Are Small Business Set Asides Now Illegal?

In a recent legal decision that could have a big impact on contractors, the D.C. federal court has ruled that awarding contracts to minority owned companies under the government’s  Section 8(a) Program may be unconstitutional.  The 8(a) Program was designed to remedy past effects of discrimination against minority businesses by providing preferential award of certain contracts.

DynaLantic Corporation sued the Defense Department alleging that a DoD contract award to a minority owned company for flight training equipment was illegal, since the 8(a) set-aside Program was allegedly unconstitutional under the equal protection clause of the Fifth Amendment to the Constitution.  DynaLantic is a small business but is not minority owned.

The DC court ruled that the 8(a) Program is constitutional on its face.  However, the court also ruled that the way DoD applied the program with respect to the award involving DynaLantic was unconstitutional.  In its decision, the court upheld the overall Program due to the Congressional record reflecting statistical evidence of racial discrimination, but concluded that the Program “as applied” was unconstitutional because the government failed to present evidence of actual discrimination in the applicable industry.

The implications of this ruling are significant, since the government may not want to go through the steps of compiling a record of discrimination in each specific industry it wants to issue a contract under the 8(a) Program.  Certain industries may also have different statistics that may leave the question of discrimination subject to dispute.  Government contractors need to be aware of this decision and be prepared for new battles that may now involve a constitutional controversy impacting small businesses in DC and throughout the United States.

Author Seth Berenzweig is the Managing Partner of D.C. regional business law firm, Berenzweig Leonard, LLP.  He can be reached at sberenzweig@berenzweiglaw.com.