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Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program (2010)

Chapter: Appendix C - Legal Standards for Race-Conscious Government Contracting Programs

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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
×
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
×
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
×
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
×
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
×
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
×
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
×
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
×
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
×
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
×
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Suggested Citation:"Appendix C - Legal Standards for Race-Conscious Government Contracting Programs." National Academies of Sciences, Engineering, and Medicine. 2010. Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program. Washington, DC: The National Academies Press. doi: 10.17226/14346.
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68 The project to develop the National Model Disparity Study and Request for Proposals for state DOTs seeks to address the evidentiary tests created by the federal courts that govern the DBE Program for federally assisted transportation contracts.217 It is in response to these strictures that disparity studies for public contracts were first conducted. It is therefore crucial to canvass the state of the law to develop national guidelines for the examination of evidence of discrimination in the market for federally assisted transportation contracts. Specifically, we “prepare[d] an analysis of the federal DBE goal-setting regulations and case law in all federal circuits con- sidering challenges to the constitutionality of the U.S. Dis- advantaged Business Program. Identify common themes and key distinguishing factors in state DOT DBE programs that influenced the court ruling on constitutionality.”218 What follows is our detailed analysis of the case law and reg- ulations relevant to the development of a disparity study model, with the focus on evidentiary issues. We begin with a review of the outlines of strict constitutional scrutiny as applied to public contracts, then discuss the particular cases that have construed how those outlines apply to the DBE program and its imple- menting regulations under 49 C.F.R. Part 26. Strict Scrutiny Standard Since the initial application of strict constitutional scrutiny almost 20 years ago to race-conscious public contracting pro- grams, federal appellate and district courts have developed parameters for establishing a government’s compelling inter- est in remedying discrimination and evaluating whether the remedies adopted to address that discrimination are narrowly tailored. This area of constitutional law is complex and con- stantly shifting, and cases are usually quite fact bound. The following are the evidentiary tests that state DOTs must con- sider in evaluating their responses to judicial opinions, as well as to the mandates of Part 26. City of Richmond v. J.A. Croson Co.219 City of Richmond v. J.A. Croson Co. established the broad constitutional contours of permissible race-based public contracting programs. Reversing long-established law, the Supreme Court for the first time extended the highest level of judicial examination from measures designed to limit the rights and opportunities of racial and ethnic minorities to leg- islation that benefits these historic victims of discrimination. Strict scrutiny requires that a government entity prove both its “compelling interest” in remedying identified discrimination based upon a “strong basis in evidence,” and that the measures adopted to remedy that discrimination are “narrowly tailored” to that evidence. However benign the government’s motive, race is always so suspect a classification that its use must pass the highest constitutional test of “strict scrutiny.” The Court struck down Richmond’s Minority Business Enterprise Plan that required prime contractors awarded city construction contracts to subcontract at least 30% of the project to Minority Business Enterprises (MBEs). A business located anywhere in the country that was at least 51% owned and controlled by “Black, Spanish-speaking, Oriental, Indian, Eskimo, or Aleut” citizens was eligible to participate. The plan was adopted after a public hearing at which no direct evidence was presented that the city had discriminated on the basis of race in awarding contracts or that its prime contractors had discriminated against minority subcontractors. The only evi- dence before the city council was: (a) Richmond’s popula- tion was 50% black, yet less than 1% of its prime construction contracts had been awarded to minority businesses; (b) local A P P E N D I X C Legal Standards for Race-Conscious Government Contracting Programs 21749 C.F.R. Part 26. 218Task 1, Scope of Work and Associated Tasks. 219488 U.S. 469 (1989).

69 contractors’ associations were virtually all white; (c) the city attorney’s opinion that the plan was constitutional; and (d) general statements describing widespread racial discrimina- tion in the local, Virginia, and national construction industries. The plaintiff had submitted the single bid to furnish and install specified plumbing fixtures in the City jail. It was unable to meet the 30% set aside because there were no minority sup- pliers either interested in or able to submit a timely quote in response to Croson’s request for quotations, in part because the supplier for one of the two designated fixture companies had already quoted directly to Croson. Twenty-one days after bid opening, an MBE submitted a quote for one of the manufac- turers that was significantly higher than the prime contractor had used to estimate its bid and higher than quotes received from non-MBEs; it also was not an authorized supplier. Rich- mond refused to grant a waiver or to increase the contract price to reflect the costs of using the MBE.220 Croson sued. In affirming the court of appeals’ determination that the plan was unconstitutional, the plurality opinion rejected the extreme positions that local governments either have carte blanche to enact race-based legislation or must prove their own illegal conduct: [A] state or local subdivision . . . has the authority to eradicate the effects of private discrimination within its own legislative jurisdiction. . . . [Richmond] can use its spending powers to remedy private discrimination, if it identifies that discrimination with the particularity required by the Fourteenth Amend- ment. . . . [I]f the City could show that it had essentially become a “passive participant” in a system of racial exclusion . . . [it] could take affirmative steps to dismantle such a system.221 Strict scrutiny of race-based remedies is required to deter- mine whether racial classifications are in fact motivated by either notions of racial inferiority or blatant racial politics. This highest level of judicial review “smokes out” illegitimate uses of race by ensuring that the legislative body is pursuing a goal important enough to warrant use of a highly suspect tool.222 It further ensures that the means chosen “fit” this compelling goal so closely that there is little or no possibility that the motive for the classification was illegitimate racial prejudice or stereotype. The Court made clear that strict scrutiny seeks to expose racial stigma; racial classifications are said to create racial hostility if they are based on notions of racial inferiority.223 Race is so suspect a basis for government action that more than “societal” discrimination is required to restrain racial stereotyping or pandering. Croson provided no defi- nition of “societal” discrimination or any guidance about how to recognize the ongoing realities of history and cul- ture in evaluating race-conscious programs. The Court simply asserted that: [w]hile there is no doubt that the sorry history of both private and public discrimination in this country has contributed to a lack of opportunities for black entrepreneurs, this observation, standing alone, cannot justify a rigid racial quota in the awarding of pub- lic contracts in Richmond, Virginia. . . . [A]n amorphous claim that there has been past discrimination in a particular industry cannot justify the use of an unyielding racial quota. It is sheer speculation how many minority firms there would be in Rich- mond absent past societal discrimination.224 Richmond’s evidence was found to be lacking in every respect. The city could not rely upon the disparity between its utilization of MBE prime contractors and Richmond’s minor- ity population because not all minority persons would be qual- ified to perform construction projects; general population representation is irrelevant. No data were presented about the availability of MBEs in either the relevant marketplace or their utilization as subcontractors on city projects. Justice O’Connor speculated that the extremely low membership of minority firms in local contractors’ associations could be explained by “societal” discrimination or perhaps blacks’ lack of interest in participating as business owners in the construction industry. To be relevant, the city would have to demonstrate statistical disparities between eligible MBEs and actual membership in trade or professional groups. Further, Rich- mond presented no evidence concerning enforcement of its own anti-discrimination ordinance. In the case at hand, the City has not ascertained how many minority enterprises are present in the local construction market nor the level of their participation in City construction projects. The City points to no evidence that qualified minority contrac- tors have been passed over for City contracts or subcontracts, either as a group or in any individual case. Under such circum- stances, it is simply impossible to say that the City has demon- strated “a strong basis in evidence for its conclusion that reme- dial action was necessary.”225 Richmond could not rely upon Congress’ determination that there has been nationwide discrimination in the con- struction industry. Congress recognized that the scope of the problem varies from market to market, and a local govern- 220Id. at 481–83. 221Id. at 491–92. 222See also Grutter v. Bollinger, 539 U.S. 306, 327 (2003) (“Not every decision influenced by race is equally objectionable, and strict scrutiny is designed to pro- vide a framework for carefully examining the importance and the sincerity of the reasons advanced by the governmental decision maker for the use of race in that particular context.”). 223488 U.S. at 493. 224Id. at 499. 225Id.at 510.

