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2 second prong of strict scrutiny. First, Richmond had not con- issue has found the regulations to be constitutional on sidered race-neutral means to increase MBE participation. their face.5 Second, the 30% quota had no basis in evidence and was ap- plied regardless of whether the individual MBE had suffered Congress Established its Compelling Interest discrimination. in Remedying Discrimination Apparently recognizing that the opinion might be miscon- strued to categorically eliminate all race-conscious contract- All courts agree that the first prong of strict scrutiny is sat- ing efforts, the Court explicitly stated: isfied by the Congressional record that forms the basis for the DBE Program. Relevant evidence included: Nothing we say today precludes a state or local entity from tak- ing action to rectify the effects of identified discrimination within Disparities between the earnings of minority-owned firms its jurisdiction. If the City of Richmond had evidence before it that non-minority contractors were systematically excluding mi- and similarly situated white-owned firms; nority businesses from subcontracting opportunities, it could Disparities in commercial loan denial rates between black take action to end the discriminatory exclusion. Where there is a business owners compared to similarly situated white busi- significant statistical disparity between the number of qualified ness owners; minority contractors willing and able to perform a particular The large and rapid decline in minorities' participation in service and the number of such contractors actually engaged by the locality or the locality's prime contractors, an inference of the construction industry when race-conscious contract- discriminatory exclusion could arise. . . . Moreover, evidence of ing programs were struck down or abandoned; and a pattern of individual discriminatory acts can, if supported by Various types of overt and institutional discrimination by appropriate statistical proof, lend support to a local govern- prime contractors, trade unions, business networks, sup- ment's determination that broader remedial relief is justified. pliers, and sureties against minority contractors. In Adarand v. Pea,4 the court extended the analysis of strict It is important to note Congress need not make specific scrutiny to race-based federal enactments such as the DBE findings on every possible ethnic subgroup that might be Program. Just as in the local government context, the national subject to discrimination. Moreover, much of the evidence government must have a compelling interest for the use of race of public and private sector discrimination went beyond the and the remedies adopted must be narrowly tailored to the results of the DBE Program to address whether a recipient evidence relied upon. would be a passive participant in a discriminatory federal-aid market without race-conscious measures. Therefore, public Intermediate Scrutiny and private discrimination is generally relevant not only in government contracts but also in the construction industry. In general, courts have subjected preferences for Women- Owned Business Enterprises (WBEs) to "intermediate DBE Regulations are Narrowly Tailored scrutiny": gender-based classifications must be supported by an "exceedingly persuasive justification" and "substantially Next, the regulations are narrowly tailored. Part 26 pro- related" to the objective. However, appellate courts reviewing vides that: the constitutionality of the DBE Program have applied strict scrutiny to the gender-based presumption of social disadvan- The overall goal must be based upon demonstrable evi- tage. Therefore, state DOTs would be wise to meet the rigors dence of the number of DBEs ready, willing, and able to of strict scrutiny for gender preferences. participate on the recipient's federally assisted contracts;6 The goal may be adjusted to reflect the availability of DBEs but for the effects of the DBE Program and of Strict Scrutiny as Applied to discrimination;7 the Disadvantaged Business Enterprise Program 5See Adarand Constructors, Inc. v. Slater, 228 F.3d 1147 (10th Cir. 2000), cert. In the wake of Adarand, Congress reviewed and revised granted, 532 U.S. 941, then dismissed as improvidently granted, 534 U.S. 103 (2001) (Adarand VII); Sherbrooke Turf, Inc. v. Minnesota Department of Trans- the DBE Program's authorizing statute and implementing portation, and Gross Seed Co. v. Nebraska Department of Roads, 345 F.3d. 964 regulations. To date, every court that has considered the (8th Cir. 2003), cert. denied, 541 U.S. 1041 (2004); Western States Paving Co., Inc. v. Washington Department of Transportation, 407 F.3d 983 (9th Cir. 2005), cert. denied, 546 U.S. 1170 (2006); Northern Contracting, Inc. v. Illinois Department of Transportation, 473 F.3d 715 (7th Cir. 2007) (Northern Contracting III). 649 C.F.R. 26.45(b). 4 7 515 U.S. 200 (1995) (Adarand III). 49 C.F.R. 26.45(d).

