When the Supreme Court ruled against race-based admissions at Harvard University, it opened the door to preference programs across the board. Recently a federal district court in Tennessee forced the Small Business Administration to suspend applications from small businesses to join the 8(a) program for disadvantaged companies. For what this may mean, Federal Drive with Tom Temin spoke with Haynes Boone procurement attorney Zach Prince.
Zach Prince Well, that’s a great question. Folks who are familiar with the 8(a) program know that to apply and be accepted to the program somebody has to demonstrate the business has to demonstrate that it’s owned and controlled by one or more socially and economically disadvantaged individuals. And those terms are defined carefully in the SBA regulations. But at least for social disadvantage, there is a presumption, a rebuttable presumption, that the SBA applies to members of certain designated groups Black Americans, Hispanic Americans, Native Americans, and certain other designated groups. There hasn’t been an update to this list since 1999. They’ve never taken a group off the list. I’m bringing these issues up because the court points these out in its decision in this ultimate case, which let me turn right to. In Ultima, this was a small business in Tennessee owned by a white woman who had a variety of IDIQ contracts with the Department of Agriculture. Slowly, over time, the business noticed that many of their major contracts were being set aside into the 8(a) program that was significantly disadvantaging them from being able to compete. They never did apply to the 8(a) program, which the court did not seem to put any emphasis on. But they believe that because of the rebuttable presumption, they would never have been accepted anyway. So they filed suit. This was way back in 2020 on the basis of a violation, asserted violation of the equal protection clause of the Constitution.
Tom Temin They filed suit several years before the Supreme Court ruled in Harvard.
Zach Prince They did. And the Harvard decision plays into this decision a bit. But frankly, the court focused a lot more on recent Sixth Circuit precedent rather than the Supreme Court decision. They cited it once or twice, but this is really a trend anyway, against the use of, let’s say, broad racial factors for preferences. It has to be really tailored if you want to survive scrutiny these days.
Tom Temin Well, tell us more about the Sixth Circuit then. What were they saying?
Zach Prince So the Sixth Circuit, arguably the Supreme Court is going to be roughly the same. There is a Sixth Circuit case that came out during the COVID era. Really, It was about yesterday’s use of this rebuttable presumption anyway, because that was the way that they were allocating COVID relief funds for certain businesses that were giving preferences based on the social disadvantage characteristic. This is as a race based preference, according to the court here in Tennessee, requires narrow tailoring. The government agreed to that to be for this clear governmental benefit, and it will be subject to strict scrutiny on review. So it needs to be really carefully constructed, very clear government objective. And this, in the court’s view, went too far.
Tom Temin In other words, if you are going to claim the disadvantage because of you are a member of a group, it sounds like you also have to actually be disadvantaged and not simply a member of the group.
Zach Prince Not necessarily. There can be, in certain instances, race-based programs that are intended to remediate past biases that are carefully tailored in a way that will survive scrutiny by the court. The problem was that in the view of the court here, the 8(a) program just doesn’t cut it for a variety of reasons. The one big reason that the court focused on it essentially failed in every prong of the analysis. But there’s no careful analysis by the government, by industry of which specific groups are prejudiced and how. It’s just very generalized looking at government contracting and not looking at one industry versus another industry and only allowing contracts into the 8(a) program for particular groups based on historical issues in those industries.
Tom Temin So in the aftermath then of that ruling, the SBA, they didn’t end the 8(a) program, but they suspended applications to it. So can we infer from that that they are reviewing the structure of it? It sounds like it could require some pretty profound changes.