ment is further constrained by the Fourteenth Amendment’s Equal Protection Clause.226 The foregoing analysis was applied only to blacks. The Court then emphasized that there was “absolutely no evidence” against other nonwhites. “The random inclusion of racial groups that, as a practical matter, may have never suffered from discrimination in the construction industry in Richmond, sug- gests that perhaps the City’s purpose was not in fact to remedy past discrimination.”227 Having found that Richmond had not presented evi- dence in support of its compelling interest in remedying discrimination—the first prong of strict scrutiny—the Court went on to make two observations about the narrowness of the remedy—the second prong of strict scrutiny. First, Rich- mond had not considered race-neutral means to increase MBE participation. Second, the 30% quota had no basis in evi- dence, and was applied regardless of whether the individual MBE had suffered discrimination.228 Further, Justice O’Con- nor rejected the argument that individualized consideration of plan eligibility is too administratively burdensome. Apparently recognizing that the opinion might be miscon- strued to categorically eliminate all race-conscious contract- ing efforts, Justice O’Connor closed with these admonitions: Nothing we say today precludes a state or local entity from taking action to rectify the effects of identified discrimination within its jurisdiction. If the City of Richmond had evidence before it that non-minority contractors were systematically excluding minority businesses from subcontracting opportunities, it could take action to end the discriminatory exclusion. Where there is a significant statistical disparity between the number of qualified minority contractors willing and able to perform a particular service and the number of such contractors actually engaged by the locality or the locality’s prime contractors, an inference of dis- criminatory exclusion could arise. Under such circumstances, the City could act to dismantle the closed business system by taking appropriate measures against those who discriminate based on race or other illegitimate criteria. In the extreme case, some form of narrowly tailored racial preference might be necessary to break down patterns of deliberate exclusion. . . . Moreover, evidence of a pattern of individual discriminatory acts can, if supported by appropriate statistical proof, lend support to a local government’s determination that broader remedial relief is justified.229 While much has been written about Croson, it is worth stressing in the context of the Model Study inquiry what evi- dence was and was not before the Court. First, Richmond presented no evidence regarding the availability of MBEs to perform as prime contractors or subcontractors and no evi- dence of the utilization of minority-owned subcontractors on city contracts.230 Nor did Richmond attempt to link the rem- edy it imposed to any evidence specific to the Program; it used the general population of the city rather than any measure of business availability. The “city has not ascertained how many minority enterprises are present in the local construction industry nor the level of their participation in city construction projects. The city points to no evidence that qualified minority contractors have been passed over for city contracts or subcon- tracts, either as a group or in any individual case.”231 Some commentators have taken this dearth of any partic- ularized proof and argued that only the most particularized proof can suffice in all cases. They leap from the Court’s rejec- tion of Richmond’s reliance on only the percentage of blacks in the city’s population to a requirement that only firms that bid or have the “capacity” or “willingness” to bid on a partic- ular contract at a particular time can be considered in deter- mining whether discrimination against black businesses infects the local economy.232 This contention has been rejected explicitly by some courts. For example, in denying the plaintiff firm’s summary judgment motion to enjoin the City of New York’s M/WBE construction ordinance, the court stated that: . . . it is important to remember what the Croson plurality opin- ion did and did not decide. The Richmond program, which the Croson Court struck down, was insufficient because it was based on a comparison of the minority population in its entirety in Richmond, Virginia (50%) with the number of contracts awarded to minority businesses (0.67%). There were no statistics presented regarding number of minority-owned contractors in the Richmond area, Croson, 488 U.S. at 499, and the Supreme Court was concerned with the gross generality of the statistics used in justifying the Richmond program. There is no indication that the statistical analysis performed by [the consultant] in the present case, which does contain statistics regarding minority contractors in New York City, is not sufficient as a matter of law under Croson.233 Further, Richmond made no attempt to narrowly tailor a goal for the procurement at issue that reflected the reality of 70 226Id. at 504; but see Adarand v. Peña, 515 U.S. 200 (1995) (Adarand III) (apply- ing strict scrutiny to Congressional race-conscious contracting measures) (dis- cussed infra). 227488 U.S. at 510. 228See Grutter, 539 U.S. at 336–337 (quotas are not permitted; race must be used in a flexible, nonmechanical way). 229488 U.S. at 509 (citations omitted). 230Id. at 502. 231Id. at 510. 232See, e.g., Northern Contracting, Inc. v. Illinois Department of Transportation, 473 F.3d 715, 723 (7th Cir. 2007) (Northern Contracting III). 233North Shore Concrete and Associates, Inc. v. City of New York, 1998 U.S. Dist. Lexis 6785, *28–29 (E.D. N.Y. 1998; see also Harrison & Burrowes Bridge Con- structors, Inc. v. Cuomo, 981 F.2d 50, 61–62 (2nd Cir. 1992) (“Croson made only broad pronouncements concerning the findings necessary to support a state’s affirmative action plan”); cf. Concrete Works of Colorado, Inc. v. City and County of Denver 36 F.3d 1513, 1528 (10th Cir. 1994) (Concrete Works II) (City may rely on “data reflecting the number of MBEs and WBEs in the marketplace to defeat the challenger’s summary judgment motion”).

71 the project. Arbitrary quotas, and the unyielding application of those quotas, did not support the stated objective of ensur- ing equal access to city contracting opportunities. The Croson Court said nothing about the constitutionality of flexible sub- contracting goals based upon the availability of MBEs to per- form the scopes of the contract in the government’s local marketplace. The federal DBE Program, as discussed below, avoids these pitfalls. Part 26 “provides for a flexible system of contracting goals that contrasts sharply with the rigid quotas invalidated in Croson.”234 While strict scrutiny is designed to require clear articula- tion of the evidentiary basis for race-based decision making and careful adoption of remedies to address discrimination, it does not, as Justice O’Connor stressed, have to be an impos- sible test that no proof can meet. Strict scrutiny need not be “fatal in fact.”235 Preferences for Women Courts usually review gender-based government decision making under “intermediate scrutiny,” which requires that gender-based classifications be supported by an “exceedingly persuasive justification” and be “substantially related” to the objective. Whether affirmative action procurement programs that benefit women are subject to the lesser constitutional standard of “intermediate scrutiny” has yet to be settled by the Supreme Court.236 Most courts have applied intermediate scrutiny to local program preferences for women,237 and then evaluated the female preference under that standard.238 This may be a distinction without meaningful difference, as only one post-Croson court has upheld gender-based provisions while striking down race-based measures.239 Further, as observed by the Seventh Circuit Court of Appeals, applying intermediate scrutiny to gender “creates the paradox that a public agency may provide stronger remedies for sex discrimination than for race discrimination; it is difficult to see what sense that makes.”240 In any event, courts reviewing the constitutionality of the DBE program have applied strict scrutiny to the gender-based preference.241 The Ninth Circuit noted that “intermediate scrutiny would not yield a different result than that obtained under strict scrutiny’s more stringent standard.”242 Therefore, state DOTs would be wise to meet the rigors of strict scrutiny for gender preferences. Establishing a “Strong Basis in Evidence” for Local Race-Conscious Contracting Programs The Croson Court’s guidance regarding the type of evidence necessary to support a race-conscious contracting program gave rise to the “disparity study.” Dozens of cities, states, and other local entities engaged consultants to conduct studies to provide statistical and anecdotal evidence of discrimina- tion against MBEs and WBEs. These studies used various approaches to estimating the availability of “ready, willing, and able” MBEs and WBEs; determining the entity’s utilization of such firms as prime contractors and subcontractors on its projects; analyzing whether there was a large and statistically significant disparity between availability and utilization; and gathering anecdotal information about the experiences of MBEs and WBEs on public and private contracts. Despite millions of dollars spent on such analyses, the results were often econometrically unsound,243 politically motivated,244 and legally inadequate. For nearly 15 years after Croson, the fed- 234Western States Paving Co., Inc. v. Washington Department of Transportation, 407 F.3d 983, 994 (9th Cir. 2005), cert. denied, 546 U.S. 1170 (2006). 235See Adarand III, 515 U.S. at 237. 236Cf. United States v. Virginia, 518 U.S. 515 (1996) (applying standard of “exceedingly persuasive justification” in striking down Virginia Military Institute’s males only admissions policy); Northern Contracting III, 473 F.3d at 720 (“IDOT does not argue for a more permissive standard for its gen- der-based initiatives and therefore we will apply strict scrutiny to the entire program.”). 237See, e.g., Associated Utility Contractors of Maryland, Inc. v. Mayor and City Council of Baltimore, 83 F.Supp.2d 613, 620 (D. Md. 2000) (Baltimore I); but see Brunet v. City of Columbus, 1 F.3d 390, 404 (6th Cir. 1993), cert. denied sub nom Brunet v. Tucker, 510 U.S. 1164 (1994) (applying strict scrutiny). 238See, e.g., Northern Contracting, Inc. v. Illinois Department of Transportation, 2004 U.S. Dist. LEXIS, 3226, *44 (N.D. Ill., Mar. 3, 2004) (Northern Contracting I) (women’s status as presumptively socially disadvantaged passes intermediate scrutiny); W.H. Scott Construction Co., Inc. v. City of Jackson, Mississippi, 199 F.3d 206, 215 n.9 (5th Cir. 1999); Engineering Contractors Association of South Florida, Inc. v. Metropolitan Dade County, 122 F.3d 895, 907–910 (11th Cir. 1997) (Engineering Contractors II); Concrete Works IV, 36 F.3d at 1519; Contractors Association of Eastern Pennsylvania v. City of Philadelphia, 6 F.3d 990. 1009 (3rd Cir. 1993) (Philadelphia II); Coral Construction Co. v. King County, 941 F.2d. 910, 930–31 (9th Cir. 1991); H.B. Rowe, Inc. v. Tippett, 2008 U.S. Dist. Lexis 100569, *25 (E.D. N.C. 2008). 239Coral Construction, 941 F.2d at 932 (applying intermediate scrutiny); cf. Western States, 407 F.3d. at 991 n.6 (no need to conduct a separate analysis of sex-based clas- sifications under intermediate scrutiny because it would not yield a different result from strict scrutiny); F. Buddie Contracting Ltd., v. Cuyahoga Community College District, 31 F.Supp.2d. 571, 584 n.18 (N.D. Oh. 1998) (“If Plain-tiff had made the requisite showing of imminent harm this Court is convinced that . . . CCC’s FBE program would likewise fail [as did the MBE program].”). 240Builders Association of Greater Chicago v. County of Cook, 256 F.3d 642, 644 (7th Cir. 2001) (Cook II). 241Adarand Constructors, Inc. v. Slater, 228 F.3d 1147, 1163 (10th Cir. 2000) (Adarand VII), cert. granted, 532 U.S. 941, then dismissed as improvidently granted, 534 U.S. 103 (2001) (applying a compelling interest analysis); Sher- brooke Turf, Inc. v. Minnesota Department of Transportation, 345 F.3d. 964, 969 (8th Cir. 2003), cert. denied, 541 U.S. 1041 (2004) (same); Northern Contracting, Inc. v. Illinois Department of Transportation, 473 F.3d 715, 720 (7th Cir. 2007) (Northern Contracting III) (same). 242Western States, 407 F.3d at 990 n.6. 243“Econometrics is the field of economics that concerns itself with the applica- tion of statistical inference to the empirical measurement of relationships pos- tulated by economic theory.” (p. 1), Greene, William H. 1997. Econometric Analysis, 3rd ed. Upper Saddle River, New Jersey: Prentice Hall. 244See, e.g., Associated General Contractors of America v. City of Columbus, 936 F. Supp. 1363, 1431–33 (S.D. Ohio 1996) (“political pressure played a role in the city’s adoption” of the M/WBE program and the study consultants).

