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House Committee Holds Hearing on SBA Procurement Rules

On January 16, the House Small Business Committee held a hearing on the Small Business Administration’s (SBA) recently released proposed rule on the implementation of the Women’s Procurement Program. The government established in 1994, as part of the Federal Acquisition Streamlining Act (P.L. 103-355), a five percent, government-wide goal for participation by women-owned small businesses (WOSBs) in federal procurement contracts. The contracting goal has not been met, with 3.4 percent of federal contracts being awarded to WOSBs as of FY2006. Additionally, Congress enacted in 2000 the Equity in Contracting Act (P.L. 106-554), which required the SBA to identify the industries in which WOSBs were underrepresented in federal procurement contracting. The proposed SBA rule seeks to implement the Women’s Procurement Program by designating the industries in which women-owned small businesses are underrepresented and requiring federal agencies to conduct an analysis of their respective procurement histories of discrimination against women-owned small businesses (WOSBs).

“It is evident that few if any women-owned businesses will benefit from the new regulation,” said Chair Nydia Velázquez (D-NY). “As a result, of the more than 10 million women-owned businesses in this country, only 1,247 businesses would qualify. Women entrepreneurs in industries like construction and manufacturing, [which] are omitted, are left scratching their heads.” She added, “Perhaps most problematic, the proposed rule appears to exceed what is constitutionally required. As a gender-based program, ‘intermediate scrutiny’ is called for. But instead, it appears that the administration is stealthily applying a restrictive ‘strict scrutiny’ standard. They can call it what they want, but the reality is that this is a standard that has no place in this rule.”

In discussing the constitutional issues associated with establishing a gender-based program, Elizabeth Papez, deputy assistant attorney general at the Department of Justice, said, “To be constitutional, federal programs that discriminate on the basis of gender in awarding government contracts must pass muster under the equal protection component of the Due Process clause of the Fifth Amendment.” She continued, ”Gender-based preferences must satisfy ‘intermediate’ or ‘heightened’ scrutiny, which the Supreme Court has identified as considerably more demanding than rational basis scrutiny, but distinct from the strict scrutiny the court applies to government preferences based on race…The Justice Department’s position on gender-based set-aside programs reflects [rulings in federal] cases and the simple lesson they offer federal entities considering such programs: If those entities…wish to maximize the chances that a particular program will survive constitutional scrutiny, it is both legally appropriate and legally prudent to require evidence of discrimination before implementing the program. This position accords with the requirement that the federal government administer all federal programs, including those benefiting women, in a constitutional manner, consistent with Supreme Court and other federal judicial precedents evaluating gender-based preference programs.”

Denise Farris, an attorney testifying on behalf of Women Impacting Public Policy, countered the Justice Department’s assertion that disparity studies and agency determinations of discrimination were necessary to implement the Women’s Procurement Program in a constitutionally sound manner: “…[T]he proposed rule not only incorrectly applies strict scrutiny, but creates a new ‘strict, strict scrutiny’ standard…We believe, based on legal history, that a gender-based program should use ‘intermediate scrutiny’ as the proper legal standard of review.” She added, “[I]nstead of authorizing restricted competition immediately in [the industries in which women-owned businesses are underrepresented], as should be allowed through the statistical study just completed, the SBA placed an additional requirement on any agency wishing to restrict competition to WOSBs to conduct its own internal study proving that it has actively discriminated against women business owners. Not only is this additional layer of study not required or even applicable for gender-based programs, but it represents an additional layer of review even if strict scrutiny were the correct standard to apply in the first place. This additional investigation poses another delay in program implementation and additionally requires the agency to go a step further in making express findings of discrimination against itself. We do not believe that any other groups who are recipients of restricted competition under the Small Business Act, such as 8(a) or service-disabled veterans, are subject to this new ‘strict, strict scrutiny,’ as proposed in this rule.”

Ranking Member Steve Chabot (R-OH) focused his remarks on the methodology the SBA used to determine the four industries national security and international affairs; coating, engraving, heat treating, and allied activities; household and institutional furniture and kitchen cabinet manufacturing; and other motor vehicle dealers — in which women-owned businesses are underrepresented: “The notice of proposed rulemaking identifies certain industries in which women-owned small businesses are underrepresented in federal government contracting. However, I am troubled by the fact that the notice does not provide the public with sufficient information on the type of probative evidence that would convince the agency to expand the scope of the industries initially covered by the rules.” He continued, “The crucial part of the program is the identification of industries in which women-owned businesses are underrepresented in the federal procurement. In the notice, the SBA proposes to calculate underrepresentation every five years, but fails to specify how it will make that calculation. Without that information, the potentially affected public has no way of accurately informing the SBA whether the proposal is adequate.”

SBA Administrator Steven Preston explained the history of the various studies and how the SBA identified the four industries: “Consistent with the requirement in the legislation for the SBA to determine the underrepresentation of WOSBs in the federal contracting marketplace, SBA itself conducted a study to establish the necessary findings. Once completed, an independent panel of experts at the National Academy of Sciences (NAS) reviewed the study to assess the sufficiency and validity of SBA’s methodology. Ultimately, NAS concluded that the original SBA study was flawed. NAS recommended a methodology for performing a study that would more effectively withstand legal and statistical scrutiny.” Mr. Preston continued, “…SBA awarded a contract to the RAND Corporation and it commenced work on a study, in accordance with the methodology recommended by NAS, to determine those industries in which women-owned small businesses are underrepresented and substantially underrepresented in federal procurement.” He went on to say, “The methodology utilizing the dollar amount was found to be the most valid measure of WOSB contract participation because…the very goal (five percent WOSB) the statute intended to support is based on contracting dollars…Congress appropriates federal funding in dollars…all government contracts are awarded in dollars…accounting and auditing processes focus on how dollars are spent; and contract actions do not allow for an accurate accounting of the financial benefits of business development that occur when small businesses receive federal contracts.”

Margot Dorfman, chief executive officer of the U.S. Women’s Chamber of Commerce, said, “The arbitrary and unscientific method they have chosen to select the industries for this program looks more like something pulled out of a hat [rather] than the results of seven years of work and a scientific disparity study. And the outrageous requirement that every agency conduct studies of discrimination in all industries only shows us how far this administration will go to prevent women from gaining fair access to federal contracts.” Ms. Dorfman continued, “Using the NRC [National Research Council] recommendations and the RAND [study] data that followed, 87 percent of all industries should be included as underrepresented [by women-owned businesses] in federal contracting…The SBA threw out the NRC’s scholarly recommendations and whittled away at possible measurements until they found a narrow selection they liked. Then, they tried to move the emphasis from underrepresentation to discrimination and tagged on the incredible requirement that every agency complete a discrimination study in every industry. Again, the SBA has turned years of time and money into a ridiculous circus, treating the lives of thousands and thousands of American citizens as toys in some political game.”

Jennifer Brown, vice president and legal director of Legal Momentum; Beth Gloss, president of United Materials, LLC; and Pam Rubenstein, president and chief executive officer of Allied Specialty Precision, also testified.

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