Dynalantic Corp. v. U.S. Dep't of Def.

885 F.Supp.2d 237

DYNALANTIC CORPORATION, Plaintiff,

v.UNITED STATES DEPARTMENT OF DEFENSE, et al., Defendants.

Civil Action No. 95–2301 (EGS).

United States District Court, District of Columbia.

Aug. 15, 2012.

Unconstitutional as Applied

15 U.S.C.A. § 637(a)(4)(A)

Michael E. Rosman, Washington, DC, for Plaintiff.

Brian J. Sonfield, U.S. Department of Treasury, Daniel Franklin Van Horn, U.S. Attorney's Office, Washington, DC, David F. Barton, Gardner Law, San Antonio, TX, for Defendants.

MEMORANDUM OPINION

EMMET G. SULLIVAN, District Judge.

Plaintiff, the DynaLantic Corporation (“DynaLantic”), is a small business that designs and manufactures aircraft, submarine, ship, and other simulators and training equipment. Plaintiff has brought this suit against Defendants—the Department of Defense (“DoD”), the Department of the Navy (“the Navy”), and the Small Business Administration (“SBA”)—to challenge the constitutionality of Section 8(a) of the Small Business Act (the “Section 8(a) program”), which permits the federal government to limit the issuance of certain contracts to socially and economically disadvantaged businesses. DynaLantic claims the Section 8(a) program is unconstitutional both on its face and as applied by Defendants in DynaLantic's industry, the military simulation and training industry. Plaintiff claims that DoD's use of the Section 8(a) program, which is reserved for “socially and economically disadvantaged individuals,” 15 U.S.C. § 637(a)(4)(A), constitutes an illegal racial preference which violates its right to equal protection under the Due Process Clause of the Fifth Amendment to the Constitution, in addition to its rights under 42 U.S.C. § 1981 and Title VI of the Civil Rights Act of 1964, 42 U.S.C. § 2000d et seq. Plaintiff also initially challenged DoD's separate statutory program, 10 U.S.C. § 2323 (“the DoD program”), which, among other things, imposed an independent obligation on the Agency to participate in Section 8(a); however, as explained herein, this challenge is moot because the DoD Program no longer exists.

The initial summary judgment briefing in this case, including the submissions of amici, was completed in 2005. However, as a result of subsequent events relating to the DoD Program, the Court has reopened the record twice since that time. First, after the DoD Program was reauthorized by Congress in 2006, the Court denied without prejudice the parties' cross-motions for summary judgment to enable the parties to supplement the record to include the evidence before Congress at the time of the reauthorization. The parties submitted supplemental briefing and evidence in 2007. The reauthorization was short-lived, however; in 2008, the Federal Circuit held that the 2006 reauthorization of the DoD Program was facially unconstitutional and enjoined its enforcement. Rothe Dev. Corp. v. Dep't of Def. (“Rothe VII ”), 545 F.3d 1023 (Fed.Cir.2008). After receiving additional briefing on the impact of Rothe VII in 2009, the Court again re-opened the record to examine evidence considered by Congress regarding Section 8(a) subsequent to the reauthorization of the DoD Program in 2006. The parties have submitted further supplemental briefing and evidence, and the Court is now in a position to reconsider the cross-motions. After careful consideration of the cross-motions, the oppositions and replies thereto, the amicus briefs, supplemental briefing by the parties, the entire record, and the applicable law, the Court concludes that the Section 8(a) program is constitutional on its face. However, the Court further concludes that the SBA's and DoD's application of the program to issue contracts in the military simulation and training industry does not survive strict scrutiny, and therefore DynaLantic prevails on its as-applied challenge. Accordingly, for the reasons set forth below, Defendants' motion for summary judgment is GRANTED IN PART AND DENIED IN PART and Plaintiff's cross-motion for summary judgment is GRANTED IN PART AND DENIED IN PART.

I. BACKGROUNDA. Statutory and Regulatory Framework

1. The Section 8(a) Program

The Section 8(a) program is a business development program for small businesses owned by individuals who are both socially and economically disadvantaged. See15 U.S.C. § 637(a); 13 C.F.R. § 124.1. Small businesses owned and controlled by such individuals may apply to the SBA and, if admitted into the program, are eligible to receive technological, financial, and practical assistance, as well as support through preferential awards of government contracts. The parties agree that DoD presently participates in the Section 8(a) program. See Defs.' Status Report and Mot. for Order Directing Supplemental Briefing at 2, Doc. No. 235; Pl.'s Opp'n to Mot. for Order to Meet and Confer at 3–4, Doc. No. 236.

