Socially-disadvantaged and woman-owned restaurants were just dealt a harsh blow by the Sixth Circuit Court of Appeals: the court stopped SBA from granting priority to socially-disadvantaged and woman-owned firms under the Restaurant Revitalization Fund, finding them to be unconstitutional discrimination.
Though the decision at issue dealt with a specific aspect of COVID relief funds, it’s a “red alert” for government contractors. Reading the decision, I’m stuck with the dreadful thought that 8(a) and WOSB contracting programs might suffer the same fate.
This could be a red-alert moment for small businesses.
The decision at issue is Vitolo v. Guzman, Nos. 21-5517/5528 (6th Cir. May 27, 2021). Antonio Vitolo (a white man) and his wife (a Hispanic woman) each own 50% of Jake’s Bar and Grill. The restaurant applied for coronavirus relief funds under the Restaurant Revitalization Fund.
Funds are distributed to qualifying restaurants on a first come, first served basis. But for the first 21 days of distributions, SBA prioritizes restaurants that are at least 51% owned and controlled by women, veterans, or socially and economically-disadvantaged individuals. This priority is important: once funds run out, other restaurants in line are out of luck.
Because Ms. Vitolo does not own 51%, and because neither her nor her husband were veterans, the restaurant’s best chance at obtaining funds was to obtain priority through socially or economically-disadvantaged owners. If this category sounds familiar, it’s for good reason: SBA determines social and economic disadvantage under the Fund through the same analysis it applies under the 8(a) Program: certain individuals are presumed disadvantaged (based on racial or ethnic background), while others not belonging to presumed groups must prove they have experienced racial or ethnic discrimination.
Mr. Vitolo does not qualify as a socially-disadvantaged individual. He therefore “sued to end the race and sex preferences in grant funding, claiming that they violated his constitutional rights.”
The district court denied Mr. Vitolo’s request for injunctive relief, saying that he was unlikely to succeed on the merits of his claim.
On appeal, the Sixth Circuit reversed. It found the Fund’s racial and gender-based priority unconstitutional.
In a nutshell, the Sixth Circuit determined that SBA did not show a “compelling interest” in applying a racial preference. Though SBA argued that it has a compelling interest in remedying past societal discrimination against minority business owners, the Sixth Circuit (quoting the Supreme Court) said that “an effort to alleviate the effects of societal discrimination is not a compelling interest.”
The court also seemed unconvinced by the distinction between those groups afforded preference under SBA’s regulation versus those that are not: “Indeed,” the court wrote, “the schedule of racial preferences detailed in the government’s response—preferences for Pakistanis but not Afghans; Japanese but not Iraqis; Hispanics but not Middle Easterners—is not supported by any record evidence at all.”
Finally, even if the preference was in support of a compelling interest, the Sixth Circuit said that the racial preference was not tailored enough to survive scrutiny. Rather than prioritizing businesses owned by individuals in certain racial groups, for example, SBA could have simply granted priority to businesses that have not yet received funds under other coronavirus relief programs.
SBA’s racial preference—in the context of Restaurant Revitalization Fund priority—was therefore found unconstitutional.
The Fund’s preference to woman-owned businesses was also found unconstitutional, even though it was held to a lesser form of scrutiny. That is, SBA needed to demonstrate that this priority is “substantially and directly related” to an “important governmental objective.”
Here, SBA argued that women-owned businesses were disproportionately affected by COVID-19. Though some evidence suggested that there were disparities in Paycheck Protection Program funds received by women, the court did not find these disparities to be evidence of intentional discrimination. Thus, without an important government objective, the gender-based priority was also found unconstitutional.
This case is important, for two main reasons:
First, and most obviously, it directly affects minority and women-owned restaurants. Under this ruling, these businesses may no longer receive priority for payments under the Restaurant Revitalization Fund; instead, businesses will have to be considered for funds regardless of the owner’s race or gender.
Second, and more broadly, it suggests to me that attacks against the 8(a) and WOSB contracting preferences aren’t abating.
These contracting preferences are no stranger to constitutional challenges. But concerningly, many of SBA’s arguments in favor of its preferences in Vitolo are the same made in favor of the contracting preferences: past discrimination against certain groups justifies certain benefits now. In fact, the Restaurant Revitalization Fund relies on SBA’s 8(a) and WOSB contracting regulations. The ease with which the Sixth Circuit rejected these arguments in Vitolo suggests that similar arguments made in the context of contracting preferences would also be successful.
That said, the sky isn’t falling for 8(a) and WOSB companies. At least not yet. This decision doesn’t overtly discuss contracting preferences. Even still, the battle in Vitolo isn’t necessarily over—the decision could be reversed by the entire Sixth Circuit or the Supreme Court.
It’s important, though, for 8(a) and WOSB companies to be on guard. And don’t be afraid to share the importance of these contracting preferences—and your successes under them—with your congressperson.
If you have any questions about socioeconomic program eligibility—or protecting it from challenges—please give me a call.
Court Stops 8(a) and WOSB Priority for COVID Relief Funds. Are Contracting Preferences Next? was last modified: May 28th, 2021 by