On February 26, 2009, U.S. Court of Appeals for the Federal Circuit entered its final judgment on the Rothe Development Corp. v. Department of Defense case, denying the appeal issued by the Department of Defense (DoD) regarding the constitutionality of the Small Disadvantaged Business Program. The case was originally decided on November 4, 2008 when the Court sided with Rothe Development Corp (RDC) who claimed that the DoD policy of applying a 10% price evaluation adjustment to bids or offers of small businesses owned and controlled by socially and economically disadvantaged individuals was facially unconstitutional.

Under Section 8(d) of the Small Business Act, the government presumes that minority owned business are socially and economically disadvantaged, and it was this aspect of the policy that was under scrutiny. RDC claimed that this policy was unconstitutional because it brought race into the mix, violating the equal protection component of the due process clause of the Fifth Amendment. The Court's ruling was based upon the decision that the government lacked "a strong basis in evidence" in deciding that minority-owned businesses were socially and economically disadvantaged. This became a big problem when RDC lost a contract to a Korean-owned business that received a 10% price evaluation adjustment. If the adjustment was not made, RDC's bid would have won the contract.

The Small Disadvantaged Business (SDB) Program was created by Section 1207 of the National Defense Authorization Act of 1987, specifically 10 U.S.C. § 2323, which established a goal of awarding 5% of DoD's contract dollars to companies owned by socially and economically disadvantaged individuals. DoD has met this goal every year since 1997 with very few complaints from companies who don't fall into one of the SDB categories. The issue here isn't really the goal of 5%; it's the 10% price evaluation adjustment, and this was the deciding factor in the Rothe v. DoD case. Understandably, small businesses that have historically benefited from the SDB program are concerned about their future business.

On March 10, 2009, the DoD Office of Small Business Programs released a guidance memorandum addressing the Rothe v. DoD case. In the memo, it is stated that "any activity, which includes but is not limited to the award of contracts and orders under contracts, advance payments, and the award of grants or scholarships or the addition of funds to existing grants and scholarships, that rely exclusively on the authority of 10 U.S.C. § 2323 should cease." This would lead one to believe, or at least hope, that the government is going to edit or change the current policy. Nevertheless, the concerns are there.

Potential Impact on Industry, Both Immediate and Long Term

The exact ramifications of the Rothe v. DoD decision remain to be seen, but a report released on March 16, 2009 by the Congressional Research Service (CRS), a legislative branch agency within the Library of Congress, minimizes the potential consequences. In the report, the co-writers address the potential implications of the decision. The big question is whether or not the percentage of contract dollars awarded to minority-owned businesses as well as other small business programs will decrease. The CRS report indicates that it won't. First of all, the 10% price evaluation adjustment has not been exercised in over a decade, and this is primarily because the government has not needed to use it. The contract that RDC lost to the Korean-owned business was procured over 10 years ago; it just took this long to go through the chain of courts. Because DoD has met their goal of 5% to disadvantaged businesses every year since 1997, they have not been in a situation where the price adjustment was needed to push them over the goal. As long as this continues to happen, problems shouldn't arise. Secondly, an additional goal is already in place for DoD to award contracts to strictly minority-owned businesses. This policy was not in question in the Rothe case because in each contracting situation, the minority-owned business' bid was lower than the competition and was therefore justified in winning.

However, anytime race is involved with the decision, regardless of whether the decision was made strictly on a high bid/low bid basis, the government could see further protests or lawsuits referencing the Rothe case. This situation might also be seen in contracting activities involving woman-owned businesses. A losing bidder could claim gender discrimination, thereby finding grounds to protest. Whether or not these potential protesters would succeed is not known. Presumably, as long as the government awards the contract to the best offer without using any type of price adjustment or preferential treatment, legal harmony will stay intact.

As for other small business programs such as veteran-owned, service-disabled veteran-owned, and HUBZone businesses, companies under these classifications should be unaffected. Only programs that rely upon potentially suspect classifications, such as race or gender, are subject to possible constitutionality challenges. It is the opinion of this blogger that industry should continue to see business as usual as we move into the future. GovWin attempted to contact a representative from the Office of Small Business Programs but was unsuccessful.