On August 30, 2023, the Small Business Administration (“SBA”) filed a “Notice of Compliance” in Ultima Services Corp. v. U.S. Dept. of Agriculture, et. al., Case No. 2:20-cv-00041, U.S. District Court for the Eastern District of Tennessee (Greenville Division), regarding the SBA’s compliance with the Ultima court’s injunction against using the rebuttable presumption of social disadvantage contained at 13 CFR 124.103(b).
The Notice of Compliance was issued in advance of a hearing in the Ultima case that took place on August 31, 2023. The hearing was scheduled by the district court to determine how to address the other remedies that Ultima sought in its complaint. In its complaint, Ultima asked for the following relief:
- A declaratory judgment that defendants are violating the Fifth Amendment to the United States Constitution and 42 U.S.C. § 1981;
- Injunctive relief precluding defendants from reserving NRCS contracts for the Section 8(a) Program;
- Requiring the defendants to reinstate contracts that defendants refused to renew for discriminatory reasons and/or replaced plaintiff with a Section 8(a) contractor;
- Damages in an amount to be determined;
- Attorney’s fees and costs pursuant to 28 U.S.C. §§ 1920, 2412(a), or 2412(b), 42 U.S.C. § 1988, or any other applicable authority; and
- Any other relief that is appropriate.
The injunction issued by the court addressed the first request for relief (that the SBA violated the Constitution by applying a rebuttable presumption of social disadvantage) but did not address the other relief sought by Ultima. Nor did the motions briefed and argued directly address those other claims, focusing on the predicate issue of whether the SBA’s rebuttable presumption is constitutional. As such, the hearing may be to address these other remedies sought by Ultima, in addition to whether the SBA is complying with the district court’s injunction.
Notably, the SBA, as a federal agency, has sixty days from the date of the injunction to file its notice of appeal, so they have until September 17th to file an appeal.
The Notice of Compliance is consistent with past announcements by the SBA regarding its response to the injunction in Ultima, specifically the requirement that individually-owned 8(a) entities establish their social disadvantage prior to award of any new 8(a) contracts. The Notice of Compliance, however, does not provide additional clarity on some issues:
- If the SBA determines that the owner of an 8(a) entity has not established a social disadvantage in connection with a prospective award of a specific 8(a) contract, that owner will not be able to appeal that decision with respect to that specific award. Instead, the agency will have to award the contract to a different 8(a) entity or award the contract through a different procurement process.
- The SBA does not believe the injunction applies to 8(a) contracts awarded prior to July 19, 2023, such that issuing priced options and in-scope modifications may continue on those contracts without a finding that the 8(a) entity is socially disadvantaged.
- Where an award under a previously awarded 8(a) contract or agreement requires SBA acceptance, such as an 8(a) sole source order awarded against an 8(a) Multiple Award Contract, a discretionary 8(a) task order competitively awarded in anon-8(a) MAC, or call orders placed against Blanket Purchase Agreements or Basic Ordering Agreements, the SBA will have to determine the qualifying individual’s social disadvantage prior to award.
- The injunction does not affect awards under previously awarded 8(a) contracts or agreements that do not require SBA acceptance, such as in-scope modifications and competitively awarded task orders under 8(a) MACs and GWACs.
- Novation of an 8(a) contract from one 8(a) entity to a new 8(a) entity will require a determination that the receiving 8(a) entity meets the social disadvantage requirement in connection with the novation.
- Awards to entity-owned 8(a)s (i.e., Alaska Native Corporations (“ANCs”), Tribes, Native Hawaiian Organizations (“NHOs”, and Community Development Corporations (“CDCs”) may proceed as usual and are not impacted by the injunction.
- Similarly, awards to individual-owned participants that did not rely on the rebuttable presumption to establish social disadvantage may proceed as usual and are not impacted by the presumption.
The Notice of Compliance states that, as a result of the injunction:
- The SBA suspended the acceptance and processing of new applications to the 8(a) program and also suspended the issuance of final decisions on pending applications that relied on the rebuttable presumption.
- The SBA is developing a revised process for establishing social disadvantage that will not rely on the rebuttable presumption of social disadvantage. All existing 8(a) entities who were admitted to the 8(a) program based on the rebuttable presumption but that have not had their eligibility determined will have to affirmatively establish social disadvantage without reliance on the rebuttable presumption. If a business owner cannot establish social disadvantage, the SBA will advise the contracting agency to award the requirement to a different 8(a) entity who can establish program eligibility or to award the contract through alternate means.
- Until the revised process is in place, the SBA will make all determinations of social disadvantage for individual-owned small business owners, whether for new applicants, current entities, or at the award stage, using the existing process the SBA has used to evaluate the social disadvantage of individual-owned firms that did not previously qualify for the rebuttable presumption.
- The SBA has not suspended the evaluation of applications submitted by or the approval of awards to 8(a) entities owned by Indian tribes, ANCs, NHOs, and CDCs. “because these businesses are not deemed eligible to participate in the 8(a) program through the rebuttable presumption of social disadvantage of the business owner.”
