A federal court has ruled that the section 8(a) of the Small Business Act (SBA) – the statutory basis for the so-called “8(a) program” administered by the U.S. Small Business Administration (“SBA”) – 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, Civil Action No. 95-2301 (Aug. 15, 2012).  The decision could affect the government’s ability to award 8(a) contracts on a sole source or competitive set-aside basis.

The DynaLantic case has been pending since 1995, when DynaLantic filed suit in the U.S. District Court for the District of Columbia challenging the Navy’s decision to procure a contract for the development of a helicopter aircrew flight simulator under the 8(a) program.  Even though the Navy canceled the procurement, the court ruled that DynaLantic’s suit still presented a “live controversy” because the Department of Defense (“DOD”) continues to participate in the 8(a) program.  After years of discovery and intervening appeals, DynaLantic’s suit morphed into a constitutional challenge to the SBA 8(a) program as a whole.

The Due Process clause of the Fifth Amendment to the U.S. Constitution guarantees individuals and businesses the right to equal protection under the law without regard to race, color or nationality.  Government programs that classify individuals on the basis of their race, such as the SBA 8(a) program, are constitutional only if they are “narrowly tailored measures that further compelling governmental interests.”  DynaLantic contended that the 8(a) program does not pass this standard.

In a Memorandum Opinion issued on August 15, 2012, the district court held that the 8(a) program is not unconstitutional “on its face” because, in authorizing the program, Congress was presented with evidence that certain minority groups suffer from discrimination.  Most of this evidence was in the form of “disparity studies” that purport to show the disparity between the number of minority-owned businesses in a variety of industries and their actual success rates in winning government contracts.  For example, recent studies showed that minority-owned business continue to receive a relatively small percentage of the total overall federal prime contract dollars.

Significantly, however, the court held that the government has no such disparity studies or other evidence to support the setting aside of contracts in military simulation and training industry for 8(a) businesses.  According to the court, the government must have industry-specific evidence for the use of the 8(a) program in a particular type of procurement.  Thus, the court issued an injunction preventing SBA and DOD from awarding procurements for military simulators under the 8(a) program “without first articulating a strong basis in evidence for doing so.”

The DynaLantic decision is the latest in a string of federal court decisions addressing the constitutionality of race-based government contracting programs.  In 2008, an appellate court struck down DOD's Small Disadvantaged Business (“SDB”) Participation Program, which authorized contracting officers to apply up to a ten percent price evaluation preference to afford SDBs a competitive price advantage when competing in an unrestricted, full-and-open competition.  The court ruled that that the government did not have sufficient evidence of "pervasive, nationwide racial discrimination" by DOD to justify the SDB program.  See Rothe Dev. Corp. v. Department of Defense, 545 F.3d 1023 (Fed. Cir. 2008).  Thereafter, the government revised subpart 19.12 of the Federal Acquisition Regulation was amended to eliminate all references to this program.  Importantly, however, the Rothe case did not address the constitutionality of section 8(a) or any other provision of the Small Business Act.

In 2005, another appellate court ruled that the U.S. Department of Transportation's Disadvantaged Business Enterprise (“DBE”) program was constitutional on its face, but its implementation by state transportation agencies requires evidence of identified discrimination in the specific state transportation contracting industry.  See Western States Paving Co., Inc. v. United States, 407 F.3d 983 (9th Cir. 2005).  The DBE program purports to enhance opportunities for socially and economically disadvantaged business enterprises to participate in federally-aided highway and transit programs.

Because DynaLantic squarely addresses the constitutionality of parts of the Small Business Act, it could open the door to lawsuits challenging the use of the 8(a) program in other industries.  The Small Business Act is the sole statutory basis for a variety of procurement tools used by government agencies to enhance participation by 8(a) businesses and SDBs in federal government prime and subcontracts.  These include(i) sole source prime contract awards, (ii) competitions restricted or “set aside” for 8(a) businesses, (iii) evaluation credits for the degree of SDB participation in non-set aside procurements, and (iv) SDB subcontracting goals imposed on large business.