On September 9, 2016, the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) issued a split decision holding that § 8(a) of the Small Business Act does not violate the Equal Protection Clause of the U.S. Constitution. Rothe Development, Inc. v. Department of Defense, No. 15-5176. Although the Court's decision comes as welcome news to participants in SBA's 8(a) Business Development program, the Court's rationale raises new questions. In its defense of § 8(a) against constitutional attack, the Court adopted an interpretation of the statute that may expose SBA's regulatory presumption that members of certain groups are "socially disadvantaged" to legal uncertainty. It also remains to be seen whether the U.S. Supreme Court takes an interest in this case after a 20-year hiatus from reviewing race-based preferences in public procurement.
Summary of the Decision
In the lower court proceeding, the District Court, SBA, and Rothe Development had unanimously agreed that the statutory definition of "socially disadvantaged individuals" at 15 U.S.C. § 637(a)(5) was subject to heightened "strict scrutiny" review under the Equal Protection Clause because the statute expressed a clear racial classification. The District Court upheld the constitutionality of § 8(a) in 2015 after concluding that the statute satisfied the legal standard for "strict scrutiny" – i.e., it was narrowly tailored to achieve an established compelling government interest. Observes expected that the primary issue on appeal would be whether the District Court's "strict scrutiny" analysis would pass constitutional muster at the D.C. Circuit.
The D.C. Circuit took an alternate and surprising path to affirming the District Court's judgment. The D.C. Circuit held that § 8(a) was subject only to the lesser (and easier to satisfy) "rational basis" constitutional review. The Court reached this conclusion because it reasoned that the statute's definition of "socially disadvantaged individuals" did not contain a racial classification. This definition states that socially disadvantaged individuals are "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) (emphasis added). Relying on the italicized clause and the legislative history of the Small Business Act, the D.C. Circuit found that Congress clearly intended to require proof of individual suffering of racial or ethnic prejudice rather than establishing a presumption of social disadvantage by mere membership in a minority group:
[The statutory definition of "socially disadvantaged individuals"] speaks of individual victims of discrimination. On its face, section 637(a)(5) envisions an individual-based approach that focuses on experience rather than on a group characteristic. . . . [T]his is not a provision in which "the race, not the person dictates the category."
The D.C. Court then took great care to explain that Congress did "not create a presumption that a member of a particular racial or ethnic group is necessarily socially disadvantaged, nor that a white person is not." Although Congress made "findings" that certain racial and ethnic groups were socially disadvantaged, the Court noted that these findings were merely in the preamble to § 8(a) (at 15 U.S.C. § 631(f)), which is not an "operative part of the statute." The Court also analyzed the legislative history of the 8(a) Program and found that "Congress affirmatively chose to jettison an express racial presumption that appeared in an earlier version of the bill." Significantly, relying on its "duty" to avoid a statutory interpretation that could create a constitutional issue, the D.C. Circuit held that 15 U.S.C. § 637(a)(5) will not be interpreted as authorizing SBA to employ group-based presumptions to determine who qualifies as a "socially disadvantaged individual:"
As we read the statute, it neither contains any racial classification nor mandates the SBA to employ one. Even if the statute could be read to permit the [SBA] to use a racial presumption, the canon of constitutional avoidance directs that we not construe the statute in a manner that renders it vulnerable to constitutional challenge on that ground.
Because it concluded that, on its face, § 8(a) lacks any racial classification triggering "strict scrutiny," the D.C. Circuit declined to review the District Court's analysis under this heightened standard. Instead, the D.C. Circuit conducted a "rational basis" review, which the statute comfortably passed. In a mere two paragraphs of a 28-page decision, the Court quickly explained that the statute "bears a rational relation to some legitimate end" – aiming to "remedy the effects of prejudice and bias that impede business formation and development and suppress fair competition for government contracts."
Rothe is not the only decision addressing the constitutionality of the 8(a) Program or the underlying statute. In 2012, the U.S. District Court for the District of Columbia ruled that section 8(a) is generally constitutional on its face but not "as applied" to contracts for military simulation and training. DynaLantic Corp. v. U.S. Department of Defense, No. 95-2301 (Aug. 15, 2012). Read our blog on the DynaLantic case.
