United States: Nuziard v. Minority Business Development Agency: Another Blow To Federally Sponsored Affirmative Action Efforts

On March 5, 2024, a federal judge in Texas struck down a federally-sponsored racial preference extended to minority groups seeking to access capital and government contracts. Nuziard v. Minority Business Development Agency ("Nuziard"). Plaintiffs, who are non-minority business owners, challenged a preference provided by the Minority Business Development Agency ("MBDA"), a bureau of the Department of Commerce, to "socially or economically disadvantaged individual[s]," defined to include African Americans, Hasidic Jews, Hispanic Americans, Native Americans and Pacific Islanders. The court struck down the MBDA's presumption that such racial minorities are socially disadvantaged, finding the preference violated the Equal Protection Clause. Nuziard, like the recent decision by a federal court in Tennessee in Ultima Services Corp. v. U.S. Department of Agriculture ("Ultima"), follows the Supreme Court's decision in Students for Fair Admissions, Inc. v. Pres & Fellows of Harvard College, 600 U.S. 181 (2023) ("SFFA") and, like Ultima, advances the mission of activist organizations across the country seeking to invalidate race-based presumptions in federally funded and sponsored entitlement programs.

Nuziard Decision Summary

The MBDA serves "socially or economically disadvantaged individual[s]" pursuant to 15 U.S.C. § 9501(9)(A). The statute includes a presumption that the term "socially or economically disadvantaged individual" includes individuals who are Black or African American, Hispanic or Latino, American Indian or Alaska Native, Asian, and Native Hawaiian or other Pacific Islanders ("Presumption Rule"). The Nuziard plaintiffs, who did not fall into any of the prescribed racial categories, challenged the presumption under the Equal Protection Clause and Administrative Procedure Act. In striking down the Presumption Rule, the court applied the "strict scrutiny" test commonly used to evaluate race-based classifications under the Equal Protection Clause which asks: (1) if the racial classification furthers compelling government interest; and (2) if so, whether the classification is narrowly tailored to achieve those interests.

The government offered two compelling interests to justify the presumption favoring minorities under the MBDA program: (1) alleviating discrimination in access to credit; and (2) addressing discrimination in private contracting markets. Applying considerations provided by the Supreme Court's decision in the SFFA case, the court considered whether specific acts of historic discrimination caused the proposed compelling interests and whether the government "actively participated" in or contributed to the discrimination. The court rejected the government's "access to credit" interest, finding that although there was evidence to show historical discrimination against minorities in accessing credit, the record failed to trace such discrimination to specific disparities today. The court further determined that the record contained "no concrete evidence of government 'induction, encouragement, or promotion' of credit discrimination." The court found that the second proposed interest was a compelling government interest, based on the significant disparity ratios for minority business enterprises ("MBEs") in government procurement/prime contracting which necessarily suggested government participation in such discrimination.

Despite finding that the government had a compelling interest in remedying past discrimination in government contracting, the court determined that the MBDA's Presumption Rule was not narrowly tailored to further the compelling government interest. The court described the MBDA's race-based presumption as both under and over-inclusive, because the presumption excludes many MBEs owned by individuals from countries who are also disadvantaged while including individuals from "more affluent" countries. Additionally, once again citing the SFFA decision, the court determined that the MBDA's presumption was based on racial stereotypes and had no logical endpoint. Consequently, the court issued a permanent, nationwide injunction, enjoining the MBDA from utilizing the Presumption Rule or otherwise considering or using an applicant's race or ethnicity in determining whether they can receive MBDA programming.

What does Nuziard mean for government contractors and private businesses?

As Judge Pittman stated in the Nuziard decision, "[t]his is a case about presumptions," which suggests that any presumption-based race conscious law or policy may be vulnerable to a successful legal challenge. Under SFFA, Ultima, and now Nuziard, programs sponsored by the Small Business Administration, as well as the U.S. Department of Transportation's Disadvantaged Business Enterprise program, are just two examples of federal programs that may be challenged and transformed. The legal challenges could expand further, implicating state and local programs that rely on inclusion of any race-based or gender-based presumptions. In each instance, eligibility applications, as well as agency reviews and approvals, will likely become more restrictive and burdensome.

While neither Ultima nor Nuziard has a direct legal impact on private employers, the indirect effects are potentially profound. First, MBEs that are government contractors will no longer benefit from the presumption that certain racial groups are socially and economically disadvantaged, and, as a result, eligible for MBDA programs. Government contractors will likely see a revamp of the MBDA application process from race-based presumptions to requiring entities to submit narratives addressing a litany of "who," "where," "when," and "what" questions to support their claim of social or economic disadvantage, much like what the Small Business Administration did in the wake of the Ultima decision. Crowell & Moring discussed these changes in detail in a previous alert.

For their part, private employers should remain vigilant and well prepared to defend their DEI initiatives and employment decisions against claims that they unlawfully favor or advantage minorities. Judge Pittman's admonition in Nuziard that nothing in the SSFA decision should be "constrained" to the college admission context portends ongoing scrutiny of and challenges to employer efforts to advance diversity in their workplaces and business relationships, including with subcontractors and vendors. The considerations Crowell & Moring previously identified here after the SFFA decision remain all the more relevant following the Nuziard decision. Plaintiffs will likely continue to assert challenges to race-conscious policies, so employers should continue to assess their DEI policies and initiatives and consider whether to adjust the language in these policies to provide flexibility in this changing landscape.

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