DBE program upheld

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A state does not have to demonstrate a compelling interest for using a disadvantaged business enterprise (DBE) program, the Seventh Circuit held on Jan. 8. The holding likely immunizes Wisconsin’s DBE program from constitutional attack.

Northern Contracting, Inc. (NCI) is a subcontractor that specializes in the construction of guardrails and fences for highway projects in Illinois.

In 2000, NCI brought suit in federal court against the State of Illinois and others, alleging that Illinois’ DBE program is unconstitutional.

The program is the result of federal law establishing a goal that 10 percent of federal highway funds be spent with DBEs, and requiring that all recipients of federal funds have a DBE program. Illinois set a DBE goal of 22.77 percent.

The court granted summary judgment in favor of Illinois, holding that the DBE program was narrowly tailored to a compelling interest — remedying the effects of racial and gender discrimination in the highway construction market.

NCI appealed, but the Seventh Circuit affirmed in a decision by Judge Ann Claire Williams.

In Milwaukee County Pavers Ass’n. v. Fielder, 922 F.2d 419 (7th Cir. 1991), the court had held that the federal government’s interest in remedying discrimination provided justification for a state to engage in a federally mandated DBE program.

Subsequently, the U.S. Supreme Court, in Adarand Constructors v. Pena, 515 U.S. 200 (1995), reversed a lower court decision applying intermediate scrutiny to federal racial classifications, and held that strict scrutiny applies.

The Seventh Circuit concluded that the holding in Adarand does not affect its decision in Milwaukee County Pavers, and a state still need not show any justification for its program, beyond Congress’ determination that DBE programs serve a compelling interest.

Since Adarand, both the Eighth and Ninth Circuits have held that, even absent evidence of discrimination in a given state, DBE programs serve a compelling national interest. However, both have also held that states are susceptible to as-applied challenges to whether the programs are narrowly tailored to address discrimination. Western States Paving Co., Inc. v. Washington State Dep’t of Transp., 407 F.3d 983 (9th Cir. 2005), cert. denied, 126 S.Ct. 1332 (Feb. 21, 2006); Sherbrooke Turf, Inc. v. Minn. Dep’t of Trans., 345 F.3d 964, 970 (8th Cir. 2003), cert. denied, 541 U.S. 1041 (2004).

Like the other circuits, the Seventh Circuit concluded that Adarand does not require it to alter its compelling interest analysis. However, it disagreed with the conclusions of those courts that states are still subject to as-applied challenges whether the programs are narrowly tailored, reaffirming its 1991 holding in Mil-waukee County Pavers that a state is insulated from such an attack.

The court noted that the U.S. Supreme Court in Adarand could have taken issue with Milwaukee County Pavers, but instead issued a very narrow holding. The court held only that federal programs involving racial classifications must be subjected to strict scrutiny.

The court wrote, “We are unconvinced by [the reasoning of the Eighth and Ninth Circuits] — all recipients are still required to have compliant DBE programs in order to be eligible for federal transportation funds, however federal law makes more clear now that compliance could be achieved even with no DBE utilization if that were the result of a good faith use of the process.”

Accordingly, the court concluded that the only relevant question was whether Illinois exceeded its grant of authority under federal law.

NCI made three arguments as to why Illinois exceeded its authority: Illinois violated 49 C.F.R. 26.45(c) by improperly calculating the relative availability of DBEs in Illinois; Illinois failed to properly adjust its base figure based on local market conditions; and Illinois violated 49 C.F.R. 26.51 by failing to meet the maximum feasible portion of its overall goal through race-neutral means.

The court rejected all three arguments presented by NCI.

First, the court noted that 49 C.F.R. 26.45(c) permits states to use
any methodology that is rationally related to the relative availability of DBEs in the market. Accordingly, the court concluded that it was permissible for Illinois to use Census Bureau data to supplement its list of registered DBEs.

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The court concluded, “We agree with the district court that the remedial nature of the federal scheme militates in favor of a method of DBE availability calculation that casts a broader net.”

Second, the court found that Illinois’ failure to separate prime contractor availability from subcontractor availability did not ignore market conditions. The court reasoned, “It would make little sense to separate prime contractor and subcontractor availability as suggested by NCI when DBEs will also compete for prime contracts and any success will be reflected in the recipient’s calculation of success in meeting the overall goal.”

Finally, the court found that Illinois did maximize attaining the goal by race-neutral means, even though the State does not keep track of how many contracts are awarded to DBEs who are also low bidders, because the regulations contain no such requirement.

Noting that Illinois has sponsored different types of informational sessions, provided technical and financial training to DBEs and other small businesses, and has initiated a bonding and financing assistance program, the court found Illinois had employed race-neutral means to maximize its goals.

Accordingly, the court affirmed that the DBE program does not violate the Constitution.

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David Ziemer can be reached by email.