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SBA program upended in wake of Supreme Court affirmative action ruling

From left, AHANA Executive Director Marvo Reguindin, AHANA Vice President Joni Wynecoop, Small Business Administration Spokane Branch Manager Joel Nania, SBA District Director Kerrie Hurd, SBA Regional Administrator Mike Fong and Spokane Mayor Nadine Woodward, gather at the Spokane Central Library to outline support for multicultural businesses in the Spokane area.  (DAN PELLE/THE SPOKESMAN-REVIEW)
By Julian Mark Washington Post

Thousands of Black, Latino and other minority business owners are scrambling to prove that their race puts them at a “social disadvantage” after a federal judge declared a key provision of a popular Small Business Administration program unconstitutional, extending the U.S. Supreme Court’s recent retreat from affirmative action.

The SBA’s 8(a) Business Development program was meant to open a pipeline to billions in government contracting dollars for historically disadvantaged groups.

But in July, a federal judge in Tennessee struck down a provision of the program that equated race with social disadvantage.

The decision – one of the first to affect the private sector in the wake of the Supreme Court’s June decision upending race-conscious college admissions – throws into disarray an SBA program that has served minority-owned small businesses for about five decades.

Legal experts said it could signal trouble for other programs meant to help underrepresented groups win federal contracts, including veterans and women.

Under the new guidelines, being Black, Hispanic, Asian or Native American is no longer enough to automatically qualify as socially disadvantaged – a key step in making it into the program.

Instead, in a mass email distributed Aug. 22 by SBA officials, business owners were instructed to submit an essay demonstrating that race had hindered their success.

The revisions sparked a “full-blown panic” from many small-business owners who had benefited from the social disadvantage presumption, said Nicole Pottroff, a government contracts lawyer with Koprince McCall Pottroff in Lawrence, Kansas, who for years has helped businesses apply for the program.

“I had a lot of initial calls from clients, from blog readers, from contractors across the board, asking: ‘What does this mean?’ ” she said, adding that she has seen a “massive influx” of businesses needing help with crafting the essays.

Approximately 4,800 businesses participate in the 8(a) program, and nearly 4,000 of them were certified under the presumption of social disadvantage, according to the SBA.

In 2020, 8(a) firms were awarded $34 billion in government contracts, according to a Congressional Research Service report.

“The SBA is proud of our work to promote equity and level the playing field in federal procurement to attract a diverse supplier base and ensure competition, innovation, and performance,” SBA Administrator Isabella Casillas Guzman said in a statement, adding that the agency is working with the Justice Department to determine its next steps.

In the meantime, additional SBA staff members are being trained to review the narratives, according to the agency, which is working with the Justice Department to create additional guidance for businesses and the agencies with which they work.

Michael Rosman, general counsel of the Center for Individual Rights, a conservative public interest law firm that sued the SBA on behalf of a white business owner, Celeste Bennett, praised the court ruling.

In a statement, Rosman said that “we and our client are pleased that we were able to achieve a significant goal of the litigation: eliminating the explicit use of race in determining who is entitled to participate in a very advantageous federal contracting set-aside program.”

The upending of the 8(a) program marks one of the first casualties in the business world of the Supreme Court’s landmark decision holding that race-conscious admissions programs at Harvard and the University of North Carolina violate the Constitution’s guarantee of equal protection.

The 8(a) program’s reliance on the presumption of social disadvantage was similarly unconstitutional, District Judge Clifton L. Corker wrote in his July 19 order enjoining the SBA from using the presumption.

Corker, who was appointed by former president Donald Trump, referred to the Harvard case nine times, in what observers called one of the first interpretations of the Supreme Court’s affirmative action ruling.

“The facts in Students for Fair Admissions, Inc. concerned college admissions programs, but its reasoning is not limited to just those programs,” Corker wrote in a footnote.

The SBA changes come amid a broad legal assault on diversity, equity and inclusion initiatives in the private sector, one that has only intensified in the wake of the Harvard and UNC decisions.

Edward Blum, the conservative activist behind the two college admissions cases, has several pending lawsuits targeting private-sector DEI programs.

In July, more than a dozen Republican attorneys general fired off letters warning the nation’s largest companies that explicit racial quotas and preferences in hiring and promotions would invite legal action.

