The judicial rejection of race-based covid relief

George R. La Noue

After President Biden’s inauguration, he immediately signed several Executive Orders to achieve race-based goals because “Our Nation deserves an ambitious whole-of-government equity agenda that matches the scale of opportunities and challenges we face.” When the Biden Administration actually implemented new race- and gender-based programs, however, they were greeted with an outburst of litigation challenges which the judiciary could not ignore. Multiple lawsuits occurred over two COVID-19 relief programs in the $1.9 trillion American Rescue Plan Act of 2021. Embedded in ARPA’s 658 pages was the Restaurant Revitalization Fund (RRF) where the Small Business Administration (SBA) could provide up to $28.6 billion to those businesses and a U.S Department of Agriculture program where USDA could forgive up to 120 percent of its many loans to those in that industry. In the RRF program, a 21-day dispersal priority was given to those businesses owned by women, veterans, and persons identified as “socially and economically disadvantaged,” while the USDA program was to benefit only “socially and economically disadvantaged” farmers and ranchers, excluding all whites, male and female. The key to both programs is that the definition of “socially and economically disadvantaged” is not based on individual race-neutral characteristics, but is instead rooted in racial and ethnic group identifications.

The Legislative Context of ARPA Race Preferences

The origin of the “socially and economically disadvantaged” classifications goes back to 1977, when Parren Mitchell, a founder of the Congressional Black Caucus and chair of the House Small Business Committee, attached an amendment to a Public Works bill that compelled state and local governments seeking federal grants to set aside 10% of the funds for minority firms. The beneficiaries were defined as firms owned by citizens “who are negroes, Spanish-speaking, Orientals, Indians, Eskimos and, Aleuts.” From that legislative origin, a number of similar federal programs, including the SBA’s 8(a), Small Disadvantaged Business (SDB), and the Disadvantaged Business Enterprise (DBE) programs, have flourished.

Decades before Critical Race Theory, dividing op-pressed and oppressors into racial categories, emerged from rarified law school classrooms into mainstream public policy discourse, a series of obscure bureaucratic decisions created a race and ethnic list to determine presumptively who was “socially and economically disadvantaged.”

The bureaucratic list was developed almost three decades ago has almost never been altered and now includes:

Black (a person having origins in any of the original racial groups of Africa); Hispanic (a person of Mexican-American, Puerto Rican, Cuban, Central or South American, or other Spanish or Portuguese origin or culture, regardless of race); Native American (an American Indian, Eskimo, Aleut or Native Hawaiian); Asian-American (Burma, Thailand, Malaysia, Indon-esia, Singapore, Brunei, Ja-pan, China, Taiwan, Laos, Cambodia (Kampuchea), Vietnam, Korea, The Phili-ppines, U.S. Trust Territory of the Pacific Islands (Re-public of Palau), Republic of the Marshall Islands, Fe-derated States of Micron-esia, the Commonwealth of the Northern Mariana Isla-nds, Guam, Samoa, Macao, Hong Kong, Fiji, Tonga, Kiribati, Tuvalu, Nauru, In-dia, Pakistan, Bangladesh, Sri Lanka, Bhutan, the Mal-dives Islands and Nepal.

Persons identified with these racial groups are presumed disadvantaged unl-ess someone comes forwa-rd “with credible evidence to the contrary.” As Circuit Judge Richard Posner not-ed, “The presumption can be rebutted, but given the difficulty of establishing w-hether a particular individual is socially and economically disadvantaged the av-ailability of the presumpti-on is likely to be decisive.”

These categories have not been revisited in decades and exclude U.S. citizens from several Asian and Middle Eastern countries who now might be objectively “socially and economically disadvantaged,” except that these residents were considered bureaucratically to be “white.” Following Justice O’Connor’s objection in City of Richmond v. Cros-on regarding why Eskimo business owners were incl-uded among Richmond’s preferred groups, this narrow tailoring issue is often raised in state and local contracting cases. In litigation regarding federal preferences, however, the group list above has almost never been challenged and these cases have been decided for and against the plaintiffs on other issues. Thus, when various ARPA programs took the “socially and economically disadvantaged” categories off the shelf, it reflected a conscious choice to use racial preferences and reject race neutrality.

The Political Context of ARPA Race Preferences

When ARPA was being drafted, a reading of existing law was that federal ra-ce economic preferences were not frequently litigated and when they were, despite the strict scrutiny standard announced in Cro-son and Adarand v. Pena, courts were often deferential to these programs. Even when preferences were overturned, the decisions were not far reaching eno-ugh to threaten the whole structure of federal race subsidies. Moreover, the support for race preferences had been strengthened by recent elections. Identity politics had become central to the agendas of many Congressional caucuses—the Congressional Black Caucus (CBC), for instance, includes “achieving greater equity” among its core goals—and the Biden administration had embraced the effort to make government and the economy “look like America.” The spread of social justice concepts based on Critical Race Theory meant that reparations, or even massive redistribution of resources from whites to non-whites, had many new adherents.