In order for a firm to participate in the Section 8(a) program, the SBA must certify that the firm is a small disadvantaged business (“SDB”) under specific criteria.¹See15 U.S.C. §§ 636(j)(11)(E) & (F); 13 C.F.R. § 124.101. A business qualifies as “small” if it meets the standards set forth in 13 C.F.R. Part 121. See13 C.F.R. § 124.102; see also15 U.S.C. § 632(a)(1)-(3). A small business is “disadvantaged” if at least fifty one percent of the firm is unconditionally owned and controlled by one or more individuals who are both socially and economically disadvantaged. See15 U.S.C. § 637(a)(4)(A)-(B); 13 C.F.R. § 124.105. “Socially disadvantaged” individuals are persons who have been “subjected to racial or ethnic prejudice or cultural bias within American society because of their identities as members of groups without regard to their individual qualities. The social disadvantage must stem from circumstances beyond their control.” 13 C.F.R. § 124.103(a); see also15 U.S.C. § 637(a)(5). “Economically disadvantaged” individuals are 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 or similar line of business who are not socially disadvantaged.” 13 C.F.R. § 124.104(a); see also15 U.S.C. § 637(a)(6)(A).

Individuals who are members of certain racial and ethnic groups are presumptively socially disadvantaged. 13 C.F.R. § 124.103(b)(1);²see also15 U.S.C. § 631(f)(1)(B)- (c) (finding that socially disadvantaged persons include “members of certain groups that have suffered the effects of discriminatory practices or similar invidious circumstances over which they have no control,” and 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”). This presumption is rebuttable, however, and may be overcome by credible evidence to the contrary. See13 C.F.R. § 124.103(b)(3). In addition, an individual who is not a member of one of the groups presumed to be socially disadvantaged may gain admission to the Section 8(a) program by establishing by a preponderance of the evidence that the individual is socially disadvantaged under the criteria set forth in 13 C.F.R. § 124.103(c).

Social disadvantage is defined in terms of “bias” and “prejudice” and not in terms of other types of “disadvantage.” See13 C.F.R. § 124.103(a). Accordingly, the statutory and regulatory definition of “social disadvantage” in 15 U.S.C. § 637(a)(6)(A) and 13 C.F.R. § 124.103(a) includes those who have been disadvantaged by racial or ethnic prejudice but not those who have been disadvantaged solely by, for example, below average educational opportunities.

All prospective program participants must show that they are economically disadvantaged. To qualify as economically disadvantaged, an individual must have a net worth of less than $250,000 upon entering the program, excluding the individual's ownership in the applicant business and equity in the individual's primary personal residence. See13 C.F.R. § 124.104(c)(2). In addition to personal net worth, the SBA examines the individual's income for the three years prior to the application and the fair market value of all assets, whether encumbered or not. See13 C.F.R. § 124.104(c). The SBA also compares the financial condition of those claiming disadvantaged status to others in the same or similar line of business who are not socially and economically disadvantaged. Id.; see also15 U.S.C. § 637(a)(6)(E).

The Section 8(a) program is one of a number of government-wide programs designed to encourage the issuance of procurement contracts to, inter alia, small businesses, service disabled veterans, socially and economically disadvantaged individuals, and women. See15 U.S.C. § 644. Congress has established an “aspirational goal” for procurement from socially and economically disadvantaged individuals, which includes but is not limited to the Section 8(a) program, of five percent of procurement dollars government wide. See id. § 644(g)(1). It has not, however, established a numerical goal for procurement from the Section 8(a) program specifically. See id. Additionally, each federal agency establishes its own goals by agreement between the agency head and the SBA. Id. DoD has established a goal of awarding approximately two percent of prime contract dollars through the Section 8(a) program. Pl.'s Mem. of P. & A. in Supp. of its Mot. for Summ. J. (“Pl.'s MSJ”) at 70.³ None of the goals established by Congress or DoD are rigid numerical quotas, and there is no penalty for failure to meet the goals.

The Section 8(a) program does not mandate the use of set-aside contracts, ever. Rather, Section 8(a) allows the SBA, “whenever it determines such action is necessary and appropriate,” to enter into contracts with other government agencies and then subcontract with qualified program participants. 15 U.S.C. § 637(a)(1). As stated above, there are no quotas for issuance of Section 8(a) contracts, and no...