That a judge struck down the SBA’s use of the presumption of social disadvantage “wasn’t completely surprising to us because we’ve known that there’s been a number of cases that have been brought (and) funded by conservative legal foundations that have always questioned any affirmative action,” said Antonio Franco, managing partner at PilieroMazza, based in Washington, D.C., which works with government contractors to apply for the 8(a) program.

After the Harvard-UNC rulings, Franco said he remembered thinking it was “only a matter of time before that same kind of ruling comes out with regard to the 8(a) program.”

Other government business programs meant to benefit disadvantaged groups may also be vulnerable, Franco added.

He cited the Transportation Department’s Disadvantaged Business Enterprise program, which dispenses transportation-related construction contracts to minority-owned businesses.

Though different from the 8(a) program in some respects, it relies on the same social disadvantage presumption.

Pottroff said the Harvard-UNC rulings have essentially made no SBA program safe from scrutiny and legal challenges, including the Service-Disabled Veteran-Owned Small Business program, Women-Owned Small Business program, the Small Disadvantaged Business program and the Historically Underutilized Business Zones program – all of whose certifications are key in helping disadvantaged business owners win contracts throughout the federal government.

“I am very concerned that the [8(a)] program itself is going to be on the chopping block at some point, and I think that is why SBA is swiftly implementing things and trying to appease the courts … because they don’t want the entire program to be on the chopping block,” she added.

To qualify for the 8(a) program, a small business must meet several requirements – including being 51% owned by U.S. citizens who are socially and economically disadvantaged.

Economic disadvantage is defined as having a personal net worth of $850,000 or less, an adjusted gross income of $400,000 or less and assets totaling $6.5 million or less.

Social disadvantage is defined as racial prejudice – or cultural bias – within American society stemming from circumstances beyond an individual’s control, and people of certain races and ethnicities were automatically assumed to be socially disadvantaged without further proof.

Those who did not benefit from the presumption of social disadvantage were required to write a narrative citing specific instances in which an objective distinguishing feature negatively impacted a business owner’s advancement in the business world, and that disadvantage must be “chronic and substantial,” according to Pottroff.

Often, business owners who applied to 8(a) through the narrative did so on the basis of their gender, sexual orientation or a disability, she said, and they were often extensive and detailed documents.

Though they had a high success rate, Pottroff said, crafting narratives requires the help of lawyers and imposes a substantial financial burden.

The ruling against the 8(a) program came in a lawsuit filed in March 2020 by Ultima Services Corp., an administrative and technical support business.

Ultima’s owner, Celeste Bennett, claimed she was precluded from being awarded a contract under the 8(a) program because she is white.

Filed against both the U.S. Department of Agriculture and the SBA, the lawsuit claimed that Ultima lost out on USDA contracts that went instead to businesses participating in the 8(a) program.

Because Bennett did not benefit from the presumption of social disadvantage, she argues that the program discriminated against her.

The lawsuit argues that 8(a)’s so-called “rebuttable presumption” of social disadvantage – the presumption that Black, Hispanic, Native American and Asian people are in all cases socially disadvantaged – violates the Fifth Amendment, which covers due process rights but also incorporates the 14th Amendment’s equal protection clause when applied to the federal government, according to Corker’s order.

In his decision, Corker wrote that the SBA and the USDA failed to establish a “compelling interest” in their use of the presumption, meaning they did not provide enough evidence that it was needed to remedy the effects of past discrimination.

Moreover, Corker wrote that the presumption’s reliance on broad racial categories was not “narrowly tailored” to address past discrimination.

The judge cited the Harvard case in reaching both decisions.

In a March 2022 deposition, Bennett said she had never applied to the 8(a) program.

When asked why, she responded, “Because I am white, and I would never be accepted into the program.”

She added that – for businesses that did not benefit from the presumption – the process for establishing social disadvantage was a “farce.”

Bennett said she started her business, Lusa, in Maryland with $5,000 and acquired Ultima in 2002 with $20,000 that she borrowed from her father, who also owned a government contracting business.

In the deposition, Bennett added that she later borrowed approximately $500,000 from her father’s company after being denied loans at several banks over the course of about five years.

In 2019, court documents show Lusa was awarded two contracts from the Natural Resources Conservation Service worth $3.8 million through a women-owned small-business program.

Asked during her deposition why she chose to take advantage of the program for women but wanted to challenge a similar program for minorities, Bennett replied, “Because I don’t set the rules, and I need to play.”