By Hailey Konnath

Law360 (May 28, 2021, 7:16 PM EDT) -- A split Sixth Circuit panel has barred the Small Business Administration from prioritizing pandemic relief for restaurants based on race and sex, slamming the government for "racial gerrymandering" and using "unconstitutional criteria."

The decision Thursday overturns a Tennessee federal judge's May 19 ruling denying a white male restaurant owner's request for a temporary restraining order. In his decision, U.S. District Judge Travis R. McDonough held that Antonio Vitolo, who owns Jake's Bar and Grill LLC, had failed to rebut the government's showing that it has a compelling interest in stopping the impacts of historical discrimination.

But the panel majority said Thursday that the district court should've issued an injunction because the government is the one that hasn't justified its "discriminatory policy." The SBA has injected explicit racial and ethnic preferences into the priority process by presuming certain applicants are "socially disadvantaged" based solely on those factors, U.S. Circuit Judges Alan E. Norris and Amul R. Thapar said.

"The added evidentiary burden faced by white men and other non-presumptively disadvantaged groups stands in marked contrast with lenient evidentiary standards set by the American Rescue Plan Act," the majority said.

The SBA has pointed generally to societal discrimination against minority business owners but didn't identify specific incidents of past discrimination, according to the majority's decision. And because "an effort to alleviate the effects of societal discrimination is not a compelling interest," the government's policy is not permissible, the majority held.

"When the government promulgates race-based policies, it must operate with a scalpel," the majority said. "And its cuts must be informed by data that suggest intentional discrimination. The broad statistical disparities cited by the government are not nearly enough."

Judges Norris and Thapar also rejected the government's contention that the issue was moot because the priority period for the loans ended while the case was being litigated. The government hasn't cleared the "high hurdle" for mootness, they said, adding that race and sex preferences continue to bear on whether an applicant receives a grant before the money runs out.

The majority added, "As today's case shows once again, the 'way to stop discrimination on the basis of race is to stop discriminating on the basis of race.'"

U.S. Circuit Judge Bernice Bouie Donald disagreed, noting in her dissent that it took the U.S. Supreme Court nearly 200 years to establish that the Constitution does permit the government to use race-based classifications to remediate past discrimination.

"It took only seven days for the majority to undermine that longstanding and enduring principle," the judge said.

The majority's reasoning suggests "we live in a world in which centuries of intentional discrimination and oppression of racial minorities have been eradicated," a world in which the pandemic didn't exacerbate those disparities and a world in which Congress passed the Restaurant Revitalization Fund to "arbitrarily provide special treatment to racial minorities and women," according to the dissent.

Judge Donald said the fund is a carefully targeted measure necessitated by an unparalleled pandemic, and Vitolo hasn't shown that he will be irreparably harmed by the way in which it is distributed.

But the majority's rationale "leads it to a puzzling, if not predictable, conclusion that the 21-day priority period in the RRF — a short-term, narrowly tailored, carefully calibrated measure designed to assist businesses most devastated by the pandemic — is unconstitutional," she said.

Judge Donald also said she was disappointed in the court's use of the emergency appellate docket. The record needs to be further developed, and that should happen before the district court, not the Sixth Circuit, she said.

"This case should have never come to this point," she said, adding that the emergency motion should've been tossed.

"In this case, the government was uniquely situated to identify a pattern of nationwide discrimination and created legislation designed to provide a temporary remedy," Judge Donald said. "That is not unconstitutional; that is the government doing its job. We are not in the business of telling Congress what it cannot do except in the most extreme of circumstances."

The Wisconsin Institute for Law & Liberty, which is representing Vitolo, celebrated the decision in a statement Friday. The institute's president and general counsel, Rick Esenberg, said the government was "trying to allocate limited COVID relief funds on the basis of race and sex."

"The Court of Appeals held it cannot and that we are likely to succeed on our claim that this program is unconstitutional," he said.

Congress created the $28.6 billion Restaurant Revitalization Fund in March as part of the American Rescue Plan Act of 2021. After reviewing evidence showing that initial government response to the pandemic — Paycheck Protection Program loans — disproportionately failed to reach minority-owned businesses, Congress opted to give preference, in certain instances, to businesses owned by women, or by those who are "socially and economically disadvantaged."

Vitolo, who sought $104,590.20 from the fund, argued in his May 12 lawsuit that the practice of giving certain groups priority violates the U.S. Constitution's equal protection clause and due process clause by impermissibly granting benefits based on race and gender classifications. Vitolo applied for a grant on the first day the application period opened, but the SBA won't process his application until those from all minority and female applicants that are received during the first three weeks of the program are fulfilled, he said.

He was after a temporary restraining order that would block the SBA from paying out its Restaurant Revitalization Fund awards unless it did so in a way that ignores race and gender, a temporary injunction that would force the SBA to process applications in the order they are received, regardless of race and gender, a declaratory judgment that the SBA's practices are unconstitutional and a permanent injunction against the practice.

Judge McDonough rejected that position, finding the restaurant owner hadn't shown a likelihood of success.

Congress reviewed evidence that the PPP failed to reach minority-owned businesses because past systems of discrimination have translated to a present lack of relationships between these businesses and banks, he noted.

"This same phenomenon caused minority-owned businesses to enter the pandemic with more financial precarity, and therefore to falter at disproportionately higher rates as the pandemic has unfolded," the judge said at the time.

The Small Business Administration didn't immediately return a request for comment Friday.

U.S. Circuit Judges Alan E. Norris, Bernice Bouie Donald and Amul R. Thapar sat on the panel for the Sixth Circuit.

Vitolo is represented by Daniel P. Lennington of the Wisconsin Institute for Law & Liberty.

The government is represented by Marleigh D. Dover and Jack Starcher of the U.S. Department of Justice's Civil Division.

The cases are Antonio Vitolo et al. v. Isabella Casillas Guzman, case numbers 21-5517 and 21-5528, both in the U.S. Court of Appeals for the Sixth Circuit.

--Additional reporting by Dave Simpson. Editing by Bruce Goldman.

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