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Rothe Development, Inc. v. Department of Defense

United States District Court, District of Columbia

June 5, 2015

ROTHE DEVELOPMENT, INC., Plaintiff,
v.
DEPARTMENT OF DEFENSE, et al., Defendants.

MEMORANDUM OPINION

KETANJI BROWN JACKSON, District Judge.

Section 8(a) of the Small Business Act, 15 U.S.C. § 637(a) (2012), establishes a business development program for "socially and economically disadvantaged small business concerns[.]" Id. § 637(a)(1)(B). Plaintiff Rothe Development, Inc. ("Rothe" or "Plaintiff") is a small business based in San Antonio, Texas that has filed the instant action against the Department of Defense ("DOD") and the Small Business Administration (collectively, "Defendants") to challenge the constitutionality of the Section 8(a) program on its face. ( See Compl., ECF No. 1, ¶ 1.) Rothe argues that the statute's definition of "socially disadvantaged" small business owners, 15 U.S.C. § 637(a)(5), is a racial classification that violates Rothe's right to equal protection under the Due Process Clause of the Fifth Amendment of the United States Constitution. ( See Compl. ¶¶ 1-2.) Rothe also claims that Section 8(a) violates the nondelegation doctrine. ( See id.; see also id. ¶ 30.)

The constitutional challenge that Rothe brings in the instant case is nearly identical to the challenge brought in the case of DynaLantic Corp. v. United States Department of Defense, 885 F.Supp.2d 237 (D.D.C. 2012). The plaintiff in DynaLantic sued the DOD, the Small Business Administration, and the Department of the Navy alleging, inter alia, that Section 8(a) was unconstitutional both on its face and as applied to the military simulation and training industry. See DynaLantic, 885 F.Supp.2d at 242. The DynaLantic court disagreed with the plaintiff's facial attack; it explained in a lengthy opinion the reasoning behind the Court's conclusion that the Section 8(a) program is facially constitutional. See id. at 248-80, 283-91. Here, Rothe relies on substantially the same record evidence and nearly identical legal arguments, and it urges this Court to strike down the race-conscious provisions of Section 8(a) on their face and thus to depart from DynaLantic 's holding in the context of the instant case. ( See, e.g., Mot. Hr'g Tr., Oct. 20, 2014, at 27:21 (Plaintiff's counsel asserting that the DynaLantic court "was just wrong").)

Before this Court at present are the parties' cross-motions for summary judgment, as well as the parties' motions to limit or exclude the proffered testimony of each other's expert witnesses-commonly referred to as " Daubert motions" based on the Supreme Court's seminal ruling on the admissibility of expert testimony in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). As explained fully below, this Court concludes that Defendants' experts meet the relevant qualification standards under Federal Rule of Evidence 702 and offer what appear to be reliable and relevant opinions; therefore, Plaintiff's Daubert motion to exclude Defendants' proffered expert testimony will be DENIED. By contrast, this Court finds sufficient reason to doubt the qualifications of one of Plaintiff's experts and to question the reliability of the testimony of the other; consequently, Defendants' Daubert motions to exclude Plaintiff's expert testimony will be GRANTED. With respect to the cross-motions for summary judgment, this Court agrees with the DynaLantic court's reasoning, and thus this Court, too, concludes that Section 8(a) is constitutional on its face. Accordingly, Plaintiff's motion for summary judgment will be DENIED, Defendants' cross-motion for summary judgment will be GRANTED, and judgment will be entered in Defendants' favor. A separate order consistent with this memorandum opinion will follow.

