Rothe Development Corp. v. U.S. Dept. of Defense

• Decision Date: 02 July 2004
• Docket Number: No. CIV.A. SA-98-CA-1011-XR.,CIV.A. SA-98-CA-1011-XR.
• Citation: 324 F.Supp.2d 840
• Parties: ROTHE DEVELOPMENT CORP., Plaintiff, v. U.S. DEPARTMENT OF DEFENSE et al., Defendants.
• Court: U.S. District Court — Western District of Texas

324 F.Supp.2d 840

ROTHE DEVELOPMENT CORP., Plaintiff, v. U.S. DEPARTMENT OF DEFENSE et al., Defendants.

No. CIV.A. SA-98-CA-1011-XR.

United States District Court, W.D. Texas, San Antonio Division.

July 2, 2004.

David Franklin Barton, The Gardner Law Firm, San Antonio, TX, for Rothe Development Corporation, a Texas Corporation.

Britannia Hobbs, United States Attorney, Western District of Texas, San Antonio, Jay D. Adelstein, U.S. Department of Justice, Civil Rights Division, Marybeth Martin, U.S. Department of Justice, Employment Litigation Section, Andrew G. Braniff, U.S. Department of Justice, Civil Rights Division, Washington, DC, for United States Department of Defense, the United States Department of the Air Force.

ORDER

RODRIGUEZ, District Judge.

On this day, the Court considered cross motions for summary judgment submitted on October 20, 2003. In addition, the Court considered responses, replies, and sur-replies submitted by both parties. While the parties did not agree as to the exact scope of inquiry presented to this Court by the Federal Circuit's remand, both provided ample documentation and legal arguments for consideration. The Government argues that the law of the case limits this action to whether Congress had a compelling interest in 1992 when it reauthorized the National Defense Authorization Act of 1987 (the "Act"). This Court, however, expressly ordered Defendant to consider the Federal Circuit's entire remand and as such, issues this Order in accordance with that remand.

At issue is the constitutionality of Section 1207 of the National Defense Authorization Act of 1987 (the "Act"). In the Act, Congress set a goal that five percent of the total dollar amount of defense contracts for each fiscal year would be awarded to small businesses, owned and controlled by socially and economically disadvantaged individuals. 10 U.S.C. § 2323. In order to achieve that goal, Congress authorized the Department of Defense to adjust bids submitted by non-socially and economically disadvantaged firms upwards by ten percent (the "price evaluation adjustment program" or "PEA"). 10 U.S.C. § 2323(e)(3). Thus, as happened here, even though Plaintiff Rothe Development Corporation ("Rothe") was technically the lowest bidder on a defense contract, its bid was adjusted upward by ten percent, and a third party, who qualified as a socially and economically disadvantaged business, became the "lowest" bidder.

Rothe complains that both the five percent goal and the ten percent preferential increase violate the Equal Protection guarantee of the Fifth Amendment because both rely in part on race-conscious classifications. In order to uphold a remedial race-conscious program, the Government must show that the statute is narrowly tailored to meet a compelling governmental interest. The burden rests with the Government to demonstrate that Congress had a strong basis in evidence to create this remedial program. Here, the Government defended the 5% goal and the price evaluation program by articulating a compelling interest in ensuring that public dollars do not finance private discrimination. Because the Government provided ample evidence demonstrating that the Department of Defense was acting as a passive participant in present day discrimination, this Court finds that Congress had a strong basis to believe that a race based remedy was necessary in 2003. However, the Government was not able to meet this standard as it applied to Rothe's bid in 1998. Thus, the Court GRANTS, in part, and DENIES, in part, Defendant's Motion for Summary Judgment and finds the 5% goal and the PEA program conducted pursuant to the National Defense Authorization Act of 1987, as reauthorized in 2003, constitutional on its face. The Court also GRANTS, in part, and DENIES, in part, Plaintiff's Motion for Summary Judgment, and finds the 5% goal and the PEA program as reauthorized in 1992 and applied in 1998, unconstitutional. (docket nos. 147 and 151).¹

Section I. Background

A. The Program at Issue

This contract dispute arose in 1998 when Rothe submitted a "technically acceptable" lower bid on a government contract solicitation but was not awarded the contract due to the application of a ten percent preferential increase of its bid. Rothe, a Texas corporation owned by a white female, sought the contract for the computer operations and maintenance services for the Base Telecommunication System and Network Control Center at Columbus Air Force Base in Mississippi. Rothe had previously been awarded this contract and was the incumbent contractor at the time of this new solicitation by the Department of Defense. There is no dispute that Rothe adequately performed under the prior contract. Although Rothe's bid was numerically the lowest, a second company, International Computers & Telecommunications ("ICT"), was awarded the contract after Rothe's bid was increased by ten percent according to the PEA program. ICT was owned and operated by an Asian American, and the business qualified as a socially and economically disadvantaged small business.

