The legislation from Sens. Maria Cantwell, D-Wash., and Jerry Moran, R-Kan., titled the Small Business Artificial Intelligence Training and Toolkit Act, would have the Commerce secretary work with the administrator of the SBA on creating AI training resources for small businesses located in rural areas, Tribal communities, or other underserved regions. The training resources would be centered on artificial intelligence and emerging technologies, including quantum technologies, among other topics.

Those trainings would be provided via grants distributed by the SBA, as well as through gifting from the private sector. The Commerce Department would also submit reports to Congress about the state of the program. The legislation requires Commerce to update these trainings, too. 

“Small businesses are the foundation of the U.S. economy, making up 99 percent of all businesses,” Cantwell said in a statement. “They drive economic growth and innovation. It is essential that all American entrepreneurs — especially our small businesses — have access to AI training and reskilling in the 21st-century marketplace. This bill gives small businesses a boost with new tools to thrive as we step into this innovative era.”

The SBA has already taken some steps to encourage businesses to deploy the technology, though the agency’s ability to inventory its AI use cases has also attracted some scrutiny from Congress.

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In a letter dated May 9 and made public this week, Ernst primarily requested details about how the SBA is managing IT investments through its IT Working Capital Fund, which the Iowa Republican said it hasn’t used appropriately. But she also probed the agency for details about its AI use cases, alleging the SBA had uses it hadn’t reported publicly in its annual inventory.

“In a recent interview, you stated that the SBA has embraced AI. Despite this, the SBA has not been transparent and reports that it has not used AI,” wrote Ernst, ranking member of the Senate Committee on Small Business and Entrepreneurship. 

AI use case inventories, which were required initially under a Trump-era executive order and later enshrined into statute, are intended to provide information about agency uses of the technology in disclosures posted on their websites. 

However, Stanford research, a Government Accountability Office review, and FedScoop reporting have found that AI inventories have lacked consistency and, in some cases, have omitted uses that should be made public. The Biden administration has recently expanded reporting requirements for those inventories and is looking to improve them.

While the SBA’s AI use case inventory currently shows no uses of the technology, Ernst cited several instances in which the agency had publicly touted AI use cases at the agency. 

She highlighted a May 2023 press release that stated “SBA will use advanced data analytics, third party data checks, and artificial intelligence tools for fraud review on all loans in the 7(a) and 504 Loan Programs prior to approval, starting August 1, 2023.” 

Ernst also pointed to a June 2023 press release that said the agency had used “several tools, including first-of-its-kind artificial intelligence,” to block millions of applications for pandemic relief that were ineligible, duplicative, or attempts at fraud.

In addition to IT investment information and AI disclosure, Ernst also requested information about how SBA planned to use its IT Working Capital Fund to improve its score for the Federal Information Technology Acquisition Reform Act.

Ernst said despite the establishment of the fund — which was created under the Modernizing Government Technology Act that became law in 2017 — SBA “has had declining performance in its efforts to manage IT and implement” FITARA. In the past three years, the agency hasn’t achieved higher than a “C” on its FITARA score, which tracks agency IT modernization progress.

The SBA confirmed to FedScoop that it had received the letter but didn’t provide further comment. Ernst had requested a response by May 23.

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In March 2020, as COVID-19 emerged as a global threat, it became apparent that millions of small businesses were headed into economic peril. While White House officials and lawmakers moved with unusual speed to enact the Coronavirus Aid, Relief and Economic Security (CARES) Act, the task of administering financial aid to small businesses suddenly fell on the U.S. Small Business Administration (SBA).

Legacy challenge

As an independent cabinet agency with fewer than 3,000 employees, the SBA had, until then, managed small business loan and grant applications using an email-based processing and approval system involving shared mailboxes built on Microsoft Outlook. The agency’s outdated backend infrastructure had never been designed — and was ill-equipped — to handle the overwhelming volume of relief requests flooding in from all 50 states once the CARES Act was enacted. Inboxes and storage capacities hit their daily caps almost immediately. Customers started to receive “undeliverable” messages. And SBA employees were unable to keep up with the skyrocketing workloads.

SBA’s leadership quickly recognized what many other public and private sector organizations discovered at the onset of the pandemic — to remain effective in an environment of rapidly escalating and fast-changing needs, they needed to transition quickly from their existing operating systems and adopt a more modern and scalable digital solution that could meet their rapidly-changing needs.

