Ruling Threatens 8(a) Program, Unless Congress Acts A federal appeals court has ruled that the Defense Department’s contracting preference for small disadvantaged businesses is unconstitutional. While the ruling applies directly only to the SDB program, it threatens to invalidate 8(a) set-asides, because eligibility standards for the two programs are so similar, according to legal authorities. A unanimous three-judge panel of the U.S. Court of Appeals for the Federal Circuit in Washington found Congress did not provide sufficient evidence of discrimination to justify creating the SDB preference to benefit racial and ethnic minorities. The judges relied on prior Supreme Court decisions limiting affirmative action, including the 1995 Adarand case, in deciding in favor of Rothe Development Corp. of San Antonio, a white-owned company that sued the Defense Department and the Air Force. The Justice and Defense departments have not said whether they will appeal to the Supreme Court. By law and regulation, certain minorities are presumed to be disadvantaged and are automatically eligible for the SDB program: African American, Hispanic, Asian Pacific, Subcontinent Asian and Native American. The appeals court opinion, by Chief Judge Paul Michel, said the Supreme Court requires “strict scrutiny” to determine whether minority groups have been subject to discrimination in a particular industry or government agency. “Because Congress did not have a ‘strong basis of evidence’ upon which to conclude that DoD was a passive participant in pervasive, nationwide racial discrimination…the statute fails strict scrutiny,” the court said. The same minority groups are automatically eligible to apply for 8(a) certification. A lawsuit pending in federal district court in Washington, DynaLantic Corp. v. U.S. Department of Defense, seeks to have the 8(a) program declared unconstitutional. Michael Rosman, an attorney for DynaLantic, told Set-Aside Alert his case attacks the 8(a) program on grounds “similar but not identical” to those raised in the Rothe case: the law’s presumption that certain minorities are socially and economically disadvantaged and therefore entitled to preferential treatment. Rosman said he and the defendant each filed amended motions for summary judgment in the case a year ago, but the court has not ruled. Although the appeals court decision is a binding precedent only for cases in the Federal Circuit, other circuit courts can take notice of the ruling. The DynaLantic case is in the District of Columbia Circuit. In his Nov. 4 opinion, Judge Michel left open the possibility that Congress might produce more evidence to justify the SDB contracting preferences. The SDB program is due to be reauthorized next year. “Congress needs to address this ‘supposed failing’ head on,” said Hank Wilfong, president of the National Association of Small Disadvantaged Businesses. He urged his members to contact their congressional representatives. Although SDB set-asides were suspended after the Adarand decision, those companies were still entitled to a 10% price evaluation adjustment. The Defense Department has not used the adjustment in recent years because it has consistently met its 5% goal for contracting with SDBs, but the law remains on the books. Rothe Development, a company owned by a white woman, first filed suit in 1998, and the case has been bouncing between district court and circuit courts ever since. After a judge in Texas upheld the constitutionality of the SDB program, Rothe appealed. In its ruling, the appeals court said the program violated Rothe’s Fifth Amendment right to equal protection of the law. Chief Judge Michel’s opinion was joined by Circuit Judge Haldane Robert Mayer (both are Reagan appointees), and District Judge Richard Stearns of Massachusetts, a Clinton appointee. The lower court noted six disparity studies showing evidence of a pattern of discrimination against minorities in public and private contracting. But the appeals court said many of the studies were outdated by the time Congress last authorized the SDB preference in 2006, or suffered from other defects. The appeals court’s legal interpretation is similar to the Bush administration’s controversial rationale for sharply limiting the women’s set-aside program. Based on a disparity study, SBA has proposed restricting the women’s set-asides to just 34 industries. In addition, the Justice Department said each agency must determine whether it has discriminated against woman-owned businesses before it can set aside contracts for them.