eral courts had struck down almost every local M/WBE pro- gram for lacking sufficient evidence of discrimination and often adopting insufficiently narrowly tailored remedies.245 Loss of race-conscious remedies led to almost immediate and drastic reductions in the participation of M/WBEs as public subcontractors. For example, the City of Richmond’s minority business participation plummeted 93% within the first year after Croson enjoined its program.246 Dramatic declines in minority business utilization also occurred in Atlanta (60%);247 Fulton County, Georgia (90%);248 Philadelphia (97%);249 Hills- borough County, Florida (99%);250 Tampa (99%);251 San Jose, California (80%);252 Cook County, Illinois (70%);253 and Elyria, Ohio (a suburb of Cleveland) (98%).254 Large declines were reported as well by officials in Detroit,255 Columbus,256 and Washington, D.C.257 Similar decreases were observed when DBE utilization mandated on federally assisted transportation projects was compared to M/WBE utilization in the same state on state funded transportation projects without race-conscious goals. Data from 1996 for Arizona, Arkansas, Connecticut, Dela- ware, Louisiana, Michigan, Missouri, Nebraska, Oregon, and Rhode Island, for example, showed that DBE participation on Federal-aid contracts was several times higher than M/WBE participation on state-funded contracts in the same state. It was 11 times higher in Michigan; over 13 times higher in Delaware; and over 120 times higher in Rhode Island.258 Whatever the weaknesses in the disparity studies, it became clear that, absent government intervention, ready, willing, and able minority- and women-owned firms were excluded from subcontracting opportunities on government projects. Even the use by agencies of race-neutral measures such as technical assistance, increased outreach, and “unbundling” large projects failed to ensure equal access to contracting opportunities without DBE goals.259 A different approach was clearly necessary if such dramatic declines in public contracting participation by minorities and women were to be forestalled. In 1999, a sea change occurred in the way the issue of contracting affirmative action was approached by its proponents. First, the U.S.DOT revised its DBE Program in 1998 to address strict scrutiny as required by the Supreme Court in Adarand v. Peña.260 Second, in 1997, a local government finally employed an improved disparity study method, which we refer to as the “law and economics approach,” to defend against a challenge to the constitutionality of its M/WBE Pro- gram. The City and County of Denver’s Program defense relied primarily on expert reports and testimony derived from an economic model of business discrimination.261 Den- ver recognized that the proper inquiry is not only whether disparities remain despite the operation of its affirmative action program (a statistical question to which many dispar- ity studies, then and now, continue to limit themselves) but also whether disparities remain when remedial intervention is not present in the marketplace, as reflected by M/WBE par- ticipation on contracts without affirmative action goals in the public sector, the private sector, or both. The results of this improved approach to conducting dis- parity research and defending challenges to race-conscious contracting programs have been dramatic for local programs. Denver’s M/WBE Program was upheld by the Tenth Court of Appeals, and the Supreme Court declined review.262 The City of Chicago’s M/WBE Program for local construction con- tracts was also held to meet compelling interest using this framework.263 72 245See, e.g., Associated General Contractors of Ohio, Inc. v. Drabik, 214 F.3d 730 (6th Cir. 2000); Associated General Contractors of Maryland, Inc. v. Mayor of Baltimore, 83 F.Supp.2d 613 (D. Md. 2000) (Baltimore I); Contractors Associ- ation of Eastern Pennsylvania, Inc. v. City of Philadelphia, 91 F.3d 586 (3d Cir. 1996) (Philadelphia II); Engineering Contractors Association of South Florida, Inc. v. Metro. Dade County, 122 F.3d 895 (11th Cir. 1997) (Engineering Con- tractors II); O’Donnell Construction Co. v. District of Columbia, 963 F.2d 420 (D.C. Cir. 1992); W.H. Scott Construction Co. v. City of Jackson, 199 F.3d 206 (5th Cir. 1999); Webster v. Fulton County, 51 F.Supp.2d 1354 (N.D. Ga. 1999), aff’d, 218 F.3d 1267 (11th Cir. 2000). 246Brimmer and Marshall Economic Consultants, Inc. June 1990. Public Policy and Promotion of Minority Economic Development: City of Atlanta and Fulton County, Georgia: Part I. Washington, D.C., p. 10. 247Id. 248Id. at 10–11. 249United States Commission on Minority Business Development. 1992, Final Report (Washington, D.C.: U.S. Government Printing Office), at 99. 250Id. 251Id. 252Id. 253Expert Report, Builders Association of Greater Chicago v. City of Chicago, et al., No. 96C 1122 (June 2003). 254Jon Wainwright telephone interview with L. Johnson, City of Elyria Office of Contract Compliance, Feb. 27, 1998. 255———. Telephone interviews with K. Dones-Carter and D. Teeter, City Council Research Department, City of Detroit Feb. 27, 1998. 256———. Telephone interview with M. Carter, City of Columbus Equal Busi- ness Opportunity Commission, Feb. 27, 1998. 257———. Telephone interview with B. Kim, Staff Attorney, Maryland Depart- ment of Transportation, concerning the Washington Suburban Sanitary Commission, Feb. 27, 1998. 258———. Telephone interview with Attorney D. Goldberg, Office of General Counsel, U.S. Department of Transportation, February 28, 1998; and Statement of Nancy E. McFadden, General Counsel, U.S. Department of Transportation, before the Subcommittee on Constitution, Federalism, and Property Rights of the U.S. Senate Committee on the Judiciary. Sept. 30, 1997, at 2. 259See, e.g., NERA Economic Consulting. 2006b. Race, Sex, and Business Enter- prise: Evidence from the State of Maryland (Final Report), Chapter IX. 260515 U.S. 200 (1995) (applying strict scrutiny to federal legislation). 261Denver had commissioned disparity studies in 1990, 1991, 1995, and 1997. 262Concrete Works of Colorado, Inc. v. City and County of Denver, 321 F.3d 950 (10th Cir. 2003), cert. denied, 540 U.S. 1027 (2003) (Concrete Works IV). 263Builders Association of Greater Chicago v. City of Chicago, 298 F.Supp.2d 725 (N.D. Ill. 2003).