Transformative solution

SBA officials turned to a cloud-based customer relationship management (CRM) platform, Microsoft Dynamics 365. The platform not only offered the scalability and customization the SBA needed but also allowed the SBA to implement a wide range of integrated features, including email automation, auto-routing, metrics recognition, storage optimization, spam prevention, app integration, and auditing capabilities.

More fundamentally, the shift to a modern CRM platform enabled the SBA to transition from a series of manual, labor-intensive processes to a more efficient, automated system that could quickly scale to the volume SBA needed.

Improved outcomes

Adopting a modern, cloud-based CRM platform not only helped SBA overcome a host of technology bottlenecks but also resulted in significant improvements in the SBA’s internal operations and customer service. The platform:

• Centralized all customer interactions and attached documents into a single contact record, saving a significant amount of time previously spent verifying that all required documents had been received.
• Categorized requests and automated routing, resulting in timelier responses and fewer requests left in limbo.
• Reduced much of the manual work associated with evaluating requests and eliminated common processing errors, enhancing productivity.
• Allowed SBA staff to more quickly triage cases and review work origins, notes, updates, and activities that had occurred across multiple teams for faster response.
• Provided customers with an easier way to submit a standardized inquiry using a convenient web form on my.sba.gov, built on Dynamics 365 Portal, rather than typing out an email. Customers can also schedule appointments through a Microsoft Power Pages Portal (appointment.sba.gov), assigned to SBA staff and fulfilled within the Dynamics 365 Customer Service platform.

By making it easier to integrate apps and implement a knowledge base reference library, the modernization effort also allowed the SBA to consolidate information from various sources and streamline the decision-making process. That effort was further enhanced with the creation of a Tier 1 dashboard for individual users and a Tier 2 dashboard for team leads to track overall caseloads, giving SBA staff the ability to make data-driven decisions faster and adapt to changing circumstances.

Mission modernization

Moving to a scalable, cloud-based CRM platform helped the SBA rally quickly in response to the sudden flood of aid requests. It also catapulted the SBA’s ability to meet its broader mission of serving and supporting small businesses.

In particular, the new platform made it possible for the SBA to manage activities more effectively with — and gain deeper insights about — more than 11 million individuals in its contact list.

“We can come to the campaign tabs [on the dashboard] and see a list of all of the different campaigns that the SBA has created inside of the platform,” explained SBA Program Manager Brian Quay. The software allows SBA staff to roll up all the cases associated with a contact record and even view image files to validate what information has been provided. It also allows SBA staff to see the status and performance of various marketing campaigns and activities.

“We can see…the number of members that were on [a particular] marketing list, how many messages were successfully sent to them, and failures. This is something that has been a huge productivity gain for SBA [staff], who were previously mainly sending those emails out through Outlook without an ability to track success,” the official said. Altogether, the platform helped SBA create and send more than 50 million templated outreach email from February to September 2023.

Another dimension of the SBA’s customer service modernization is the implementation of Power BI dashboards natively embedded into Dynamics 365. This allows executives who aren’t trained to use Dynamics to still access the metrics it provides by leveraging Power BI on the web or their mobile devices.  

Within two and a half years, the SBA expanded the platform from four mailboxes to over 200 individual inboxes, used by close to 80 teams with an unprecedented volume of activity. According to recent estimates, the platform now tracks over 20 million cases to date and has resulted in operational cost savings of over $25 million.

Lessons learned

The SBA’s transition from an email-based tracking system to a cloud-based CRM platform yielded several valuable lessons for federal executives considering a similar transformation:

Firstly, the importance of scalability cannot be overstated. In a crisis situation, the ability to quickly scale up operations is crucial, and a flexible digital platform can make all the difference.

Secondly, customization matters. Tailoring the system to the agency’s unique needs ensures maximum efficiency and usability.

Thirdly, integration capabilities are a game-changer. The ability to connect different tools and data sources creates a unified ecosystem, enabling faster decision-making.

Lastly, automation is a key enabler of efficiency. By automating routine tasks, agencies can focus their efforts on high-impact activities and respond swiftly to emerging challenges.

The Small Business Administration’s journey to digital modernization also demonstrates that in a rapidly evolving world, embracing innovative solutions is not just an option; it’s a necessity to empower organizations to thrive, grow, and support those they serve.

