Court Decision Voids Major Small Business Contracting Law

Elizabeth Newell, Government Executive, November 6, 2008

A federal appeals court has thrown out a law establishing a 5 percent goal for awarding defense contracts to small businesses owned by socially and economically disadvantaged individuals.

The decision has the potential to invalidate the small disadvantaged and 8(a) contracting programs, which help socially and economically disadvantaged firms win billions of dollars in federal contracts every year.

The opinion, issued by the U.S. Court of Appeals for the Federal Circuit, strikes down a legislative provision, first enacted in 1986 and renewed numerous times since, which sets a goal that 5 percent of federal defense contracting dollars each fiscal year must be awarded to certain entities, including small disadvantaged companies.

The court noted that this provision incorporates the 1953 Small Business Act’s presumption that African-American, Asian-American, Hispanic-American and Native American business owners are socially disadvantaged.

The provision therefore violates the equal protection component of the Fifth Amendment right to due process, because it authorizes the Defense Department to afford preferential treatment on the basis of race and does not meet a “strict scrutiny” standard, the appeals court decided. Under this requirement, the government must prove that the preference is “narrowly tailored to serve a compelling government interest.”

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Defense’s practice of giving minority companies a 10 percent price credit meant that companies owned by certain socially and economically disadvantaged groups did not have to be the lowest bidder to win federal contracts, and helped the department achieve the congressionally mandated goal. Defense is required to waive price adjustments if it is meeting the small business goals, and has not employed adjustments since March 2007.

The initial suit was filed in 1998 by Rothe Development Corp., a Texas-based information technology company that lost a Defense contract to an Asian-American-owned business. Rothe, owned by a Caucasian woman, had been the lowest bidder.

David Barton, of the San Antonio-based Gardner Law Firm, who represented Rothe, said the decision will force minority-owned businesses to compete on an equal playing field.

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