73 The Denver and Chicago decisions provide the most detailed analysis of the evidence necessary to establish that the government would be a passive participant in a discrimina- tory marketplace in the absence of race-based remedies. Par- ticularly in light of the Ninth Circuit’s opinion in Western States, these decisions provide important guidance to state DOTs in determining what evidence is relevant to whether DBEs experience discrimination in their marketplaces such that race-conscious subcontracting goals are needed to level the playing field for DBEs. Concrete Works, Inc. v. City and County of Denver. Denver’s local program had been challenged several years earlier,264 and the trial was held in February 1999. Denver adopted an ordinance in 1990 that provided for annual goals of 16% for MBEs and 12% for WBEs in construction con- tracts, and 10% for both MBEs and WBEs in professional design and construction services contracts. Bidders were to meet contract-specific goals or make good faith efforts to do so. The city revised the program in 1996 and 1998, reducing the annual goals for both MBEs and WBEs in construction contracts to 10% and prohibiting M/WBE prime contractors from counting self-performed work toward the goals. After conducting surveys and hearings, Denver extended the pro- gram and increased the goals in 1998. At trial, Denver introduced evidence of its contracting activ- ities dating back to the early 1970s. This consisted of reports of federal investigations into the utilization and experiences of local MBEs and of the City’s early affirmative action efforts. M/WBE participation dramatically increased when the city adopted its first MBE ordinance in 1984. To comply with Croson, the city commissioned a study to assess the propriety of the program. The 1990 study found large disparities between the availability and utilization of M/WBEs on city projects without goals. It likewise found large dispari- ties on private sector projects without goals. Interviews and tes- timony revealed continuing efforts by white male contractors to circumvent the goals. After reviewing the statistical and anecdotal evidence, the city adopted the 1990 Ordinance. A 1991 study of goods, services, and remodeling industries also found large disparities for city contracts not subject to goals. When the Tenth Circuit reversed and remanded for trial in Concrete Works II, the city commissioned another study. The 1995 study used U.S. Census Bureau data to determine MBE and WBE availability and utilization in the construction and design industries in the Denver Metropolitan Statistical Area (MSA). It calculated separate disparity indices for firms with and without employees. Census data were also used to examine average revenues per employee and rates of self-employment. Disparities in self-employment rates persisted even after hold- ing education and length of work experience constant. A tele- phone survey to determine the availability and utilization of M/WBEs in the Denver MSA showed large disparities in the construction and professional design industries. The 1995 study included discussion of a 1993 study for the Denver Housing Authority which found disparities for M/WBEs in some areas in some years, including those when it implemented an affirma- tive action program, and a 1992 study for the Regional Trans- portation District that found large disparities for both prime and subcontracting in the Denver marketplace. Based upon this evidence, the city enacted the 1996 Ordinance. In 1997, Denver commissioned another study to examine whether discrimination limited the opportunities of M/WBEs in construction projects of the type undertaken by the city. The court found this Study used a “more sophisticated” method265 to calculate availability by: (1) specifically deter- mining the city’s geographic and procurement marketplace; (2) using Dun & Bradstreet’s Marketplace data to obtain the total number of available firms and numerous directories to determine the number of M/WBEs; (3) conducting surveys to adjust for possible misclassification of the race and gender of firms; and (4) presenting a final result of weighted averages of availability for each racial group and women for both prime and subcontracts. The 1997 study then compared M/WBE availability and uti- lization in the Colorado construction industry. It also examined 1987 Census data from the Survey of Minority-Owned Business and the Survey of Women-Owned Businesses, the most cur- rent then available. All comparisons yielded large and statis- tically significant disparities. The 1997 study also found that the potential availability of M/WBEs, as measured by the rates at which similarly situated white males form businesses, was sig- nificantly greater than their actual availability. The study next examined whether minorities and women in the construction industry earned less than white males with similar characteris- tics. Large and statistically significant disparities were found for all groups except Asian Americans. A mail survey was con- ducted to obtain anecdotal evidence of the experiences of MBEs and WBEs and non-M/WBEs in the construction industry. Again, with the exception of Asian Americans, minorities, 264Plaintiff Concrete Works of Colorado, Inc. (CWC), a construction firm owned by a white male, sued the City in 1992, alleging that it had been denied three con- tracts for failure to meet the goals or to make good faith efforts and seeking injunctive relief and money damages. The district court granted the City’s motion for summary judgment. Concrete Works of Colorado, Inc. v. City & County of Denver, 823 F.Supp. 821 (D. Colo. 1993) (Concrete Works I). The Tenth Circuit reversed, holding that genuine issues of material fact precluded summary judgment. Concrete Works of Colorado, Inc. v. City & County of Denver, 36 F.3d 1513 (10th Cir. 1994) (Concrete Works II). The district court, after a bench trial, held the ordinance to be unconstitutional. Concrete Works of Colorado, Inc. v. City & County of Denver, 86 F.Supp. 2d 1042 (D. Colo. 2000) (Concrete Works III). Denver appealed. 265321 F.3d at 966.

and women with similar characteristics experienced much greater difficulties than did their white male counterparts. A follow-up telephone survey indicated that the disparities were even greater than first indicated. Based upon the 1997 study, the city enacted the 1998 Ordinance. At trial, the city also introduced additional, comprehensive anecdotal evidence. M/WBEs testified that they experienced difficulties in prequalifying for private sector jobs; their low bids were rejected; they were paid more slowly than non- M/WBEs; they were charged more for materials than non- M/WBEs; they were often required to do additional work not required of white males; and there were barriers to joining trade unions and associations. There was extensive testimony detailing the difficulties M/WBEs suffered in obtaining lines of credit. The “most poignant” testimony involved blatant harassment suffered at work sites, including physical assaults. The trial court found for the plaintiff. The Tenth Circuit reversed and directed the entry of judg- ment for Denver. The district court’s legal framework “mis- state[d] controlling precedent and Denver’s burden at trial.”266 The government need not prove that the statistical infer- ences of discrimination are “correct.” Strong evidence sup- porting the government’s determination that remedial action is necessary need not be “irrefutable or definitive” proof of discrimination. Statistical evidence creating inferences of dis- criminatory motivations is sufficient and therefore evidence of marketplace discrimination can be used to meet strict scrutiny.267 It is the plaintiff who must prove by a preponder- ance of the evidence that such proof does not support those inferences. Croson does not require that each group included in the ordinance suffer equally from discrimination. In contrast to Richmond, Denver introduced evidence of bias against each group; that is sufficient.268 Nor must Denver demonstrate that the “ordinances will change discriminatory practices and policies” in the local marketplace; such a test would be “illogical” because firms could defeat the remedial efforts simply by refusing to cease discriminating.269 Next, a municipality need not prove that “private firms directly engaged in any discrimination in which Denver pas- sively participates do so intentionally, with the purpose of dis- advantaging minorities and women. . . . Denver’s only burden was to introduce evidence which raised the inference of dis- criminatory exclusion in the local construction industry and link its spending to that discrimination. . . . Denver was under no burden to identify any specific practice or policy that resulted in discrimination. Neither was Denver required to demonstrate that the purpose of any such practice or policy was to disadvantage women or minorities. To impose such a burden on a municipality would be tantamount to requiring proof of discrimination and would eviscerate any reliance the municipality could place on statistical studies and anecdotal evidence.”270 Similarly, the trial court was wrong to reject the statistical evidence because such evidence cannot identify the individuals responsible for the discrimination.271 Contrary to the district court’s conclusion, the burden of compliance need not be placed only upon those firms directly responsible for the discrimination. The proper focus is whether the burden on third parties is “too intrusive” or “unacceptable.”272 Croson’s admonition that “mere societal” discrimination is not enough to meet strict scrutiny273 does not apply where the government presents evidence of discrimination in the indus- try targeted by the program. “If such evidence is presented, it is immaterial for constitutional purposes whether the indus- try discrimination springs from widespread discriminatory attitudes shared by society or is the product of policies, prac- tices, and attitudes unique to the industry. . . . The genesis of the identified discrimination is irrelevant.” The trial court was wrong to require Denver to “show the existence of spe- cific discriminatory policies and that those policies were more than a reflection of societal discrimination.”274 The court further rejected the notion that a municipality must prove that it is itself guilty of discrimination to meet its burden. Denver can show its compelling interest by “evidence of private discrimination in the local construction industry coupled with evidence that it has become a passive partici- pant in that discrimination . . . [by] linking its spending prac- tices to the private discrimination.”275 Denver further linked its award of public dollars to discriminatory conduct through the testimony of M/WBEs that identified general contractors who used them on City projects with M/WBE goals but refused to use them on private projects without goals. The court then turned to the evidence of discrimination against M/WBEs in the market for commercial credit. The lending discrimination studies and business formation stud- ies are relevant and probative because they show a strong link between the disbursement of public funds and the channel- ing of those funds due to private discrimination. “Evidence that private discrimination results in barriers to business for- mation is relevant because it demonstrates that M/WBEs are 74 266Id. at 970. 267Id. at 975. 268Id. at 976. 269Id. at 973 (emphasis in the original). 270Id. at 971. 271Id. at 973. 272Id. 273See 488 U.S. at 497. 274321 F.3d at 976. 275Id. at 977.

