Are Federal Contracting Diversity Programs in Danger?

Over the summer, the United States District Court for the Eastern District of Tennessee issued a ruling in Ultima Servs. Corp v. Dep’t of Ag., which affects the process for determining eligibility for the Small Business Administration’s (SBA) 8(a) Program. Section 8(a) of the Small Business Act, enacted in 1953, grants the SBA the ability to acquire contracts from other governmental agencies and award them to socially and economically disadvantaged small businesses. The aim of this program is to bolster business development.

In Ultima, the plaintiff filed a complaint alleging that SBA and the Department of Agriculture’s use of race violated the right to equal protection under the Fifth Amendment of the U.S. Constitution. The District Court found that the SBA’s reliance on a “rebuttable presumption,” that racial and ethnic minorities are “socially disadvantaged” for the 8(a) program was unconstitutional. Under this rebuttable presumption, individuals who qualified for the program did not need to submit evidence of their socially disadvantaged status. The plaintiff in Ultima, alleged that SBA’s use of this rebuttable presumption was unconstitutional because it discriminated against individuals who did not meet this qualification. As a result of this ruling, the SBA is enjoined from using the rebuttable presumption of social disadvantage when administering the 8(a) program.

The Federal Disadvantaged Business Enterprise program (“DBE”) also utilizes a rebuttable presumption that racial and ethic minorities (as well as women) are socially and economically disadvantaged. Such a showing is required to be certified as a DBE. To date, those provisions have not been struck down, but such a possibility could be on the horizon.

SBA’s Interim Guidelines

In light of the ruling, the SBA issued interim guidelines that now require individuals to establish socially disadvantaged status by completing a social disadvantage narrative.

To participate in the 8(a) Program, a firm must be 51% owned and controlled by socially and economically disadvantaged individuals. The owner(s) must be able to demonstrate their individual social disadvantage status by writing a narrative. Social disadvantage is defined, under 13 CFR 124.103(c),  as “an individual that has been subjected to racial, ethnic, or cultural bias within American society because of their identities as members of groups and without regard to their individual qualities. Under the new guidelines, social disadvantage narratives should state (1) an indication of which identity or identities are the basis of social disadvantage, and (2) descriptions of incidents in which bias or discrimination has occurred.

To indicate a qualifying identity, the SBA requests individuals to clearly describe which identity or characteristics they possess and how they have been subject to discrimination in order to help the agency understand their experiences and eligibility for the program. Under this section, race, religion, ethnic origin, gender, sexual orientation, identifiable disability, and isolation from American society all constitute identities and characteristics for qualification. Only one identity or characteristic is sufficient to establish this element.

Under the second requirement, description of incidents, the SBA recommends that an individual should provide two incidents of bias to establish chronic and substantial social disadvantage. The experience(s) should be related to education, employment, and business history. The agency also recommends ensuring that the narrative of the incidents describes who, what, where, why, when, and how the discrimination or bias occurred.

Takeaways

To comply with the Ultima ruling, the SBA is now requiring all 8(a) program participants who were eligible in the past to complete a social disadvantage narrative.

• The Court decision does not impact entity-owned firms, such as firms owned by Native American tribes, Alaska Native Corporations, or Native Hawaiian Organizations.

• All current 8(a) participants will receive direct communication from the SBA and will be provided detailed processes for establishing social disadvantage or that the participant had already established this status.

• To receive new contracts under the 8(a) program, an individual-owned 8(a) participant that previously relied on the presumption will now need to submit information to the SBA to allow the agency to determine eligibility.

To read the SBA’s Interim Guidelines and a link to the social disadvantage narrative, please visit: https://www.sba.gov/federal-contracting/contracting-assistance-programs/8a-business-development-program.