Notably, the District Court did not hold that the 8(a) program as a whole is unconstitutional or that sole source or competitive 8(a) set aside contracts are not permissible. It only held that the SBA is prohibited from applying its current rebuttable presumption of social disadvantage. As such, Ultima’s ruling should have limited direct effect on Native Corporation and Tribally-owned entities who are applying for entry into the 8(a) program because they do not rely on any presumption of social disadvantage for entry into the 8(a) program. They are deemed, by statute, to be socially disadvantaged (15 U.S.C. § 637(a)(4)), and that classification is a political (Morton v. Mancari, 417 U.S. 535 (1974)), and not racial, classification.
However, there is a risk that approach could change.
For example, in its recent Brackeen decision, the United States Supreme Court acknowledged that one of the petitioners was bringing a due process challenge to Indian Child Welfare Act (ICWA) on the basis that its tribal placement preference was unconstitutional racial discrimination. The Supreme Court did not decide the equal protection challenge to ICWA, finding that the petitioners lacked standing to assert that challenge. Instead, the Supreme Court deferred to an equal protection challenge the Brackeens (one of the petitioners) are pursuing in Texas state court. This state court action, or other state court actions, bear watching in the future because there are four justices who may be sympathetic to an equal protection challenge to ICWA. Justice Barrett, writing for the majority, specifically identified that state court case as a viable avenue to raise an equal protection challenge to ICWA. Justice Kavanaugh wrote a concurrence explicitly raising his concerns that ICWA’s placement preference raised equal protection issues. And Justice Alito and Justice Thomas would find ICWA unconstitutional in almost its entirety. As such, there remains the possibility of a Texas state court, or a different state court case, finding ICWA unconstitutional on equal protection claims, with that determination potentially being brought back to the Supreme Court for decision, with four out of the nine justices having indicated some support for that type of challenge.
If that racial discrimination claim finds its way back to the Supreme Court, it could be the basis for the Supreme Court to find that Congress’s classifications of Native Americans and Alaska Natives are a racial, and not political, classification. If that occurred, Ultima’s rationale may apply with equal force to Native Corporations and Tribes’ deemed social disadvantage, and therefore affect their ability to participate in the 8(a) program. As such, continued monitoring of Ultima is appropriate for Native Corporations and Tribes.
Below is a more in-depth summary of the District Court’s decision.
Discussion
Ultima is a challenge brought by federal contractor who was the incumbent for work that was moved to the 8(a) program. Ultima is not an 8(a) contractor and is owned by a white woman. Ultima brought a challenge arguing the 8(a) program’s use of a rebuttable presumption of social disadvantage for certain groups discriminated on the basis of race.
8(a) Program and Rebuttable Presumption of Social Disadvantage
Section 8(a) of the Small Business Act grants the SBA the authority to acquire procurement contracts from other government agencies and to award or arrange for performance of those contracts by small businesses “whenever [Defendant SBA] determines such action is necessary[.]” 15 U.S.C. § 637(a)(1). Congress directed the SBA “to arrange for the performance of such procurement contracts by negotiating or otherwise letting subcontracts to socially and economically disadvantaged small business concerns[.]” 15 U.S.C. § 637(a)(1)(B).
Congress defined a “socially and economically disadvantaged small business concern” as a business at least 51% owned by a socially and economically disadvantaged individual. 15 U.S.C. § 637(a)(4)(A). Congress further defined “socially disadvantaged individuals” as “those who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities.” 15 U.S.C. § 637(a)(5).
The SBA’s regulations provide that individuals can establish social disadvantage by presenting evidence of one objective distinguishing feature, such as race or ethnic origin, which has contributed to social disadvantage. 13 C.F.R. § 124.103(c)(2)(i). An individual’s social disadvantage must be rooted in treatment he experienced in American society and that disadvantage must be chronic and substantial, not fleeting or insignificant. 13 C.F.R. § 124.103(c)(2)(ii)–(iii). The social disadvantage must have negatively impacted an individual’s entry into, or advancement in, the business world. 13 C.F.R. § 124.103(c)(2)(iv).
