Dynalantic Corp. v. United States Department of Defense

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA
)
DYNALANTIC CORPORATION, )
)
Plaintiff, )
) Civil Action No. 95-2301 (EGS)
v. )
)
UNITED STATES DEPARTMENT )
OF DEFENSE, et al., )
)
Defendants. )
)
MEMORANDUM OPINION
Plaintiff, the DynaLantic Corporation (“DynaLantic”), is a
small business that designs and manufactures aircraft, submarine,
ship, and other simulators and training equipment. Plaintiff has
brought this suit against Defendants – the Department of Defense
(“DoD”), the Department of the Navy (“the Navy”), and the Small
Business Administration (“SBA”) – to challenge the
constitutionality of Section 8(a) of the Small Business Act (the
“Section 8(a) program”), which permits the federal government to
limit the issuance of certain contracts to socially and
economically disadvantaged businesses. DynaLantic claims the
Section 8(a) program is unconstitutional both on its face and as
applied by Defendants in DynaLantic’s industry, the military
simulation and training industry. Plaintiff claims that DoD’s
use of the Section 8(a) program, which is reserved for “socially
and economically disadvantaged individuals,” 15 U.S.C.
§ 637(a)(4)(A), constitutes an illegal racial preference which
violates its right to equal protection under the Due Process
Clause of the Fifth Amendment to the Constitution, in addition to
its rights under 42 U.S.C. § 1981 and Title VI of the Civil
Rights Act of 1964, 42 U.S.C. § 2000d et seq. Plaintiff also
initially challenged DoD’s separate statutory program, 10 U.S.C.
§ 2323 (“the DoD program”), which, among other things, imposed an
independent obligation on the Agency to participate in Section
8(a); however, as explained herein, this challenge is moot
because the DoD Program no longer exists.
The initial summary judgment briefing in this case,
including the submissions of amici, was completed in 2005.
However, as a result of subsequent events relating to the DoD
Program, the Court has reopened the record twice since that time.
First, after the DoD Program was reauthorized by Congress in
2006, the Court denied without prejudice the parties’ cross-
motions for summary judgment to enable the parties to supplement
the record to include the evidence before Congress at the time of
the reauthorization. The parties submitted supplemental briefing
and evidence in 2007. The reauthorization was short-lived,
however; in 2008, the Federal Circuit held that the 2006
reauthorization of the DoD Program was facially unconstitutional
and enjoined its enforcement. Rothe Dev. Corp. v. Dep’t of Def.
(“Rothe VII”), 545 F.3d 1023 (Fed. Cir. 2008). After receiving
2
additional briefing on the impact of Rothe VII in 2009, the Court
again re-opened the record to examine evidence considered by
Congress regarding Section 8(a) subsequent to the reauthorization
of the DoD Program in 2006. The parties have submitted further
supplemental briefing and evidence, and the Court is now in a
position to reconsider the cross-motions. After careful
consideration of the cross-motions, the oppositions and replies
thereto, the amicus briefs, supplemental briefing by the parties,
the entire record, and the applicable law, the Court concludes
that the Section 8(a) program is constitutional on its face.
However, the Court further concludes that the SBA’s and DoD’s
application of the program to issue contracts in the military
simulation and training industry does not survive strict
scrutiny, and therefore DynaLantic prevails on its as-applied
challenge. Accordingly, for the reasons set forth below,
Defendants’ motion for summary judgment is GRANTED IN PART AND
DENIED IN PART and Plaintiff’s cross-motion for summary judgment
is GRANTED IN PART AND DENIED IN PART.
I. BACKGROUND
A. Statutory and Regulatory Framework
1. The Section 8(a) Program
The Section 8(a) program is a business development program
for small businesses owned by individuals who are both socially
and economically disadvantaged. See 15 U.S.C. § 637(a); 13
3
C.F.R. § 124.1. Small businesses owned and controlled by such
individuals may apply to the SBA and, if admitted into the
program, are eligible to receive technological, financial, and
practical assistance, as well as support through preferential
awards of government contracts. The parties agree that DoD
presently participates in the Section 8(a) program. See Defs.’
Status Report and Mot. for Order Directing Supplemental Briefing
at 2, Doc. No. 235; Pl.’s Opp’n to Mot. for Order to Meet and
Confer at 3-4, Doc. No. 236.
In order for a firm to participate in the Section 8(a)
program, the SBA must certify that the firm is a small
disadvantaged business (“SDB”) under specific criteria.1 See 15
U.S.C. §§ 636(j)(11)(E) & (F); 13 C.F.R. § 124.101. A business
qualifies as “small” if it meets the standards set forth in 13
C.F.R. Part 121. See 13 C.F.R. § 124.102; see also 15 U.S.C.
§ 632(a)(1)-(3). A small business is “disadvantaged” if at least
fifty one percent of the firm is unconditionally owned and
controlled by one or more individuals who are both socially and
economically disadvantaged. See 15 U.S.C. § 637(a)(4)(A)-(B); 13
C.F.R. § 124.105. “Socially disadvantaged” individuals are
persons who have been “subjected to racial or ethnic prejudice or
1
A number of acronyms referring to minority-owned and/or
disadvantaged firms are used throughout. “MBE” means minority
business enterprise, “WBE” means women’s business enterprise,
“DBE” means disadvantaged business enterprise. “SDB” means small
(socially and economically) disadvantaged business.
4
cultural bias within American society because of their identities
as members of groups without regard to their individual
qualities. The social disadvantage must stem from circumstances
beyond their control.” 13 C.F.R. § 124.103(a); see also 15
U.S.C. § 637(a)(5). “Economically disadvantaged” individuals are
those socially disadvantaged individuals “whose ability to
compete in the free enterprise system has been impaired due to
diminished capital and credit opportunities as compared to others
in the same or similar line of business who are not socially
disadvantaged.” 13 C.F.R. § 124.104(a); see also 15 U.S.C.
§ 637(a)(6)(A).
Individuals who are members of certain racial and ethnic
groups are presumptively socially disadvantaged. 13 C.F.R. §
124.103(b)(1);2 see also 15 U.S.C. § 631(f)(1)(B)-(c) (finding
2
The regulation, 13 C.F.R. § 124.103(b)(1), lists five
broad groups and thirty-seven subgroups:
There is a rebuttable presumption that the following
individuals are socially disadvantaged: Black
Americans; Hispanic Americans; Native Americans (Alaska
Natives, Native Hawaiians, or enrolled members of a
Federally or State-recognized Indian tribe); Asian
Pacific Americans (persons with origins from Burma,
Thailand, Malaysia, Indonesia, Singapore, Brunei,
Japan, China (including Hong Kong), Taiwan, Laos,
Cambodia (Kampuchea), Vietnam, Korea, The Philippines,
U.S. Trust Territory of the Pacific Islands (Republic
of Palau), Republic of the Marshall Islands, Federated
States of Micronesia, the Commonwealth of the Northern
Mariana Islands, Guam, Samoa, Macao, Fiji, Tonga,
Kiribati, Tuvalu, or Nauru); Subcontinent Asian
Americans (persons with origins from India, Pakistan,
Bangladesh, Sri Lanka, Bhutan, the Maldives Islands or
Nepal).
5
that socially disadvantaged persons include “members of certain
groups that have suffered the effects of discriminatory practices
or similar invidious circumstances over which they have no
control,” and that “such groups include, but are not limited to,
Black Americans, Hispanic Americans, Native Americans, Indian
tribes, Asian Pacific Americans, Native Hawaiian Organizations,
and other minorities”). This presumption is rebuttable, however,
and may be overcome by credible evidence to the contrary. See 13
C.F.R. § 124.103(b)(3). In addition, an individual who is not a
member of one of the groups presumed to be socially disadvantaged
may gain admission to the Section 8(a) program by establishing by
a preponderance of the evidence that the individual is socially
disadvantaged under the criteria set forth in 13 C.F.R.
§ 124.103(c).
Social disadvantage is defined in terms of “bias” and
“prejudice” and not in terms of other types of “disadvantage.”
See 13 C.F.R. § 124.103(a). Accordingly, the statutory and
regulatory definition of “social disadvantage” in 15 U.S.C.
§ 637(a)(6)(A) and 13 C.F.R. § 124.103(a) includes those who have
been disadvantaged by racial or ethnic prejudice but not those
who have been disadvantaged solely by, for example, below average
educational opportunities.
All prospective program participants must show that they are
economically disadvantaged. To qualify as economically
6
disadvantaged, an individual must have a net worth of less than
$250,000 upon entering the program, excluding the individual’s
ownership in the applicant business and equity in the
individual’s primary personal residence. See 13 C.F.R.
§ 124.104(c)(2). In addition to personal net worth, the SBA
examines the individual’s income for the three years prior to the
application and the fair market value of all assets, whether
encumbered or not. See 13 C.F.R. § 124.104(c). The SBA also
compares the financial condition of those claiming disadvantaged
status to others in the same or similar line of business who are
not socially and economically disadvantaged. Id.; see also 15
U.S.C. § 637(a)(6)(E).
The Section 8(a) program is one of a number of government-
wide programs designed to encourage the issuance of procurement
contracts to, inter alia, small businesses, service disabled
veterans, socially and economically disadvantaged individuals,
and women. See 15 U.S.C. § 644. Congress has established an
“aspirational goal” for procurement from socially and
economically disadvantaged individuals, which includes but is not
limited to the Section 8(a) program, of five percent of
procurement dollars government wide. See id. § 644(g)(1). It
has not, however, established a numerical goal for procurement
from the Section 8(a) program specifically. See id.
Additionally, each federal agency establishes its own goals by
7
agreement between the agency head and the SBA. Id. DoD has
established a goal of awarding approximately two percent of prime
contract dollars through the Section 8(a) program. Pl.’s Mem. of
P.& A. in Supp. of its Mot. for Summ. J. (“Pl.’s MSJ”) at 70.3
None of the goals established by Congress or DoD are rigid
numerical quotas, and there is no penalty for failure to meet the
goals.
The Section 8(a) program does not mandate the use of set-
aside contracts, ever. Rather, Section 8(a) allows the SBA,
“whenever it determines such action is necessary and
appropriate,” to enter into contracts with other government
agencies and then subcontract with qualified program
participants. 15 U.S.C. § 637(a)(1). As stated above, there are
no quotas for issuance of Section 8(a) contracts, and no
penalties for failing to award them. Admission to the Section
8(a) program does not guarantee that a participant will receive
8(a) contracts. 13 C.F.R. § 124.501(c).
Section 8(a) contracts can be awarded on a “sole source”
basis (i.e., reserved to one firm) or on a “competitive” basis
(i.e., between two or more Section 8(a) firms). 13 C.F.R.
§ 124.501(b). Sole source 8(a) awards generally are limited in
3
For ease of reference, the cross-motions for summary
judgement will be referred to as “MSJs” throughout.
8
value to $6.5 million or below for manufacturing contracts and $4
million for all other contracts. See 13 C.F.R. § 124.506.
SBA regulations prescribe circumstances under which SBA will
not accept a procurement for award as an 8(a) contract. One such
circumstance arises where SBA has made a written determination
that acceptance of the procurement would have an adverse impact
on other small businesses. This adverse impact concept is
designed to protect small businesses which are performing
government contracts located outside the Section 8(a) program.
13 C.F.R. § 124.504(c).
Section 8(a) program participants are required to have a
comprehensive business plan which SBA is required to review
annually. 13 C.F.R. §§ 124.402, 124.403. Participants are also
required to submit an annual certification that they meet program
eligibility requirements along with financial and other
information to enable the SBA to verify their continued
eligibility and monitor their performance and progress in
business development. 13 C.F.R. §§ 124.112(b), 124.509(c),
124.601, 124.602; see 15 U.S.C. §§ 637(a)(4)(c), 637(a)(6)(B),
637(a)(12)(A), 637(a)(20). Program participants are eligible to
receive management and technical assistance provided through
SBA’s private sector service providers, including (i) counseling
and training in the operation of small business and business
development; (ii) assistance in developing comprehensive business
9
plans; and (iii) assistance obtaining equity and debt financing.
13 C.F.R. §§ 124.701-124.704; see 15 U.S.C. § 636(j)(13) & (14).
A firm may remain in the Section 8(a) program for a maximum
of nine years, but only if it continues to meet all of the
eligibility requirements throughout that period. See 13 C.F.R.
§ 124.2; 15 U.S.C. §§ 636(j)(10)(E), 636(j)(10)(H), 636(j)(15).
In contrast, a participant must leave the Section 8(a) program
early if (1) it has attained its business objectives as set forth
in its business plan on file with the SBA, and (2) it has
demonstrated the ability to compete in the marketplace without
further assistance under the program. See 13 C.F.R.
§ 124.302(a)(1). A participant who fails to maintain eligibility
will be terminated from the program. See 13 C.F.R.
§ 124.303(a)(2). In addition, a participant must leave the
program if the net worth of any of the owners on whom its
eligibility is based exceeds $750,000. See 13 C.F.R.
§§ 124.104(c)(2), 124.302(a)(2).
An individual or firm may participate in the Section 8(a)
program only once. After exiting the Section 8(a) program for
any reason, a firm is no longer eligible to reapply, and any
individual who has been counted toward the ownership requirement
for that firm may never again be counted toward the ownership
requirement for another firm. See 13 C.F.R. § 124.108(b); 15
U.S.C. § 636(j)(11)(B) & (c).
10
The Small Business Act requires the President to submit an
annual report to Congress on both the performance of small
businesses generally and of small businesses owned by socially
and economically disadvantaged individuals in particular. The
report must include a discussion of the current role of small
businesses in the economy on an industry-by-industry basis and
include recommendations for revising the Act. 15 U.S.C. § 631b.
The SBA is also required to submit to Congress an annual
assessment of the Section 8(a) program. 15 U.S.C. §
636(j)(16)(B).
2. Plaintiff’s Business
DynaLantic, a small business as defined by the SBA, bids on,
competes for, operates in, and performs contracts and
subcontracts in the simulation and training industry. The
simulation and training industry is composed of those
organizations that develop, manufacture, and acquire equipment
used to train personnel in any activity where there is a
human-machine interface. Pl.’s MSJ at 4. Firms that manufacture
simulation and training equipment and that operate in the
simulation and training industry must have specialized skills,
qualifications, and knowledge. Id.Plaintiff designs, fabricates, tests, installs, and supports
sophisticated, high technology training devices for the U.S.
military, foreign military services, and other customers. Pl.’s
11
MSJ, Ex. A, Decl. of Jeffery Weinstock ¶ 6. Since its inception,
over 68 percent of DynaLantic’s total revenues have been
generated from prime contracts with the U.S. military, and all of
those contracts have derived from contracts for simulators,
related training equipment, and services. Id. ¶ 5. Plaintiff
typically bids on, or competes for, contracts and subcontracts of
up to $15 million, with most of those contracts and subcontracts
being under $5 million in value. Pl.’s MSJ at 4. Generally
speaking, Plaintiff’s main competitors are not large businesses
but rather are other small businesses, including SDBs such as
Section 8(a) firms. Id. Plaintiff has never been a participant
in the Section 8(a) program and has never been certified as a
SDB. Id. at 4-5.
B. Procedural History
In 1995, the Navy determined it would award a contract for
the development of a UH-1N Aircrew Procedures Trainer (“APT”), a
mobile flight simulator for the “Huey” helicopter, exclusively
through the Section 8(a) program. Plaintiff, which had
previously designed and manufactured flight simulators for the
military, claims it would have competed for this procurement but
for the fact that it was not a participant in the Section 8(a)
program. Plaintiff filed an administrative protest with the
government’s contracting officer, contesting the decision to
procure the contract through the Section 8(a) program. After
12
Plaintiff’s administrative claim and subsequent administrative
appeal were denied, it filed suit in this Court, claiming that
the Navy’s decision to procure the APT contract through the
Section 8(a) program was unconstitutional. Plaintiff sought
declaratory and injunctive relief.
On May 20, 1996, this Court issued a Memorandum Opinion and
Order denying DynaLantic’s motion for a preliminary injunction,
concluding that it lacked standing to bring its action and had
otherwise failed to establish a sufficient factual and legal
basis for the issuance of a preliminary injunction. See
DynaLantic Corp. v. Dep’t of Def., 937 F. Supp. 1 (D.D.C. 1996).
Subsequently, on August 9, 1996, this Court dismissed the case on
standing grounds. See Order, Aug. 9, 1996.
Plaintiff appealed from both the denial of its motion for
preliminary injunction and the dismissal order. The D.C. Circuit
dismissed the appeal from the denial of the motion for
preliminary injunction as moot in light of the dismissal of the
entire action, but granted DynaLantic’s motion to enjoin the APT
procurement during the pendency of the appeal from the dismissal
order. DynaLantic Corp. v. Dep’t of Def., 115 F.3d 1012, 1018
(D.C. Cir. 1997). A few weeks later, while briefing for that
appeal was still underway, the Navy canceled the proposed
solicitation for the APT procurement.
13
The D.C. Circuit held that DynaLantic had standing to
challenge the constitutionality of the Section 8(a) program,
because Plaintiff was unable to compete for DoD contracts that
are reserved for Section 8(a) program participants. DynaLantic
Corp., 115 F.3d at 1014. The Court of Appeals noted that
DynaLantic had not challenged Section 8(a) on its face in its
original or first amended complaint. Nevertheless, the Court of
Appeals permitted DynaLantic to amend its pleadings upon remand
in order to raise a facial challenge to the Section 8(a) program.
We allow [Dynalantic] to amend its pleadings to raise a
general challenge to the 8(a) program as administered by the
SBA and participated in by the Defense Department. . . .
[A]s amended, the case is clearly not moot. The government
apparently intends to continue to award contracts under the
8(a) program, and DynaLantic’s challenge to the program is
not mooted merely because the challenge to one particular
application of it may be.
Id. at 1015.
Following the remand to this Court, Plaintiff filed a second
amended complaint (the operative complaint for this litigation),
which challenges the constitutional validity of the Section 8(a)
and DoD programs. See Second Am. Compl. ¶¶ 1, 13. In Count I,
the sole count of its complaint, DynaLantic claims that the set-
aside components of Section 8(a) and the DoD programs deprive
DynaLantic from competing for federal procurements in the
simulation and training industry on the basis of race, thereby
“violat[ing] DynaLantic’s rights under 42 U.S.C. §§ 1981 and
2000d and the equal protection component of the Due Process
14
Clause of the Fifth Amendment of the Constitution.” Id. ¶ 23.
DynaLantic seeks an injunction and declaratory judgment
“prohibiting Defendants . . . from awarding any contract for
military simulators based on the race of the contractors,” a
declaratory judgment that the “set-aside scheme” is
unconstitutional on its face and as applied to the “military
simulator and training equipment industry,” costs and attorneys’
fees. Id. at 8-9 (Prayer for Relief).
After extensive discovery and a stay in the case, the
parties filed cross-motions for summary judgment, oppositions,
and replies. Following the filing of the parties’ cross-motions,
the Court invited amici, who had first shared their views in the
case in 1995, to file additional submissions. The NAACP Legal
Defense & Education Fund, Inc., the Pacific Legal Foundation, the
Mountain States Legal Foundation, and Rothe Development
Corporation filed amicus briefs.
On August 23, 2007, this Court issued a Memorandum Opinion
and Order denying the parties’ cross-motions for summary judgment
without prejudice. The Court noted that DynaLantic challenged
not only the Section 8(a) program, but also DoD’s policy of
awarding contracts to socially and economically disadvantaged
businesses pursuant to the DoD Program, 10 U.S.C. § 2323. The
Court also noted that the DoD Program had been reauthorized in
2006, but the record contained no information on the evidence
15
before Congress regarding that reauthorization. The Court found,
therefore, that it could not resolve the fundamental issues
raised by the parties’ motions without considering the evidence
before Congress in 2006. Accordingly, the Court ordered the
parties to file supplemental briefs on the effect of the
reauthorization of 10 U.S.C. § 2323. In November 2007, the
parties filed supplemental briefs and replies on the impact of
the 2006 reauthorization of the Section 8(a) and the DoD programs
on this case. The parties also supplemented the record with
legislative materials before Congress during the 2006
reauthorization.
