SBA rethinks disadvantaged contracting program after federal court ruling

A federal court rules that SBA can’t automatically assume a small business is socially and economically disadvantaged, based on the owner's race, when applyin...

The Small Business Administration is putting a temporary pause on adding new applicants to its disadvantaged business program.

The U.S. District Court for the Eastern District of Tennessee ruled last month that SBA can’t automatically assume a small business is socially and economically disadvantaged, based on the owner’s race, when applying for the agency’s 8(a) business development program.

Members of the 8(a) program are eligible for set-aside federal contracts, and the Biden administration is looking to increase the flow of government contracting dollars that go to these disadvantaged small businesses.

SBA, prior to the ruling, automatically considered small businesses to be socially disadvantaged and eligible for the 8(a) program if the owner identified as a racial or ethnic minority.

Robert Tompkins, a partner at the law firm Holland & Knight and co-chair of the National Government Contracts Practice, said 8(a) participants and applicants under the court’s ruling will have to demonstrate how they individually have suffered the types of harm that would give rise to a social disadvantage.

“Any individual that is within one of those designated groups, all they had to do is say, ‘We’re part of this group,’” Tompkins said. “What the court seems to be saying is that’s too broad — just because someone is a member of one of the designated groups does not necessarily mean that they are in fact socially disadvantaged.”

SBA states on its website that it will put a hold on accepting new members into its 8(a) program until it revises the application to comply with the court’s decision. SBA didn’t immediately respond to a request for comment.

But it remains unclear what long-term impact the court’s ruling will have on SBA adding new 8(a) members — or whether it will impact the Biden administration’s goal of shifting more federal contracting dollars to these disadvantaged businesses.

The ruling stems from a lawsuit filed by Ultima Services Corporation, a woman-owned small business, against the Agriculture Department.

Ultima claimed USDA engaged in race-based discrimination when it placed Ultima’s previous USDA contract into the 8(a) program. Because Ultima was not an 8(a) certified small business, it was no longer eligible to compete for that contract.

Bret Wacker, managing director at Clark Hill Public Strategies, said Ultima’s owner, Celeste Bennett, argued that USDA’s decision put her company at a disadvantage, compared to its 8(a) competitors.

“Her complaint was, ‘Why am I at a disadvantage? Why do I have to go through all this work, to get the advantage of the 8(a) program, and someone who just happens to be a different race than me gets the advantage?’ That’s the dispute,” Wacker said.

District Court Judge Clifton Corker, in his July 19 ruling, pointed to a recent Supreme Court ruling on affirmative action in college admissions as evidence that racially conscious government programs must have a “‘logical endpoint.’”

It remains unclear what the district court’s ruling will mean for the long-term future of the 8(a) program.

Antonio Franco, managing partner at the law firm Piliero Mazza, said the ruling may ultimately open SBA’s 8(a) program to a broader pool of contractors.

“It will essentially mean that individuals that are applying for the program, whether they’re a member of these presumed groups or not, are going to have to establish, through a preponderance of the evidence, why they would be deemed socially disadvantaged. And just because you’re a member of one of these groups, I don’t think it’s going to be allowing you to just check the box,” Franco said.

Wacker said the district court’s ruling will probably put a “slowdown” on SBA bringing new applicants into the 8(a) program.

“Any time you put another obligation in front of the agency to do more work … then it necessarily slows the process down a little bit. At the end of the day, will it be much ado about nothing? It potentially could be,” he said.

SBA already has a mechanism in place for small business owners to demonstrate their social disadvantage, if they weren’t automatically considered based on their race or veteran status.

Tompkins said applicants, in this case, would have to demonstrate “longstanding and pervasive” prejudice based on their identity, and how those discriminatory actions impacted their business’ ability to compete.

“It’s not as if is uncharted territory here. There is specific direction about how one would go about proving that individualized social disadvantage laid out in SBA’s regulations, and people have been able to do that successfully,” Tompkins said. “It’s not a new process, but it may be new for some who have not previously been required to go through that process.”

Small businesses currently certified in the 8(a) program need to recertify every nine years, but Tompkins urged all firms currently in the program to gather evidence of their disadvantaged status, following the court’s ruling.

“I think both aspiring 8(a) applicants, as well as current 8(a) participants would be prudent to develop an individualized statement of social disadvantage, and be prepared to present that, if their status is questioned as a company,” he said.

While it remains to be seen how SBA will reshape the application process to follow the court’s order, Tompkins said these changes may have a “limiting effect” on the number of participants in the 8(a) program.

“It certainly adds a substantial requirement that has to be met. And I think by virtue of that fact, there will be some applicants who utilize the presumption of disadvantage, who ultimately won’t be able to demonstrate proof that they were, in fact, socially disadvantaged under the SBA’S rules,” he said.

More broadly, the ruling may also make it harder for the Biden administration to meet its long-term goal of shifting more federal contracting dollars to disadvantaged small businesses.

President Joe Biden announced in June 2021 a goal for 15% of all federal contracting spending to go to small, disadvantaged businesses by 2025. The current goal is 10%.

“Regardless of what they ultimately decide to do, there is an immediate chilling effect that comes with the suspension of the application process. And so, for all those reasons, I think that the administration’s goals are more difficult to attain,” Tompkins said.

The court will hold a hearing with both parties in the lawsuit later this month to discuss further or alternative remedies.

“Maybe they’re just going to have to get back to the drawing board and give this some more thought,” Franco said about SBA’s pause on new 8(a) applicants. “As well as members of Congress, if they want a program that has an element of affirmative action-type attributes.”

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