• CAFC Holds DOD Contract Goals for Small Disadvantaged Businesses Unconstitutional
  • February 5, 2009
  • Law Firm: Holland & Hart LLP - Denver Office
  • In a dramatic election day decision, the Court of Appeals for the Federal Circuit (CAFC) has ruled 10 USC § 2323, Contract Goal for Small Disadvantaged Businesses and Certain Institutions of Higher Education, unconstitutional, casting a shadow over many longstanding federal contract preference programs.1 Among other things, the statute created a 5% goal for federal contract awards to various entities, primarily small business concerns owned and controlled by socially and economically disadvantaged individuals. In addition to declaring the current version of 10 USC § 2323 facially unconstitutional, the Court’s opinion enjoins the application of the statute to federal procurement activity covered by the statute. 

    The Rothe case involved protracted litigation challenging the Department of Defense (DOD) Small Disadvantaged Business (SDB) contract preference program. In 1998, Rothe was the low bidder on an Air Force procurement for computer and communications services. After the application of a 10% price evaluation adjustment factor, Rothe was no longer the low bidder, and the contract was awarded to a socially disadvantaged company in accordance with the predecessor statute to 10 USC § 2323. That award triggered the litigation by Rothe challenging the validity of the contract award and the constitutionality of DOD’s statutory preference scheme.

    Initially, the Rothe Court cited the well-known strict scrutiny standard of review for cases involving government preferences based on race: “It is well established that when the government distributes burdens or benefits on the basis of individual racial classifications, that action is reviewed under strict scrutiny.”2 The Court noted that in order to survive a strict scrutiny review, a statute incorporating an explicit racial classification, “…must serve a compelling governmental interest, and must be narrowly tailored to further that interest.”3 The Court also observed that while a compelling interest may be demonstrated to remedy the effects of past or recent discrimination,4 the government must be able to identify the discrimination and have a strong basis in evidence before resorting to race conscious measures.5

    Based upon this precedent, the Rothe Court then reviewed the evidence relied upon by Congress to support DOD’s preference program. That evidence consisted of six “disparity” studies involving three cities, two counties and one state which purported to show federal contract awards to minority businesses below the level of minority business participation in the federal marketplace. Rothe argued in its appeal that these studies were stale, had not been relied upon by Congress, were methodologically flawed and did not establish DOD participation in discriminatory practices.

    Although finding that the studies were not stale and declining to rule on whether Congress gave them actual consideration before enacting 10 USC § 2323, the Rothe Court focused instead on the validity of the studies themselves and found several statistical flaws. Significantly, the Court commented that four of the studies had been prepared by the same company and that the United States comprises over three thousand counties and county-equivalent regions. The Court then continued its analysis by stating that two of the six studies failed to eliminate unqualified SDB’s from their statistical pool, and five of the studies failed to account for the relative capacity of the SDB’s to compete for larger contracts or multiple contract awards. In essence, the Court was concerned that the sheer number of businesses owned by minorities might not be correlated with the volume of business conducted by minority-owned companies. In other words, the size of the SDB and its inability to bid on more than one contract at a time might also account for the disparity in the dollar value of contracts awarded to minority-owned businesses. The Court analogized this situation to the volume capacity of a micro-brewery in the marketplace at a given time to the volume capacity of Budweiser in the same marketplace at the same time. Based upon this analysis, the Rothe Court then held, “…that the defects we have noted detract dramatically from the probative value of these six studies, and, in conjunction with their limited geographic coverage, render the studies insufficient to form the statistical core of the “strong basis in evidence” required to uphold the statute.”6 The Court added that it could find no strong basis to conclude that DOD had been an active or passive participant in discriminatory practices.

    In arriving at its holding, the Rothe Court acknowledged, “Different studies, in the context of different legislative history, may support different conclusions.”7 The Court added that it was not stating any blanket rules about the reliability of “disparity” studies, and seemed to invite corrective action by Congress: “Thus, if Congress reenacts [10 USC § 2323] again before it is set to expire in 2009—as Congress is free to do—we cannot now predict, nor do we intend to prejudge, whether any such new enactment will be supported by “a strong basis in evidence.””8 Finally, the Court noted that the statute as currently drafted was otherwise narrow in scope and application, hinting that it would pass constitutional muster if properly supported by statistical evidence in the future.

    Based on the concluding remarks by the Rothe Court cited above, the long term impact of the case may be less than it appears to be. In essence, the Court was saying that Congress had not done its homework, but that if it was able to provide a statistical basis to support preferences in the future, then the statute could well pass muster. As a practical matter, DOD has met its 5% goal every fiscal year from 1998 through 2007, effectively suspending application of the 10% price evaluation adjustment through March 9, 2009. Thus, the practical effect of an injunction in this case is greatly diminished. In addition, interim guidance issued by the Small Business Association (SBA) as a result of the Rothe decision indicates that that agency will wait to see how DOD will respond, and that in the meantime SBA programs remain unaffected. For this reason, existing contracts will remain in force, especially since the Rothe Court did not address the retroactivity issue in its decision. Finally, the impact of the decision will be limited by the fact that it only applies to DOD’s SDB program under 10 USC § 2323. While the rationale of the Rothe decision is certainly applicable to a wider array of programs, it is unclear whether it would extend to preferences with other objectives, such as the Service Disabled Veteran Owned Small Business Program.

    1. Rothe Development Corporation v. Department of Defense and Department of the Air Force, CAFC No. 2008-1017, November 4, 2008.
    2. Parents Involved in Cmty. Sch. v. Seattle Sch. Dist. No. 1, 127 S. Ct. 2738, 2751 (2007).
    3. Adarand Constructors, Inc. v. Pena, 515 US 200 at 235 (1995).
    4. Shaw v. Hunt, 517 US 899, 909 (1996).
    5. Richmond v. J.A. Croson Co., 488 U.S. 469, at 500, 504 (1989).
    6. Rothe, supra.
    7. Rothe, supra.
    8. Rothe, supra.