Cortez III Serv. V. Nat. Aeronautics & Space Admin., Civil Action No. 96-01301 (SS).

• Decision Date: 27 November 1996
• Docket Number: Civil Action No. 96-01301 (SS).
• Citation: 950 F.Supp. 357
• Court: U.S. District Court — District of Columbia
• Parties: CORTEZ III SERVICE CORPORATION, Plaintiff, v. NATIONAL AERONAUTICS & SPACE ADMINISTRATION, et al., Defendants.

Page 357

950 F.Supp. 357

CORTEZ III SERVICE CORPORATION, Plaintiff, v. NATIONAL AERONAUTICS & SPACE ADMINISTRATION, et al., Defendants.

Civil Action No. 96-01301 (SS).

United States District Court, District of Columbia.

November 27, 1996.

Stuart Henry Newberger, Crowell & Moring, Washington, DC, for Plaintiff.

Daniel Franklin Van Horn and Darya Geetter, U.S. Attorney's Office, Washington, DC, for Federal Defendants.

MEMORANDUM OPINION

SPORKIN, District Judge.

This matter is before the Court on plaintiff's Motion for Preliminary Injunction, defendants' response thereto, defendants' Motion to Dismiss, and plaintiff's response thereto.

I. Background

Plaintiff is a New Mexico-based corporation. In 1986, it was awarded a contract by the NASA Lewis Research Center ("LeRC") pursuant to a set aside under Section 8(a) of the Small Business Act, 15 U.S.C. § 637(a) (1994) ("8a"). The contract was known as the Consolidated Logistics and Administrative Support Services ("CLASS") Contract. The terms of CLASS required plaintiff to provide LeRC with a broad range of services, from transportation to property disposal to video production.

In 1990, the CLASS contract expired. The new contract, CLASS-II, was offered under "full-and-open" bidding. In other words, contractors of any size, or social or economic background, could compete for the contract. Plaintiff was successful in its bid and has been operating under that contract ever since.

CLASS-II was set to expire on September 30, 1996.¹ In 1995, NASA started the process of setting up a follow-on procurement. That procurement was to include all of the services currently provided under CLASS-II, as well as additional services currently provided under smaller 8(a) contracts. The new contract is known as the Management and Operations Contract I ("MOC I"). Although the new contract would be larger than CLASS-II, which had been the subject of full-and-open competition, NASA decided that the new contract should be offered as a small business set-aside. Initially, NASA sought to administer MOC I as an internal set-aside. However, on the advice of counsel who were apparently worried about the implications of the Supreme Court's decision in Adarand Constructors, Inc. v. Pena, ___ U.S. ___, 115 S.Ct. 2097, 132 L.Ed.2d 158 (1995), NASA asked the SBA to take over awarding the contract so it could offer it pursuant to 8(a).

The 8(a) program is a business development program for small businesses owned by individuals who are both economically and socially disadvantaged. Small businesses owned and controlled by such individuals may apply to the SBA and, if certified by the SBA into the program, receive technological, financial, and practical assistance, as well as support through preferential awards of government contracts. The program allows the SBA to enter into contracts with other government agencies and then subcontract with qualified 8(a) participants.

In order for a firm to participate in the 8(a) program, the SBA must certify that it is a "small business." A business qualifies as "small" if it is independently owned and operated, is not dominant in its field of operation, and has the number of employees or annual gross receipts not in excess of the level set by regulation for the industry in which the business operates. 15 U.S.C. §§ 632(a)(1)-(3). A small business is "disadvantaged" if at least 51% of the firm is unconditionally owned and controlled by an individual who is both socially and economically disadvantaged. 15 U.S.C. § 637(a)(4)(A)-(B). "Socially disadvantaged" individuals are those who have been "subjected to racial and ethnic prejudice or cultural bias because of their identities as members of groups without regard to their individual qualities." 15 U.S.C. § 637(a)(5); 13 C.F.R. § 124.105. "Economically disadvantaged" individuals are those socially disadvantaged individuals "whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same business area who are not socially disadvantaged." 15 U.S.C. § 637(a)(6)(A).

Individuals who are members of certain racial groups are presumptively socially disadvantaged. 13 C.F.R. § 124.105. However, social disadvantage may be demonstrated by any individual who presents evidence to the SBA that he or she has personally suffered social disadvantage as a result of "color, ethnic origin, physical handicap, long-term residence in an environment isolated from the mainstream of American society, or other similar cause not common to small business persons who are not socially disadvantaged." 13 C.F.R. § 124.105(c)(1)(i). If this background has adversely affected the individual's status in business, the individual qualifies as socially disadvantaged. 13 C.F.R. § 124.105(c)(v).

