SBA 8(a) Applications Are Currently on Hold Due to Recent Federal Court Decision

Applications for the Small Business Administration (“SBA”)’s 8(a) program are currently on hold as the SBA develops its response to a decision from the U.S. District Court for the Eastern District of Tennessee (the “district court”) finding one element of the program unconstitutional.  The district court’s decision is somewhat old news, at least in the modern 24-hour news cycle, having been issued on July 19, 2023.  But the SBA’s response is of somewhat more recent vintage.  Accordingly, we thought it appropriate to do a deep dive into the background on the 8(a) program, the federal district court’s decision, and the SBA’s response.

In short, the district court said that the SBA’s reliance on a “rebuttable presumption” that members of certain ethnic groups are “socially disadvantaged” for purposes of qualifying for the 8(a) program violates the Constitution’s equal protection clause.  The most likely upshot from this decision is that going forward members of the certain designated ethnic groups will have to provide a narrative with their application detailing the specific instances where they faced discrimination.  However, SBA is still studying the matter so we will keep you posted as this develops.

What is the SBA 8(a) program?

The SBA 8(a) program is one of several SBA contracting assistance programs. The SBA 8(a) program is the commonly known name for the SBA’s Minority Small Business and Capital Ownership Development Program which provides participating small businesses with training, technical assistance, and, most importantly, contracting opportunities in the form of set-asides and sole-source awards. Ward & Berry provided an overview of the 8(a) program. To qualify for the 8(a) program, small businesses must be “unconditionally owned and controlled by one or more socially and economically disadvantaged individuals who are of good character and citizens of and residing in the United States” and demonstrate “potential for success.” See 13 CFR 124.101. The SBA regulations define each of these six requirements. The lawsuit that resulted in the federal district court decision challenged the criteria by which SBA determines whether an 8(a) applicant is “socially disadvantaged.”

Who is socially disadvantaged?

Under the SBA regulations, individuals are considered to be socially disadvantaged if they have “been subjected to racial or ethnic prejudice or cultural bias within American society because of their identities as members of groups and without regard to their individual qualities.” See 13 CFR 124.103(a). There is a rebuttable presumption that certain groups of people, based on race or ethnicity, are socially disadvantaged. 13 CFR 124.103(b)(1) lists the racial and ethnic groups that are presumed socially disadvantaged. The presumption can be overcome with credible evidence that an individual is not socially disadvantaged despite being a member of one of the racial or ethnic groups listed in 13 CFR 124.103(b)(1).  In practice, the presumption that members of these groups are socially disadvantaged has rarely been rebutted.

Applicants who are not part members of one of the designated groups can still establish social disadvantage by a preponderance of evidence. The SBA requires applicants to submit corroborating evidence in the form of a narrative identifying an “objective distinguishing feature that has contributed to social disadvantage.”  See 13 CFR 124.103(c)(2)(i).

Ultima Servs. Corp. v. U.S. Dep’t of Agric.

As noted above, on July 19, 2023, the District Court for the Eastern District of Tennessee issued an injunction to stop the SBA from using the rebuttable presumption to identify socially disadvantaged 8(a) applicants. See Ultima Servs. Corp. v. U.S. Dep’t of Agric., No. 220CV00041DCLCCRW, 2023 WL 4633481 (E.D. Tenn. July 19, 2023).

The plaintiff, Ultima Services Corporation (“Ultima”), sued the Department of Agriculture and the SBA alleging that the SBA’s use of the rebuttable presumption was unconstitutionally discriminatory against individuals that were not a member of one of the designated groups, and thus violated Ultima’s right to equal protection under the Fourteenth Amendment. Id. at *1. The district court agreed with Ultima, finding that the SBA did not have a compelling interest to use the rebuttable presumption to determine whether an applicant is socially disadvantaged, nor did the SBA narrowly tailor their use of the rebuttable presumption. (According to applicable precedents, any government action that involves racial parsing must serve a “compelling government interest” and be “narrowly tailored” to achieve that interest, i.e., it must exercise the least discrimination possible to achieve the interest.)

The court agreed that the SBA had the statutory authority to award government contracts to socially disadvantaged businesses and use appropriate methods, including a rebuttable presumption, to determine whether a group had faced prejudice or bias. Id. at *8-9.  However, because the rebuttable presumption is based on a racial classification, the court examined whether the SBA’s use of a racially-based rebuttable presumption was constitutional under the Fourteen Amendment Equal Protection Clause. Id. at *10. While the SBA claimed that the presumption was tied to the 8(a) program’s goal of remediating past discrimination, the court determined that the SBA did not provide strong evidence of specific instances of discrimination or of intentional past discrimination. Id. at *12-13. Further, the court found that the presumption was not narrowly tailored when, for instance, the SBA did not have a process for challenging a person’s social disadvantaged. Id. at *15. After determining that the SBA’s rebuttable presumption violated the Fourteenth Amendment, the court enjoined the SBA from using the presumption when determining an applicant’s social disadvantage. Id. at *18.

What does this mean for current 8(a) program participants and future 8(a) program applicants?

Current 8(a) program participants will most likely not be affected by the court’s decision as the decision does not prohibit the SBA from considering race or ethnicity as a social disadvantage. Instead, the most likely response to this decision is that future 8(a) applicants who are members of a designated group will be required to establish their individual social disadvantage by a preponderance of the evidence. Without the use of the rebuttable presumption, the SBA officials will then have to individually determine social disadvantage. This may mean the potential for more inconsistent determinations or findings among people of the same ethnic or racial group. The SBA may take longer to process applications, now having to review more narratives.

Another possible outcome is that the SBA could take regulatory action and amend the rebuttable presumption in an effort to more narrowly tailor the program, as the court suggested in its decision.

There is no word on when the SBA is going to lift its hold on 8(a) applications while it studies this problem.  But for many who had hoped to take advantage of participating in the program, this latest development is a significant blow.

We will continue to monitor the situation and provide updates as the SBA’s response materializes.  If you have any questions about the SBA, the 8(a) program, or writing a narrative to satisfy the social disadvantage requirements, reach out to us at Ward & Berry.