Federal Court Rejoins SBA’s Rebuttable Assuming for 8(a) Program

ON July 19, 2023, the U.S. District Court for the Eastern District of Tennessee rendered a momentous decision in the case of Ultima Servs. Corp. v. U.S. Dep’t of Agric., No. 2:20-CV-0041-DCLC-CRW. The court ruled that the SBA’s rebuttable presumption of social disadvantage, a critical aspect used in the admission process of many small-disadvantaged businesses into the 8(a) program, violated the equal protection rights of a government contractor. Consequently, the court has ordered the cessation of the use of the rebuttable presumption in administering the 8(a) program.

Background

Section 8(a) of the Small Business Act empowers the Small Business Administration (SBA) to acquire procurement contracts from government agencies and assign them to small businesses. SBA is directed to facilitate the performance of these contracts by negotiating or issuing subcontracts to socially- and economically-disadvantaged small business concerns. The Act defines socially- and economically-disadvantaged individuals as those who faced racial or ethnic prejudice or cultural bias due to their group identity, regardless of their individual qualities, and SBA is responsible for determining whether a group has experienced such prejudice or bias.

In the administration of the 8(a) program, SBA employs a rebuttable presumption of social disadvantage for individuals belonging to specific minority groups during the application process. These groups, including Black Americans, Hispanic Americans, Native Americans, Asian Pacific Americans, Subcontinent Asian Americans, and others designated by SBA, are eligible for this presumption based on SBA’s regulation, not by statute.

Individuals seeking participation in the SBA 8(a) program, but not falling under the groups benefiting from the rebuttable presumption, must demonstrate by a preponderance of the evidence that they are socially disadvantaged. This involves proving that one objectively distinguishing feature, such as race or ethnic origin, contributed to their social disadvantage, which is deeply rooted in their treatment within American society, significant, and long-lasting, and negatively impacted their entry into or advancement in the business world.

 

Court Case

Ultima Services Corporation (Ultima), a small business providing administrative and technical support services, filed a complaint against the U.S. Department of Agriculture (USDA) and the Small Business Administration (SBA) alleging race discrimination. Ultima had been rendering services to USDA’s National Resources Conservation Services (NRCS) since 2004 and had secured four regional indefinite delivery indefinite quantity (IDIQ) contracts from USDA in 2017. However, in 2018, USDA decided not to extend any more options under Ultima’s IDIQ contracts, along with pending task orders, and instead awarded sole-source contracts exclusively to businesses enrolled in the 8(a) program. As Ultima was not a participant in the 8(a) program, it was ineligible for these sole-source awards, which resulted in reduced bidding on contracts and a decline in revenue.

 

In an attempt to enter the 8(a) program, a USDA contracting officer requested the SBA Georgia District Office to move an Ultima contract for administrative services in Mississippi NRCS offices to the 8(a) program. However, the request was rejected by the SBA Georgia District Office due to the perceived adverse impact on a small business like Ultima. Subsequently, the USDA contracting officer submitted another letter to the SBA Mississippi District Office seeking to move Ultima’s contract to the 8(a) program, this time identifying a different 8(a) participant for the contract without mentioning the initial request. SBA accepted this second letter, placed the contract into the 8(a) program, and removed Ultima as the servicing firm for the Mississippi NRCS offices.

 

In response to these actions, on March 4, 2020, Ultima filed a complaint alleging race discrimination, claiming that SBA and USDA violated its Fifth Amendment right to equal protection under the law by using the rebuttable presumption for certain groups in the 8(a) program. The court issued its decision on July 19, 2023, declaring that the SBA’s rebuttable presumption was not a narrowly tailored measure to achieve a compelling government interest, based on precedent from the U.S. Court of Appeals for the Sixth Circuit. Consequently, the court ruled in favor of Ultima, enjoining SBA and USDA from using the rebuttable presumption of social disadvantage in administering the 8(a) program.

 

Key Takeaways 

The immediate impact of this decision means that-if it is not stayed pending appeal-for current and future applications for admission into the 8(a) program, members of groups that were identified by SBA as having a rebuttable presumption of social disadvantage will now need to affirmatively establish the existence of social disadvantage, such as race, under the elements set forth above.  The will likely need to provide a detailed narrative showing that they are, indeed, socially disadvantage.  This may not be an easy task.

In addition, the court reserved ruling on any further remedy subject to a hearing on that issue.  While Ultima requested monetary remedies, it is not clear whether any additional remedies provided by the court would include non-monetary remedies, such as further restrictions on the use of the 8(a) program.  Moreover, even if the court does not impose additiona remedies, it si foreseeable that, given this decision, other government contracts that are not participants in the 8(a) program could, in certain circumstances, raise a more general constitutional challenge to the 8(a) program itself.