a presumption of social disadvantage include Black Americans, Hispanic Americans, Native Americans, Asian Pacific Americans, Subcontinent Asian Americans and members of other groups designated from time to time by the SBA.
The rebuttable presumption was based on Congress’ recognition that persons in certain groups “are socially disadvantaged because of their identification as members of certain groups that have suffered the effects of discriminatory practices or similar invidious circumstances over which they have no control” and that it was in the national interest to rectify these conditions.
The Ultima Servs. Corp. Decision
The U.S. District Court for the Eastern District of Tennessee concluded that the presumption employed by the 8(a) program violates the constitutional right to equal protection guaranteed under the Fifth Amendment of the U.S. Constitution.
The court determined that the 8(a) program’s use of a rebuttable presumption failed to meet the stringent criteria of strict scrutiny. This standard demands a compelling government interest and a narrowly tailored approach addressing that interest. Drawing from the Supreme Court’s recent ruling addressing racial preferences in college admissions, Students for Fair Admissions, the court acknowledged the government’s compelling interest in addressing specific instances of past discrimination that contravened the Constitution or established laws. The court, however, found that even if the SBA had a compelling government interest, the agency’s approach was not narrowly tailored.
Ultimately, the district court enjoined the SBA from using the rebuttable presumption of social disadvantage. The court, however, reserved the right to rule on any further remedy and has scheduled a hearing on that issue for Aug. 31, 2023.
Fallout from the Ultima Servs. Corp Decision
The court’s injunction affects both prospective applicants and current participants who relied upon the presumption. In response to the Ultima decision, the SBA has temporarily stopped reviewing applications for the 8(a) program. Additionally, individually owned 8(a)s must establish social disadvantage via submission of a narrative supported by evidence before receiving new contract awards. The performance of existing contracts will not be affected. Entity-owned 8(a) businesses—i.e., Alaska Native Corporations, Community Development Corporations, Indian tribes and Native Hawaiian Organizations—are not impacted. Accepted 8(a)s with established social disadvantage are also not affected. But accepted 8(a)s who obtained 8(a) status using the presumption must now establish disadvantage using the SBA’s regulatory criteria.
On August 18, 2023, the SBA issued interim guidance addressing the Ultima decision. This guidance states that all individually owned 8(a) participants that relied on the rebuttable presumption of social disadvantage to meet the social disadvantage requirements of the 8(a) program must now establish their individual social disadvantage by completing a social disadvantage narrative as required by 13 C.F.R. § 124.103(c). The SBA defines, at 13 CFR § 124.103, socially disadvantaged individuals as those who have faced racial or ethnic prejudice, cultural bias or other similar forms of discrimination within American society due to their identity as members of certain groups. Notably, the social disadvantage must be beyond the individual’s control and stem from circumstances that they could not reasonably influence.
The SBA’s regulations require that business owners demonstrate individual social disadvantage by a preponderance of the evidence. The regulations instruct that evidence should include specific elements, such as an objective distinguishing feature (e.g., race, ethnic origin, gender, disability), chronic and substantial disadvantage, negative impact on entry or advancement in the business world and a connection between discriminatory conduct and negative outcomes. The regulations also outline examples and scenarios to illustrate the application of these criteria and provide a framework for socially disadvantaged group inclusion. Additionally, the SBA’s interim guidance from August 18 included a link to the SBA’s Guide for Writing a Social Disadvantage Narrative, which provides further instruction for how companies can construct the required narrative.
Given the likelihood that the SBA will continue to take actions in response to the injunction while an appeal of the district court’s decision is taken by the Government, participants in the 8(a) program should expect additional developments. We plan to report on any such developments in future client alerts.
[1] 15 U.S.C. § 637(a)(4)(A); 13 C.F.R. § 124.105.
[2] 13 C.F.R. § 124.103.
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