SBA’s 8(a) Program Survives Constitutionality Challenge … For Now

Last month, the U.S. Court of Appeals for the D.C. Circuit handed down an opinion in Rothe Development, Inc. v. U.S. Department of Defense affirming a lower court’s 2015 decision denying a challenge to the constitutionality of Small Business Administration’s (“SBA”) 8(a) business development program (“8(a) Program”). However, reading the majority and dissenting opinion leads one to seriously question whether the book is truly closed on this case and/or other challenges to the constitutionality of the 8(a) Program.

As the D.C. Circuit put it, the 8(a) Program permits the SBA “to enter into contracts with other federal agencies, which the SBA then subcontracts to eligible small businesses that compete for the subcontracts in a sheltered market.”  To be eligible to participate in the 8(a) Program, a business must be owned by “socially and economically disadvantaged” individuals, meaning persons “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.”

In the Rothe Development case, plaintiff Rothe, who was not an 8(a) Program participant (and who claimed it was not economically and socially disadvantaged and therefore not eligible for the 8(a) Program), filed a lawsuit against the U.S. Department of Defense (“DoD”) and SBA in federal court challenging the constitutionality of the 8(a) Program. Rothe alleged that the 8(a) Program violated Rothe’s right to equal protection under the Due Process Clause of the Fifth Amendment. Importantly, Rothe’s challenge was limited to whether the statutory provisions defining “socially disadvantaged” small business owners (15 U.S.C. § 637(a)(5)) were facially unconstitutional.

In June 2015, the U.S. District Court Judge Ketanji Brown Jackson issued summary judgment in favor of DoD and SBA, ruling that the 8(a) Program was constitutional on its face.  Judge Jackson ruled that because the statutory provision at issue (15 U.S.C. § 637(a)(5)) contained a racial classification, the strict scrutiny test applied.  However, Judge Jackson also ruled that the statutory provision was facially constitutional under the strict scrutiny test because the government satisfied both elements of the test: (1) the government articulated an established compelling interest for the 8(a) Program—namely, remedying race-based discrimination and its effects, and (2) the 8(a) Program is narrowly tailored to achieve the established compelling interest.

Rothe appealed, and this month the D.C. Circuit denied Rothe’s appeal.  Interestingly, even though the D.C. Circuit found the statute constitutional, the D.C. Circuit’s reasoning significantly departs from the reasoning in Judge Brown Jackson’s decision.  A two-judge majority on the D.C. Circuit concluded that the challenged statutory provision did not contains a racial classification, reasoning that the statutory provision:

uses facially race-neutral terms of eligibility to identify individual victims of discrimination, prejudice, or bias, without presuming that members of certain racial, ethnic, or cultural groups qualify as such. That makes it different from other statutes that either expressly limit participation in contracting programs to racial or ethnic minorities or specifically direct third parties to presume that members of certain racial or ethnic groups, or minorities generally, are eligible. Congress intentionally took a different tack with section 8(a), opting for inclusive terms of eligibility that focus on an individual’s experience of bias and aim to promote equal opportunity for entrepreneurs of all racial backgrounds.

Because the majority concluded the statute was “facially race-neutral,” it applied  rational basis review instead of instead of strict scrutiny (and with it a much lower burden for the government). Not surprisingly, the majority concluded that the statute was constitutional under rational basis review:

“[The statute] bears a rational relation to some legitimate end.” The statute aims to remedy the effects of prejudice and bias that impede business formation and development and suppress fair competition for government contracts.

Counteracting discrimination is a legitimate interest; indeed, in certain circumstances, it qualifies as compelling. …  And the statutory scheme is rationally related to that end. Congress conditioned participation in the 8(a) program on social disadvantage, defined as an individual’s experience of discrimination or bias. … Because “[s]mall businesses owned and controlled by socially and economically disadvantaged individuals (most of whom are minority) receive a disproportionately small share of Federal purchases,” … the program offers those participants technical assistance and the opportunity to bid on federal contracts in a sheltered market. The point of such sheltered markets is to provide disadvantaged business owners opportunities to gain management experience and build performance records—chances they might otherwise lose to competitors unhindered by the disadvantages they have experienced as a result of bias and prejudice. The program therefore provides the benefits socially and economically disadvantaged individuals most need to participate on fair terms in the national economy.

In dissent, Circuit Judge Karen L. Henderson emphatically disagreed with the majority’s conclusion that the statutory provisions at issue were facially race-neutral.  Noting that both parties and the district court believed the statute contained a racial classification, Circuit Judge Henderson argued that the statutory language contains “a paradigmatic racial classification” and therefore the strict scrutiny test should apply.

For a few reasons, the D.C. Circuit’s decision leaves the door open to further challenges to constitutionality of SBA’s 8(a) Program (and possibly an appeal to the Supreme Court).  First, unlike the statutory provisions, the majority held that SBA’s implementing regulations that further define “Who is socially disadvantaged?“, do “contain a racial classification in the form of a presumption that an individual who is a member of one of five designated racial groups (and within them, 37 subgroups) is socially disadvantaged.”  As a result, the strict scrutiny test would apply to these regulations — but Rothe elected not to challenge the constitutionality of the implementing regulation.  Therefore, the D.C. Circuit’s opinion open the door to Rothe (or another party) filing another suit challenging the constitutionality of SBA regulations implementing the 8(a) Program.  Second, the fact that both parties, the district court, and one of three judges on the D.C. Circuit, all concluded that the strict scrutiny test should apply to the statute, and none of the circuit court judges opined on whether the statutory provision at issue would pass the strict scrutiny test, makes one wonder whether Rothe may press this appeal by petitioning for a en banc rehearing before the entire D.C. Circuit or by filing a cert petition with the U.S. Supreme Court.  Certainly there is a reasonable possibility that another set of judges would disagree with the majority opinion in Rothe that the statutory provisions were facially race-neutral.  If that were to happen, the next issue that would be addressed is whether the statutory provision satisfied the strict scrutiny test — an issue that no circuit court judge has addressed that to date.  So, despite surviving this constitutional challenge, the book on the constitutionality of the  the 8(a) Program is by no means closed.