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.

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Photo of Jennifer Plitsch Jennifer Plitsch

Jennifer Plitsch leads the firm’s Government Contracts Practice Group, where she works with clients on a broad range of issues arising from both defense and civilian contracts including contract proposal, performance, and compliance questions as well as litigation, transactional, and legislative issues.

She…

Jennifer Plitsch leads the firm’s Government Contracts Practice Group, where she works with clients on a broad range of issues arising from both defense and civilian contracts including contract proposal, performance, and compliance questions as well as litigation, transactional, and legislative issues.

She has particular expertise in advising clients on intellectual property and data rights issues under the Federal Acquisition Regulations (FAR) and obligations imposed by the Bayh-Dole Act, including march-in and substantial domestic manufacturing. Jen also has significant experience in negotiation and compliance under non-traditional government agreements including Other Transaction Authority agreements (OTAs), Cooperative Research and Development Agreements (CRADAs), Cooperative Agreements, Grants, and Small Business Innovation Research agreements.

For over 20 years, Jen’s practice has focused on advising clients in the pharmaceutical, biologics and medical device industry on all aspects of both commercial and non-commercial agreements with various government agencies including:

  • the Department of Veterans Affairs (VA);
  • the Department of Health and Human Services (HHS), including the Biomedical Advanced Research and Development Authority (BARDA), the National Institutes of Health (NIH), and the Centers for Disease Control (CDC);
  • the Department of Defense (DoD), including the Defense Threat Reduction Agency (DTRA), the Defense Advanced Research Projects Agency (DARPA), and the Joint Program Executive Office for Chemical Biological Defense (JPEO-CBRN); and
  • the U.S. Agency for International Development (USAID).

She regularly advises on the development, production, and supply to the government of vaccines and other medical countermeasures addressing threats such as COVID-19, Ebola, Zika, MERS-CoV, Smallpox, seasonal and pandemic influenza, tropical diseases, botulinum toxin, nerve agents, and radiation events. In addition, for commercial drugs, biologics, and medical devices, Jen advises on Federal Supply Schedule contracts, including the complex pricing requirements imposed on products under the Veterans Health Care Act, as well as on the obligations imposed by participation in the 340B Drug Pricing program.

Jen also has significant experience in domestic sourcing compliance under the Buy American Act (BAA) and the Trade Agreements Act (TAA), including regulatory analysis and comments, certifications, investigations, and disclosures (including under the Acetris decision and Biden Administration Executive Orders). She also advises on prevailing wage requirements, including those imposed through the Davis-Bacon Act and the Service Contract Labor Standards.

Photo of Terra White Fulham Terra White Fulham

Terra Fulham represents corporate and individual clients in complex litigations and investigations, with particular expertise in defending government contractors against allegations of fraud and False Claims Act violations. She has experience representing clients at all stages of internal and government investigations, including conducting…

Terra Fulham represents corporate and individual clients in complex litigations and investigations, with particular expertise in defending government contractors against allegations of fraud and False Claims Act violations. She has experience representing clients at all stages of internal and government investigations, including conducting witness interviews, managing government subpoena and CID responses, defending witnesses in government interviews, and advocating before government enforcement officials. She has litigated qui tam matters brought under the False Claims Act, including matters alleging subcontractor fraud, quality assurance deficiencies, conflicts of interest, and cost mischarging. Terra also has experience with suspension and debarment matters, representing entities in such proceedings to ensure their continued eligibility to participate in federal programs.

She has also represented clients in a variety of litigation matters during motions practice, discovery, and final hearings.

Terra also maintains an active pro bono practice, with an emphasis on immigration-related impact litigation.