The report was produced by Scoop News Group for FedScoop, as part of a series on innovation in government, underwritten by Microsoft Federal.

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While many of these actions are still preliminary, growing focus on the technology signals that federal officials expect to not only govern but eventually use generative AI. 

A majority of the civilian federal agencies that fall under the Chief Financial Officers Act have either created guidance, implemented a policy, or temporarily blocked the technology, according to a FedScoop analysis based on public records requests and inquiries to officials. The approaches vary, highlighting that different sectors of the federal government face unique risks — and unique opportunities — when it comes to generative AI. 

As of now, several agencies, including the Social Security Administration, the Department of Energy, and Veterans Affairs, have taken steps to block the technology on their systems. Some, including NASA, have or are working on establishing secure testing environments to evaluate generative AI systems. The Agriculture Department has even set up a board to review potential generative AI use cases within the agency. 

Some agencies, including the U.S. Agency for International Development, have discouraged employees from inputting private information into generative AI systems. Meanwhile, several agencies, including Energy and the Department of Homeland Security, are working on generative AI projects. 

The Departments of Commerce, Housing and Urban Development, Transportation, and Treasury did not respond to requests for comment, so their approach to the technology remains unclear. Other agencies, including the Small Business Administration, referenced their work on AI but did not specifically address FedScoop’s questions about guidance, while the Office of Personnel Management said it was still working on guidance. The Department of Labor didn’t respond to FedScoop’s questions about generative AI. FedScoop obtained details about the policies of Agriculture, USAID, and Interior through public records requests. 

The Biden administration’s recent executive order on artificial intelligence discourages agencies from outright banning the technology. Instead, agencies are encouraged to limit access to the tools as necessary and create guidelines for various use cases. Federal agencies are also supposed to focus on developing “appropriate terms of service with vendors,” protecting data, and “deploying other measures to prevent misuse of Federal Government information in generative AI.”

Agency policies on generative AI differ

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“There is no basis in the Court’s order or federal law for such relief,” the Justice Department, which represents SBA and the Department of Agriculture, said of the requested injunction for the administrative and technical support industry.

The DOJ also called other remedies requested by Ultima to appoint a monitor to SBA’s certification of 8(a) participants and enjoin SBA’s ongoing efforts to comply with the court’s order “drastic” and “extraordinary.”

The Friday memo filed in the U.S. District Court for the Eastern District of Tennessee is a response to Ultima Services Corp.’s request for relief beyond an injunction that prevents the SBA from using a “rebuttable presumption” of social disadvantage in the 8(a) program aimed at broadening the pool of federal government contractors.

The rebuttable presumption made it easier for businesses owned by people belonging to certain racial and ethnic groups to qualify for the social disadvantage requirement of the program. But in July, the court ruled that the presumption violated Ultima’s right to equal protection. The decision cited the Supreme Court’s decision striking down the use of race in college admissions, which came less than a month before.

Earlier this month, Ultima requested that the court go further. Among its requests, it asked the court to bar the use of the 8(a) program in the industry it’s a part of: The administrative and technical support industry. It defined that as spanning three North American Industry Classification System (NAICS) codes for industries.

“This would bar not just Defendants—but every federal agency— from using the 8(a) program in three of the largest industries used by the program,” the DOJ said in its Friday filing. “It also would prevent 8(a) participants who never even benefitted from the presumption—and those that did but have since established social disadvantage without it—from fully participating in a lawful federal contracting program.”

In addition to its requested industry-specific injunction, Ultima also asked the court to prevent SBA from exercising contract options or making similar modifications to contracts with 8(a) businesses that relied on the rebuttable presumption and “providing a shortened or less rigorous review of narratives of social disadvantage” than the agency did before the court’s order.

But the DOJ said Friday that “Defendants have fully complied with the Court’s order.”

Following the injunction, the SBA started requiring so-called “narratives” of social disadvantage for businesses that previously qualified under the presumption. Those narratives, which require business owners to detail bias and discrimination they’ve faced, must be approved for a business to receive new contract awards.

“Out of an abundance of caution, SBA has treated the Court’s order as requiring more than eliminating the presumption at the application stage,” DOJ said, noting the agency doesn’t typically review a business’s social disadvantage after they’ve applied for the program.

The SBA also temporarily halted new applications to the program while it was working to comply with the order. According to the new filing, it reopened that portal on Friday.