I. BACKGROUND

A. The Section 8(a) Program

Congress enacted the Small Business Act of 1953 ("the Act"), 15 U.S.C. §§ 631-57s, in order to encourage and develop the "capacity of small business" in America, and thereby to promote national "economic well-being" and "security[.]" 15 U.S.C. § 631(a) (1958). Section 8(a) of the Act grants the Small Business Administration the authority to acquire procurement contracts from other government agencies and to award or otherwise arrange for performance of those contracts by small businesses "whenever [the agency] determines such action is necessary[.]" Id. § 637(a). This authority remained "dormant for a decade" after the Act's passage, DynaLantic, 885 F.Supp.2d at 253, but over the course of many years and after a series of executive orders and legislative amendments, see id. at 253-57, the current Section 8(a) program emerged with the express purpose of helping socially and economically disadvantaged individuals who own small businesses "compete on an equal basis in the American economy[, ]" 15 U.S.C. § 631(f)(2)(A) (2012).

The Section 8(a) program provides small businesses that socially and economically disadvantaged individuals own-the Small Business Administration refers to such businesses as "small disadvantaged businesses" or "SDBs, " see Small Disadvantaged Business Program, 73 Fed. Reg. 57, 490 (Oct. 3, 2008)-with valuable "technological, financial, and practical assistance, as well as support through preferential awards of government contracts[, ]" DynaLantic, 885 F.Supp.2d at 243; see also 15 U.S.C. § 636(j)(10)(A); 13 C.F.R. § 124.404.[1] SDBs can receive myriad types of assistance and support under the Section 8(a) program, including help "develop[ing] and maintain[ing] comprehensive business plans[, ]" 15 U.S.C. § 636(j)(10)(A)(i); "nonfinancial services" such as "loan packaging, [] financial counseling, [] accounting and bookkeeping assistance, [] marketing assistance, and [] management assistance[, ]" id. § 636(j)(10)(A)(ii); assistance "obtain[ing] equity and debt financing[, ]" id. § 636(j)(10)(A)(iii); and the opportunity to compete for certain government contracts that are limited to Section 8(a) program participants, see id. § 637(a)(1)(D). Moreover, once admitted into the Section 8(a) program, participating SDBs may stay in the program for up to nine years, provided that they continue to meet the eligibility criteria for qualifying for-and remaining in-the program. See id. § 636(j)(10)(C); 13 C.F.R. § 124.2. Specifically, at all times applicants and participants must: (1) be a "small" business, as that term is defined in 13 C.F.R. § 121, see 13 C.F.R. §§ 124.101, 124.102; (2) demonstrate their business's potential to succeed, see id. § 124.101; and (3) have a majority owner or owners who are current U.S. residents and citizens of good character, and who are also "socially and economically disadvantaged" as the statute defines those terms, id.

The dispute in the instant case centers on the statutory definition of "socially disadvantaged individuals." Section 637 of Title 15 of the U.S. Code defines "[s]ocially disadvantaged individuals" as "those who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities." 15 U.S.C. § 637(a)(5); see also id. § 631(f)(1)(B) (individuals may be "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"). Pursuant to the statute, "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[.]" Id. § 631(f)(1)(C). Thus, the statute establishes "a rebuttable presumption" that members of these particular groups, and certain other groups, are "socially disadvantaged[, ]" 13 C.F.R. § 124.103(b)(1), and if an individual business owner is not a member of a presumptively socially disadvantaged group, then he or she "must establish individual social disadvantage by a preponderance of the evidence[, ]" id. § 124.103(c)(1). See also id. § 124.103(c)(2) (explaining that sufficient "[e]vidence of individual social disadvantage" has several "elements[, ]" including "[a]t least one objective distinguishing feature that has contributed to social disadvantage" and "[p]ersonal experiences of substantial and chronic social disadvantage in American society").

In addition to defining "socially disadvantaged individuals[, ]" the statute also defines "[e]conomically disadvantaged individuals[.]" 15 U.S.C. § 637(a)(6)(A). These are "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 business area who are not socially disadvantaged." Id. Factors that determine economically disadvantaged status include "income for the past three years[, ]... personal net worth, and the fair market value of all assets, whether encumbered or not." 13 C.F.R. § 124.104(c). As explained, a small business that can demonstrate its ability to succeed and that is owned by an individual citizen of good character who is considered socially and economically disadvantaged within the statutory definitions is eligible to participate in the Section 8(a) program. See id. § 124.101.

