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Update on Challenge to the Constitutionality of the SBA 8(a) Program

January 9, 2023

Overview

In Ultima Services Corporation v. U.S. Department of Agriculture et al., Case No. 2:20-CV-‎‎00041, Ultima Services Corporation filed suit in the U.S. District Court for the Eastern District of ‎Tennessee (Greenville Division) challenging the constitutionality of the Small Business ‎Administration’s 8(a) Business Development Program. The central issue in the case is whether ‎the 8(a) Program, and in particular the 8(a) Program’s presumption that certain small business ‎owners are socially disadvantaged, violates the Fifth Amendment’s guarantee of equal ‎protection.   ‎

The 8(a) Program is a small business development program run by the SBA. Participants in the ‎‎8(a) Program can receive business development assistance from the SBA, including the ‎opportunity to compete for federal contracts that are set aside for 8(a) Program participants ‎and the potential for sole source contract awards.  ‎

For small businesses not owned by Alaska Native Corporations, federally recognized Tribes, or ‎Native Hawaiian Organizations, the owner of the small business must be socially and ‎economically disadvantaged to be eligible to participate in the 8(a) Program. The SBA defines ‎socially disadvantaged individuals as those individuals who have been subjected to racial or ‎ethnic prejudice or cultural bias within American society because of their identities as members ‎of groups and without regard to their individual qualities and the social disadvantage must stem ‎from circumstances beyond their control. Certain groups of individuals are presumed by the ‎SBA to be socially disadvantaged:  ‎

Black Americans; Hispanic Americans; Native Americans (Alaska Natives, ‎Native Hawaiians, or enrolled members of a Federally or State ‎recognized Indian Tribe); Asian Pacific Americans (persons with origins ‎from Burma, Thailand, Malaysia, Indonesia, Singapore, Brunei, Japan, ‎China (including Hong Kong), Taiwan, Laos, Cambodia (Kampuchea), ‎Vietnam, Korea, The Philippines, U.S. Trust Territory of the Pacific Islands ‎‎(Republic of Palau), Republic of the Marshall Islands, Federated States of ‎Micronesia, the Commonwealth of the Northern Mariana Islands, Guam, ‎Samoa, Macao, Fiji, Tonga, Kiribati, Tuvalu, or Nauru); Subcontinent Asian ‎Americans (persons with origins from India, Pakistan, Bangladesh, Sri ‎Lanka, Bhutan, the Maldives Islands or Nepal); and members of other ‎groups designated from time to time by SBA according to procedures set ‎forth at [13 C.F.R. § 124.103(b)(1)].‎

The SBA defines “economically disadvantaged individuals” as socially disadvantaged individuals ‎whose ability to compete in the free enterprise system has been impaired due to diminished ‎capital and credit opportunities as compared to others in the same or similar line of business ‎who are not socially disadvantaged. The SBA establishes net worth, income, and total asset ‎criteria as factors that are used when determining if an individual is economically disadvantaged.  ‎

Ultima argues the 8(a) Program, facially and as applied, is unconstitutional because Ultima’s ‎owner, despite being economically disadvantaged, does not fall within the group of small ‎business owners who are presumed to be socially disadvantaged. Ultima also argues that the 8(a) ‎Program was established as a race-neutral program and that when the SBA adopted and began ‎employing the race-conscious presumption in the mid 1980s, it did so without Congressional ‎approval or authority. ‎

The government makes four main arguments in defense of the 8(a) Program: ‎

  • the 8(a) Program was deemed constitutional on two other occasions involving the same ‎exact challenge that Ultima presents in its case; ‎
  • the 8(a) Program survives strict scrutiny because the Program is race-neutral and the ‎presumption of social disadvantage is narrowly tailored: the government considered and ‎found race-neutral alternatives insufficient to address past and current discriminations, ‎necessitating the narrowly-tailored race-conscious presumption; ‎
  • Ultima lacks standing because it failed to apply for certain contracts outside of the 8(a) ‎Program for which it did qualify and because, at varying points in recent years, Ultima’s ‎revenue exceeded the threshold to qualify as a small business, including when it filed ‎its lawsuit; and ‎
  • Ultima has failed to satisfy its burden of proving that the 8(a) Program or the rebuttable ‎presumption is unconstitutional. ‎

