Sept. 13 (Bloomberg) -- Minority vendors and contracting attorneys say a federal court ruling may damage a government program designed to boost disadvantaged businesses.
A U.S. judge in Washington ruled on Aug. 15 that the Defense Department can’t favor such companies for work on military simulators, which replicate what it’s like to fly a fighter jet or sail a ship.
The potential significance of the narrow decision at first escaped the notice of some contractors in the government’s so-called 8(a) program for disadvantaged firms, said David Stephens, chief executive officer of Katmai Government Services LLC, a minority vendor that has a contract at risk. Participants now say the ruling may have a broader effect on federal awards to minority-owned small businesses, already bracing for looming budget cuts designed to reduce the U.S. deficit.
“It is potentially the death knell of the 8(a) program,” Stephens said in an e-mail. His Anchorage, Alaska-based company, which makes technology used in simulators, received a notice from the Army 12 days after the decision declaring the “immediate cessation” of new minority-preference contracts related to the products, he said.
The ruling may “open the door to more lawsuits” challenging the program in other industries and federal agencies, said Alan Chvotkin, counsel and executive vice president of the Professional Services Council, an Arlington, Virginia-based association for contractors.
“The implications across the government could be significant,” Chvotkin said in a phone interview.
Justice Department Review
U.S. District Judge Emmet Sullivan ruled that setting aside the simulator contracts for minority-owned firms without specific evidence that they face discrimination in the industry violates the Constitution.
The government “provided no evidence whatsoever from which an inference of discrimination in that industry could be made,” said Sullivan, appointed in 1994 by former President Bill Clinton.
Unlike appeals court rulings, the decision of a single federal judge isn’t binding on any other court. Bill Miller, a spokesman for the U.S. Attorney’s Office for the District of Columbia, declined to comment on whether the Justice Department would appeal. He said his office is reviewing the court’s decision. Cheryl Irwin, a Pentagon spokeswoman, didn’t respond to requests for comment.
“The SBA is working with the Department of Justice and Department of Defense to review the decision and determine the appropriate next steps,” Emily Cain, a Small Business Administration spokeswoman, said in an e-mail.
The fears expressed by vendors may be overblown, based on the Defense Department’s reaction so far, said Joe Hornyak, a partner in the Tysons Corner, Virginia, office of law firm Holland & Knight LLP.
The Pentagon stopped awarding 8(a) contracts for simulators and related services, and won’t extend existing contracts through the program, according to an Aug. 22 memo obtained by Bloomberg.
“Businesses ought to feel fortunate that this is all the Department of Defense did,” Hornyak said in a phone interview. The Pentagon “could have looked at other industries to see if there was evidence of underrepresentation and discrimination and, if not, decided to stop awarding contracts in those sectors, as well.”
An increase in lawsuits challenging the preference program is “not as likely as you might think,” said Hornyak, who specializes in contracting law. “Most government contractors might be reluctant to take on an important program like the 8(a) program.”
Katmai, an Alaska Native-owned company, in April won a contract under the 8(a) program to maintain and upgrade technology used to train soldiers in detecting and reacting to artillery fire and to chemical and biological weapons, CEO Stephens said.
The contract had been valued at $12.6 million over five years and the company so far has been paid about $637,000. If the government doesn’t exercise further options, the agreement will end Dec. 31, and Katmai will have to fire 31 workers out of 275 employees.
The decision may have a “devastating” effect on minority firms, said Anthony Robinson, president of the Minority Business Enterprise Legal Defense and Educational Fund in Largo, Maryland.
“The discrimination that prompted the program still exists,” Robinson, who is also on the board of the Washington-based National Black Chamber of Commerce, said in a phone interview.
Filed in 1995
Minority-owned firms usually gain access to the government market through the preferential program. Without the protection it provides, “it’s almost impossible for them to survive,” he said.
The lawsuit that led to the decision was filed in 1995 by DynaLantic Corp., a Sayville, New York-based company that makes flight simulators and other military training equipment. It contested a Navy plan to award a contract for a flight simulator through the preference program.
Jeff Weinstock, vice president and part owner of DynaLantic, said the company filed the lawsuit because officials thought the firm was unfairly getting shut out of programs.
The court ruling “should help a lot” over time, he said. The company derives all of its revenue from simulator and training-related services.
DynaLantic primarily subcontracts with top contractors such as Waltham, Massachusetts-based Raytheon Co. and Bethesda, Maryland-based Lockheed Martin Corp. It has built simulators that imitate the experience of flying aircraft, ships and vehicles, including the Seawolf SSN-21 submarine, made by General Dynamics Corp., and the Huey II helicopter, made by Textron Inc.’s Bell Helicopter division.
In a filing yesterday in Washington, DynaLantic asked the judge to amend his order, arguing that the Aug. 15 ruling ``should have been broader on its restrictions'' on the Defense Department than just requiring evidence of discrimination in the industry.
``Merely articulating a strong basis in evidence for using the race-conscious Section 8(a) program in the simulation and training industry is not enough,'' Michael Rosman, a lawyer for DynaLantic, wrote in the filing.
The department should be blocked from issuing contracts through the 8(a) program until it can also show that the process meets the higher constitutional standard of being ``narrowly-tailored'' and meeting ``a compelling governmental interest,'' according to Rosman of the Center for Individual Rights, a Washington-based public interest group that opposes racial preferences.
The 8(a) program, established by Congress in 1978, was designed to help socially and economically disadvantaged companies compete for government work. Admission to the program gives entrepreneurs access to federal contracts that often aren’t subject to competition.
The SBA defines socially disadvantaged individuals as “those who have been subjected to racial or ethnic prejudice or cultural bias,” such as women, blacks, Hispanics, Native Americans and Asian-Americans.
Across all federal agencies, the program accounted for $16.8 billion in contract awards in the fiscal year that ended Sept. 30, more than the budget of the Commerce Department.
Eligibility is limited to U.S. citizens whose net worth can’t initially exceed $250,000 or rise above $750,000 while in the program.
The case is DynaLantic Corp. v. U.S. Department of Defense, 95-cv-02301, U.S. District Court, District of Columbia (Washington).
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