The U.S. Small Business Administration cannot consider restaurant owners' race or sex when evaluating applications for COVID relief funds, a federal appeals court has ruled.

A 2-1 panel of the 6th U.S. Circuit Court of Appeals held Thursday that the SBA's policy of giving priority to minority- and women-owned restaurants in its $29 billion restaurant aid program was unconstitutional, granting a motion for an injunction by Tennessee restaurant owner Antonio Vitolo.

The SBA and Daniel Lennington of Wisconsin Institute for Law and Liberty, a lawyer for Vitolo and his restaurant, Jake's Bar and Grill, did not immediately respond to requests for comment.

Vitolo sued the government on May 12, seeking an injunction barring the SBA from processing only applications from business at least 51% owned by women, veterans, minorities or other disadvantaged groups during a priority period running from May 3 to May 24. Vitolo's wife and business partner is Hispanic but owns only 50% of the restaurant, according to the lawsuit.

U.S. District Judge Travis McDonough in the Eastern District of Tennessee denied the motion for an injunction, and Vitolo brought an emergency appeal.

Circuit Judge Amul Thapar on Thursday first addressed the government's argument that the case was moot because the priority period had ended. It was not, he said, because priority applicants had been given a head start, meaning the fund could still be depleted before Vitolo's application was processed.

He said Vitolo was likely to succeed on the merits because government policies recognizing race were "presumptively invalid" unless they were narrowly tailored to advance a compelling state interest.

Thapar said the government's stated goal of remedying past discrimination against minority business owners was too general to qualify. The government, he said, had not cited specific instances of intentional discrimination, and statistical disparities "don't cut it."

He also said the effect of the program's race-based criteria, which he described as "preferences for Pakistanis but not Afghans; Japanese but not Iraqis; Hispanics but not Middle Easterners," was not supported by evidence.

"When the government promulgates race-based policies, it must operate with a scalpel," he said, finding that the SBA's program did not qualify. Similar reasoning applied to the agency's policy of giving priority to women-owned businesses, he said.

Thapar was joined by Senior Circuit Judge Alan Norris.

Circuit Judge Bernice Donald dissented, saying the majority went against longstanding precedent allowing the government to take measures to remedy past injustice.

"The majority's reasoning suggests we live in a world in which centuries of intentional discrimination and oppression of racial minorities have been eradicated," she 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."

Donald said the court should have denied the injunction, calling the SBA's program "a carefully targeted measure necessitated by an unparalleled pandemic."

The case is Vitolo et al v. Guzman, 6th U.S. Circuit Court of Appeals, No. 21-5517.

For plaintiffs: Daniel Lennington of Wisconsin Institute for Law and Liberty

For the government: Marleigh Dover and Jack Starcher of the U.S. Department of Justice