The US Court of Appeals for the Federal Circuit has ruled that the 2006 federal statute establishing a defense contract “goal” for small businesses owned by “socially disadvantaged individuals” violates the Constitution’s Fifth Amendment’s equal protection component. The statute in question, 10 U.S.C. No 2323, sets aside a “goal” of 5 percent of DOD procurement expenditures for contracts and subcontracts with “small businesses owned and controlled by socially and economically disadvantaged individuals” and allows for up to a 10 percent “price evaluation adjustment” (PEA) when comparing bids of minority and non-minority firms. The statute was first enacted in 1986 and renewed at various times where it has been suspended through March 2009 because DOD has met its set aside goals.

The lawsuit was brought in 1998 by a business owned by a white woman who complained she lost a contract to a socially disadvantaged firm as a result of a PEA. A series of complicated rulings and appeals resulted in a ruling by the district court that the statute met the “strict scrutiny” and “narrow tailoring” that earlier cases established had to be met (e.g. Adarand Constructors). The appeals court looked at the studies intended to show discrimination that justified the statute and found that five of them had failed to account for differences in size or relative capacity when citing discriminatory patterns so by focusing on percentages of firms in the market owned by minorities rather than percentage of total marketplace capacity that approach substantially increased the disparity ratios.  This failing was magnified by the limited geographic reach of the firms that were located in one state, two counties and three cities that were deemed to be inadequate to identify discrimination nationwide. The Court concluded the studies in question and other “anecdotal” evidence used to justify the statute along with the failure to produce a single incident of discrimination by DOD failed strict scrutiny requirement and hence violated the fifth amendment. The court stressed its holding applied to the particular evidence offered by DOD and the district court and should not be construed as stating any blanket rules about other studies that may exist (Rothe Development Corp v DOD. Fed. Cir/ No. 2008-1017).

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