On March 5, 2024, the U.S. District Court for the Northern District of Texas ordered the Minority Business Development Agency (MBDA) to cease using race or ethnicity as a basis for determining access to agency programming. Judge Mark T. Pittman’s opinion heavily relies on the U.S. Supreme Court’s decision, Students for Fair Admissions v. Harvard (SFFA), in which the Supreme Court struck down the affirmative action student admissions policies of several universities.
While the MBDA opinion acknowledges that SFFA involved race-based college admissions policies, the U.S. District Court noted “nothing in the decision indicates the Court’s holding should be constrained in that context.” With that acknowledgement, the U.S. District Court continues the anticipated expansion of SFFA’s reasoning by courts nationwide. This decision implicates the viability of diversity, equity and inclusion (DEI) initiatives both within the education industry and beyond.
Background
As McGuireWoods discussed in alerts on June 29 and July 5, 2023, SFFA involved two cases brought by Students for Fair Admissions against Harvard University and the University of North Carolina at Chapel Hill (UNC) in which the Supreme Court held that the consideration of race in the universities’ admissions processes violated Title VI of the Civil Rights Act of 1964 and the equal protection clause of the Fourteenth Amendment of the U.S. Constitution.
MBDA Opinion
The MBDA, an agency under the U.S. Department of Commerce that was permanently authorized by the 2021 Infrastructure Act, serves to “promote the growth of minority owned businesses through the mobilization and advancement of public and private sector programs, policy, and research.” The agency promotes this mission through operating centers that provide access to grants, consulting services and other programs to support minority-owned businesses.
In March 2023, prior to the SFFA decision, three plaintiffs filed suit against the MBDA. All three individuals are white men who own their own small businesses and sought the agency’s assistance. While one of the plaintiffs determined that he was ineligible to apply for MBDA services from his own research, the other two were told up front that they were ineligible because they were not minorities. The plaintiffs subsequently filed suit in the Northern District of Texas against the MBDA.
The court ruled that the statute authorizing the MBDA was unconstitutional, primarily because the statute presumed that the plaintiffs were not disadvantaged. The court emphasized that the equal protection clause under the Fourteenth Amendment prohibited “governmentally imposed discrimination based on race.” Any exceptions to this had to be for a compelling purpose and sufficiently focused on obtaining measurable objectives warranting the use of race. While the court found that remedying historic discrimination in government contracting (specifically within the realm of public procurement and prime contracting) was a compelling government interest, the MBDA’s racial presumption was not narrowly tailored to warrant the use of race as a factor deciding the class of individuals eligible to utilize the MBDA’s services.
Of note, the court used the SFFA decision as a basis to evaluate whether the MBDA’s racial presumption was narrowly tailored. Applying SFFA, the court found (1) that the MBDA’s race-based presumption was both underinclusive (citing to the agency’s arbitrary exclusion of minority business enterprises owned by individuals from the Middle East, North Africa and North Asia), as well as overinclusive (since the agency presumed that members of a given racial group may or may not have experienced discrimination); (2) that, by stereotyping applicants, the MBDA was using race “as a negative,” and (3) that the MBDA’s presumptions of who constitutes a “socially or economically disadvantaged individual” had no “logical endpoint.”
Specific to MBDA’s stereotyping, the court makes an explicit reference to the applicability of SFFA: “Though SFFA concerned college admissions, nothing in the decision indicates the Court’s holding should be constrained to that context.” The U.S. District Court’s extension of SFFA’s logic is the latest among several notable cases that have relied on SFFA outside the college admissions context. As eager litigants digest the Supreme Court’s ruling, government and private institutions are likely to see similar challenges.
Effects on the Education Industry and Beyond
The U.S. District Court’s extension of SFFA in the MBDA opinion highlights the potential extension of SFFA beyond its facts. Although the Supreme Court refused to grant emergency relief enjoining West Point from considering race in its admissions process, as discussed in an alert on Feb. 9, 2024, and denied certiorari in a case contesting the admissions policies of a Northern Virginia high school, individual members of the Supreme Court signaled their willingness to decide these issues.
Outside the education industry, the MBDA opinion sets up the potential for more scrutiny of governmental programs at both federal and state levels. The most obvious example is the litigation against the U.S. Small Business Administration (SBA). As described in a Sept. 29, 2023, alert, the SBA’s 8(a) program supports small businesses that are at least 51% owned by individuals who are socially disadvantaged. Similar to the MBDA, the 8(a) program’s authorizing regulation includes a rebuttable presumption that certain racial and ethnic groups qualify as socially disadvantaged. In July 2023, the U.S. District Court for the Eastern District of Tennessee enjoined the SBA from using its rebuttable presumption to administer the 8(a) program. SBA has since issued interim guidance compelling 8(a) participants to establish their social disadvantage by completing a social disadvantage narrative.
Additionally, an ongoing case against the Department of Transportation may affect its Disadvantaged Business Enterprise program. At the local level, in a suit supported by the Pacific Legal Foundation, a group of Asheville, North Carolina, residents filed suit in September 2023 protesting the city’s “appointment preference for minority applicants” to a local commission.
While the eventual disposition of the MBDAmatter remains unclear, courts have begun expanding upon SFFA — both within the education industry and beyond — and there will certainly be more to come.
For help analyzing the scope and impact of SFFA and the MBDA decision for your organization, please contact the authors, your McGuireWoods contact or a member of the firm’s labor and employment, government contracts or education teams, or the DEI practice team.