75 precluded at the outset from competing for public construc- tion contracts. Evidence of barriers to fair competition is also relevant because it again demonstrates that existing M/WBEs are precluded from competing for public contracts.”276 Plaintiff failed to present evidence to rebut the lending discrimination data, instead resting on its belief that such evidence is irrelevant. Contrary to the trial court’s ruling, the business formation stud- ies were not flawed because they did not control for “quality of education,” “culture” and “religion.” Plaintiff failed not only to define such vague terms but also to conduct its own study con- trolling for these factors or to produce expert testimony that to do so would eliminate the disparities.277 The district court also erred in rejecting the disparity studies because it did not control for firm size, area of specialization, and whether the firm had bid on city projects. The circuit court agreed with Denver’s experts that while it may be true that M/WBEs are smaller in general than white male firms, most construction firms are small and can expand and contract to meet their bidding opportunities. Importantly, Denver estab- lished that size and experience are not race- and gender-neutral variables: “M/WBE construction firms are generally smaller and less experienced because of discrimination.”278 Further, plaintiff failed to conduct any study showing that the disparities dis- appear when such variables are held constant. Likewise, it pre- sented no evidence that controlling for firm specialization explained the disparities. “Additionally, we do not read Croson to require disparity studies that measure whether construction firms are able to perform a particular contract.”279 That M/WBEs were overutilized on city projects with goals goes only to the weight of the evidence because it reflects the effects of a remedial program. Denver presented evidence that goals and nongoals projects were similar in purpose and scope and that the same pool of contractors worked on both types. “Particularly persuasive” was evidence that M/WBE participation declined significantly when the program was amended in 1989. The “utilization of M/WBEs on City proj- ects has been affected by the affirmative action programs that have been in place in one form or another since 1977. Thus, the non-goals data is the better indicator of discrimination in public contracting” and supports the position that discrimi- nation existed before the enactment of the ordinances.280 There is no requirement that anecdotal testimony be veri- fied. “Denver was not required to present corroborating evi- dence and CWC was free to present its own witnesses to either refute the incidents described by Denver’s witnesses or to relate their own perceptions on discrimination in the Den- ver construction industry.”281 This “failure” of the legislative body to somehow verify testimony had been a favorite shib- boleth of plaintiffs in other cases.282 Finally, as for the narrow tailoring requirement of strict scrutiny, the court held that because plaintiff had waived its claim that the ordinances were not narrowly tailored at an earlier stage in this litigation, the district court’s holding in Concrete Works I that the ordinances satisfy the other prong of strict scrutiny was affirmed. Builders Association of Greater Chicago v. City of Chicago. After more than seven years of pretrial motions and discov- ery and almost seven weeks of trial, the federal district court found that the City of Chicago proved its compelling interest in remedying identified discrimination against black-, Hispanic- and women-owned construction firms.283 The court relied in large part on the statistical analysis that was similar to that upheld in Concrete Works. However, the pro- gram as implemented in 2003, which had not been reviewed since its inception in 1990, was not sufficiently narrowly tai- lored to meet strict constitutional scrutiny. The court stayed the final order against operation of the Program for construc- tion contracts for six months to permit the city to review the ruling and adopt a new program. The opinion first reviews the historical proof of discrimina- tion against minorities, particularly blacks, in the Chicago con- struction industry. While not legally mandated, Chicago was a segregated city and “City government was implicated in that history.” After the election of Harold Washington as the first black mayor, several reports focused on the exclusion of minorities and women from city procurement opportu- nities as well as pervasive employment discrimination by city departments. Mayor Washington imposed an executive order mandating that at least 25% of city contracts be awarded to minority-owned businesses and 5% to women-owned businesses. In the wake of Croson, Chicago commissioned a Blue Rib- bon Panel to recommend an effective program that would sur- vive constitutional challenge. Based upon the panel’s report, and 18 days of hearings with over 40 witnesses and 170 exhibits, Chicago adopted a new program in 1990 that retained the 25%/5% goals; added a Target Market, wherein contracts were limited to bidding only by M/WBEs; and provided that larger construction contracts could have higher goals. The Builders Association of Greater Chicago challenged this ordinance in 1996. A similar suit was filed against Cook 276Id. 277Id. at 979. 278Id. at 983 (emphasis in the original). 279Id. at 987–88 (emphasis in the original). 280Id. 281Id. at 989. 282See, e.g., Builders Association of Greater Chicago v. County of Cook, 123 F.Supp.2d 1087 (N.D. Ill. 2000) (BAGC v. Cook). 283Builders Association of Greater Chicago v. City of Chicago, 298 F. Supp.2d 725 (N.D. Ill. 2003).

County’s Program, which was declared unconstitutional in 2000.284 The court held that the playing field for minorities and women in the Chicago area construction industry was still not level. That does not mean, however, that speculation about the greater number of M/WBEs that did exist in the absence of discrimination is sufficient to support a current race-based remedy. At the same time, that there was perhaps overutilization of M/WBEs on city projects was not sufficient to abandon remedial efforts, as that result is “skewed by the program itself.” The city presented a great amount of statistical evidence. Despite the plaintiff’s attacks about over-aggregation and dis- aggregation of data and which firms were included in the analyses, “a reasonably clear picture of the Chicago construc- tion industry emerged. . . . While the size of the disparities was disputed, it is evident that minority firms, even after adjustment for size, earn less and work less, and have less sales compared to other businesses.” Further, while it is somewhat unclear whether disparities for Asians and Hispanics result from discrimination or the lan- guage and cultural barriers common to immigrants, there were two areas “where societal explanations do not suffice.” The first is the market failure of prime contractors to solicit M/WBEs for nongoals work. Chicago’s evidence was consistent with that presented of the effects of the discontinuance or absence of race-conscious programs throughout the country. Not only did the plaintiff fail to present credible alternative explanations for this universal phenomenon but also this result “follows as a matter of economics. . . . [P]rime contractors, without any discriminatory intent or bias, are still likely to seek out the sub- contractors with whom they have had a long and successful relationship. . . . [T]he vestiges of past discrimination linger on to skew the marketplace and adversely impact M/WBEs dis- proportionately as more recent entrants to the industry. . . . [T]he City has a compelling interest in preventing its tax dollars from perpetuating a market so flawed by past discrim- ination that it restricts existing M/WBEs from unfettered com- petition in that market.” The judge also relied upon the city’s evidence of discrimi- nation against minorities in the market for commercial loans. Even the plaintiff’s experts were forced to concede that, at least as to Blacks, credit availability appeared to be a problem. Plaintiff’s expert also identified discrimination against white females in one data set. After finding that Chicago met the compelling interest prong, the court held that the city’s program was not nar- rowly tailored to address these market distortions and barri- ers because: • There was no meaningful individualized review of M/WBEs’ eligibility; • There was no sunset date for the ordinance or any means to determine a date; • The graduation threshold of $27.5 million was very high and few firms have graduated; • There was no personal net worth limit; • The percentages operated as quotas unrelated to the num- ber of available firms; • Waivers were rarely granted; • No efforts were made to impact private sector utilization of M/WBEs; and • Race-neutral measures had not been promoted, such as linked deposit programs, quick pay, contract downsizing, restricting prime contractors’ self-performance, reducing bonds and insurance requirements, local bid preferences for subcontractors, and technical assistance. Chicago is the only city ever to have received a stay to permit revision of its program to meet narrow tailoring. It amended its ordinance to meet the court’s 2004 deadline and continues to implement M/WBE subcontracting goals with- out interruption. Narrowly Tailoring a Race-Conscious Program Even if a jurisdiction has a strong basis in evidence to believe that race-based measures are needed to remedy identified dis- crimination, the program must be narrowly tailored to that evi- dence. The courts have repeatedly examined the following fac- tors in determining whether race-based remedies are narrowly tailored to achieve their purpose: • The efficacy of race-neutral remedies at overcoming iden- tified discrimination; • The relationship of numerical benchmarks for government spending to the availability of minority- and women-owned firms and to subcontracting goal-setting procedures; • The flexibility of the program requirements, including the provision for good-faith efforts to meet goals and contract specific goal-setting procedures; • The congruence between the remedies adopted and the beneficiaries of those remedies; • Any adverse impact of the relief on third parties; and • The duration of the program.285 76 284BAGC v. Cook. In contrast to the City of Chicago, Cook County presented very little statistical evidence and none directed toward establishing M/WBE avail- ability, utilization, economy-wide evidence of disparities, or other proof beyond anecdotal testimony. 285United States v. Paradise, 480 U.S. 149, 171 (1987); see also Sherbrooke, 345 F.3d at 971–972; Drabik, 214 F.3d at 737–738.

