Scrutinizing Set-Asides

Proposed rule requiring proof of past discrimination riles women-owned business advocates.

Helping agencies meet a governmentwide goal to award 5 percent of contracting dollars to women-owned small businesses doesn't sound like it would be a contentious initiative. It has been more than seven years, however, since Congress passed legislation to do just that, and the program is still far from implementation.

The most recent stumbling block is a proposed rule by the Small Business Administration that would require agencies to prove they discriminated against women-owned small businesses in past procurements before awarding set-aside contracts. Women's advocates and lawmakers are up in arms, saying the administration is using the Constitution as an excuse to stonewall a valuable program.

The SBA rule stems from a commissioned RAND Corp. study, which showed that women-owned small businesses are underrepresented in somewhere between 0 percent and 87 percent of federal contracting industries, depending on which methodology is used. The report's primary author, Elaine Reardon, says RAND was hired not to determine whether women-owned small businesses are underrepresented but rather to find out how susceptible the measures are to methodology. "If you're going to base policy on these numbers, you're going to want to know how sensitive they are to tweaking," Reardon says.

The study computed disparity levels in two of four ways: using the number of contracts won by women-owned small businesses or the amount of contracting dollars awarded to them; and defining "ready, willing and able" contractors either as firms with at least one employee or as those that have registered with the government as potential contractors.

In the proposed rule, SBA used the RAND data to classify women-owned small businesses as underrepresented in only four specific industries. Women's advocates oppose SBA's decision to use the narrowest definition of underrepresentation and require agencies to prove their own past discrimination. But SBA and the Justice Department insist the rule is necessary to ensure that the set-aside program could withstand a legal challenge.

At a Jan. 16 House Small Business Committee hearing, SBA Administrator Steven Preston said the agency "has been, and remains, committed to implementing the statutorily authorized set-aside for women-owned businesses and intends to do so in a constitutionally valid manner."

The courts apply various levels of scrutiny to preference programs, Elizabeth Papez, deputy assistant attorney general at Justice's Office of Legal Counsel, explained at the hearing. The lowest level of scrutiny applies to initiatives that do not focus on race or gender, such as veterans preference, and requires the government to show a rational basis for the programs. Gender-based preferences get intermediate or heightened scrutiny, meaning programs must be "substantially related to an important governmental objective." Race-based preferences must satisfy strict scrutiny and be "narrowly tailored to serve a compelling government interest."

Intermediate scrutiny of women's programs requires the government to provide "exceedingly persuasive" justification through "genuine, nonhypothetical evidence of discrimination," Papez said. But many say ordering agencies to prove their own past discrimination could open them up to lawsuits from those same firms. "There's a kind of absurdity here," says Jennifer Brown, vice president and legal director for Legal Momentum, a New York-based advocacy group dedicated to women's rights. "Agencies are not going to admit a history of discrimination; they'd be crazy to."

Critics say the proposed rule amounts to unnecessarily strict scrutiny. Rep. Nydia Velázquez, D-N.Y., chairwoman of the House committee, says the standard being applied by SBA "has no place in this rule." There has been much debate over whether the rule applies strict or intermediate scrutiny, but Brown says that debate misses the big picture. "The Department of Justice and Small Business Administration's position is way beyond anything that any level of scrutiny requires. So you really don't have to nail down exactly which level of scrutiny they're applying, because they're applying a level of scrutiny that is unrecognizable."

Defenders and critics of the proposal disagree on whether comparable evidence of discrimination is required for other set-aside programs, particularly those that are race-based. SBA's 8(a) program for small businesses with socially and economically disadvantaged owners, for example, are at least as cumbersome as the proposed rule for women's procurement, according to Justice. Still, the 8(a) regulations "haven't resulted in programs that fly through the courts with green lights," one official says. "The goal is . . . to design something where if you do get sued, which is likely to happen, you have a good chance of winning the lawsuit, getting the program out of court and moving forward with it."

Speaking at the hearing for the group Women Impacting Public Policy, Denise Farris, founder of the Kansas-based Farris Law Firm, doubted other preference programs are subject to "the new strict, strict scrutiny." She fears that the proposed rule would hobble other federal programs and would have "chilling and highly detrimental consequences at the state and local level."

Just because an initiative can be challenged in court does not mean the government must bear an excessive burden in ensuring it will pass muster, critics of the proposal say. "Can you bring a case about a program like this? Of course you can," Brown says. "Does that mean it's unconstitutional? No."

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