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.

Pentagon

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.”

Nor did it help the government’s case that, as the appeals court observed, none of the six studies was ever discussed at a congressional hearing. “There is no indication that these studies were debated or reviewed by members of Congress”—again, the arm of government that must establish a strong basis in evidence—“or by any witnesses.”

Significantly, Rothe brought what is called a facial challenge, meaning one in which the plaintiff alleges that the legislation is always unconstitutional and therefore must be voided. The appeals court agreed with the facial challenge. The Obama administration declined to appeal the decision to the Supreme Court and advised relevant agencies that programs relying exclusively on the authority of the bid preference statute “should cease.” Not that the administration was especially attentive to the matter: Agencies continued to include the language of the now unconstitutional and unenforceable statute in their contract documents—inclusions that Rothe noticed and successfully protested, says its lawyer, David F. Barton.

In retrospect, the first Rothe case was tactically important, a demonstration that preferences in contracting are indeed vulnerable. And so that case led to the second one, which will be argued in trial court this September: a facial challenge to Section 8(a) of the Small Business Act.

Enacted in 1978, Section 8(a) seeks to promote “the business development of small business concerns owned and controlled” by socially disadvantaged individuals. As was the case with the bid preference statute, Section 8(a) presumes that individuals who are members of certain racial groups are socially disadvantaged. The statute sets a government-wide “goal for participation” by such small businesses at “not less than five percent of the total value of all prime contract and subcontract awards for each fiscal year.” And, critically, it provides that the competition for contracts awarded under Section 8(a) be “restricted to eligible program participants.”

Thus, Section 8(a) “sets aside” a portion of all federal contracting dollars (and not just the Pentagon’s); only members of certain minority groups can compete for them. Rothe’s complaint is that the set-aside denies it—and any small businesses owned by individuals who are not members of the preferred minority groups—the opportunity to join the competition. “If Section 8(a) were not there,” says Patenaude, “we could bid on double the amount of contracts we do now.”

Here, again, Rothe’s challenge relies primarily on the equal protection clause. Rothe contends that Congress did not have “a strong basis in evidence” for the racial classification in Section 8(a). The government says it did and this time has gone for volume in trying to prove it, entering into the record some 107 disparity studies totaling more than 40,000 pages. The studies contain, says the government, “significant evidence of large and adverse disparities facing minority business enterprises,” disparities that “cannot be explained solely by differences between the minority and non-minority businesses in factors untainted by the effects of discrimination” and which “are consistent with the presence of discrimination and its lingering effects in the small business contracting environment.”

Rothe responds that the studies don’t involve federal contracting and so are of marginal relevance, examining, as they do, contracting by states, counties, cities, a housing finance agency, a mosquito control district, a sewer district, airports, transit authorities, a toll highway authority, and so forth. Moreover, says Rothe, those 107 studies were done not by the federal government but by disparity study companies, “which may have a vested interest in finding disparities.” Rothe says that records of contracts awarded by the U.S. Department of Transportation to disadvantaged business enterprises show “dramatic overutilization” of such firms, in contrast to the “under-utilization” found in the disparity studies. Rothe argues the government has taken “a haphazard quantity over quality approach” in  “scouring the country for disparities studies [and] then assuming the state and local studies relate to the federal 8(a) program, which they do not.”

Rothe also contends that the program’s racial classification is an unconstitutional delegation of congressional power to a federal agency, the Small Business Administration. The argument turns on the fact that Section 8(a) names five minority groups, the members of which are  presumed to be socially disadvantaged, but then by implication authorizes the SBA to recognize additional minority groups, granting them the same presumption. Rothe’s argument is that under the Constitution, Congress may not delegate to the executive branch the power to make racial classifications.

Of the two arguments, the delegation (or, more precisely, nondelegation) argument might interest more justices. But the real issue in the case concerns equal protection and whether disparity studies can sustain racially preferential departures from that constitutional principle.

In 1989 and 1995 cases, the Court, with Sandra Day O’Connor writing, effectively sanctioned the use of disparity studies to make “an inference of discriminatory exclusion” that preferences could remedy—ironically doing so in cases striking down preferences in contracting. An entire disparity studies industry has emerged since, and the Roberts Court may wish to review that development and its implications. After all, as Rothe knows from its rather full experience with these matters, disparity studies are often methodologically flawed, and their premise—that statistics can somehow prove discrimination—remains doubtful.

The question remains, moreover, whether racial preferences, inherently discriminatory as they are, can ever be the right response even to ostensible proofs of discrimination using statistics. The contracting bid process, in particular, is transparent, and acts of bias thus can be identified and corrected. As Chief Justice Roberts wrote in a different context in 2009, “The way to stop discrimination on the basis of race is to stop discriminating on the basis of race.”

Terry Eastland is an executive editor at The Weekly Standard.

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