The US Small Business Administration (SBA) temporarily suspended new application submissions to its 8(a) Business Development program, and it will require many existing participants to explain why they qualify for the program after a district judge in the US District Court for the Eastern District of Tennessee held that the SBA’s use of a “rebuttable presumption” of social disadvantage for certain minority groups in determining eligibility for the program violated a federal contractor’s Fifth Amendment right to equal protection.

The court’s order in Ultima Services Corp. v. US Department of Agriculture blocks the SBA—and the US Department of Agriculture (USDA)—from using the “rebuttable presumption” when administering the 8(a) program.

SBA 8(A) BUSINESS DEVELOPMENT PROGRAM

The SBA’s 8(a) Business Development program was designed to help certain small, disadvantaged business concerns compete in the US federal marketplace. To qualify for the program, current regulations require businesses to show that they are at least 51% owned and controlled by US citizens who are socially and economically disadvantaged. Certain groups that are specifically identified by the SBA—including “Black Americans,” “Hispanic Americans,” “Native Americans,” “Asian Pacific Americans,” and “Subcontinent Asian Americans”—receive a “rebuttable presumption” of social disadvantage.

Individuals who are not members of those specifically designated groups that are presumed to be socially disadvantaged can demonstrate their eligibility for the 8(a) program if they establish individual social disadvantage by a preponderance of the evidence. Claims of individual social disadvantage are evaluated by the SBA on a case-by-case basis.

Individuals who show that they qualify for the 8(a) program can access a broad range of benefits, including becoming eligible for certain set-aside and sole-source federal government contracts; receiving one-on-one business development assistance from dedicated business opportunity specialists; qualifying to receive federal surplus property on a priority basis; and receiving free training from the SBA’s 7(j) Management and Technical Assistance program.

ULTIMA SERVICES CORP. V. US DEPARTMENT OF AGRICULTURE

In Ultima Services, the plaintiff sued the USDA and the SBA after the USDA declined to exercise options under the plaintiff’s indefinite-delivery, indefinite-quantity contracts and instead awarded sole-source contracts to companies participating in the SBA’s 8(a) Business Development program. The plaintiff was not a participant in the 8(a) program and was thus ineligible for sole-source contracts awarded through that program. The plaintiff filed suit and challenged the USDA’s actions on multiple grounds, including by arguing that the use of a “rebuttable presumption” to determine eligibility for the SBA’s 8(a) program violated the plaintiff’s Fifth Amendment right to equal protection.

In an opinion responding to the parties’ cross-motions for summary judgment, the district court held that the “rebuttable presumption” could not survive strict scrutiny and did violate the plaintiff’s Fifth Amendment rights. To support those conclusions, the court cited the US Supreme Court’s recent holding in Students for Fair Admissions Inc. v. President & Fellows of Harvard College, in which the Court held that colleges’ use of race-based affirmative action in the admissions process was unconstitutional. Based on that reasoning, the district court blocked the USDA and SBA from using the “rebuttable presumption” of social disadvantage for certain minority groups when administering the 8(a) Business Development program.

TAKEAWAYS

In the wake of the injunction, many small businesses that qualified for the program based on the “rebuttable presumption” of social disadvantage will be required to provide a narrative explaining why they are socially disadvantaged.

The SBA has also temporarily suspended new 8(a) application submissions, meaning that new applications will not be accepted until a later date to be determined.

For now, it is unclear whether or how the injunction will affect the SBA’s 8(a) Business Development program in the long term, and the injunction may be lifted if the district court’s order is successfully appealed. The district court also signaled that it will consider issuance of additional remedies after a hearing scheduled later in August. Morgan Lewis will continue to monitor the injunction and the SBA’s response.

The district court’s reliance on the Supreme Court’s recent affirmative action decision in Students for Fair Admissions also marks one of the first interpretations of that new precedent. As the dust settles in the wake of that Supreme Court decision and as courts rely upon it to respond to various claims, Morgan Lewis will be tracking those new developments. To get the latest on this evolving situation, visit our US Supreme Court Affirmative Action Decision: DEI & ESG Impact resource center and subscribe to our mailing list.

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