Justice Department Readies New 8(a) Rules

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Justice Department Readies New 8(a) Rules

By Neil Munro
Staff Writer

"Although the growing role of women-owned 8(a)s will help, the Justice Department is just "tinkering [with the 8(a) program]. ... They're not really fixing it."
-Marina Laverdy
Latin American Management Association

The government will soon curb contract awards to the most successful minority-owned companies in the $6.7 billion 8(a) program and increase competition from white-owned companies, say executives working for 8(a) companies.

In return, the new rules being drafted by the Department of Justice will allow greater cooperation among 8(a) firms and bolster the controversial program's defense against legal challenges making their way through the courts, say the executives.

The Clinton administration's rules "are positive, because they are fair and reasonable," said Fernando Galaviz, president of The Centech Group Inc., Arlington, Va., and vice chairman of the National Federation of 8(a) Companies, Arlington, Va.

The rules should be released by the end of the month, said D.J. Caulfield, a spokesman for the Small Business Administration, which manages the 8(a) program that sets aside new federal contracts for companies whose owners are certified to suffer from social disadvantage and have a net worth less than $250,000. In 1996, the 8(a) program steered agency contracts worth $6.7 billion to 6,115 companies, according to SBA officials.

Executives who attended a July 7 closed-door briefing held by SBA and Justice officials said the government is drafting the rules to help defend the 8(a) program from pending court battles at federal courts across the nation.

The 8(a) program has been under legal attack by white-owned firms, who say the program discriminates against white-owned firms by assuming that all minority-business owners are socially disadvantaged. The legal challenges were spurred by the 1995 Supreme Court's Adarand Constructors, Inc. vs. Pena decision that curbed affirmative action programs.

On June 20, the Federal Court of Appeals for the D.C. Circuit allowed Dynalantic Inc., Deer Park, N.Y., to sue the federal government for unfairly transferring a contract into the 8(a) program, barring Dynalantic from competing for the contract. Although the contract was later canceled, Dynalantic is continuing the case because it "finds itself in this situation often enough," said Michael Janik, a partner at the Washington firm of McKenna & Cuneo, which represents Dynalantic. Other companies are considering similar lawsuits, Janik added.

Under the new rules, 8(a) companies could only receive up to $100 million in special, no-competition contract awards. Once they exceed this threshold, they would be forced to compete against other large 8(a) companies for any additional 8(a) contracts. But 8(a) firms that entered the program before January will be exempt from this $100 million limit.

John Jensen, a lawyer who works on 8(a) issues for the Washington-based firm of Shaw, Pittman, Potts & Trowbridge, said few 8(a) companies ever take in $100 million.

Government officials have also promised to tighten enforcement of rules intended to prod 8(a) companies to pursue more non-8(a) contracts. Under this regime, 8(a) companies in the fifth year of participation in the program must generate 15 percent of their revenue from non-8(a) work. By the ninth year, after which companies are forced to quit the program, their non-8(a) work must comprise 75 percent of company revenue. If companies fail to meet these targets for 12 months, SBA officials could exclude them from further 8(a) awards, said Galaviz.

The new measures will also allow the SBA administrator to curb 8(a) awards in various sectors of the economy, such as telecommunications, dredging or software development, said Marina Laverdy, executive director of the Washington-based Latin American Management Association, which represents many Latin American 8(a) firms.

These curbs can be imposed if a "benchmark" study shows that minority owned firms have already won a significant share of contracts in each sector, she said.

To ease entry by white-owned firms, applicants will need only show by a "preponderance of the evidence" that company owners have suffered from social and economic discrimination. Under existing rules, applicants must show "clear and convincing" evidence that they have suffered from such discrimination. This change will likely allow many white-owned firms into the program, said Laverdy.

"I love the change ... since I represent women's entrepreneurs," said Joann Payne, president of the lobbying group Women First National Legislative Committee, Arlington, Va. "It will open up 8(a) to qualified women's businesses,"

Currently, the SBA has allowed 17 companies owned by white men to join the program. The SBA has also accepted 1,092 women-owned companies, including some companies owned by white women.

The new rules also provide a series of beneficial changes for minority-owned firms. These changes include a relaxation of rules that have hindered cooperation and cross-ownership of 8(a) firms, as well as new rules that allow small 8(a) firms to form a "mentor-protégé" alliance with firms that have graduated from the program. Existing rules allow these alliances among non-8(a) companies, but hinder such alliances among 8(a) companies.

This change will help small 8(a) companies cooperatively win contracts for many small programs that are often "bundled" in large omnibus contracts, said Laverdy. Also, these provisions "stamp the imprimatur of legitimacy on a normal business relationship," said Jensen.

"Presumably, SBA will screen out front companies," which are established to capture 8(a) contracts for larger, non-8(a) firms, he said.

Industry executives are divided over whether these revisions will protect the program from future lawsuits.

"There's no way" that the 8(a) program can be derailed by a court, said Carlos Sandoval, a lawyer with Sandoval and Keng, Waldorf, Md., who works on 8(a) issues. The program already includes a growing number of white-owned and women-owned companies, preventing it from being labeled a minority-only program, he said. "The broader the base, the harder it is to get rid of it," said Sandoval.

Although the growing role of women-owned 8(a)s will help, the Justice Department is just "tinkering with [the 8(a) program]. ... They're not really fixing it," said Laverdy.

For example, the reform does nothing to quiet congressional criticism of the program's high wealth limits, she said. The program now allows membership to companies owned by people with a net worth of more than $250,000, excluding the business and a personal home. The cap on permissible net worth rises steadily to $750,000 after eight years.

To defend the program in court, government officials may end the presumption that minority business owners are socially disadvantaged, said Laverdy. However, "that would certainly open up the flood gates" for white-owned firms trying to enter the program, she said.

Proponents of the 8(a) program must also guard against emerging laws that would bar all affirmative action contracts, Laverdy said. For example, Rep. Charles Canady, R-Fla., Sen. Charles Grassley, R-Iowa, and Sen. Orrin Hatch, R-Utah, are promoting a bill that would end the 8(a) program, she said.

Industry executives said they are facing another curve ball from the Senate, which has given initial approval to a bill that would steer government contracts to small companies based in poor areas, to be dubbed HUBZones. The bill is championed by Sen. Christopher Bond, R-Mo., chairman of the Senate Committee on Small Business.

Many 8(a) executives have lobbied hard against Bond's bill, fearing that it would siphon contracts away from the 8(a) program. To satisfy their concerns, Bond modified the bill to give the 8(a) program the same priority as HUBZone contracts and directed that the government award at least 23 percent of contract dollars to small firms, up from 20 percent today, said Kenneth Bricker, a spokesman for Bond.

The government awarded roughly $200 billion in contracts last year. "By expanding the pie, there is no way anyone can say we are cutting 8(a) contracts," said Bricker.

Bond's measure was unanimously approved June 26 by the Senate Committee on Small Business.


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