77 The Fourth Circuit Court of Appeals has described the nar- row tailoring requirements as follows: The preferences may remain in effect only so long as necessary to remedy the discrimination at which they are aimed; they may not take on a life of their own. The numerical goals must be waivable if qualified minority applications are scarce, and such goals must bear a reasonable relation to minority percentages in the relevant qualified labor pool, not in the population as a whole. Finally, the preferences may not supplant race-neutral alternatives for rem- edying the same discrimination.286 It is imperative that remedies not operate as fixed quotas.287 Firms that fail to meet the subcontracting goals but make good faith efforts to do so must be eligible for contract awards.288 Further, firms that meet the goals cannot be favored over those who made good-faith efforts. In Croson, the Court refers approvingly to the contract-by-contract waivers used in the U.S.DOT’s DBE Program.289 This feature has been central to the holding that the DBE Program meets the narrow tailoring requirement.290 The over- or under-inclusiveness of those persons to be included in the program is an additional consideration, and goes to whether the remedies truly target the evil identified.291 The “fit” between the problem and the remedy manifests in three ways—which groups to include, how to define those groups, and which persons will be eligible to be included within those groups. First, the determination of presumptive social disadvan- tage of each racial and ethnic group must be based upon the evidence.292 In striking down the District of Columbia’s MBE program, the court noted that there were no “find- ings with respect to discrimination in the construction industry against Hispanic Americans, Asian Americans, Pacific Islander Americans, or Native Americans, all of whom are included in the Act’s definition of ‘minority.’ ”293 The “random inclusion” of groups that may never have experienced discrimination in the entity’s marketplace may indicate impermissible “racial politics.”294 Similarly, the Seventh Circuit, in striking down Cook County’s program, remarked that a “state or local government that has dis- criminated just against blacks may not by way of remedy discriminate in favor of blacks and Asian Americans and women.”295 However, at least one court has held that some quantum of evidence of discrimination for each group is sufficient. The Tenth Circuit held that Croson does not require that each group included in the ordinance suffer equally from discrimination.296 Next, the level of specificity at which to define beneficiaries must be addressed. Approaches range from a single goal like the DBE Program that includes all racial and ethnic minorities and white women297 to separate goals for each minority group and women.298 Ohio’s Program was specifically faulted for lumping together all “minorities,” with the court questioning the legitimacy of forcing black contractors to share relief with recent Asian immigrants.299 Third, program remedies should be limited to those firms that have a nexus to the harms sought to be amelio- rated. Some courts have held that state and local programs must provide proof that the individual owner of a firm seeking to benefit from the program has suffered discrimination.300 Failure to make “neutral” changes to contracting and pro- curement policies and procedures that disadvantage all small businesses may result in a finding that the program unduly burdens non-M/W/DBEs.301 However, “innocent” parties can 286Maryland Troopers Association, Inc. v. Evans, 993 F.2d 1072, 1076–77 (4th Cir. 1993) (citations omitted). 287See 49 C.F.R 26.43 (quotas are not permitted and set-aside contracts may be used only in limited and extreme circumstances “when no other method could be reasonably expected to redress egregious instances of discrimination”). 288See, e.g., BAGC v. Chicago, 298 F. Supp.2d at 740 (“Waivers are rarely or never granted . . . The City program is a rigid numerical quota . . . formulistic percent- ages cannot survive strict scrutiny.”). 289488 U.S. at 508; see also Adarand VII, 228 F.3d at 1181. 290See, e.g., Sherbrooke, 345 F.3d at 972. 291Association for Fairness in Business, Inc. v. New Jersey, 82 F.Supp.2d 353, 360 (D.N.J. 2000). 292Contractors Association of Eastern Pennsylvania v. City of Philadelphia, 6 F.3d 990, 1007 (3rd Cir. 1993) (Philadelphia II) (strict scrutiny requires data for each minority group; data was insufficient to include Hispanics, Asians or Pacific Islanders or Native Americans); cf. Northeastern Florida Chapter of the AGC v. Jacksonville, 508 U.S. 656, 660–661 (1993) (new ordinance narrowed to blacks and women). 293O’Donnell, v. District of Columbia, 963 F.2d at 427. 294Webster, 51 F.Supp.2d at 1380–1381. 295BAGC v. Cook County, 256 F.3d at 646 (no evidence of discrimination against any group other than Blacks). 296Concrete Work IV, 321 F.3d at 9761. 297See 49 C.F.R. §26.45(h) (overall goal must not be subdivided into group- specific goals). 298See Engineering Contractors II, 122 F.3d at 900 (separate goals for blacks, Hispanics and women). 299Associated General Contractors of Ohio v. Drabik, 214 F.3d 730, 737 (6th Cir. 2000) (Drabik II); see also Western States, 407 F.3d at 998 (“We have pre- viously expressed similar concerns about the haphazard inclusion of minority groups in affirmative action programs ostensibly designed to remedy the effects of discrimination.”). 300See, e.g., Drabik I, 50 F.Supp.2d at 766 (no “consideration given to whether the particular MBE seeking a racial preference has suffered from the effects of past discrimination by the state or prime contractors.”); Main Line Paving Co., Inc. v. Board of Education, 725 F.Supp. 1349, 1362 (E.D. Penn. 1989) (“program con- tains no provisions to identify those who were victims of past discrimination and to limit the program’s benefits to them”). 301See Engineering Contractors Assoc. of South Florida, Inc. v. Metropolitan Dade County, 943 F.Supp. 1546, 1581–1582 (S.D. Fla. 1996) (Engineering Contrac- tors I) (County chose not to change its procurement system).

be made to share some of the burden of the remedy for eradi- cating racial discrimination.302 Race-based programs must have duration limits.303 A race- based remedy must “not last longer than the discriminatory effects it is designed to eliminate.”304 “Narrow tailoring also implies some sensitivity to the possibility that a program might someday have satisfied its purposes.”305 One of the factors lead- ing to the court’s holding that the City of Chicago’s M/WBE Program was no longer narrowly tailored was the lack of a sun- set provision.306 As recently reiterated by the Eleventh Circuit Court of Appeals, the “unlimited duration of the [District’s] racial goals also demonstrates a lack of narrow tailoring. . . . While the District’s effort to avoid unintentional discrimination should certainly be ongoing, its reliance on racial classifications should not.”307 In contrast, the U.S.DOT DBE Program’s peri- odic review by Congress has been repeatedly held to provide adequate durational limits.308 This means that affirmative action programs must be reg- ularly reviewed to ensure that a strong basis in evidence remains to use the highly suspect tool of race in government decision making. Very old studies will not suffice to support current programs.309 The City of Augusta, Georgia’s program failed to meet strict scrutiny, because “the [M/WBE] Program is still in place 13 years after the [Disparity] Study was com- piled without any further investigation into the underlying reasons for creating a program, and without any sunset or expiration provision.”310 Likewise, Chicago’s program was based on 14-year-old information, which while it supported the program adopted in 1990, no longer was sufficient stand- ing alone to justify the city’s efforts in 1994.311 How old is too old is not definitively answered,312 but state DOTs would be wise to analyze data at least once every five or six years. Burdens of Production and Proof Unlike most legal challenges, the state DOT in an Adarand challenge has the initial burden of producing a “strong basis in evidence” in support of its DBE Program. That is, the gov- ernment has the burden to put forth evidence of its com- pelling interest in employing race and gender as decision- making factors.313 However, the plaintiff must then proffer evidence to rebut the government’s case, and bears the ulti- mate burden of production and persuasion that the affirma- tive action program is unconstitutional.314 A plaintiff “cannot meet its burden of proof through conjecture and unsupported criticism of [the government’s] evidence.”315 For example, in the challenge to the Minnesota and Nebraska DBE Programs, “plaintiffs316 presented evidence that the data was susceptible to multiple interpretations, but they failed to present affirma- tive evidence that no remedial action was necessary because minority-owned small businesses enjoy non-discriminatory access to and participation in highway contracts. Thus, they failed to meet their ultimate burden to prove that the DBE Program is unconstitutional on this ground.”317 Likewise, in rejecting cross motions for summary judg- ment, the court in the challenge to the City of Memphis’ local M/WBE Program, held that: Defendant has produced a study which concludes that the City discriminated in the award of construction contracts. An enor- mous amount of data was analyzed and organized into the final 78 302Concrete Works IV, 321 F.3d at 973; Wygant v. Jackson Board of Education, 476 U.S. 267, 280–281 (1986); Adarand VII, 228 F.3 at 1183 (“While there appears to be no serious burden on prime contractors, who are obviously compensated for any additional burden occasioned by the employment of DBE subcontrac- tors, at the margin, some non-DBE subcontractors such as Adarand will be deprived of business opportunities”); cf. Northern Contracting, Inc. v. Illinois Department of Transportation, 2005 U.S. Dist. LEXIS 19868, *5 (Sept. 8, 2005) (Northern Contracting II) (“Plaintiff has presented little evidence that it [sic] has suffered anything more than minimal revenue losses due to the program.”); Western States, 407 F.3d at 995. 303Drabik I, 50 F.Supp.2d at 766 (S.D. Ohio 1999) (“The 1980 MBE Act is unlim- ited in duration. . . . There is no evidence that, at any time during the nearly two decades the Act has been in effect, the General Assembly has ever reconsidered whether a compelling state interest exists which would justify the continuation of a race-based remedy.”). 304515 U.S. at 238. 305Drabik II, 214 F.3d at 737. 306BAGC v. Chicago, 298 F.Supp.2d at 739; see also O’Donnell, 963 F.2d at 428 (the District “reenacted the law in 1980 and deleted the sunset provision. Fifteen years have now passed since the District put its minority contracting pro- gram into effect. The District has not suggested that an end is in sight.”). Web- ster, 51 F. Supp. 2d at 1382 (telling disqualifier was that the County had been implementing a “quota” program since 1979 with no contemplation of program expiration). 307Virdi v. DeKalb County School District, 2005 U.S. App. LEXIS 11203. At *18 11th Cir. June 13, 2005; see also Thompson Building Wrecking Co., Inc. v. City of Augusta, Georgia, 2007 U.S. Dist. LEXIS 27127, 9 (S.D. Ga. 2007). 308See Western States, 407 F.3d at 995; H.B. Rowe, 2008 U.S. Dist. Lexis at *27 (state M/WBE program is reviewed every 5 years). 309See id. (old evidence was insufficient); Baltimore I, 83 F.Supp.2d at 620 (10- year-old evidence to justify 1999 goals is equivalent to no evidence); Drabik I. 310Thompson. v. Augusta, at *9. 311BAGC v. Chicago, 298 F.Supp.2d at 739. 312See, e.g., Drabik I, 50 F.Supp.2d at 745, 750 (“A program of race-based bene- fits cannot be supported by evidence of discrimination which is now over twenty years old. . . . The state conceded that it had no additional evidence of discrimi- nation against minority contractors, and admitted that during the nearly two decades the Act has been in effect, it has made no effort to determine whether there is a continuing need for a race-based remedy.”); Brunet, 1 F.3d at 409 (14- year-old evidence of discrimination “too remote to support a compelling gov- ernmental interest.”). 313See, e.g., Phillips & Jordan, Inc. v. Watts, 13 F.Supp.2d 1308, 1313 (N.D. Fla. 1998). 314Rothe Development Corporation v. U.S. Department of Defense, 262 F.3d 1306, 1317 (Fed. Cir. 2001) (Rothe V); Adarand VII, 228 F.3d at 1166; see also Scott, 199 F.3d at 219, Philadelphia III, 91 F.3d at 597. 315Concrete Works IV, 321 F.3d at 989; see also H.B. Rowe, 2008 U.S. Dist. Lexis at *27. 316The plaintiffs in both cases were represented by the same counsel and attempted to rely upon the same consultant. 317Sherbrooke, 345 F.3d at 970