In November 2008, the Federal Circuit held that Congress did
not have a strong basis in evidence for implementing race-
conscious measures when it reauthorized the DoD Program in 2006;
thus, the Federal Circuit invalidated the DoD Program as facially
unconstitutional. Rothe VII, 545 F.3d 1023. The parties in this
case agreed that Rothe VII did not moot this case in its entirety
“because DoD continues to participate in [the 8(a)] program under
the statutory authority of the Small Business Act, independent of
[the DoD Program]. Therefore, this case continues to present a
live controversy about DoD’s use of the Section 8(a) program.”
Defs.’ Status Report at 2, Doc. No. 235; see also Pl.’s Opp’n to
Defs.’ Mot. for Order to Meet and Confer at 3-4, Doc. No. 236.
Defendants requested that the record be supplemented to include
16
additional information that Congress had amassed since the 2006
reauthorization. Defendants argued “that the Court should
consider” the more recent evidence “in connection with the
compelling interest underlying the Section 8(a) program and the
continuing need for that program’s race-conscious features.”
Defs.’ Status Report at 2, Doc. 235. The Court agreed, and on
October 23, 2009, ordered that “the record in this action shall
be supplemented to include pertinent materials considered by
Congress subsequent to the reauthorization” of the DoD Program.
Minute Order, Oct. 23, 2009. The parties submitted a joint
report containing a proposed list of additional Congressional
materials to be considered, and thereafter submitted supplemental
briefing addressing the effect of those additional Congressional
materials on the issues in this case. The cross-motions for
summary judgment, as supplemented by the additional record
evidence and additional briefing, are now ripe for resolution by
the Court.
II. STANDARD OF REVIEW AND BURDEN OF PROOF
A. Summary Judgment
Pursuant to Federal Rule of Civil Procedure 56, summary
judgment should be granted if the moving party has shown that
there are no genuine issues of material fact and that the moving
party is entitled to judgment as a matter of law. See Fed. R.
Civ. P. 56; Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986);
17
Waterhouse v. Dist. of Columbia, 298 F.3d 989, 991 (D.C. Cir.
2002). In ruling on cross-motions for summary judgment, the
court shall grant summary judgment only if one of the moving
parties is entitled to judgment as a matter of law upon material
facts that are not genuinely disputed. See Citizens for
Responsibility & Ethics in Wash. v. Dep’t of Justice, 658 F.
Supp. 2d 217, 224 (D.D.C. 2009) (citing Rhoads v. McFerran, 517
F.2d 66, 67 (2d Cir. 1975)).
B. Permanent Injunction & Declaratory Judgment
Plaintiff seeks a permanent injunction preventing Defendants
from using Section 8(a) to award contracts, both generally and in
the simulation industry. The standard for granting a permanent
injunction is much like the standard for a preliminary
injunction, and the Court is required to consider four factors:
(1) success on the merits; (2) whether the movant will suffer
irreparable injury absent an injunction; (3) the balance of
hardships between the parties; and (4) whether the public
interest supports granting the requested injunction. Winter v.
Natural Res. Def. Council, Inc., 555 U.S. 7, 32 (2008) (citations
omitted). Unlike a preliminary injunction, actual success on the
merits is a prerequisite to obtain permanent injunctive relief.
Id.In addition to injunctive relief, Plaintiff also requests a
declaratory judgment. See 28 U.S.C. § 2201(a) (“In a case of
18
actual controversy within its jurisdiction, . . . any court of
the United States . . . may declare the rights and other legal
relations of any interested party seeking such declaration,
whether or not further relief is or could be sought.”); Fed. R.
Civ. P. 57.
C. Facial Challenge
The parties dispute the correct standard for a facial
challenge. Defendants argue that this Court must apply the test
articulated by the Supreme Court in United States v. Salerno,
that “[a] facial challenge to a legislative Act is, of course,
the most difficult challenge to mount successfully, since the
challenger must establish that no set of circumstances exists
under which the Act would be valid.” 481 U.S. 739, 745 (1987).
Plaintiff responds that the Salerno test was questioned as
possibly dictum by a plurality in City of Chicago v. Morales, 527
U.S. 41, 55 n.22 (1999) (plurality op., Stevens, J.) and urges
the Court not to apply it. DynaLantic also relies on Rothe VII,
a case which bears directly on the history of this case because
it found the DoD Program’s race-based measures unconstitutional.
In Rothe VII, the Federal Circuit followed its own circuit
precedent and declined to apply Salerno to a facial challenge to
the DoD Program’s race-conscious measures. 545 F.3d at 1032.
Plaintiff urges this Court to do the same.
19
Plaintiff fails to recognize, however, that the Salerno test
has been adopted by this Circuit and cited with approval
following Morales. Although the Circuit acknowledged the views
expressed by Justice Stevens, it expressly stated that, “[f]or
our part, we have invoked Salerno’s no-set-of-circumstances test
to reject facial constitutional challenges.” AmFac Resorts v.
Dep’t of Interior, 282 F.3d 818, 826 (D.C. Cir. 2002) (citing
authorities), vacated in part on other grounds sub nom. Nat’l
Park Hospitality Ass’n v. Dep’t of Interior, 538 U.S. 803 (2003);
see also Shelby County v. Holder, 679 F.3d 848, 883 (D.C. Cir.
2012).4 This Court is bound by Circuit precedent; accordingly,
the Salerno test applies.
D. Strict Scrutiny
The parties agree that Section 8(a) employs a race-based
rebuttable presumption to define the class of “socially
disadvantaged” individuals who may, if they also establish
economic disadvantage, participate in the program. The parties
further agree that Section 8(a) authorizes the use of race-
conscious remedial measures. Accordingly, to the extent that the
Section 8(a) program relies on race-conscious criteria, it is
4
As Plaintiff points out, the Federal Circuit has
questioned the applicability of Salerno to equal protection
cases. Pl.’s MSJ at 43-44. At least two other circuits,
however, have applied Salerno to equal protection challenges.
See W. States Paving Co. v. Wash. State Dep’t of Transp., 407
F.3d 983, 991 (9th Cir. 2005); Sherbrooke Turf v. Minn. Dep’t of
Transp., 345 F.3d 964, 971 (8th Cir. 2003).
20
subject to strict scrutiny. “[R]acial classifications . . . are
constitutional only if they are narrowly tailored measures that
further compelling governmental interests.” Adarand
Constructors, Inc. v. Peña (“Adarand III”), 515 U.S. 200, 227
(1995); accord City of Richmond v. J.A. Croson Co., 488 U.S. 469,
493 (1989) (plurality opinion); Winter Park Commc’ns, Inc. v.
FCC, 873 F.2d 347, 357 (D.C. Cir. 1989).
Although the test for strict scrutiny is rigorous, the
Supreme Court has cautioned that it should not be interpreted as
“strict in theory, but fatal in fact.” Adarand III, 515 U.S. at
237 (internal citation omitted). “The unhappy persistence of
both the practice and the lingering effects of racial
discrimination against minority groups in this country is an
unfortunate reality, and government is not disqualified from
acting in response to it.” Id.III. DISCUSSION
A. Legal Standard to Establish a Compelling Interest
The government must make two showings to articulate a
compelling interest served by the legislative enactment. First,
the government must “articulate a legislative goal that is
properly considered a compelling government interest.”
Sherbrooke, 345 F.3d at 969. The Supreme Court has held that the
government has a compelling interest in “remedying the effects of
past or present racial discrimination[.]” Shaw v. Hunt, 517 U.S.
21899, 909 (1996). Second, “[i]n addition to identifying a
compelling government interest, the government must demonstrate
‘a strong basis in evidence’ supporting its conclusion that race-
based remedial action was necessary to further that interest.”
Sherbrooke, 345 F.3d at 969 (quoting Croson, 488 U.S. at 500).
Strict scrutiny demands such review because:
Absent searching judicial inquiry into the justification for
race-based measures, there is simply no way of determining
what classifications are . . . in fact motivated by
illegitimate notions of racial inferiority or simple racial
politics. Indeed, the purpose of strict scrutiny is to
“smoke out” illegitimate uses of race by assuring that the
legislative body is pursuing a goal important enough to
warrant the use of a highly suspect tool.
Croson, 488 U.S. at 493.
The government can meet its burden without conclusively
proving the existence of racial discrimination in the past or
present. See Wygant v. Jackson Bd. of Educ., 476 U.S. 267, 292
(1986) (O’Connor, J., concurring); Concrete Works of Colo., Inc.
v. City and Cnty. of Denver (“Concrete Works IV”), 321 F.3d 950,
958 (10th Cir. 2003). The government may rely on both
statistical and anecdotal evidence, although anecdotal evidence
alone cannot establish a strong basis in evidence for the
purposes of strict scrutiny. Id. at 977. In order to determine
whether the government has demonstrated a strong basis in
evidence, the court must make “factual determinations about the
accuracy and validity of [the government’s] evidentiary showing
for its program.” Concrete Works of Colo., Inc. v. City and
22
Cnty. of Denver (“Concrete Works II”), 36 F.3d 1513, 1522 (10th
Cir. 1994).
After the government makes an initial showing, the burden
shifts to DynaLantic to present “credible, particularized
evidence” to rebut the government’s “initial showing of a
compelling interest.” Concrete Works IV, 321 F.3d at 959(citations omitted). “Notwithstanding the initial burden of
initial production that rests with the [government], ‘[t]he
ultimate burden of proof remains with [the challenging party] to
demonstrate the unconstitutionality of an affirmative-action
program.’” Concrete Works IV, 36 F.3d at 1522 (quoting Wygant,
476 U.S. at 277-78). Furthermore, although Congress is entitled
to no deference in its ultimate conclusion that race-conscious
action is warranted, its fact-finding process is generally
entitled to a presumption of regularity and deferential review.
Rothe Dev. Corp. v. U.S. Dep’t of Def. (“Rothe III”), 262 F.3d
1306, 1321 n.14 (Fed. Cir. 2001) (“That Congress is entitled to
no deference in its ultimate conclusion that race-based relief is
necessary does not mean that Congress is entitled to no deference
in its factfinding.” (citing Croson, 488 U.S. at 500)); cf. Am.
Fed’n of Gov’t Employees v. United States, 330 F.3d 513, 522
(D.C. Cir. 2003) (“Incident to its lawmaking authority, Congress
has the authority to decide whether to conduct investigations and
hold hearings to gather information.”).
23
B. The Purpose of Section 8(a)
As set forth above, in order to meet the first prong of the
compelling interest test, the government must identify a purpose
for the use of race-conscious criteria that is properly
identified as a compelling interest. In this case, the
government has identified the compelling interest for the Section
8(a) program as “breaking down barriers to minority business
development created by discrimination and its lingering effects,”
including exclusion from contracting with the federal government.
Defs.’ Mem. of P.& A. in Supp. of Defs.’ Mot. For Summ. J.
(“Defs.’ MSJ”) at 27, 29. DynaLantic argues that the government
cannot identify a compelling interest unless it can show race
discrimination in contracting by federal, state or local
governments, or at the very least, that private industries
directly used federal funds to discriminate. Pl.’s MSJ at 33-37.
DynaLantic also argues that the race-based presumption of social
disadvantage shows that the law’s purpose was not remedial, but
was instead “to favor virtually all minority groups, in general,
over the larger pool of citizens (including those with lower
economic opportunity).” Id. at 40.
The Court rejects DynaLantic’s argument that Defendants may
only seek to remedy discrimination by a governmental entity, or
discrimination by private individuals directly using government
funds to discriminate. It is well established that “[t]he
24
federal government has a compelling interest in ensuring that its
funding is not distributed in a manner that perpetuates the
effect of either public or private discrimination” within an
industry in which it provides funding. Western States, 407 F.3d
at 991 (“It is beyond dispute that any public entity, state or
federal, has a compelling interest in assuring that public
dollars, drawn from the tax dollars of all citizens, do not serve
to finance the evils of private prejudice.” (quoting Croson, 488
U.S. at 492 (plurality op. of O’Connor, J.))). As the Tenth
Circuit has explained, such private prejudice may take the form
of discriminatory barriers to the formation of qualified minority
businesses, “precluding from the outset competition for public .
. . contracts by minority enterprises.” Adarand VII, 228 F.3d at
1167-68. Private prejudice may also take the form of
“discriminatory barriers” to “fair competition between minority
and non-minority enterprises . . . precluding existing minority
firms from effectively competing for public construction
contracts.” Id. at 1168. In both cases, these barriers would
“show a strong link between racial disparities in the federal
government’s disbursement of public funds” for federal contracts
“and the channeling of those funds due to private
discrimination.” Id. at 1167-68. Accordingly, under the
Fourteenth Amendment the government may implement race-conscious
programs not only for the purpose of correcting its own
25
discrimination, but also “to prevent itself from acting as a
‘passive participant’” in private discrimination in the relevant
industries or markets. Concrete Works IV, 321 F.3d at 958(quoting Croson, 488 U.S. at 492). The Court concludes,
therefore, that the Defendants state a compelling purpose in
seeking to remediate either public discrimination or private
discrimination in which the government has been a “passive
participant.” Croson 488 U.S. at 492.5
The Court also rejects DynaLantic’s claim that Section
8(a)’s purpose is not truly remedial, but instead is “to favor
virtually all minority groups, in general, over the larger pool
of citizens (including those with lower economic opportunity).”
Pl.’s MSJ at 40. As the government points out, the Section 8(a)
program is designed “to identify individual businesses that are
[economically] disadvantaged” by requiring an individualized
showing of economic disadvantage by each successful applicant.
Defs.’ Opp’n to Pl.’s MSJ (“Defs.’ Opp’n”) at 13. The statute,
in turn, defines “economically disadvantaged individuals” as
socially disadvantaged individuals “whose ability to compete in
the free enterprise system has been impaired due to diminished
5
This section of the Memorandum Opinion only addresses
whether “passive participation” in private discrimination is an
appropriate purpose for race-based legislation. It does not
address whether the government has presented strong evidence of
its passive participation in private discrimination. See infra
Section III.D.
26
capital and credit opportunities as compared to others in the
same or similar line of business who are not socially
disadvantaged.” 13 C.F.R. § 124.104(a); see also 15 U.S.C.
§ 637(a)(6)(A). Individuals whose net worth exceeds $250,000
cannot establish economic disadvantage for purposes of entering
the Section 8(a) program. 13 C.F.R. § 124.104(c)(2). Moreover,
the 8(a) program is open to socially and economically
disadvantaged non-minority individuals. Id. § 124.103(c). In
short, the program is directed at individual firms that can show
economic disadvantage, and is not limited to minorities. The
Court agrees with the government that the Section 8(a) program’s
structure convincingly confirms its remedial purpose. Defs.’
Opp’n at 14.
C. Evidence Before Congress6
1. Legislative History of the Section 8(a)
Program
The Small Business Act of 1953 created the Small Business
Administration (“SBA”). See Pub. L. No. 83-163, 67 Stat. 232(1953). Section 8(a) of the Act delegates to the SBA the
authority and an obligation, “whenever it determines such action
6
This section draws, in substantial part, from the
Defendants’ submissions to the Court, which the Plaintiff, with
few exceptions, does not challenge as a matter of historical
record. Of course, Plaintiff challenges the sufficiency of the
evidence before Congress to demonstrate compelling interest, but
the sufficiency of the evidence is not at issue in this section
of the Court’s Memorandum Opinion.
27
is necessary,” to enter into contracts with any procurement
agency of the federal government to furnish goods and services.
Id. at § 8(a). The SBA can also enter into subcontracts with
small businesses for the performance of such contracts. The
Section 8(a) authority was dormant for a decade after the Small
Business Act was enacted. The Section 8(a) program as it
operates today evolved from Executive Orders issued by Presidents
Lyndon B. Johnson and Richard M. Nixon in response to the Kerner
Commission.7 The Kerner Commission investigated incidents of
civil disorder in the inner cities following urban unrest in
1967. Having found that disadvantaged individuals enjoyed no
appreciable ownership of small businesses and did not share in
the community redevelopment process, the Kerner Commission
recommended that steps be taken to increase the level of business
ownership by minorities so that they would have a better
opportunity to materially share in the competitive free
enterprise system. See H.R. Rep. No. 956, at 2 (1982); S. Rep.
No. 1070, at 14 (1978).
Following the Kerner Commission’s report, President Johnson
ordered the SBA to use its Section 8(a) authority to direct
contracts to businesses located in distressed urban communities
in order to create jobs. Later, in 1969, pursuant to President
7
See Exec. Order No. 11375, 3 C.F.R. 684 (1966-1970);
Exec. Order No. 11518, 3 C.F.R. 907 (1966-1970).
28
Nixon’s order, the SBA changed the emphasis of the Section 8(a)
program from hiring the unemployed in the inner city to
developing successful small businesses owned by disadvantaged
persons. As a result of the Executive Orders, the SBA’s Section
8(a) authority was used, by administrative regulation, to channel
federal purchase requirements to socially or economically
disadvantaged individuals.
Prior to the enactment of Pub. L. No. 95-507 in 1978,
Congress did not exert any legislative control over the Section
8(a) program other than indirectly through appropriations. See
S. Rep. 29, at 4 (1987); H.R. Rep. No. 460, at 19 (1987); H.R.
Rep. No. 956, at 2 (1982); H.R. Rep. No. 949, at 3 (1978). In
1972, however, the House Select Committee on Small Business
issued a report that included a lengthy description of the
problems confronting minority entrepreneurs. The report
recognized that although minority and non-minority small business
owners had much in common, racial and ethnic prejudice posed a
“unique dilemma” for minority business owners which “presented
almost insurmountable obstacles to business development.” See
H.R. Rep. No. 1615, at 18-19 (1972). The specific problems cited
in the report included lack of business experience and capital.
In addition, the report cited census statistics showing that
minorities comprised about 17 percent of the total U.S.
population but owned about 4.3 percent of United States
29
businesses, and that the receipts of those minority-owned
businesses amounted to 0.7 percent of the total receipts reported
for all firms. Id.
Similar statistical disparities were cited in a 1975 report
on hearings conducted by the Subcommittee on Small Business
Administration Oversight and Minority Enterprise of the House
Committee on Small Business (the “1975 Report”). The report
stated that minorities comprised about 16 percent of the nation’s
population while 3 percent of businesses were minority-owned, and
those businesses realized about 0.65 percent of the gross
receipts of all businesses in the country. The Subcommittee
found that:
[T]he effects of past inequities stemming from racial
prejudice have not remained in the past. The Congress
has recognized the reality that past discriminatory
practices have, to some degree, adversely affected our
present economic system. . . . These statistics are
not the result of random chance. The presumption must
be made that past discriminatory systems have resulted
in present economic inequities. In order to right this
situation the Congress has formulated certain remedial
programs designed to uplift those socially or
economically disadvantaged persons to a level where
they may effectively participate in the business
mainstream of our economy.
H.R. Rep. No. 468, at 1-2 (1975). The Subcommittee specifically
expressed its “hope[] that some day remedial programs will be
unnecessary and that all people will have the same economic
opportunities,” but concluded that, “until that time remedial
action must be considered as a necessary and proper accommodation
30
for our Nation’s socially or economically disadvantaged persons.”
Id. (footnote omitted).
The Subcommittee that prepared the 1975 Report took “full
notice as evidence for its consideration” of reports submitted to
Congress by the General Accounting Office (“GAO”) and by the U.S.
Commission on Civil Rights. Id. at 11. The latter report, based
on statistical data compilation as well as interviews and other
qualitative data gathered from a broad swath of federal and state
government agencies, discussed the barriers encountered by
minority businesses in gaining access to government contracting
opportunities at the federal, state, and local levels. Among the
major difficulties confronting minority businesses were
deficiencies in working capital, inability to meet bonding
requirements, disabilities caused by an inadequate “track
record,” lack of awareness of bidding opportunities,
unfamiliarity with bidding procedures, preselection before the
formal advertising process, and the exercise of discretion by
government procurement officers to disfavor minority-owned
businesses. See U.S. Comm’n on Civil Rights, Minorities and
Women as Government Contractors, at 16-28, 86-88 (1975) (“CCR
Report”). More specifically, the CCR Report stated:
Minority and female-owned firms . . . received less than
seven-tenths of one percent of the contracting dollars of
state and local governments which were able to provide data
to the Commission. Unlike federal procurement, a
substantial portion of State and local purchases is for
items bought in relatively small quantities from wholesalers
31
and retailers. State and local governments also spend
proportionately more than the Federal Government for
construction. Since a large percentage of minority firms
are retail and small construction companies . . . both the
volume and nature of State and local contracting should
provide extensive contracting opportunities for minority
[firms].
