On July 19, the U.S. District Court for the Eastern District of Tennessee found unconstitutional the Small Business Administration’s 8(a) Program regulations which establish a rebuttable presumption of social disadvantage for members of certain racial and ethnic groups. Unlike other applicants for the 8(a) Program, individuals who qualify for this rebuttable presumption are not required to submit evidence of actual social disadvantage to be admitted into the Program. The Court found that this presumption violated the Fifth Amendment because it “does not further a compelling governmental interest and is not narrowly tailored to achieve that interest.” As a result, the Court prohibited the SBA from future use of this presumption in administering the 8(a) Program. The immediate impacts of this decision, pending any SBA appeal, are unclear. However, all new 8(a) applicants will be required to be treated equally and to present facts and evidence that the individual applicant has suffered social disadvantage that has negatively impacted his or her entry into or advancement in the business world. This will undoubtedly mean, in the near term, that 8(a) applications will take longer and fewer applicants will be accepted.

In Ultima Servs. Corp. v. U.S. Dep’t of Agric., the Plaintiff alleged that the SBA and the USDA engaged in unconstitutional race-based discrimination when they placed Ultima’s previous USDA contract into the 8(a) Program. Specifically, Plaintiff alleged that the SBA’s rebuttable presumption for admitting certain groups into the 8(a) Program unlawfully discriminated on the basis of race. Because Plaintiff is not an 8(a) participant, it was no longer able to compete for the contracted work. And because Plaintiff’s owner was not a member of the groups presumed to be socially disadvantaged, her burden to be admitted into the 8(a) program was significantly higher.

Prior to this ruling, the SBA presumed many small-disadvantaged businesses were socially disadvantaged, and thus potentially eligible 8(a) participants, solely because their owners belonged to certain minority groups, i.e., Black Americans, Hispanic Americans, Native Americans, Asian Pacific Americans, Subcontinent Asian Americans, and members of other groups designated from time to time by the SBA. While the SBA claimed that this social disadvantage presumption could theoretically be rebutted, the Court found that argument wanting because the SBA had “no process for a third party to question an applicant’s social disadvantage,” and that proving an individual applicant had never experienced racial and ethnic discrimination as “virtually impossible.” While the Court found that Congress had authorized the SBA to carry out the Congressional goal of awarding federal contracts to small, disadvantaged businesses, it found that the method SBA chose to do so violated the Plaintiff’s Fifth Amendment equal protection rights. The SBA has no ability to measure the utility of the rebuttable presumption in solving past racial discrimination and could point to no evidence of having addressed specific instances of such discrimination. As a result, the Court concluded, the rebuttable presumption had no “logical end point,” citing the Supreme Court’s recent rejection of Harvard’s affirmative action plan in Students for Fair Admissions, Inc. v. Harvard. In other words, the Government was exercising “unbridled discretion” in drawing arbitrary lines as to which groups benefit from the rebuttable presumption, which fails the Fifth Amendment.

The Court reserved ruling on any further remedies, both monetary and non-monetary, which may mean further restrictions on the 8(a) program, or more general constitutional challenges to the 8(a) program may be forthcoming. The Clark Hill team will continue to monitor this closely and provide the necessary updates.