Initial Challenge to 8(a) Presumption of Social Disadvantage for Certain Minority Groups Succeeds: What This Means for Now

On July 19, 2023, the federal district court of the Eastern District of Tennessee issued a decision regarding a case involving the rebuttable presumption of social disadvantage in place under the 8(a) Business Development Program. Ultima Servs. Corp. v. U.S. Dep’t of Agric., 220CV00041DCLCCRW, 2023 WL 4633481, at *1 (E.D. Tenn. July 19, 2023). This decision found that this presumption is unconstitutional as it violates the right to equal protection. This, understandably, has caused a great deal of confusion and concern for current and potential 8(a) Program participants. In this post, we will not be providing our opinion on the correctness of the court’s decision (or analyze it from a policy perspective), as we will leave that to attorneys who specialize in constitutional law. Instead, we will go over the decision, what it means, and what it could affect down the road.

The Presumption

The first thing we need to go over is the presumption in question. Part of the requirement for entry and staying in the 8(a) Program is that the majority owner(s) of the company in question be “socially disadvantaged.” 13 C.F.R. § 124.103. This means that such individuals are considered to have been subjected to prejudice and discrimination for some sort of inherent personal characteristic, most notably race and ethnicity. 13 C.F.R. § 124.103 goes on to note that there is a rebuttable presumption that certain peoples are socially disadvantaged. These include African Americans, Hispanic Americans, Native Americans, Asian-Americans, and Pacific Islander Americans. The regulation goes into more detail on these groups at 13 C.F.R. § 124.103(b)(1). But all you need to understand from this is that, if a person is a member of one of these groups, they are presumed to be socially disadvantaged under the rule. It does not mean they are the only people who can be found socially disadvantaged. We regularly assist clients who seek to get into—and often do get into—the program due to other features of their identities such as their disabilities, their gender, and other such characteristics. But for those cases, SBA requires a narrative from the applicant explaining how they are socially disadvantaged. When the presumption applies, no such narrative is generally required.

Ultima Servs. Corp. v. U.S. Dep’t of Agric.

In 2018, the USDA decided to not exercise options on a contract it awarded to Ultima Services Corporation (“Ultima”) and instead sole source that work to 8(a) companies. Ultima couldn’t challenge the refusal to exercise the option, but it could challenge the 8(a) Program itself as being discriminatory. As such, it brought an argument that the 8(a) Program discriminates against those who do not fall into SBA’s list of presumed socially disadvantaged groups, attacking the rebuttable presumptions itself. This argument was made under the Equal Protection clause of the Fourteenth Amendment of the U.S. Constitution. While we are not constitutional law lawyers, we briefly explain it here.

The court observed that “[t]he Fifth Amendment’s incorporation of the Fourteenth 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 8(a) Program does specifically provide a benefit to one group (racial minorities) over others. Where the government makes a distinction based on race, courts will examine the rule under what’s called “strict scrutiny.” As the court noted, laws will be upheld under strict scrutiny “only if they are [(1)] narrowly tailored measures that further [(2)] compelling governmental interests.” These two concepts have been heavily litigated for decades and entire journals have been written to explain and explore what each mean, but, to simplify, the government has to both show it has a really good reason for its law (compelling interest) and that there isn’t some sort of more-neutrally applicable alternative that could achieve the goal (narrowly tailored). In the end, the court found that the rebuttable presumption of the 8(a) Program was neither narrowly tailored nor furthered a compelling governmental interest, and therefore, violates the Constitution.

The court’s reasoning on the matter of compelling interest is that, while SBA’s evidence included “expert reports and agency studies regarding disparities that (Minority Business Enterprises) face nationally,” they did not “identify a specific instance of discrimination which they seek to address with the use of the rebuttable presumption.” In other words, the government’s argument is based on the systemic disparities minority-owned businesses face, and, based on Shaw v. Hunt, 517 U.S. 899, 909, 116 S. Ct. 1894, 1902, 135 L. Ed. 2d 207 (1996), such “societal discrimination,” as opposed to specific instances of discrimination, is not enough for a compelling governmental interest.

