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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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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.

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