The Court of Appeals for the Federal Circuit provided another piece of the 20 year development of the law in the area of racially preferential contracting procedures earlier this month in Rothe Development Corp. v. Dept. of Defense and Dept. of the Air Force. http://www.cafc.uscourts.gov/opinions/08-1017.pdf. The Court held that the statute, 10 USC §2323 (“Section 1207”) was facially unconstitutional because Congress lacked the requisite “strong basis in evidence” at the time of the most recent re-enactment of the law.

Section 1207 was originally enacted in 1986 and made effective for three years, and has been re-enacted at the end of every three-year period since then. The current version of the statute was enacted in 2006 and is set to expire in 2009.

Section 1207 created a goal that five percent of Department of Defense (DOD) contract dollars be awarded to businesses owned by socially and economically disadvantaged individuals (known as socially disadvantaged businesses, or SDB’s) and authorized the entry into “contracts using less than full and open competitive procedures” in order to reach this goal. The contractual procedures authorized by Section 1207 were constrained by a limitation that the DOD not pay more than ten percent over fair market value on any contract. This limitation was implemented by the DOD in the form of a price evaluation adjustment (PEA) of ten percent added to non-SDB bids.

Rothe was the lowest bidder on an Air Force contract pertaining to computer systems and communication services, but lost the contract to a higher bid submitted by a minority-owned business because of the ten percent PEA increase. The minority-owned business was considered a SDB under Section 1207 based on a presumption incorporated from the Small Business Act (SBA) that members of minority races are socially disadvantaged individuals. Because of this racial distinction, the statute was subjected to “strict scrutiny” when reviewed for compliance with the Fifth Amendment Due Process Clause guarantee of equal protection. The Court found that Congress did not have a “strong basis in evidence” when it determined that DOD was a passive participant in racial discrimination. Thus, a race-conscious remedy was not justified.

Rothe may not be as far reaching as it appears for two reasons. First, the decision was heavily fact-driven. Twenty-five of the forty-seven pages review the statistical and other evidence relied on by Congress during the 2006 re-enactment. The Court stated that its holding was case-specific and avoided setting blanket rules or deciding whether a further re-enactment of the statute would be constitutional.

Second, the defendants are considering an appeal to the U.S. Supreme Court and have asked that enforcement be suspended pending that appeal. If enforcement is suspended and Congress re-enacts the statute with a different evidentiary basis, Rothe may never have any effect.