How Will (and Should) the DynaLantic Decision Affect ANCs?
PHOTO: Oles Morrison Rinker & Baker LLP
On August 15, 2012, a federal trial court in Washington, DC declared that the Department of Defense’s administration of the SBA’s 8(a) set-aside program violated Constitutional equal protection laws. As significant as was the decision itself, the response by federal agencies will be equally, if not more, significant, and federal contractors should start planning for fewer set-aside opportunities under the SBA’s 8(a) business development program. In addition, because Alaska Native Corporations enjoy preferences that arguably rest upon a legal foundation distinct from those of other small businesses eligible to participate in the 8(a) program, ANCs should take special note of the DynaLantic decision and its implications for the short and long term.
In DynaLantic Corp. v. the U.S. Department of Defense, the challenger, DynaLantic, claimed that the DoD’s use of the Section 8(a) program, which is reserved for small businesses unconditionally owned and controlled by “socially and economically disadvantaged individuals,” constituted an illegal racial preference that violated its right to equal protection under the Due Process Clause of the Fifth Amendment to the Constitution, as well as provisions within the Civil Rights Act of 1964. DynaLantic’s case was built on two primary challenges. The first was a “facial” challenge, which required DynaLantic to prove that there was no set of circumstances under which the 8(a) program was valid or constitutional. The second was an “as-applied” challenge, which required DynaLantic to show that there was no evidence of racial or ethnic discrimination in DynaLantic’s particular industry (DynaLantic specializes in the design manufacture, installation and support of a wide array of military and commercial training systems) that would justify setting aside a solicitation in that industry under the 8(a) program.
DynaLantic lost on its facial challenge but, nevertheless concluded (to the shock and awe of what I expect was the vast majority of small business contracting professionals, both within and outside the Government): “[B]because the government has not met its burden to show a compelling interest in remedying discrimination in the military simulation and training industry, DynaLantic prevails on its as-applied challenge.”
Faced with the pronouncement of a federal judge that its small business set aside policy had violated our most significant and sacred of legal documents, DoD initially responded by suspending awards to 8(a) companies set aside for 8(a) companies (note that it appears DoD has since lifted this suspension, although not for procurements within the military training industry). Interest groups such as the Native American Contractors Association and the United States Hispanic Chamber of Commerce responded immediately, criticizing DoD’s reaction as overreaching and unnecessary, and forecasting that such restrictions on the 8(a) program would result in job losses in an already less than stellar economy.
Several observations immediately come to mind when reflecting upon the potential impact of this decision and the host of reasonable agency responses. First, and not necessarily foremost, although the significance of the DynaLantic ruling should be apparent to anyone involved with small business contracting with the federal Government, the implications of the ruling will be not known for some time. For instance, it is now a virtual certainty that any company, large or small, can and will challenge set asides under the 8(a) program if there is reason to believe that evidence of racial discrimination within any particular industry in not sufficient to support a set-aside. The 128-page DynaLantic decision was based, in large part, upon numerous academic “disparity studies” that examined the presence and extent of such discrimination, from which the Court concluded there was insufficient evidence to justify set asides in the military simulation and training industry, although there was sufficient evidence to justify the continuation 8(a) program, at least for the time being. In the absence of such studies or related evidence of discrimination in any particular industry, one could reasonably conclude from DynaLantic that a set-aside under the 8(a) program would be unconstitutional.
Equally if not more concerning are the implications of DynaLantic for Alaska Native Corporations. ANCs are entitled to contracting preferences that are unique in federal small business contracting, including within exclusive subset of contractors that qualify for the SBA’s 8(a) business development program. These preferences include a presumption of social and economic disadvantage, relaxed affiliation rules that would otherwise exclude ANCs from 8(a) program eligibility, and the ability to receive sole source awards at dollar thresholds significantly higher than those available to other 8(a) contractors. These preferences are reflected in the SBA’s regulations, the Federal Acquisition Regulation, and the several implementing statutes responsible for these regulations. In view of these preferences, ANCs have every reason to be more concerned with the impact of DynaLantic because they have more at stake, and potentially more to lose, if industries eligible for the 8(a) program begin to fall by the wayside in the absence of sufficiently documented racial or ethnic discrimination.
But consider the following: ANCs are deemed socially and economically disadvantaged for purposes of the 8(a) program by operation of the Alaska Native Claims Settlement statute, (see Title 43 of the U.S. Code, Chapter 33) which indicates that ANCs shall be considered minority and economically disadvantaged business enterprises. The Congressional declaration of policy underlying this statute begins by stating that “there is an immediate need for a fair and just settlement of all claims by Natives and Native groups of Alaska, based on aboriginal land claims.” In addition, although the presumption of social disadvantage conferred upon ANCs is similarly conferred upon the numerous minority groups that have suffered from racial and ethnic discrimination in the United States, ANCs are unlike most other presumptively socially disadvantaged applicants to the 8(a) program who must submit financial information to establish their economic disadvantage status. The SBA’s regulations expressly recognize the economic disadvantage status conferred upon ANCs by the Alaska Native Claims Settlement statute and, consequently, ANCs need not independently establish it to be admitted into the 8(a) program. Notably, the Court concluded, perhaps erroneously, that: “All prospective program participants must show that they are economically disadvantaged.”
Suffice it to say, the historical and statutory bases for ANCs’ socially and economically disadvantaged status within the 8(a) program, when viewed against the DynaLantic decision, place ANCs in legally and constitutionally uncharted waters. A reasonable interpretation of DynaLantic is that, regardless of any presumption of social disadvantage or evidence of economic disadvantage that an applicant may rely upon to gain admission to the 8(a) program, these presumptions are outweighed by the Constitutional equal protection rights of the individuals and businesses that DynaLantic seeks to protect; consequently, 8(a) small businesses should no longer expect to see procurements set aside for the 8(a) program in industries without documented, persuasive evidence of racial and ethnic discrimination particular to that industry.
That said, one can also reasonably conclude that the preferences conferred upon ANCs within the 8(a) program are linked to a settlement between the United States Government and Alaska Natives and that, furthermore, the presumption of both minority and economic disadvantage applicable to ANCs (that is arguably the legal foundation of ANCs’ eligibility for and success within the 8(a) program) was conferred by Congress without the limitation or reservation that DynaLantic now seeks to impose. The DynaLantic decision specifically held that the SBA and DoD are enjoined from awarding procurements for military simulators under the Section 8(a) program without first articulating a strong basis in evidence for doing so. Whether the legal reasoning supporting this carefully drafted holding should affect the statutes and regulations responsible for ANCs’ preferences within the 8(a) program is a different question that, at present, remains answered.
In the absence of an appeal by DynaLantic or the Government, this murkiness will be clarified by future legal challenges by 8(a) small businesses, non-8(a) small businesses, large businesses and (I would imagine) ANCs to the changes in federal set aside policies we shall undoubtedly soon see as agencies struggle with how to best interpret DynaLantic’s reach and intent. In the meantime, it is safe to say that 8(a) set-aside acquisition policy will become more confusing and potentially inconsistent before the proverbial tide turns, and that federal contractors, agencies and everyone involved with 8(a) small business contracting should prepare themselves to weather the storm.
About the Author
Jonathan DeMella is a partner with Oles Morrison Rinker & Baker LLP, a Seattle-based law firm with practice areas in construction, government contracts and commercial litigation. DeMella’s legal expertise includes assisting contractors involved in disputes with the federal government and counseling clients in many areas of construction and government contract law. Prior to joining Oles Morrison in Seattle, he practiced in Washington, D.C. where he litigated for a large internationally recognized law firm.