The Small Business Administration (SBA) has temporarily suspended new applications to the 8(a) Business Development Program while it revises the application questionnaire in light of the recent decision from the District Court for Eastern District of Tennessee.
On July 19, 2023, the Tennessee court issued a decision in Ultima Servs. Corp. v. U.S. Dep't of Agric., 220CV00041DCLCCRW, 2023 WL 4633481, at *1 (E.D. Tenn. July 19, 2023) finding the 8(a) program's rebuttable presumption of social disadvantage for certain races and ethnicities is unconstitutional as it violates the right to equal protection. The court's decision found the program's rebuttable presumption was not narrowly tailored and did not further a compelling governmental interest, thus violating the law. The court further found the presumption was not truly "rebuttal" as there is no mechanism to challenge the presumption of social disadvantage.
While the impact of this decision is still unfolding, it is unclear whether there will be an immediate effect to the companies currently in the 8(a) program. The Tennessee court did not find the program as a whole is unconstitutional. Communications with the SBA on August 2, 2023, confirmed the SBA is reevaluating the application questionnaire. The SBA further stated, "Companies that are currently in the 8(a) program or have pending applications will receive further guidance from SBA as we complete review of this legal decision."
Currently, to be eligible for the 8(a) program, the applicant must be owned by one or more socially disadvantaged individuals as set forth in 13 C.F.R. § 124.103. As described in the regulation, certain peoples are presumed to be socially disadvantaged, including African Americans, Hispanic Americans, Native Americans, Asian Americans, and Pacific Islander Americans. The 8(a) program is not limited to these groups, but no further information is required for members of these groups to establish social disadvantage. Those who seek entry into the program who fall outside these groups, such as those claiming disadvantage based on gender, disabilities, or other characteristics, must provide the SBA with a narrative explaining how they are socially disadvantaged.
The Ultima decision did not challenge the 8(a) program as a whole, but specifically focused on the rebuttable presumption of social disadvantage and the benefit the program provides to racial minorities. The court found that the SBA's evidence of the disparities faced by minority-owned businesses nationally was insufficient as it did not identify a specific instance of discrimination the government seeks to address with the use of the rebuttable presumption.
While the SBA is still determining next steps, the most likely result from the court's decision is the SBA will now require all applicants to provide a narrative describing how they have been socially disadvantaged, though it is unclear at this time if the SBA will be requiring any other information. Requiring narratives from all applicants will create a significant administrative burden on both applicants and the SBA.
The court's decision is focused on the presumption of social disadvantage to enter and remain in the 8(a) program, but it does raise questions about the continued future of the program. This is particularly true in the wake of the U.S. Supreme Court's recent decisions in the Students for Fair Admissions v. Harvard and Students for Fair Admissions v. University of North Carolina cases, which severely limited the use of race in college admissions processes. It is also unclear whether the SBA will seek to appeal the decision to the Sixth Circuit Court of Appeals. We will continue monitoring as the situation develops.