Small Disadvantaged Business | The Contracting Education Academy

April 25, 2017 By AMK

High court asked to review SBA disadvantaged biz program

An information technology contractor has asked the U.S. Supreme Court to review a D.C. Circuit decision upholding the U.S. Small Business Administration‘s 8(a) program for disadvantaged small businesses, arguing the panel’s majority failed to recognize that the program involves racial classification that requires strict scrutiny.

Rothe Development Inc., a nonminority-owned small business that mostly bids on federal defense contracts, filed a petition for a writ of certiorari after the D.C. Circuit denied panel and full-body rehearings of its split September opinion. In a 2-1 decision, a three-judge panel rejected Rothe’s challenge to the law underpinning the 8(a) program, ruling that the program was not unconstitutionally based on race.

However, in Rothe’s petition, filed on April 13, the contractor argued that until the panel issued its majority decision, Congress, the federal government and the courts had all recognized that the statutory provisions of the program use race-conscious means “to distribute burdens and benefits.” The panel’s assertion that the law implementing the program is race-neutral on its face ignores the plain language of the statute, Rothe said.

“In sum, the statutory provisions of the Section 8(a) program contain a paradigmatic racial classification because they distribute burdens and benefits on the basis of race,” Rothe said. “Because the panel majority’s contrary conclusion and failure to apply strict scrutiny are irreconcilable with the plain language of the provisions and this court’s precedents, review is warranted.”

Keep reading this article at: https://www.law360.com/publicpolicy/articles/914715/high-court-asked-to-review-sba-disadvantaged-biz-program

October 4, 2016 By AMK

D.C. Circuit upholds constitutionality of SBA’s 8(a) program

Last month, in Rothe Development, Inc. v. Department of Defense, the D.C. Circuit upheld the constitutionality of the Small Business Administration (“SBA”) 8(a) program by rejecting arguments that the Small Business Act contains an unconstitutional classification based on race.

8a-decision-sept-2016 The goal of the SBA’s 8(a) program is to expand government contracting opportunities to small business owners. Under the Small Business Act, the SBA enters into contracts with other federal agencies, which the SBA then subcontracts to eligible small businesses to compete for subcontracts in a sheltered market. Businesses owned by “socially and economically disadvantaged” individuals are eligible to participate in the 8(a) program.

Per the statute, socially disadvantaged individuals are those “who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities.”

Keep reading this article at: https://www.insidegovernmentcontracts.com/2016/09/d-c-circuit-upholds-constitutionality-sbas-8a-program/

September 28, 2016 By AMK

The thin legal case for affirmative action in contracting

Affirmative action in government contracting is alive — barely.

On September 9, 2016, a federal appeals court upheld a Small Business Administration program that gives advantages to people who have suffered racial discrimination, reasoning that the law as written doesn’t discriminate on the basis of race, because anyone can be the target of racial bias. The decision, which is based on paper-thin legal logic, is an attempt to keep remediation-based affirmative action from disappearing altogether. It may be too little, too late.

The program, known as 8(a) after the section of the Small Business Act in which it appears, gives a preference in government contracting to small businesses owned by “socially and economically disadvantaged” individuals. The law defines the socially disadvantaged as people “who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities.”

If this sounds like race-based affirmative action, that’s because it is. The SBA regulations implementing the law create a presumption that any member of racial minority has been subject to bias. Unless the presumption is overcome by evidence that the business owner hasn’t suffered discrimination — a pretty unlikely scenario — the program functions to give minority business owners an advantage.

Back in the day, the racial preference wouldn’t have been a legal problem. The original theory of affirmative action was precisely to remedy past discrimination by giving an advantage to those who had suffered its effects, namely racial minorities.

Keep reading this article at: https://www.bloomberg.com/view/articles/2016-09-13/the-thin-legal-case-for-affirmative-action-in-contracting

October 20, 2015 By AMK

Appeals court allows DBE fraud convictions to be offset by contract performance

In a recent ruling, Philadelphia’s U.S. Court of Appeals broke from precedent by allowing a defendant credit toward the financial judgement rendered even though the work performed was done fraudulently.

Joseph Nagle and Ernest Fink, defendants in the case, co-owned Schuylkill Products Inc. (Schuylkill), a manufacturer of concrete beams used in highway bridge work (United States of America v. Joseph W. Nagle and Ernest G. Fink, U.S, Court of Appeals for the Third Circuit, Sept. 30, 2015). SPI entered into an arrangement with a disadvantaged business enterprise (DBE) known as Marikina Engineers and Construction Corporation (Marikina).

Background

The U.S. Department of Transportation (USDOT) provides funds to state transportation agencies to finance transportation projects nationwide. These funds are used for highway construction, provided through the Federal Highway Administration (FHWA), or towards mass transit systems, provided through the Federal Transit Administration (FTA), or for airports, provided through the Federal Aviation Administration (FAA). In Pennsylvania, the FHWA provides funds to the Pennsylvania Department of Transportation (PennDOT).

Federal regulations require states that receive USDOT funds to set annual goals for participation in public transportation contracts by DBEs (49 CFR § 26.21). A DBE is a small business that is at least 51% owned by an individual or individuals who are both socially and economically disadvantaged and whose management and daily operations are controlled by one or more of the disadvantaged owners. State agencies set DBE goals when soliciting bids for a contract, and bids for the contract must show how the contractor will meet the goal. If the prime contractor is not a DBE, the goals are met by pledging that certain subcontractors that will work on a contract are DBEs. Typically, state DOTs certify businesses as DBEs. A business must be certified as a DBE before it or a prime contractor can rely on its DBE status in bidding for a contract. In order to count towards a contract’s DBE participation, a DBE must perform what is known as “Commercially Useful Function” on the contract. Therefore, a certified DBE whose “role is limited to that of an extra participant in a transaction, contract, or project through which funds are passed in order to obtain the appearance of DBE participation” cannot be counted towards DBE participation (Id. § 26.55(c)(2)).

The Case

Court records show that in 1993 the Schuylkill firm entered into an arrangement with Marikina, a Connecticut corporation owned and managed by Romeo P. Cruz. Because Cruz was of Filipino descent, Marikina qualified as a DBE for USDOT projects. Marikina was certified as a DBE in Connecticut and Pennsylvania, among other states. Schuylkill and Marikina agreed that Marikina would bid to serve as a subcontractor for highway and transit contracts that had DBE participation requirements. If Marikina was selected for the subcontracts, Schuylkill and a subsidiary would perform all of the work on those contracts. Schuylkill would pay Marikina a fixed fee for its participation but otherwise keep the profits from the scheme. To conceal the scheme, Schuylkill used fake Marikina letterhead, provided employees with fake Marikina business cards, put magnetic signs with Marikina’s logo on the sides of Schuylkill’s vehicles, and used a rubber stamp with Cruz’ signature to endorse checks. In court, it was undisputed that Schuylkill had in fact performed the work for which Marikina had bid, constituting fraud by virtue of misrepresentation of DBE status.

Between 1993 and March 2008, Marikina was awarded contracts under PennDOT’s and the Philadelphia transit system’s DBE program worth $135.8 million.

Ultimately, Fink pled guilty to one count of conspiracy to defraud the United States, and a jury found Nagle guilty of conspiracy to defraud the United States, wire fraud, mail fraud, conspiracy to engage in unlawful monetary transactions, and engaging in unlawful monetary transactions. Cruz and two of Schuykill’s employees were indicted separately, and they pled guilty to the charges along with agreeing to cooperate with the prosecution of Nagle and Fink.

The District Court concluded that the appropriate legal standard to calculate the amount of loss was the face value of the contracts Marikina received, and that the defendants were not entitled to a credit against the loss for the work performed because they had not allowed a legitimate DBE to perform the work.

The Appeals

Initially, Fink objected to the loss calculation on the basis that the proper loss amount was the pecuniary harm suffered by an actual DBE that did not receive the contracts — in other words, the profit an actual DBE would have received on the contracts. Nagle objected to the loss calculation on the grounds that: 1) there was no evidence another DBE was willing to perform the contracts, 2) the highway department and the transit agency received what they paid for under the contracts, and 3) the largest conceivable actual loss was the value of the contracts less overhead and expenses. A District Court found that they were responsible for the face value of the contracts Marikina received without any credit for the work performed on the contracts.

Before the Third Circuit Court of Appeals, Nagle and Fink insisted that the amount of loss they were responsible for was not the face value of the contracts Marikina received. Instead, they said that they were entitled to a credit for the services they performed on the contracts (100%), therefore reducing the loss to $0.

The Court of Appeals noted that while the transportation agencies did not receive the full benefit of the contracts in that the Government’s interest in having a DBE perform the work was not fulfilled, they did receive the benefit of having the building materials provided and assembled. The Court concluded that despite the DBE fraud, the District Court should calculate the amount of loss by taking the face value of the contracts and subtracting the fair market value of the services rendered under those contracts. This includes, the Appeals Court noted, “the fair market value of the materials supplied, the fair market cost of the labor necessary to assemble the materials, and the fair market value of transporting and storing the materials.” The Appeals Court also ruled that, “if possible and when relevant, the District Court should keep in mind the goals of the DBE program that have been frustrated by the fraud.”

The Significance

Time will tell what the District Court decides on re-sentencing Nagle and Fink and whether monetary penalties for DBE fraud, of any dollar level, are imposed. The Nagle decision explicitly governs a DBE case, thus it could affect similar DBE fraud cases in the future. The case also could become an important precedent for defendants in cases dealing with other sorts of fraud, including fraud involving contracts with 8(a), woman-owned, veteran-owned, HUBZone, and other small businesses.

October 16, 2014 By AMK

The small-business conundrum

Recent news reveals that federal agencies overstated their success last year in contracting with small businesses that face socioeconomic disadvantages. It turns out that the Small Business Administration’s inspector general identified over $400 million of contract actions awarded to ineligible firms, thus overstating SB goaling performance in FY13.

Download the IG report here.

While reasons for misreporting are one issue, the perennial issue of meeting SB goals persists. Some people joke that when an agency fails to meet their SB target, the response is to increase it. Does goal setting work? Everyone agrees with fundamental ideals of small entrepreneurs and businesses bringing fresh ideas, outlooks, and solutions to government and societal problems.

Keep reading this article at: http://www.federaltimes.com/article/20141008/BLG06/310080012/The-small-business-conundrum

Last month, in Rothe Development, Inc. v. Department of Defense, the D.C. Circuit upheld the constitutionality of the Small Business Administration (“SBA”) 8(a) program by rejecting arguments that the Small Business Act contains an unconstitutional classification based on race.

Affirmative action in government contracting is alive — barely.

In a recent ruling, Philadelphia’s U.S. Court of Appeals broke from precedent by allowing a defendant credit toward the financial judgement rendered even though the work performed was done fraudulently.

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