CCR Report at 122. However, the percentage of contracting
dollars awarded to women and minority firms at the state and
local level - less than seven tenths of one percent - did not
reflect these “extensive contracting opportunities.” Id. The
CCR Report found one reason for the disparity was discrimination.
The unwillingness of many contracting officers [in state and
local governments] to abandon long-established practices not
directed toward minorities or women is an obstacle to
effective implementation of special contracting programs.
Efforts to increase the number of minority and female-owned
firms on bidders’ lists have been thwarted by contracting
practices, such as requiring minority and female-owned firms
to comply with stringent pre-qualification standards.
[T]he Commission found . . . negative and even hostile
attitudes among State and local procurement officers toward
minority and female firms.
Id. at 125, 127.
In 1977, the House Committee on Small Business issued a
report (the “1977 Report”) summarizing its activities during the
preceding two years, one chapter of which summarized the 1975
Report. See H.R. Rep. No. 1791, at 124-49 (1977). Another
chapter of the 1977 Report summarized a review of the SBA’s
Surety Bond Guarantee Program, as a result of which the following
finding was made:
32
The very basic problem disclosed by the testimony is
that, over the years, there has developed a business
system which has traditionally excluded measurable
minority participation. In the past more than the
present, this system of conducting business
transactions overtly precluded minority input.
Currently, we more often encounter a business system
which is racially neutral on its face, but because of
past overt social and economic discrimination is
presently operating, in effect, to perpetuate these
past inequities.
Id. at 182.
Congress codified the Section 8(a) program in 1978. See
Pub. L. No. 95-507, 92 Stat. 1760 (1978). Reports prepared by
the GAO and investigations conducted by both the executive and
legislative branches prior to the 1978 codification showed that
the Section 8(a) program had fallen far short of its goal to
develop businesses owned by disadvantaged individuals, and that
one reason for this failure was that the program had no
legislative basis. See S. Rep. No. 1070, at 14 (1978) (the “1978
Report”). The 1978 Report explained that the bill’s purpose was
to provide a statutory basis for the program and establish the
policy goal of developing businesses owned by socially and
economically disadvantaged persons, “rather than the mere
awarding of 8(a) contracts.” Id. at 2-3, 14. The 1978 report
also recognized that “the pattern of social and economic
discrimination continues to deprive racial and ethnic minorities,
and others, of the opportunity to participate fully in the free
33
enterprise system.” Id. For this reason, the 1978 Report
explained that:
[T]he bill is designed to foster business ownership by
socially and economically disadvantaged persons and to
promote the viability of businesses run by such persons
by providing contract, financial, technical and
management assistance. . . . Although it is expected
that, as under the present 8(a) program, the majority
of qualifying firms will be those owned and operated by
racial and ethnic minorities, the program will be open
to any business owned by persons who meet the socially
and economically disadvantaged test.
Id. at 14-15.
The final version of Pub. L. No. 95-507 made the following
findings:
[M]any . . . persons are socially disadvantaged because
of their identification as members of certain groups
that have suffered the effects of discriminatory
practices or similar invidious circumstances over which
they have no control; that such groups include, but are
not limited to, Black Americans, Hispanic Americans,
Native Americans and other minorities.
Pub. L. No. 95-507, § 201, 92 Stat. 1757, 1760 (1978). The
Conference Report explained that these findings:
[E]stablish the premise that many individuals are
socially and economically disadvantaged as a result of
being identified as members of certain groups. . . .
In other words, in many, but not all, cases status as a
minority can be directly and unequivocally correlated
with social disadvantagement and this condition exists
regardless of the individual, personal qualities of
that minority person.
H.R. Rep. No. 1714, at 20-21 (1978).
Representative Joseph P. Addabbo, the floor manager of the
House bill, pointed out that “[o]ur findings clearly state that
34
groups such as Black Americans, Hispanic Americans, and Native
Americans, have been and continue to be discriminated against and
that this discrimination has led to the social disadvantage of
persons identified by society as members of those groups.” 124
Cong. Rec. 34097 (1978). Senator Sam Nunn, who managed the bill
in the Senate, also emphasized that “[b]ecause of present and
past discrimination many minorities have suffered social
disadvantagement.” Id. at 35408 (1978).
The Conference Report expressed the conferees’ intention
that the authority given to the SBA under Section 8(a) “will be
used solely for economic and business development and not merely
to channel contracts at a random pace to a preconceived group of
eligibles for the sake of social or political goals.” H.R. Rep.
No. 1714, at 22-23 (1978); see also S. Rep. No. 1070, at 2 (1978)
(“The purpose of this chapter is to provide a legislative design
for the business development services of SBA’s 8(a) program so as
to insure that the emphasis is placed on business development
rather than mere awarding of 8(a) contracts.”). In addition,
although the conferees intended that the “primary beneficiaries
of [the Section 8(a)] program will be minorities,” they also
recognized “that other Americans may also suffer from social
disadvantagement because of cultural bias,” and so could
participate in the program. H.R. Rep. No. 1714, at 22 (1978).
35
In 1988, Congress passed substantial revisions to the
Section 8(a) program. See Pub. L. No. 100-656, 102 Stat. 3853(1988). The House report on that bill described the Section 8(a)
program as “the Federal government’s most significant effort to
redress the effects of discrimination on entrepreneurial
endeavors,” and stated that the program is intended to “help a
broad class of socially and economically disadvantaged
individuals to compete in the mainstream of the American
economy.” H.R. Rep. No. 460, at 16 (1987). In addition, the
report stated that “[t]he purpose of 8(a) . . . is to create
on-going small businesses that can compete on their own once they
leave the program. . . . The 8(a) program is designed to promote
the development of firms so that set-asides will not be necessary
in the future.” Id.The Senate report on the 1988 amendments stated that the
Section 8(a) program:
[H]as historically been the primary vehicle for guiding
federal procurement decisions toward economically
disadvantaged minority-owned businesses. The program
has served two critical and complimentary purposes:
first, lending an element of fairness to distribution
of taxpayer-financed federal procurement contracts, and
second, creating opportunities for minority-owned
businesses to overcome their historic disadvantage and
compete successfully in our bountiful free enterprise
economy.
S. Rep. No. 394, at 1 (1988). Congress continued to express
concern about statistical disparities indicating that there may
36
be discriminatory barriers to minority business formation,
development, and success.
[M]inorities are still less likely to own a small
business. Some 1.8% of the minority population owned a
business in 1982 compared with 6.4% of all business
owners. Moreover, minority-owned firms are smaller
than nonminority businesses with lower sales and fewer
employees. . . . These hearings and the Chairman’s
legislative proposal . . . are an effort to get the
8(a) program to focus on its original statutory
objective. That objective is simple enough – to boost
minority ownership of small businesses that can compete
in a competitive market.
Minority Business Development Program Reform Act of 1987,
Hearings Before the Senate Comm. on Small Business, 100th Cong.,
16-18 (1988) (Statement of Senator Sasser). The House report
noted:
[O]nly six percent of all firms are owned by
minorities; less than two percent of minorities own
businesses while the comparable percent for
nonminorities is over six percent; and the average
receipts per minority firm are less than ten percent
the average receipts of all businesses.
H.R. Rep. No. 460, at 18 (1987). Federal procurement data
revealed a similar pattern. In 1986, total prime contracts
approached $185 billion, while minority-owned businesses received
$5 billion in prime contracts, or about 2.7 percent of the prime
contract dollars. Id. Echoing the observations of a decade
earlier, the House Report concluded that the disparities between
minority and non-minority business development and success in the
economy and in federal procurement were:
37
[N]ot the result of random chance. The presumption has been
made by past Congresses, and now reaffirmed by this
Committee, that discrimination and the present effects of
past discrimination have hurt socially and economically
disadvantaged individuals in their entrepreneurial
endeavors. It is a legitimate purpose of government to
correct the imbalance caused by discrimination[.]
Id.
2. Subsequent Evidence Before Congress
The parties disagree whether the Court should consider post-
enactment evidence of discrimination to find a compelling
interest. DynaLantic argues the Court is limited to the evidence
before Congress when it enacted Section 8(a) in 1978 and revised
it in 1988, particularly when considering the facial challenge.
See, e.g., Pl.’s MSJ at 38-9; Pl.’s Reply at 5; Pl.’s Opp’n to
Mot. for Order to Meet and Confer at 5, Doc. 236. Defendants,
for their part, argue that the Court should consider both earlier
and more recent evidence before Congress, the earlier evidence to
show that the Section 8(a) program was “appropriately remedial in
[its] inception,” and the more recent evidence to show a
continuing compelling need for the program. Defs.’ MSJ at 15-23;
Defs.’ Reply Mem. in Supp. of Mot. for Supplemental Briefing at
2, 5, Doc. 237. The Court agrees with Defendants, and
accordingly will consider both direct and circumstantial
evidence, including post-enactment evidence introduced by
Defendants.
38
The Supreme Court has held that “the institution that makes
the racial distinction must have had a strong basis in evidence
to conclude the remedial action was necessary before it embarks
on an affirmative action program.” Shaw, 517 U.S. at 910
(citations omitted). However, nearly every circuit to consider
this question has held that reviewing courts may also consider
post-enactment evidence. See Eng’ Contractors v. Metro Dade
Cnty., 122 F.3d 895, 911 (11th Cir. 1997) (holding that post-
enactment evidence may be considered because “a violation of
federal statutory or constitutional requirements does not arise
with the making of a finding; it arises when the wrong is
committed” (quoting Wygant, 476 U.S. at 289 (O’Connor, J.,
concurring))); see also Adarand VII, 228 F.3d at 1166; Concrete
Works II, 36 F.3d at 1521; Contractors Ass’n of E. Pa., Inc. v.
City of Philadelphia, 6 F.3d 990, 1003-04 (3d Cir. 1993). Post-
enactment evidence is particularly relevant when, as here, the
statute is over thirty years old and the evidence used to justify
Section 8(a) is stale for purposes of determining a compelling
interest in the present. Moreover, the Small Business Act
requires that both the President and the SBA report annually to
Congress on the status of small disadvantaged businesses
generally and the Section 8(a) program in particular; thus, the
statute itself contemplates that Congress will review the 8(a)
program on a continuing basis. 15 U.S.C. §§ 631b, 636(j)(16)(B).
39
Following the Tenth Circuit’s approach in Adarand VII, the
Court reviews the post-enactment evidence in three broad
categories: (1) evidence of barriers to the formation of
qualified minority contractors due to discrimination, (2)
evidence of discriminatory barriers to fair competition between
minority and non-minority contractors, and (3) evidence of
discrimination in state and local disparity studies.8
a) Barriers to Minority Business Formation
The government has presented evidence in the form of
Congressional investigations, Congressional hearings, and outside
studies of statistical and anecdotal evidence regarding obstacles
to the formation of minority-owned enterprises.
Most notably, the government has presented significant
evidence on race-based denial of access to capital and credit,
8
The Adarand VII court explained that consideration of
these three categories were highly relevant to the government’s
theory – which it also asserts in this case - that “it had
essentially become a ‘passive participant’ in a system of racial
exclusion” in the private sector. 228 F.3d at 1167 (citing
Concrete Works II, 36 F.3d at 1529; Croson, 488 U.S. at 492).
The court explained that evidence of discriminatory barriers to
minority contracting “show a strong link between racial
disparities in the federal government’s disbursements of public
funds for construction contracts and the channeling of those
funds due to private discrimination. The first discriminatory
barriers are to the formation of qualified minority
subcontracting enterprises due to private discrimination,
precluding from the outset competition for public construction
contracts by minority enterprises. The second discriminatory
barriers are to fair competition between minority and non-
minority [] enterprises, again due to private discrimination,
precluding existing minority firms from effectively competing for
public construction contracts.” Id. at 1167-68.
40
which has been described as “[o]ne of the most formidable
stumbling blocks to the formation and development of minority
business.” U.S. Comm’n on Minority Business Development, Final
Report at 12 (1992). Moreover, the government has presented
evidence which shows disparate treatment of similarly situated
minority and non-minority loan applicants. See Small Business
Administration’s 8(a) Minority Business Development Program,
Hearing Before the Senate Comm. on Small Business, 104th Cong.
178 (1995) (testimony of Fernando V. Galaviz) (independent
studies have found that minorities have a higher probability of
being rejected for loans than non-minority persons with the same
qualifications); Unconstitutional Set-Asides: ISTEA’s Race-Based
Set-Asides After Adarand, Hearing Before the Subcomm. on the
Constitution, Federalism, and Property Rights of the Senate Comm.
on the Judiciary, 105th Cong. 112 (1997) (testimony of Nancy
McFadden) (non-minority business owners in the construction
industry receive over 50 times more loan dollars than African-
American business owners with identical borrowing
characteristics).
More recent evidence before Congress has shown that racial
discrimination in access to capital has not diminished. Social
scientists conducted statistical analyses of lending patterns
nationally as well as in nine local jurisdictions between 1999
and 2007, including regression analyses to control for a large
41
number of financial and other characteristics of the firms,
including creditworthiness. All of the studies have found that
“African-American-owned firms, Hispanic-owned firms, and to a
lesser extent other minority-owned firms are substantially and
statistically significantly more likely to be denied credit than
are White-owned firms,” even after controlling for factors other
than race. Moreover, when minority owned firms did receive a
loan, they were obligated to pay higher interest rates on the
loans than comparable non-minority firms. See Business Start-Up
Hurdles in Underserved Communities: Access to Venture Capital and
Entrepreneurship Training, Hearing Before the Senate Comm. on
Small Business and Entrepreneurship, 110th Cong. 2-30 (2008)
(hereinafter “Start-Up Hurdles”) (testimony of Jon Wainwright,
Ph.D., social scientist and principal investigator of almost 30
studies on business discrimination since 2000); How Information
Policy Affects the Competitive Viability of Small and
Disadvantaged Business in Federal Contracting, Hearing before the
Subcomm. on Information Policy, Census, and Nat’l Archives of the
House Comm. on Oversight and Gov’t Reform, 110th Cong. 27-28, 66-
67 (2008) (hereinafter “Information Policy”); The Department of
Transportation’s Disadvantaged Business Enterprise Program,
Hearing Before the House Comm. on Transportation and
Infrastructure, 111th Cong. 291-92, 329-31 (2009) (hereinafter
“DOT’s DBE Program”).
42
In addition to quantitative analysis of lending
discrimination, Congress has heard significant qualitative
testimony regarding lending discrimination. See, e.g.,
Encouraging the Growth of Minority-Owned Small Businesses and
Minority Entrepreneurship, Hearing Before the House Comm. on
Small Business, 107th Cong. at 20 (2001) (testimony of Don
Furtivo); id. at 45-47 (submission by U.S. Hispanic Chamber of
Commerce) (stating that banks believe that loans to minorities
involve high risk); Availability of Credit to Minority-Owned
Small Businesses, Hearing Before the Subcomm. on Financial
Institutions Supervision, Regulation, and Deposit Insurance of
the House Comm. on Banking, Finance, and Urban Affairs, 103d
Cong. 22 (1994) (testimony of Harrison Boyd) (hereinafter
“Availability of Credit”); Problems Facing Minority and
Women-Owned Small Businesses in Procuring U.S. Government
Contracts, Hearing Before the Subcomm. on Commerce, Consumer, and
Monetary Affairs of the House Comm. on Government Operations,
103d Cong. 45-49 (1993) (testimony of Sherman N. Copelin, Jr.)
(opining that most problems faced by African-American businesses
stem from a pervasive and extremely negative perception that
African-American businesses and their owners are not good
financial risks, that African-American businesses are “second
rate,” and that African-American business owners will not pay
their debts and are incapable of operating profitably in a
43
competitive mainstream business environment); Federal Minority
Business Programs, Hearing Before the House Committee on Small
Business, 102d Cong. 8-9 (1991) (testimony of Joshua I. Smith)
(observing that “tremendously negative” perception of minorities’
business skills has impeded their ability to obtain capital and
credit); Availability of Credit, at 1 (Opening Statement of
Representative Richard Neal); Small Business Development, Hearing
Before the Subcomm. on Procurement, Tourism, and Rural
Development of the House Comm. on Small Business, 102d Cong. 9,
60 (1992) (testimony of Doris Jefferies Ford, Ph.D.); Summary of
Activities: A Report by the House Comm. on Small Business, H.R.
Rep. No. 108-800, at 150-53 (2004); Availability of Capital and
Federal Procurement Opportunities to Minority-owned Small
Businesses, Hearing before the House Small Business Committee,
108th Cong. 3, 48 (2004) (statements of Honorable Danny Davis,
noting that in Illinois, less than two percent of federal
contracts went to minorities in 2002 and that traditional lending
institutions are less likely to provide capital to minority-owned
businesses).
Evidence has also been presented to Congress that minorities
are routinely excluded from critical business relationships,
particularly through closed or “old boy” business networks that
make it especially difficult for minority-owned businesses to
obtain work. See, e.g., Problems Facing Minority and Women-Owned
44
Small Businesses in Procuring U.S. Government Contracts, Hearing
Before the Subcomm. on Commerce, Consumer, and Monetary Affairs
of the House Comm. on Government Operations, 103d Cong. 97 (1993)
(testimony of Joseph A. Williams) (explaining that minorities and
women are often left out of the design or planning phase for
public contracts); Meaning and Significance for Minority
Businesses of the Supreme Court Decision in the City of Richmond
v. J.A. Croson Co., Hearing Before the Subcomm. on Legislation
and National Security of the House Committee on Government
Operations, 101st Cong. 129-31 (1990) (testimony of James M.
Bond, Jr.) (stating that “pervasive” discrimination in selection
of architects for important buildings and professional
advancement limits African-American and Hispanic architects’
access to capital and work in the non-minority community)
(hereinafter “The Significance of Croson”); To Amend The Civil
Rights Act of 1964: Permitting Minority Set-Asides, Hearing
Before the Senate Comm. on Governmental Affairs, 101st Cong.
14-15 (1990) (testimony of William Bowen) (noting that closed
business networks deprive minority-owned firms of business
opportunities).
On November 10, 2005, Senator Edward M. Kennedy spoke before
the Senate concerning DoD’s use of race-conscious measures,
including the Section 8(a) program. 151 Cong. Rec. S12668-01,
2005 WL 3018127 (Nov. 10, 2005). He observed that federal
45
government contracting “has long been dominated by ‘old-boy’
networks that make it very difficult for African Americans,
Latinos, Asians, and Native Americans to participate fairly,” and
that “[y]ears of Congressional hearings have shown that
minorities historically have been excluded from both public and
private construction contracts in general, and from Federal
defense contracts in particular.” Id. Recent evidence before
Congress establishes that minorities continue to experience
barriers to business networks. See, e.g., DOT’s DBE Program, at
16, 207-208, 223, 310-12 (testimony from Joel Szabat, Deputy
Assistant Secretary for Transportation Policy at DOT, and others
discussing evidence of discriminatory exclusion of minority firms
from business networks, and the difficulty of trying to break
into those networks); Information Policy, at 59, 62, 67, 69
(same).
In addition to the lending discrimination studies discussed
above, discriminatory barriers to minority business formation
have been quantified in a number of recent statistical studies
before Congress. Since 2006, over fifty state and local
disparity studies, conducted in twenty eight states and the
District of Columbia, have been introduced or discussed at
Congressional hearings. See, e.g., The Minority Business
Development Agency: Enhancing the Prospects for Success, Hearing
Before the Subcomm. on Commerce, Trade and Consumer Protection of
46
the House Comm. on Energy and Commerce, 111th Cong. 5-6 (2009)
(testimony of David Hinson) & App. B; DOT’s DBE Program, 8-9, 312
(testimony of Joel Szabat); The Federal Aviation Administration
Reauthorization Act of 2009, Hearing Before the House Comm. on
Transportation and Infrastructure, 111th Cong. 483 (2009)
(testimony of Gene Roth); Infrastructure Investment: Ensuring an
Effective Economic Recovery Program, Hearing before the House
Comm. on Transportation and Infrastructure, 111th Cong. 353-54
(2009) (testimony of Gene Roth); Information Policy, at 19-22
(testimony of Jon Wainwright); id. at 55, 59-60 (testimony of
Anthony Brown); Start-Up Hurdles, at 1 (testimony of Rodney
Strong); id. at 3 (testimony of Dan O’Bannon); Minority
Entrepreneurship: Assessing the Effectiveness of SBA’s Programs
for the Minority Business Community, Hearing Before the Senate
Comm. on Small Business and Entrepreneurship, 110th Cong. 26
(2007) (hereinafter “Minority Entrepreneurship”) (testimony of
Jon Wainwright).