All prospective program participants must show that they are economically disadvantaged. An economically disadvantaged individual may not have a net worth exceeding $250,000 upon entering the program. 13 C.F.R. § 124.106(a)(2)(i). Additionally, the SBA examines the individual's income for the last two years, as well as the firm's assets, revenues, capital, net worth, and access to financing, supplier credit, and bonding capability. 13 C.F.R. §§ 124.106(a)(2)(ii)-(iii). The SBA uses the information to compare the firm to other entities in the same line of business who are not socially disadvantaged. 13 C.F.R. § 124.106(a)(1)(i).

An individual or firm can participate in the 8(a) program only once. After exiting the 8(a) program for any reason, a firm is no longer eligible to reapply. 13 C.F.R. § 124.108(c). Once a firm exits the program, an individual who has been counted toward the ownership requirement for that firm can never again be counted toward the 51% ownership requirement for another firm. Id.

In 1986, plaintiff qualified under 8(a): it was a small socially- and economically-disadvantaged business, at least 51% owned by an African-American, and had never participated in the program before. Plaintiff admits that it no longer qualifies for participation in the 8(a) program because it is now a large, non-minority-owned business and has completed the maximum term allowable under 8(a). But plaintiff claims that MOC-I should — like CLASS-II — be offered to full-and-open competition, rather than restricted to 8(a)-qualified firms. Plaintiff claims that by making MOC-I an 8(a) contract, defendants have violated plaintiff's equal protection rights by initiating a race-based program that is not narrowly tailored to a compelling government interest. Plaintiff also claims that defendants have violated the Administrative Procedure Act by offering a contract under 8(a) that will eventually exceed the dollar-limit for such contracts.²

II. Standing

As a preliminary matter, the Court must evaluate defendants' claim that plaintiff does not have standing to bring this action. To have standing, plaintiff must satisfy a three-prong test. First, plaintiff must allege that it has suffered some actual or threatened injury; second, the injury must be fairly traceable to the challenged official conduct; and third, there must be a substantial likelihood that the alleged injuries will be redressed by a judicial decision in the plaintiff's favor. Jacobs v. Barr, 959 F.2d 313, 315 (D.C.Cir.1992).

The parties agree that if MOC-I is offered as an 8(a) contract, plaintiff is not eligible to compete. The reason for this is threefold: first, plaintiff is no longer a "small business," under the SBA; second, plaintiff is no longer a socially or economically disadvantaged business; and third, the plaintiff has "graduated" from the 8(a) program by participating for the maximum time allowed. But plaintiff would be eligible to compete for MOC-I if defendant NASA offered it as to "full-and-open" competition, as it did with CLASS-II.

Plaintiff claims that by not making MOC-I "full and open," the defendants have violated its rights under the constitution and the APA. The Court concludes that plaintiff has standing to make that claim. Under the standing analysis: (1) plaintiff faces the threatened injury of losing the right to compete for a valuable contract; (2) that injury is fairly traceable to the decision by NASA and SBA to offer the contract under 8(a); and (3) if the Court finds that defendants violated either the APA or the Constitution, such a decision would put plaintiff in a position to compete for the contract, which it is now precluded from doing.³

III. Equal Protection Claim

In order to succeed on its motion for preliminary injunction, plaintiff must demonstrate that: (1) it has a substantial likelihood of success on the merits; (2) it will suffer irreparable injury in the absence of injunctive relief; (3) neither the defendants nor any other interested party will be harmed by the issuance of an injunction; and (4) an injunction will serve the public interest. Washington Metropolitan Area Transit Comm'n v. Holiday Tours, Inc., 559 F.2d 841 (D.C.Cir.1977).

A. Reasonable Likelihood of Success on Merits

Plaintiff claims that based on the evidence before the Court at this time, there is a substantial likelihood that at a trial in this matter it could prove that defendants' offering of MOC-I under 8(a) is unconstitutional in light of Adarand. Adarand involved the Surface Transportation and Uniform Relocation Assistance Act of 1987, which parallels section 8(a) in much of its language. It requires, inter alia, prime contractors in government highway projects to subcontract a percentage of any project to disadvantaged business subcontractors. Like 8(a), minority status creates a rebuttable presumption of disadvantage. The plaintiff in Adarand challenged the constitutionality of the set-aside program. The lower courts analyzed the program using an "intermediate scrutiny" analysis. Id. at ___, 115 S.Ct. at 2104. The Supreme Court reversed. Justice O'Connor held, with three Justices...