The Section 8(a) program is but "one of a number of government-wide programs [that are] designed to encourage the issuance of procurement contracts to" certain small businesses, DynaLantic, 885 F.Supp.2d at 244 (citing 15 U.S.C. § 644), including businesses that are owned by women, businesses that are owned by service-disabled veterans, and businesses that are located in historically underutilized business zones, known as "HUBZones." See 15 U.S.C. § 637(m) (establishing procurement program for woman-owned small businesses); id. § 657f (establishing procurement program for small businesses owned by service-disabled veterans); id. § 657a (establishing contracting assistance and procurement program for HUBZone small businesses). As part of the legislative scheme that governs the Section 8(a) business development program and similar programs directed toward developing opportunities for small businesses in America, Congress has specifically directed the President to "establish [annual] Government-wide goals for procurement contracts awarded to [various] small business concerns[.]" Id. § 644(g)(1)(A). With respect to SDBs in particular, Congress has specified that the goal for participation "shall be established at not less than 5 percent of the total value of all prime contract and subcontract awards for each fiscal year." Id. § 644(g)(1)(A)(iv).[2] The participation goals with respect to other small business programs are similar- see, e.g., id. § 644(g)(1)(A)(v) ("not less than 5 percent" for woman-owned small businesses); id. § 644(g)(1)(A)(ii) ("not less than 3 percent" for small businesses owned by service-disabled veterans); id. § 644(g)(1)(A)(iii) ("not less than 3 percent" for HUBZone small businesses)-and all of the statutory targets are "aspirational" and not mandatory, DynaLantic, 885 F.Supp.2d at 244 (quotation marks omitted).

B. Rothe's Claim

Rothe is a Texas corporation that operates in the computer services industry and bids on and performs government procurement contracts on a nationwide basis. ( See Affidavit of Dale Patenaude ("Patenaude Aff."), Ex. 1 to Pl.'s Compl., ECF No. 1-1, at 3; see also Defs.' Statement of Material Facts & Resp. to Pl.'s SOF ("Defs.' SOF"), ECF No. 64-2, ¶ II.23; Pl.'s Resp. to Defs.' Statement of Material Facts ("Pl.'s SOF Resp."), ECF No. 68-1, ¶ I.1.)[3] Rothe employs approximately 120 individuals ( see Patenaude Aff. at 3), and it allegedly qualifies as a woman-owned small business under the Act and its accompanying regulations ( see id.; Pl.'s SOF Resp. ¶ I.1). According to Plaintiff, Rothe derives "[a]pproximately 85-90%" of its annual gross income from government contracts. (Patenaude Aff. at 4; see also Pl.'s Statement of Material Facts ("Pl.'s SOF"), ECF No. 55-1, ¶ 24.) Specifically, Rothe bids on and performs DOD and military contracts that, for the most part, fit into one of the following five North American Industry Classification System ("NAICS") codes: Custom Computer Programming Services (541511); Computer Systems Design Services (541512); Computer Facilities Management Services (541513); Other Computer Related Services (541519); and Facilities Support Services (561210). (Patenaude Aff. at 3-4.)[4] Rothe does not participate in the Section 8(a) program and does not allege that it has ever applied to the program or otherwise sought certification as an SDB. ( See Patenaude Aff. at 2; Pl.'s SOF ¶ 18; see also Defs.' SOF ¶ II.18.)

