On June 29, 2023, the United States Supreme Court issued its
historic decision in Students for Fair Admissions v.
Harvard, 600 U.S. 181 (2023). This decision upended
decades of precedent and held that race-conscious (affirmative
action) college admissions programs violated the Equal Protection
Clause of the Fourteenth Amendment. This landmark decision has
emboldened attacks on Disadvantaged Business Enterprise
(“DBE”) programs nationwide.
Ultima Servs. Corp. v. US Dep't. of
Agric., Case No.
2:20-CV-00041 (E.D. Tenn. July 19, 2023)
On July 19, 2023, the United States District Court for the Eastern
District of Tennessee issued its decision in Ultima Servs.
Corp. v. US Dep't. of Agric., Case No. 2:20-CV-00041.
There, the court held that the Small Business
Administration's (“SBA”) use of a race-based
rebuttable presumption to establish social disadvantage was
unconstitutional and enjoined the SBA from using that presumption
in the administration of its 8(a) program.
Per the SBA's website: “The 8(a) program is a robust
nine-year program created to help firms owned and controlled by
socially and economically disadvantaged individuals. Businesses
that participate in the program receive training and technical
assistance designed to strengthen their ability to compete
effectively in the American economy.”
Whenever a statute or other government action provides burdens or
benefits based on race, ethnicity, or national origin, courts
employ a strict scrutiny test. The test has two parts. First, the
racial classification must further a compelling government
interest. Second, it must be narrowly tailored to meet that
interest.
In Ultima, the SBA argued that the compelling
government interest was to remedy past acts of discrimination in
federal contracting. By way of proof, it offered expert reports
showing “large, adverse disparities in the utilization of
minority-owned businesses” across multiple industries. The
court found this was not enough. Specifically, the court held that
the SBA did not: (i) identify any specific instance of
discrimination; (ii) did not provide evidence of any intentional
discrimination; and (iii) did not identify any government
participation (passive or otherwise) in the discrimination that the
8(a) program was designed to address.
The court also found that the use of this race-based presumption
was not narrowly tailored. Specifically, the court found that the
8(a) program: (i) was not flexible and limited in duration; (ii)
lacked a specific remedial objective (no participation goals);
(iii) was both over inclusive and underinclusive; (iv) did not
consider race-neutral alternatives to the presumption of social
disadvantage; and (v) negatively impacted the third parties not
eligible to participate.
Accordingly, it issued its nationwide injunction. In August of
2023, the SBA issued its interim guidance requiring all 8(a)
participants whose program eligibility is based upon one or more
individuals and who relied upon the presumption of social
disadvantage to establish their individual social disadvantage by
completing a social disadvantage narrative. The SBA also published
a detailed guide instructing contractors how to write a
social disadvantage narrative.
In September, Ultima filed for a permanent injunction and requested
additional relief in September. No hearing has yet taken
place.
Jeffrey Nuziard, et. al. v. Minority Bus.
Dev. Agency, et.
al., Case 4:23-cv-00278-P (N.D. Texas March
2, 2024)
On March 5, 2024, the United States District Court for the Northern
District of Texas issued its opinion in Jeffrey Nuziard,
et. al. v. Minority Business Development Agency, et. al., Case
4:23-cv-00278-P. There, the court issued a nationwide, permanent
injunction enjoining the Minority Business Development Agency
(“MBDA”), as well as anyone that administers its
programs, from using an applicant's race or ethnicity in
determining eligibility for the MBDA program or any of its
benefits. Final judgment was entered on May 2, 2024. No appeal
has yet been filed.
In Nuziard, three business owners filed suit arguing
that certain programs implemented by the MBDA were racially
discriminatory and violated the Constitution's Equal
Protection Clause because the programs were only available to
“socially or economically” disadvantaged individuals,
and only certain minority groups were presumed to be socially
disadvantaged.
The logic behind the decision
in Nuziard tracked Ultima closely.
