WT Business Beat

By Nick Wakeman

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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 7:22 PM


Reader Comments

Wed, Jan 13, 2010 thomas www.onlineuniversalwork.com

With Facebook and Twitter being among the leaders of the Social networks, marketing as a small business is being transformed..
Respondents according to the Vertical Response survey appear to need some differentiation with the use of SE marketing and Social media Marketing

Mon, Nov 10, 2008 ROB MONTGOMERY MD

The national developments over the past couple of weeks have demonstrated that the logical evolution of federal small business regulations dictates that the 8(a) program's time has come to an end. There is no need for procurement regulations that give unfair advantages based on the color of one's skin or the origin of their birth. All small businesses should be treated the same based on their actual disadvantages that result from their diminished size and limited resources, not the ethnicity or race of their founders. The federal government has a sufficiently difficult time properly enforcing small business set-asides let alone tracking all of the xOB designations and their integrity. There should only be one small business designation based on revenue volume that is easily audited and enforced.

Mon, Nov 10, 2008 Edward Milton VA

An Asian-indian, for example, whose parents came to the USA when he/she is three years old, uses English as a first language, lives in a million-dollar home, drives a Benz, and is educated in the finest schools starts a small business. By SBA standards, this person is "disadvantaged" in government competition. But why? Skin color? What government evaluator is committing this offense? Why not find out and fire this kind of employee? Why not go after offenders, rather than discriminating against Caucasians who start small businesses? You know the truth? It is they who are the ones against whom real discrimination is committed.

Mon, Nov 10, 2008 Jack Savage VA

Goliath (large government contractors in general) should be really happy with this. They've already got contract bundling, and large IDIQ agency contracts, on their side along with really weak enforcement (if at all) of small business subcontracting requirements, not to mention President-elect Obama's plan to tax any small businessman that does make it through the gauntlet and make a little money. If the Democratic Congress has any, um, backbone, it will find ways to reverse the trend away from taking business away from small businesses. If they do not, then the millions of small businesses in the U.S. should band together to pick a new Congress.

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