Rothe filed the instant action against the DOD and the Small Business Administration on May 9, 2012. ( See Compl.) The gravamen of Rothe's complaint is that the Section 8(a) program "prevents Rothe from bidding on [DOD] contracts" on the basis of race in violation of Rothe's rights under the equal protection component of the Due Process Clause of the Fifth Amendment ( id. ¶ 2), and that the program is an unconstitutional delegation of authority to the Small Business Administration "to make or enact racial classifications" ( id. ¶ 30). Accordingly, Rothe seeks (1) a declaratory judgment that the definition of "socially disadvantaged individuals" as set forth in the statutes pertaining to the Section 8(a) program is unconstitutional on its face ( see id. ¶¶ 52-54); (2) a permanent injunction that prevents Defendants from using the "socially disadvantaged individuals" definition to exclude Rothe from bidding on contracts reserved for Section 8(a) participants ( see id. ¶¶ 56-59); and (3) an award of reasonable attorneys' fees, costs, and expenses ( see id. ¶¶ 61-64).

Notably, as mentioned earlier, the legal claims in Rothe's complaint are nearly identical to the facial constitutional claim in the second amended complaint that was filed in DynaLantic Corp. v. Department of Defense, a case that was pending in this district when Rothe's complaint was filed. See Second Am. Compl., DynaLantic v. Dep't of Defense, 885 F.Supp.2d 237 (D.D.C. 2012) (No. 95-cv-2301) ("DynaLantic's Second Am. Compl."). Given the similarity of the two cases-and also the fact that the DynaLantic court considered and reached the merits of the constitutional claim-a brief description of the facts, circumstances, and holding of DynaLantic is warranted.

C. DynaLantic Corp. v. Department of Defense

In DynaLantic, a small business that bid on and performed contracts and subcontracts in the military simulation and training industry-but that did not participate in the Section 8(a) program and was not an SDB-sued the DOD, the Small Business Administration, and the Department of the Navy alleging, inter alia, that the statutory provisions of Section 8(a) limiting certain contract awards to "small business concerns owned and controlled by socially and economically disadvantaged individuals'" were unconstitutional on their face and also as applied to the industry in which the plaintiff operated. DynaLantic's Second Am. Compl. ¶ 9; see also DynaLantic, 885 F.Supp.2d at 246-47. Specifically, DynaLantic argued that the challenged provisions prevented it and other small businesses "from competing for federal procurements... on the basis of race, thereby violat[ing] DynaLantic's rights under... the equal protection component of the Due Process Clause of the Fifth Amendment of the Constitution.'" DynaLantic, 885 F.Supp.2d at 247 (second alteration in original) (quoting DynaLantic's Second Am. Compl. ¶ 23). After extensive discovery, briefing, and submissions by amici, the Court (Sullivan, J.) granted summary judgment on the facial constitutional claim in favor of the government, and granted summary judgment on the as-applied claim to DynaLantic. See id. at 248-83.

With respect to the applicable legal standards, the Court explained that to prevail on its facial constitutional claim DynaLantic would have to "establish that no set of circumstances exist[ed] under which the [challenged provisions] would be valid.'" Id. at 249 (quoting United States v. Salerno, 481 U.S. 739, 745 (1987)). Moreover, because constitutional validity in a particular circumstance turned on the application of strict scrutiny to the admittedly race-conscious provisions at issue, the government would have to show both the existence of a compelling governmental interest underlying the challenged provisions (supported by a strong basis in evidence that race-based remedial action was required to further such interest) and that the challenged provisions were narrowly tailored to achieve the articulated compelling interest. See id. at 250-51.

The Court then engaged in a detailed examination of the challenged statutory provisions, the arguments of the parties and their amici, relevant precedent, and the extensive record evidence, including disparity studies on racial discrimination in federal contracting across various industries. See id. at 251-80, 283-91. Ultimately, the Court concluded "that Congress ha[d] a compelling interest in eliminating the roots of racial discrimination in federal contracting, funded by federal money[, ]" and also that the government "ha[d] established a strong basis in evidence to support its conclusion that remedial action was necessary to remedy that discrimination" insofar as it provided "extensive evidence of discriminatory barriers to minority business formation... [and] minority business development, " as well as "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." Id. at 279. The Court also found that DynaLantic had failed "to present credible, particularized evidence that undermined the government's compelling interest [or that] demonstrated that the government's evidence did not support an inference of prior discrimination and thus a remedial purpose.'" Id. (quoting Wygant v. Jackson Bd. of Educ., 476 U.S. 267, 293 (1986) (O'Connor, J., concurring)).