The court utilized the same factors and analysis to find that the
government failed to show either a compelling interest in presuming
that certain minority groups were socially or economically
disadvantaged, or that the MBDA's race-based presumption was
narrowly tailored.
Mid-America Milling Co., LLC, et al. v. US Dep't
of Transp., et
al., Case No. 3:23-cv-00072 (E.D. Ky.
Oct. 26, 2023)
On October 26, 2023, a similar lawsuit was filed in the United
States District Court for Kentucky, Mid-America Milling
Co., LLC v. Department of Transportation, Case No.
3:23-cv-00072. In Mid-America, plaintiffs challenged
the federal Department of Transportation's
(“DOT”) Disadvantaged Business Enterprise
program. Specifically, they argued that the DOT's
use of a rebuttable presumption to determine whether an individual
was socially disadvantaged was unconstitutional racial
discrimination. Plaintiffs, who were not disadvantaged, claimed
they were “being forced to compete” in an unequal
system that imposed race and gender-based contracting goals
prioritizing DBE firms. The plaintiffs further argued that
removing the rebuttable presumption of social disadvantage
available to entities owned by women and certain races would render
the program race and gender neutral.
No decision has yet been issued.
Ohio's EDGE Program
Ohio's Encouraging Diversity, Growth, and Equity
(“EDGE”) program was originally created by Executive
Order 2002-17T in December 2002, and was codified in July
2003. See Ohio Revised Code (“RC”)
Section 122.92 through 122.925.
EDGE is not a set-aside program. Instead, it establishes DBE
contracting goals for state agencies, boards and commissions in
awarding contracts. The program applies to procurements of supplies
and services, professional services, information technology
services, and construction, architecture and engineering.
According to RC § 122.922, to participate in the EDGE program,
a business must show both social and economic disadvantage. Like
the statutes at issue
in Ultima, Nuziard,
and Mid-America, the EDGE statute contains a
rebuttable presumption to establish social disadvantage. RC §
122.922(B)(3)(b)(i).
Based upon this recent trend, it seems it may only be a matter of
time until the constitutionality of the EDGE program is challenged
in court. Will the State of Ohio pass the strict scrutiny test by
demonstrating that the race-based rebuttable presumption furthers a
compelling government interest and is narrowly tailored to meet
that interest?
More importantly, if a court does find that EDGE is
unconstitutional, and that the race-based rebuttable presumption of
social disadvantage can no longer be used, what does that really
mean? Will the program be terminated? Like the 8(a) program, will
EDGE simply continue without the rebuttable presumption? Or will
new legislation take its place?
Other Ohio DBE statutes have been found unconstitutional in the
past (see Associated Gen. Contrs. of Ohio, Inc. v.
Drabik, 214 F.3d 730 (6th Cir. 2000). In response, however,
lawmakers have simply passed new legislation to assist these
traditionally disadvantaged businesses. So, even if this cycle
continues and EDGE is held unconstitutional, either in whole or in
part, we expect that Ohio's support for programs aimed at
benefitting minorities, women, and service veterans will
continue.
Endnotes
“District Court Rules SBA Presumption of Social Disadvantage
Is Unconstitutional,” July 25, 2023, Christopher
Slotee.
District Court Rules SBA Presumption of Social Disadvantage Is
Unconstitutional - Schwabe.
“Encouraging Diversity, Growth & Equity,” Ohio
Facilities Construction Commission.
EDGE.pdf (ohio.gov).
“The Need for a Minority Contractors' Group
Continues,” Feb. 14, 2023, Rhonda Crowder.
The Need for a Minority Contractors' Group Continues |
Construction Employers Association (ceacisp.org).
“U.S. District Court Bars Racial Criteria for Minority
Business Development Agency Programs,” March 15, 2024,
Christopher Slotee.
U.S. District Court Bars Racial Criteria for Minority Business
Development Agency Programs - Schwabe.
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