The Magazine

Let’s Set Aside Set-Asides

In government contracting, some are more equal than others.

Jun 16, 2014, Vol. 19, No. 38 • By TERRY EASTLAND
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In our episodic “national conversation about race,” perhaps it is time to take notice of Rothe Development Corporation of San Antonio, Texas, which, you could say, has been having its own conversation about race—in the federal courts. Rothe is a government contractor that has now brought two lawsuits challenging racial preferences in federal contracting, winning the first, which was filed in 1998 and decided in 2008, and hoping, of course, to win the second, which was filed in 2012 and could go to the Supreme Court while President Obama is in office. At stake, ultimately, is whether the government will quit the business of preferring certain citizens to others on the basis of race—and thus discriminating against some—in awarding contracts.


A small business of roughly 120 employees, Rothe does contract work for the Department of Defense, the government’s principal contracting agency, with about 67 percent of federal contracting dollars. Rothe specializes in work involving computers, among them custom programming and systems design, as well as their operation and maintenance.

Starting in the late 1980s, Rothe had a contract to manage the computer systems at Columbus Air Force Base in Columbus, Mississippi. But when the business was up for bid in 1998, International Computer and Telecommunications, Inc. (ICT) got the job, even though Rothe’s bid was the lowest. The reason had to do with race. Indeed, as Rothe’s vice president, Dale Patenaude, told me, “the only reason we lost that contract was because of race.”

The statute under which the contract was let sets a numerical “goal”—that 5 percent of federal defense contracting dollars be awarded to certain entities, including small businesses owned by “socially disadvantaged” individuals. The statute incorporated the Small Business Act’s presumption that black Americans, Asian Americans, Hispanic Americans, and native Americans are socially disadvantaged. And it authorized the Defense Department to take such measures as necessary to reach that 5 percent goal, including awarding contracts to small disadvantaged businesses at prices up to 10 percent above the lowest offer.

The Pentagon carried out that directive by making a “price evaluation adjustment” to bids by firms that were not small disadvantaged businesses. It increased their bids by 10 percent before comparing them to bids by small disadvantaged companies.

Rothe was (and still is) owned by whites and thus was presumed not to be a socially disadvantaged business. ICT was owned by a Korean-American couple and thus was presumed to be socially disadvantaged. Rothe bid $5.57 million, and ICT bid $5.75 million. Rothe’s bid was the lowest, but the Air Force, making a price evaluation adjustment, concluded that Rothe’s bid was $6.1 million and hence higher than ICT’s. So the Air Force awarded the business to ICT.

Rothe sued, contending that the bid preference statute violated the Fourteenth Amendment’s equal protection clause. In declaring the measure unconstitutional—coincidentally, on Election Day 2008—the U.S. Court of Appeals for the Federal Circuit explained that Congress, which passed the law in 1986 and last reauthorized it in 2006, had failed to demonstrate, as case law requires, “a strong basis in evidence” upon which it could conclude that the Defense Department was “a passive participant in pervasive, nationwide discrimination”—a necessary predicate for racial preferences.

The government had tried to meet that requirement mainly with “disparity studies,” which, as the district court in the case explained, seek to calculate a ratio “between the expected contract amount of a given [racial or ethnic] group and the actual contract amount received by that group.” A finding that a given minority group received less than 80 percent of the expected amount “indicates a relevant degree of disparity and might support an inference of discrimination.”

The government submitted six disparity studies, but the appeals court was unimpressed. Two of the studies failed to weed out unqualified businesses, and five failed to account for potential differences in company size, thus reducing the studies’ value in establishing the necessary “strong basis in evidence.” Furthermore, as only six jurisdictions—five localities and just one state—were the subjects of the disparity studies, the court felt compelled to say, “We would be hesitant to conclude even from methodologically unimpeachable disparity studies of one state, two counties, and three cities that there is a nationwide pattern or practice of discrimination in public and private contracting.”

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