Second Time’s the Charm…

An earlier CIR challenge to Section 8(a) – DynaLantic Corp. v. Department of Defense – achieved one of the few legal victories against the racial set-aside program, one that will be exceedingly useful in our newest challenge on behalf of Ultima Services.

In DynaLantic, CIR set an important federal district court precedent limiting the use of Section 8(a) to industries with substantial evidence of past racial discrimination. DynaLantic designed and manufactured simulation and training equipment for the U.S. military. In 1995, the Department of Defense sought out bids for new contracts that DynaLantic was ready, willing, and able to perform. There was just one problem. The DoD was only seeking bidders through the 8(a) program, and DynaLantic’s owners were white.

CIR challenged the racially discriminatory set-aside law under the Fifth Amendment, particularly as it was applied to the simulation and training industry. There was no doubt that Section 8(a) favored companies based on race, but the SBA and DoD tried to defend the program as serving a compelling interest.

In 2012, the District Court for the District of Columbia ruled in favor of DynaLantic, finding that the government could not justify applying 8(a) to the simulation field. The court’s opinion established a rigorous standard limiting the application of the race-based 8(a) program to the particular industries in which it could be rationally said to address the compelling state interest of remedying past discrimination.

For decades, the government took for granted that it could freely utilize Section 8(a) without first proving that there was a real history of discrimination in the industries to which it was applied. CIR argued that such use of the program was entirely arbitrary. Awarding contracts on the basis of race in industries with no history of discrimination amounted to awarding contracts on the basis of race for its own sake, without serving any compelling state interest. And the district court agreed.

The court’s opinion rightly acknowledged that not all industries are alike, and if the SBA wanted to use the 8(a) program, it would need to prove that the government had been involved, actively or passively, in racial discrimination in the relevant industry. The training and simulation industry was only a few decades old at the time, so the SBA could not credibly argue that it was combatting a legacy of racially discriminatory policies by awarding military simulation and training contracts through the 8(a) program.

The powerful precedent CIR set in DynaLantic will be of inestimable importance in our new lawsuit on behalf of Ultima Services Corporation. DynaLantic was a strong victory, but the case settled before it could be reviewed by the Court of Appeals. With the momentum and precedent from our earlier victory in DynaLantic, everything is in place to deliver a fatal blow to the SBA’s racial set-aside program in Ultima.

A huge win against racial preferenc

Ultima Services Corp. v. USDA

     This summer, CIR’s federal court victory put an abrupt halt to one of the nation’s most far-reaching and long-standing racial set-aside programs in government contracting. CIR filed Ultima Services Corp. v. USDA in 2020 on behalf of Celeste Bennett, the owner of Ultima, challenging the racial preferences in the Small Business Administration’s section 8(a) program.

     Bennett is white, and therefore she didn’t qualify for the automatic presumption of social disadvantage in the 8(a) program. Originally, the law allowed federal agencies to set aside contracts for small “socially disadvantaged” businesses without regard to race, but over the decades, the program morphed into a thinly veiled racial set-aside. Under a 1986 regulation, the SBA automatically presumed that members of certain racial groups are socially disadvantaged.

     Federal District Judge Clifton Corker sided with CIR and put a stop to the SBA’s four-decades-old, multibillion-dollar government contracting set-aside program nationwide. Judge Corker’s opinion reached the long overdue conclusion that government agencies cannot award contracts based on race.

     The Cost of Race Preferences

     Since the 1980s, federal officials have awarded as much as $34 billion a year in SBA 8(a) contracts. Sometimes, these officials want to create the appearance that the government is advancing “racial equity,” as with President Biden’s 2023 executive order that committed to increasing contracts with socially disadvantaged businesses by 50%.

     The 8(a) program is no “benign” preference—as if race discrimination is ever benign. In the zero-sum world of competitive contracting, one person’s unlawful racial benefit comes at a cost to someone else.

     In Celeste Bennett’s case, the cost was virtually her entire business.

