Small business program declared unconstitutional
A court ruling this week might open other small business contracting programs to litigation.
In a nutshell, the Appeals Court for the Federal Circuit ruled
that the Defense Department's small, disadvantaged business contracting rule was unconstitutional.
Since other small business programs, such as the 8(a) contracting program, use virtually identical criteria as the SDB program, people such as Guy Timberlake of the American Small Business Coalition, think that the other programs also could be challenged and killed on constitutional grounds.
The case -- Rothe Development versus the Defense Department and Air Force -- began in 1998 when Rothe lost a contract to International Computer and Telecommunications Inc. Rothe is owned by a white woman and ICT is owned by a Korean-American couple. ICT's bid was $5.75 million to Rothe's $5.57 million bid.
The case has gone back and forth between the district court and the appeals court, but this latest decision pretty much crushes DOD's SDB program. The court ruled that the evidence Congress used to pass the Defense Authorization Act was not strong enough to show a national pattern of discrimination. The Defense Department cannot use section 1207 of the act to award contracts.
The court's ruling is narrow and applies only to the DOD SDB program, said William Welch, a contracts attorney with General Counsel PC in McLean, Va. The ruling doesn't say that preference programs are unconstitutional, Welch said.
"But I can see other plaintiff's using this methodology, that when they reauthorize [a small business provision] that Congress didn't have the supporting information," he said. But challenges to programs such as the 8(a) program would take years to make their way through the court.
Congress also has a relatively straight-forward remedy -- put more evidence that a pattern of discrimination exists into the record supporting the bill, Welch said.
Even without this decision, the SDB program has been shaky as fewer agencies participated and the Small Business Administration recently made it a self-certified designation for companies.
But it is the repercussions of the decision that have people like Timberlake concerned.
The 8(a) and other set-aside programs have plenty of critics. Many complain that these programs give an unfair advantage because they are no longer needed. All companies should compete on a level playing field. I've heard the charge that 8(a)s aren't "real" companies. Once they graduate from the program they fail.
I know that happens. But let's not rush into anything here.
The program has some merits. It does create viable companies for the entrepreneurs who use it as a tool. One 8(a) exec told me recently that his 8(a) wins are providing the funds for him to build the infrastructure so his company can compete in the full-and-open marketplace. He has a transition plan in place so he'll be ready to compete when he graduates.
Think about NCI Information Systems. It is a former 8(a) that is now a publicly traded company. It has been ranked on our Top 100 list of the largest government contractors for the past two years. Think of the jobs and careers that NCI created.
I think this story is just beginning. Small business advocates will likely be on Capitol Hill explaining ways that Congress can address the court's ruling. Some will argue that many socio-economic groups still are discriminated against. Another argument is that small business programs foster economic growth.
We definitely need that now.
Posted by Nick Wakeman on Nov 07, 2008 at 9:54 AM