Federal Courts Weigh in on Restaurant Revitalization Fund 

Several federal court decisions in recent weeks cast doubt on race and sex preferences in a program to give financial help to the nation’s restaurants. Judges on a federal appeals court in the midwest and in Texas ruled that applicants for assistance from the Restaurant Revitalization Fund must be considered without regard to demographic characteristics.

The RRF is a feature of the American Rescue Plan Act, the sweeping economic aid package enacted into law on March 11. The legislation set aside $28.6 billion in grants, on a first-come, first-served basis for applicants, to make up for the difference between restaurants’ lost revenues and help provided by the Paycheck Protection Program.

“Baked into the bill was this veterans status, gender, and race-based analysis of who could have a 21-day head start on the applications,” said Boulder attorney Mike Laszlo, whose firm represents restaurateurs around the state. “When the gates opened, only those race and gender and veterans status-qualified applications would be looked at first.”

In a 2-1 ruling released May 27,  the 6th U.S. Circuit Court of Appeals held that the preferences for Small Business Administration funding of RRF applicants are unconstitutional. “When the government promulgates race-based policies, it must operate with a scalpel,” Judge Amul Thapar wrote in a case known as Vitolo v. Guzman. “And its cuts must be informed by data that suggest intentional discrimination.” He explained that a policy goal of addressing the impacts of past race discrimination cannot sustain a race-based preference in the law against constitutional attack. “Since an effort to alleviate the effects of societal discrimination is not a compelling interest, the government’s policy is not permissible.”

Thapar also accused Congress of handing out racial preferences in RFF funding without enough consideration of the differences in the extent of discrimination suffered by various ethnic groups. “The schedule of racial preferences detailed in the government’s regulation – preferences for Pakistanis but not Afghans; Japanese but not Iraqis; Hispanics but not Middle Easterners – is not supported by any record evidence at all,” he said. 

The Kentucky-based jurist’s last stab at the RFF law was based on a perceived lack of precision. “Here, the government could have used any number of alternative, nondiscriminatory policies,” he wrote. “Yet it failed to do so. For example, the government contends that minority-owned businesses disproportionately struggled to obtain capital and credit during the pandemic. But an obvious race-neutral alternative exists: The government could grant priority consideration to all business owners who were unable to obtain needed capital or credit during the pandemic.” 

He rejected a Biden administration argument that Congress appropriately considered the extent to which previous pandemic relief had reached minority communities. Nor can a structural benefit be given to women, Thapar said. “For starters, [the government] fails to show that prioritizing women-owned restaurants serves an important governmental interest,” he wrote. “The government claims an interest in assisting with the economic recovery of women-owned businesses, which were ‘disproportionately affected’ by the COVID-19 pandemic. But while remedying specific instances of past sex discrimination can serve as a valid governmental objective, general claims of societal discrimination are not enough.” 

Thapar also knocked Congress for not distinguishing between women-owned restaurants that were adversely impacted by the past year’s public health crisis and those that were not. “The priority system is designed to fast-track applicants hardest hit by the pandemic,” he said. “Yet under the Act, all women-owned restaurants are prioritized—even if they are not economically disadvantaged.” As with the American Rescue Plan Act’s race-based preferences for the RFF, Thapar also said Congress could not justify sex-based preferences on the basis of whether women disproportionately were left out from PPP assistance. “There is no need to use sex as a proxy when the government seeks to remedy a problem that is purely economic,” he said.

Judge Bernice Bouie Donald of Memphis dissented in the case. She denounced the majority for undermining the Supreme Court’s affirmative action precedents and of ignoring the nation’s economic and social realities. “The majority’s reasoning suggests we live in a world in which centuries of intentional discrimination and oppression of racial minorities have been eradicated,” Donald wrote. “The majority’s reasoning suggests we live in a world in which the COVID-19 pandemic did not exacerbate the disparities enabled by those centuries of discrimination. The majority’s reasoning suggests that we live in a world in which Congress passed the Restaurant Revitalization Fund not to aid the nation’s economic recovery, but to arbitrarily provide special treatment to racial minorities and women.” 

Chris Jackson, a partner at Holland & Hart who specializes in handling appeals, said the Vitolo v. Guzman case is not the first to challenge government spending programs on grounds that they violate the Equal Protection Clause. “Courts have been grappling with race- and gender-based decision-making, especially from the government, for lots and lots of years,” he said. 

Earlier, Judge Reed O’Connor of the Northern District of Texas also enjoined the racial preference aspects of the RFF, rejecting Department of Justice efforts to introduce into evidence previous Congressional findings of race discrimination in government contracting and of structural barriers to small business establishment faced by members of minority groups. “Assuming…that the evidence is relevant, even the case cited by Defendants recognizes the well-established principle about the industry-specific inquiry required to effectuate [the racial preference] standards: The fact that [the standards are] constitutional on [their] 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,” O’Connor wrote in his May 18 order in a case called Greer’s Ranch Cafe v. Guzman. “Rather, agencies have a responsibility to decide if there has been a history of discrimination in the particular industry at issue.”

Jackson does not think either decision is likely to go to the Supreme Court. “I think, basically, it’s less likely this would get appealed because the side that would be in favor of affirmative-action type-policies is the side that lost and they would probably say ‘we don’t want to appeal this because we’re concerned the Supreme Court might issue a decision that’s even worse.’”

Laszlo said that the RRF was the result of an effort by two industry groups, the Independent Restaurant Coalition and the National Restaurant Association, to secure “specific restaurant relief” since the industry “had taken it on the chin.” They asked Congress to appropriate $120 billion to restaurants impacted by the pandemic. “The PPP only went so far,” Laszlo said. “You got a certain amount of money that could go to payroll and it could go to very limited non-payroll expenses, like your lease and interest on loans.” 

The problem, Laszlo continued, is that restaurants that were closed during the pandemic could not reopen without making purchases not covered by the PPP. “Anybody who knows the restaurant industry knows you don’t just turn the switch back on and you’re operating,” he said. “You need food, you need other materials that go into a day-to-day service, and the PPP didn’t allow for those types of items to be purchased using the funds.”

Despite the continuing desire for financial assistance on the part of many restaurants around the nation, Laszlo said that neither of the federal court decisions may have much significant impact on the restaurant industry going forward because the RRF has been depleted. The application process began at the end of April and continued until the funds were distributed. 

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