Decision in Defense procurement case could set precedent

Observers say a federal court ruling that voids small business contracting goal could affect minority procurement programs governmentwide.

Last week's federal court decision overturning the law that established a 5 percent goal for awarding defense contracts to socially and economically disadvantaged small businesses could affect other minority contracting programs, procurement observers said on Tuesday.

The ruling by the U.S. Court of Appeals in Rothe Development Corp. v. Department of Defense and Department of the Air Force stated that the government did not have sufficient evidence of "pervasive, nationwide racial discrimination" by Defense to justify a race-based contracting preference program. Procurement and legal analysts argued that the rationale could be applied to minority contracting programs and the women's procurement program governmentwide.

"The decision itself is limited, but I definitely think there will be future cases that quote this case as precedent where they try to make the argument that it applies in a broader way," said Robert Burton, former deputy administrator of the Office of Federal Procurement Policy and now a partner at the Washington law firm Venable. "I think it's pretty clear the case will be cited as precedent for striking down other preference categories."

While the Rothe case applies specifically to the small disadvantaged business program at Defense, it is a short leap to the nearly identical, and also race-based, governmentwide contracting portion of the federal 8(a) program. Guy Timberlake, chief executive officer of the American Small Business Coalition, said while the decision was not a direct hit on the 8(a) program or minority contracting programs outside of Defense, he recognized that it paves a clear path to future challenges.

Joe Hornyak, a partner in Holland & Knight's government contracts group, said that now he would expect a challenge of the 8(a) program to incorporate the reasoning from the Rothe opinion and, therefore, to yield a similar decision.

"The 8(a) program is not dead yet but this decision, if allowed to stand, could really have an impact on the 8(a) program should another contractor try a similar challenge," Hornyak said. "If the same court were reviewing the 8(a) program … and following the same reasoning, will they uphold the program or strike it down? I frankly think they'd have to strike it down."

Hornyak noted, however, that further challenges based on the Rothe case will take months or years to wind their way through the court system. Timberlake urged concerned small businesses not to panic.

"One of the things we're trying to do right now is damage control, trying to prevent people from freaking out right now," Timberlake said. "This only impacts the [Defense] program specific for small disadvantaged business at this point. There's a lot of knee-jerk paranoia happening already."

Defense, the Small Business Administration and Congress so far are mum on how they will handle the decision, but they have several options. One would be to follow the process used during the last few years to establish the women's procurement program. While SBA and the Justice Department have been accused of foot-dragging on the program, they have tried to ensure it would stand up to constitutional challenge by commissioning disparity studies to determine the industries in which women are underrepresented.

"The court probably would have ruled differently if there had been that kind of evidence, so those types of studies would be very helpful in trying to justify future set-asides," Burton said.

While Defense ultimately is responsible for dealing with the decision's implications, SBA and Justice have said they are reviewing the case, and lawmakers will have to determine the best way to salvage the contracting goals they have long mandated.

"I believe, especially since we have a Democratic administration and a heavily Democratic Congress, or will soon, that you will see them appeal this to the Supreme Court or go back and try to follow in the reasoning of this decision and provide evidence to support other programs," Hornyak said. "I don't think they'll throw up their hands and say it's dead … [that] minority contracting in general is dead."

Burton said he sees no way in which all agencies, and the Federal Acquisition Regulation Council, can avoid addressing this decision. "Whatever [Defense] does in reaction to this case, I would think the government would want to apply that very quickly to avoid related litigation," he said.

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