79 disparity study, including data about the non-WMBE and WMBE contractors in the City. In producing the study, Defen- dant introduces evidence which raises the inference of dis- criminatory exclusion in the local construction industry and links its public spending to that discrimination. . . . In a case such as this, the party opposing the use of a remedial race clas- sification must introduce credible, particularized evidence to rebut the City’s initial showing of the existence of a compelling interest.318 Therefore, it is not enough for a challenger to criticize the government’s evidence; it must carry its “ultimate burden of persuading the court that the [government entity’s] evidence did not support an inference of prior discrimination and thus a remedial purpose.”319 Standard of Appellate Review With one exception, the circuits that have directly addressed the question have held that the proper standard of review of a facial challenge to the constitutionality of government race-based decision making is de novo review.320 The DBE Pro- gram has been reviewed under this test.321 The Eleventh Cir- cuit, however, treated the district court’s determination of the constitutionality of the local legislation as factual findings and therefore applied the “clearly erroneous” standard.322 Strict Scrutiny as Applied to the Disadvantaged Business Enterprise Program We now turn to the application of strict scrutiny to the U.S.DOT DBE Program. In Adarand v. Peña,323 the Court extended the analysis of strict scrutiny under the Due Process Clause of the Fourteenth Amendment to federal enactments. It overruled existing case law that held federal racial classifi- cations to be subject to a less rigorous standard than strict scrutiny.324 Just as in the local government context, when evaluating federal legislation and regulations: [t]he strict scrutiny test involves two questions. The first is whether the interest cited by the government as its reason for injecting the consideration of race into the application of law is sufficiently compelling to overcome the suspicion that racial characteristics ought to be irrelevant so far as treatment by the government is concerned. The second is whether the govern- ment has narrowly tailored its use of race, so that race-based clas- sifications are applied only to the extent absolutely required to reach the proffered interest. The strict scrutiny test is thus a recog- nition that while classifications based on race may be appropriate in certain limited legislative endeavors, such enactments must be carefully justified and meticulously applied so that race is deter- minative of the outcome in only the very narrow circumstances to which it is truly relevant.325 In the wake of Adarand, Congress reviewed and revised the DBE Program statute326 and implementing regulations327 for Federal-aid contracts in the transportation industry. To date, every court that has considered the issue has found the regu- lations to be facially constitutional.328 We note that a recent decision from the Federal Circuit Court of Appeals struck down the Department of Defense (DOD) Program for Small Disadvantaged Businesses (SDBs).329 The program set an overall annual goal of 5% for DOD con- tracting with SDBs. The court held that Section 1207,330 which among other race-conscious remedies provides a 10% bid pref- erence to SDBs, violates strict scrutiny because Congress did not have a “strong basis in evidence” before it in 2006, upon which to conclude that the DOD was a passive participant in racial dis- crimination in relevant markets across the country. The six local disparity studies upon which DOD primarily relied did not meet the compelling interest prong, and in any event were not “before” Congress when it reenacted the program in 2006. The opinion mostly restates the current strict scrutiny stan- dards and reaffirms that with proper evidence, the federal gov- ernment can adopt a race-conscious program to remedy 318West Tennessee Chapter of Associated Builders and Contractors, Inc. v. City of Memphis, 302 F.Supp.2d 860, 864 (W.D. Tenn. 2004). 319Wygant, 476 U.S. at 293. 320See, e.g., Philadelphia III, 91 F.3d at 596 (whether a strong basis in evidence exists is a question of law);. Scott. v. Jackson, 199 F.3d at 211 (“we review the court’s findings of fact for clear error; its conclusions of law are reviewable de novo”); Drabik II, 214 F.3d at 734 (“The constitutionality of a statute is a ques- tion of law, reviewable de novo.”); Northern Contracting III, 473 F.3d at 720 (“we review the district court’s legal conclusion that IDOT’s program is constitutional de novo and its factual determinations for clear error”); Adarand VII, 228 F.3d at 1161; Rothe V, 262 F.3d at 1316. 321Northern Contracting III, 473 F.3d at 720 (“we review the district court’s legal conclusion that IDOT’s program is constitutional de novo and its factual deter- minations for clear error”); cf. Sherbrooke, 345 F.3d at 970 (court took a “hard look at the evidence”). 322Engineering Contractors II, 122 F.3d at 903–04. 323515 U.S. 200 (1995) (Adarand III). 324Fullilove v. Klutznick, 448 U.S. 448 (1980). 325Adarand Constructors IV, 965 F. Supp. at 1569–1570; see also Adarand III, 515 U.S. at 227. 326Transportation Equity Act for the 21st Century (TEA-21), Pub. L. No. 105–178 (b)(1), 112 Stat. 107, 113. 32749 C.F.R. Part 26. 328Adarand Constructors, Inc. v. Slater, 228 F.3d 1147 (10th Cir. 2000) (Adarand VII), cert. granted then dismissed as improvidently granted, 532 U.S. 941, 534 U.S. 103 (2001); Sherbrooke Turf, Inc. v. Minnesota Department of Transportation, 345 F.3d. 964 (8th Cir. 2003), cert. denied, 541 U.S. 1041 (2004); Northern Contract- ing, Inc. v. Illinois Department of Transportation, 2004 U.S. Dist. LEXIS 3226 at *64 (N.D. Ill., Mar. 3, 2004) (Northern Contracting I); Western States Paving Co., Inc. v. Washington Department of Transportation, 407 F.3d 983, 993 (9th Cir. 2005), cert. denied, 126 S.Ct. 1332 (2006). 329Rothe Development Corporation v. U.S. Department of Defense, 545 F.3d 1023 (Fed. Cir. 2008) (Rothe VII). 33010 U.S.C. § 2323.