DynaLantic appealed the District Court's ruling regarding on the constitutionality of the program as a whole. In March of 2014, while that appeal was pending, the parties agreed to a settlement pursuant to which the Department of Defense issued class deviation to the Defense FAR Supplement (DFARS) prohibiting contracting officers from using the 8(a) program for contracts for military simulation and training. See DFARS 219.803 (DOD Class Deviation 2014-O0007).
The D.C. Circuit's decision is as significant for the issues it left unanswered as for those it decided. In its effort to save the statute from a "strict scrutiny" review, the Court may have invited new challenges to the legality of SBA's regulations implementing the 8(a) Program. SBA's regulations establish a "rebuttable presumption" that individuals are socially disadvantaged if they are members of the following racial and ethnic groups: (1) Black Americans; (2) Hispanic Americans; (3) Native Americans; (4) Asian Pacific Americans; and (5) Subcontinent Asian Americans. 13 C.F.R. § 124.103(b)(1). For individuals who are members of these groups, there is no requirement to present evidence of individual social disadvantage and no case-by-case review by SBA. The D.C. Circuit noted the issue of whether SBA's presumption of social disadvantage for these five groups might be contrary to the statutory language of § 8(a) and on shaky constitutional ground. But the Court declined to address the question:
In contrast to the statute, the SBA's regulation implementing the 8(a) program does contain a racial classification in the form of a presumption that an individual who is a member of one of five designated racial groups (and within them, 37 subgroups) is socially disadvantaged. See 13 C.F.R. § 124.103(b). This case does not permit us to decide whether the race-based regulatory presumption is constitutionally sound, for Rothe has elected to challenge only the statute.
(Emphasis added.) The D.C. Circuit's observation that SBA's regulations are "in contrast to the statute" may encourage future challenges regarding whether SBA's regulatory presumptions at § 124.103(b) survive review under the Administrative Procedure Act as well as the Equal Protection Clause. Even without the regulatory presumptions, the remainder of SBA's regulations may still be valid and workable, as 13 C.F.R. § 124.103(c) sets forth the procedure for the kind of "case-by-case" review of "evidence" of individual social disadvantage favored by the D.C. Circuit. The legal bar might be set higher, but many applicants would likely still be able to establish individual social disadvantage by a preponderance of the evidence.
In addition, the D.C. Circuit's opinion features a heated battle between the majority (Judges Pillard and Griffith) and the dissent (Judge Henderson). The two opinions offer a fascinating duel over the legislative history of § 8(a) in 1978 (when Congress seemed to back away from creating any group-based presumptions of social disadvantage) and in 1980 (when Congress amended the statute and seemed to acknowledge that it had intended to create such group-based presumptions all along). Each opinion is well researched and well crafted (and make for enjoyable reading). Both the constitutionality of § 8(a) and the legality of SBA's implementing regulation may turn on the resolution of this question.
One must wonder whether this will be the last word on this case. The Supreme Court has not weighed in on the constitutionality of affirmative action preferences in government contracting since Adarand Constructors, Inc. v. Peña, 515 U.S. 200 (1995), more than twenty years ago. Last term, the Supreme Court applied the "strict scrutiny" standard to the consideration of race and ethnicity in college admissions in Fisher v. University of Texas at Austin, 579 U.S. ___ (2016). It may be tempted to address the D.C. Circuit's attempt to skirt "strict scrutiny" review of the 8(a) Program by resorting to clever statutory interpretation. Also, contractors shut out of 8(a) set-aside procurements may be tempted to challenge the use of the 8(a) Program for particular types of contracts, as in DynaLantic.
The High Court also demonstrated a rarely shown interest in procurement law in its last term by addressing the statutory "rule of two" set-aside preference for contracts that can be performed by veteran-owned small businesses in Kingdomware Technologies, Inc. v. United States, 579 U.S. ___ (2016). (Its holding that orders placed under the Federal Supply Schedule Program are "contracts" for the purposes of small business set-aside statutes raises interesting questions about the applicability of other small business preference programs to the GSA Schedules.) When the High Court receives the anticipated cert petition regarding the Rothe Development case, perhaps it will be unable to resist the chance to address the intersection of the Equal Protection Clause and public procurement in 2017.