The DOJ further said that Ultima’s suggestion that businesses that previously relied on the presumption won’t be held to the same standard for social disadvantage as other applicants is “without merit.”

“Since the Court’s order, all social disadvantage determinations have been made using the standard previously used for applicants who were not members of the designated groups entitled to rely on the presumption,” the DOJ said.

An attorney for Ultima didn’t immediately respond to a request for comment.

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The House Committee on Small Businesses hosted a hearing Wednesday morning with private-sector leaders to discuss recovering stolen pandemic loan funds and establishing safeguards against digital fraud in the event of another national emergency. 

While the amount of money lost to fraudulent actors is contested — argued to be a range of amounts up to $36 billion and more than $400 billion — committee members looked to identity verification and biometrics technology that agencies like the Small Business Administration used that were not effective during the pandemic, as well as how bad actors used stolen information to commit fraud. 

Industry leaders offered solutions to fight digital fraud, which included presentation attack detection (PAD), to defend against those trying to enter online platforms with masks or computer-generated images that try to trick biometric verification processes. Other witnesses spoke to the data that was stolen and used in order to steal the identities of other small businesses. 

“I want to show you the actual log-ins that our vendors accepted as real people,” Rep. Aaron Bean, R-Fla., said during the meeting, displaying various pictures of dolls that were used for biometric verification in order to acquire government loans meant for small businesses. 

ID.me, an online platform to help prevent fraud and abuse, uses software to detect false presentations in biometric verification. Such technology could be used in the future in order to prevent fraudulent behavior, but it wasn’t employed throughout the pandemic to assist in protecting small business funds.

J.T. Taylor, senior director of fraud investigations and operations at ID.me, identified the images that Bean presented as “masks” that were able to get through online platforms to commit fraud. Taylor stated that through biometric verification software ID.me uses, this could have been prevented and has been used to detect fraud. 

“We stopped these at the gate and you can see [those committing fraud] got through various platforms,” Taylor said in an interview. “The way that it does that is it’s looking for depth cues as well as pixelation. That [PAD] is a software, and then we run that in the verification platform servers.”

While biometric verification has been offered as support for agencies that are trying to defend against fraud, Linda Miller, founder and CEO of Audient Group, said that stolen information was used most widely to commit fraud. 

“It’s important to note that identity theft plays a role in loan fraud, but it was not the largest driver of fraud,” Miller said during the hearing. “Front-end identity verification technology including remote biometrics is but one tool in [Small Business Administration’s] toolset, and it is by no means a panacea,” 

Miller reported that those who successfully committed fraud created “shell companies” that used information stolen from other small businesses in order to apply for loans, a process that is only uncovered through conducting “due diligence” on the information from the loan applications. She said the Small Business Administration now has safeguards in order to prevent from this level of fraud occurring again.

“They now require tax transcripts of loan applicants, they use vendor information to verify a bank account and they flag certain…prefixes, none of which was done during the start of the pandemic,” Miller said. 

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That request was part of the additional relief Ultima Services Corp. asked the U.S. District Court for the Eastern District of Tennessee to provide in a Friday motion. The court’s previous decision enjoined the use of a “rebuttable presumption” that certain business owners qualifying for the SBA’s 8(a) federal contracting program faced social disadvantage because of their race or ethnicity. 

Ultima argued the court should grant the additional industry-specific relief “because Ultima is still suffering from the lingering effects of defendants’ discrimination.”

It also cited the Supreme Court’s ruling striking down the use of race in college admissions, arguing preventative measures are warranted to ensure the defendants, which include SBA, aren’t establishing the type of application essay program the court ruled unlawful for universities. 

The motion is the latest in a case that threw the keystone SBA contracting program into uncertainty. The lawsuit began in 2020 when Ultima, a small business government contractor, filed a complaint alleging that the program’s rebuttable presumption was racially discriminatory. Ultima’s owner, Celeste Bennett, is a white woman and wasn’t eligible for the presumption. In court documents, Ultima claimed it lost out on opportunities for USDA’s Natural Resources Conservation Service to businesses in the program.

As a result of the court’s July injunction, the SBA temporarily paused new 8(a) applications and began requiring businesses in the program that relied on the rebuttable presumption to prove social disadvantage in a narrative detailing past discrimination before they can accept new contract awards.

In the new motion, Ultima said it “disagrees with Defendants’ interpretation of the existing injunction.”

