The U.S. District Court for the Eastern District of Tennessee recently issued a decision holding that a rebuttable presumption of social disadvantage for certain minority groups to qualify for inclusion in the Small Business Administration’s (“SBA’s”) 8(a) Business Development Program (the “8(a) program”), as used by the United States Department of Agriculture (“USDA”) and the SBA, violated the equal protection clause of the Fifth Amendment. Ultima Servs. Corp. v. United States Dep’t of Agric., No. 2:20-CV-00041-DCLC-CRW (E.D. Tenn. July 19, 2023).

Background

In administering the 8(a) program, the SBA applies a rebuttable presumption of social disadvantage to individuals of certain minority groups. This presumption is not established by statute but by SBA regulations, which state that members of certain racial and ethnic groups are presumed to be socially disadvantaged, including Black Americans, Hispanic Americans, Asian Pacific Americans, Native Americans (American Indians, Eskimos, Aleuts, or Native Hawaiians), and Subcontinent Asian Americans. For more information on who is considered to be socially disadvantaged: SBA’s 8(a) Business Development Program and 13 C.F.R. § 124.103(b)(1). Individuals applying to the 8(a) program that do not belong to one of these designated groups may still qualify by submitting a narrative statement of social disadvantage providing evidence they are more likely than not to be socially disadvantaged. 13 C.F.R. § 124.103(c)(1).

The Ultima Case

In 2018, the USDA declined to issue additional task orders under Indefinite Delivery Indefinite Quantity (“IDIQ”) contracts previously awarded and used to provide services to the Natural Resources Conservation Service (“NRCS”) offices. To continue providing services to NRCS offices, the USDA instead awarded sole-source contracts with companies participating in the SBA’s 8(a) program. Ultima Services Corporation (“Ultima”) held one of the IDIQ contracts but was not considered for award of the sole source contracts since Ultima was not a participant in the 8(a) program. Ultima argued that the USDA’s use of the rebuttable presumption in the 8(a) program violated its rights to equal protection under the Fifth Amendment.

The Ultima Court explained that the Fifth Amendment’s Equal Protection Clause prevents the government from “making distinctions that (1) burden a fundamental right; (2) target a suspect class; or (3) intentionally treat one individual differently from others similarly situated without any rational basis.” The Ultima Court further explained that when examining government distinctions of race that favor one race over another, the courts apply strict scrutiny. This means that the law is constitutional “only if they are [(1)] narrowly tailored measures that further [(2)] compelling governmental interests.”

The Ultima Court primarily relied on a Sixth Circuit decision, Vitolo v. Guzman, 999 F.3d 353, 359 (6th Cir. 2021), which addressed a similar issue. In Vitolo, the Sixth Circuit ruled that the government has a compelling interest in remedying past discrimination only when three criteria are met: (1) the policy must target a specific episode of past discrimination and cannot rest on a “generalized assertion that there has been past discrimination in an entire industry”; (2) there must be evidence of intentional discrimination in the past; (3) the government must have had a hand in the past discrimination it now seeks to remedy.

The Ultima Court applied the same analysis used in Vitolo and held that the USDA failed to show a compelling interest for their use of the rebuttable presumption as applied to Ultima. The Ultima Court reasoned that the USDA’s evidence failed to show that the government participated in the past discrimination in the relevant industries in which Ultima operated. Rather, the Ultima Court ruled that the expert reports, agency studies, and anecdotal evidence presented by the USDA only showed broader societal discrimination rather than a specific instance of past discrimination, which did not support an inference of intentional discrimination.

Based on this analysis, the Ultima Court held that the USDA’s use of the rebuttable presumption in the 8(a) program was not narrowly tailored. The Ultima Court examined several factors, including the necessity for race-based relief, the efficacy of alternative remedies, the flexibility and duration of the relief, and the impact of the relief on the rights of third parties.

Further, the Ultima Court determined that although participants can only remain in the 8(a) program for nine years, there is no temporal limit on the use of the rebuttable presumption. The Ultima Court also found that the rebuttable presumption was both underinclusive and overinclusive: underinclusive because “certain groups that could qualify will be left out of the presumption” and overinclusive because it “sweeps broadly by including anyone from the specified minority groups, regardless of the industry in which they operate.”

Thus, the Ultima Court explained:

Defendants’ assertion that the rebuttable presumption presents only a slight burden because a minor amount of all national federal contracting dollars is eligible for small businesses offers cold comfort. Ultima operates within a specific set of industries and the Mississippi contract, as well as others like it, represents a substantial amount of revenue. National statistics do not lessen the burden that the rebuttable presumption places on Ultima. Defendants have failed to show that the use of the rebuttable presumption in the 8(a) program is narrowly tailored.

Takeaways

The Ultima decision is important for several reasons. First, Ultima only challenged the SBA’s use of the rebuttable presumption of social disadvantage for the 8(a) program, not the entire 8(a) program itself. Therefore, the 8(a) program is still intact. Second, to comply with the Ultima Court’s decision, SBA has issued a press release, interim guidance, and temporarily suspended new 8(a) application submissions. The interim guidance states that SBA is requiring all 8(a) participants whose program eligibility is based upon one or more individuals who relied upon the presumption of social disadvantage to establish their specific social disadvantage by submitting a personal social disadvantage narrative. For assistance, SBA has provided a link to its Guide for Writing a Social Disadvantage Narrative. Third, the Ultima decision will likely open the door to future challenges to SBA’s authority, the 8(a) program itself, and programs outside of the 8(a) program that are race-based.

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