- The SBA is requiring entities that are individually owned by Native Americans (including Alaska Natives, Native Hawaiians, or enrolled members of a federally or state-recognized Indian tribe) to prove social disadvantage to the extent that such businesses relied on the rebuttable presumption to establish social disadvantage.
- The SBA is not conducting new eligibility determinations on contracts where the SBA approved the 8(a) award and the 8(a) awardee prior to issuance of the injunction. The SBA takes the position that once the contract is awarded, the SBA has no further role to which the injunction would apply. This would include “finaliz[ing] and sign[ing] contracts with the previously approved 8(a) awardees or exercise priced options and in-scope modifications.” The SBA explained:
Under SBA’s regulations, SBA conducts an eligibility determination when an 8(a) sole source procurement is accepted into the program or when an apparent successful offeror on a competitive 8(a) procurement is identified. See 13 C.F.R. § 124.501(g). After that point, no further eligibility determination is required unless there is a new contracting action.
Included with the Notice of Compliance is a memorandum distributed by the SBA to all “Federal Chief Acquisition Officers & Senior Procurement Executives” on August 18, 2023. The memorandum identifies three categories of entities within the 8(a) program and states that the injunction applies only to those that relied on the rebuttable presumption of social disadvantage to enter the 8(a) program:
There are three categories of 8(a) Program participants:
- Individual-owned small businesses that used the rebuttable presumption of social disadvantage to establish eligibility;
- Individual-owned small businesses that did not use the rebuttable presumption of social disadvantage and, therefore, have already provided SBA with documentation to establish social disadvantage; and
- Entity-owned small businesses that do not have to establish social disadvantage to participate in the program (these businesses must only establish economic disadvantage at the Entity level). These entity-owned businesses are owned by Indian tribes, Alaska Native Corporations, Native Hawaiian Organizations, or Community Development Corporations.
SBA and DOJ do not interpret the injunction to apply either to individual-owned small businesses that previously established social disadvantage without the use of the presumption (Group 2) or to small businesses that are entity-owned (Group 3). The processing of 8(a) awards made to these two groups of 8(a) participants will not be affected.
The memorandum concludes that the Ultima injunction does not apply to (i) entities owned by Indian tribes, Alaska Native Corporations, Native Hawaiian Organizations, or Community Development Corporations, or (ii) entities that established social disadvantage without use of the rebuttable presumption of social disadvantage.
In regards to contracting actions, the memorandum states that:
- Federal agencies can and should still submit procurements for acceptance into the 8(a) program, but that “[b]efore an award can be made to an individual-owned participant that previously relied on the presumption of social disadvantage to support its eligibility, SBA must make an affirmative determination that the individual upon whom eligibility is based has established personal social disadvantage without the presumption.”
- For sole source awards, the SBA will verify the 8(a) entities eligibility for the award, including social disadvantage, as part of its acceptance of the sole source award.
- For competitive 8(a) awards, the procuring agency will need to request an eligibility determination of the identified apparent successful offeror or offerors. The SBA will verify that the awardee meets the social disadvantage requirement in connection with the contract eligibility determination.
- Once an entity has demonstrated social disadvantage via the new process, the SBA will not ask that entity to complete the new process again with respect to a different contract award.
- If the business owner cannot establish social disadvantage as part of this new process, the SBA will not be able to reconsider the business owner’s eligibility for this specific proposed award due to operational constraints. The requesting agency will be required to award the requirement to a different 8(a) firm that has established social disadvantage without reliance on the presumption or award the contract through an alternative means.
- Agencies may not rely on SBA inaction as approval. For individual-owned participants, agencies may not proceed to finalizing a contract with the participant until the SBA has affirmatively indicated that the individual-owned participant has demonstrated its social disadvantage.
- However, awards to individual-owned participants that did not rely on the rebuttable presumption to establish social disadvantage and awards to entity-owned participants (i.e., ANCs, Tribes, NHOs, and CDCs) may proceed as usual.
- Contracts that were placed into the 8(a) Program prior to July 19, 2023, are not affected by the injunction. Performance on such contracts, as well as most future actions, such as issuing priced options and in-scope modifications may continue as usual.
- Where a contracting action under a previously awarded 8(a) contract or agreement requires SBA acceptance, including an 8(a) sole source order awarded against an 8(a) Multiple Award Contract (MAC) or Government-wide Acquisition Contract (e.g., STARS III), a discretionary 8(a) task order competitively awarded in a non-8(a) MAC, or call orders placed against Blanket Purchase Agreements or Basic Ordering Agreements, the SBA will have to determine the qualifying individual’s social disadvantage prior to award.
- The injunction does not affect contracting actions under previously awarded 8(a) contracts or agreements that do not require SBA acceptance, including in-scope modifications and competitively awarded task orders under 8(a) MACs and GWACs.
- Replacing one 8(a) entity with another 8(a) entity on an 8(a) contract (i.e., novating the contract) is considered a new contracting action to the firm receiving the award. The SBA will assess whether the receiving firm meets the social disadvantage requirement in connection with the novation.
This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney.