March 25, 1998
CRS Report for Congress
Received through the CRS Web
Legal Analysis of the 10% Disadvantaged Small
Business Set-Aside Provisions of H.R. 2400, the
"Building Efficient Surface Transportation and
Equity Act of 1997"
Charles V. Dale
Congressional Research Service
Surface transportation authorization bills before the 105th Congress continue a
10 % allocation of authorized funds for "socially and economically disadvantaged" small
business concerns as defined by the Small Business Act (SBA). The racial presumption
included in that SBA definition has figured in recent court cases challenging the
constitutionality of minority group preferences in federal transportation funding
The House will soon vote on H.R. 2400, the "Building Efficient Surface
Transportation and Equity Act of 1997"(BESTEA), an omnibus bill to fund surface
transportation into the next century. Like the version of the legislation which passed the
Senate in early March (S. 1173), BESTEA continues a provision from the current
transportation authorization law providing for a percentage allocation of appropriated
funds for "disadvantaged business enterprises" as follows: "Except to the extent that the
Secretary determines otherwise, not less than 10% of the amounts authorized to be
appropriated under titles I, II, III, IV, and VI of this Act shall be expended with small
business concerns owned and controlled by socially and economically disadvantaged
individuals."1 The italicized reference specifically incorporates the definition of the same
term as used in §8(d) of the Small Business Act2 and "relevant subcontracting regulations
promulgated pursuant thereto."
Section 8(d) in effect codified regulations of the Small Business Administration
(SBA) and established a "presumption" of social and economic disadvantage based on
§ 102(b)(1) of H.R. 2400.
15 U.S.C. §637(d).
Congressional Research Service ˜ The Library of Congress
minority group identification. Under the Act and SBA rules, small businesses owned and
operated by members of certain groups--including Blacks, Hispanics, Native Americans,
and Asian Pacific Americans--are "presumed" to be socially disadvantaged by the SBA.3
By contrast, nonminority applicants have the burden of proving "by clear and convincing
evidence" that they have been victims of "racial or ethnic prejudice or cultural bias" in
order to qualify as a disadvantaged business.4 In addition, the applicant must show that
"economic disadvantage" has diminished its capital and credit opportunities, thereby
limiting its ability to compete with other firms in the open market.5 Accordingly,
nonminority applicants seeking to establish social and economic disadvantage must satisfy
specified regulatory criteria.6
The ISTEA disadvantaged business "goal" provision was one leg of the statutory
"stool" supporting a U.S. Department of Transportation (DOT) affirmative action program
presently being challenged in the federal courts. The Federal Highway Lands Program,
a component of the Federal Highway Administration within DOT, had developed a "raceconscious subcontracting compensation clause (SCC)" program. The SCC did not allocate
or set-aside a specific percentage of subcontract awards for disadvantaged business
enterprises (DBEs) or require a commitment on the part of prime contractors to
subcontract with minority firms. Rather, "incentive payments" varying from 1.5% to 2%
of the contract amount were paid to prime contractors whose subcontracts with one or
more qualified DBEs exceeded 10% of total contract value. The SCC program was
challenged by a white-owned construction firm whose low bid on a subcontract for
highway guard rails was rejected in favor of a higher bidding DBE.
Prime contractors on major federal contracts are obliged by §8(d) to maximize minority
participation and to negotiate a "subcontracting plan" with the procuring agency which includes
"percentage goals" for utilization of small socially and economically disadvantaged firms. To
implement this policy, a clause required for inclusion in each such prime contract states that "[t]he
contractors shall presume that socially and economically disadvantaged individuals include Black
Americans, Hispanic Americans, Native Americans, Asian Pacific Americans, and other minorities,
or any other individual found to be disadvantaged by the Administration pursuant to §8(a)..." Id.
15 U.S.C. §637(a)(5).
The statute, 15 U.S.C. §637(a)(6)(A), defines economic disadvantage in terms of:
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 who are not
socially disadvantaged, and such diminished
opportunities have precluded or are likely to preclude
such individuals from successfully competing in the
15 U.S.C. §637(d). Criteria set forth in the regulations permit an administrative
determination of socially disadvantaged status to be predicated on "clear and convincing evidence"
that an applicant has "personally suffered" disadvantage of a "chronic and substantial" nature as
the result of any of a variety of causes, including "long term residence in an environment isolated
from the mainstream of American society," with a negative impact "on his or her entry into the
business world". 13 C.F.R. §124.105(c).
In a 1995 decision, Adarand Constructors v. Pena,7 the U.S. Supreme Court for the
first time applied the constitutional rigors of "strict scrutiny," an established judicial
standard for reviewing state and local affirmative action measures, to race-conscious
decisionmaking by the federal government. Thus, to pass constitutional muster, DOT had
to show that its program to "compensate" contractors on federal highway projects for the
added costs of doing business with "disadvantaged" minority subcontractors furthered a
"compelling governmental interest" and was "narrowly tailored" to that end. By a narrow
5 to 4 margin, the U.S. Supreme Court vacated a contrary appeals court ruling and
remanded the case for reconsideration.
On June 2, 1997, the U.S. District Court in Colorado issued its decision on remand
from Adarand in which it determined how strict scrutiny was to be applied to the DOT
program in question.8 Judge Kane readily conceded as a threshold matter that the
government had a "compelling" interest in "reducing discriminatory barriers in federal
contracting." Nearly two decades of congressional hearings into the social and economic
obstacles facing minority entrepreneurs, and "disparity studies" illustrating exclusion of
minority contractors at the state and local level, provided Congress with a "strong basis
in evidence" for concluding that a nationwide remedy was warranted. But the program
as administered failed the constitutional requirement of "narrow tailoring" because of its
"almost exclusive" emphasis on race and ethnicity.
The narrow tailoring aspect of strict scrutiny analysis generally entails consideration
of a host of factors--limitations on program scope and duration, waiver authority,
nonracial alternatives, and impact on nonminorities--relevant to the administration of
governmental affirmative action.9 Periodic congressional oversight and approval of federal
affirmative action remedies often appeared to be of pivotal constitutional significance in
the pre-Adarand era. The Court in Fullilove v. Klutznick10 pointed to the congressional
reauthorization process as an inherent limitation on the duration of a 10% set-aside of
federal public work funding for minority contractors, thereby insuring that it "is not a
permanent part of federal contracting requirements." Metro Broadcasting Inc. v. FCC 11
reviewed two FCC programs affording minority preferences in "distress sales" of existing
broadcast facilities and in comparative proceedings for new licenses as a means of
promoting "viewpoint diversity." In applying a standard of "intermediate scrutiny," Justice
Brennan wrote for the Court that it was "of overriding significance in these cases that the
FCC's minority ownership programs have been specifically approved--indeed, mandated--
115 S. Ct. 2097 (1995).
Adarand Constructors Inc. v. Pena, 966 F.Supp. 1556 (D. Colo. 1997).
In United States v. Paradise, 480 U.S. 149, 187 (1986), the U.S. Supreme Court identified
five factors which may be relevant to the determination of whether an affirmative action remedy
is narrowly drawn to achieve its goal: "(i) the efficacy of alternative remedies; (ii) the planned
duration of the remedy; (iii) the relationship between the percentage of minority group members
in the relevant population or workforce, (iv) the availability of waiver provisions if the hiring plan
could not be met; and (v) the effect of the remedy upon innocent third parties."
448 U.S. 448, 513 (Powell, J. concurring).
497 U.S. 547, 563 (1990).
by Congress."12 Thus, the Court distinguished earlier rulings which had applied strict
scrutiny state and local affirmative action programs on the grounds that the FCC program
was supported by Congress' institutional competence and commerce powers.
Just what weight the courts would accord the fact of congressional authorization or
reauthorization when determining whether a racial classification is narrowly tailored after
Adarand can only be speculated. The Supreme Court in Adarand "altered the playing
field" of prior federal affirmative action law by expressly overruling Metro's intermediate
review standard in favor of strict judicial scrutiny and left other aspects of the decision in
considerable doubt. In addition, the federal district court on remand from Adarand found
that the DOT program as administered lacked narrow tailoring for reasons unrelated to the
duration of the remedy. Consequently, it refused to address the government's argument
that regular congressional review of DOT's disadvantaged small business program since
1982 reinforced the current ISTEA program by assuring that it "will not last longer than
the discriminatory effect it is designed to eliminate."
Judge Kane's opinion does emulate Fullilove and Metro Broadcasting in its
deferential approach to the congressional determination of a compelling governmental
interest. But after conceding to Congress the power to determine and legislate the national
elimination of discriminatory barriers in federal contracting, the district court largely
forecloses the exercise of that legislative authority by race-conscious means. Any
constitutional fortification provided by congressional reenactment of the ISTEA
disadvantage business goal may prove marginal when measured against dicta from Judge
Kane's opinion that "it [is] difficult to envisage a race-based classification that is narrowly
tailored." Thus, while the absence of active legislative oversight could be a factor further
undermining the constitutional validity of congressional affirmative action measures, it is
questionable whether the mere reauthorization of existing authority would materially
strengthen race-conscious legislation against strict judicial scrutiny.
Two aspects of the district court's analysis of the "narrow tailoring" requirement
could prove most unsettling for federal small disadvantaged business programs if they
become the prevailing judicial view. First, the "optional" or voluntary nature of the SCC
program was not enough to save it, notwithstanding the fact that prime contractors were
free to accept bid proposals from any subcontractor, regardless of race or ethnicity. The
government's failure to prevail on this issue may cast a shadow over other federal minority
contracting efforts -- e.g., the § 8(a) set-aside, bid or evaluation preferences, and the
disadvantaged small business provision in ISTEA or BESTEA -- which, under Judge
Kane's reasoning, may be viewed as imposing a "choice based only on race" at least as
"mandatory" and "absolute" as the incentive payment to prime contractors in Adarand, if
not more so. Similarly, the fact that the SCC program did not expressly incorporate any
"goals, quotas, or set-asides" was not sufficient to divorce it, in the district court's view,
from the percentage goal requirements imposed by statutes the program was designed to
implement. Those statutory provisions--the 5% minimum disadvantaged small business
goal in § 8(d) of the SBA and the parallel 10% requirement in STURAA and ISTEA--were
deemed invalid for lack of narrow tailoring. The district court ruling could place in
Justice Brennan's reference was to Congress' enactment of FCC appropriations legislation
that prohibited the FCC from re-examining the two minority ownership policies at issue in Metro.
question much of the federal government's current effort to advance minority small
business participation in the procurement process by race-conscious means.