A case from the United States Court of Appeals for the Sixth Circuit[1] highlights that, even in times of crisis like the COVID-19 pandemic, prioritizing federal grant money based on race and gender will likely violate the equal protection and due process clause of the U.S. Constitution.

BACKGROUND

The American Rescue Plan Act of 2021, a coronavirus relief bill, created and funded the Restaurant Revitalization Fund (“RRF”) with $28.6 billion to aid privately owned food and beverage businesses. Applications are processed by the Small Business Administration (“SBA”). Because there was a limited amount of funding allocated for the RRF, applications for the program were processed as they are received. However, for the first 21 days of the program, the SBA was only allowed to assign grants to priority applicants based on race and gender.

Antonio Vitolo, a white American, and his wife, a Hispanic American co-own a restaurant called Jake’s Bar and Grill in Harriman, Tennessee. The COVID-19 pandemic caused the restaurant significant economic hardship, so Vitolo applied for an RRF grant on the first day the SBA began accepting applications.  However, because he and his wife each owned 50% of the business, their application would not be considered “priority,” and their application would not be considered until the priority period ended. Vitolo sued the SBA alleging the program violated his constitutional right to equal protection because priority status is given explicitly based on race and gender. He sought a temporary restraining order and preliminary injunction to prevent the government from using race and gender preferences in the program’s application processing.

DISCUSSION

Before considering the merits of the case, the Court resolved the government’s objections that Vitolo lacked standing and that the claim was moot because the 21-day priority period had ended while Vitolo’s case was on appeal.

The Court noted that Vitolo had shown “substantial likelihood of success on standing” because if the Court stopped the SBA from prioritizing RRF applications based on race and gender, Vitolo’s application would be reviewed sooner. Also, the Court decided the case was not moot because priority applications received during the 21 days were still being processed first after the priority period expired.    

RACE-BASED CLASSIFICATION

For a policy that is explicitly based on race to be constitutional, it must survive strict scrutiny– that is, the government must show that a narrowly tailored remedy is necessary to achieve a compelling government interest.

The government argued that it had a compelling interest in remedying “past societal discrimination” that minority restaurant owners often experience.  The government may have a compelling interest in remedying past discrimination only when three criteria are met: (1) the policy must target a specific episode of past discrimination — not general discrimination in an entire industry, (2) there must be evidence of intentional discrimination in the past, (3) the government must have had a hand in the past discrimination it now seeks to remedy. 

The Court determine the government did not meet its burden of satisfying the three criteria above and stated that, “when the government promulgates race-based policies, it must operate with a scalpel. And its cuts must be informed by data that suggest intentional discrimination.”  As a result, the SBA did not have a compelling interest to allow race-based priority status for RRF grants.  The RRF did not remedy a specific incident of past intentional discrimination by the government. 

Also, the Court articulated that even if the government had shown a compelling interest, the race-based priority status in the RRF was invalid because it was not narrowly tailored.  For a policy to be narrowly tailored the government must show a “serious, good faith consideration of workable race-neutral alternatives.” The Court noted that this requires the government to engage in a genuine effort to determine whether alternative race-neutral policies could address the alleged harm. 

The Court found that the SBA could have guaranteed that minority-owned businesses received funds through race-neutral alternatives, such as giving priority to any business that had not previously received funding.  As a result, the race-based policy was not narrowly tailored.

GENDER-BASED CLASSIFICATIONS

Gender-based classifications are invalid unless the government can show the remedy is substantially related to an important government interest. The government argued that it had an interest in remedying the disproportionate negative effects the pandemic had on women-owned restaurants. The government offered statistics that showed women-owned businesses asked for less funding in previous loan programs as compared to male-owned businesses, but the Court held that this data was not enough to show intentional discrimination by the government that needed to be remedied through policy. The Court also ruled that the priority system was not substantially related to its proposed interest; while the government designed the program as a means of helping businesses that were hit hardest by the pandemic, the program fast-tracked all women-owned restaurants, even if they were not as negatively impacted as others.

Because the Court found that the government failed to show justification for the race and gender-based classifications in the RRF, it granted Vitolo’s request for an injunction until his case was fully resolved and all appeals exhausted. However, the Court held that the SBA could continue to prioritize veteran applicants.

PRACTICAL ADVICE

As of Monday, June 14, 2021, $27.5 billion of the fund’s $28.6 billion have been distributed to 100,000 businesses. The SBA received over 186,200 applications in just the first two days of the program; within ten days, they had received nearly 266,000 application, which accounted for $65 billion of requested funds.

Because the SBA was enjoined from distributing funds to priority applicants until the conclusion of the Vitolo case and its appeals, it is likely the fund will deplete before most minority-owned business applications are reviewed.  The remaining funds are likely to be distributed to non-minority owned businesses that applied within the first week of the program.  

If Congress were to allocate additional funding for coronavirus relief to restaurants in the future, it is recommended that all businesses apply as early as possible to ensure funding, as the Vitolo case affirms that priority may not be given based on race or gender.

Authors: Daniel C. Conlon and Desiree Bsales[2]

For more information on this or any other legal matter, contact Daniel Conlon at dconlon@tuckerlaw.com.

[1] Vitolo v. Guzman, Case No. 3:21-cv-00176, 2021 WL 2172181 (6th Cir. 2021).

[2] Tucker Arensberg, P.C. summer associate, University of Pittsburgh School of Law (anticipated graduation 2024)

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