Disparity studies are statistical studies performed for
state and local governments, generally by outside consultants.
They are designed to measure the availability and utilization of
minority and women-owned firms on public contracts. The studies
address a variety of industries in a variety of state and local
markets. In addition, some of the studies examine the
availability and utilization of minority and women-owned firms in
47
the private contracting market. Many of these disparity studies
include statistical analysis of minority business formation. The
studies are not uniform in nature, methodology, or results. On
balance, however, they reveal large, statistically significant
barriers to business formation among minority groups that cannot
be explained by factors other than race. The following four
studies are examples.
A 2009 Arizona study considered the likelihood of self-
employment among minorities as compared to non-minorities,
applying the methodology employed by a Denver disparity study
that was approved by the Tenth Circuit in Concrete Works IV. The
study controlled for factors including marital status, age,
health, household property value, mortgage payments, unearned
income, and level of education. The study found white males were
roughly twice as likely to be self-employed as African Americans
and Hispanic Americans in all industries in the state of Arizona.
Over seventy percent of the disparity in self employment rates
among African Americans, Hispanic Americans, and Native Americans
was attributable to race differences. See Availability Analysis
and Disparity Study for the Arizona Dep’t of Transp.: Final
Report, MGT of America, Inc., § 7.7 (March 16, 2009) (hereinafter
“Arizona Study”).
Likewise, a 2006 study in Atlanta, Georgia, found that after
controlling for age, wealth, and other variables, minorities
48
continue to show disparities in entry into self-employment. In
the construction and service industries, non-minority men were
between two and three times as likely to be self-employed as
African Americans and Asian Americans. City of Atlanta Disparity
Study and Legal Analysis, The Executive Summary, Griffin &
Strong, P.C., at 16 (October 11, 2006) (hereinafter “Atlanta
Study”).
A 2006 Maryland study conducted a regression analysis to
analyze race disparities in business formation between similarly
situated minorities and White males. The study found that in the
construction industry in Maryland, the business formation rate–-
as compared to White males--is 29-62 percent lower for African
Americans, 35-51 percent lower for Hispanic Americans, 45-50
percent lower for Native Americans, and between 12 percent higher
and 42 percent lower for Asian Americans. The study concluded
that “observed [minority business] availability levels in the
State of Maryland are substantially and statistically lower than
those that would be expected . . . if commercial markets operated
in a race- . . . neutral manner. This suggests that minorities .
. . are substantially and significantly less likely to own their
own businesses as a result of discrimination than would be
expected based upon their observable characteristics including
age, education, geographic location, and industry.” See Race,
Sex, and Business Enterprise: Evidence from the State of Maryland
49
(Final Report), NERA Economic Consulting, at 120 (March 8,
2006)(hereinafter “Maryland Study”).
A 2007 study conducted in Nevada examined the rates of
business ownership in the construction and engineering
industries. The study employed a multivariate regression
analysis to control for factors including personal financial
resources, creditworthiness, age, education, family
characteristics, and ability to speak English. After accounting
for neutral factors, the study showed identifiable negative
disparities in business ownership rates for Asian Americans and
Native Americans, and significant negative disparities in
business ownership rates for Hispanic Americans and African
Americans. Specifically, the study found that there were “only
18 percent as many African American-owned construction businesses
in Nevada as one would anticipate if African Americans working in
the industry owned businesses at the same rate as similarly
situated non-Hispanic white males,” and only 48 percent as many
Hispanic-owned construction businesses. Availability and
Disparity Study, Nevada Dep’t of Transp., BBC Research &
Consulting, Appendix H pp. 4-6 (June 15, 2007) (hereinafter
“Nevada Study”).
b) Barriers to Minority Business Development
50
In addition to barriers to minority business formation, the
government has presented significant evidence of barriers to
development by existing minority businesses. Specifically, the
government presents evidence of discrimination by prime
contractors, private sector customers, suppliers, and bonding
companies.
For example, Andrew F. Brimmer and F. Ray Marshall, the
authors of a study on minority businesses, testified about the
barriers that confront existing minority-owned businesses.
Brimmer identified discriminatory practices including denial of
opportunities to bid, discrimination in bonding, customer
end-user discrimination, closed business networks, discrimination
in subcontracting, bid shopping, bid manipulation, price
discrimination by suppliers, discrimination in financing, and
discrimination in employment opportunities. See City of Richmond
v. J.A. Croson: Impact and Response, Hearing Before the Subcomm.
on Urban and Minority-Owned Business Development of the Senate
Committee on Small Business, 101st Cong. 33-35 (1990) (testimony
of Andrew F. Brimmer).
Marshall testified that minority-owned businesses are often
not invited to bid for private sector contracts because of
negative perceptions about minorities in business. Therefore,
minority-owned businesses have little opportunity to obtain work
in the private sector. Marshall reported that public-sector
51
contracts account for ninety-three percent of minority-owned
contractors’ business in Atlanta while private sector contracts
make up eighty percent of non-minority contractors’ business.
Moreover, the size of the public contracts obtained by
minority-owned contractors is much smaller than the size of the
contracts obtained by non-minority-owned contractors, making it
harder for the minority-owned contractors to develop their
businesses. Id. at 45-48 (testimony of F. Ray Marshall).
Marshall also testified that minorities are more
disadvantaged in business than they are in any other area, and
that the Atlanta study’s findings are not unique to that city,
but are typical of most major U.S. cities. Id. at 46, 128.
Additional Congressional hearings confirm that such
discrimination occurs around the country. See, e.g., Encouraging
the Growth of Minority-Owned Small Businesses and Minority
Entrepreneurship, Hearing Before the House Comm. on Small
Business, 107th Cong. (2001) (field hearing in Albuquerque, New
Mexico); Small Business Administration’s 8(a) Minority Business
Development Program, Hearing Before the Senate Comm. on Small
Business Administration’s 8(a) Minority Business Development
Program, Hearing Before the Senate Comm. On Small Business, 104th
Cong. 164 (1995) (testimony of Nancy E. Archuleta) (disparity
study conducted for the State of Texas found widespread
marketplace discrimination against women and minorities,
52
especially African-Americans and Hispanic Americans); Problems
Facing Minority and Women-Owned Small Businesses in Procuring
U.S. Government Contracts, Hearing Before the Subcomm. on
Commerce, Consumer, and Monetary Affairs of the House Comm. on
Gov’t Operations, 103d Cong. 42-51 (1993) (field hearing in
Chicago); The Significance of Croson (testimony of Gloria Molina)
(Hispanic American community continues to suffer from the long
history of discrimination in Los Angeles).
More recent evidence before Congress is consistent with the
earlier evidence, demonstrating that discrimination by prime
contractors, private sector customers, suppliers and bonding
companies continues to limit minority business development. Some
of this evidence is quantitative, set forth in some of the state
and local disparity studies presented to Congress between 2006
and 2009. While the studies are not uniform in nature,
methodology, or results, they contain powerful evidence that
discrimination “fosters a decidedly uneven playing field” for
minority business entities seeking to compete in federal
contracting. See Adarand VII, 228 F.3d at 1170. The following
studies are presented as a sample of the quantitative evidence
before Congress.
A 2006 Maryland study explained that discrimination by
commercial customers and suppliers can be statistically shown by
disparities between minority and non-minority business owner
53
earnings. Maryland Study, at 117. Controlling for age, time,
education, labor market experience, geography and industry, the
study found that, in the economy as a whole and for industries in
Maryland in particular, there exist “negative and statistically
significant and large business owner earnings disparities for
Blacks, Hispanics, Asians, [and] Native Americans. . . . The
measured difference for Blacks ranges between 28 and 59 percent
[less than similarly situated non-minority owners]; for
Hispanics, from 19 percent to 39 percent; for Asians, from 4
percent to 22 percent; and for Native Americans, from 38 percent
to 51 percent.” Maryland Study, at 111, 115-16. Similar
findings were reported in Arizona. See Arizona Study, § 7.7
(controlling for factors including marital status, age, health,
household property value, mortgage payments, unearned income, and
level of education, all self-employed minorities in Arizona
reported significantly lower earnings than their majority
counterparts in all industries). An Atlanta study likewise found
that when minorities in Atlanta are self-employed, “they earn
significantly less than non-minority males. Across all
industries, after controlling for other factors, African
Americans earned 30 percent less . . . than non-minority males
from self-employment. . . . More than half the disparity in
self-employment income between non-minority males and African
Americans was attributable to race.” Atlanta Study, at 7.
54
Finally, a 2009 study on a wide variety of industries in San
Antonio, Texas, found statistically significant differences in
earnings from self-employment for Hispanic Americans and African
Americans as compared to white males, even after controlling for
education, age, and other variables. San Antonio Regional
Business Disparity Causation Analysis Study: City of San Antonio,
Texas, MGT of America, Inc. § 9-7 (April 7, 2009) (“San Antonio
Study”). In addition, the study controlled for company age,
capacity, ownership level of education and experience, and number
of employees, and found that even after controlling for all of
those factors, minority status “had a negative effect on company
earnings of all minority groups except for Hispanic Americans.”
Id. § 9-9.
In addition to the quantitative data, Congress heard
qualitative testimony that these problems are “strikingly similar
across the country” and in a variety of industries. Minority
business owners consistently report that they “encounter
significant barriers to doing business in the public and private
sector marketplaces, as both prime contractors and
subcontractors,” that they “often suffer from stereotypes about
their suspected lack of competence and are subject to higher
performance standards than similar nonminority men,” and that
they “encounter discrimination in obtaining loans and surety
bonds; receiving price quotes from suppliers; working with trade
55
unions; obtaining public and private sector prime contracts and
subcontracts; and being paid promptly.” DOT’s DBE Program at 331
(testimony of Jon Wainwright); See also Information Policy at 20-
28 (testimony of Jon Wainwright); Minority Entrepreneurship at
27, 33-34 (testimony of Jon Wainwright that, based on his
statistical studies as well as hundreds of questionnaires and
interviews with minority and non-minority business owners,
“without the use of affirmative remedies such as subcontracting
goals, minorities and women would receive few if any
opportunities on government contracts. . . . Prime contractors
who solicit M/WBEs on goals projects rarely do so in the absence
of goals”).
Congress has also amassed evidence that discrimination and
entrenched patterns resulting from years of exclusion prevent
minority business owners from obtaining surety bonds, which are
generally required by federal and state procurement rules. See
Adarand VII, 228 F.3d at 1171-72 (“Minority subcontracting
enterprises in the construction industry find themselves unable
to compete with non-minority firms on an equal playing field due
to racial discrimination by bonding companies.”). In its 1994
report about the problems facing minority and women-owned small
businesses, the House Committee on Government Operations found
that an “[i]nability to obtain bonding is one of the top three
reasons that new minority small businesses have difficulty
56
procuring U.S. Government contracts.” H.R. Rep. No. 103-870
(1994). Witnesses also testified that prime contractors
sometimes set bonding requirements at an unnecessarily high
level, which then effectively excludes a large percentage of
minority owned businesses who are unable to secure the required
level of bonding. Information Policy at 62, 67 (testimony of
Anthony Robinson); id. at 92 (testimony of Anthony Brown); see
also DOT’s DBE Program at 311 (testimony of Joel Szabat).
c) State and Local Disparity Studies
(1) History of Disparity Studies in this
Case
Following the Supreme Court’s decision in Croson, there have
been hundreds of disparity studies placed before Congress. These
statistical studies have undertaken “to assess the disparity, if
any, between availability and utilization of minority owned
businesses in government contracting.” Adarand VII, 228 F.3d at
1172 (citing Appendix – The Compelling Interest for Affirmative
Action in Federal Procurement, 61 Fed. Reg. 26,042, 26,061-62
(1996) (presenting the Urban Institute’s analysis of thirty nine
disparity studies)); see also Defs.’ Supplemental Br. on the
Effect of the 2006 Reauthorization of DoD Program at 13 n.7, Doc.
No. 230 (discussing introduction of new evidence from fifteen
state and local disparity studies); Joint Report and Notice of
Filing, Dec. 24, 2009, Doc. No. 238 (identifying approximately
57
fifty additional state and local disparity studies). Since
Croson and Adarand, courts have examined these studies and
subjected them to varying degrees of analysis. Compare Concrete
Works IV, 321 F.3d at 962-69 (analyzing studies in minute
detail), with Adarand VII, 228 F.3d at 1172-74 and Sherbrooke,
345 F.3d at 969-71 (looking at studies’ conclusions more
generally).9
As a threshold matter in this case, as DynaLantic points
out, although Defendants have placed significant evidence
regarding disparity studies into the record, they have not relied
heavily on those studies. Pl.’s Mem. on Evidence Presented to
Congress After Jan. 4, 2006 at 7-8, Doc. No. 240. Indeed, in the
last round of briefing in this case, Defendants placed
approximately 50 disparity studies into the record with little or
no analysis. See generally Defs.’ Supplemental Br. on Evidence
Presented to Congress After Jan. 4, 2006, Doc. No. 239.
Likewise, while DynaLantic attacked a few of the older disparity
studies presented by the government in earlier briefing, it did
not attempt to do so with regard to the fifty most recent studies
9
As the Tenth Circuit noted, “the conclusions of virtually
all social scientific studies may be cast into question by
criticism of their choices and methodologies. The very need to
make assumptions and to select data sets and relevant variables
precludes perfection in empirical social science.” Adarand VII,
228 F.3d at 1173 n.14. Accordingly, “[a]n analysis is not devoid
of probative value simply b]ecause it may theoretically be
possible to adopt a more refined approach[.]” Contractors Ass’n
of E. Pa., 91 F.3d at 603.
58
before Congress. See generally Pl.’s Mem. on Evidence Presented
to Congress After Jan. 4, 2006.
Given the nature of the claims at issue in this case, the
Court agrees with the parties that it is unnecessary to examine
the vast amount of statistical evidence before it in the level of
detail that, for example, the Tenth Circuit examined the evidence
in Concrete Works IV. See 321 F.3d at 960-70, 974-90. The first
claim is DynaLantic’s facial challenge to the statute. As set
forth above, DynaLantic cannot win on its facial challenge unless
it persuades the Court that the evidence before Congress is so
poor that “no set of circumstances exists under which the Act
would be valid.” Salerno, 481 U.S. at 745. The second claim is
DynaLantic’s challenge to the Section 8(a) program as applied to
the military simulation and training industry. However, the
parties agree that Defendants have no evidence of discrimination,
either in the public or private sector, in the simulation and
training industry. See Pl.’s Statement of Undisputed Material
Facts at ¶¶ 140-50.
(2) Legal Standard for Strong Basis in
Evidence Under Croson
Although this case does not require meticulous analysis of
the tens of thousands of pages of data in the record, the
principles articulated by the Supreme Court in Croson and this
Circuit in O’Donnell still apply. In Croson, the Supreme Court
rejected a 30 percent minority set aside for city construction
59
contracts in Richmond. The city presented evidence of the small
number of minority businesses relative to the general population,
the small number of minority city contracts relative to the
number of minority businesses, and the low minority participation
in training programs and unions. Croson, 488 U.S. 498-99. The
Supreme Court rejected the evidence as insufficient to justify
the race-conscious measures in the ordinance because the measures
“could not in any realistic sense be tied to any injury suffered
by anyone.” Id. at 499.
While there is no doubt the sorry history of both private
and public discrimination in this country has contributed to
a lack of opportunities for black entrepreneurs, this
observation, standing alone, cannot justify a rigid racial
quota in the awarding of public contracts in Richmond,
Virginia. . . . [A]n amorphous claim that there has been
past discrimination in a particular industry cannot justify
the use of an unyielding racial quota.
Id. Put another way, the Court found that the low level of
minority entry into, and participation in, the construction
industry did not justify race-based remedial measures absent
evidence from which an “inference of discriminatory exclusion
could arise.” Id. at 503, 508.
The Croson Court then explained that the government could
meet its burden by demonstrating that there were eligible
minorities in the relevant market - in that case, the Richmond
construction industry - that were denied entry or access
notwithstanding their abilities. Id. at 502-03 (city could
demonstrate discrimination in skilled industry such as
60
construction by showing there was a pool of minorities “qualified
to undertake the particular task” of construction contracting who
were nevertheless excluded from that type of work; city could
present evidence of discriminatory exclusion from training
programs or professional associations by showing a statistical
disparity between minorities eligible for membership and actual
minority membership).
Following Croson, this Circuit’s decision in O’Donnell
likewise instructs that data comparing raw numbers of minorities
and contract dollars is, without more, “constitutionally
meaningless.” 963 F.2d at 426. In order to be compelling, data
must test the hypothesis that “discrimination caused the low
percentage” of minorities in the relevant market. Id.
(“[m]inority firms may not have bid on . . . construction
contracts because they were generally small companies incapable
of taking on large projects; or they may have been fully occupied
on other projects; or the District’s contracts may not have been
as lucrative as others available in the Washington metropolitan
area; or they may not have had the expertise needed to perform
the contracts; or they may have bid but were rejected because
others came in with a lower price.”). With these principles in
mind, the Court turns to the disparity studies.
(3) The Post-2006 Disparity Studies
61
As noted above, Defendants submitted over 50 disparity
studies, encompassing evidence from 28 states and the District of
Columbia, which have been before Congress since 2006. See
generally Joint Report and Notice of Filing, Doc. No. 238; Defs.’
Supplemental Br. on Post-2006 Evidence, at 8, Doc. No. 239.
Nearly all of the studies included the construction industry and
construction related services, and approximately seventeen of the
studies are limited to that industry. The remaining studies
addressed a variety of industries in addition to construction:
professional services (generally including accounting, legal,
consulting, medical, and educational), architecture and
engineering, general commodities/goods, and “other services” such
as janitorial and maintenance services and security guards.
As might be expected from such a broad variety of studies,
they varied in method, depth, breadth, and rigor. The Court
found some of the studies without value and accordingly did not
rely upon them. See, e.g., City of Bridgeport Disparity Study
Regarding Minority Participation in Contracting, Mason Tillman
Assocs. (Aug. 2005) (portion of study provided contains no
analysis or explanation); Race, Sex & Business Enterprise:
Evidence from the State of Illinois and the Chicago Metropolitan
Area, NERA, (June 20, 2006) (same). One of the studies found no
discrimination. See Consortium Disparity Update Prepared for
City of Albany, Georgia, BBC Research & Consulting (Aug. 20,
62
2008). Most of the studies showed varying amounts of disparities
and discrimination among industries and different minority
groups. Some of the studies were unable to meaningfully analyze
certain minority groups because of the small sample size of
contractors from these groups. Many of the studies did not
distinguish between Asian Pacific Americans and Subcontinent
Asian Americans, as the Section 8(a) program does. See 13 C.F.R.
§ 124.103(b)(1).
The Court reviewed the studies with a focus on two
indicators which other courts have found relevant in analyzing
disparity studies. First, the Court considered the disparity
indices calculated. A disparity index is generally calculated by
dividing the percentage of MBE, WBE, and/or DBE firms utilized in
the contracting market by the percentage of M/W/DBE firms
available in the same market. Normally, a disparity index of 100
demonstrates full M/W/DBE participation; the closer the index is
to zero, the greater the M/W/DBE disparity due to
underutilization. See, e.g., Concrete Works IV, 321 F.3d at 962.
Second, the Court reviewed the method by which the studies
calculated the availability and capacity of minority firms. Some
courts have looked closely at these factors to evaluate the
reliability of the disparity indices, reasoning that the indices
are not probative unless they are restricted to firms of
significant size and with significant government contracting
63
experience.10 See, e.g., Rothe VII, 545 F.3d at 1040-46; Eng’g
Contractors Ass’n of S. Fla., Inc., 122 F.3d at 914, 917. While
not all of the studies addressed these factors, a significant
portion did so, and most (although not all) found significant
disparities between availability and utilization of minority
contractors. These studies demonstrate that qualified, eligible
minority-owned firms are excluded from contracting markets, and
accordingly provide powerful evidence from which an “inference of
discriminatory exclusion could arise.” Croson, 488 U.S. at 503,
508. The following studies, among others, used relatively narrow
measurements of availability and/or conducted relatively detailed
capacity analyses.
