With the National Minority Enterprise Development (M.E.D.) Week awards approaching on October 20–26, 2024, it’s an opportune time to spotlight a few programs that aim to expand opportunities for minority-owned businesses. This three-part series will unpack the complex interplay between race-based set-aside procurement programs and historically underutilized business (HUB) development programs, delve into federal and state programs, and explore their impact on fostering a diverse business environment.
What are the Legal Standards for Race-Based Set-Aside and HUB Programs?
Race-based and HUB programs are evaluated under different legal frameworks established by case law analyzing the Equal Protection Clause.
Race-based set-aside programs are designed to address the present effects of past discrimination by reserving a portion of government contract spending for businesses owned by members of certain racial or ethnic groups. Because they explicitly consider race, these programs are closely regulated. To withstand legal challenges, these programs must demonstrate a compelling governmental interest and be narrowly tailored to achieve that interest, a legal standard known as “strict scrutiny.”
HUB programs aim to support businesses in economically disadvantaged regions or those owned by economically disadvantaged individuals, which may include minorities, women, veterans, and other groups. These programs often provide access to business development resources, training, and more, aiming to level the playing field for businesses that have been historically marginalized or overlooked. If HUB programs provide an automatic presumption of disadvantage based on race, they are subject to strict scrutiny. If they presume disadvantage based on gender, they must further an important government interest in a substantially related way, known as “intermediate scrutiny.” When a HUB program is race- or gender-neutral, however, it is evaluated under the least stringent standard, “rational basis scrutiny,” requiring that the program furthers a legitimate government interest in a way that is rationally related to that interest.
Satisfying the Legal Standard for Race-Based and HUB Programs
It is generally accepted that historical events reverberate, to some degree at least, into the present. But this assertion, however accurate, is not enough to justify the establishment of any programs. Justice Sandra Day O’Connor emphasized this in a pivotal case that set the standard for evaluating such programs. She said:
“[w]hile there is no doubt that the sorry history of both private and public discrimination in this country has contributed to a lack of opportunities for black entrepreneurs, this observation, standing alone, cannot justify a rigid racial quota in the awarding of public contracts . . . . [A]n amorphous claim that there has been past discrimination in a particular industry cannot justify the use of an unyielding racial quota.”
These programs require clear evidence of their necessity and effectiveness. The government interest requirement can be satisfied through two types of evidence:
- Statistical evidence that demonstrates the underutilization of minority or female firms relative to their availability in the jurisdiction’s market area, known as “disparity indices.” This is similar to the “disparate impact” analysis in employment discrimination cases.
- Anecdotal evidence detailing race- and gender-based barriers that hinder the full and fair participation of minority firms in the market area and in their attempts to secure contracts with the agency, akin to the “disparate treatment” analysis used in employment discrimination cases.
The requirement to tailor the program to advance the government’s interest is fulfilled by answering five questions to ensure that the remedy is appropriate:
- How effective is the remedy in addressing the identified discrimination?
- How closely are the numerical benchmarks for government spending and the availability of minority- and women-owned firms correlated?
- Do the remedies actually help the intended beneficiaries?
- What are the negative impacts of the remedy on third parties?
- How long will the program persist?
To observe how these standards are applied in practice, consider following the process used by the Phoenix, Arizona Public Transit System to establish benchmarks in the Disadvantaged Business Enterprise (D.B.E.) program.
What’s Next: Federal Programs
In the next installment of this series, we’ll explore various federal programs, such as the 8(a) Business Development Program and the D.B.E. program, to understand how these initiatives aid minority-owned businesses.
For more information or to discuss further, please contact KJK attorney Gregory L. Williams (GLW@kjk.com).