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3 The recipient must meet the maximum feasible portion under 49 C.F.R. 26.45(c). Step 1 is to determine "a base fig- 8 of the goal through race-neutral measures, as well as esti- ure for the relative availability of DBEs. The following are ex- mate that portion of the goal it predicts will be met through amples of approaches that you may take toward determining such measures;9 a base figure. . . . (1) Use DBE Directories and Census Bureau The use of quotas is not permitted,10 and set-asides are lim- Data. . . . (2) Use a bidders list. . . . (3) Use data from a dispar- ited only to extreme circumstances when no other method ity study. . . . (4) Use the goal of another DOT recipient. . . . could reasonably be expected to redress egregious instances (5) Alternative methods. Subject to the approval of the DOT of discrimination;11 operating administration, you may use other methods to The goals are to be adjusted during the year to remain determine a base figure for your overall goal." narrowly tailored;12 Absent bad faith administration of the program, a recipient Step 2 Analysis: Examining Evidence of Disparities in cannot be penalized for not meeting its goal;13 DBE Opportunities. After the state DOT has estimated its Eligibility is limited to small firms owned by persons whose Step 1 base figure of DBE availability, it must estimate the level net worth is less than $750,000;14 of DBE availability in a discrimination-free market, that is, Certification is available to persons who are not presump- DBE availability "but for" discrimination. 49 C.F.R. 26.45(d) tively disadvantaged but can demonstrate actual social and requires that state DOTs must consider the "current capacity economic disadvantage;15 of DBEs to perform work in your DOT-assisted contracting The presumption of social disadvantage for minorities and program, as measured by the volume of work DBEs have women is rebuttable;16 performed in recent years; [and] [e]vidence from disparity The firm must be a small business;17 studies conducted anywhere within your jurisdiction, to the Exemptions from any or all program requirements are extent it is not already accounted for in your base figure" and available;18 and may consider "[s]tatistical disparities in the ability of DBEs to The authorizing legislation is subject to Congressional get the financing, bonding and insurance" and "[d]ata on em- reauthorization that will ensure periodic public debate. ployment, self-employment, education, training and union apprenticeship programs. . . . If you attempt to make an adjust- ment to your base figure to account for the continuing effects State DOTs' Implementation of Part 26 of past discrimination (often called the "but for" factor) or the Must be Narrowly Tailored effects of an ongoing DBE program, the adjustment must be Part 26 requires that a state DOT narrowly tailor its DBE based on demonstrable evidence that is logically and directly efforts to the evidence of discrimination in its marketplace. related to the effect for which the adjustment is sought." Dis- The regulations prescribe narrowly tailored methods for set- parity or availability studies should provide data probative of ting annual DBE goals to achieve a level playing field for DBEs. this inquiry. 49 C.F.R. 26.45 provides that recipients must set an overall goal for DBE participation in their federally assisted contracts Judicial Review of Disadvantaged Business "based on demonstrable evidence of the availability of ready, Enterprise Goal Setting Under Part 26 willing and able DBEs relative to all businesses ready, willing and able to participate on your DOT-assisted contracts (here- To develop a model disparity or availability study for after, the `relative availability of DBEs'). The goal must reflect state DOTs, it is critical to understand the cases reviewing your determination of the level of DBE participation you state DOTs' application of Part 26. We briefly summarize the would expect absent the effects of discrimination." three decisions that speak directly to the types of evidence relevant and necessary for state DOTs' narrowly tailored Step 1 Analysis: Estimating DBE Availability. The process program implementation. to set the overall annual DBE goal is divided into two steps Northern Contracting, Inc. v. Illinois Department of 8 49 C.F.R. 26.51(a) Transportation. In the most recent case, the Seventh Cir- 9 49 C.F.R. 26.51(c). cuit Court of Appeals held that the Illinois Department of 10 49 C.F.R. 26.43(a). 11 49 C.F.R. 26.43(b). Transportation's (IDOT's) Federal Fiscal Year (FFY) 2005 12 49 C.F.R. 26.51(f ). DBE Plan was narrowly tailored. 13 49 C.F.R. 26.47(a). IDOT had commissioned an availability study to meet Part 14 49 C.F.R. 26.67(b). 15 49 C.F.R. Part 26, Appendix E. 26's requirements.19 For Step 1, the IDOT Study developed a 16 49 C.F.R. 26.67(b). 17 19 49 C.F.R. 26.65. NERA Economic Consulting. 2004a. Disadvantaged Business Enterprise Avail- 18 49 C.F.R. 26.15(a). ability Study: Prepared for the Illinois Department of Transportation.