As for finding the presumption not narrowly tailored, the court claims that the rebuttable presumption is rebuttable in name only:

“Indeed, Klein, an employee of Defendant SBA, testified that ‘[t]here’s no process for a third party to question someone’s social disadvantage as part of the application process.’ As the Sixth Circuit in Vitolo noted, ‘[because] proving someone else has never experienced racial or ethnic discrimination is virtually impossible, this ‘presumption’ is dispositive.’”

Furthermore, the court stated that SBA had not shown the specific objectives of the presumption and that because of “SBA’s failure to review race-neutral alternatives in the wake of the Supreme Court’s precedents, the Court cannot conclude that ‘no workable race-neutral alternative would achieve the compelling interest.’” After discussing the impact of the presumption on federal contracting as a whole, the court stated:

“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, represent 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.”

What Does This Mean?

The first thing to get out of the way: The court’s decision is not currently that the 8(a) Program violates the Constitution. This has been the greatest concern of many contractors. The court’s decision here specifically states only that the SBA now isn’t allowed to use the “rebuttable presumption of social disadvantage” for the 8(a) Program. The 8(a) Program still exists. The 8(a) Program itself was not challenged here. That said, it is unclear at this time what other impacts this decision—and future ones that may be based on it—could have on the 8(a) Program.

On that note, we see nothing expressly in the decision stating that those who have already been admitted to the 8(a) Program through the rebuttable presumption will need to reapply or that their status in the program is in jeopardy. While there have been a few observers who have said otherwise, we are doubtful that the injunction would require the reapplication of all present participants who used the presumption. Such an after-the-fact requirement would itself present legal and constitutional concerns (such as the difficulty of imposing court decisions retroactively), and we would anticipate that SBA is going to try to see to it that the decision has as little impact on the current state of affairs as possible. If you are already in the 8(a) Program, we would say for now, just keep an eye out on any further news.

If you are not an 8(a) Program participant and are applying or have applied, and the rebuttable presumption would have applied to you, again, there are some other things to note. One is that this decision was by a federal district court, not the Supreme Court. In other words, this matter is likely not over. It is a virtual certainty that the federal government will challenge this decision at the Sixth Circuit Court of Appeals. There may in the meantime be further injunctions and holds that change things during the pendency of the decision. We will keep you updated on those if they arise.

Second, you can still apply to the 8(a) Program even if the rebuttable presumption would have applied to you. The ruling is that the presumption no longer may be applied in its current formulation, it is not that admission of minority-owned businesses into the program is not allowed. The difference is now that SBA will likely require some form of a narrative of social disadvantage from you as well, explaining how you have experienced discrimination and bias that has held you back in your education, career, and business history. But we certainly do not take this lightly. This is a major change that could impact many, both regarding the success of their applications and the cost, time, and resources required to submit it.

SBA has historically required a great deal of detail from these narratives, but with this decision, if it persists, we are curious whether SBA might go easier on its review of these narratives in order to further the goals of the 8(a) Program. The result could, in fact, be that admission into the 8(a) Program becomes easier for everyone as a result of the court’s decision.

That all being said, for now, minority-owned businesses seeking entry into the 8(a) Program can no longer rely on the benefit of the rebuttable presumption of social disadvantage. We would recommend that if you are applying for admission, you prepare a narrative of social disadvantage or a licensed attorney assist you in the preparation of such a narrative. If you have already applied, we think it would be prudent for now to just keep an eye out for further instructions from SBA, and only prepare a narrative if asked, as we know that the preparation of a narrative can be time-consuming, which further can create more expense for you if you hire outside help to assist with it.

Questions about this post? Email us. Need legal assistance? Call us at 785-200-8919.

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