In addition to seeking an injunction of the program’s use in its industry, Ultima also asked the court to prevent SBA from exercising contract options or making similar modifications to contracts with 8(a) businesses who relied on the rebuttable presumption, and “providing a shortened or less rigorous review of narratives of social disadvantage” than the agency did before the court’s injunction. 

Ultima further asked the court to appoint someone to review the SBA’s certification for 8(a) participants who previously relied on the rebuttable presumption or make public the narratives those businesses now must submit for certification that explain their social disadvantage. 

Until the requests for additional relief are resolved, Ultima requested the court to temporarily enjoin the defendants from taking actions on 8(a) contracts with businesses that relied on the rebuttable presumption, regardless of whether the SBA approved their new narrative.

The U.S. Department of Justice, which represents the government defendants (SBA and USDA), declined to comment. Michael Rosman, general counsel for the Center for Individual Rights who represents Ultima, didn’t respond to a request for comment.

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The new “narrative” requirement for the Small Business Administration’s 8(a) Business Development program, which is aimed at opening the federal contracting world to disadvantaged businesses, comes in light of a recent court ruling enjoining its use of presumed racial and ethnic disadvantage as a qualification. 

While the narratives will allow the SBA to keep things moving, they also stand to jeopardize both participants’ membership in the program and their future 8(a) contract opportunities, lawyers and experts said in interviews with FedScoop. They stressed the importance of providing detailed narratives.

“Take it seriously. Take it very seriously. Because not only do you have to have the social narrative, it has to be approved by SBA,” said Robb Wong, a former associate administrator of the SBA’s Office of Government Contracting & Business Development who, in an earlier role at the agency, helped write the 8(a) program eligibility rules.

Without a narrative, Wong said businesses in the program won’t be able to get new contracts, and even with a narrative, there’s still a possibility that SBA could disapprove it and businesses could lose their 8(a) certification. 

The July ruling by the U.S. District Court for the Eastern District of Tennessee struck down the program’s use of what’s known as a “rebuttable presumption” that certain racial and ethnic groups — including Black, Hispanic, and Asian Pacific Americans — have been subject to prejudice and are therefore socially disadvantaged. 

That presumption made it easier for businesses owned by people belonging to one of those groups to qualify for the program’s social disadvantage requirement. The court, however, said the presumption ran afoul of the constitutional right to equal protection. The opinion cited the Supreme Court’s ruling, just three weeks prior, that colleges can’t use race as a factor in admissions through affirmative action.

“The thing about these narratives is that they require a person to go into extensive detail about something that happened to them that they very well may want to forget,” said Matthew Moriarty, a federal contracting attorney and founding member of Schoonover & Moriarty who has helped clients with narratives.

Narratives have previously been a part of the application process for business owners outside the presumed groups wanting to establish social disadvantage for things like disability, religion, sexual orientation, and gender. The new guidance expands the pool of businesses who must complete them.

“I think people really need to consider these to be significant legal documents that have the chance to, unfortunately, at this point, make or break a business,” Moriarty said.

The 8(a) program is aimed at helping socially and economically disadvantaged businesses contract with the federal government over a period of nine years maximum. To qualify, businesses must be at least 51% owned and operated by one or more U.S. citizens who also meet social and economic disadvantage requirements. As participants in the program, businesses are able to get contract opportunities specifically set aside for the 8(a) program.

The Biden administration has sought to expand opportunities for the program, which is an important piece in its goal to achieve 15% of prime contracting awards going to small disadvantaged businesses by 2025. Awards for 8(a) businesses made up about 5.4% of all federal contracts awarded in fiscal year 2021, or roughly $34.4 billion, according to a Congressional Research Service report last year.

“As we work with the Department of Justice to continue reviewing the District Court’s ruling and evaluating the next steps, the SBA and Biden-Harris Administration remain committed to supporting this crucial program and the small business owners who have helped drive America’s strong economic growth,” SBA Administrator Isabella Casillas Guzman said in a statement announcing the new guidance Friday.

The SBA had previously announced a temporary suspension of new applications to comply with the court ruling, which is still in effect.

Under the new guidance, 8(a) participants were to receive letters Monday either detailing the process for creating a narrative or telling them they’ve already established disadvantage. SBA’s guidance also clarified that the new requirement doesn’t apply to businesses that previously established social disadvantage in a narrative or entity-owned firms, which refers to businesses owned by groups such as Indian tribes and Alaska Native Corporations. 