A 2008 study in Alaska examined disparities in public sector
minority contracting across a wide range of industries, including
architecture and engineering, commodities, construction, design-
build, manufacturing, and professional services. Alaska
10
Other studies have disputed the value of capacity
analysis, explaining that “M/WBEs may be smaller, newer, and
otherwise less competitive than non-M/WBEs because of the very
discrimination sought to be remedied by race-conscious
contracting programs. Racial and gender differences in these
‘capacity’ factors are the outcomes of discrimination and it is
therefore inappropriate as a matter of economics and statistics
to use them as control variables in a disparity study.” Race,
Sex & Business Enterprise: Evidence from Memphis, Tennessee, NERA
55 (2008). The Court agrees that discriminatory barriers to
formation and development, discussed above, would impact
capacity. However, as discussed above, Croson and O’Donnell
require the additional showing that eligible minority firms
experience disparities, notwithstanding their abilities, in order
to give rise to an inference of discrimination.
64
Disadvantaged Business Enterprise Study, D. Wilson Consulting
Group, LLC at 4-6 (June 8, 2008) (hereinafter “Alaska Study”).
The study examined availability by creating a master database
from, e.g., census figures, city and state vendor data, and
member lists from minority professional associations, then
“filtered the data to extract a subset of qualified, willing and
able firms.” Specifically, the study accounted for the firms’
reported revenue generation, the past procurement history of the
agency, and businesses licences and other specialty
qualifications. Alaska Study, at 4-3 - 4-5. The study also
measured firm capacity by considering the size of each firm’s
past bids, past revenue generated, and revenue generation
capacity. Based on these factors, the study divided the firms
into two categories for purposes of measuring availability: prime
contractor availability and subcontractor availability. Id. at
4-8. The study found significant disparities between utilization
and availability of minority-owned DBEs, in all industries, by
the Alaska Department of Transportation and the Municipality of
Anchorage. Id. at vi; see also, e.g., 5-73 (between 2002 and
2006, in all industry categories combined and where a disparity
index of under 80 is significant, disparity indices were as
follows -- African-American: 4.88, Native American: 28.99, Asian
American: 5.14; Hispanic American: 44.29).
65
A 2006 study of the New Jersey construction services
industry narrowly measured minority contractor availability. The
pool of available minority contractors was comprised almost
entirely – over 97.5 percent - of contractors who had been
precertified/prequalified to perform the relevant work by the
state, had bid on the work, or had actually been awarded public
contracts in the past. State of New Jersey Construction Services
Disparity Study 2003-2004, Mason Tillman Assoc., Ltd. at 5-6
(June 2006). The study also controlled for capacity by
considering the size of the State’s awarded prime contracts and
the largest contracts awarded to various MBE businesses. The
study concluded that MBEs in the state did not have the capacity
to bid on the larger contracts; accordingly, the disparity study
was restricted to an examination of contract awards of $500,000
and under. Id. at 5-9, 5-16. The study found significant
disparities between utilization and availability, in almost all
respects, for minority contractors contracting with State
Agencies, Authorities and Commissions, as well as State Colleges
and Universities. See id. at 1-2 - 1-5. The study found
significant disparities in all forms of contracting: informal
contracting, sub-contracting and prime-contracting. Disparities
were statistically significant for African Americans, Hispanic
Americans, Asian Americans and, to a lesser extent, Native
Americans. Id.
66
A 2008 study encompassing construction, architecture and
engineering, professional services, other services, and goods and
supplies in Dayton, Ohio narrowly measured availability for prime
contracts by including only firms that had bid on or performed
work for the city, or had registered with the city to be
considered for such work. A Second-Generation Disparity Study
for the City of Dayton, Ohio, MGT of America, Inc. at 4-6 (Aug.
8, 2008). The study considered both public contracting and
private sector construction contracting.11 In public
contracting, the study revealed significant disparities between
availability and utilization of all minority contractors among
all industries, with the exception of the public prime
construction contracts, in which Asian-Americans were
overutilized. See Id. at 5-3 - 5-14. In the private market, the
disparities were even more significant, at both the prime and
subcontracting level, for all minorities including Asian-
Americans. Id. at 7-7. The study observed:
Due to exclusionary laws and years of discrimination,
MBEs/WBEs have entered the marketplace only recently, from a
historical perspective, when compared with nonminority
firms. They thus tend to be smaller than more established
and older nonminority male-owned firms, which, in turn,
limit their capacity not only to undertake large-scale
11
In many of the disparity studies, even the ones that
analyzed public contracting across a wide range of industries,
private sector analysis seemed to be limited to the construction
industry. It appears that this is because significant public
data - such as building permits - is available for private sector
construction projects.
67
construction projects but also to access capital and other
advantages in bonding and insurance.
Id. at 7-24. The study further concluded, however, that capacity
alone did not account for the disparities between availability
and utilization, particularly in the private sector, and
concluded that the disparities were so large that they could be
credibly ascribed to discrimination. Id.
The Nevada study narrowly measured the availability of
minority firms in the state’s transportation construction and
engineering industries, looking only at firms which had a past
history of performing the relevant work in the public sector or
had bid on such work, were qualified to perform the tasks, and
had the capacity to perform prime contracts (or alternatively,
subcontracts). Nevada Study, § II at 10. The study also
specifically controlled for capacity (by looking at the size of
contracts firms had bid on and been awarded in the past) to see
if minority-owned firms had higher or lower bid capacity than
similarly situated majority contractors. Id., App. H. at 13-16.
The study found that capacity was unlikely to be a deterrent to
obtaining work for many minority contractors, because “African
American, Asian-Pacific American, and Subcontinent Asian
Americans are more likely to have above median bid capacity than
majority-owned firms.” Id., App. H. at 15. Nevertheless, the
study found evidence of significant disparities for each
racial/ethnic group in the federally-funded construction and
68
engineering contract awards. Specifically, where a disparity
index under 80 is considered significant, the disparity indices
were as follows: African Americans: 32, Asian-Pacific Americans:
3, Subcontinent Asian Americans: 28, Hispanic Americans: 57,
Native Americans: 25. In state-funded contracts, the disparity
indices were as follows: African Americans: 36; Asian Pacific
Americans: 5, Subcontinent Asian Americans: 304 (indicating
overutilization), and Hispanic Americans: 26. Id., § IV, at 14-
15.
The San Antonio study examined disparities in public sector
contracting in several industries: (1) construction, (2)
architecture and engineering, (3) professional services such as
financial, legal, and educational, (4) other services such as
security guards, computer technology, and janitorial/maintenance
services, and (5) goods contracts. The study also examined
disparities in the private sector in construction. The study
found substantial disparity for African Americans, Asian
Americans, and Native Americans in all industries for public
sector prime contracting as well as subcontracting, and
substantial disparities for Hispanic Americans in architecture
and engineering, professional services, and goods contracting.
San Antonio Study at I-ii. Minority utilization in private
sector construction was, by a significant margin, lower still.
Utilization of minority and women-owned businesses “was low in
69
absolute terms (close to 1 percent), in comparison to M/WBE
subcontractor utilization on [City] projects (about 24.5
percent)[.]” Id. at iv. The study considered minority owned
firms’ capacity to perform the work as a possible explanation for
the disparities, but ultimately rejected that possibility.
Capacity alone is not a sufficient explanation for these
differences, especially at the subcontractor level in the
construction industry, where capacity is a lesser
consideration and availability far exceeds the record of
utilization, especially in the private sector. When private
sector M/WBE utilization at the subcontractor level for
commercial building projects is only a fraction of public
sector M/WBE utilization, there is evidence, supported by
anecdotal [evidence], that a number of non-M/WBE firms
utilized for public sector construction projects employ
M/WBE subcontractors primarily because the municipality
encourages them to do so[.]
San Antonio Study at § 6-8.
The Atlanta study undertook a similar analysis in the
construction and professional services industries and reached
similar conclusions. “[M]inority firms won less than 1 percent
of private sector commercial subcontracts . . . in the Atlanta .
. . area,” a small fraction of the percentage of subcontractors
used on City projects. Atlanta Study, at 8. “There is evidence
that lack of business capacity and experience is not a sufficient
explanation for the low levels of utilization in the private
sector. Low levels of utilization were found not only in
subcontracting, but also on small contracts. Moreover, a private
sector regression analysis, after controlling for the effects of
variables related to company capacity, years in the business and
70
education of the owner, determined that race and gender were
significant factors in explaining the significantly lower
earnings of minority and female firms.” Id., at 9.
D. Analysis: Strong Basis in Evidence
For the reasons discussed in Section III.B. above, the Court
concludes that the government has articulated a compelling
interest for the Section 8(a) program: “breaking down barriers to
minority business development created by discrimination and its
lingering effects,” including exclusion from contracting with the
federal government. Defs.’ MSJ at 27, 29. As a matter of law,
the government may implement race-conscious programs that seek
“to remedy its own discrimination or even to prevent itself from
acting as a ‘passive participant’” in private discrimination in
the relevant industries or markets. Concrete Works IV, 321 F.3d
at 958 (quoting Croson, 488 U.S. at 492). The Court must now
determine whether the government has demonstrated “‘a strong
basis in the evidence’ supporting its conclusion that race-based
remedial action was necessary to further that interest.”
Sherbrooke, 345 F.3d at 969 (quoting Croson, 488 U.S. at 500).
DynaLantic has challenged the Section 8(a) program both on
its face and as applied to the military simulation and training
industry. The Court considers each in turn.
71
1. Facial Challenge
The Court turns first to DynaLantic’s facial challenge. “A
facial challenge to a legislative Act is, of course, the most
difficult challenge to mount successfully, since the challenger
must establish that no set of circumstances exists under which
the Act would be valid.” Salerno, 481 U.S. at 745.
The text of the Section 8(a) statute does not mandate set-
asides in all government contracting. Rather, it provides “[i]t
shall be the duty of the [Small Business] Administration and it
is hereby empowered, whenever it determines such action is
necessary or appropriate” to enter into contracts with federal
agencies, and to arrange for performance of those contracts by
socially and economically disadvantaged businesses. 15 U.S.C. §§
637(a)(1)(A), (a)(1)(B) (emphasis added). In order to find the
statute facially constitutional under Salerno, therefore, the
Court must determine whether Congress had a strong basis in
evidence to conclude that, under any set of circumstances, it
would be necessary and appropriate for the SBA to exercise its
power. Put another way, in order for DynaLantic to prevail on
its facial challenge, it must show that Congress did not have a
strong basis in evidence for permitting race-conscious measures
to be used under any circumstances, in any sector or industry in
the economy. For the reasons set forth below, the Court
concludes that DynaLantic cannot meet its “heavy burden” to
72
establish that the 8(a) program is unconstitutional on its face.
Salerno, 481 U.S. at 745.
a) The Government’s Initial Burden
As discussed in Section III.A supra, the Court must first
determine whether the government has met its initial burden to
present a “strong basis in evidence” sufficient to support its
compelling interest. At that point, the burden shifts to
DynaLantic to introduce “credible, particularized evidence to
rebut the government’s initial showing of the existence of a
compelling interest.” Adarand VII, 228 F.3d at 1175. “The
ultimate burden remains with the [plaintiff] to demonstrate the
unconstitutionality of an affirmative action program.” Wygant,
476 U.S. at 277-78 (plurality op.).
Upon careful consideration of the evidence presented by the
government, the Court concludes that the government has met its
initial burden of presenting a strong basis in evidence that
remedial action was - and remains - necessary to remedy
nationwide discrimination in the construction industry, at the
very least, and likely in other industries as well.
Before enacting Section 8(a) in 1978, Congress had before it
not only all of the evidence in the legislative history of
Section 8(a), but also all of the evidence in the legislative
history of another race-conscious measure it had enacted the
previous year, the Public Works Employment Act of 1977. The
73
evidence regarding the Public Works Act is relevant because,
“[a]fter Congress has legislated repeatedly in an area of
national concern, its Members gain experience that may reduce the
need for fresh hearings or prolonged debate when Congress again
considers action in that area.” Fullilove v. Klutznick, 448 U.S.
448, 502 (1980) (Powell, J., concurring). The Public Works Act
of 1977 included an MBE program which required that ten percent
of federal funding for any state or local public works project be
awarded to minority business enterprises. Non-minority
contractors raised an equal protection challenge to the MBE
program, and the Supreme Court considered its constitutionality
in Fullilove v. Klutznick. As the Fullilove Court explained, the
legislative history of the Public Works Act overlapped
significantly with the legislative history of Section 8(a).
Fullilove, 448 U.S. at 460. The Supreme Court examined the
legislative history of Section 8(a) in detail, as well as similar
history concerning the construction industry. Id. at 463-67.
The Court found:
Congress had abundant evidence from which it could conclude
that minority businesses have been denied effective
participation in public contracting opportunities by
procurement practices that perpetuated the effects of
private discrimination. . . . Congress had before it, among
other data, evidence of a long history of a marked disparity
in the percentage of public contracts awarded to minority
business enterprises. This disparity was considered to
result not from any lack of capable and qualified minority
businesses, but from the existence and maintenance of
barriers to competitive access which had their roots in
racial and ethnic discrimination and continue today, even
74
absent any intentional discrimination or other unlawful
conduct. Although much of this history related to the
experience of minority businesses in the areas of federal
procurement, there was direct evidence before the Congress
that this pattern of disadvantage and discrimination existed
with respect to state and local construction contracting as
well. In relation to the MBE provision, Congress acted
within its competence to determine that the problem was
national in scope.
Fullilove, 448 U.S. at 477-78.12
More recently, in 2005, the Ninth Circuit reviewed the
legislative history of the Transportation Equity Act for the 21st
Century (“TEA-21”), which was enacted in 1998. W. States, 407
F.3d at 991-93. The Western States court listed evidence before
Congress in 1998 which was extremely similar, in kind, to the
evidence before Congress when Section 8(a) was enacted in 1978.
Specifically, the court considered statistical and anecdotal
disparities between (1) minority population and minority business
ownership in the United States; (2) majority and minority
business receipts nationwide; and (3) minority business share and
minority percentage of federal contracting dollars throughout the
12
Fullilove did not fully articulate the standard of review
it had used, leaving some uncertainty as to whether strict or
intermediate scrutiny applied to remedial race-conscious
legislation. In Adarand III, the Supreme Court announced the
strict scrutiny standard of review, casting doubt on the analysis
and result in Fullilove to the extent that it rested on
intermediate scrutiny. Fullilove’s factual findings regarding
discrimination in minority contracting, however, have not been
disturbed. See Adarand VII, 228 F.3d at 1175, n.17; see also
Croson, 488 U.S. at 488 (focusing on Fullilove’s factual
findings); Rothe III, 262 F.3d at 1321 n.14 (Congress’s fact
finding process is generally entitled to a presumption of
regularity and deferential review).
75
economy. Id. at 992. The Western States court also considered
nationwide barriers to minority entry and minority business
development, such as lending discrimination and discrimination by
prime contractors, customers, and suppliers. Id. The court
found that this evidence, “considered at the time of TEA-21’s
enactment,” was sufficient to show that “Congress had a strong
basis in evidence” for enacting the nationwide race-conscious
provisions of the statute. Id. 993.
As discussed above, Congress examined extensive evidence
before enacting Section 8(a) through hearings, reports, raw data,
statistical studies, and witness testimony. The evidence before
Congress includes extensive statistical analysis, qualitative and
quantitative consideration of the unique challenges facing
minority small businesses (as distinguished from the challenges
facing all small businesses), and examination of the race-neutral
measures that had been enacted by previous Congresses but had
failed to reach minority owned firms. This evidence was
described in Fullilove as an “abundant” basis on which to find
discriminatory barriers to market entry and fair competition
existed, and, moreover, impacted federal contracting in the
construction industry and beyond. It is also very similar in
kind to the evidence presented in Western States, which the Ninth
Circuit found to be a “strong basis in evidence” sufficient to
establish a compelling interest in nationwide race-conscious
76
legislation. The Court finds that the evidence before Congress
when it enacted Section 8(a) satisfies the government’s initial
burden to demonstrate a compelling interest. Specifically, the
Court finds that Congress had a strong basis in evidence to
conclude that action was necessary to remediate discrimination
against minority business enterprises when it enacted Section
8(a). The Court therefore turns to the evidence before Congress
since that time to determine whether the government has met its
burden to show a continuing compelling need for the program.
Based on the record in this case, the Court concludes that
Congress has “spent decades compiling evidence of race
discrimination” in a variety of industries, including but not
limited to construction. Sherbrooke, 345 F.3d at 970. The
record contains extensive statistical and anecdotal evidence of
specific discriminatory barriers to market entry and fair
competition, evidence that discrimination and its lingering
effects (1) raised barriers to minority business formation and
development that precluded minority-owned businesses at the
outset from competing for government contracts, and (2) impeded
existing minority-owned businesses’ ability to obtain government
contracts. Additionally, the record contains substantial
quantitative evidence of broad gaps between minority and non-
minority contract awards in both public and private sector
contracting. These studies reveal wide disparities, around the
77
country, in the construction industry and others, even when
controlling for other factors such as capacity and eligibility.13
Croson and Adarand III hold that significant disparities between
the availability and utilization of eligible, qualified minority
businesses is sufficient for “an inference of discriminatory
exclusion” to arise, which provides the necessary basis for the
government to use race-conscious measures in response. Croson,
488 U.S. at 509. The government has presented this evidence
here. While the government’s evidence is most copious in the
construction industry, it has also produced significant evidence
in professional services, architecture and engineering, and other
industries. The government has therefore established that there
are at least some circumstances where it would be “necessary or
appropriate” for the SBA to award contracts to businesses under
the Section 8(a) program. 15 U.S.C. § 637(a)(1); see also
Salerno, 481 U.S. at 745. Accordingly, the Court concludes that,
13
The Court finds that the evidence from around the country
is sufficient for Congress to authorize a nationwide remedy.
Defendants point out, and DynaLantic does not dispute, that “in
contrast to race-conscious municipal programs, ‘[t]he geographic
scope of Congress’s reach . . . is ‘society-wide’ and therefore
nationwide.’” Defs.’ MSJ at 12 (quoting Adarand VII, 228 F.3d at
1147). “Congress [has] a ‘broader brush’ than municipalities for
remedying discrimination. . . . [W]e do not think that Congress
needs to have evidence before it of discrimination in all fifty
states in order to justify [a nationwide program]. . . .
Contrarily, evidence of a few isolated instances of
discrimination would be insufficient to uphold the nationwide
program.” Rothe III, 262 F.3d at 1329-30.
78
in response to Plaintiff’s facial challenge, the government has
met its initial burden to present “a ‘strong basis in evidence’
sufficient to support its articulated, constitutionally valid,
compelling interest.” Adarand VII, 228 F.3d 1174-75.
b) Plaintiff’s Rebuttal
Because Defendants have made their initial showing of a
compelling interest, the burden shifts to the Plaintiff to show
why the evidence relied on by Defendants fails to demonstrate a
compelling governmental interest. See Concrete Works IV, 321
F.3d at 959. In order to prevail on its facial challenge,
Plaintiff must show that Congress does not have a strong basis in
evidence to conclude that the SBA would find it “necessary or
appropriate” to award Section 8(a) contracts under any
circumstances. DynaLantic attempts to rebut Defendants’ showing
of a compelling interest in a number of ways. Broadly speaking,
these challenges are that (1) the legislative history is
insufficient, (2) there is no evidence of discrimination by the
federal government, therefore the Section 8(a) program improperly
attempts to remedy societal discrimination, (3) the evidence is
flawed, (4) evidence of fraud in race-conscious programs renders
the challenged programs invalid, and (5) there is insufficient
evidence of discrimination as to each minority group.
79
(1) Sufficiency of Legislative History
First, DynaLantic argues that the legislative history of the
Section 8(a) program does not support a finding of a compelling
interest. DynaLantic claims “there was little serious debate
surrounding the use of set-asides,” and the evidence Congress
considered was inadequate as a matter of fact to support a
compelling interest under Croson and Adarand. Pl.’s Opp’n to
Defs.’ MSJ at 38.
