The Federal Circuit Court of Appeals has ruled unconstitutional a federal law that establishes a five-percent goal for defense contract dollars to be set aside for small businesses owned by certain socially and economically disadvantaged individuals (Black, Asian, Hispanic and Native Americans). (Rothe Development Corporation v. Department of Defense and Department of the Air Force, C.A.F.C. No. 2008-1017, 11/4/08)
When the Department of the Air Force awarded a contract to an Asian-American owned business even though Rothe Development Corporation was the lowest bidder, Rothe challenged the set-aside law under the constitutional guarantee of equal protection.
The district court rejected the constitutional argument and granted the government’s motion for summary judgment. However, the appeals court has now held that when it enacted 10 U.S.C. §2323 Congress did not have a "strong basis in evidence" to conclude that "race-conscious remedial measures were necessary…" and that the law is therefore "unconstitutional on its face." (Opinion pp. 2-3)
The law instructed that when "practicable and when necessary to facilitate achievement of the 5 percent goal…the Secretary of Defense may enter into contracts using less than full and open competitive procedures….but shall pay a price not exceeding fair market cost by more than 10 percent…" to the disadvantaged contractors. (Opinion p. 3; emphasis added by the court) The Defense Department implemented the requirement by adding a "PEA" (price evaluation adjustment) of 10 percent to bids submitted by companies that did not meet the test of being disadvantaged before comparing their bids to those companies that do meet the test. (p. 3)
When it most recently reauthorized the law, Congress made a change to require the PEA to be smaller than 10 percent if non-SDBs (small disadvantaged businesses) are "being denied a reasonable opportunity to compete." (p. 6)
When the agency applied the PEA to Rothe’s lowest submitted bid, the effect was that Rothe’s bid was evaluated as higher than the winning bid that had been submitted by a Korean-American owned company. (p. 7)
The appeals court now reverses and remands the case to the district court. (p. 18) The court goes to pains to point out in its decision that should Congress reenact this law "we cannot now predict, nor do we intend to prejudge whether any such new enactment will be supported by a ‘strong basis in evidence.’" (p. 45) In other words, Congress can fix the problem if it comes up with a better factual justification for permitting preferential treatment of contractors on the basis of race.