The U.S. Court of Appeals for the Federal Circuit, second only to the Supreme Court in terms of the regulation of federal procurement, handed down an opinion Nov. 4 that sent shock-waves through the government contracting community.
In Rothe Development Corp. v. Department of Defense, the court ruled that the 2006 version of a 22-year-old federal statute that creates a preference for “socially and economically disadvantaged individuals” in defense spending is unconstitutional. Unless reenacted, the statute is set to expire in March.
Specifically, the statute, found at 10 U.S.C. § 2323, sets a goal that 5 percent of all federal defense contracts be awarded to certain entities including small businesses owned by “socially and economically disadvantaged individuals.”
The statute includes a presumption that black Americans, Asian Americans, Subcontinent Asian Americans, Hispanic Americans and American Indians are disadvantaged and allows the Department of Defense to give small businesses owned by such individuals a preference in the bidding process equal to up to 10 percent of the overall contract price. In other words, the government will add up to a 10 percent performance evaluation adjustment to the price of all offers received from non-disadvantaged businesses before determining the lowest bid on a given contract.
Although some changes to 10 U.S.C. § 2323 have occurred through the years, the purpose of the statute when enacted during 1986 and when reenacted during 2006 has remained largely the same: to encourage participation and include historically excluded individuals in the process the U.S. government utilizes to procure goods and services.
Nevertheless, the court ruled that Congress’ most recent reenactment of the statute does not pass constitutional muster.
Any law enacted by Congress containing an explicit race classification like the one found in Section 2323 is subject to strict judicial scrutiny. In a nutshell, this means that such a law must be narrowly tailored to achieve a compelling governmental interest. For some time, it has been the law in the United States that remedying the effects of past or present racial discrimination is always a compelling governmental interest.
However, the government must still identify the discrimination it attempts to remedy and have a strong basis in evidence before enacting a law containing a race classification.
In this case, the court’s constitutional objection to the statute focused squarely on the question of whether the Congress’ basis in evidence was strong enough to justify including a race classification in Section 2323. Ultimately, the court ruled that it was not.
Interestingly, the system the federal government utilizes to determine the most appropriate way to spend federal procurement dollars is replete with programs applying preferences similar to the one created by Section 2323. The question of what the ramifications of the decision will be to these other preferential programs remains unsettled.
The fact that the court’s analysis, and ultimate ruling, was based narrowly upon the question of the sufficiency and strength of the evidence considered by Congress is important to note when considering the potential repercussions of the court’s opinion because many preferential programs are not authorized by 10 U.S.C. § 2323, but by other statutes.
This means that the evidence used to support these other programs may be sufficient to pass constitutional muster.
The Small Business Administration is responsible for implementing numerous programs applying various preferences in the procurement process similar to the Department of Defense’s preference created by Section 2323.
During 2007, $24.9 billion was awarded to small disadvantaged businesses utilizing a preferential program like the Department of Defense’s, and another $8.5 billion was awarded to businesses in SBA’s HUBZone program, where disadvantaged status is often a consideration.
Certainly, many SBA programs implementing preferences may remain unaffected to the extent they implement non-Department of Defense preferences given the court’s narrow rationale in its opinion and the fact that only the Department of Defense’s preference was examined.
However, taking into consideration the fact that the court’s opinion instructs the lower court to enter a judgment enjoining application of the current 10 U.S.C. § 2323, this cannot be said for heretofore “socially and economically disadvantaged” contractors on Department of Defense contracts.
The court’s decision has created a fair amount of uncertainty surrounding the federal procurement process. It remains to be seen what the Department of Defense’s response to the decision will be and, further, what effect that response will have on the status of Section 2323 and contracts currently awarded by operation of the preference authorized therein.
It also is unclear how the SBA will respond to the decision, although it appears that SBA’s position is that the decision does not affect any SBA programs.
In fact, there is only one ramification of the court’s decision that is certain: the government contracting community is paying close attention to see what will happen next.
W. Craig Willis is an attorney in the Government Contracts group at Holland & Hart. He can be reached at WCWillis@hollandhart.com.