The SBA also applies a rebuttable presumption of social disadvantage to individuals of certain minority groups applying to the 8(a) program. 13 C.F.R. § 124.103(b)(1). The rebuttable presumption treats certain minority groups as socially disadvantaged, and it applies to Black Americans, Hispanic Americans, Native Americans, Asian Pacific Americans, Subcontinent Asian Americans, “and members of other groups designated from time to time by [Defendant] SBA.” Individuals who qualify for the rebuttable presumption do not have to submit evidence of social disadvantage. 13 C.F.R. § 124.103(b)(1). While the regulations state that the rebuttable presumption “may be overcome with credible evidence to the contrary,” the SBA does not have a formal process for submitting evidence that could overcome the rebuttable presumption.
The District Court found that the SBA has not added a group to the list of those entitled to the rebuttable presumption since 1999, and has never removed a group from that list for no longer being adversely affected by the present effects of discrimination.
Ultima’s Arguments
SBA’s Authority to Adopt a Rebuttable Presumption
The District Court first rejected Ultima’s argument that Congress did not give the SBA the authority to adopt a rebuttable presumption for purposes of determining social disadvantage. The District Court found that Congress gave the SBA the authority to determine eligibility:
Congress directed Defendant SBA to award government contracts to Small Disadvantaged Business (SDBs) and provided that “[a]ll determinations made pursuant to [§ 637(a)(5)] with respect to whether a group has been subjected to prejudice or bias shall be made by [Defendant SBA].” 15 U.S.C. § 637(a)(8). Thus, Congress provided Defendant SBA with the authority to carry out its goal of awarding government contracts to SDBs. Whether in carrying out that goal Defendants violated Ultima’s equal protection rights is a separate question from whether Defendants had any authority to act in the first instance.
…
Here, 15 U.S.C. § 637(a)(8) expressly grants authority to Defendant SBA to determine “whether a group has been subjected to prejudice or bias[.]” 15 U.S.C. § 637(a)(8). Congress authorized Defendant SBA to determine which groups faced prejudice or bias. See id. Although Ultima is correct that Congress did not mandate that Defendant SBA use a race-based rebuttable presumption, it did contemplate that Defendant SBA would identify group characteristics and accompanying forms of bias that would be considered when evaluating claims of social disadvantage. See id. Congress’s grant of authority to Defendant SBA undercuts Ultima’s argument to the contrary.
…
Again, the Court agrees that Congress did not mandate the use of a rebuttable presumption in § 637. Instead, Congress generally granted Defendant SBA the ability to make “determinations . . . with respect to whether a group [had] been subjected to prejudice or bias[.]” 15 U.S.C. § 637(a)(8). Congress’s decision not to mandate a specific method by which Defendant SBA had to make those “determinations” does not show that Defendant SBA was precluded from using a rebuttable presumption.
Application of Strict Scrutiny to the Rebuttable Presumption
Ultima also argues that the SBA’s rebuttable presumption that certain groups are socially disadvantaged does not survive strict scrutiny and violates Ultima’s Fifth Amendment right to equal protection. The District Court found that the rebuttable presumption did not pass strict scrutiny.
Compelling Government Interest
The first prong of the strict scrutiny test is whether the racial classification furthers a compelling government interest. The District Court framed this test as requiring the SBA to show that the presumption of social disadvantage is addressing: (i) specific instances of past discrimination, (ii) disparities caused by intentional discrimination, and (iii) discrimination in which the federal government played an active role. The District Court found that the SBA had not met any of these elements of proof.