So it was not surprising that when the RRF was passed by the House Small Business Committee (chaired by Nydia Velazquez, the former chair of the Congressional Hispanic Caucus), it was based on a finding that during the pandemic “women—especially mothers and women of color—are exiting the workforce at alarming rates” and that “eight of ten minority businesses are on the brink of closure.” Consequently, the RFF prioritized distribution of limited relief funds to owners primarily based on their sex and race.

Similarly the effort to have USDA forgive 120 percent of debts owed by “socially and economically” disadvantaged farmers and ranchers was led by Senators Booker and Warnock in the upper chamber and Rep. David Scott in the lower, all members of the CBC. When finally enacted, those debt forgiveness provisions excluded all white farmers and ranchers from what was ostensibly Covid relief.

If the DOJ does not successfully defend the current definitions of “socially and economically disadvantaged” groups, then the use of that concept in other federal subsidy programs is jeopardized.

The stakes in the agricultural preference litigation were increased when USDA turned the issue away from securing equal protection for all toward achieving equity for some. The race-based beneficiaries did not have to be currently in arrears in their USDA loans, and a January 26, 2021 federal rule stopped all debt collections and foreclosures, and all evictions for borrowers of any race. Agriculture Secretary Vilsack, however, testified that USDA would forgive 13,000 to 15,000 in loans to non-white food producers and that might cost up to $4 billion. Under this new debt relief plan, food producers were encouraged to update or submit new race and ethnic information to their local USDA service center so checks could be sent quickly, although “socially disadvantaged” persons did not actually have to apply for loan forgiveness. Those persons merely had to review and sign a letter mailed to them from the Farm Service Agency verifying the amount of their debt and their race or ethnicity. They did not have to allege or prove any previous discrimination.

Secretary Vilsack notably did not use the Covid-19 emergency as the reason for expediting these checks. Instead, he argued the urgency was caused because “prior efforts to remedy specific, individualized discrimination have failed to do the necessary work needed to address systematic discrimination [that] socially disadvantaged producers face.” Food producers who were white, however, could not have their debts canceled, regardless of their individual circumstances or the effect of Covid-19 on their businesses. The USDA announcement said the Biden-Harris Administration is committed “to equity across the Department by removing systematic barriers and building a workforce more representative of America”

The Judicial Response to the ARPA Racial Preferences

These two ARPA restaurant and agricultural industry programs were immediately challenged in cases brought all over the United States. Several things happened to change the past pattern of limited, uncoordinated litigation. First, COVID-19 affected and created emergencies for Americans of all backgrounds. That relief efforts should be distributed by race and sex was discordant with that reality. Second, unlike 8(a), SDB, and DBE particular contract awards, the ARPA preferences were starkly visible and affected simultaneously large numbers of businesses in every Congressional district and state in the country. Third, past race preference litigation was client-financed and usually took place only when specific contracts were lost, while the ARPA lawsuits were brought by non-profit litigating agencies (America First Legal, Mountain States Legal, Pacific Legal, Southeastern Legal, and the Wisconsin Institute for Law & Liberty). They were invigorated by the chance to challenge the principle of these preferences.

ARPA’s use of racial classifications created an overreach that courts could not ignore. In responding, several court-issued opinions whose logic threatened all previous use of those preferences in federal subsidy programs. Both the government and the plaintiffs agreed that strict scrutiny was the necessary judicial standard for review. Typically, in a DBE case, the issue of compelling interest turns on the validity of findings of a specific and recent disparity study. No such contemporary study existed on a national scale for the restaurant or agricultural industries. So the Justice Department (DOJ) was forced to justify the ARPA race and sex priorities with the evidence at hand. That strategy has not been successful.

First, courts found that the hastily passed race and sex preferences were not based on any compelling evidence about discrimination in either the restaurant or agricultural industries. In Vitolo v. Guzman, a Sixth Circuit panel majority noted that Croson holds that governmental racial classifications cannot rest on “generalized assertions that there has been past discrimination in an entire industry.” The evidence must be of intentional discrimination, consisting of active or passive governmental discrimination. The majority found that the SBA rules were based only on allegations of “societal discrimination” which was not a sufficiently compelling interest.

Second, Courts found that ARPA did not first attempt to use race-neutral methods to address relief issues which is a strict scrutiny requirement. SBA might have defined its grant priorities economically or epidemiologically by providing relief to individual businesses according to the states or regions that were hurt most by Covid-19. The agency believed restaurants owned by women and minorities were disproportionately harmed by the pandemic, so it could have distributed funds to the most impacted zip codes which would have been a race- and sex-neutral plan raising no constitutional issues. Instead, SBA, following the relevant ARPA statutory provision, and turned to preferred identity group categories.

