Introduction

Seventh Circuit decision in Midwest Fence

Effect of federal jurisprudence on specialty contractors

Comment

Introduction

In 1983, in recognition of the historical impact of discrimination on the ability of racial and minority-owned businesses to contract with the government, the federal government passed a federal disadvantaged business enterprise (DBE) programme which has been reauthorised as recently as 2015 in Section 1101(b) of the Fixing America's Surface Transportation Act, Pub L 114–94. The purpose of the DBE programme is to require states that accept federal highway funding to attempt to spend at least 10% of federal highway funds in contracting with DBEs. However, this goal is aspirational. The federal regulations require the states to establish DBE participation goals for federally funded highway projects and attempt to reach those goals after determining the relative availability of DBEs "ready, willing and able" to participate in those projects – reflecting the level of DBE participation that would be expected absent the effects of discrimination. The states must then examine local conditions (eg, the capacity of DBEs to perform work in the state's Department of Transport-assisted contracting programme and evidence from any disparity studies) to adjust the base figures if necessary.

Since its introduction, this programme has been constitutionally challenged several times by non-DBE businesses which have argued that the programme unconstitutionally discriminates on the basis of race. These challenges have led to decisions from the Eighth, Ninth and Tenth Circuits finding the federal and corresponding state programmes to be facially constitutional because they serve the compelling government interest of remedying a history of discrimination in highway construction contracting and are narrowly tailored to achieve this goal.

Seventh Circuit decision in Midwest Fence

In a decision issued on November 4 2016, in Midwest Fence Corporation v US Department of Transportation, 840 F3d 932 (7th Cir 2016), the Seventh Circuit joined the Eighth, Ninth and Tenth Circuits in holding that the federal DBE programme is constitutional on its face because it serves the compelling government interest in remedying a history of discrimination in highway construction contracting.

Facts In this case, Midwest Fence Corporation – a specialty contractor that focuses its business on guardrails and fencing – challenged federal and state programmes that were promoting participation of DBEs in highway construction contracts. The primary remedial goal of the DBE programmes is to level the playing field by providing small businesses owned and controlled by socially and economically disadvantaged individuals with a fair opportunity to compete for federally funded transportation contracts.

DBEs are for-profit small businesses in which socially and economically disadvantaged individuals own at least a 51% interest and also control management and daily business operations. Individuals who qualify as 'socially and economically disadvantaged' are typically racial minorities and women, but other individuals can also qualify on a case-by-case basis. To be regarded as 'economically disadvantaged', an individual must have a personal net worth that does not exceed $1.32 million. To be regarded as a 'small business', a firm must not exceed a certain size designated on an industry-by-industry basis by the Small Business Administration and must have average annual gross receipts less than $22.41 million. Midwest Fence is not a DBE.

Midwest Fence sued the US Department of Transportation, the Illinois Department of Transportation and the Illinois State Toll Highway Authority, arguing that these programmes were in violation of the equal protection clause of the Fourteenth Amendment.

Because the DBE programmes permit government contracting decisions to be made with reference to racial classifications, they are subject to strict scrutiny and can survive an equal protection challenge only if the government can show that they were narrowly tailored to further a compelling government interest.

Decision The Northern District of Illinois granted the defendants' motions for summary judgment and the Seventh Circuit affirmed, finding the programmes facially constitutional.

The Seventh Circuit found that the federal programme serves a compelling government interest in remedying a history of discrimination in highway construction contracting. The court also found that the programme was narrowly tailored because it is flexible and adaptive to local conditions. The programme provides states with ample discretion to tailor their DBE programmes to their own markets and requires the use of race and gender-neutral measures before turning to race and gender-conscious ones.

The court also found that the Illinois Department of Transportation and Illinois State Toll Highway Authority programmes survived strict scrutiny because the state defendants established a substantial basis in evidence to support the need to remedy the effects of past discrimination in their markets, and found that the programmes were narrowly tailored to serve that remedial purpose for similar reasons to those that supported the finding that the federal programme was narrowly tailored.

Effect of federal jurisprudence on specialty contractors

The Seventh Circuit recognised that specialty contractors may be disproportionately affected by these regulations by including the following illustration:

"[I]magine a state's DBE participation goal is 10%, so that DBEs should receive 10% of [all federal funds received]... Let's say the state will spend $100 million. To meet its overall goal, $10 million should go to DBEs. Let's also assume the state cannot achieve that goal with race-neutral measures and so must turn to contract goals. Then suppose that half the contracts have no subcontracting possibilities, rendering them ineligible for contract goals. Now, instead of drawing the $10 million in DBE funds from the total $100 million, the state looks only to the $50 million in contracts with subcontracting possibilities to meet its DBE contract goals. Furthermore, if of that $50 million, only $20 million of work can be performed by subcontractors (and thus by DBEs), the $10 million will be drawn from that pool and that pool alone. Thus, in this example, although the participation goal calls for DBEs to receive 10% of total funds, in practice it requires the state to award DBEs fully half of the available subcontractor funds while taking no business away from prime contractors."(1)

In light of this recognition, the court explained that it could have concluded differently if Midwest Fence had presented evidence that non-DBE subcontractors were being excluded from the market; but because Midwest Fence showed only that the Illinois programme could yield that result, it was not enough to create a factual question to survive summary judgment.

Comment

With four appellate courts approving of the constitutionality of this federal DBE programme, should non-DBE specialty subcontractors be worried? While these DBE programmes create the possibility for non-DBE specialty subcontractors to find themselves with fewer opportunities than they had before, the federal regulations provide several protections.

First, as mentioned above, the programme offers states significant flexibility in meeting their DBE goals. Only when race-neutral efforts prove inadequate do the regulations authorise a state to resort to race-conscious measures to achieve the remainder of its DBE-utilisation goal. The federal regulations also explicitly prohibit the use of quotas. Moreover, where race-conscious contracting goals are used, prime contractors can meet that goal by either subcontracting the requisite amount of work to DBEs or demonstrating good-faith efforts to do so. Further, if a non-DBE finds itself in financial trouble, Section 26.67(d) 49 CFR permits a firm owned by a non-minority to qualify as a DBE if the owner can demonstrate that he or she is socially and economically disadvantaged.

For further information on this topic please contact Anita Ponder or Emily Kesler at Seyfarth Shaw LLP by telephone (+1 312 460 5000) or email (aponder@seyfarth.com or ekesler@seyfarth.com). The Seyfarth Shaw website can be accessed at www.seyfarth.com.

Endnotes

(1) Midwest Fence, 840 F3d at 944.

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