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Wednesday, October 12, 2011

Rothe Development Corporation v. Department of Defense: The Constitutionality of Federal Contracting Programs for Minority-Owned and Other Small Businesses

Jody Feder
Legislative Attorney

Kate M. Manuel
Legislative Attorney

This report discusses Rothe Development Corporation v. Department of Defense, a case involving a constitutional challenge to a minority contracting program authorized under Section 1207 of the Department of Defense (DOD) Authorization Act of 1987. This program allowed DOD to take 10% off the price of offers submitted by “small disadvantaged businesses” in determining which offer had the lowest price or represented the best value for the government. Section 1207 also incorporated a presumption that minorities are socially and economically disadvantaged.

On November 4, 2008, the U.S. Court of Appeals for the Federal Circuit struck down the DOD preference program, holding that Section 1207 was facially unconstitutional because Congress did not have sufficient evidence to conclude that there was racial discrimination in defense contracting when it reauthorized the program in 2006. Later, on February 27, 2009, the U.S. District Court for the Western District of Texas, San Antonio Division, to which the case had been remanded for entry of judgment, enjoined defense agencies from implementing other programs authorized by Section 1207 because these programs were “contingent” on the subsections containing the price preference and must “also fall” when they do. These programs included technical and infrastructure assistance for certain minority-serving institutions (MSIs) of higher education, including historically black colleges and universities (HBCUs), Hispanic-serving institutions (HSIs), Alaska Native- and Native Hawaiian-serving institutions (ANNHIs), and majority-minority institutions (MMIs). However, the 111th Congress enacted legislation (P.L. 111- 84) that authorizes defense agencies to provide assistance similar to that authorized under Section 1207 to MSIs.

On September 9, 2011, the Obama Administration proposed amending the Federal Acquisition Regulation (FAR) in light of the decisions by the Federal Circuit and district court in Rothe. Among other things, the proposed changes would delete those provisions of the FAR which govern price evaluation adjustments to bids or offers submitted by small disadvantaged businesses for defense contracts, as well as relocate and amend those provisions of the FAR regarding monetary incentives and evaluation factors for subcontracting with small disadvantaged businesses.

The report examines the Rothe decision in detail; describes existing contracting programs for minority-owned and women-owned small businesses; and analyzes Rothe’s potential effect on these programs, including the Business Development Program under Section 8(a) of the Small Business Act. These programs were not at issue in Rothe and would not be substantively changed by the Obama Administration’s proposed amendments to the FAR. However, as numerous commentators and the Small Business Administration (SBA) have recognized, the Rothe decision could have significant implications for other federal contracting programs for small businesses.

Date of Report: September 23, 2011
Number of Pages: 24
Order Number: R40440
Price: $29.95

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