Third, the Sixth Circuit took a major step that may undermine the race-based “socially and economically disadvantaged” concept underlying so many federal programs. It found that the government did not satisfy the narrow tailoring prong of strict scrutiny by justifying the inclusion of the particular racial and ethnic groups on its preferred list. Judge Thapar, the first federal judge of South Asian origin in American history, asked a question no other judge had publically raised about the “socially and economically disadvantaged” group categories. Looking at the SBA list, his opinion wanted to know why there were “preferences for Pakistanis, but not for Afghans; Japanese but not Iraqis; Hispanics but not Middle Easterners—[which] is not supported by any record evidence at all?” There is no good answer to that inquiry, just decades of rote bureaucratic repetition. It can be expected now that the question will always be asked of government witnesses wherever group membership on the list is relied upon to distribute preferences and that those cases will be brought more frequently.

Fourth, in finding the race preferences in the USDA program unconstitutional, two district courts found a lack of a compelling interest in Adam J. Faust, et.al. v. Thomas J. Vilsack and Scott Wynn v. Thomas J. Vilsack. Judge Marcia Morales Howard in her Wynn decisions went into new judicial territory. Even if a compelling interest for this race-based program could be established, she concluded the USDA program was not narrowly tailored because it provided debt relief to all minority farmers whether there was any evidence of discrimination against them as individuals. Typically, in cases involving race-based programs, the issue is whether statistics showing general disparities or other evidence suggests discrimination against a particular group. If the answer is yes, all members of that group, whether they have personally suffered discrimination or are otherwise successful, become eligible for race-based preferences.

In the segregation era, it didn’t matter whether individual African Americans were educated, affluent or successful entrepreneurs, all still suffered from racial discrimination. In the 21st century, that argument can still be made, but it will be harder to prove.

The Lasting Significance of the ARPA Race Preference Cases

It is never possible to be certain about the trajectory of judicial doctrine, particularly when the relevant cases are only a few months old, most of the rulings are preliminary injunctions. Further, there is only one Circuit Court opinion—and a divided panel at that. Nevertheless, something important seems to be occurring in the ARPA cases. Judge Thapar’s challenge to the whole concept of the racial and ethnic basis for categorization of “socially and economically disadvantaged” persons placed the DOJ in a difficult position. If it had appealed en banc, the precedents in the Sixth Circuit were not favorable. The majority also had carefully cited Supreme Court precedents for its ruling and the DOJ might have believed that the current high Court would not be supportive of the RRF’s use of racial priorities and even might have found the whole race-based “socially and economically disadvantaged” concept invalid. Furthermore, the political optics of excluding white male-owned restaurateurs who exist in every Congressional district in the country might have been unattractive. On June 3, 2021, the SBA announced that it was halting its previous race and sex-based priority payments and would now process timely claims from white male owners, before accepting any more from the priority groups.

The losses in district courts about the exclusion of white farmers and ranchers from USDA debt relief funds are also causing the DOJ problems. The Mountain States Legal Foundation (Tenth Circuit), the Southeastern Legal Foundation (Sixth Circuit), and the American First Legal (Fifth Circuit) are representing other white plaintiffs challenging the USDA debt relief program in separate cases. USDA has announced it will appeal the Faust and Wynn decisions and has asked for delays before the various preliminary injunctions become permanent. Courts, however, have not been sympathetic to using current racial preferences to remedy discrimination dating from earlier decades which could lead to wide-open government reallocations whenever there was a political majority to support them. At issue also is the “equity” concept of changing the American workforce to make it “representative” in various sectors of the economy as Secretary Vilsack proclaimed was the ultimate goal of the Biden-Harris administration.

Perhaps the government will find some previously overlooked evidence in the Congressional record or produce expert witnesses to support a compelling interest and narrow tailoring argument for all the groups now defined as “socially and economically disadvantaged.” This new evidence would also have to show that there are no white farmers or ranchers who should be eligible for debt relief. Those requirements are mind-boggling tasks. That also may be an awkward position for many Congressional candidates to support in the mid-term 2022 elections. As Justice Sandra O’Connor stated in Croson, if general statistical disparities were defined as “identified discrimination” then this would give “governments license to create a patchwork of racial preferences about any particular field of endeavor.” If the DOJ does not successfully defend the current definitions of” socially and economically disadvantaged” groups, then the use of that concept in other federal subsidy programs is jeopardized. Whatever the outcome, the newly energized litigating agencies that challenged the ARPA preferences are waiting.

Courtesy: Law & Liberty.

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