Federal Court Finds SBA’s 8(a) Program Unconstitutional

Periodically, there are judicial and press challenges to the constitutionality of SBA’s 8(a) minority business development program. On July 19, the U.S. Federal District Court for the Eastern District of Tennessee issued a ruling finding that a key element of this long-standing federal program designed to benefit “socially and economically disadvantaged small businesses” failed to meet the Constitutional standards for “equal protection.” [1]

SBA’s 8(a) program was originally enacted by Congress in 1958. The program was not focused specifically on minority-owned small businesses until an Executive Order was issued by President Nixon in 1970. In 1978, Congress amended the Small Business Act to give the SBA express statutory authority for its 8(a) program for minority-owned businesses.

The law gives SBA the authority to acquire federal contracts from other agencies and provide for the performance of those contracts by small businesses who are owned by “socially and economically disadvantaged individuals.” The law provides that “socially and economically disadvantaged individuals” who were subjected to prejudice or bias because of their identification with certain minority groups are eligible to participate in the program. In administering the program, SBA applies a rebuttable presumption of “social disadvantage” to those in the identified groups; but core to the Tennessee court’s decision is the point that this rebuttable presumption was established by SBA via regulations, not because of statute.[2]  Individuals who are not members of groups that SBA has designated by virtue of this “rebuttable presumption” must affirmatively establish that they are “socially disadvantaged” based on criteria SBA has adopted. All individuals who are designated “socially disadvantaged,” whether through the rebuttable presumption or by affirmative establishment, must also demonstrate that they are “economically disadvantaged” under standards set by SBA regulations.

Ultima, a small business, is owned and operated by a white woman, but it is not an SBA-designated 8(a) company. Ultima has been awarded numerous federal contracts, primarily from the Department of Agriculture (USDA). Beginning in 2018, USDA began moving some of these contracting opportunities into the 8(a) program. Ultima challenged the SBA’s use of the “rebuttable presumption of social disadvantage” for certain minority groups under the SBA 8(a) program, alleging that such presumption discriminated against her based on a race-based designation in violation of the Fifth Amendment to the U.S. Constitution.

The Tennessee Federal District Court, in following a decision from the U.S. Court of Appeals for the Sixth Circuit,[3] concluded that SBA has statutory authority to establish a “rebuttable presumption of social disadvantage”, but such presumption could not withstand the “strict scrutiny” that is required to be applied when the Federal Government uses a racial classification. The Court specifically found that the Government did not have a “compelling interest” in remedying past racial discrimination and failed to demonstrate “strong evidence” to support its use. In addition, the Court found that the presumption was not “narrowly tailored” to remedy the past racial discrimination.

The Court stopped SBA from using the rebuttable presumption of social disadvantage for new small business applicants to the 8(a) program. The Court also scheduled a hearing for August 31 to discuss whether and what other remedies may be appropriate based on its decision. Remedies could include a determination of whether the decision is to be applied to existing 8(a) companies as well as future applicants, and whether federal buying agencies (like the Department of Agriculture) are precluded from making future 8(a) contract awards to existing 8(a) companies.

This is certainly not the first federal case to challenge some aspect of the 8(a) program’s structure and operation. Since the Biden Administration has made a strong public policy push to significantly increase 8(a) and other program awards to minority businesses,[4] it is highly likely that the Federal Government, through the Department of Justice, will ask the Tennessee District Court to pause application of its decision (i.e., “stay” the injunction), while it appeals this ruling. In the interim, while SBA has not made any statement about the Ultima decision as of August 1st, SBA will, at a minimum, have to pause considering new applications for admission into the 8(a) program based on the “rebuttable presumption” that the firm is socially disadvantaged.

Centre Law will continue to closely monitor the legal and regulatory developments related to this case. 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 normally work.

[1] Ultima Services Corp. v. Department of Agriculture (USDC, ED Tenn; July 19, 2023), available at https://webservices.courthousenews.com/sites/Data/AppellateOpinionUploads/2023-20-7–11-55-39-220cv41b.pdf (last viewed Aug 1, 2023)

[2] In this case, SBA argued that the regulation on “rebuttable presumption” derived from the congressional mandate to SBA to make determinations of social disadvantage. See Ultima, supra, slip opinion at 7.

[3] See Vitolo v. Guzman, 999 F.3d 353 (6^th Cir; May 27, 2021), holding the Federal government cannot allocate limited coronavirus relief funds based on the race and sex of the applicants, available at https://www.opn.ca6.uscourts.gov/opinions.pdf/21a0120p-06.pdf (last viewed Aug 1, 2023)

[4] See, for example, “Biden-⁠Harris Administration Advances Equity And Economic Opportunity Through Federal Procurement And State And Local Infrastructure Contracting”, July 26, 2022, available at https://www.whitehouse.gov/briefing-room/statements-releases/2022/07/26/fact-sheet-biden-harris-administration-advances-equity-and-economic-opportunity-through-federal-procurement-and-state-and-local-infrastructure-contracting/ (last viewed Aug 1, 2023)