The District Court found that the SBA had failed to show a compelling government interest because the SBA did not identify a specific instance of discrimination that they were seeking to address and “effort to alleviate the effects of societal discrimination is not a compelling interest”:
Here, Defendants’ evidence includes expert reports and agency studies regarding disparities that Minority Business Enterprises (MBEs) face nationally. Some of those studies are broken down by industry and include national statistics for the industries in which Ultima operates. But Defendants do not identify a specific instance of discrimination which they seek to address with the use of the rebuttable presumption. Defendants instead rely on the disparities faced by MBEs nationally as sufficient to justify the use of a presumption that certain minorities are socially disadvantaged. “[A]n effort to alleviate the effects of societal discrimination is not a compelling interest,” and Defendants’ reliance on national statistics shows societal discrimination rather than a specific instance.
The District Court also found that the SBA had failed to show instances of intentional discrimination that needs to be addressed:
Here, Defendants primarily offer evidence of national disparities across different industries. They do not offer further evidence to show that those disparities are tied to specific actions, decisions, or programs that would support an inference of intentional discrimination that the use of the rebuttable presumption allegedly addresses…. Defendants cannot affirmatively link those disparities to intentional discrimination because they also cannot eliminate all variables that could account for the disparities. That the Sixth Circuit’s precedents create a high bar to justify the use of racially conscious programs does not relieve Defendants from meeting that burden.
Finally, the District Court found that the SBA failed to show the government participated in the discrimination that the 8(a) program is designed to address:
Although the Court does not doubt the persistence of racial barriers to the formation and success of MBEs, Defendants’ evidence does not show that the government was a passive participant in such discrimination in the relevant industries in which Ultima operates. As evidence of passive participation, Defendants note that Congress found MBEs lacked access to “capital, bonding, and business opportunities” because of discrimination. Defendants further note that Congress found that MBEs faced “outright blatant discrimination directed at disadvantaged and minority business people by majority companies, financial institutions, and government at every level.” Those examples, however, relate broadly to the federal government’s actions in different areas of the national economy. They do not show that the federal government allowed discrimination to occur in the industries relevant to Ultima. Because the Court must determine whether the use of racial classifications is supported with precise evidence, examples of the federal government’s passive participation in areas other than the relevant industries do not support Defendants’ use of the rebuttable presumption here.
The District Court specifically rejected the SBA’s argument that the 8(a) program is to remedy the effects of past racial discrimination in federal contracting:
Defendants assert that their use of the rebuttable presumption in the 8(a) program is to remedy the effects of past racial discrimination in federal contracting. But Defendant USDA admits it does not maintain goals for the 8(a) program. And Defendant SBA admits that it does not require agencies to have goals for the 8(a) program. Defendants also do not examine whether any racial group is underrepresented in a particular industry relevant to a specific contract in the 8(a) program. Without stated goals for the 8(a) program or an understanding of whether certain minorities are underrepresented in a particular industry, Defendants cannot measure the utility of the rebuttable presumption in remedying the effects of past racial discrimination. In such circumstances, Defendants’ use of the rebuttable presumption “cannot be subjected to meaningful judicial review.” The lack of any stated goals for Defendants’ continued use of the rebuttable presumption does not support Defendants’ stated interest in “remediating specific, identified instances of past discrimination[.]” If the rebuttable presumption were a tool to remediate specific instances of past discrimination, Defendants should be able to tie the use of that presumption to a goal within the 8(a) program.
Accordingly, the District Court found that “Defendants have failed to show a compelling interest for their use of the rebuttable presumption as applied to Ultima.”
Narrowly Tailored
Noting that “[e]ven in the limited circumstance when drawing racial distinctions is permissible to further a compelling state interest…[t]he means chosen to accomplish the [government’s] asserted purpose must be specifically and narrowly framed to accomplish that purpose,” the District Court found that the SBA’s presumptions of social disadvantage was not narrowly tailored.