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4 "custom census" designed to provide an accurate calculation "level playing field" for IDOT's contracts and subcontracts. of the current relative availability of DBEs, which employed a Of particular importance for the Model Study Project is the seven-step analysis that: court's affirmance of estimating the availability of DBEs by relying on the study's "custom census" approach rather than Created a database of representative IDOT projects; simply counting the certified DBEs among IDOT bidders, Identified the appropriate geographic market for IDOT's prequalified prime contractors, and registered subcontrac- contracting activity; tors, as the plaintiff had urged. The court held that the reme- Identified the appropriate product market for IDOT's con- dial nature of the program favors a method of DBE availability tracting activity; calculation that "casts a broader net." Counted all businesses in those relevant markets; Identified minority-owned and women-owned businesses Sherbrooke Turf, Inc. v. Minnesota Department of Trans- in those markets; portation. The Minnesota Department of Transportation's Verified the ownership status of minority-owned and (Mn/DOT's) implementation of Part 26, based on a similar women-owned businesses; and availability study, was likewise held to be constitutional. After Verified the ownership status of all other firms. holding that Congress had ample evidence of discrimination against DBEs in the market for federal-aid transportation con- For Step 1, the study estimated that DBEs comprised 22.77% tracts, the Eighth Circuit noted that "Sherbrooke presented of IDOT's available firms. evidence attacking the reliability of the data the state used in For Step 2, the study examined whether and to what extent determining its recommended overall goal." But Sherbrooke there were disparities between the rates at which minorities "failed to establish that better data was [sic] available or that and women form businesses relative to similarly situated Mn/DOT was otherwise unreasonable in undertaking this white men, as well as disparities in the relative earnings of thorough analysis and in relying on its results. The precipitous those businesses. Controlling for numerous variables such as drop in DBE participation in 1999, when no race-conscious the owner's age, education, and the like, the study found that methods were employed, supports Mn/DOT's conclusion in a race-neutral marketplace, the availability of DBEs would that a substantial portion of its 2001 overall goal could not be be approximately 20.8% higher, yielding a Step 2 estimate of met with race-neutral measures."20 DBE availability "but for" discrimination of 27.51%. In Sherbrooke's companion case, the Nebraska Department In addition to the IDOT Study, the court considered: of Roads' (NDORs') DBE goal based on an availability study21 was upheld. An availability study designed to meet Part 26 conducted Western States Paving Co., Inc. v. Washington State for Metra, the Chicago commuter rail agency; Department of Transportation. The result from the Ninth Expert reports from a decision holding that the City of Circuit was dramatically different in the challenge to the Wash- Chicago had a compelling interest in its minority and women ington State Department of Transportation's (WSDOT's) DBE business program for construction contracts; Program. While the DBE Program's legislation and regula- Expert reports and anecdotal testimony presented to tions were held to facially satisfy strict scrutiny, WSDOT's the Chicago City Council in support of the city's revised implementation of the regulations was not sufficiently nar- Minority and Women Business Enterprise (M/WBE) Pro- rowly tailored. Although a recipient need not demonstrate an gram ordinance; independent compelling interest for its DBE Program, it is Anecdotal evidence gathered at IDOT's public hearings on necessary to undertake an "as applied" inquiry into whether the DBE program; the state's program is narrowly tailored to its marketplace. Data on DBE utilization on construction projects in "un- The Ninth Circuit held that grantees must proffer addi- remediated" markets without DBE goals; tional evidence of discrimination beyond that relied upon by DBE utilization of 1.6% in the Illinois State Toll Highway Congress to apply race-conscious contract goals to meet the Authority's voluntary DBE program for non-federal-aid annual goal, including that discrimination must have affected contracts; and all of the presumptively socially disadvantaged groups included IDOT's "zero goal" experiment, where DBEs received ap- in Part 26. proximately 1.5% of the total value of contracts without goals. 20 Sherbrooke, 345 F.3d. at 97374. The trial and appellate courts held this to be sufficient 21 MGT of America, Inc., September 2000, "Availability and Goal Setting Study." proof of discrimination such that race-neutral measures This study used the bidders list approach to estimating Step 1 availability. The alone would be inadequate to ensure that DBEs operate on a Eighth Circuit did not comment on this method.

