President Donald Trump’s stance on diversity, equity, and inclusion (DEI) is taking further shape and is likely to cause challenges for individuals and companies in the government contracting space. That’s especially true now for prime contractors holding a contract that includes a Disadvantaged Business Enterprise (DBE), a Women-Owned Business Enterprise (WBE), or a Minority Business Enterprise (MBE) utilization goal or if prime contractors are a DBE, WBE, or MBE competing in the government marketplace.  

On the second day of his second term, the president issued an executive order titled "Ending Illegal Discrimination and Restoring Merit-Based Opportunity." In this order, the president instructed the attorney general to put forward a "plan of specific steps or measures to deter DEI programs or principles … that constitute illegal discrimination or preferences" and, to accomplish that, he directed "each relevant agency" to work with the Justice Department to "identify up to nine potential civil compliance investigations" coming from the above list of entities.

Further in that same executive order, the president required federal contractors to certify compliance with anti-discrimination laws. Two weeks later, Attorney General Pam Bondi issued a memo directing the Department of Justice’s Civil Rights Division to investigate and penalize "illegal DEI" policies in the private sector. In July, the Small Business Administration stepped into this movement, announcing a "full-scale" audit of its 8(a) program for socially and economically disadvantaged small business owners, as we detailed in our previous client alert.  

The challenging question for all companies that wished to comply with these new orders and mandates was, "What do they mean by 'illegal DEI'?" Bondi has begun to flesh out that term further in a recently released memo, "Guidance for Recipients of Federal Funding Regarding Unlawful Discrimination." Beyond explicitly equating DEI programs as a per se "discriminatory practice," the attorney general included the following example of an "unlawful use of protected characteristics:" 

"A federally funded state agency implements a DEI policy that prioritizes awarding contracts to women-owned businesses, automatically advancing female vendors or minority-owned businesses over equally or more qualified businesses without preferred group status. This includes any contract selection process that uses sex or race as a tiebreaker or primary criterion, such as policies favoring 'minority- or women-owned' businesses without satisfying the appropriate level of judicial scrutiny."

Bondi’s memorandum also advises that "[f]acially neutral criteria (e.g. 'cultural competence', 'lived experience,' geographic targeting) that function as proxies for protected characteristics violate federal law if designed or applied with the intention of advantaging or disadvantaging individuals based on protected characteristics."

These pronouncements raise complicated questions for those operating in the governmental space. Many (if not most) federal contracts include DBE and WBE utilization goals which require prime contractors to make reasonable efforts to award a specified percentage of the work to DBE and WBE certified firms.  And these requirements generally flow down and apply to grant recipients (such as state agencies administering federal highway funds and the like) and require those grant recipients (such as state transportation departments) to impose similar restrictions on their contractors.  

It is important to remember that federal DBE programs were largely a reaction to the Supreme Court’s 1989 City of Richmond vs. J.A. Croson Co. decision which struck down a race-based preferential bidding regime. Thus, it is not hard to imagine that DBE and similar state and local programs will come under scrutiny in light of the pronouncements set forth in Bondi’s memorandum. 

Key takeaways for prime contractors include:

• Identify all contracts in which you are involved that include DBE, MBE, WBE, or 8(a) program participants.
   
• Review contract application materials and other documents to identify whether and where the government contract’s requirements themselves required or gave preferential treatment to applicants who themselves were, or included as partners or subcontractors, DBE, MBE, WBE or 8(a) program participants. Also, identify whether the contract was open to applicants who were not participating in one of these programs. 
   
• Working with counsel, assess whether the inclusion of these particular contractors satisfy "the appropriate level of judicial scrutiny." That is: 
   
  • Any preference or favoring based on race, religion, national origin or "alienage" (treating citizens and non-citizens differently) must survive the "strict scrutiny" requirement of showing a "compelling government interest" and means that are "narrowly tailored…to achieve that interest" in order to be permissible.
     
  • By contrast, gender-based preference or favoring is subject to an intermediate (aka "heightened") scrutiny standard, meaning is there an "important government objective" sought, and is the means of the preference "substantially related" to achieving that objective?
     
  • Preferences for other reasons only require a "rational basis" for favoring some people over others — that there is a rational relationship between the government’s interest and the means of achieving it. And the burden is on the party challenging the preference to show that there is no rational basis to justify the classification.  

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