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Small Disadvantaged Businesses Preference Ruled Unconstitutional

The 2006 reauthorization of the annual five-percent Department of Defense contracting goal for small disadvantaged business concerns (10 USC 2323) violated the Fifth Amendment's equal protection component, the Court of Appeals for the Federal Circuit has held, because Congress did not have a strong basis in evidence on which to conclude DoD was a passive participant in pervasive, nationwide racial discrimination to justify remedial measures based on race. After losing a bid for a 1998 telecommunications services contract because a competitor benefitted from the 10-percent price-evaluation adjustment applied to bids of SDBs, the protester challenged the constitutionality of the program. On the second remand from the Federal Circuit, the district court held the SDB program satisfied the strict scrutiny required for explicit racial classifications because statistical and anecdotal evidence before Congress prior to the 2006 reauthorization constituted prima facie proof of nationwide and pervasive discrimination in public and private contracting and was a strong basis for the remedial action, and the SDB program was narrowly tailored (51 CCF 78,799). On the protester's third appeal, the Federal Circuit for the first time addressed the constitutionality of the SDB program.
No Strong Basis in Evidence

The appellate court reviewed the evidence before Congress and the district court, including six state and local disparity studies, other statistical analyses, and anecdotal evidence, and concluded the evidence did not provide the "strong basis" required to justify remedial action based on race. The disparity studies attempted to calculate the ratio between the expected and actual contract amounts of given race/gender groups. However, the studies generally failed to account for the relative size or capacity of minority-owned businesses, which could affect their volume of business even in the absence of discrimination. Defects in the studies' availability and capacity analyses detracted "dramatically" from their probative value. In addition, the studies, which analyzed data from one state, two counties, and three cities, were too limited geographically to extrapolate their findings of discrimination nationwide. The other statistical evidence was not substantially more probative, and anecdotal evidence was insufficient by itself to support the SDB program. The court noted SDB program amendments had limited the application of preferences based on race, but without the evidentiary basis needed to support a compelling interest in a race-based remedial program, the court could not determine whether the 2006 reenactment was narrowly tailored to a compelling interest.
2009 Reenactment

The Federal Circuit noted it could not predict and did not intend to prejudge whether a reenactment of the SDB program before its expiration in 2009 would be supported by a strong basis in evidence. The court cautioned its assessment of the evidence supporting the 2006 reenactment was based on the particular items of evidence offered by the government and should not be construed as a blanket rule about the reliability of particular types of evidence, such as disparity studies. The court also noted the government had failed to carry out its 1999 intention to develop "new benchmarks and utilization estimates every three years," but solid benchmarks for the minority groups covered by the SDB program were needed to determine whether the five-percent goal was tailored to the capacity of firms owned by members of those groups. (Rothe Development Corp. v. Dept. of Defense, et al., CA-FC, 52 CCF 79,022)

(The news featured above is a selection from the news covered in the Government Contracts Report Letter, which is published weekly and distributed to subscribers of the Government Contracts Reporter. )


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