The parties have filed cross-motions for summary judgment. After the parties completed their ‎briefing on those motions, the district court took note that the parties relied on Grutter v. ‎Bollinger, 539 U.S. 306 (2003), for a number of propositions in their filings. In Grutter, the ‎Supreme Court ruled that a public institution of higher learning (i.e. the University of Michigan ‎Law School) has a compelling interest in attaining the educational benefits derived from a ‎diverse student body.‎

On December 8, the district court ordered the parties to file supplemental letters addressing ‎whether a potential decision by the Supreme Court in a pending case, Students for Fair ‎Admissions, Inc. v. University of North Carolina, et al., (the “SFFA case”), overruling Grutter ‎would impact the issues in Ultima’s case and, if so, whether the case should be stayed until the ‎Supreme Court releases its decision in the SFFA case. ‎

On December 22, 2022, the parties filed supplemental briefing, in which the parties reached ‎the same conclusions: (1) a potential Supreme Court decision overruling Grutter will not have ‎an impact on the issues in Ultima’s case; and (2) the district court should not stay (i.e., ‎delay) Ultima’s case until the Supreme Court releases its decision in the SFFA case. Despite ‎coming to the same conclusions, each party provided slightly different reasoning.‎

Although identifying the potential ways in which the Supreme Court may overturn Grutter, ‎Ultima did not explicitly state how such a decision would affect the outcome of its own case. ‎Instead, Ultima identified four ways in which the Supreme Court may overrule Grutter:  ‎

  • While the Grutter Court noted that the use of race as a compelling interest may no ‎longer be necessary in twenty-five years, this Supreme Court could conclude that the ‎Constitution requires a quicker termination date to any race-conscious program. ‎
  • The Supreme Court could conclude that Grutter failed to place a substantial enough ‎burden on those defending race-conscious decision-making. ‎
  • The Supreme Court could conclude that the categorization in the SFFA cases is not ‎sufficiently narrowly tailored to achieve a compelling governmental interest. ‎
  • The Supreme Court may conclude that the Grutter Court failed to impose a sufficient ‎requirement with regard to the consideration of race-neutral alternatives. ‎

In contrast, the government argued that Grutter and the SFFA cases involve different questions ‎regarding (1) the “compelling interest” and (2) the “legal bases for the challenged actions.” The government noted that the issue in Grutter and the SFFA cases involves the use of a race-based element to attain a ‎diverse student body in addition to the “already accepted compelling interest in remedying past ‎discrimination.” The government framed the issue in Ultima’s case as whether there is a strong ‎basis in the evidence supporting the remedial compelling interest of remedying discrimination ‎in federal contracting. The government also argued that, in the SFFA cases, the Supreme ‎Court’s analysis of the narrow tailoring standard would provide little guidance because the ‎application of that analysis is highly context- and fact-specific. ‎

Notably, neither party cited to Grutter for any principle that is unique to Grutter, and instead ‎cite to that case, as well as other cases from the Sixth Circuit and other courts, for the purpose ‎of identifying well-settled factors addressing when a remedial measure is narrowly tailored. ‎

A decision by the district court in Ultima’s case could affect the status of the 8(a) Program, ‎particularly for the government contractors who presumptively qualify for the 8(a) Program. If ‎the court were to side with Ultima, then the presumption may be deemed unconstitutional and ‎invalid, with unexpected and far ranging impacts on the 8(a) Program as a whole. As such, small ‎businesses in the 8(a) Program, or those seeking to potentially enter into the 8(a) Program, may ‎want to continue to monitor the status of Ultima’s lawsuit.‎

This article summarizes aspects of the law and does not constitute legal advice. For legal advice for ‎your situation, you should contact an attorney.

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