With respect to narrow tailoring, the DynaLantic court considered several factors, including: "(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." Id. at 283 (citing United States v. Paradise, 480 U.S. 149, 171 (1987) (plurality and concurring opinions)). Upon consideration of all of these factors, see id. at 283-91, the Court concluded that "the Section 8(a) program is narrowly tailored on its face[, ]" id. at 291. Consequently, because the government had demonstrated that Section 8(a)'s race-conscious provisions were narrowly tailored to further a compelling state interest, the Court held that strict scrutiny was satisfied in the context of "the construction industry... [and] in other industries such as architecture and engineering, and professional services as well[, ]" id. at 279-80, and because DynaLantic had thus failed to meet its burden to show that the challenged provisions were unconstitutional in all circumstances, the Court held that Section 8(a) was constitutional on its face and entered summary judgment on the facial constitutional claim in the government's favor, see id. at 293.[5]

The parties in DynaLantic cross-appealed to the United States Court of Appeals for the District of Columbia Circuit in October of 2012. See Defs.' Notice of Appeal, DynaLantic v. Dep't of Defense, 885 F.Supp.2d 237 (D.D.C. 2012) (No. 95-cv-2301), ECF No. 252; Pl.'s Notice of Cross-Appeal, DynaLantic v. Dep't of Defense, 885 F.Supp.2d 237 (D.D.C. 2012) (No. 95-cv-2301), ECF No. 254. On January 31, 2014, this Court stayed proceedings in the instant case pending resolution of the DynaLantic appeal. ( See Order, Dec. 23, 2013, ECF No. 43, at 1.) However, on February 11, 2014, the parties in this matter notified this Court that the D.C. Circuit had dismissed DynaLantic after the parties in that case reached a settlement and withdrew their appeal. ( See Joint Notice of Dismissal of DynaLantic & Status Report, ECF No. 47, at 1-2.)

D. Procedural History

As noted, Rothe filed its action challenging the facial constitutionality of the Section 8(a) program on May 9, 2012, while the DynaLantic case was still pending in the district court-both actions were treated as related cases and assigned to the same district judge. That judge permitted discovery to proceed in the instant matter at the parties' urging ( see Scheduling Order, Sept. 18, 2012, ECF No. 23, at 2; see also Pl.'s Suppl. Resp. to the Court's Minute Orders & Scheduling Recommendations, ECF No. 21, at 4; Defs.' Suppl. Resp. to the Court's Minute Orders & Scheduling Recommendations, ECF No. 22, at 5), and discovery continued even after the DynaLantic opinion upholding the facial constitutionality of the Section 8(a) program issued. The instant action was transferred to the undersigned on April 5, 2013, while discovery was still underway. ( See Minute Entry, Apr. 5, 2013; see also Am. Scheduling Order, ECF No. 24, at 2; Minute Order, Dec. 18, 2012 (extending discovery period); Minute Order, Mar. 25, 2013 (same).)

During the discovery period, the parties prepared and exchanged expert reports regarding evidence of discrimination in government contracting. Defendants retained two experts, who testified, broadly speaking, that socially disadvantaged and minority-owned small businesses are significantly less likely, statistically, to win government contracts than their non-minority and non-SDB counterparts ( see Report of Defs.' Expert Robert N. Rubinovitz ("Rubinovitz Report"), ECF No. 44-3, at 12; Additional Analysis by Dr. Robert Rubinovitz ("Rubinovitz Suppl. Report"), ECF No. 44-4, at 2), and that minority-owned businesses across the country are substantially underutilized in government contracting-a phenomenon that, according to these experts, cannot be explained by nondiscriminatory factors ( see Report of Defs.' Expert Jon Wainwright ("Wainwright Report"), ECF No. 46-3, at 27, 97). Plaintiff also engaged two experts, and Plaintiff's experts maintained that Defendants' experts' conclusions were incorrect largely because their data and methods were flawed. ( See, e.g., Report of Pl.'s Expert Dale Patenaude ("Patenaude Report"), ECF No. 49-2, at 2; Report of Pl.'s Expert John Charles Sullivan ("Sullivan Report"), ECF No. 49-4, at 11-12, 23-37.)