The District Court identified several factors to consider in determining if the presumption of social disadvantage is narrowly tailored: “the necessity for the race-based relief, the efficacy of alternative remedies, the flexibility and duration of the relief, the relationship of the numerical goals to the relevant labor market, and the impact of the relief on the rights of third parties.”
Flexibility and Duration of Relief
The District Court found that the presumption of social disadvantage was not flexible because individuals not subject to the presumption had to go through twice the effort to obtain entry to the 8(a) program:
Here, certain minority groups receive a presumption that others do not. Although that presumption technically can be overcome, the Court struggles to see how that process would work in practice. Indeed, Klein, an employee of Defendant SBA, testified that “[t]here’s no process for a third party to question someone’s social disadvantage as part of the application process.” As the Sixth Circuit in Vitolo noted, “[because] proving someone else has never experienced racial or ethnic discrimination is virtually impossible, this ‘presumption’ is dispositive.” Vitolo, 999 F.3d at 363 (emphasis in original). Individuals who do not receive the presumption must show both economic disadvantage and discrimination that have negatively impacted their advancement in the business world and caused them to suffer chronic and substantial social disadvantage. In effect, individuals who do not receive the presumption must put forth double the effort to qualify for the 8(a) program.
Citing to the recent affirmative action decision by the United States Supreme Court, the District Court also found it relevant that the 8(a) program did not have a termination date:
Defendants concede that “the 8(a) program has no termination date,” necessarily meaning there is no temporal limit on the use of the rebuttable presumption. Such a boundless use of a racial classification exceeds the concept of narrow tailoring as explained by Sixth Circuit and Supreme Court precedents. Although Defendants note that participation in the 8(a) program itself is limited to nine years, that limit does not show that the use of the rebuttable presumption is similarly constrained. Defendants conceivably could use the rebuttable presumption for as long as the 8(a) program itself is in place, regardless of how many program participants have timed out. “In short, there is no reason to believe that [Defendants] will—even acting in good faith—comply with the Equal Protection Clause any time soon.” Students for Fair Admissions, Inc., 143 S. Ct. at 2173.
Whether the 8(a) Program Is Necessary
In evaluating whether the presumption of social disadvantage is narrowly tailored, the District Court considered the “specific remedial objectives for the 8(a) program:”
The lack of specific remedial objectives for the use of the rebuttable presumption presents a double-edged sword for Defendants. On one hand, the lack of a specific objective provides Defendants with an amount of flexibility. As Defendants assert, “that every person in the designated group gets the benefit of the presumption, absent credible evidence to the contrary, is the entire point.” On the other hand, the lack of a specific objective shows that Defendants are not using the rebuttable presumption in a narrow or precise manner. And the Sixth Circuit has held that Defendants must present “the most exact connection between justification and classification.” Michigan Road Builders Ass’n, Inc., 834 F.2d at 588. Here, Defendants admit that they do not have any specific objectives linked to their use of the rebuttable presumption, and such unbridled discretion counsels against a racial classification being narrowly tailored. See id.
Whether the 8(a) Program Is Both Over and Underinclusive
The District Court also found the presumption of social disadvantage to not be narrowly tailored because it is both over and underinclusive:
Defendant SBA determines which groups receive the rebuttable presumption of social disadvantage. Some of those groups match the groups listed in the statute enacting the 8(a) program. But Defendant SBA has added more groups since that time that appear underinclusive when compared with groups that do not receive the rebuttable presumption. For example, Defendant SBA includes “Subcontinent Asian Americans” while excluding individuals from Central Asian nations, such as Mongolia, Afghanistan, and Uzbekistan. Defendant SBA also does not include Arab Americans in its list of individuals entitled to the rebuttable presumption. The Court does not doubt that Central Asian Americans and Arab Americans have faced significant discrimination in a number of areas, including in business formation and development. Those individuals, however, are not considered presumptively socially disadvantaged. And as Ultima notes, Defendant SBA does not consider other groups, such as Hasidic Jews who have faced similarly appalling discrimination, eligible for the rebuttable presumption of social disadvantage. Defendants arbitrary line drawing for who qualifies for the rebuttable presumption shows that the “categories are themselves imprecise in many ways.” Students for Fair Admissions, Inc., 143 S. Ct. at 2167. Thus, the determination of which groups of Americans are presumptively disadvantaged compared with others necessarily leads to such a determination being underinclusive because certain groups that could qualify will be left out of the presumption.