“The hardest part about the narrative — and frankly, this is the reason that even some attorneys struggle with the narrative — is it is a very unique meshing of emotional and detailed writing from kind of a personal perspective and one that is very hard for some people to relate to,” said Nicole Pottroff, an equity partner at Koprince McCall Pottroff LLC who specializes in 8(a) narratives.

The time period to complete those narratives if there is an active offer is tight. Generally, when companies get a contract offer, the SBA has about five days to accept it on that firm’s behalf, Pottroff said. 

But narratives, at least in the past, have taken time. Pottroff said the SBA typically comes back with questions asking for more information. She said clients have frequently come to her firm because everything else about their 8(a) applications is fine except for the narrative. 

“Even when we write fantastic narratives, the questions can be as simple as we’d like some more details on this event, or can you tell us a little more specifically how … you felt this event was based on bias,” Pottroff said. It’s not clear whether that will continue to be the norm, she said.

Narratives require business owners to outline exactly how they’ve experienced bias and discrimination based on their identity. That needs to be supported by detailed descriptions of incidents that show “chronic and substantial social disadvantage,” according to SBA guidance. Those descriptions should include “who, what, where, why, when, and how discrimination or bias occurred,” SBA says. 

While businesses can complete the narratives themselves, Pottroff said that the SBA’s requirements are very specific and recommended that companies that have the ability and resources seek assistance. However, Pottroff also said she hopes the SBA process generally gets easier so that more people can successfully complete them on their own.

Wong said whether a business owner should seek counsel depends on the person. He recommends business owners write their narratives in three sections for education, employment, and business with three examples each. “And try to be as specific as possible,” Wong said. 

Moriarty said those examples can include details as specific as what someone was wearing at the time or what car they were driving. 

While some delays or inconsistencies are possible with the change, Wong said he expects the end of the fiscal year to be “fairly unremarkable” for SBA. He voiced support for SBA’s longtime associate general counsel for procurement law, John Klein, who has shared guidance about the change with those in the 8(a) community. Wong said he believes Klein will come up with a solution that’s “efficient and effective for government.”

In the meantime, Moriarty emphasized “the clock is ticking” for businesses that want to be eligible for contract awards that are upcoming. 

“If you’re an 8(a) and there’s a contract that you have an eye on that you want to be insured that you’re eligible for, there is no time like the present to get moving on this thing,” Moriarty said.

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“To comply with the Court’s order, SBA is requiring all 8(a) participants whose program eligibility is based upon one or more individuals who relied upon the presumption of social disadvantage to establish their individual social disadvantage by completing a social disadvantage narrative,” the SBA said in a post to its website Friday.

The SBA said it plans to send a communication to participants in the program, which is aimed at broadening the government contracting landscape, on Monday, Aug. 21. That communication will either “detail the process for establishing social disadvantage or will clarify that the participant has already established social disadvantage and may proceed with federal contract awards,” the SBA said.

The July ruling by a district court in Tennessee threw the 8(a) program into uncertainty after it struck down its use of a “rebuttable presumption” of social disadvantage, which is a legal term for something presumed true absent other evidence.

The statute that established the 8(a) program, the Small Business Act, defines certain racial and ethnic groups as having a rebuttable presumption of disadvantage, which in turn makes it easier for companies owned by people belonging to those groups to apply for the program.

The statement Friday comes after the SBA announced a temporary pause on new applications for the 8(a) program in light of the injunction. The government has not yet indicated whether it plans to appeal the ruling, which relied in part on the Supreme Court’s decision striking down the use of race in college admissions through affirmative action.

While certain groups were spelled out as having that presumption of disadvantage, companies owned by people outside those groups were still able to write a so-called “narrative” explaining their disadvantage. As a result of the court ruling, that existing process is being broadened to companies that previously relied on the presumption. 

The SBA also noted that certain participants of the program will not be impacted by the change.

“If you were originally admitted to the program because the qualifying owner established social disadvantage by a preponderance of the evidence, you will not need to submit a narrative,” the SBA said. “The Court’s decision also does not impact entity-owned firms, such as firms owned by Indian tribes, Alaska Native Corporations, or Native Hawaiian Organizations – these firms will not need to submit narratives.”