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5 WSDOT determined its Step 1 base figure of DBE avail- sented by IDOT, Mn/DOT, and NDOR in support of their ability by dividing the number of certified DBEs by the total programs. The Sherbrooke and Northern Contracting courts number of establishments in the Census Bureau's County reviewed ample targeted evidence of DBEs' availability to Business Patterns (CBP) database. In Step 2, it followed the perform on state DOT contracts and subcontracts, as well as U.S.DOT's guidelines and adjusted the base figure to reflect evidence of the discriminatory barriers those firms face in the average of the Step 1 estimate averaged with the median pursuing such opportunities. of prior 5 years' DBE participation. WSDOT did not have sta- tistical evidence upon which to make an adjustment for dis- Additional Evidence of Discrimination criminatory barriers and therefore could only rely upon the gap between its Step 1 estimate of 14% and the 9% DBE par- Step 2 requires recipients to consider evidence of the effects ticipation on contracts without goals. However, the court of the DBE Program and discrimination on DBE availability. held that this 14% figure reflects the effects of the DBE Pro- The case law is very sparse regarding analysis of the elements gram, and thus is not indicative of DBE utilization in a race- of the determination of availability "but for" the effects of dis- neutral market. Further, the disparity between DBE availabil- crimination. The Western States opinion does not address what ity and DBE utilization on race-neutral contracts was entitled would suffice, and IDOT determined not to make a Step 2 ad- to little weight because it did not account for the "relative justment. Sherbrooke noted without further comment that capacity" of DBEs. Finally, the state did not rely upon any the DBE availability figure was adjusted from 11.4 to 11.6%. anecdotal evidence of discrimination in Washington's trans- This report therefore looks to cases construing state and portation marketplace in setting its goal. local M/WBE programs for guidance on the types of evidence The opinion is unclear how much evidence of discrimina- relevant to whether discrimination continues to affect the tion in a recipient's jurisdiction is necessary to support the use Step 1 base figure. Proof of the disparate impacts of economic of race-conscious contract goals. The court somewhat collapses factors on minority- and women-owned firms and the dis- the compelling interest requirement of "strong evidence" of parate treatment of such firms by actors critical to success discrimination with the requirement that the remedy be nar- should be shown using statistics and economic models to ex- rowly tailored to that evidence. The regulations disavow the amine the effects of systems or markets on different groups. need for grantees to conduct disparity studies, yet the opin- Anecdotal evidence of personal experiences with discrimina- ion demands evidence that closely resembles a disparity study. tory conduct, policies, or systems is also probative. Specific It also seems to confuse the setting of an overall agency evidence of discrimination or its absence may be direct or cir- goal--the expected DBE participation in a discrimination- cumstantial and should include economic factors and oppor- free market--with the means used to achieve that goal--the tunities in the private sector affecting the business success of use of race-conscious subcontracting goals. Even if a recipient minority and women disadvantaged business enterprises concluded that its market was fully fair and open, that does (M/W/DBEs). not mean that it would not set a goal, only that it would not employ race-based measures to meet it. Utilization of DBEs. Disparity studies examine whether Perhaps this merely illustrates that if a party presents no and to what extent there are disparities between the availabil- study, the court then lacks guidance on the correct economic ity of DBEs and their utilization on public and private sector and legal analysis of discrimination. The Ninth Circuit pointed contracts and subcontracts. This is known as the "disparity out that "[b]oth Minnesota and Nebraska had hired outside index" or "disparity ratio," which is calculated by dividing the consulting firms to conduct statistical analyses of the avail- utilization of DBEs by the availability of DBEs. Courts have ability and capacity of DBEs in their local markets, and the looked to disparity indices in determining whether Croson's Eighth Circuit relied upon those studies to hold that the evidentiary foundation is satisfied. An index less than 100% States' DBE Programs independently satisfied strict scrutiny's indicates that a given group is being utilized less than would narrow tailoring requirement."22 As a result of no study and be expected based on its availability, thereby supporting an no expert testimony, the Ninth Circuit made several serious inference of the present effects of discrimination. errors, including imposing a requirement for a Step 2 adjust- The government need not prove that the statistical inferences ment, ignoring the effects of discrimination on DBE "capacity," of discrimination are "correct." Statistical evidence creating and misstating the test for whether a disparity is substantively inferences of discriminatory motivations has been held to significant. meet strict scrutiny. It is the plaintiff who must then persuade Given the Ninth's Circuit's reliance on Sherbrooke, what the court that such proof does not support those inferences. WSDOT lacked was the type of expert statistical evidence pre- Past utilization of DBEs on state DOT contracts is useful in suggesting a "floor" of the availability of DBEs that are "ready, 22 407 F.3d at 997. willing and able." That DBEs are utilized on the agency's