Zach Prince It certainly could. They didn’t necessarily need to suspend all applications at the moment. I suspect that it’s an issue of resourcing that they’re going to have to be focusing so much on what they’re going to do the program to make it survive this court’s injunction that they just couldn’t continue processing applications, but they could have continued taking applications and just not apply to rebuttable presumption. The problem is that for anybody who’s looked at these rules, if you don’t have the rebuttable presumption, you have to do quite a bit to demonstrate social disadvantage, which takes a lot of review time from the SBA. So the question is going to be first for new applicants, what this is going to look like. And then for existing program participants, what it’s going to look like. And it’s anybody’s guess. Now, current participants, this decision opens the door for facial attacks on the entire program. Many 8(a) participants benefited from the rebuttable presumption. Maybe most of them. And so application of the rebuttable presumption is unconstitutional going forward, or as applied rather than the court distinguish between a facial attack and an as applied challenge. But there’s no real distinction between the two, in practice. It should be unconstitutional, period. If the court’s decision stands up on appeal, it’s going to be hard to see how the current program survives. So does that mean that the SBA is going to need to come up with new criteria both for considering applications and for contracts and then apply that to all current program participants? Make everyone reapply? Maybe. It really might. It also raises the question about any other contractual preference based on protected class like WSBs. That will probably be a little bit easier to defend because sex based discrimination is subject to slightly lower level of scrutiny. Just that’s the constitutional decisions that have come out over the years. And one benefit the WSB program has is that there are actually goals. Agencies are told you must or are supposed to award X percent. That was something the court actually thought was important. The 8(a) program does not have the similar goals, which made the government’s point that this whole program is supposed to benefit these classes in the view of the court somewhat suspect.
Tom Temin Right. So the rebuttable presumption exists in the 8(a) program, but it doesn’t necessarily mean that all preference programs or small business contracting goals or minority business or disadvantaged business contracting goals themselves are out the window. This is narrow to 8(a) in the way the SBA has set up 8(a).
Zach Prince It is, but in theory, some of these arguments would apply to other types of programs.
Tom Temin Got it. What about, say, veteran preference in contracting, for example?
Zach Prince Veteran preferences are probably safe. It’s not subject to the same levels of scrutiny, and I think the government would have a much easier time defending it.
Tom Temin It’s hard, hard to rebut that someone is a veteran. I guess you know what others might be. You mentioned women owned small businesses. You think is is fairly safe.
Zach Prince I’m not sure if I would say it’s fairly safe. It’s slightly safer. That’s the one that really leapt to mind as potentially subject to attack in the wake of this decision. But just focusing on the 8(a) program, the SBA is going to have to do a lot of work in the coming months to figure out where they want to go. I don’t think they’re going to jettison the program, but it’s going to be a heck of a lot of work if they’re going to have to fix every current program participant and reevaluate every contract that’s been allowed into the 8(a) program.
Tom Temin And what about contracting officers that are using 8(a) as a basis to make awards, set asides and preferences? Could they be protested on the grounds? Hey, wait a minute, 8(a) is rebuttable presumption. Tennessee court said suspension going on. You can’t do that. They could entangle something in a protest on that basis. I’m guessing.
Zach Prince They could. They wouldn’t frame it as a protest because a lot of those types of decisions are technically protest proof. They would frame it as a violation of the equal protection clause, just like they did in this Tennessee case, and effectively enjoin awards to the program without actually characterizing it as a bid protest. But I think that’s exactly right. Someone is likely in the wake of this decision to do just that.
Tom Temin And they can’t take that case to the GAO that you have to go to court. So there’s a higher bar and greater expense to bringing the whole thing.
Zach Prince That’s right. And they will probably bring it to court in a jurisdiction that is going to be more skeptical of these types of programs. So, for example, Tennessee.
Tom Temin Right. Interesting. So it’s really then kind of the ball is in SBA’s court now with how it will revamp if it chooses to the 8(a) program or it could appeal.
Zach Prince I assume it will appeal. But before it gets to that, there’s going to be another hearing Aug. 31 in this case to determine the scope of the injunction. Right now, the court did grant a generalized injunction against the use of the rebuttable presumption period, even though Ultima characterized its challenge as an as applied challenge, not a facial challenge to the program. But it is very challenging conceptually to distinguish between those two concepts, which the court noted. So Aug. 31, it’s going to be hearing arguments on how it should be crafting this going forward. In the interim, the SBA is trying to figure out how to continue allowing this program.
Tom Temin So it may not be, as you say, a facial assault on the program, but if it’s only as applied still, if you take out one brick from a tall wall and it’s low in the wall, that wall could come tumbling down eventually.
Zach Prince I suspect it might. I think any current program participant should be doing some careful thinking about preparing an application as if they were coming at this anew, arguing for social disadvantage and follow the same characteristics that you would if you didn’t have the rebuttable presumption. And it is a bit onerous. But the the regulations are there. I assume that the rebuttable rebuttable presumption, at least in the short term, is not coming back and you’re going to have to come up with a way to justify your participation.