To comply with court, federal agency lets White people claim social disadvantage

The Minority Business Development Agency started in 1969. (Sydney Schaefer/AP)

For the second time in less than a year, a federal program for minority businesses is being retooled to serve all races - including White people - calling into question long-held standards on what it means to be “socially disadvantaged” amid a wave of injunctions and lawsuits.

In March, a federal judge in Texas ordered the Minority Business Development Agency to open its doors to entrepreneurs from all racial and ethnic backgrounds, ruling that its presumption that Blacks, Latinos, Asians and other minorities are inherently disadvantaged violated the Constitution’s equal protection clause.

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The government has not appealed the ruling, which echoed the Supreme Court’s landmark decision last summer to strike down race-based college admissions. In a memo dated March 20, the MBDA announced that it would comply with the order, directing staffers at its 40 business centers around the country to forgo racial considerations when vetting applicants. Instead, candidates must sign a form, under the penalty of perjury, attesting their disadvantage to certify that they’re “minority business enterprises.” No supporting documentation is required.

It’s the latest sign the government is untethering its definition of social disadvantage from broad racial and ethnic classifications, a presumption increasingly besieged by legal challenges. Last year, the Small Business Administration was forced to overhaul a program for minority government contractors and now requires applicants to prove their disadvantage through essays. A Department of Transportation program’s use of racial categories also is facing legal scrutiny, while dozens of other federal and state programs meant for minorities face similar threats.

The MBDA’s new client engagement form asks applicants to certify their disadvantage to secure its assistance in accessing capital and government contracts. Social disadvantage, the agency said, applies to anyone subjected to racial prejudice because of their identity. Economic disadvantage, meanwhile, speaks to an individual’s inability to compete in the free enterprise system because their identity impairs their access to capital and credit.

The agency “is complying and will continue to comply with the ruling and in accordance with the law as it serves communities across the nation,” Commerce Secretary Gina Raimondo said in a statement, adding that she is disappointed by the court ruling. “Achieving our full economic potential requires that all Americans, regardless of background, geography or demographics, can start and grow their businesses.”

But Dan Lennington, a lawyer with the Wisconsin Institute for Law & Liberty who sued the MBDA on behalf of three White plaintiffs, warned in an email that the agency’s response could lead to “a culture of dishonesty.”

“MBDA is shirking its responsibility to decide who qualifies for assistance by using a standardless process and delegating decision-making to individual applicants,” he said. “Apparently, an applicant can now qualify for federal assistance if they merely feel disadvantaged. But it is MBDA who should be making these decisions on eligibility based on facts, not the beneficiaries of such programming based on feelings.”

The MBDA changes mark the second time the federal government has abandoned racial classifications after a court ruling. In July, a federal judge in Tennessee enjoined the SBA’s 8(a) program, which helps minority-owned businesses secure government contracts, from presuming certain minorities were disadvantaged.

In response to the ruling, which the government has not appealed, the SBA now requires applicants to prove their disadvantage through essays that recount specific experiences in which their race or identity hindered their success in the business world.

The shift is part of the ongoing fallout from the Supreme Court’s June 29 ruling against Harvard and the University of North Carolina that upended race-conscious college admissions. Though the high-court ruling - which blasted Harvard’s use of racial categories as “imprecise” and “overbroad” - concerned university admissions, its reasoning weighed heavily in subsequent court decisions barring the use of racial classifications in government programs, including the injunction against the MBDA.

For the first time since 1997, the Office of Management and Budget in March revised the racial categories it uses to collect data, combining questions for race and ethnicity, and adding “Middle Eastern or North African” as a new category. Other federal agencies are expected to adopt the new system. And in March, the Smithsonian settled a lawsuit alleging that an internship at its National Museum of the American Latino hired only Latino students, promising to make it clear that the program was open to all.

Before the order, the MBDA presumed that a list of groups were socially and economically disadvantaged, including Black people, Latinos, Native Americans, Asians, Puerto Ricans, Eskimos, Aleuts and Hasidic Jews.

Now, according to the March 20 guidance, the MBDA’s centers “MUST NOT apply these statutory or regulatory presumptions.”

The MBDA was established by executive order in 1969 by President Richard M. Nixon and made permanent in 2021 under the Infrastructure Investment and Jobs Act, which greatly increased its funding to $550 million over five years. In fiscal 2022, MBDA clients secured $1.6 billion in private and government contracts, agency data shows. The agency also helped businesses raise $1.2 billion in capital, as well as create or retain roughly 16,000 jobs. Black-owned businesses received $680 million in contracts, the most of any group, followed by Hispanic-owned businesses at $526 million.

Before the court order, minority businesses owners were required to sign the client engagement forms certifying their disadvantage, even though they benefited from the presumption. The difference is that its new form notes that an “individual of any race or ethnicity may meet the definition of socially or economically disadvantaged under the MBDA Act.”

Businesses’ eligibility for assistance is also determined based on race-neutral criteria such as the age of the business, an applicant’s net worth and the business’s sustainability, according to a March 20 guidance.

Sarah Hinger, deputy director of the Racial Justice Program at the American Civil Liberties Union, said the MBDA changes show that it is not moving away from its mission of helping socially and economically disadvantaged business.

“That is good to see,” she said. “And really, it looks like what the agency is doing here is clarifying the scope of who is included in the businesses that they serve.”

Richard Kahlenberg, director of the American Identity Project at the Progressive Policy Institute, said the shift away from race could help the MBDA focus more on socioeconomic status. But, he said, using a form to establish applicants’ disadvantage probably will not help the agency accomplish its goals, and he suggested the agency adopt an essay-writing process similar to universities and the SBA to help it focus on an individual’s need.

Kahlenberg, who testified for the plaintiffs in the Harvard case, has long criticized race-based affirmative action, arguing instead for a class-based approach.

“If you care about racial diversity, as I do, you want to find fairer ways to get to the same result,” he said.

“And it’s precisely because of the nation’s history of discrimination and the ongoing realities of discrimination by race that communities of color will disproportionately benefit from a needs-based approach to affirmative action,” he added. “And there’s no constitutional problem with that.”

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