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