On June 29, 2023, the United States Supreme Court issued its historic decision in Students for Fair Admissions v. Harvard, 600 U.S. 181 (2023). This decision upended decades of precedent and held that race-conscious (affirmative action) college admissions programs violated the Equal Protection Clause of the Fourteenth Amendment. This landmark decision has emboldened attacks on Disadvantaged Business Enterprise (“DBE”) programs nationwide.
Ultima Servs. Corp. v. US Dep’t. of Agric., Case No. 2:20-CV-00041 (E.D. Tenn. July 19, 2023)
On July 19, 2023, the United States District Court for the Eastern District of Tennessee issued its decision in Ultima Servs. Corp. v. US Dep’t. of Agric., Case No. 2:20-CV-00041. There, the court held that the Small Business Administration’s (“SBA”) use of a race-based rebuttable presumption to establish social disadvantage was unconstitutional and enjoined the SBA from using that presumption in the administration of its 8(a) program.
Per the SBA’s website: “The 8(a) program is a robust nine-year program created to help firms owned and controlled by socially and economically disadvantaged individuals. Businesses that participate in the program receive training and technical assistance designed to strengthen their ability to compete effectively in the American economy.”
Whenever a statute or other government action provides burdens or benefits based on race, ethnicity, or national origin, courts employ a strict scrutiny test. The test has two parts. First, the racial classification must further a compelling government interest. Second, it must be narrowly tailored to meet that interest.
In Ultima, the SBA argued that the compelling government interest was to remedy past acts of discrimination in federal contracting. By way of proof, it offered expert reports showing “large, adverse disparities in the utilization of minority-owned businesses” across multiple industries. The court found this was not enough. Specifically, the court held that the SBA did not: (i) identify any specific instance of discrimination; (ii) did not provide evidence of any intentional discrimination; and (iii) did not identify any government participation (passive or otherwise) in the discrimination that the 8(a) program was designed to address.
The court also found that the use of this race-based presumption was not narrowly tailored. Specifically, the court found that the 8(a) program: (i) was not flexible and limited in duration; (ii) lacked a specific remedial objective (no participation goals); (iii) was both over inclusive and underinclusive; (iv) did not consider race-neutral alternatives to the presumption of social disadvantage; and (v) negatively impacted the third parties not eligible to participate.
Accordingly, it issued its nationwide injunction. In August of 2023, the SBA issued its interim guidance requiring all 8(a) participants whose program eligibility is based upon one or more individuals and who relied upon the presumption of social disadvantage to establish their individual social disadvantage by completing a social disadvantage narrative. The SBA also published a detailed guide instructing contractors how to write a social disadvantage narrative.
In September, Ultima filed for a permanent injunction and requested additional relief in September. No hearing has yet taken place.
Jeffrey Nuziard, et. al. v. Minority Bus. Dev. Agency, et. al., Case 4:23-cv-00278-P (N.D. Texas March 2, 2024)
On March 5, 2024, the United States District Court for the Northern District of Texas issued its opinion in Jeffrey Nuziard, et. al. v. Minority Business Development Agency, et. al., Case 4:23-cv-00278-P. There, the court issued a nationwide, permanent injunction enjoining the Minority Business Development Agency (“MBDA”), as well as anyone that administers its programs, from using an applicant’s race or ethnicity in determining eligibility for the MBDA program or any of its benefits. Final judgment was entered on May 2, 2024. No appeal has yet been filed.
In Nuziard, three business owners filed suit arguing that certain programs implemented by the MBDA were racially discriminatory and violated the Constitution’s Equal Protection Clause because the programs were only available to “socially or economically” disadvantaged individuals, and only certain minority groups were presumed to be socially disadvantaged.
The logic behind the decision in Nuziard tracked Ultima closely. The court utilized the same factors and analysis to find that the government failed to show either a compelling interest in presuming that certain minority groups were socially or economically disadvantaged, or that the MBDA’s race-based presumption was narrowly tailored.
Mid-America Milling Co., LLC, et al. v. US Dep’t of Transp., et al., Case No. 3:23-cv-00072 (E.D. Ky. Oct. 26, 2023)
On October 26, 2023, a similar lawsuit was filed in the United States District Court for Kentucky, Mid-America Milling Co., LLC v. Department of Transportation, Case No. 3:23-cv-00072. In Mid-America, plaintiffs challenged the federal Department of Transportation’s (“DOT”) Disadvantaged Business Enterprise program. Specifically, they argued that the DOT’s use of a rebuttable presumption to determine whether an individual was socially disadvantaged was unconstitutional racial discrimination. Plaintiffs, who were not disadvantaged, claimed they were “being forced to compete” in an unequal system that imposed race and gender-based contracting goals prioritizing DBE firms. The plaintiffs further argued that removing the rebuttable presumption of social disadvantage available to entities owned by women and certain races would render the program race and gender neutral.
No decision has yet been issued.
Ohio’s EDGE Program
Ohio’s Encouraging Diversity, Growth, and Equity (“EDGE”) program was originally created by Executive Order 2002-17T in December 2002, and was codified in July 2003. See Ohio Revised Code (“RC”) Section 122.92 through 122.925.
EDGE is not a set-aside program. Instead, it establishes DBE contracting goals for state agencies, boards and commissions in awarding contracts. The program applies to procurements of supplies and services, professional services, information technology services, and construction, architecture and engineering.
According to RC § 122.922, to participate in the EDGE program, a business must show both social and economic disadvantage. Like the statutes at issue in Ultima, Nuziard, and Mid-America, the EDGE statute contains a rebuttable presumption to establish social disadvantage. RC § 122.922(B)(3)(b)(i).
Based upon this recent trend, it seems it may only be a matter of time until the constitutionality of the EDGE program is challenged in court. Will the State of Ohio pass the strict scrutiny test by demonstrating that the race-based rebuttable presumption furthers a compelling government interest and is narrowly tailored to meet that interest?
More importantly, if a court does find that EDGE is unconstitutional, and that the race-based rebuttable presumption of social disadvantage can no longer be used, what does that really mean? Will the program be terminated? Like the 8(a) program, will EDGE simply continue without the rebuttable presumption? Or will new legislation take its place?
Other Ohio DBE statutes have been found unconstitutional in the past (see Associated Gen. Contrs. of Ohio, Inc. v. Drabik, 214 F.3d 730 (6th Cir. 2000). In response, however, lawmakers have simply passed new legislation to assist these traditionally disadvantaged businesses. So, even if this cycle continues and EDGE is held unconstitutional, either in whole or in part, we expect that Ohio’s support for programs aimed at benefitting minorities, women, and service veterans will continue.
Endnotes
“District Court Rules SBA Presumption of Social Disadvantage Is Unconstitutional,” July 25, 2023, Christopher Slotee. District Court Rules SBA Presumption of Social Disadvantage Is Unconstitutional - Schwabe.
“Encouraging Diversity, Growth & Equity,” Ohio Facilities Construction Commission. EDGE.pdf (ohio.gov).
“The Need for a Minority Contractors’ Group Continues,” Feb. 14, 2023, Rhonda Crowder. The Need for a Minority Contractors’ Group Continues | Construction Employers Association (ceacisp.org).
“U.S. District Court Bars Racial Criteria for Minority Business Development Agency Programs,” March 15, 2024, Christopher Slotee. U.S. District Court Bars Racial Criteria for Minority Business Development Agency Programs - Schwabe.