The Court disagrees that Congress had insufficient evidence
to adopt Section 8(a) in 1978. As set forth above, when Congress
considered Section 8(a) it had before it not only the legislative
history of that statute, but also the legislative history of the
MBE set-aside provision in the Public Works Employment Act of
1977. Fullilove, 448 U.S. at 502 (“After Congress has legislated
repeatedly in an area of national concern, its Members gain
experience that may reduce the need for fresh hearings or
prolonged debate when Congress again considers action in that
area.”) (Powell, J., concurring). As explained above, the
Supreme Court considered the legislative history of Section 8(a)
and the Public Works Employment Act, and found it contained
“abundant evidence” to justify remedial race-conscious measures
in the construction industry and indeed in federal contracting as
a whole. Fullilove, 502 U.S. at 477-78. Significantly,
Plaintiff acknowledges the additional legislative history in
80
Fullilove, but argues that case should be “limited to its facts,”
i.e., the construction industry. Pl.’s Opp’n to Defs.’ MSJ at
41-42. However, in order to succeed on its facial challenge,
DynaLantic must prove there is no set of circumstances under
which Section 8(a) would be constitutional. Therefore, the facts
in the legislative history at issue in Fullilove are precisely
what is relevant in the instant case. Based on the evidence
before Congress with respect to both the Public Works Employment
Act of 1977, and, a year later, the heavily overlapping
legislative history of Section 8(a), the Court concludes that
Congress had a strong basis in evidence to conclude the use of
race-conscious measures was necessary in, at least, some
circumstances.
The Court also rejects Plaintiff’s argument that the type of
legislative history compiled by Congress when it enacted Section
8(a) is legally insufficient in a post-Croson, post-Adarand
world. Pl.’s MSJ at 40. As discussed above, in a 2005 case, the
Ninth Circuit catalogued the legislative history of TEA-21, which
appears very similar to the legislative history of Section 8(a)
in terms of the type of evidence produced. See W. States, 407
F.3d at 991-93. Western States considered the legislative
history in light of Croson and Adarand III and found it
constituted a strong basis in evidence. Id.
81
(2) Evidence of Government Discrimination
Second, DynaLantic argues in rebuttal that the record
contains no evidence of discrimination by the federal government,
and therefore the Section 8(a) program improperly attempts to
remedy societal discrimination. Plaintiff claims that there is
no allegation that the government discriminated with regard to
any barriers to minority business formation or development such
as bonding or lending discrimination. Pl.’s Opp’n to Defs.’ MSJ
at 42-49. Plaintiff further maintains that Defendants have not
identified any nexus between the federal government and race
discrimination in contracting itself. According to DynaLantic,
to show a compelling interest, the government must provide
evidence of direct race discrimination in contracting by federal,
state or local governments, or at the very least, evidence that
private industries directly used federal funds to discriminate.
See, e.g., Pl.’s Reply in Supp. of its MSJ at 11-14. Plaintiff
acknowledges that the government’s theory for implementing race-
conscious measures is based on its passive participation in
discrimination in the private sector. However, Plaintiff claims
that without evidence of government discrimination, or at least
evidence that the government has intentionally collaborated with
private entities which it knows engaged in discrimination, it
cannot show passive participation. Id.
82
DynaLantic’s definition of passive participation is wrong as
a matter of law. While the Supreme Court did, at one time,
appear to condition race-conscious measures upon a showing of
prior discrimination by the government itself, see Wygant, 476
U.S. at 274, that requirement was rejected in Croson. The
Supreme Court explained that a governmental entity:
[H]as legislative authority over its procurement policies,
and can use its spending powers to remedy private
discrimination . . . . Thus, if the City could show that it
has essentially become a “passive participant” in a system
of racial exclusion practiced by elements of the local
construction industry, we think it clear that the city could
take affirmative steps to dismantle such a system. It is
beyond dispute that any public entity, state or federal, has
a compelling interest in assuring that public dollars, drawn
from the tax contributions of all citizens, do not serve to
finance the evil of private prejudice.
488 U.S. at 492. This Circuit has adopted the same test. See
O’Donnell, 963 F.2d at 425 (governmental entities “may take
remedial action when they possess evidence [that] their own
spending practices are exacerbating a pattern of prior
discrimination, . . . public or private” (quoting Croson, 488
U.S. at 504))(emphasis added).
Subsequent to Croson, the Tenth Circuit, after considering
extensive evidence of private discrimination, held that those
materials were not merely evidence of generalized societal
discrimination, but instead constituted evidence of specific
discriminatory barriers to market entry and fair competition
facing potential and actual minority entrepreneurs. Adarand VII,
83
228 F.3d at 1167-75. The court then concluded that such evidence
establishes a “strong link” between the government’s disbursement
of funds for public contracts and the channeling of those funds
due to private discrimination. See id. at 1167-68 (explaining
that barriers to formation preclude “from the outset” competition
for public contracts by minority enterprises, explaining further
that barriers to development preclude “existing minority firms
from effectively competing” for public contracts); accord
Sherbrooke, 345 F.3d at 970; Concrete Works IV, 321 F.3d at
977.14
This Court agrees with Croson and its progeny that the
government may properly be deemed a “passive participant” when it
fails to adjust its procurement practices to account for the
effects of identified private discrimination on the availability
and utilization of minority-owned businesses in government
contracting. See Adarand VII, 228 F.3d at 1165 (“[W]e readily
conclude that the federal government has a compelling interest in
not perpetuating the effects of racial discrimination in its own
distribution of federal funds and in remediating the effects of
14
So far as this Court is aware, the Seventh Circuit is the
only circuit to adopt a more rigid standard. See Builders Ass’n
v. County of Cook, 256 F.3d 642, 645 (7th Cir. 2001) (indicating
that the concept of “passive participation” should be limited to
situations where a government unit might be deemed “a kind of
joint tortfeasor, coconspirator, or aider and abettor”). This
standard has not been adopted by either this Circuit or the
Supreme Court.
84
past discrimination in the government contracting markets created
by its disbursements.”); Sherbrooke, 345 F.3d at 969. Moreover,
as discussed above, the Court concludes that Congress did
identify discriminatory disparities in government contracting.
Specifically, the government compiled substantial evidence of
identified private racial discrimination which affected minority
utilization in specific industries of government contracting,
both before and after the enactment of the Section 8(a) program.
Accordingly, DynaLantic’s argument fails.
(3) Flaws in the Evidence
DynaLantic raises several related arguments with respect to
the quality of the evidence before Congress. First, Plaintiff
complains that Defendants have not conducted an independent
investigation into the truthfulness or accuracy of the documents
identified as providing their strong basis in evidence. Second,
Plaintiff points out that all of the evidence does not
necessarily support findings of discrimination. Finally,
Plaintiff alleges the disparity studies are flawed. Upon
consideration, the Court finds that any flaws DynaLantic has
identified in the data do not rise to the level of “credible,
particularized evidence” necessary “to rebut the government’s
initial showing of a compelling interest.” Adarand VII, 228 F.3d
at 1175.
85
The proponent of a race-conscious remedial program is “not
required to unequivocally establish the existence of
discrimination[,] nor [is] it required to negate all evidence of
non-discrimination.” Concrete Works IV, 321 F.3d at 991(internal quotation marks omitted). Rather, a “strong basis in
evidence” exists when there is evidence “‘approaching a prima
facie case of a constitutional or statutory violation,’ not
irrefutable or definitive proof of discrimination.” Id. at 971(quoting Croson, 488 U.S. at 500); see also O’Donnell, 963 F.2d
at 424 (race-conscious “legislation must rest on evidence at
least approaching a prima facie case of racial discrimination in
the relevant industry”). Accordingly, DynaLantic’s claim that
the government must independently verify the evidence presented
to it is unavailing. Likewise, the government may act to remedy
discrimination when there is a “strong basis” in evidence from
which an inference of discrimination could arise. Croson, 488
U.S. at 510. The complete absence of evidence suggesting a
contrary result is not required.
Plaintiff also argues that the disparity studies before the
Court are inadequate. In earlier briefing before the Court,
DynaLantic examined several of the studies relied upon by
Defendants. Plaintiff did not, however, undertake this task in
the parties’ most recent submissions to the Court. In 2009,
Defendants placed into the record approximately 50 disparity
86
studies which had been introduced or discussed in Congressional
hearings since 2006. DynaLantic did not rebut or even discuss
any of those studies individually. See generally Pl.’s Mem. on
Evidence Presented to Congress After Jan. 4, 2006; Pl.’s Reply
Br. on Evidence Presented to Congress After Jan. 4, 2006.
Rather, DynaLantic asserted generally that the studies did not
control for the capacity of the firms at issue, and were
therefore unreliable. See Pl.’s Mem. on Evidence Presented to
Congress After Jan. 4, 2006 at 3-7.15
As set forth in Section III.C.2.c above, DynaLantic’s
arguments are incorrect as a matter of fact. While not all of
the disparity studies accounted for the capacity of the firms,
many of them did control for capacity and still found significant
disparities between minority and non-minority owned firms.
DynaLantic disputes the methodology of Jon Wainwright, a social
scientist identified by Defendants, who authored some of the
studies submitted to Congress. Dr. Wainwright argues that
capacity measurements are unreliable because “most, if not all,
identifiable indicators of capacity are themselves impacted by
15
DynaLantic also asserted that the studies are
“irrelevant” because they “are not nationwide in scope[.]” Id. at
9. However, as discussed above in Section III.D.1.a, Congress
need not have evidence of discrimination in all 50 states to
demonstrate a compelling interest. Rothe III, 262 F.3d at 1329.
In this case, Defendants have presented recent evidence of
discrimination in a significant number of states and localities
which, taken together, represent a broad cross-section of the
nation.
87
discrimination.” Defs.’ Supplemental Br. on Evidence Presented
to Congress After Jan. 4, 2006 at 10; see also Pl.’s Mem. on
Evidence Presented to Congress After Jan. 4, 2006 at 5-7.
However, while Plaintiff disputes the validity of Dr.
Wainwright’s methods, it does not discuss his more recent
studies, nor does it demonstrate the disparities shown in those
studies are eliminated when there is a control for firm capacity.
See Concrete Works IV, 321 F.3d at 983 (finding criticism of
Denver’s disparity studies insufficient for same reason). In
short, DynaLantic’s “general criticism” of the multitude of
disparity studies introduced by the Defendants after 2006 does
not constitute “particular evidence undermining the reliability
of the particular disparity studies” and, therefore, “is of
little persuasive value.” Adarand III, 228 F.3d at 1173 n.14;
see also Sherbrooke, 345 F.3d at 970 (“In rebuttal, [plaintiffs]
presented evidence that the data was susceptible to multiple
interpretations, but they failed to present affirmative evidence
that no remedial action was necessary because minority-owned
small businesses enjoy non-discriminatory access to and
participation in highway contracts. Thus, they failed to meet
their ultimate burden to prove that the DBE program is
unconstitutional on this ground.”).
88
(4) Fraud in the Administration of Race-
Conscious Programs
Plaintiff claims that Defendants’ evidence is flawed and
unreliable because, Plaintiff alleges, fraud pervades
race-conscious programs. Regardless of the program at issue,
Plaintiff argues, “[a]ll major set-aside efforts have been
tainted significantly by fraud.” Pl.’s Opp’n to Defs.’ MSJ at 25
(internal citation omitted). Plaintiff asserts that the
existence of fraud demonstrates that the data Defendants cite to
defend their use of race is fatally flawed, cannot be used to
establish any discrimination, and undermines their evidence of
the alleged compelling interest. Id. at 24-32. Defendants, for
their part, argue that while the Section 8(a) program may have
had problems with fraud in the past, those problems have been
largely corrected since the late 1990s. See Defs.’ Reply in
Supp. of its MSJ at 15-17. More fundamentally, Defendants argue
that a prior misapplication of the program is not grounds for
declaring the program unconstitutional. If Plaintiff has any
evidence that undeserving individuals are improperly benefitting
from the Section 8(a) program today, its recourse is to bring
those facts to the attention of the appropriate government
officials so that corrective action can be taken. See 13 C.F.R.
§ 124.103(b)(3).
Defendants have the better argument here. Although the
history of abuse of federal programs is alarming, DynaLantic has
89
cited no authority in support of its claim that such abuse is
sufficient to invalidate a statute on its face. Moreover, the
vast majority of evidence relied upon by Defendants to show a
compelling interest is not based on data from Section 8(a)
program participants. The statistical and anecdotal evidence
regarding discriminatory barriers to minority business formation
and development, and the resulting disparities in government
contracting, is largely drawn from state and local governments
and from the private sector. The identity of Section 8(a)
participants, and their status as bona fide socially and
economically disadvantaged individuals – or not - does not
undermine the reliability of those studies.
(5) Evidence of Discrimination Against Each
Minority Group
DynaLantic argues that the government did not have a
compelling interest to find that “each of the preferred groups”
had suffered discrimination and therefore should be included in
the rebuttable presumption of social disadvantage. Pl.’s MSJ at
44-46; see also Pl.’s Reply at 20.16 DynaLantic maintains that
the government must show it had evidence of discrimination
against not only all of the five broad groups racial groups
16
As discussed below in Section III.E, DynaLantic raises a
similar claim in arguing that the 8(a) program is not narrowly
tailored; specifically, it claims the program is overinclusive
because it includes groups which have not suffered
discrimination.
90
identified in the statute and accompanying regulation, but the
thirty-seven racial subgroups as well. Pl.’s MSJ at 48-50; see
also 15 U.S.C. § 631(f)(1); 13 C.F.R. § 124.103. Defendants
respond that Congress need not reach this level of specificity;
evidence of racial discrimination among the five broad groups is
sufficient. Defs.’ Opp’n at 27-29. The Court agrees with
Defendants, as well as at least two circuits which have
considered the identical issue, that Congress has a strong basis
in evidence if it finds “evidence of discrimination is
sufficiently pervasive across racial lines to justify granting a
preference to all five purportedly disadvantaged groups included”
in Section 8(a). Rothe III, 262 F.3d at 1330; see also Adarand
VII, 228 F.3d at 1176 n.18; see also id. at 1185-86 (“‘Race’ is
often a classification of dubious validity - scientifically,
legally, and morally. We do not impart excess legitimacy to
racial classifications by taking note of the harsh fact that
racial discrimination commonly occurs along the lines of the
broad categories identified: Black Americans, Hispanic Americans,
Native Americans, Asian Pacific Americans and other minorities.”
(internal quotations omitted)). Based on the evidence
discussed at length above, the Court finds that Congress had
strong evidence “that the discrimination is sufficiently
pervasive across racial lines to justify granting a preference to
all five” groups included in Section 8(a). Rothe III, 262 F.3d
91at 1329. Specifically, the Court concludes that the record
reveals specific, persuasive evidence from which a reasonable
inference of discrimination could be made against each of the
minority groups at issue. Equally persuasive to the Court, the
evidence reveals that across the nation, public and private
contracting markets are “overwhelmingly composed of non-
minorities due to the effects of racial discrimination.” Adarand
VII, 228 F.3d at 1176 n. 18. In light of the evidence of
“pervasive discrimination across racial lines,” the fact that
specific evidence varies, to some extent, within and between
minority groups, is not a basis to declare the statute facially
invalid. Id.; see also Concrete Works IV, 321 F.3d at 971. This
case is therefore distinguishable from Croson, where the
legislation at issue contained “random inclusion of racial
groups” for whom there was no evidence of residency in the
jurisdiction, let alone of discrimination in the relevant
industry. 488 U.S. at 506.
c) Facial Challenge: Conclusion
For the foregoing reasons, the Court concludes that Congress
has a compelling interest in eliminating the roots of racial
discrimination in federal contracting, funded by federal money.
The Court further concludes that the government has established a
strong basis in evidence to support its conclusion that remedial
action was necessary to remedy that discrimination by providing
92
significant evidence in three different areas. First, it
provided extensive evidence of discriminatory barriers to
minority business formation, which stifles, from the outset,
minority competition for federal contracts. Second, it provided
forceful evidence of discriminatory barriers to minority business
development, which also impairs minority competition for federal
contracts. Third, it provided significant evidence that, even
when minority businesses are qualified and eligible to perform
contracts in both the public and private sectors, they are
awarded these contracts far less often than their similarly
situated non-minority counterparts. The evidence considered by
this Court is particularly strong, nationwide, in the
construction industry; however, the government has provided
substantial evidence of widespread disparities in other
industries such as architecture and engineering, and professional
services as well.
In order to rebut the government’s showing, DynaLantic had
to present credible, particularized evidence that undermined the
government’s compelling interest and demonstrated that the
government’s evidence “did not support an inference of prior
discrimination and thus a remedial purpose.” Wygant, 476 U.S. at
293 (O’Connor, J., concurring). It failed to do so.
As discussed throughout, Section 8(a) does not mandate race-
conscious set-asides at any time. Rather, the statute instructs
93
the SBA to enter into contracts with socially and economically
disadvantaged business only when the SBA finds it “necessary or
appropriate.” 15 U.S.C. § 637(a)(1). To prevail on its facial
challenge, Plaintiff had to show that Congress lacked a strong
basis in evidence to conclude that there is any set of
circumstances in which it would be necessary or appropriate for
the SBA to enter into such contracts. DynaLantic did not meet
its burden under either strict scrutiny or under Salerno.
Accordingly, DynaLantic’s facial challenge to Section 8(a) fails.
2. As-Applied Challenge
As set forth above, Section 8(a) provides Congressional
authorization for the SBA to enter into procurement contracts
using race-conscious measures when “it determines such action is
necessary or appropriate.” 15 U.S.C. § 637(a)(1). In addition
to its facial challenge, DynaLantic challenges SBA and DOD’s use
of the Section 8(a) program as applied: namely, the agencies’
determination that it is necessary or appropriate to set aside
contracts in the military simulation and training industry. See
Second Am. Compl. ¶¶ 13-16, 25, Prayer for Relief.
As noted above, Defendants concede that they do not have
evidence of discrimination in this industry. Indeed,
DynaLantic’s statement of undisputed facts contains the following
statements, which Defendants have admitted:
94
140. There is no Congressional report, hearing or finding
that references, discusses or mentions the simulation
and training industry.
141. Defendants are unaware of any discrimination in the
simulation and training industry.
142. None of the documents that Defendants have cited as
justification for the race-conscious mechanisms in the
Section 8(a) . . . Program[] . . . mentions or
identifies instances of past or present discrimination
in the simulation and training industry[.]
[. . .]
144. DoD is unaware of any disparity study, by anyone, with
regard to the simulation and training industry.
Pl.’s Statement of Undisputed Material Facts ¶¶ 140-44 (internal
citations omitted); see also Defs.’ Resp. to Pl.’s Statement of
Undisputed Material Facts at 17. Defendants do not view this
lack of evidence as a problem. Instead, they maintain that as a
matter of law, the government need not tie evidence of
discriminatory barriers to minority business formation and
development to evidence of discrimination in any particular
industry. See, e.g., Defs.’ Opp’n at 4, 17-19. Defendants argue
as follows:
[T]he Section 8(a) program makes no claim to be directed at
discrimination within a single industry or location, nor
does it seek to achieve a pre-determined level of minority
representation in any particular industry category.
Instead, the Section 8(a) program takes aim at problems that
cut across industries – i.e., discrimination that inhibits
the development of certain minority-owned businesses and
frustrates their ability to participate on an equal
opportunity basis in contracting with the federal
government. Whatever sorts of findings might be needed at
the industry level to uphold a Congressional measure
designed to attain a certain level of minority-owned
95
business participation in one industry, the Constitution
does not require findings of that sort to find a compelling
governmental interest for the Section 8(a) Program.
Defs.’ Opp’n at 18. Upon careful consideration, the Court
concludes that Defendants’ position is irreconcilable with
binding authority upon this Court, specifically, the Supreme
Court’s decision in Croson, as well as this Circuit’s decision in
O’Donnell Construction Company, which adopted Croson’s reasoning.
As discussed in Section III.C.2.c above, Croson made clear that
the government must provide evidence demonstrating there were
eligible minorities in the relevant market - in that case, the
Richmond construction industry - that were denied entry or access
notwithstanding their eligibility. See 488 U.S. at 502; see also
O’Donnell, 963 F.2d at 427. Croson and O’Donnell held that
absent such evidence, the government is left with unexplained
disparities, which are insufficient to create an “inference of
discriminatory exclusion,” and therefore insufficient to
demonstrate a compelling interest. Croson, 488 U.S. at 498-508;
see also O’Donnell, 950 F.2d at 424-27.
