Labor & Employment Law — 12/16/08

Disadvantaged minority set-asides for defense contracting unconstitutional

A federal law that sets a goal of awarding five percent per fiscal year of defense contracting dollars to companies owned by “socially and economically disadvantaged individuals” has been found unconstitutional by the Federal Circuit Court of Appeals. The law incorporates the Small Business Act’s rebuttal presumption that African-Americans, Asians, Hispanics and Native-Americans are socially disadvantaged individuals, but implementing regulations require all owners to demonstrate the economic disadvantage element. The plaintiff corporation, owned by a Caucasian woman, claimed the law was unconstitutional on its face and as applied by the US Department of Defense (DoD) when it awarded a contract to an Asian-American-owned business despite the fact that the plaintiff was the lowest bidder. A federal district court upheld the law and granted summary judgment in favor of the DoD on the plaintiff’s facial challenge. After the plaintiff’s claim for monetary damages became moot, the district court entered a final judgment in favor of the DoD. (Rothe Dev Corp v Dep’t of Defense, FedCir, 91 EPD ¶43,388)

In 1995, the US Supreme Court held in Adarand Constructors Inc v Pena (66 EPD ¶43,556), that race-conscious government programs must be evaluated pursuant to strict scrutiny standards to determine whether they violate the equal protection guarantees contained in the US Constitution. Under strict scrutiny analysis, such programs must be narrowly tailored to further a compelling government interest. In the present case, the Federal Circuit found that Congress did not have “a strong basis in evidence” upon which to conclude that the DoD was a passive participant in racial discrimination in relevant markets nationwide when it reenacted the law in 2006; therefore, it lacked a compelling state interest to justify the law’s race-conscious remedial measures. At that time, Congress relied on certain statistical and anecdotal evidence, including: (1) six disparity studies of state and local contracting conducted by private research and consulting firms between 2002 and 2005 at the behest of state and/or local governments in Texas, Ohio, New York, Virginia and California; (2) a September 2005 study by the United State Commission on Civil Rights (“USCCR”) entitled, “Federal Procurement After Adarand”; (3) letters from individual business owners describing incidents of perceived discrimination in state, local, and private contracting; (4) various anecdotes regarding discrimination recounted by members of Congress in floor statements or remarks; (5) testimony by small business owners before the House Small Business Committee in 2001 and 2004; and (6) three reports from the Small Business Administration – two from 2005 and one from 2000 – regarding ownership and success rates of small businesses.

Although it rejected the plaintiff contractor’s argument that the six disparity studies were too stale to justify the law, the Federal Circuit found problems with other aspects of the studies. The court was doubtful as to whether the studies were properly before Congress because they were not discussed at any Congressional hearings. Noting problems with the studies methodology and limited geographic coverage, the court concluded that “the studies do not provide a substantially probative and broad-based statistical foundation necessary for the ‘strong basis in evidence’ that must be the predicate for nationwide, race-conscious action.” Likewise, the court found that the other statistical evidence relied upon by Congress was not “substantially more probative than that contained in the six disparity studies.” The court noted that in the absence of strong statistical evidence, the anecdotal evidence was insufficient, by itself, to support race-conscious government action.

Because it held the Congress lacked the evidentiary basis for a compelling state interest, the Federal Circuit did not reach the question of narrow tailoring. Accordingly, the appellate court reversed the district court, finding that the statute, on its face, as reenacted in 2006, violated the equal protection component of the Fifth Amendment right to due process.

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