The United States Court of Appeals for the Federal Circuit issued a decision on November 4, 2008, declaring that Department of Defense (DoD) preferences for small business concerns owned and controlled by “socially and economically disadvantaged individuals” (SDBs) in 10 U.S.C. § 2323 (Section 1207) violate the United States Constitution, specifically the equal protection component of the Fifth Amendment right to due process. The Federal Circuit found that, in authorizing DoD to afford preferential treatment to SDBs on the basis of race, Congress did not have a “strong basis in evidence” upon which to conclude that DoD was a passive participant in pervasive, nationwide racial discrimination. As a result, the Court found that 10 U.S.C. § 2323 fails the “strict scrutiny” test that is applied to constitutional challenges of such race-based preferences.

Section 1207 was originally enacted in 1986. Although it has been reenacted several times since, the three most important aspects of the statute have remained unchanged. In pertinent part, Section 1207:

(1) Sets a “goal” that five percent (5%) of federal defense contracting dollars for each fiscal year be awarded to certain entities including small business concerns owned and controlled by “socially and economically disadvantaged individuals”;

(2) Incorporates the Small Business Act’s presumption that Black Americans, Asian Americans, Hispanic Americans, and Native Americans are socially disadvantaged individuals; and

(3) Provides that DoD shall give specified forms of assistance to the listed entities and may, when practicable and necessary to achieve the 5% goal, make advance payments to those entities and award contracts to them at prices up to ten percent (10%) above fair market cost.

DoD implemented the final aspect of Section 1207 by applying a price evaluation adjustment (PEA) to bids submitted by non-SDB bidders, increasing those bids by 10% before comparing them to the bids submitted by SDBs. In 1998, Congress made a significant amendment to this aspect of the statute. The amendment required DoD to suspend the PEA mechanism for an entire year after any fiscal year in which the 5% goal had been met. DoD has met the 5% goal each year since, and as a result, DoD has not included the SDB PEA mechanism in DoD prime contracts since 1999.

Rothe’s challenge to Section 1207 began in the late 1990s when the Air Force decided to consolidate a contract Rothe had with the U.S. Air Force to maintain, operate, and repair computer systems at Columbus Air Force Base with a separate contract for communication services. The Air Force issued a solicitation for competitive bids and let the contract pursuant to the Section 1207 program. Rothe, owned by a Caucasian female, bid $5.57 million. International Computer and Telecommunications (ICT), a competitor to Rothe owned by a Korean-American couple and certified as a SDB, bid $5.75 million. Although Rothe’s bid was lower than ICT’s bid, the Air Force considered Rothe’s bid to be $6.1 million—higher than ICT’s bid—because of the PEA. The Air Force therefore awarded the contract to ICT.

Rothe filed suit against DoD in November 1998, seeking both an injunction against DoD’s award of the contract to ICT and a declaratory judgment that Section 1207 is unconstitutional on its face. Originally filed in U.S. District Court in Texas, the case has followed a long, circuitous procedural path leading up to the Federal Circuit’s November 4, 2008, decision—its third opinion in this case.

Because Section 1207 incorporates an explicit racial classification—the presumption that members of certain minority groups are “socially disadvantaged” for purposes of obtaining SDB status and the benefits that flow from that status under Section 1207 itself—the Court applied the “strict scrutiny” test to the statute. Thus, to survive Rothe’s facial challenge, the Court stated that Section 1207 “must serve a compelling governmental interest and must be narrowly tailored to further that interest.” The Court further stated that, while the Government may have a compelling interest in “remedying the effects of past or present racial discrimination, . . . an effort to alleviate the effects of societal discrimination is not a compelling interest.” Therefore, before resorting to race-conscious measures, the Court found that the Government must “identify [the] discrimination [to be remedied], public or private, with some specificity,” and must have a “strong basis in evidence” upon which “to conclude that remedial action [is] necessary.”

In reversing the district court’s decision, the Federal Circuit found that the statistical and anecdotal evidence before Congress at the time it reenacted Section 1207 in 2006 did not provide a “strong basis in evidence” in which to conclude that DoD was a passive participant in pervasive, nationwide racial discrimination. Among other things, the Court found that the six state and local disparity studies relied upon by Congress were too limited in their geographic coverage and contained several methodological defects, rendering their conclusions unreliable. The Court also found that the additional statistics and anecdotal evidence cited in the Congressional Record were not sufficiently probative of nationwide discrimination against the range of minority groups afforded a presumption under Section 1207 to serve as the foundation of a “strong basis in evidence.” As a result, the Court held that Congress did not have a sufficiently “compelling interest” to support the raced-based preferences in Section 1207 and that the statute thus violates the equal protection component of the Fifth Amendment right to due process.

Notably, in concluding its compelling interest analysis, the Court left open the possibility that Congress could in the future establish a “strong basis in evidence” for the SDB preferences contained in Section 1207 with more reliable statistical and anecdotal evidence:

We stress that our holding is grounded in the particular items of evidence offered by DOD and relied on by the district court in this case, and should not be construed as stating blanket rules, for example about the reliability of disparity studies. As the Fifth Circuit has explained, there is no ‘precise mathematical formula to assess the quantum of evidence that rises to the Croson ‘strong basis in evidence’ benchmark.” Rather, ‘[t]he sufficiency of a [government’s] findings of discrimination in a local industry,’ or for that matter in a state-wide or nationwide industry, ‘must be evaluated on a case-by-case basis.’ Thus, if Congress reenacts Section 1207 again before it is set to expire in 2009—as Congress is free to do—we cannot now predict, nor do we intend to prejudge, whether any such new enactment will be supported by a ‘strong basis in evidence.’