The government attempts to distinguish Croson on a number of
grounds, none of which is persuasive. First, the government
points to the existence of a “rigid quota” in Richmond as opposed
to Section 8(a)’s “reasonable aspirational goal.” Defs.’ Opp’n
at 14. Defendants fail to recognize, however, that the Supreme
Court explicitly adopted the Croson standards in Adarand III, a
96
case involving race-based “goals” as opposed to “quotas.” 515
U.S. at 205, 223-27. Second, Defendants claim Croson is
inapplicable because the Richmond ordinance mandated “reflexive
or stereotypical reliance on race” alone, while the Section 8(a)
program requires individual consideration of economic
disadvantage in addition to race. Defs.’ Opp’n at 13-14. Again,
Defendants do not acknowledge that, at least so far as this Court
is aware, every court to consider the issue has applied Croson’s
reasoning to programs which, like the 8(a) program, require both
social and economic disadvantage to qualify. See, e.g., Adarand
VII, 228 F.3d at 1163-66; Sherbrooke, 345 F.3d at 969; Western
States, 407 F.3d at 991-93; N. Contracting, Inc. v. Illinois,
Case No. 00-C-4515, 2004 U.S. Dist. LEXIS 3226, *89-101 (N.D.
Ill. Mar. 3, 2004).
Finally, the government attempts to distinguish Croson by
claiming that its purpose in the Section 8(a) program is
different. Specifically, the government argues that its interest
is “not to channel disadvantaged businesses into particular
industries at particular locations, but instead to enable
disadvantaged individuals to overcome racial discrimination in
business development and equal opportunity in whatever industry
they choose to enter.” Defs.’ Opp’n at 19. This is not,
however, a difference in the fundamental nature of the 8(a)
program; it is a difference in the scope of the 8(a) program.
97
Essentially, the government maintains that discrimination in
business formation and growth exist throughout the economy. The
government may well be correct. However, absent an evidentiary
showing that, in a highly skilled industry such as the military
simulation and training industry, there are eligible minorities
who are “qualified to undertake [] particular task[s]” and are
nevertheless denied the opportunity to thrive there, the
government cannot comply with Croson’s evidentiary requirement to
show an inference of discrimination. See Croson, 488 U.S. at
501. As this Circuit has held, the government “cannot simply
rely on broad expressions of purpose or general allegations of
historical or societal racism. Rather, its legislation must rest
on evidence at least approaching a prima facie case of
discrimination in the relevant industr[ies].” O’Donnell, 963
F.2d at 424. Excusing the federal government from this
requirement would permit the federal government to implement
race-conscious preferences using a different standard of proof
than state and local governments, a result which has been
squarely rejected by the Supreme Court in Adarand III. 515 U.S.
at 224, 226-27.
The government states that it does not have to make an
industry-based showing in order to show strong evidence of
discrimination. However, Defendants have not explained how else
they would meet Croson’s requirement to show that minority
98
businesses are ready, able and willing to perform in the relevant
marketplace, however that is defined.17 Of utmost importance,
the government has not identified legal authority to support its
theory. To the contrary, as another judge on this court has
observed, the same Department of Justice that represents
Defendants has recognized that the federal government must take
an industry-based approach to demonstrating compelling interest.
In Cortez III Service Corp. v. National Aeronautics & Space
Administration, the Honorable Stanley Sporkin found the Section
8(a) program constitutional on its face because there was
evidence before Congress of racial discrimination impacting
government contracting and “there is a compelling government
interest in combating such discrimination where it exists.” 950
F. Supp. 357, 361 (D.D.C. 1996). However, he found the program
unconstitutional as applied to the NASA contract at issue because
the government had provided no evidence of discrimination in the
industry in which the NASA contract would be performed. Judge
Sporkin held:
17
The Court recognizes that the pieces of legislation
considered in Croson, Adarand III, and O’Donnell were all
explicitly restricted to one industry. This case presents a
different factual scenario, because Section 8(a) is not industry-
specific. However, the government has not proposed an
alternative framework to Croson within which the Court can
analyze the evidence. In fact, a significant portion of the
evidence the government presents in this case is industry
specific. See supra Section III.C.2.c. This Court therefore is
constrained to follow the binding precedent of Croson, Adarand
III, and O’Donnell.
99
The fact that Section 8(a) is constitutional on its face,
however, does not give the SBA, NASA, or any other
government agency carte blanche to apply it without
reference to the limits of strict scrutiny. Rather,
agencies have a responsibility to decide if there has been a
history of discrimination in the particular industry at
issue. . . . [I]t is not inconsistent with Congress’s
mandate to the SBA, to require the SBA to ensure that in
each context where an 8(a) set-aside is proposed, such a
set-aside is actually required.
Id. at 361. Judge Sporkin noted that the Department of Justice
had advised federal agencies to make industry-specific
determinations before offering set-aside contracts and
specifically cautioned them that without such particularized
evidence, set-aside programs may not survive Croson and Adarand.
Id. at 361-62 (citing Proposed Reforms to Affirmative Action in
Federal Procurement, 61 Fed. Reg. 26042 (1996); Walter Dellinger,
Office of Legal Counsel, U.S. Department of Justice, Memorandum
to General Counsels (June 28, 1995) (hereinafter, “DOJ
Memorandum”).18 The government has not meaningfully
distinguished Cortez III from this case.
A reviewing court need not take a party’s definition of
“industry” at face value, and may determine the appropriate
18
Specifically, DoJ advised that to survive Adarand III,
evidence supporting the use of set asides needed to be grounded
in “statistics” that are “sophisticated and focused.” DOJ
Memorandum, App. A (“a statistical underrepresentation of
minorities in a sector or industry . . . without more, [is] an
impermissible bas[i]s for affirmative action.”) It advised
agencies to seek evidence that “attempt[s] to identify the number
of qualified minorities in the sector or industry or seek[s] to
explain what that number would look like ‘but for’ the
exclusionary effects of discrimination.” Id.100
industry to consider is broader or narrower than that proposed by
the parties. See Rothe III, 262 F.3d at 1330 (district court may
define the relevant industry more broadly as “business services”
instead of the narrower “computer maintenance and repair services
in the defense industry,” as urged by plaintiff). However, in
this case, the government did not argue with Plaintiff’s industry
definition - military simulation and training - and did not
propose another. More significantly, it provided no evidence
whatsoever from which an inference of discrimination in that
industry could be made.
“Without question, there is a compelling government interest
in combating [] discrimination where it exists.” Cortez III, 950
F. Supp. at 361. On this record, however, the Court is unable to
conclude that Defendants have produced evidence of discrimination
in the military simulation and training industry. Accordingly,
because the government has not met its burden to show a
compelling interest in remedying discrimination in the military
simulation and training industry, DynaLantic prevails on its as-
applied challenge.
Having concluded that DynaLantic prevails on its as-applied
challenge, the Court need not consider whether the Section 8(a)
program is narrowly tailored, as applied to the military
simulation and training industry. However, having concluded
above that Section 8(a) has a strong basis in evidence to further
101
its compelling interest on its face, the Court must still
determine whether it is narrowly tailored to survive a facial
challenge.
E. Narrow Tailoring
In addition to showing strong evidence that a race-conscious
program serves a compelling interest, the government must show
that “the means chosen to accomplish the government’s asserted
purpose [are] specifically and narrowly framed to accomplish that
purpose.” Grutter v. Bollinger, 539 U.S. 306, 333 (2003)
(citations omitted). “An affirmative action plan is narrowly
tailored if, as a practical matter it discriminates against
whites as little as possible consistent with effective
remediation.” Majeske v. City of Chicago, 218 F.3d 816, 820 (7th
Cir. 2000) (citation omitted). The Court considers several
factors in this analysis: (1) the efficacy of alternative, race-
neutral remedies, (2) flexibility, (3) over- or under-
inclusiveness of the program, (4) duration, (5) the relationship
between numerical goals and the relevant labor market, and (6)
the impact of the remedy on third parties. United States v.
Paradise, 480 U.S. 149, 171, 187 (1987) (plurality and concurring
opinions); see also Croson, 488 U.S. at 508 (plurality opinion).
DynaLantic’s facial challenge to the Section 8(a) program
requires the Court to look carefully at the regulations “to
determine whether they may be constitutionally applied under any
102
set of factual circumstances.” Sherbrooke, 345 F.3d at 971
(citing Salerno, 481 U.S. at 746); accord N. Contracting, Inc. v.
Illinois, 2004 U.S. Dist. LEXIS 3226, *123.
1. Race-Neutral Means
After a compelling interest has been identified and properly
documented, and before the government undertakes race-conscious
efforts, it first must consider the use of race-neutral means.
See Adarand III, 515 U.S. at 237-38 (remanding action to
determine “whether there was ‘any consideration of the use of
race-neutral means to increase minority business participation’
in government contracting” (quoting Croson, 488 U.S. at 507)).
“Narrow tailoring does not require exhaustion of every
conceivable race-neutral alternative” before implementing race-
conscious measures. Grutter, 539 U.S. at 339. Rather, narrow
tailoring requires “serious, good faith consideration of workable
race neutral alternatives.” Id.As Defendants point out, Congress attempted to use race-
neutral measures to foster and assist minority owned business for
at least twenty-five years prior to incorporating a race-
conscious component in Section 8(a), and these race-neutral
measures failed to remedy the effects of discrimination on
minority small business owners. Beginning with the Small
Business Act of 1953, Congress authorized various programs to
“aid, counsel, assist, and protect . . . the interests of
103
small-business concerns” and to “insure that a fair proportion of
the total purchases and contracts for supplies and services for
the government be placed with small-business enterprises . . . .”
Pub. L. No. 83-163, § 202, 67 Stat. 232 (1953). The race-neutral
measures employed by Congress between 1953 and 1978 included
creation of a surety bond guarantee program, creation of a new
class of small business investment companies to provide debt and
equity capital, improvement of disaster assistance, loans to
small businesses, small business development centers, and,
notably, race-neutral small business set-asides. See, e.g.,
Defs.’ MSJ at 31-33. Accordingly, Defendants argue that when
Congress considered the race-conscious provisions of Section
8(a), it had before it evidence of continuing discriminatory
barriers to minority businesses notwithstanding all of the race-
neutral measures it had already enacted. See Adarand VII, 228
F.3d at 1178 (“The long history of discrimination in, and
affecting the public construction procurement market - despite
efforts dating back at least to the enactment in 1958 [sic] of
the SBA to employ race-neutral measures . . . justifies
race-conscious action . . . .”).
DynaLantic’s claims that no race-neutral alternatives were
considered are based on Defendants’ admission, during discovery,
that (1) no other alternative to race has ever been used in the
Section 8(a) program; (2) neither Congress nor the SBA considered
104
the operation of non-race-conscious alternatives, such as
anti-discrimination laws, before establishing the race-conscious
requirements in the Section 8(a) program; and (3) the SBA also
has not used other, race-neutral means to address alleged
discrimination against minority contractors (or similar problems
for non-minorities), such as any different standards regarding
start-up costs, bonding costs, or other criteria for emerging
businesses. Pl.’s MSJ at 51-52. As Defendants correctly point
out, however, these admissions are taken out of context and do
not undermine their evidence that the government considered race-
neutral means. See Defs.’ Opp’n at 33-35. Accordingly, the
Court concludes that Defendants’ admissions do not support
DynaLantic’s claims.
The admissions at issue arise from Defendants’ answers
during discovery about a document prepared by the SBA to provide
information about the Section 8(a) program following the Supreme
Court’s 1995 decision in Adarand III. See Pl.’s MSJ, Ex. B49,
U.S. Small Business Administration Management of the 8(a)
Program: Narrow Tailoring (hereinafter “8(a) Document”). The
8(a) Document uses a question-and-answer format. In response to
the question “[d]id Congress or the agency consider the operation
of non-race-conscious alternatives . . . before establishing the
race-conscious requirement,” the SBA answered “No.” Id. at 4.
Defendants assert that this answer is only correct insofar as the
105
Section 8(a) program itself is concerned. In other words, they
explain that the answer means simply that the Section 8(a)
program, as codified by Congress and implemented by the SBA, has
always contained a race-conscious element. See Defs.’ Opp’n, Ex.
1, First Declaration of Darryl K. Hairston (“Hairston Decl. 1”)
¶ 4.
As Defendants note, the portion of the 8(a) Document on
which Plaintiff’s argument depends was not intended to address
the race-neutral alternatives which were utilized prior to the
codification of the Section 8(a) program. To the contrary, the
8(a) Document itself, on the two pages immediately following the
question and answer on which Plaintiff relies, references some of
those race-neutral alternatives, including surety bond
guarantees, loan guarantees, and counseling and training. See
Pl.’s MSJ, Ex. B49 at 5-6; see also, e.g., Pub. L. No. 91-609, 84
Stat. 1813 (1970) (surety bond guarantee program); Pub. L. No.
83-163, §§ 207(a) & (e), 67 Stat. 235-36 (1953) (loans and loan
guarantees; counseling and training).
The Court agrees with Defendants that the 8(a) Document,
when read in context, does not support Plaintiff’s claims.
Congress adopted a race-conscious contracting preference for the
Section 8(a) program only after long experience showed that
race-neutral alternatives were inadequate to combat the effects
of racial discrimination against minority-owned businesses. As
106
discussed at length in Sections III.C and III.D above, the Court
further concludes that recent evidence indicates minority
business developments remain hampered by the same kinds of
discriminatory barriers that prompted the enactment of the
Section 8(a) program. Specifically, many of the recent disparity
studies before Congress indicate that in the absence of race-
conscious measures, discrimination against qualified minority
contractors in a variety of industries is far more pronounced.
See supra Section III.C; see also Adarand VII, 228 F.3d at 1174
(“There is ample evidence that when race-conscious public
contracting programs are struck down or discontinued, minority
participation in the relevant market drops sharply or even
disappears.”).
2. Flexibility
The Court next considers whether the Section 8(a) program is
sufficiently flexible in granting race-conscious relief. A rigid
racial quota system such as the one invalidated in Croson or
O’Donnell “is the hallmark of an inflexible affirmative action
program.” W. States, 407 F.3d at 994. The Section 8(a) program,
by contrast, contains no quotas at all; it provides for
aspirational goals and imposes no penalties for failing to meet
them. Nevertheless, DynaLantic claims that the Section 8(a)
program is inflexible for two principal reasons: first, it
contains a presumption that minorities are socially
107
disadvantaged, and second, it lacks sufficiently effective waiver
mechanisms. Pl.’s MSJ at 54-58.
DynaLantic’s claim that the race-based presumption renders
the statute inflexible is unpersuasive in light of several
decisions which have held similar race-based presumptions pass
constitutional muster. The Eighth and Ninth Circuits, as well as
the Northern District of Illinois, have all considered facial
challenges to statutes containing a presumption that minorities
are socially disadvantaged. The courts found the statutes
narrowly tailored: (1) because the presumption was rebuttable,
and (2) because it contained an individualized economic component
as well. See W. States, 407 F.3d at 995; Sherbrooke, 345 F.3d at
973; N. Contractors, 2004 U.S. Dist. LEXIS 3226, at *130. The
Section 8(a) program is similarly flexible. The presumption that
a minority applicant is socially disadvantaged may be rebutted if
SBA is presented with credible evidence to the contrary. 13
C.F.R. § 124.103(c). Likewise, an individual who is not
presumptively disadvantaged may qualify for such status if s/he
can demonstrate social disadvantage by a preponderance of the
evidence. Id. Finally, the 8(a) program requires an
individualized determination of economic disadvantage. Id. §
124.104. Each applicant must establish economic disadvantage
under the standards contained in the regulations, including the
submission of a narrative statement describing his or her
108
economic disadvantage and personal financial information. Id. §
124.104(b). Individuals whose net worth exceeds $250,000 are not
considered economically disadvantaged for the purposes of entry
into the Section 8(a) program. Id. § 124.104(c)(2). Because
“race is made relevant in the program, but [] is not a
determinative factor,” the Court finds the program is flexible.
Sherbrooke, 345 F.3d at 973.
DynaLantic also argues that the Section 8(a) program is not
sufficiently flexible because it does not contain industry based
waivers and waivers for specific minority groups. Pl.’s MSJ at
55-57. While the Court agrees that Plaintiff’s concerns about
the scope of Section 8(a) warrant careful consideration by the
Court, it finds these arguments misplaced here. As set forth
above, the Court has carefully considered - and accepted -
Plaintiff’s arguments regarding industry in the context of
compelling interest. And the Court considers Plaintiff’s
arguments regarding the scope of minorities included in Section
8(a) twice - above, in the compelling interest analysis, and
below, in considering whether the program is over- or under-
inclusive. Accordingly, it is unnecessary to consider these
points again here.19
19
Plaintiff raises the same industry based argument as a
sign that the 8(a) program is impermissibly over-inclusive and
therefore not narrowly tailored. Again, because the Court found
this issue more appropriately considered and resolved under the
rubric of compelling interest, the Court does not address it
109
Finally, it is noteworthy that the Section 8(a) program
contains a waiver provision “despite the already non-mandatory
nature of the [] program[].” Adarand VII, 228 F.3d at 1181. SBA
will not accept a procurement for award as an 8(a) contract if it
determines that acceptance of the procurement would have an
adverse impact on small businesses operating outside the Section
8(a) program. 13 C.F.R. § 124.504. The waiver is an additional
element of flexibility in the 8(a) program. See Paradise, 480
U.S. at 171.
3. Over- and Under-Inclusiveness
DynaLantic argues that the program is both over- and under-
inclusive. See, e.g., Pl.’s MSJ at 46-51; Pl.’s Reply at 20-21.
Plaintiff claims the program is over-inclusive because “virtually
every minority group is presumed to be disadvantaged,” Pl.’s MSJ
at 49, and under-inclusive because it fails to include groups
such as women and Hasidic Jews, see id. at 50-51.
Plaintiff’s over-inclusiveness argument fails for two
reasons. First, as discussed in Section III.D above, the
government had strong “evidence of discrimination [which] is
sufficiently pervasive across racial lines to justify granting a
preference to all five purportedly disadvantaged groups” at
issue. Rothe III, 262 F.3d at 1330. Second, unlike the program
found unconstitutional in Croson, Section 8(a) does not provide
again here.
110
that every member of a minority group is disadvantaged. See 488
U.S. at 508 (plurality opinion). Admittance to the Section 8(a)
program is narrowly tailored because it is based not only on
social disadvantage, but also on an individualized inquiry into
economic disadvantage. See Adarand VII, 228 F.3d at 1184.
Specifically, it is limited to small businesses whose owners have
a personal net worth of less than $250,000. Any person may
present “credible evidence” challenging an individual’s status as
socially or economically disadvantaged. 13 C.F.R. §§
124.103(b)(3), 124.112(c). Finally, a firm owned by a non-
minority may qualify as socially and economically disadvantaged.
Id. § 124.103(d); see also N. Contractors, 2004 U.S. Dist. LEXIS
3226, at *137-38 (rejecting over-inclusiveness challenge on
substantially the same grounds).
The Court is puzzled by Plaintiff’s under-inclusiveness
challenge. Section 8(a) is designed, in relevant part, to remedy
identifiable “racial or ethnic prejudice or cultural bias,” not
gender or religious discrimination. 13 C.F.R. § 124.103(a); 15
U.S.C. § 637(a)(5). Again, however, a firm owned by an
individual in either of these groups may qualify as socially and
economically disadvantaged and thus participate in the Section
8(a) program.
111
4. Duration
The Supreme Court has explained that race-conscious remedies
should “not last longer than the discriminatory effects [they
are] designed to eliminate.” Adarand III, 515 U.S. at 238(citations omitted). Although the Section 8(a) program does not
incorporate a specific “sunset” provision applicable to the
entire program, it does impose temporal limits on every
individual’s participation that fulfill the temporal aspect of
narrow tailoring. The Tenth Circuit has held that Section 8(a)’s
temporal limits survive strict scrutiny in light of the program’s
focus on the specific social and economic circumstances of
individual firms and their owners, not merely their minority
status. Adarand VII, 228 F.3d at 1179. This Court agrees.
The Section 8(a) program places a number of strict
durational limits on a particular firm’s participation in the
Section 8(a) program. First, participation is limited by statute
and regulation to a maximum term of nine years. See 13 C.F.R.
§ 124.2; 15 U.S.C. §§ 636(j)(10)(c), 636(j)(10)(E),
636(j)(10)(H), 636(j)(15). Furthermore, once a business or
disadvantaged individual has participated in the Section 8(a)
program, neither the business nor that individual will be
eligible again. See 13 C.F.R. § 124.108(b); 15 U.S.C.
§§ 636(j)(11)(B) & (c).
