Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Dynalantic Corporation v. United States Department of Defense

August 15, 2012


The opinion of the court was delivered by: Emmet G. Sullivan United States District Judge


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 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.


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 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.*fn1 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 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);*fn2 see also 15 U.S.C. § 631(f)(1)(B)-(c) (finding 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 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 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.*fn3

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 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 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).

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 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 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.

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 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 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 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.


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);

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 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.

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).*fn4 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 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. Pena ("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.


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. 899, 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 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.").

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 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 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.*fn5

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 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 Congress*fn6

1. Legislative History of the Section 8(a)


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 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.*fn7 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 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 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 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 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:

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 ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.