A law requiring that minority-owned companies receive five percent of defense contracting dollars has been found unconstitutional by a federal appeals court, in a ruling that has the potential to invalidate the small disadvantaged and 8(a) contracting programs.

In Rothe Development v. Department of Defense and Department of the Air Force the United States Circuit Court for the Federal Circuit held that Congress lacked strong enough proof of insidious racial discrimination when it enacted the contracting law giving preferential status to businesses owned and controlled by “disadvantaged individuals”. As a result, the court declared the contracting law unconstitutional as a violation of equal protection guarantees and halted any further application of this law.

Congress first passed the contracting law in 1986. The law directs the U.S. Department of Defense (DoD) and other federal agencies to set a goal of awarding five percent of the annual dollar amount of contracts to small businesses owned and controlled by “disadvantaged individuals,” as defined under the Small Business Act. These individuals included “Black Americans, Hispanic Americans, Native Americans, Asian Pacific Americans, and other minorities … presumed to be ‘socially and economically disadvantaged individuals.’” The set-aside established in the contracting law was implemented in recognition of a history of past discrimination against certain minority groups.

While most defense contracts and dollars still go to large multi-national businesses, the government generally has met the goal of awarding five percent to minority-owned firms.

The DoD is expected to review this decision with the Justice Department, possibly in order to determine whether to seek Supreme Court review.