The Seventh Circuit Court of Appeals recently decided a case brought by a specialty contractor who was an unsuccessful bidder for work on the Illinois toll roads.
The bidder (Midwest Fence) filed a lawsuit, Midwest Fence Corporation v. United States Department of Transportation, et al., Case No. 15-1827 (7th Cir. Nov. 4, 2016), claiming that the U.S. Department of Transportation’s (USDOT) disadvantaged business enterprise (DBE) program violated the Equal Protection clause of the U.S. Constitution. The bidder similarly argued that the Illinois Department of Transportation (IDOT) and the Illinois State Toll Highway Authority (Tollway) also had no basis to use DBEs.
This case is instructive for public works contractors in Wisconsin who may be required to use DBEs, and for non-DBE subcontractors who bid against DBEs.
About Disadvantaged Business Enterprises
Congress established the DBE program to ensure nondiscrimination in the award and administration of DOT-assisted contracts, remove barriers to the participation of DBEs in DOT-assisted contracts, and assist the development of firms to successfully compete in the marketplace outside of the DBE program.
The stated purpose of the DBE program is to ensure that federally assisted contracts for highway, transit and aviation projects are made available for small businesses owned and controlled by socially and economically disadvantaged individuals.
DBEs typically bid on public projects where federal public funds are being used. They can be administered by local agencies, such as Milwaukee County or the City of Madison.
For federally funded transportation-related projects, a DBE is a legislatively mandated USDOT program that applies to Federal highway dollars expended on federally-assisted contracts issued by USDOT recipients such as State Transportation Agencies (STAs).
Every three years, STAs are required to set an annual DBE goal that they must use good faith efforts to meet. This goal is in the form of a percentage of federal funds apportioned annually to each STA, and is calculated based upon the relative availability of DBE firms as compared to all firms in the relevant geographic market area. STAs that do not meet their goal in any given year must submit a document to their operating administrations, identifying and analyzing the reasons why the goal was not met, and creating specific steps to correct the problems.
The Facts of the Case
Midwest Fence is a specialty contractor for guardrails and fencing. Because of its size and specialization, it usually bids on projects as a subcontractor. It is not a DBE.
Midwest Fence filed the lawsuit in 2010, alleging that the federal DBE program, IDOT’s implementation of it, and the Tollway’s own program violate its 14th Amendment right to equal protection.
Midwest Fence asserted the following primary theories:
- The federal regulations prescribe a method for setting individual contract goals that places an undue burden on non-DBE subcontractors, especially certain kinds of subcontractors, including guardrail and fencing contractors like Midwest Fence.
- The presumption of social and economic disadvantage is not tailored adequately to reflect differences in the circumstances actually faced by women and the various racial and ethnic groups who receive that presumption.
- The federal regulations are unconstitutionally vague, particularly with respect to “good faith efforts” to justify a front-end waiver.
The federal DBE program authorizes and to some extent requires state governments to rely on racial classifications in awarding government contracts. Accordingly, the equal protection challenge requires governmental entities to show that the program can survive strict scrutiny, meaning that the program serves a compelling government interest and is narrowly tailored to advance that interest. Midwest Fence did not challenge the national compelling interest in remedying past discrimination.
States and DBE Participation Goals
If a state projects that it can meet its entire DBE participation goal for the year through neutral means, the state must implement its program without setting contract goals during that year, unless such goals later become necessary. If a state projects that it is likely to exceed its overall DBE participation goal, it must reduce or eliminate the use of contract goals as necessary to avoid exceeding its overall goal.
The Court found that the federal program is both flexible and limited in duration. Quotas, one hallmark of an inflexible system, are flatly prohibited, and states may apply for waivers, including waivers of any provisions regarding administrative requirements, overall goals, contract goals or good faith efforts.
The regulations also require states to remain flexible as they administer the program over the course of the year. For instance, a state must continually reassess its DBE participation goals and whether contract goals are necessary to meet those overall goals. If a state falls behind its DBE participation goal, it may increase its use of contract goals. If it is on track to exceed its participation goal, it must reduce or eliminate its reliance on those measures.
The Court also emphasized that states need not set a contract goal on every USDOTassisted contract, nor must they set those goals at the same percentage as the overall participation goal. The goal for a specific contract may be higher or lower than that percentage level of the overall goal, depending on such factors as the type of work involved, the location of the work, and the availability of DBEs for that particular contract. On a broader scale, states may also adjust their overall participation goals if circumstances change.
The Seventh Circuit’s Decision
The Seventh Circuit found against Midwest Fence and upheld the DBE program. First, the Seventh Circuit emphasized that the federal DBE program requires states to meet as much as possible of their overall DBE participation goals through race- and gender-neutral means.
The Court also held that these provisions allow for significant and ongoing flexibility. States are not locked into their initial DBE participation goals. Their use of contract goals is meant to remain fluid, reflecting a state’s progress toward its overall DBE goal. As for duration, Congress has repeatedly reauthorized the program after taking new looks at the need for it. Finally, states must monitor progress toward meeting DBE goals on a regular basis and alter the goals if necessary. They must stop using race- and gender-conscious measures if those measures are no longer needed.
The Court addressed Midwest Fence’s concern about the burden on third parties and whether the DBE program was over inclusive. The Court concluded that the regulations include mechanisms to minimize the burdens the program places on non-DBE third parties. The Court noted regulations require states to take steps to address overconcentration of DBEs in certain types of work if the overconcentration unduly burdens non-DBEs to the point that they can no longer participate in the market.
The Court pointed out that standards can be relaxed if uncompromising enforcement would yield negative consequences. For instance, states can obtain waivers if special circumstances make the state’s compliance with part of the federal program impractical and contractors who fail to meet a DBE contract goal can still be awarded the contract if they have documented good faith efforts to meet the goal. Midwest Fence Corporation v. United States Department of Transportation, et al., Case No. 15-1827 (7th Cir. Nov. 4, 2016).
Conclusions and Implications
Projects involving DBEs can be challenging for contractors and non-DBE subcontractors competing against DBEs. For the foreseeable future, the law is settled that DBEs will be generally found to be constitutional when tied to federal funds. There may be instances where DBEs can be challenged where no federal funds are involved. Contractors can also run into problems when their good faith efforts are challenged, and open to interpretation.
It is important to understand the DBE requirements upfront on projects, and where those requirements cannot be met, to follow the specified procedures to the letter, in order to satisfy the good faith efforts requirement. The DBE requirement and/or questioning of good faith efforts may provide an opportunity for a bid challenge under the appropriate circumstances.