In Dynalantic Corp. v. U.S., the District Court for the District of Columbia recently evaluated the constitutionality of section 8(a) of the Small Business Act, commonly known as the 8(a) program.i According to the plaintiff, a non-8(a)-qualifying small business, the program constituted an improper racial preference program that violated its rights under the Equal Protection Clause of the Fifth Amendment to the Constitution, both on its face and as applied to the particular industry.ii On August 15, 2012, the court upheld the 8(a) program as a whole but found that the program could not survive strict scrutiny as applied to the particular industry challenged—the military simulation and training industry.
The 8(a) program is a business development program administered by the Small Business Administration designed to aid small businesses owned and controlled by socially and economically disadvantaged individuals. Social disadvantage is presumed in certain racial categories, although that presumption is rebuttable.iii The program does not set forth quotas, but rather aspirational goals for contracting to 8(a) companies.iv It also permits, under certain conditions, setting-aside procurements for competition only amongst 8(a) entities or sole source (i.e., non-competitive) awards.
In order to be successful on its facial challenge, Dynalantic would have had to persuade the court that there were no set of circumstances in which the 8(a) program could be found valid. However, its facial challenge did fail because the court found that the 8(a) program was constitutional because “the government has a compelling interest in ‘remedying the effects of past or present racial discrimination.’”v And, the Government had satisfied its burden to “demonstrate ‘a strong basis in evidence’ supporting its conclusion that race-based remedial action was necessary to further that interest.”vi
The As-Applied Challenge
But, with regard to the as-applied challenge, the court sided with Dynalantic. According to the court, the race-conscious program had to survive the same strict scrutiny standard, not only as to the facial challenge to the program as a whole, but also with regards to the particular industry, in this case the military simulation and training industry. In a nutshell, the defendants admitted that they did not have evidence of discrimination in the industry, nor were they aware of any discrimination in the particular industry.
Defendants instead defended on the theory that no demonstration of discrimination in the particular industry was required. But, based on its interpretation of the binding precedent, the court disagreed.vii It found that industry-specific determinations were required. In the absence of evidence to justify such a determination, the court enjoined the defendants “from awarding procurements for military simulators under the Section 8(a) program without first articulating a strong basis in evidence for doing so.”viii
What type of evidence would have been sufficient? Presumably it would have been the same type of evidence that persuaded the court that the 8(a) program as a whole could withstand a facial challenge. The court found that the Government was not required to show conclusive evidence of the existence of racial discrimination, and the Government was able to “rely on both statistical and anecdotal evidence, although anecdotal evidence alone cannot establish a strong basis in evidence for the purposes of strict scrutiny.”
With regards to the facial challenge, the court had looked at the evidence before Congress when it enacted the 8(a) program and evidence that came before Congress subsequent to its enactment to justify the continued need for the program, detailing barriers to minorities in both forming and developing business, in the form of reports, testimony, and disparity studies based on statistical evidence. In fact, the court noted that hundreds of disparity studies had been put before Congress, and “[s]ince 2006, over fifty state and local disparity studies, conducted in twenty eight states and the District of Columbia, have been introduced or discussed at Congressional hearings.” And while the Government had introduced over 50 disparity studies, with little or no analysis, none of these disparity studies were relevant to the industry at issue in the case at hand. Generic, statistical evidence simply was not enough to justify a race-conscious factor but appears to be the type of evidence to which the court would have given credence, had it been industry-specific.
So what does this mean for the future of 8(a) contracting? Assuming that the case is not overturned on any subsequent appeal, it means that the 8(a) program, as a whole, survives. However, as it currently stands, this decision opens the door to further as-applied challenges in other industries. With the exception of perhaps construction, it does not seem likely that the Department of Defense (or any other Federal agency) has been conducting industry-specific studies to demonstrate the evidence of discrimination needed to satisfy the standard adopted by the court. As a result, further as-applied challenges, in practice, could impact the use of 8(a) set-asides in industries where there is insufficient evidence of discrimination.
i Dynalantic Corp. v. U.S. Dept. of Defense, No. 1995-2301, Memorandum Opinion (D.D.C. Aug. 15, 2012).
By way of background, Dynalantic first filed an agency-level protest in 1995, challenging the Navy’s decision to set aside a contract to develop a UH-1N Aircrew Procedures Strainer for competition under the 8(a) program. When the agency denied the protest and subsequent administrative appeal, Dynalantic filed suit in the District Court for the District of Columbia, challenging the constitutionality of the 8(a) program. In the 17 years between filing the protest and this decision, Dynalantic’s case was bounced back and forth between the trial court and the appellate court while issues, including questions of standing and mootness, were decided.
During this time, the Navy cancelled the proposed solicitation that had originally been questioned, but the case was permitted to go forward as both a facial challenge and an as-applied challenge. Also during the pendency of the case, other critical decisions were issued by the Supreme Court, such as the Rothe decision, in which the Federal Circuit struck down the Department of Defense’s (“DoD”) program, which gave evaluation preferences to small disadvantaged businesses and had “imposed an independent obligation on the Agency to participate in Section 8(a).” Rothe Development Corp. v. Department of Defense, 545 F.3d 1023 (Fed.Cir. 2008).
ii Plaintiff also challenged the program as a violation of rights under 42 U.S.C. § 1981 and Title VI of the Civil Rights Act of 1964, 42 U.S.C. § 2000d et seq. These claims were not persuasive to the court.
iii The racial groups for whom social disadvantage is presumed are Black Americans, Hispanic Americans, Native Americans, Asian Pacific Americans, and Subcontinent Asian Americans. See 13 C.F.R. § 124.103(b)(1) for a more detailed listing.
iv The SBA’s goal is that 5% of Federal dollars be awarded through the 8(a) program. The DoD’s goal is to award 2% of its prime contract dollars through the 8(a) program.
v Quoting Shaw v. Hunt, 517 U.S. 899, 909 (1996).
vi Quoting Sherbrooke Turf v. Minn. Dep’t of Transp., 345 F.3d 964, 969 (8th Cir. 2003) (quoting City of Richmond v. J.A. Croson Co., 488 U.S. 469, 500 (1989)).
vii The court particularly relied on Croson, 488 U.S. 469 and O’Donnell Construction Company v. D.C., 963 F.2d 420 (1992).
viii In response to this decision, the Office of the Under Secretary of Defense issued a Memorandum on August 22, 2012, stating that “contracts for procurement of military simulators or any services in the military simulator industry should not be awarded through the 8(a) program.”