SBA Issues Interim Guidance After Ultima Decision Finds 8(a) Program Violates Equal Protection

September 29, 2023

On July 19, 2023, in Ultima Services Corp. v. U.S. Department of Agriculture, the U.S. District Court for the Eastern District of Tennessee enjoined the U.S. Small Business Administration (SBA) from determining federal contractor eligibility for its 8(a) Business Development program according to a “rebuttable presumption” that individuals of certain racial groups are socially disadvantaged. Participation in the 8(a) program provides certain contractors access to preferential federal government procurement opportunities, including certain sole-source and set-aside contracts.

Ultima Decision Summary and SBA Response

In the decision, Judge Clifton L. Corker held that the SBA 8(a) program’s exclusion of plaintiff small business contractor Ultima Services, whose owner is a white woman, from opportunities to receive federal contracts based on SBA’s “use of the rebuttable presumption” violates the U.S. Constitution’s Fifth Amendment guarantee of equal protection. The court accordingly enjoined SBA and the U.S. Department of Agriculture (USDA) from “using the rebuttable presumption of social disadvantage in administering Defendant SBA’s 8(a) program.”

The decision relied in large part on the U.S. Supreme Court’s June 2023 landmark decision, Students for Fair Admissions (SFFA), which addressed the “affirmative action” use of race as a factor in collegiate admissions. For background, see McGuireWoods alerts published on June 29 and July 5, 2023, analyzing the Supreme Court’s decision and its impact on education and employment law, including on federal contractors and subcontractors.

In response to the injunction, the SBA took the following actions:

  • Temporarily suspended new 8(a) application submissions to comply with the court’s decision.
  • Issued interim guidance on Aug. 18, 2023, requiring all 8(a) participants whose program eligibility is based upon one or more individuals who relied upon the presumption of social disadvantage to establish their individual social disadvantage by completing a social disadvantage narrative.
  • Published a detailed guide instructing contractors how to write a social disadvantage narrative.
  • Announced that current 8(a) participants will receive a direct communication detailing what, if any, additional information must be provided to SBA in order to continue Program participation.

Further Decision Background

The SBA’s 8(a) program is designed to help small businesses that are at least 51% owned by individuals who are socially and economically disadvantaged. Since 1986, SBA regulations have provided a rebuttable presumption of social disadvantage to individuals who hold themselves out as members of certain minority groups (but not others). Typically, SBA has made its determinations by applying the presumption and those who qualified were not required to submit evidence of having faced social disadvantage.

Ultima had provided administrative and technical services to the USDA since 2004. However, in 2018, the USDA decided not to exercise further options on Ultima’s four indefinite-delivery, indefinite-quantity contracts with the USDA, instead setting the contracts aside for 8(a) program participants and, in some cases, awarding the contracts on a sole-source basis. Ultima was not an 8(a) program participant and was thus ineligible to compete for the contracts it previously performed once they were redesignated.

Facing significant financial losses, Ultima sued the SBA and USDA in 2020 under the Fifth Amendment’s guarantee of equal protection, under which courts evaluate governmental use of racial classifications under a strict judicial scrutiny standard — meaning the government must demonstrate that a racially discriminatory policy is (1) a narrowly tailored measure that (2) furthers a compelling governmental interest.

In analyzing the 8(a) program’s use of a “rebuttable presumption,” the District Court applied the rationale of SFFA to determine that the program did not further a compelling governmental interest. The court analyzed the SBA racial presumption program under a three-part standard adopted by the Sixth Circuit:

  1. The government’s policy must target a specific episode of past discrimination and cannot rest on a generalized assertion that there has been past discrimination in an entire industry.
  2. The government must support its asserted compelling interest with evidence of intentional discrimination in the past.
  3. The government must show that it participated in the past discrimination it seeks to remedy, such as by demonstrating it acted as a passive participant in a system of racial exclusion practiced by elements of a local industry.

The court found that SBA failed to meet any of the criteria to justify the rebuttable presumption as a means to remedy identifiable, intentional discrimination for which the government had been an active or passive participant. The court also determined that SBA and the USDA did not offer any stated goals for the 8(a) program against which the court could review the rebuttable presumption’s effectiveness in remedying discrimination, further undermining any agency argument that the 8(a) program was designed to address specific instances of past discrimination.