On November 14, 1986, Congress enacted the National Defense Authorization Act of 1987. Pub.L. 99-661, 100 Stat. 3816. "Congress may employ racial or ethnic classifications in exercising its Spending or other legislative powers only if those classifications do not violate the equal protection component of the Due Process Clause of the Fifth Amendment." Fullilove v. Klutznick, 448 U.S. 448, 480, 100 S.Ct. 2758, 65 L.Ed.2d 902 (1980). In Section 1207 of the Act, Congress established an annual goal that five percent of the total dollar amount spent for defense contracts should be awarded to small businesses owned and controlled by socially and economically disadvantaged individuals. In order to meet this goal, the Department of Defense uses several methods, including the program at issue here. The Act specifically defined the term "socially and economically disadvantaged" in accordance with the Small Business Act and the regulations issued pursuant to it. 15 U.S.C. § 631 et seq."[S]ocially disadvantaged individuals are those who have been subject to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities." 15 U.S.C. § 637(a)(5). "[E]conomically 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). There is a presumption that Black Americans, Hispanic Americans, Native Americans, and Asian-Pacific Americans are socially and economically disadvantaged individuals. 15 U.S.C. § 637(d)(3)(C).² This presumption may be rebutted with credible evidence by a contracting officer, a failed bidder, or the Small Business Administration. 13 C.F.R. § 124.1017. In addition, any business concern or individual has the right to apply to be considered socially and economically disadvantaged. 13 C.F.R. § 124.201.

In order to help meet the goal of five percent participation, all competitive bids sought by the Department of Defense were subject to a ten percent preferential increase when competing with small businesses owned and controlled by socially and economically disadvantaged individuals (known as small disadvantaged businesses or "SDB's"). 10 U.S.C. § 2323(e)(3) reads in full:

To the extent practicable and when necessary to facilitate achievement of the 5 percent goal described in subsection (a), the head of an agency may enter into contracts using less than full and open competitive procedures (including awards under section 8(a) of the Small Business Act) and partial set asides for entities described in subsection (a)(1), but shall pay a price not exceeding fair market cost by more than 10 percent in payment per contract to contractors or subcontractors described in subsection (a). The head of an agency shall adjust the percentage specified in the preceding sentence for any industry category if available information clearly indicates that nondisadvantaged small business concerns in such industry category are generally being denied a reasonable opportunity to compete for contracts because of the use of that percentage in the application of this paragraph.

Here, Rothe contends that the PEA program unconstitutionally takes race into consideration, thus violating the Equal Protection guarantee of the Fifth Amendment.³ Although race is not the only consideration in determining whether a business will qualify as an SDB, Black Americans, Hispanic Americans, Asian-Pacific Americans, and other minorities are presumed to be both economically and socially disadvantaged. 15 U.S.C. § 637(d)(3)(C); 10 U.S.C. § 2323(a)(1)(A). Thus, even though the program benefits "socially and economically disadvantaged" businesses and individuals, the term is not race neutral because of the underlying rebuttable presumption. See also Sherbrooke Turf, Inc. v. Minn. Dep't of Transp., 345 F.3d 964, 969 (8th Cir.2003) (holding that although the program confers benefits on "socially and economically disadvantaged" individuals, a term which is race-neutral, strict scrutiny applies because the statute presumes minorities are in that class).

Rothe complains of the 5% goal and the PEA program on its face and as applied to Rothe's 1998 bid. Rothe has not brought a generalized challenge to the Small Business Act of 1958.⁴ The Small Business Act promotes a governmental policy of maximizing small business opportunities. 15 U.S.C. § 631. This policy choice by Congress is not at issue today. Instead, the issue presented is the constitutionality of the 5% goal and the preferential price increase that uses the race neutral term, "socially and economically disadvantaged individuals."

B. Procedural Background

Rothe originally filed this action...