     Bennett built an effective and highly competitive company. Starting in 2004, Ultima performed technical and administrative support contracts for the Natural Resources Conservation Service (NRCS), an agency within the USDA. By 2017, she won four regional contracts, providing support to every NRCS office in the country.

     That all changed in 2018, when the USDA decided to end all four contracts, and instead enter into individual contracts for each office through the 8(a) program. Because Bennett does not qualify as an 8(a) contractor, the USDA’s move excluded her from bidding on the contracts that once made up the core of her business. Since then, Ultima has gone from five hundred employees to just one.

     A Decades Long Fight

     CIR knew that challenging the 8(a) program would be a fight—but it was a fight for which CIR was uniquely prepared. Longtime supporters of CIR’s work may recall Dynalantic v. DOD. Dynalantic, a small manufacturer of military training simulators, came to us when the Defense Department reserved a contract for a helicopter simulator to the 8(a) program. Since Dynalantic is not owned by a member of one of section 8(a)’s preferred racial groups, it was precluded from bidding.

     After a more than ten-year-long battle, the court finally found in favor of Dynalantic, holding that the 8(a) program was unconstitutional as applied in the military simulation industry because there was no history of discrimination in that industry.

     Dynalantic was a major victory against the section 8(a) program. But although we were able to vindicate our client’s rights, CIR remained committed to finding a case that would end the whole program. CIR learned from Dynalantic how the government defends section 8(a)—and that gave us unique insight into how to challenge it.

     The District Court’s Dizzying Blow to Section 8(a)

     On July 19, 2023, Judge Corker issued a fantastic opinion that thoroughly dismantled the government’s proffered justifications for its arbitrary use of race. He found that the government failed to demonstrate any compelling interest for the program and provided six independent reasons why it was not narrowly tailored to achieve whatever interest it was serving.

     Among his reasons, Judge Corker found that the government had no legitimate goal for the program; the government had never considered any race-neutral alternatives; and the list of races that received the presumption was both over- and underinclusive (all Hispanic Americans are presumed socially disadvantaged, but no Arabs are). In Judge Corker’s words, “Defendants’ arbitrary line drawing for who qualifies for the rebuttable presumption shows that the categories are themselves imprecise in many ways.”

     Judge Corker found that the presumption of social disadvantage violates the Constitution’s guarantee of equal protection under law. He enjoined the SBA from using the presumption, which had the immediate effect of bringing the program to a halt.

     The End of Contracting Preferences

     The impact of Ultima does not stop with section 8(a). Federal, state, and local governments award nearly $2 trillion in contracting. One estimate is that as much as $150 billion is channeled through racial set-asides.

     Under the reasoning in the Ultima opinion, all such preference programs are constitutionally suspect and would likely fail strict judicial review.

     As of the time of publishing, the DOJ has not filed an appeal. Its goal seems to be to give the SBA a chance to paper over Judge Corker’s ruling with a nominal change to the program. Instead of assuming that all minority-owned small businesses are socially disadvantaged, the SBA is now requesting existing 8(a) business owners to write narratives explaining how their minority status disadvantaged them.

     The SBA says it is employing new staff to read the narrative essays, and it is training these agents to process these essays in mere days. These new agents are working in SBA’s headquarters rather than the congressionally established office of compliance. Suffice it to say, there is plenty of room for abuse in that system.

     CIR recently requested Judge Corker to stop this effort to circumvent his original injunction and appoint a court monitor to ensure that the SBA complies. However the court rules, one side may appeal to the U.S. Sixth Circuit. If we win there, the Solicitor General would likely file a cert petition, which the Supreme Court would almost certainly grant. That means in the next few years, we could achieve a Supreme Court precedent that delivers the knock-out punch to racial set-asides once and for all.

     In other words: The fight is not over, but CIR’s Ultima victory is a monumental step toward permanently ending the use of pernicious race preferences in federal, state, and local contracting.