On July 19, the U.S. District Court for the Eastern District of Tennessee ruled in favor of Ultima Services Corporation, prompting the pause of new 8(a) applications and necessitating a reorganization of the program’s eligibility process.
In the wake of the Supreme Court’s Students for Fair Admissions decision, U.S. District Court Judge Clifton Corker found the 8(a) program’s rebuttable presumption to violate the Fourteenth Amendment’s Equal Protection clause as “the presumption does not further a compelling governmental interest and is not narrowly tailored to achieve that interest.” The ruling has precipitated the issuance of guidance by the Small Business Administration (SBA), providing greater clarity to the current state of 8(a) eligibility and next steps for 8(a) participants. We reflect on the program, the recent decision, and its implications below.
8(a) Program Overview
The Small Business Act was enacted in 1953 to encourage the growth and development of small businesses. Section 8(a) of the legislation allows the SBA to award contracts to small businesses “whenever [SBA] determines such action is necessary[.]” SBA is authorized “to arrange for the performance of such procurement contracts by negotiating or otherwise letting subcontracts to socially and economically disadvantaged small business concerns[.]”
Congress defined “socially and economically disadvantaged small business concerns” as those concerns that are “at least 51% owned by a socially and economically disadvantaged person.” Socially disadvantaged individuals are defined as “those who have been 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 regulations outline what it takes for an individual to prove they are socially disadvantaged. The individual must establish, by a preponderance of the evidence, that they have “at least one objective distinguishing feature that has contributed to social disadvantage, such as race, ethnic origin, gender, identifiable disability, long-term residence in an environment isolated from the mainstream of American society or other similar causes not common to individuals.” In addition, evidence must be presented that establishes “[t]he individual’s social disadvantage [is] rooted in treatment which he or she has experienced in American society,” that the “social disadvantage [is] chronic and substantial,” and the “disadvantage [has] negatively impacted . . . his or her entry into or advancement in the business world.” This preponderance of the evidence standard is a fairly high burden to reach and, in some cases, requires extensive documentation and corroborating evidence.
The regulations also provide a rebuttable presumption of social disadvantage for the following minority groups: Black Americans, Hispanic Americans, Native Americans, Asian Pacific Americans, Subcontinent Asian Americans and any other members of groups designated by SBA. Under the rebuttable presumption, those who claim to be members of a group listed above do not have to submit any evidence of social disadvantage. The legality of this mechanism for eligibility is at the heart of the Ultima decision.
The Ultima Decision
Ultima Services Corporation, a small business owned by a white woman, performed on several Indefinite Delivery Indefinite Quantity (IDIQ) contracts, providing services to the Natural Resources Conservation Service (NRCS). In 2018, the U.S. Department of Agriculture (USDA) decided not to exercise any options under the four IDIQ contracts Ultima held. Then, the company began to notice that, in some instances, the SBA awarded sole-source contracts to 8(a) companies—opportunities for which Ultima was ineligible.
Ultima filed a complaint alleging the SBA’s use of the rebuttable presumption for the 8(a) program discriminated based on race, violating the Fourteenth Amendment’s Equal Protection Clause. More specifically, Ultima argued that the rebuttable presumption cannot survive a strict scrutiny test given that the government cannot show the use of the rebuttable presumption serves a compelling interest and that the presumption is not narrowly tailored to serve that alleged compelling interest.
The district court agreed with Ultima, enjoining the SBA from using the rebuttable presumption. The court found the SBA’s evidence was inadequate to show a compelling government interest, in major part due to the requirement recently set forth in Students for Fair Admissions that even though there is a compelling interest in “remediating specific, identified instances of past discrimination that violated the Constitution or a statute,” the government must have goals that are “sufficiently coherent for purposes of strict scrutiny.” The USDA admitted it doesn’t maintain 8(a) program goals, and SBA admitted it had no such requirements for agencies. The lack of stated goals makes it impossible to measure the program’s utility, and therefore, the use of the presumption cannot support the government’s stated interest—“remediating specific, identified instances of past discrimination[.]” In addition, the rebuttable presumption was found not to be narrowly tailored due, in part, to there being no process for a third party to question an 8(a) participant’s eligibility making it dispositive in practice, there being no “logical end point”—a recently reaffirmed requirement for race-conscious governmental programs—and the lack of any consideration of race-neutral alternatives.
SBA Guidance
Following the ruling, the state of both the current 8(a) participants and prospective applicants was unclear, but the SBA issued interim guidance on August 18 in an attempt to clear up some confusion. The guidance clarified that current participants who established social disadvantage by a preponderance of the evidence are unaffected by the injunction. Similarly, entity-owned firms like Alaskan Native Corporations and Native Hawaiian Organizations are not required to submit any new documentation.
However, those participants “whose program eligibility is based upon one or more individuals who relied upon the presumption of social disadvantage to establish their individual social disadvantage” must complete a social disadvantage narrative to establish their social disadvantage. SBA provided guidance for writing the narrative here.
This guidance is not the last of SBA’s efforts to provide insight into its interpretation of the court order and the path forward. In fact, on August 21, all current 8(a) participants should have received a “direct communication” from SBA detailing the social disadvantage eligibility process or confirming that a firm has already established social disadvantage. Further, all entity-owned firms and those participants who have submitted a social disadvantage narrative and been approved should have been notified that they have met the requirements. These notifications should help 8(a) participants determine the next steps.
SBA also notes that program participants “should continue to submit their annual review and continuing eligibility materials to SBA.”
Going Forward
Following the Students for Fair Admissions decision, it was clear that racially-based governmental programs could be affected. The district court’s decision has paused all new 8(a) applicants until the SBA can develop updated application questions for individually owned firms, which will be designed to better determine social disadvantage. The implications of the decision are still unknown; however, it will likely change the current 8(a) process and may even invite anticipatory programmatic changes or litigation around other governmental preference initiatives like the Women-Owned Small Business program. 8(a) participants and prospective applicants alike should continue to monitor SBA announcements as new guidance is issued and the case is almost certainly appealed to the Sixth Circuit. Current participants should also ensure they received their August 21 communication, which will clarify the next steps. We will continue to update our readers as new program announcements are made, or litigation is initiated.
