A Texas federal district court judge has decided that the Minority Business Development Agency’s (MBDA) policies that provide financial assistance to minority-owned businesses are unconstitutional.¹  While the court’s decision does not apply to private businesses that may encourage supplier diversity as part of a holistic inclusion, equity and diversity (IE&D) program, companies should be aware of this development as IE&D programs evolve in the wake of the Supreme Court’s holding in Students for Fair Admissions, Inc. v. President & Fellows of Harvard College, 600 U.S. 181 (2023) (SFFA).

Nuziard v. Minority Business Development Agency

Certain business owners who were denied or ineligible for MBDA benefits because they did not identify as members of disadvantaged races or ethnicities challenged the MBDA requirement in Nuziard v. Minority Business Development Agency.  The MBDA, which is a federal agency, provides financial assistance to business owners who are considered “socially or economically disadvantaged”² and established a presumption of social or economic disadvantage based on race and ethnicity.  The plaintiffs argued that this presumption violated the equal protection guarantees of the Fifth Amendment’s Due Process Clause. The MBDA argued that the agency’s policies are constitutional because they had a compelling interesting in remedying past discrimination in which the government “passively participated.” 

The court agreed with the plaintiffs and found that, while the government had a compelling interest in remedying discrimination in governmental contracts, the statute was not narrowly tailored enough to remedy that interest.  In reaching its decision, the court acknowledged that the disenfranchisement of minority business enterprises was “beyond dispute.”³  Nevertheless, the court permanently enjoined the MBDA from using race as a factor in determining whether to provide financial assistance to businesses.⁴ 

Related Developments

Various initiatives intended to remedy past discrimination have been challenged based on SFFA.  Indeed, SFFA was relied upon extensively in the Nuziard decision.  SFFA was also extended to the government context last year in Ultima Services Corp. v. U.S. Department of Agriculture.⁵ In Ultima, the court enjoined the Small Business Administration (SBA) “from using the [race- and ethnicity-based] rebuttable presumption of social disadvantage in administering” the 8(a) Business Development Program.

Other lawsuits have targeted public and private sector programs available based on race and ethnicity. Various groups (including attorneys general, legislators, and advocacy groups) have also drawn attention to initiatives that are available based on race and ethnicity in public letters.

Recent decisions related to IE&D generally focus on racial preferences as a disfavored solution but do not necessarily deny, and sometimes explicitly acknowledge, past or present discrimination.⁶ 

Takeaways

The court’s decision in Nuziard does not mean that companies need to scrap their supplier diversity programs. Growing and developing successful business relationships with a wide range of suppliers promotes competition and innovation.  And, a supplier diversity program is often a key component of a company’s broader commitment to ethical business practices and social responsibility.  In light of recent decisions, however, companies may undertake a review of practices to confirm valid objectives are not achieved in improper ways.  Consistent with a commitment to an inclusive procurement strategy, companies can:

• Adopt objective, business-related criteria and standardize decision making in the procurement process;
• Consider creative and innovative programming that supports equal opportunity to compete for contracts; and
• Update practices to minimize risks of challenges based on evolving jurisprudence.