Conversely, the rebuttable presumption sweeps broadly by including anyone from the specified minority groups, regardless of the industry in which they operate. Defendants respond that there is no authority requiring them to analyze whether MBEs are underutilized in specific industries or sectors. They further argue that they have presented evidence in the administrative and technical support services industries, which are the only industries at issue here. But Defendant SBA is not making specific determinations as to whether certain groups in certain industries have faced discrimination. It instead applies Congress’s nationwide findings to all members of the designated minority groups. Such an application of the presumption proves overinclusive by failing to consider the individual applicant to the 8(a) program and the industries in which they operate.
Race-Neutral Alternatives to the Rebuttable Presumption
The District Court also found that the SBA has not considered race-neutral alternatives to the presumption of social disadvantage after Supreme Court decisions calling into question certain racial classifications of government programs:
Up until 1986, Defendant SBA reviewed eligibility for participation in the 8(a) program on a case-by-case basis. After 1986, Defendant SBA implemented the rebuttable presumption of social disadvantage for certain minority groups as part of its review of applications to the 8(a) program. Only three years later, the Supreme Court clarified the constitutionality of racially conscious programs—like the 8(a) program with the rebuttable presumption—in City of Richmond v. J.A. Croson Co., when it determined that government actors could use racial classifications only if the classifications survived strict scrutiny. And the Supreme Court again recently reaffirmed that “[a]ny exception to the Constitution’s demand for equal protection must survive a daunting two-step examination known in our cases as ‘strict scrutiny.’” Students for Fair Admissions, Inc., 143 S. Ct. at 2162 (emphasis added). Defendant SBA has not revisited the use of the rebuttable presumption since 1986 and insists that the presumption remains workable under the Supreme Court’s precedents Because of Defendant SBA’s failure to review race-neutral alternatives in the wake of the Supreme Court’s precedents, the Court cannot conclude that “no workable race-neutral alternative would achieve the compelling interest.” Vitolo, 999 F.3d at 362 (internal quotations omitted).
Whether the Rebuttable Presumption Affects Third Parties
Finally, the District Court concluded that SBA has failed to consider the effect of the rebuttable presumption on parties like Ultima:
Defendants’ assertion that the rebuttable presumption presents only a slight burden because a minor amount of all national federal contracting dollars is eligible for small businesses offers cold comfort. Ultima operates within a specific set of industries and the Mississippi contract, as well as others like it, represent a substantial amount of revenue. National statistics do not lessen the burden that the rebuttable presumption places on Ultima. Defendants have failed to show that the use of the rebuttable presumption in the 8(a) program is narrowly tailored.
The District Court’s Ruling
The District Court ultimately concluded, and held, that:
Defendants’ use of the rebuttable presumption violates Ultima’s Fifth Amendment right to equal protection of the law. It is ORDERED that Defendants are ENJOINED from using the rebuttable presumption of social disadvantage in administering Defendant SBA’s 8(a) program. The Court reserves ruling on any further remedy subject to a hearing on that issue.
The District Court also found that a broad injunction applicable to the SBA as a whole, as opposed to just Ultima, was appropriate because enjoining the SBA from using the rebuttable presumption was necessary to “resolve a claim”:
Although the Court construed Ultima’s challenge as an as-applied challenge, “the distinction between facial and as-applied challenges is not so well defined that it has some automatic effect.” Thus, the Court may enjoin Defendants from using the rebuttable presumption because that remedy is “necessary to resolve a claim[.]”
