Another Minority Business Development Program Found Unconstitutional

Introduction

On March 5, 2024, a federal district court judge in the Northern District of Texas ruled¹ that the statute and the program operation of the Minority Business Development Agency (MBDA) within the Department of Commerce is an unconstitutional race-based programs that provided preferential treatment to certain groups identified as “socially or economically disadvantaged individuals.” The court issued a permanent injunction halting the agency from imposing the racial and ethnic classifications for eligibility to its programs, or otherwise considering or using an applicant’s race or ethnicity in determining whether the applicant can receive assistance from the agency’s business centers. All three of the plaintiffs in the case were white-owned small businesses, although only two of the three were found to have “standing” to challenge the MBDA program.

The government has 60 days to appeal the district court’s decision. MBDA and the U.S. Department of Justice have indicated their intent to appeal the court’s decision, but as of the date of this blog, no appeal has been filed.

Background

In response to the race riots in 1968, the MBDA was created by Executive Order by President Nixon on March 5, 1969². The agency was finally made permanent by statute in 2021. MBDA’s long-standing program guidance, and it’s 2021 statute,³ provides that the agency serves “socially or economically disadvantaged individual,” which is further defined as “an individual who has been subjected to racial or ethnic prejudice or cultural bias … because of the individual’s identity as a member of a designated group, without regard to any individual quality.” According to the Texas court, the agency uses a codified list of preferred races/ethnicities, and the agency presumes that anyone from that list is automatically “socially or economically disadvantaged,” while anyone outside of those groups is presumptively not disadvantaged and not entitled to benefits. If individuals from other groups apply for funding through the MBDA, they must produce sufficient evidence to rebut the presumption that they are not disadvantaged in order to be eligible for assistance.

In response to the Court’s decision, the MBDA director issued a statement⁴ and committed to “continue MBDA’s programs and work to assist businesses owned by socially or economically disadvantaged individuals in a manner consistent with the court’s decision.” On March 20, 2024, MBDD announced that it would comply with the Court order and directed all of its business centers to avoid racial considerations when screening applicants. However, applicants for assistance must sign a “statement of disadvantage,” under penalty of perjury, that they are a “minority business,” although no other documentation is required to be submitted.

This case is similar to the Small Business Administration’s 8(a) minority business development program that a Tennessee federal court, in Ultima Services,⁵ on July 19, 2023, ruled unconstitutional because SBA used a racial and ethnic list of groups to “presume” that an individual was “socially” disadvantaged; those not in the identified list of groups had the burden of proving that they faced discrimination that resulted in being socially disadvantaged, although there was evidence presented in the case that anyone not in the designated groups had not succeeded in independently proving social disadvantage. In addition to meeting the “social disadvantage” status, all applicants for SBA’s program have to individually demonstrate that they are also “economically disadvantaged,” based on SBA criteria. By contrast, under the MBDA program, a firm in a designated group would be eligible if the owner met either the “social” or the “economic” disadvantage criteria.

In the SBA case, the Tennessee Federal district court found that SBA has the statutory authority to create a rebuttable presumption, but also found that the rebuttable presumption did not survive the “strict scrutiny” test required for a race-based designation. The district court found 1) the Government failed to show a compelling interest for their use of the rebuttable presumption as applied to Ultima Services, and 2) even if the Government could establish a compelling interest, the rebuttable presumption was not narrowly tailored to serve the asserted interest. That same two-part strict scrutiny test was applied in the MBDA case.

To its credit, SBA took immediate action following the Ultima Services ruling to at least temporarily align the 8(a) program with the court’s initial ruling.⁶ It issued new narratives requiring all new program applicants, and those recently added to the program, to complete to provide a factual basis upon which SBA could make a determination as to whether the individual was “socially” disadvantaged. If an individual cannot establish social disadvantage status under the new narrative requirement, it will not be eligible for new 8(a) contract awards. If SBA is unable to affirmatively determine social disadvantage in connection with a pending contract award, the SBA will initiate suspension and/or termination proceedings. In addition, SBA, in conjunction with the Department of Justice, issued guidance to federal buying activities on how to apply the court’s ruling to pending and new contract awards to be offered to the 8(a) Program.

Conclusion

We are watching closely for further developments in both the MBDA and SBA cases, and any further agency actions. We have already provided assistance to our clients in completing the new SBA narrative and navigating through the updated guidance on 8(a) awards. We also cover these cases in several of the training classes Centre Law offers the public; the full list of our training courses is available here.

If you have any questions or need any additional information, please do not hesitate to contact the author or the Centre Law attorney with whom you work.

¹ Nuziard v. Minority Bus. Dev. Agency (USDC, N.D. Texas) March 5, 2024, available at https://fingfx.thomsonreuters.com/gfx/legaldocs/zjvqwooxmvx/03062024mbda.pdf.
² See Executive Order 11458,” Prescribing Arrangements for Developing and Coordinating a National Program for Minority Business Enterprise” (March 5, 1969), available at https://archives.federalregister.gov/issue_slice/1969/3/7/4935-4939.pdf.
³ See 15 U.S.C. 9501, et seq. (2021), available at https://uscode.house.gov/view.xhtml?path=/prelim@title15/chapter120&edition=prelim.
⁴ Statement by Eric Morissettes (performing the duties of the Under Secretary of Minority Business Development, and the Minority Business Development Agency), March 11, 2024, available at https://www.mbda.gov/eric-morrissettes-head-mbda-statement-response-nuziard-v-mbda-court-ruling.
⁵ Ultima Service v. Dept of Agriculture, USDC, ED Tennessee (July 19, 2023), available at https://storage.courtlistener.com/recap/gov.uscourts.tned.93612/gov.uscourts.tned.93612.86.0.pdf.
⁶ As of the date of this blog, no final order has been issued in this case, despite August 2023 oral arguments and briefings regarding the remedies to be applied.