The constitutionality of small business programs has been a significant topic of debate over the past few years. The U. S. Court of Appeals for the D.C. Circuit recently upheld the constitutionality of the Small Business Administration’s 8(a) Program finding that the challenged provisions do not, on their face, classify individuals by race.
Section 8(a) of the Small Business Act authorizes the SBA to acquire procurement contracts from other government agencies and to award or arrange for performance of those contracts by small businesses whenever the agency determines such action is necessary. The current Section 8(a) Program was developed with the express purpose of helping small business owners who are socially and economically disadvantaged compete on an equal basis in the American economy. The Program provides qualifying small businesses with technological, financial, and practical assistance through preferential awards of government contracts. To receive the benefits conferred under the Program, applicants must: (1) be small businesses; (2) demonstrate their businesses’ potential to succeed; and (3) be owned by U.S. citizens of good character that are “socially and economically disadvantaged.”
The question regarding the constitutionality of the Section 8(a) Program arose in the most recent case, Rothe Development, Inc. v. U.S. Dept. of Defense et al., out of the Act’s race-conscious definition of “socially disadvantaged individuals.” In 2012, Rothe Development Corporation, a woman-owned small business, filed suit against the Department of Defense and the SBA. Rothe claimed that the statute’s definition of “socially disadvantaged” small business owners is a racial classification that violates its right to equal protection under the Due Process Clause of the Fifth Amendment. According to Rothe, the government, under the 8(a) Program, has increasingly set aside contracts for minority-owned/controlled businesses, which unfairly prevents Rothe from competing for those contracts on equal footing with minority-owned contractors.
Rothe argued that the racial classification stems from three provisions: (1) the statutory definition of socially disadvantaged individuals; (2) a government-wide goal of awarding 5 percent of federal contracts to small businesses owned by socially disadvantaged individuals; and (3) the findings section of the statute, which Rothe claimed assumes that all individuals who are members of certain groups (Black Americans, Hispanic Americans, Native Americans, Asian Pacific Americans, Native Hawaiian Organizations, and other minorities) are socially disadvantaged. The district court upheld the constitutionality of the 8(a) Program, and Rothe immediately appealed. On September 9, 2016 the U.S. Court of Appeals for the D.C. Circuit affirmed the district court’s decision.
The court held that the statute does not contain an unconstitutional racial classification for the following reasons: (1) the definition of “socially disadvantaged individuals” does not distribute burdens or benefits on the basis of individual racial classifications and that while the statute does reference specific groups, it does not do so as a floor for participation; (2) the program’s goal is not a racial classification as it refers to socially and economically disadvantaged individuals and does not define the relevant business owners by their race; and (3) that in implementing the program, the SBA requires an individualized showing of a social disadvantage. As the statute lacks a racial classification, the court applied rational basis review, under which it concluded that the statutory scheme was rationally related to the legitimate government interest of counteracting discrimination.
Judge Karen Lecraft Henderson disagreed with the majority, stating that she would hold that the challenged portions of the Small Business Act include a racial classification and therefore are subject to strict scrutiny. Judge Henderson parts from the majority’s analysis which she explained is “fundamentally flawed” because it assumes that a statute that “does not classify exclusively on the basis of race must necessarily be ‘facially race-neutral.’” In her dissenting opinion, Judge Henderson explains that the inquiry as to whether Section 8(a) is race neutral boils down to whether the Act provides members of certain racial groups an advantage in qualifying for contract preference by virtue of their race. She points out that it is membership in a class that has suffered racial/ethnic prejudice or cultural bias, not an inquiry into each applicant’s unique experience of discrimination that determines whether an individual is socially disadvantaged. She also commented on the SBA’s implementing regulations, which she interpreted as presuming that members of certain racial groups are automatically categorized as socially disadvantaged but that individuals who do not belong to any of the designated groups must establish their individual social disadvantage by a preponderance of the evidence.
Accordingly, Judge Henderson reasoned that “Section 8(a) contains a paradigmatic racial classification” because Congress has distributed a benefit to members of statutorily designated racial groups because of their membership in one of them. These designated racial groups are not required to meet the same standard in establishing their eligibility to participate in the Program that members of non-minority races must satisfy.
This is not the first lawsuit challenging the constitutionality of small business programs over the past few years, let alone the first suit filed by Rothe. Parties challenging the constitutionality of such programs have been successful in some cases. It remains to be seen whether these challenges will change the SBA’s 8(a) Program and other small business set aside programs. If Rothe had been successful in its challenge, it would have been a damaging blow to race-conscious small business programs and ultimately may have significantly affected the way government contracts are awarded.
Read the United States Court of Appeals for the D.C. Circuit’s full opinion at: https://www.cadc.uscourts.gov/internet/opinions.nsf