Accordingly, the court determined that the 8(a) program was not narrowly tailored to serve the agencies’ alleged compelling interest according to several factors. Specifically, the court found that the 8(a) program:

  • Was insufficiently flexible and unlimited in duration, because the rebuttable presumption was a rigid system that lacked any “logical end point” (referencing SFFA).
  • Could not be proven to be necessary, and its lack of any specific objectives indicated that the agencies were “not using the rebuttable presumption in a narrow or precise manner.”
  • Was both overinclusive and underinclusive. It applied broadly to all individuals in certain racial categories, regardless of whether there was evidence of discrimination in a particular contractor’s industry sector, while at the same time failing to provide protection for numerous racial minority groups that undoubtedly faced significant discrimination.
  • Failed to consider race-neutral alternatives since the time the rebuttable presumption program began in 1986.
  • Did not sufficiently consider the program’s impact on third parties. The agencies did not adequately consider the negative impact that moving contracts to the 8(a) program would have on Ultima.

Notice of Compliance and Further Litigation Remains

On Aug. 29, 2023, the federal government filed a “Notice of Compliance” outlining its procedures to meet the requirements described in the court’s July 19, 2023, order. Subsequently, Ultima filed a motion for additional equitable relief, arguing the federal government misinterpreted the relief the court ordered and asked the court to clarify its injunctive relief. Specifically, Ultima’s motion requested that the court:

  • Clarify that the preliminary injunction enjoins the federal government from exercising options or making similar modifications to 8(a) program contracts with contractors that received the rebuttable presumption.
  • Clarify that the court’s preliminary injunction precludes SBA from providing a shortened or less rigorous review of narratives of social disadvantage than was applied to evidence submitted under 13 C.F.R. § 124.103(c) before the preliminary injunction.
  • Enjoin the federal government from using the 8(a) program in the administrative and technical support industry, the industry in which Ultima competes for federal contracts.
  • Either appoint a monitor to review SBA’s certification of 8(a) participants that previously received the benefit of the rebuttable presumption, or make the narrative essays of social disadvantage (and SBA’s decision with respect to each of them) public.
  • Temporarily enjoin the federal government from awarding, completing, modifying or exercising options on any contracts through the 8(a) program to 8(a) participants who received the benefit of the rebuttable presumption until the court rules on Ultima’s other requests.

The parties are scheduled to complete their briefing on the issue of further equitable relief on Oct. 6, 2023.

Takeaways for Federal Contractors

The SBA 8(a) program remains a key aspect of federal procurement law despite these recent changes. Further, despite the ruling, the court notably upheld Congress’ overall statutory grant of authority to SBA to award federal contracts to small, disadvantaged businesses.

Federal contractors who are currently eligible for the 8(a) program, and those that believe they may be eligible for the 8(a) program under a more dynamic regulatory framework, should closely monitor both the progress of the Ultima Services case for further remedial decisions and SBA’s response in continuing to craft a compliant 8(a) program.

This decision, along with other recent legal actions and developments, may as a practical matter encourage similar challenges to other government contracting programs that rely on racial classifications, including, for example, the required creation of employee affirmative action plans (AAPs) under Executive Order 11246. The affirmative action framework under E.O. 11246 and the implementing regulations of the U.S. Department of Labor’s Office of Federal Contract Compliance Programs (OFCCP) may face significant challenges under the three-part standard for remedial action tied to past discrimination discussed above.

Further, the OFCCP AAP requirements rely on racial classifications that were called into question in the Ultima Services decision, echoing the SFFA decision’s similar discussion of the criticism:

Defendant SBA includes “Subcontinent Asian Americans” [in the groups that receive the rebuttable presumption of social disadvantage] while excluding individuals from Central Asian nations, such as Mongolia, Afghanistan, and Uzbekistan. Defendant SBA also does not include Arab Americans in its list of individuals entitled to the rebuttable presumption. The Court does not doubt that Central Asian Americans and Arab Americans have faced significant discrimination in a number of areas, including in business formation and development. Those individuals, however, are not considered presumptively socially disadvantaged. And as Ultima notes, Defendant SBA does not consider other groups, such as Hasidic Jews who have faced similarly appalling discrimination, eligible for the rebuttable presumption of social disadvantage. Defendants arbitrary line drawing for who qualifies for the rebuttable presumption shows that the “categories are themselves imprecise in many ways.” Thus, the determination of which groups of Americans are presumptively disadvantaged compared with others necessarily leads to such a determination being underinclusive because certain groups that could qualify will be left out of the presumption. (Emphasis added).

Should you have any questions about compliance with the SBA 8(a) program’s interim guidance or other government contractor-related enforcement or compliance concerns, please contact the authors, your McGuireWoods contact, or a member of the firm’s government contracts, affirmative action, or government investigations & white collar litigation teams.