When the U.S. Supreme Court struck down affirmative action programs in the college admissions context in late June, it noted that racially conscious government programs must have a “logical end point.” Students for Fair Admissions, Inc. v. Harvard and Students for Fair Admissions v. University of North Carolina (“SFFA”). It has been apparent for some time that the “logical end point” concept could have implications for racially conscious programs in the government contracts context, and indeed it took only three weeks after SFFA for this to manifest in a decision issued by U.S. District Court for the Eastern District of Tennessee, Ultima Servs. Corp. v. U.S. Department of Agriculture. In Ultima, the court relied on reasoning in SFFA to conclude that regulations in the Small Business Administration’s (“SBA”) 8(a) program that establish a rebuttable presumption of social disadvantage to individuals in certain minority groups violate the Fifth Amendment’s Equal Protection rights of individuals who are not members of those minority groups.

SBA’s 8(a) Program

The Small Business Act has been in place for 70 years. Section 8(a) of the Act authorizes the SBA to facilitate increased government contracting opportunities for socially and economically disadvantaged small businesses by working with procurement agencies to set aside certain procurements for 8(a) contractors—contractors who have been accepted into the 8(a) program by virtue of being socially and economically disadvantaged. Contractors who are not in the 8(a) program are ineligible to compete for 8(a) set-aside contracts (although they can participate in such procurements as subcontractors).

Ultima

The plaintiff in Ultima is a small business that has for many years provided administrative and technical support services to the U.S. Department of Agriculture (“USDA”). Several years ago, the USDA coordinated with the SBA to move some of the services the plaintiff had been providing into an 8(a) set-aside procurement. The small business plaintiff was owned by a white woman not entitled to a rebuttable presumption of social disadvantage under SBA’s regulations. While it might have been theoretically possible for her to apply for her company to be admitted to the 8(a) program, as a practical matter it would have been a daunting and perhaps unrealistic path without a rebuttable presumption of social disadvantage. So her company sued, alleging that SBA’s regulations establishing a rebuttable presumption for individuals in certain minority groups were impermissibly race-based under the strict scrutiny to which such programs are subject.

The court agreed with the plaintiff and enjoined the USDA and the SBA from using the rebuttable presumption of social disadvantage in administering the SBA’s 8(a) program. The injunction has nationwide effect. While there were a number of factors leading to the court’s conclusion, it seemed the court was concerned with an apparent lack of updated analysis by the SBA as to whether rebuttable presumptions of social disadvantage for qualifying minority groups make sense today, decades after the promulgation of the regulations establishing the rebuttable presumption for the qualifying groups. The court expressed concern that there was no analysis regarding when there might be a “logical end point” for a small business preference program based in part on owner membership in particular racial groups. The court also noted a seeming lack of explanation as to why certain minority groups but not others were entitled to a rebuttable presumption of having been socially disadvantaged. And the court was concerned about the SBA’s lack of an actual process by which a third party could challenge the “rebuttable presumption” that an individual in a qualifying minority is in fact socially disadvantaged.

Key Takeaways

• It is too early to tell exactly how SFFA and Ultima will impact SBA’s 8(a) program. The court in Ultima has scheduled a hearing on August 31, 2023, to discuss possible further remedies. The Government may appeal the decision.
• For now, the decision does not enjoin any aspect of the SBA’s 8(a) program other than use of the rebuttable presumption of social disadvantage based on race. Already-awarded contracts are not affected, although implications for unexercised option periods are unclear.
• There are means for certain small businesses to establish eligibility for participation in the 8(a) program other than through a rebuttable presumption of social disadvantage. There are statutorily based means for small businesses owned by Alaska Native Corporations, Tribes, and Native Hawaiian Organizations to be considered socially disadvantaged for purposes of 8(a) program eligibility. This is not impacted by the Ultima decision.
• Notwithstanding Ultima’s focus on the rebuttable presumption as opposed to the 8(a) program as whole, the SBA reports that it is suspending new applications for admission to the program while it revises its application questionnaire to comply with the court’s decision. At this point, the pause is halting all applications regardless of whether the applicant is relying on a rebuttable presumption of social disadvantage.

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