A series of Daubert motions followed: specifically, Rothe filed a single motion to exclude or limit the testimony of Defendants' experts Robert Rubinovitz and Jon Wainwright ( see Pl.'s Mot. to Exclude or Limit Test. of Defs.' Experts & Mem. in Supp. ("Pl.'s Daubert Br."), ECF No. 45) on the grounds that their testimony is both unreliable and irrelevant to the factual matters at hand. Defendants filed two separate motions to exclude the reports and testimony of Plaintiff's experts Dale Patenaude and John Charles Sullivan. ( See Defs.' Mot. in Limine to Exclude the Expert Reports & Test. of Pl.'s Expert Dale Patenaude ("Defs.' Patenaude Daubert Mot."), ECF No. 44; Defs.' Mot. in Limine to Exclude the Testimony and Ops. of Pl.'s Expert John Charles Sullivan, Esq. ("Defs.' Sullivan Daubert Mot."), ECF No. 46.) In essence, Defendants contend that Plaintiff's experts are not qualified to testify as experts and that their proffered testimony is unreliable. ( See Defs.' Mem. in Supp. of Defs.' Patenaude Daubert Mot. ("Defs.' Patenaude Daubert Br."), ECF No. 44-1, at 9-19; Defs.' Mem. in Supp. of Defs.' Sullivan Daubert Mot. ("Defs.' Sullivan Daubert Br."), ECF No. 46-1, at 9-20.)

Rothe then filed a motion for summary judgment with respect to its claim that the definition of "socially disadvantaged individual" as it appears in the Act and is used in the context of administering the Section 8(a) program is unconstitutional on its face. ( See Pl.'s Mot. for Summ. J., ECF No. 55.) Rothe's motion argues, first, that Section 8(a)'s definition of socially disadvantaged individuals "is unconstitutional racial balancing, for which there is no compelling interest, and for which narrow tailoring is impossible"; and second, that the definition violates the nondelegation doctrine insofar as it "lack[s] any intelligible principle to limit the Executive's discretion in deciding whether racial, ethnic or cultural bias has occurred or even what constitutes a racial, ethnic, or cultural group." (Pl.'s Mem. in Supp. of Pl.'s Mot. for Summ. J. ("Pl.'s MSJ Br."), ECF No. 56, at 7.)

Defendants responded by filing a cross-motion for summary judgment (Defs.' Cross-Mot. for Summ. J., ECF No. 64), in which Defendants maintain that "Rothe's facial challenge is identical to that brought and rejected in DynaLantic ... and fails for the same reasons" (Defs.' Mem. in Supp. of Defs.' Cross-Mot. for Summ. J. & Resp. to Pl.'s Mot. for Summ. J. ("Defs.' MSJ Br. & Resp."), ECF No. 64-1, at 13). Specifically, Defendants assert that (1) the government has a compelling "interest in breaking down barriers to minority business development created by discrimination and its lingering effects'" ( id. (quoting DynaLantic, 885 F.Supp.2d at 251)); (2) there is "a strong basis in evidence to support [the government's] conclusion that remedial action was necessary'" to further that interest ( id. (quoting DynaLantic, 885 F.Supp.2d at 279)); and (3) the statute is narrowly tailored and "designed to minimize the burden on non-minority firms" ( id. at 14 (citing DynaLantic, 885 F.Supp.2d at 290)). Defendants also argue that the Section 8(a) program conforms to the nondelegation ...


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