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6 contracts at greater percentages than the Step 1 headcount wide activities is also highly relevant to the state DOT's pas- does not end the inquiry into whether discrimination still cre- sive participation in discrimination. If DBEs are suffering ates barriers to equal contracting opportunities. However, discrimination in the private markets, the government has an where the government has been implementing race-conscious interest in ensuring that its own contracting activities do not remedies like the long-standing DBE Program, DBE utiliza- further this evil. tion may merely reflect those efforts; it does not signal the end Economy-wide evidence has consisted of various types. of discriminatory barriers but rather the program's success in Barriers to the formation of DBE contractors have included reducing those barriers. the following: While 26.45(d) clearly defines "capacity" as past utiliza- tion, some agencies have added a gloss of "capacity analysis" Exclusion from "good old boy" networks, often the result of to lower the Step 1 base figure. They note that DBEs are often several generations of family participation in the industry; smaller and newer than established white male-owned busi- Barriers to union membership; and nesses and may lack the qualifications needed for DOT work Race-based denial of access to start-up and working capital. (prior DOT track record, high bonding capacity, ownership or long-term leases of equipment, existing union agreements, Barriers to competition by existing DBEs have included the etc.). The agency therefore downgrades the remedial goal to following: reflect the "real-world" effects of discrimination. The Ninth Circuit has further confused the issue by rejecting Nonsolicitation of DBEs in the absence of DBE goals; the only type of "capacity" marker required to be considered by Bid shopping of DBE quotes to non-DBEs; the regulations it held to be constitutional--past state DOT Industry domination by "informal, racially exclusionary DBE utilization. WSDOT argued that DBE capacity should business networks"; reflect the relationship between its Step 1 availability estimate Discrimination by surety bonding companies; and and its past utilization. The court, however, held that was "no Price and delivery discrimination by suppliers. evidence of discrimination" because utilization was affected by the imposition of DBE contract goals. It then rejected the Unremediated Markets Data. It is critical to measure the disparity between DBE availability and utilization because the participation of minority- and women-owned firms in the ab- availability measure did not statistically control for the "rela- sence of race-conscious goals, if such evidence is available. tive capacity" (which it did not define). The court does not Evidence of race and gender discrimination in relevant "un- appear to have contemplated that the existence of the program remediated" markets, that is, markets that have no race- would provide DBEs with more "capacity" (that is, supply) by conscious subcontracting goals, provides an important indi- creating more opportunities to work (that is, demand) by the cator of the effects of the DBE Program and the level of DBE application of contract goals. participation to be expected in the absence of DBE contract In Northern Contracting, the Seventh Circuit recognized that goals, that is, a totally race-neutral program. lack of DBE "capacity" reflects the injury of discrimination; it The courts are clear that the government has a compelling is not an argument for limiting or abandoning the cure. As dis- interest in not financing the evil of private prejudice with cussed in Appendix B, applying a "capacity" adjustment is sci- public dollars. If DBE utilization is below availability in un- entifically unsound and contrary to the DBE Program's objec- remediated markets, then an inference of discrimination may tive of remedying, not affirming, the results of discrimination. be supportable. Numerous courts have recognized that the Size, longevity, bonding limits, etc., have been affected and re- virtual disappearance of M/W/DBE participation after pro- duced by the discrimination the legislation seeks to ameliorate, grams have been enjoined or abandoned strongly indicates and therefore cannot be used to dilute the remedy. Proper sta- substantial barriers remain to the participation of minority tistical analysis should not control for the variables affected by contractors. This analysis addresses whether the govern- the behavior sought to be isolated. Moreover, the construction ment has been and continues to be a "passive participant" industry is particularly elastic, such that any firm's "capacity" in such discrimination, in the absence of race-conscious today is not its "capacity" tomorrow, as the award of new con- remedies. Thus, the results of nongoals contracts can help tracts, the completion of existing projects, and the ability to to demonstrate that, but for the interposition of remedial employ temporary workers and rent equipment make the race-conscious measures, discrimination would lead to dis- ability to perform a particular contract at a particular moment parities in government contracting. impossible to determine from a research standpoint. Anecdotal Evidence. Anecdotal evidence of experiences Economy-Wide Evidence of Discrimination. Evidence with discrimination in contracting opportunities, including of discriminatory barriers in the private sector or economy- testimony from other governments' studies and programs, is