Earlier this month, in Rothe Development, Inc. v. Department of Defense, the D.C. Circuit upheld the constitutionality of the Small Business Administration (“SBA”) 8(a) program by rejecting arguments that the Small Business Act contains an unconstitutional classification based on race. Although the decision will likely be seen as a positive development for small business government contractors and other 8(a) program supporters, the court’s opinion leaves the door open for further challenges to the 8(a) program based on the SBA’s implementing regulations.
The goal of the SBA’s 8(a) program is to expand government contracting opportunities to small business owners. Under the Small Business Act, the SBA enters into contracts with other federal agencies, which the SBA then subcontracts to eligible small businesses to compete for subcontracts in a sheltered market. Businesses owned by “socially and economically disadvantaged” individuals are eligible to participate in the 8(a) program. Per the statute, socially disadvantaged individuals are 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 appellant, Rothe Development, Inc., is a small business that bids on Department of Defense (“DoD”) contracts, including the types of subcontracts that SBA may award to socially and economically disadvantaged businesses through the 8(a) program. Rothe alleged that the 8(a) program’s implementing statute contained an unconstitutional racial classification that hindered Rothe’s ability to compete with minority-owned businesses for government contracts. It argued that the statute’s definition of “socially disadvantaged” business owners was a racial classification that violated Rothe’s right to equal protection under the Due Process Clause of the Fifth Amendment because it prevented Roth from bidding on federal contracts on the basis of race. Rothe asserted that the statute should be subject to “strict scrutiny” review, and that the SBA lacked sufficient evidence to show that the qualified minority-owned businesses had been discriminated against. The district court agreed that the statute was subject to strict scrutiny, but found the statute constitutional after concluding that it was narrowly tailored to meet a compelling interest.
The D.C Circuit rejected Rothe’s arguments. It disagreed with the parties, and the district court below, that the Small Business Act warranted strict judicial scrutiny. Rothe had argued that strict scrutiny was warranted because the statute expressly classified individuals based on their race. But the court held that the provisions of the Small Business Act challenged by Rothe do not, on their face, classify individuals by race. The Small Business Act does not reference specific racial or ethnic groups; rather, Section 8(a) uses facially race-neutral term of “socially disadvantaged” to identify victims of discrimination, prejudice, or bias, without a presumption that members of certain racial, ethnic or cultural groups qualify as such.
Because the statute did not create a racial classification on its face, the D.C. Circuit held that did not need to determine whether district court correctly concluded that the statute is narrowly tailored to meet a compelling interest. Rather, the court applied the less stringent “rational basis” test. It found that the statute “plainly” was supported by a rational basis because it bore a “rational relation” to a “legitimate interest,” i.e., the goal of remedying the effects of prejudice and bias that impede business development and suppress fair competition for government contracts.
The D.C. Circuit’s opinion ends a trend in recent years of successful challenges to government programs designed to increase the number of contracts awarded to minority businesses. In 2011, Rothe successfully challenged the DoD practices under its Small Disadvantaged Business Program, which resulted in significant changes to the program. Rothe also intervened in a 2012 case filed by DynaLantic Corporation, which protested DoD’s decision to set aside a contract for military simulation and training services for minority-owned businesses. Although the district court found that the program was constitutional on its face, it also found that the DoD’s implementation was invalid because the Government lacked sufficient evidence of prior race-based discrimination in the military training and simulation market.
Though the court rejected Rothe’s challenge to the Small Business Act statute, the court appeared to leave open the possibility of a future challenge to the 8(a) program based on the SBA’s implementing regulations. The court noted that unlike the challenged statute, “the SBA’s regulation implementing the 8(a) program does contain a racial classification in the form of a presumption that an individual who is a member of one of five designated racial groups . . . is socially disadvantaged.” Because Rothe challenged only the statute, however, the case did not permit the court to decide “whether the race-based regulatory presumption is constitutionally sound.”
It remains to be seen whether Rothe will appeal the recent D.C. Circuit decision. Regardless of whether it proceeds with this case, it is likely that challenges to the 8(a) program will continue.