Federal Race-/Sex-Based Restaurant Revitalization Fund Grants Blocked

A court issues a temporary restraining order, finding plaintiff's claim was likely to succeed on the merits.

From yesterday's decision by Judge Reed O'Connor in Greer's Ranch Cafe v. Guzman (N.D. Tex.):

Plaintiff Philip Greer … owns and operates Plaintiff Greer's Ranch Café—a restaurant which lost nearly $100,000 in gross revenue during the COVID-19 pandemic …. Greer seeks monetary relief under the $28.6-billion Restaurant Revitalization Fund ("RRF") created by the American Rescue Plan Act of 2021 ("ARPA") and administered by the Small Business Administration ("SBA"). Greer prepared an application on behalf of his restaurant, is eligible for a grant from the RRF, but has not applied because he is barred from consideration altogether during the program's first twenty-one days from May 3 to May 24, 2021.

During that window, ARPA directs SBA to "take such steps as necessary" to prioritize eligible restaurants "owned and controlled" by "women," by "veterans," and by those "socially and economically disadvantaged." {"Economically disadvantaged individuals are those socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same business area who are not socially disadvantaged. In determining the degree of diminished credit and capital opportunities the Administration shall consider, but not be limited to, the assets and net worth of such socially disadvantaged individual…." "Socially disadvantaged individuals are those who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities. Individuals who are members of the following groups are presumed to be socially disadvantaged: Black Americans; Hispanic Americans; Native Americans (including Alaska Natives and Native Hawaiians); Asian Pacific Americans; or Subcontinent Asian Americans.")} …

As to race-based classifications, Plaintiffs challenge SBA's implementation of the "socially disadvantaged group" and "socially disadvantaged individual" race-based presumption and definition from SBA's Section 8(a) government-contract-procurement scheme into the RRF- distribution-priority scheme as violative of the Equal Protection Clause. Defendants argue the race-conscious rules serve a compelling interest and are narrowly tailored, satisfying strict scrutiny….

Defendants propose as the government's compelling interest "remedying the effects of past and present discrimination" by "supporting small businesses owned by socially and economically disadvantaged small business owners … who have borne an outsized burden of economic harms of [the] COVID-19 pandemic."  To proceed based on this interest, Defendants must provide a "strong basis in evidence for its conclusion that remedial action was necessary."

As its strong basis in evidence, Defendants point to the factual findings supporting the implementation of Section 8(a) itself in removing obstacles to government contract procurement for minority-owned businesses, including House Reports in the 1970s and 1980s and a D.C. District Court case discussing barriers for minority business formation in the 1990s and 2000s. Assuming arguendo that the evidence is relevant, even the case cited by Defendants recognizes the well-established principle about the industry-specific inquiry required to effectuate Section 8(a)'s standards:

"The fact that Section 8(a) is constitutional on its face, however, does not give the SBA … or any other government agency carte blanche to apply it without reference to the limits of strict scrutiny. Rather, agencies have a responsibility to decide if there has been a history of discrimination in the particular industry at issue …."

[The defendants' evidence] lacks the industry-specific inquiry needed to support a compelling interest for a government-imposed racial classification. While the Court is mindful of … statistical disparities and expert conclusions based on those disparities, "[d]efining these sorts of injuries as 'identified discrimination' would give … governments license to create a patchwork of racial preferences based on statistical generalizations about any particular field of endeavor." City of Richmond v. J.A. Croson Co. (1989)….

Thus, the Court concludes that the government has failed to prove that it likely has a compelling interest in "remedying the effects of past and present discrimination" in the restaurant industry during the COVID-19 pandemic. For the same reason, the Court finds that Defendants have failed to show an "important governmental objective" or "exceedingly persuasive justification" necessary to support a sex-based classification…. Accordingly, the Court concludes that Plaintiffs are likely to succeed on the merits of their claim that Defendants' use of race-based and sex-based preferences in the administration of the RRF violates [equal protection principles] ….