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The Wednesday ruling from Judge Clifton L. Corker of the U.S. District Court for the Eastern District of Tennessee enjoined the small business agency and the Department of Agriculture — both defendants in the case — from using a “rebuttable presumption of social disadvantage” in the SBA’s business development program known as “8(a).”

The opinion relies in part on the Supreme Court’s recent decision striking down the use of race in college admissions through affirmative action. It could have broad impact as the SBA manages the program across the U.S. government, federal contracting experts told FedScoop, though they noted its full scope isn’t clear and it will likely be appealed.

“It’s a significant blow to what really is the SBA’s crown jewel socioeconomic program,” Matthew Moriarty, a founding partner at Schoonover & Moriarty in Kansas who focuses on federal contracting.

The Small Business Administration, the Department of Agriculture, and the Justice Department, which represents the agencies, didn’t respond to requests for comment on whether they planned to appeal the decision.

In his opinion, Corker said use of a “rebuttable presumption” violated the Fifth Amendment rights of the company that brought the lawsuit, Ultima Services Corporation, to equal protection of the law. 

A “rebuttable presumption” is a legal term for something presumed true absent other evidence. The statute that established the 8(a) program, Small Business Act, uses that presumption in the section that defines certain racial and ethnic groups as socially disadvantaged. The 8(a) program is aimed at helping small businesses that are at least 51% owned and operated by a U.S. citizen who is socially and economically disadvantaged.

Corker said the agencies didn’t identify whether racial groups are underrepresented in specific industries that are relevant to contracts in the 8(a) program and didn’t outline the goals of the program.

“Without stated goals for the 8(a) program or an understanding of whether certain minorities are underrepresented in a particular industry, Defendants cannot measure the utility of the rebuttable presumption in remedying the effects of past racial discrimination,” Corker said.

The lawsuit began in March 2020 when Ultima, a small business government contractor, filed a complaint alleging that the rebuttable presumption in the program was racially discriminatory. The business is owned by Celeste Bennett, a white woman, and isn’t eligible for the presumption. In court documents, Ultima claimed it lost out on opportunities to businesses in the program.

“We’re pleased with the decision,” said Michael E. Rosman, general counsel for the Center for Individual Rights, who represents Ultima. “Defendants’ reservation of contracts for the Section 8(a) program was decimating to Ultima, shrinking its revenues by large proportions.  The order enjoins the use of a presumption that favored certain small businesses based solely on the race of their owners.”

Rosman said they believe the decision would preclude USDA from “reserving virtually every contract in Ultima’s industry for the program” and “will have significant positive effects outside of the USDA” as the Small Business Administration’s approval is needed to reserve contracts for the 8(a) program.

Whether the ruling impacts those currently in the program isn’t clear.

Emily W. Murphy, a senior fellow at the Greg and Camille Baroni Center for Government Contracting at George Mason University, said if the ruling stands, current participants in the program will likely have to prove their disadvantage.

If the injunction is going to remedy harm against Ultima, which is challenging how the program is being administered in favor of those currently in the 8(a) program, “it would suggest it has to apply to current participants,” said Murphy, former administrator of the General Services Administration and a former SBA contracting official.

While the opinion could be appealed, she said the administration will likely have to weigh the risks of such an action in the current legal environment. The SBA and DOJ are going to have to figure out how to maneuver through that because the ruling comes as the federal government is in its fourth quarter, where a majority of spending takes place, Murphy said. 

Others said impact on those in the program currently isn’t likely.

Moriarty said the decision is unlikely to impact current set-asides — contracts specifically designated for types of small businesses — and people currently in the program. But moving forward, the SBA can’t rely on the presumption that certain individuals are socially disadvantaged. Those businesses could still demonstrate disadvantage, but that process would likely be longer and more difficult, he said.

“So now, because of this injunction, all applicants, regardless of the type of person that they are, are going to have to demonstrate specific instances of social disadvantage in order to be granted entry into the program,” Moriarty said.

Antonio R. Franco, managing partner at Piliero Mazza in Washington focused on government contracting, also said he doesn’t believe the ruling would apply to people currently in the program, but that it could have a chilling effect on working with businesses in the program.

“The problem is going to be can those people still benefit from the program if agencies are reluctant to award contracts to these companies because they believe that they’re going to be challenged using this case,” Franco said.

The parties in the cases will meet next on Aug. 31 to discuss other potential remedies.

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