Were You Aware of the Massive Change to the SBA 8(a) Program as a Result of a Recent Court Decision?
February 13, 2024
It is pretty rare when a long standing federal program like the Small Business Administration (“SBA”) 8(a) program gets shut down, but that is what happened last year in the wake of an injunction issued by a federal court. In this Surety Today the Blog post we will take a look at what happened.
A Refresher: In 1953 Congress enacted the Small Business Administration and established the 8(a) Business Development Program to allow participants to compete for 8(a) set-aside and sole-source awards of federal contracts. The government’s goal was to award at least 5 percent of all federal contracts to small disadvantaged businesses each year. In 2021, President Biden set an overall goal of awarding 15% of federal prime contracting to small disadvantaged businesses by fiscal year 2025. The 8(a) program was created to help companies owned and controlled by socially and economically disadvantaged individuals expand their footprint in the federal marketplace through training and technical assistance. Once accepted into the program, the certification lasts for nine years for the certified company, unless they “graduate” earlier under the terms of the program.
In order to participate in the 8(a) program, the company that is seeking certification must demonstrate that it is controlled by “socially and economically disadvantaged” individual(s). “Social disadvantage” is defined as an individual that has been subjected to racial, ethnic, or cultural bias within American society because of their identities as members of groups and without regard to their individual qualities. See 13 CFR 124.103(c). Congress explained that “economically disadvantaged individuals” were “those 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.” Congress further noted “that 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[.]” Individuals seeking to enter the program must satisfy a “preponderance of the evidence” standard in making their showing of social disadvantage. Under the SBA’s pre-July 2023 rules, beginning in 1986, individuals could demonstrate social disadvantage by simply indicating their inclusion in one of the recognized identified disadvantaged groups as part of the application process. This practice became known as using a “rebuttable presumption of social disadvantage” or “presumption of social disadvantage.” Most companies entered the 8(a) program utilizing the presumption approach. Before SBA implemented the rebuttable presumption, it reviewed 8(a) eligibility on a case-by-case basis.
The Ultima Services Ruling: On July 19, 2023, everything changed because the U.S. District Court for the Eastern District of Tennessee, issued a ruling in Ultima Servs. Corp. v. U.S. Dep’t of Agric., No. 2:20-CV-00041-DCLC-CRW, 2023 WL 463348 (E.D. Tenn. July 19, 2023), that found the SBA’s use of a “rebuttable presumption” of social disadvantage for certain minority groups to qualify for inclusion in the 8(a) Program violated the Fifth Amendment’s Equal Protection Clause. The Ultima Court decided that the SBA could not “presume” individuals to be socially disadvantaged based on their membership in one of the identified groups. The Court’s decision also required the SBA to immediately stop using the presumption of social disadvantage to administer the 8(a) program. The SBA has taken the position that the injunction does not extend to current contracts. Although a challenge was submitted to that position, which has not been ruled on.
The Response: In light of the Ultima ruling, the SBA was forced to temporarily suspended 8(a) applications. The SBA began requiring all 8(a) participants whose program eligibility was based upon one or more individuals who relied upon the presumption of social disadvantage to establish their individual social disadvantage by completing a social disadvantage narrative. In light of the new ruling, the SBA must now determine that the discrimination or bias experienced by an individual is chronic, substantial, and has occurred within American society (not another country). Additionally, the discrimination must have negatively impacted the individual’s entry or advancement in the business world. The SBA sent all current 8(a) participants a direct communication that detailed the process for establishing social disadvantage. To assist with the process, on August 18, 2023 the SBA published interim guidance on its website. Existing 8(a) participants who did not submit a social disadvantage narrative to re-establish eligibility were suspended from the 8(a) program on November 15, 2023. To overcome the suspension, companies were required to submit an individual social disadvantage narrative to re-establish eligibility. Before a company can receive new 8(a) contract awards SBA must approve the new narrative to ensure continued eligibility.
If a company cannot establish social disadvantage status it will not be eligible for new 8(a) contract awards. If the SBA is unable to affirmatively determine social disadvantage in connection with a pending contract award, the SBA will initiate suspension and/or termination proceedings.
Sureties should be on the look out to see if their principals, who are in the SBA 8(a) program, have complied with the submission of a new narrative requirement to remain in the program. If a surety is looking for an 8(a) completion contractor, make sure they are properly certified under the new requirement.
If you have questions regarding the issues discussed in this post, please do not hesitate to contact Michael A. Stover, Esq. (410-659-1321/mstover@wcslaw.com), or any member of the Wright, Constable & Skeen, Surety and Fidelity practice group.