112
In addition to these temporal limits, a Section 8(a) program
participant’s eligibility is continually reassessed and must be
maintained throughout its program term. A participant must
annually submit a certification that it meets program eligibility
requirements, along with financial and other information to
permit the SBA to verify its continuing eligibility for the
program and to enable the SBA to monitor its performance and
progress in business development. See 13 C.F.R. §§ 124.112(b),
124.509(c), 124.601, 124.602; 15 U.S.C. §§ 637(a)(4)(c),
637(a)(6)(B), 637(a)(12)(A), 637(a)(20). Morever, a participant
must leave the program early if the firm has substantially
achieved the targets, objectives, and goals set forth in its
business plan and has demonstrated the ability to compete in the
marketplace without assistance. 13 C.F.R. § 124.302(a). A
participant may also be terminated early for failing to maintain
its eligibility. Id. § 124.303(a)(2).
The SBA must conduct an evaluation of a Section 8(a) program
participant’s eligibility for continued participation whenever it
receives specific and credible information alleging that the
participant no longer meets the requirements for continued
program eligibility. See 13 C.F.R. § 124.112(c); 15 U.S.C.
§§ 636(j)(10)(J)(I), 637(a)(6)(c). Thus, once a program
participant overcomes its disadvantaged status, or has been
113
afforded a reasonable opportunity to do so, its participation in
the Section 8(a) program ends.
In short, Section 8(a)’s “inherent time limit and graduation
provisions ensure that it . . . is carefully designed to
‘endure[] only until . . . the discriminatory impact’ has been
eliminated; once a DBE loses its economic disadvantage, it loses
its certification.” Adarand VII, 228 F.3d at 1179 (quoting
Paradise, 480 U.S. at 178). Accordingly, with regard to
appropriate limits on duration, the Section 8(a) program is
narrowly tailored.
5. Numerical Proportionality
Plaintiff claims that the Section 8(a) program, as
administered by SBA and utilized by DoD, lacks numerical
proportionality, i.e., that the aspirational goals established by
the government are not reasonably tied to the pool of available
minority businesses. Plaintiff argues that the contract goals
for Section 8(a) firms or SDBs - socially and economically
disadvantaged businesses - are unrelated to the discrimination
suffered by minority groups and, therefore, the program is not
narrowly tailored. Pl.’s MSJ at 53-54; see also Pl.’s Opp’n to
Defs.’ MSJ at 65-69. Upon consideration of the three
aspirational goals at issue in this case, all of which set goals
that less than five percent of contract dollars be awarded to
firms in the Section 8(a) program, the Court cannot agree.
114
In Croson, the Court struck down a 30 percent quota for
minority firm contracts in the construction industry as not
“narrowly tailored to any goal, except perhaps outright racial
balancing. It rests upon the ‘completely unrealistic’ assumption
that minorities will choose a particular trade in lockstep
proportion to their representation in the local population.” 488
U.S. at 507 (plurality opinion). The three contracting goals at
issue in this case are significantly different from the quota in
Croson. First, the Small Business Act establishes government-
wide aspirational goals for procurement contracts awarded to,
inter alia, small businesses, small business concerns owned by
women, and small business concerns controlled by socially and
economically disadvantaged individuals. 15 U.S.C. § 644(g)(1).
The government-wide goal for small businesses owned by socially
and economically disadvantaged individuals is five percent of the
value of all prime and subcontract awards annually. Id. The
Section 8(a) program, however, contains only a subset of socially
and economically disadvantaged businesses; the term “socially and
economically disadvantaged” includes individuals, programs and
contract awards apart from, and in addition to, the Section 8(a)
program. See Pl.’s MSJ at 12-13; see also, e.g., 15 U.S.C. §§
637(d)(1), (d)(3)(c) (program to increase subcontracting among
socially and economically disadvantaged individuals not limited
to those who qualify for the Section 8(a) program). Therefore,
115
the government-wide goal contemplates that only a portion of the
five percent goal will be met through the 8(a) program.
Second, the statute requires each federal agency to
establish goals for the same groups. Id. § 644(g)(2).
Accordingly, DoD established a five percent aspirational goal for
socially and economically disadvantaged businesses, which
includes but is not limited to Section 8(a) firms. See Pl.’s MSJ
at 8-9.20 Third, beginning in 2002, DoD established a separate
Section 8(a) goal, of approximately two percent of the value of
prime and subcontract awards. See Pl.’s MSJ, Ex. B33, Deposition
of Timothy J. Foreman at 29-30 (“Foreman Dep.”); see also Pl.’s
MSJ at 70 (stating that, in 2003, the DoD goal for 8(a) contracts
rose to 2.1 percent). DoD’s Section 8(a) goal is a subset of the
goal for socially and economically disadvantaged businesses. See
Pl.’s MSJ at 9-10; see also, e.g., 15 U.S.C. §§ 637(d)(1),
(d)(3)(c). Accordingly, the Court examines three goals, all of
which are purely aspirational and all of which provide for less
than five percent of contracts to be awarded under the Section
8(a) program.
20
DoD’s five percent goal was contained in the DoD Program,
10 U.S.C. § 2323, which the Federal Circuit invalidated in 2008.
Rothe VII, 545 F.3d 1023. However, DoD’s goal also originates in
15 U.S.C. § 644(g)(2), which remains in effect. Neither party
has asserted that DoD’s goals have changed as a result of the
Federal Circuit’s decision in Rothe.
116
In light of the government’s evidence discussed at length in
Section III.C. above, the Court concludes that these goals are
facially constitutional. The evidence presented established that
minority firms are ready, willing, and able to perform work equal
to two to five percent of government contracts in industries
including but not limited to construction. The evidence further
demonstrated that the effects of past discrimination have
excluded minorities from forming and growing businesses, and the
number of available minority contractors reflects that
discrimination. Accordingly, “the existing percentage of
[eligible] minority-owned businesses is not necessarily an
absolute cap on the percentage that a remedial program” and in
particular, an aspirational goal, “might legitimately seek to
achieve.” Adarand VII, 228 F.3d at 1181. “It is reasonable to
conclude that allocating more than 95 percent of all federal
contracts to non-minority persons, is in and of itself a form of
passive participation in discrimination that Congress is entitled
to seek to avoid.” Id. (quoting Croson, 488 U.S. at 492).
Plaintiff notes that Defendants do not maintain separate
statistics for the simulation and training industry, nor do they
have any disparity study for this industry. Pl.’s MSJ at 53-54.
The Court agrees that these facts may be relevant in an as-
applied challenge; however, the Court does not reach the issue
because DynaLantic has already prevailed, on the threshold
117
question of compelling interest, in its as-applied challenge.
See Rothe VII, 545 F.3d at 1049-50 (finding that without a strong
basis in evidence, it was “impossible to evaluate” the numerical
proportionality factor because the government had nothing to
compare it to – it did not know the “share of contracts
minorities would receive in the absence of discrimination”). To
survive a facial challenge, however, the government need not
provide evidence that the goals are numerically proportionate in
each and every industry.
6. Burden on Third Parties
As Plaintiff points out, by their nature “[s]et-asides
impose a burden upon those not necessarily guilty of
discrimination.” Pl.’s Opp’n at 71. The Supreme Court in
Wygant, however, held that “[a]s part of this Nation’s dedication
to eradicating racial discrimination, innocent persons may be
called upon to bear some of the burden of the remedy. ‘When
effectuating a limited and properly tailored remedy to cure the
effects of prior discrimination, such a “sharing of the burden”
by innocent parties is not impermissible.’” Wygant, 476 U.S. at
280-81 (plurality opinion) (quoting Fullilove, 448 U.S. at 484);
see also W. States, 407 F.3d at 995 (“[A]lthough [race-conscious
measures] place[] a very real burden on non-DBE firms, this fact
along does not invalidate [the statute]. If it did, all
affirmative action programs would be unconstitutional because of
118
the burden upon non-minorities.” (citing Adarand III, 515 U.S. at
237)). Accordingly, remedial race-conscious harms must “work the
least harm possible to other innocent persons competing for the
benefit.” Grutter, 539 U.S. at 341 (internal quotation omitted).
“The proper focus is on whether the burden on third parties is
‘too intrusive’ or ‘unacceptable.’” Concrete Works IV, 321 F.3d
973 (citing Wygant, 476 U.S. at 283).
The parties focus most of their arguments regarding undue
burden on Plaintiff’s as-applied challenge, i.e., DoD’s use of
the 8(a) program in the military simulation and training industry
and the alleged undue burden on DynaLantic as a result. See
Pl.’s MSJ at 61-66, 72-73; Defs.’ Opp’n at 40-44; Pl.’s Opp’n to
Defs.’ MSJ at 71-77. As explained throughout, the Court need not
reach, and indeed is unable to reach, DynaLantic’s as-applied
challenge on narrow tailoring grounds. See Rothe VII, 545 F.3d
at 1049-50 (noting that the absence of a strong basis in evidence
renders it impossible to consider certain of the narrow tailoring
factors; without an understanding of the scope of discrimination
at issue, a reviewing court cannot determine whether remedial
measures are narrowly tailored to that discrimination).
Accordingly, the Court limits its consideration of undue burden
to Plaintiff’s facial challenge. While it is undoubtedly true
that third parties bear the burden of the remedy in Section 8(a),
as with any remedial scheme, the Court concludes that the use of
119
the Section 8(a) program to set aside certain contracts does not,
on its face, create an impermissible burden on non-participating
firms.
The Section 8(a) program includes a number of provisions
designed to minimize the burden on non-minority firms. As
discussed above, the presumption that a minority applicant is
socially disadvantaged may be rebutted if SBA is presented with
credible evidence to the contrary. 13 C.F.R. § 124.103(c). An
individual who is not presumptively disadvantaged may qualify for
such status if s/he can demonstrate social disadvantage by a
preponderance of the evidence.21 Id. And the 8(a) program
requires an individualized determination of economic
disadvantage, and is not open to individuals whose net worth
exceeds $250,000 regardless of race. Id. §§ 124.104(a),
21
Since Section 8(a)’s inception, the burden on non-
minorities to show that they are socially disadvantaged has been
reduced from a “clear and convincing” standard to a
“preponderance of the evidence” standard. Compare 13 C.F.R. §
124.103(c)(1) (current version), with 13 C.F.R. § 124.105(c)(1)
(1997 version); see also 63 Fed. Reg. 35726, 35727-28 (June 30,
1998). This change was expressly adopted to more narrowly tailor
the Section 8(a) program, and has had the effect of making the
program’s benefits more widely available. As of September 3,
1999, there were approximately 5,830 firms participating in the
Section 8(a) program, of which about 105 (approximately 1.8
percent) were owned and controlled by individuals who had proven
individual social disadvantage. See Defs.’ MSJ at 60 (citing
Resp. to Pl.’s Second Set of Interrogs. to Defs., No. 4 (Nov. 4,
1999)). By February 20, 2003, however, the percentage of program
participants owned and controlled by individuals who had proven
individual social disadvantage had risen to approximately 7.18
percent. See Defs.’ MSJ at 60 (citing Am. Resp. to Pl.’s Second
Set of Interrogs. to Defs. (Apr. 17, 2003)).
120
124.104(b), 124.104(c)(2). Other courts considering similar
provisions in race-conscious statutes have found that they
“minimize the race-based nature of the [] program,” thereby also
minimizing the adverse impact on third parties, and accordingly
are narrowly tailored. Sherbrooke, 345 F.3d at 972 (statute
creates no undue burden where the presumption that minority
applicants are socially disadvantaged is rebuttable, statute
contains $750,000 net worth limitation on DBE status, thus
excluding wealthy individuals of all races, and statute permits
firms owned by non-minorities to qualify for DBE program if they
can demonstrate social and economic disadvantage); see also W.
States, 407 F.3d at 995 (same); N. Contractors, 2004 U.S. Dist.
LEXIS 3226, at *133 (same).
In addition to the applicant-based criteria designed to
minimize the burden on non-whites who seek to join the program,
Section 8(a) regulations also contain provisions to mitigate the
adverse impact on firms remaining outside the program. The
regulations prohibit the SBA from accepting a procurement for
award as an 8(a) contract if it makes a determination that the
award would have an adverse impact on an individual small
business, a group of small businesses located in a specific
geographical location, or other small business programs. This
adverse-impact concept is designed to protect small businesses
which are performing non-Section 8(a) contracts, and this feature
121
helps narrowly tailor the program. See 13 C.F.R. § 124.504.
Plaintiff argues that the impact analysis regulation does not
offer sufficient protection to non-participants. Pl.’s Opp’n at
71-72. However, the government is not required to eliminate the
burden on non-minorities in order to survive strict scrutiny; a
limited and properly tailored remedy to cure the effects of prior
discrimination is permissible even when it burdens third parties.
See Wygant, 476 U.S. at 280-81 (plurality opinion). The Court
finds that the Section 8(a) program takes appropriate steps to
minimize the burden on third parties, and accordingly finds that
the Section 8(a) program is narrowly tailored on its face.
F. Civil Rights Claims
1. Section 1981
Plaintiff argues that the Defendants’ actions violate not
only its constitutional rights, but also its rights under 42
U.S.C. § 1981. Section 1981 gives all citizens of the United
States “the same right in every State and Territory to make and
enforce contracts . . . as is enjoyed by white citizens.” 42
U.S.C. § 1981. Section 1981(c), which was added to Section 1981
by the Civil Rights Act of 1991, further provides that “[t]he
rights protected by this section are protected against impairment
by nongovernmental discrimination and impairment under color of
State law.” Id. § 1981(c). Defendants, federal agencies, are
operating under the color of federal law. Section 1981 does not
122
apply to actions taken under the color of federal law, nor does
it permit suit against instrumentalities of the federal
government. See, e.g., Sindram v. Fox, 374 Fed. App’x 302, 304
(3d Cir. 2010); Dotson v. Griesa, 398 F.3d 156, 162 (2d Cir.
2005); Davis-Warren Auctioneers v. FDIC, 215 F.3d 1159, 1161
(10th Cir. 2000); Davis v. Dep’t of Justice, 204 F.3d 723, 725
(7th Cir. 2000); Lee v. Hughes, 145 F.3d 1272, 1277 (11th Cir.
1998); Prince v. Rice, 453 F. Supp. 2d 14, 25-26 (D.D.C. 2006).
Accordingly, Plaintiff’s Section 1981 claim must be dismissed.
2. Section 2000d
Plaintiff has asserted a claim against Defendants pursuant
to 42 U.S.C. § 2000d, et seq. (Title VI of the Civil Rights Act
of 1964) for declaratory and injunctive relief. Title VI’s
operative section provides that “[n]o person in the United States
shall, on the ground of race, color, or national origin, be
excluded from participation in, be denied benefits of, or be
subjected to discrimination under any program or activity
receiving Federal financial assistance.” 42 U.S.C. § 2000d. The
statute defines “program or activity” as the operations of
departments, agencies, instrumentalities, and other sectors of
state or local governments; colleges and certain public systems
of education; local educational agencies and school systems;
certain corporations and other private organizations; and other
entities established by a combination of two or more of the
123
mentioned entities. 42 U.S.C. § 2000d-4a. As a former Judge on
this Court has noted, “this comprehensive definition does not
include the operations of the federal government and its
agencies, and, indeed, the caselaw recognizes that a Plaintiff
may not bring suit under Title VI for programs maintained
directly by federal agencies.” Wise v. Glickman, 257 F. Supp. 2d
123, 132 (D.D.C. 2003) (collecting cases).
In response, Plaintiff cites Fordice Construction Company v.
Marsh, a 1990 decision from the Southern District of Mississippi
which held, without analysis or citation to authority, that the
SBA’s use of the Section 8(a) program violated Plaintiff’s rights
under Section 2000d. 773 F. Supp. 867, 882 (S.D. Miss. 1990).
As far as the Court is aware, no case has followed Fordice for
this proposition. In light of the weight of contrary authority,
including case law from this court, the Court finds Fordice
unpersuasive. See Soberal-Perez v. Heckler, 717 F.2d 36, 38 (2d
Cir. 1983); Wise, 257 F. Supp. 2d 123; Marsaw v. Trailblazer
Health Enters., LLC, 192 F. Supp. 2d 737, 750 (S.D. Tex. 2002);
Williams v. Glickman, 936 F. Supp. 1, 5 (D.D.C. 1996). Because
Plaintiff may not bring suit under Title VI for programs
administered directly by the federal government, its claim under
Title VI must be dismissed.
124
G. Relief
For the reasons set forth above, the Court finds Section
8(a) is constitutional on its face. Accordingly, Plaintiff’s
requests for relief regarding its facial challenge are denied.
Plaintiff has, however, prevailed on its challenge to Section
8(a) as applied to the military simulation and training industry.
Plaintiff requests a permanent injunction prohibiting Defendants
“from awarding contracts for military simulators based on the
race of the contractors (including, but not limited to, pursuant
to the set-aside scheme).” Second Am. Compl. at 8. Because the
only set-aside program before the Court is that contained in the
Section 8(a) program, the Court is not empowered to grant relief
beyond that program, and accordingly considers the request for a
permanent injunction solely as it relates to Section 8(a).
For the reasons set forth above, the Court finds that
DynaLantic succeeds on the merits of its as-applied
constitutional challenge to the Section 8(a) program,
specifically, SBA and DoD’s award of contracts for military
simulators under the Section 8(a) program. The second prong of
the permanent injunction test requires a finding that Plaintiff
will suffer irreparable injury in the absence of injunctive
relief. “It has long been established that the loss of
constitutional freedoms . . . unquestionably constitutes
irreparable injury.” Mills v. Dist. of Columbia, 571 F.3d 1304,
125
1312 (D.C. Cir. 2009) (citation omitted); see also Simms v. Dist.
of Columbia, Case No. 12-cv-701, 2012 U.S. Dist. LEXIS 93052, at
*41-42 (D.D.C. July 6, 2012). Because DynaLantic succeeds on the
merits of its as-applied constitutional equal protection claim,
the Court finds this deprivation of Plaintiff’s constitutional
rights constitutes irreparable harm. Turning to the third prong,
the balance of harms, the Court finds the balance tips in favor
of Plaintiff, as Defendants may continue to award contracts for
military simulators under all other federal programs. Moreover,
nothing prevents the government from invoking Section 8(a),
provided it complies with the equal protection requirements.
Finally, the Court considers the fourth factor, public interest.
As this Circuit held in O’Donnell, the issuance of an injunction
“would serve the public’s interest in maintaining a system of
laws free of unconstitutional racial classifications.” 963 F.2d
at 429. “Without question, the public has an interest in
ensuring that Defendants do not implement a set-aside plan in
violation of the Constitution.” Cortez III, 950 F. Supp. at 363.
Plaintiff also requests that the Court issue a declaratory
judgment that the Section 8(a) program as applied by Defendants
to set aside contracts for military simulators is
unconstitutional and violates DynaLantic’s rights to equal
protection. In light of the Court’s issuance of a permanent
injunction in DynaLantic’s favor on the identical issue, the
126
Court concludes that the requested declaratory relief is “both
duplicative and unwarranted” and therefore will deny Plaintiff’s
request for a declaratory judgment. Serv. Employees Int’l Indus.
Pension Fund v. Aliquippa Cmty. Hosp., 628 F. Supp. 2d 166, 172
n.2 (D.D.C. 2009); see also Gibson v. Liberty Mut. Group, Inc.,
778 F. Supp. 2d 75, 79 (D.D.C. 2011) (dismissing claim for
declaratory relief because it would neither clarify the rights of
the parties nor terminate the dispute between them).
IV. CONCLUSION
For the foregoing reasons, the Court concludes that the
Section 8(a) program, 15 U.S.C. § 637(a)(1), is constitutional on
its face. However, based on the record before it, the Court is
unable to conclude that Defendants have produced evidence of
discrimination in the military simulation and training industry
sufficient to demonstrate a compelling interest. Therefore,
DynaLantic prevails on its as-applied challenge.
Accordingly, Defendants’ Motion for Summary Judgment is
GRANTED IN PART and DENIED IN PART; Plaintiff’s Motion for
Summary Judgment is GRANTED IN PART and DENIED IN PART. The
Small Business Administration and the Department of Defense are
hereby enjoined from awarding procurements for military
simulators under the Section 8(a) program without first
articulating a strong basis in evidence for doing so.
Plaintiff’s remaining requests for declaratory and injunctive
127
relief are DENIED. A separate Order accompanies this Memorandum
Opinion.
Signed: Emmet G. Sullivan
United States District Judge
August 15, 2012
128