On July 19, 2023, the U.S. District Court for the Eastern District of Tennessee issued an important decision where it declared that the Small Business Administration’s (SBA) rebuttable presumption of social disadvantage, which is used in admitting many small-disadvantaged businesses to the SBA’s 8(a) program, violated the equal protection rights of a government contractor and enjoined the use of the rebuttable presumption in administering the 8(a) program. Ultima Servs. Corp. v. U.S. Dep’t of Agric., No. 2:20-CV-0041-DCLC-CRW (E.D. Tenn. July 19, 2023). The decision will likely have an immediate impact on businesses that have pending applications or are intending to apply for admission into the 8(a) program, and may have further impacts upon the 8(a) program down the road.
As is well known, section 8(a) of the Small Business Act (Act) grants SBA authority to acquire procurement contracts from other government agencies and to award or arrange for performance of these contracts by small businesses. To that end, the Act directs SBA to arrange for the performance of such procurement contracts by negotiating or otherwise issuing subcontracts to socially- and economically-disadvantaged small business concerns. The Act states that socially- and economically-disadvantaged individuals are those who were subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities. The Act further provides that SBA shall make any determinations as to whether a group was subjected to prejudice or bias.
In administering the 8(a) program, SBA applies a rebuttable presumption of social disadvantage to individuals of certain minority groups in processing applications to the 8(a) program. These minority groups include Black Americans, Hispanic Americans, Native Americans, Asian Pacific Americans, Subcontinent Asian Americans, and members of other groups designated from time to time by SBA. This rebuttable presumption is not, however, established by statute, but by SBA regulation.
In applying for the SBA 8(a) program, those individuals who are not members of groups that SBA identified in its regulations as possessing the rebuttable presumption of social disadvantage must affirmatively establish by a preponderance of the evidence that they are socially disadvantaged based upon one objectively distinguishing feature (such as race or ethnic origin) which contributed to social disadvantage that (a) is rooted in treatment the individual experienced in American society; (b) is chronic and substantial and not fleeting in nature; and (c) negatively impacted that individual’s entry into, or advancement in, the business world.
The plaintiff, Ultima Services Corporation (Ultima), a small business providing administrative and technical support services, is owned and operated by a white woman. Ultima provided services to the U.S. Department of Agriculture’s (USDA) National Resources Conservation Services (NRCS) since 2004 and, relevant here, under four regional indefinite delivery indefinite quantity (IDIQ) contracts awarded by USDA to Ultima in 2017. However, in 2018, USDA decided not to exercise any more options under all four of Ultima’s IDIQ contracts, as well as any pending task orders under these contracts. Instead, in order to provide these services, USDA began awarding sole-source contracts with businesses that were admitted into the 8(a) program. Ultima was not a participant in the 8(a) program and, therefore, could not receive any such sole-source awards. Although Ultima stated it was ready, willing, and able to perform administrative and technical services, it reduced its bidding on contracts following the USDA’s decision not to exercise options on its USDA contracts and experienced a decline in revenue.
In 2018, a USDA contracting officer submitted a letter to SBA Georgia District Office requesting it to move to the 8(a) program an Ultima contract for administrative services in NRCS offices located in Mississippi and identified an 8(a) participant to perform the contract. However, the SBA Georgia District Office rejected this request due to the adverse impact it would have on a small business like Ultima. The USDA contracting officer followed up with another letter to the SBA Mississippi District Office requesting it to move Ultima’s contract to the 8(a) program, identifying a different 8(a) participant to perform the contract without mentioning the first letter. SBA accepted this letter, placed the contract into the 8(a) program, and removed Ultima as the firm servicing the Mississippi NRCS offices.
As a consequence, on March 4, 2020, Ultima filed a complaint alleging, in relevant part, that SBA and USDA engaged in race discrimination in violation of its right to equal protection under the Fifth Amendment of the U.S. Constitution when they used the rebuttable presumption for certain groups in the 8(a) program. As explained above, on July 19, 2023, the court issued its decision. In short, following precedent from the U.S. Court of Appeals for the Sixth Circuit where it applied a strict scrutiny analysis to the SBA’s rebuttable presumption as a racial classification, the court found the rebuttable presumption was not a narrowly tailored measure to achieve a compelling government interest. Accordingly, the court declared SBA and USDA’s use of the rebuttable presumption violates Ultima’s Fifth Amendment right to equal protection under the law and enjoined them from using the rebuttable presumption of social disadvantage in administering the 8(a) program.
The immediate impact of this decision means that–if it is not stayed pending appeal–for current and future applications for admission into the 8(a) program, members of groups that were identified by SBA as having a rebuttable presumption of social disadvantage will now need to affirmatively establish the existence of social disadvantage, such as race, under the elements set forth above. They will likely need to provide a detailed narrative showing that they are, indeed, socially disadvantaged. This may not be an easy task.
In addition, the court reserved ruling on any further remedy subject to a hearing on that issue. While Ultima requested monetary remedies, it is not clear whether any additional remedies provided by the court would include non-monetary remedies, such as further restrictions on the use of the 8(a) program. Moreover, even if the court does not impose additional remedies, it is foreseeable that, given this decision, other government contractors that are not participants in the 8(a) program could, in certain circumstances, raise a more general constitutional challenge to the 8(a) program itself.
PilieroMazza will continue to monitor developments in this case. If you have questions about this case and the implications for your business, please contact Tony Franco and Patrick Rothwell, the authors of this client alert, or another member of PilieroMazza’s Government Contracts Group.