identified discrimination that is supported by a strong basis in evidence. Since this is the standard that governs the DBE Pro- gram, Rothe VII does not implicate or undermine Adarand VII, Sherbrooke, Western States, or Northern Contracting. The opin- ion barely mentions those cases, let alone suggests that their reasoning or results are wrong. Since DOD did not rely on the evidence Congress relied upon in adopting Part 26, the court did not consider that record. Of particular relevance to our project is that the court opined that there is no fixed time limit on the relevance of data; an agency should use the “most recent available data.”331 Further, regression analysis is a proper tool.332 It noted that the six local government studies proffered by DOD were the major evidence relied upon and questioned their approaches to availability and “capacity.” The court noted “that a minority-owned firm’s capacity and qualifications may them- selves be affected by discrimination.”333 The opinion pointedly made no blanket pronouncements about methodologies or what evidence would suffice to support Congress’ legislation for DOD. There was almost no consideration of narrow tailor- ing, which of course is the focus for state DOTs. Congress Established its Compelling Interest in Remedying Discrimination All courts agree that the first prong of strict scrutiny is satis- fied by the Congressional record that forms the basis for the DBE program. “In light of the substantial body of statistical and anecdotal material considered at the time of TEA-21’s enact- ment, Congress had a strong basis in evidence for concluding that—in at least some parts of the country—discrimination within the transportation contracting industry hinders minori- ties’ ability to compete for federally funded contracts.”334 Congress’ conclusion that the effects of widespread race dis- crimination in the construction industry must be redressed is supported by the record. [T]he evidence presented by the government in the present case demonstrates the existence of two kinds of discriminatory barri- ers to minority subcontracting enterprises, both of which show a strong link between racial disparities in the federal govern- ment’s disbursements of public funds for construction contracts and the channeling of those funds due to private discrimination. The first discriminatory barriers are to the formation of qualified minority subcontracting enterprises due to private discrimina- tion, precluding from the outset competition for public con- struction contracts by minority enterprises. The second discrim- inatory barriers are to fair competition between minority and non-minority subcontracting enterprises, again due to private discrimination, precluding existing minority firms from effectively competing for public construction contracts. The government also presents further evidence in the form of local disparity studies of minority subcontracting and studies of local subcontracting mar- kets after the removal of affirmative action programs.335 Relevant evidence included: • Disparities between the earnings of minority-owned firms and similarly situated white-owned firms; • Disparities in commercial loan denial rates between black business owners compared to similarly situated white busi- ness owners; • The large and rapid decline in minorities’ participation in the construction industry when affirmative action pro- grams were struck down or abandoned; and • Various types of overt and institutional discrimination by prime contractors, trade unions, business networks, sup- pliers, and sureties against minority contractors.336 The Eighth Circuit Court of Appeals took a “hard look” at the evidence and concluded that the legislature had: spent decades compiling evidence of race discrimination in gov- ernment highway contracting, of barriers to the formation of minority-owned construction businesses, and of barriers to entry. In rebuttal, [the plaintiffs] presented evidence that the data were susceptible to multiple interpretations, but they failed to present affirmative evidence that no remedial action was necessary because minority-owned small businesses enjoy non-discriminatory access to and participation in highway contracts. Thus, they failed to meet their ultimate burden to prove that the DBE program is unconstitutional on this ground.337 The Tenth Circuit specifically rejected the idea that in enact- ing the DBE Program, Congress must make specific findings on every possible ethnic subgroup that might be subject to discrimination. [B]ecause of the unreliability of racial and ethnic categories and the fact that discrimination commonly occurs based on much broader racial classifications, extrapolating findings of discrimi- nation against Native Americans, Asian-Pacific Americans, and Asian-Americans to include Aleuts, Samoans, and Bhutanese, respectively, is more a question of nomenclature than of narrow tailoring. The Constitution does not erect a barrier to the govern- ment’s effort to combat discrimination based on broad racial clas- sifications that might prevent it from enumerating particular eth- nic origins falling within such classifications.338 80 331545 F.3d at 1039. 332Id. at 1043. 333Id. at 1045. 334Western States, 407 F.3d at 993; see also Sherbrooke Turf, 345 F.3d. at 969; Adarand VII, 228 F.3d at 1176; Northern Contracting III, 473 F.3d at 721. 335Adarand VII, 228 F.3d at 1167–68. 336Western States, 407 F.3d at 992–93. 337Sherbrooke Turf, 345 F.3d. at 970; see also Adarand VII, 228 F.3d at 1175 (Plain- tiff has not met its burden “of introducing credible, particularized evidence to rebut the government’s initial showing of the existence of a compelling interest in remedying the nationwide effects of past and present discrimination in the fed- eral construction procurement subcontracting market.”). 338Adarand VII, 228 F.3d at 1185–86.

81 It is important to note that courts have recognized that evi- dence beyond the results of the DBE Program is probative of whether a recipient would be a passive participant in discrimi- nation without affirmative action measures. “Furthermore, we may consider public and private discrimination not only in the specific area of government procurement contracts but also in the construction industry generally; thus, any findings Congress has made as to the entire construction industry are relevant.”339 DBE Regulations are Facially Narrowly Tailored Next, the regulations meet the second prong of strict scrutiny. Unlike the prior program,340 Part 26 is facially nar- rowly tailored because: • The overall goal must be based upon demonstrable evi- dence of the number of DBEs ready, willing, and able to participate on the recipient’s federally assisted contracts. • The goal may be adjusted to reflect the availability of DBEs but for the effects of the DBE Program and of discrimination. • The recipient must meet the maximum feasible portion of the goal through race-neutral measures as well as estimate that portion of the goal it predicts will be met through such measures. • The use of quotas and set-asides is limited only to those sit- uations where there is no other remedy. • The goals are to be adjusted during the year to remain nar- rowly tailored. • Absent bad-faith administration of the program, a recipi- ent cannot be penalized for not meeting its goal. • The presumption of social disadvantage for racial and eth- nic minorities and women is rebuttable, “wealthy minor- ity owners and wealthy minority firms are excluded, and certification is available to persons who are not presump- tively disadvantaged but can demonstrate actual social and economic disadvantage.”341 • Anyone can challenge the disadvantage of any firm.342 • Each firm’s owner is regularly reviewed to ensure that his or her economic disadvantage has not exceeded the per- sonal net worth limit.343 • Exemptions and waivers from any or all Program require- ments are available. These elements have led the courts to conclude that the DBE Program meets the second prong of strict scrutiny. First, the reg- ulations place strong emphasis on the use of race-neutral means to achieve minority and women participation. Relying upon Grutter v. Bollinger, the Eighth Circuit held that while “[n]arrow tailoring does not require the exhaustion of every conceivable race-neutral alternative . . . it does require serious, good faith consideration of workable race-neutral alternatives.”344 The DBE Program is also flexible. Eligibility is limited to small firms owned by persons whose net worth is less than $750,000. There are built-in Program time limits, and the state DOT may terminate the use of any race-conscious meas- ures if it meets its annual overall goal through race-neutral means for two consecutive years. Moreover, the authorizing legislation is subject to Congressional reauthorization that will ensure periodic public debate. Next, the goals are tied to the relevant market. “Though the underlying estimates may be inexact, the exercise requires the States to focus on establishing realistic goals for DBE partici- pation in the relevant contracting markets. This stands in stark contrast to the program struck down in Croson.”345 Finally, Congress has taken significant steps to minimize the race-conscious nature of the program. “[W]ealthy minor- ity owners and wealthy minority-owned firms are excluded, and certification is available to persons who are not presump- tively [socially] disadvantaged but can demonstrate actual social and economic disadvantage. Thus, race is made rele- vant in the program, but it is not a determinative factor.”346 Nonminority males are not unduly burdened by the Pro- gram. “Implementation of the race-conscious contracting goals for which TEA-21 provides will inevitably result in bids submitted by non-DBE firms being rejected in favor of higher bids from DBEs. Although this places a very real burden on non-DBE firms, this fact alone does not invalidate TEA-21. If it did, all affirmative action programs would be unconstitu- tional because of the burden upon non-minorities.”347 Challenges to the DBE program require more than vague attacks or unsupported speculation about other possible out- comes and methodologies for narrow tailoring. While plaintiff: presented evidence attacking the reliability of [the Availability Study’s] data, it failed to establish that better data was [sic] avail- able or that Mn/DOT was otherwise unreasonable in undertaking this thorough analysis and in relying on its results. The precipitous drop in DBE participation in 1999, when no race-conscious meth- ods were employed, supports Mn/DOT’s conclusion that a sub- stantial portion of its 2001 overall goal could not be met with race- neutral measures, and there is no evidence that Mn/DOT failed to adjust its use of race-conscious and race-neutral methods as the year progresses, as the DOT regulations require.348 339Id. at 1166–67. 34049 C.F.R. Part 23. 341Sherbrooke Turf, 345 F.3d. at 973. 34249 C.F.R. §26.87. 343See Adarand VII, 228 F.3d at 1186–87 (“The current regulations more precisely identify the proper minority recipients of DBE certification by periodically rescreening for economic disadvantage all candidates for such certification.”). 344Sherbrooke Turf, 345 F.3d. at 972. 345Id. 346Id. at 973. 347Western States, 407 F.3d at 995. 348Id.

Finally, a plaintiff cannot use a challenge to a state’s imple- mentation of the federal DBE Program under narrow tailoring as a collateral attack on the regulation’s compelling interest. “[A]ppellants cannot protest the federal program by claiming the state’s implementation of it is unconstitutional.”349 State DOTs’ Implementation of Part 26 Must be Narrowly Tailored Part 26 requires that state DOTs narrowly tailor their DBE efforts to the evidence of discrimination in their marketplace. Especially in the context of considering options to respond to the demands of narrow tailoring, it is important to focus upon the overall objective of the DBE program “to achieve a ‘level playing field’ for DBEs seeking to participate in federal- aid transportation contracting. To reach a level playing field, recipients need to examine their programs and their markets and determine the amount of participation they would expect DBEs to achieve in the absence of discrimination and the effects of past discrimination.”350 Among the objectives of the regulations is “help to remove barriers to the participation of DBEs in DOT-assisted contracts” and to “assist the development of firms that can compete suc- cessfully in the marketplace outside the DBE program.”351 A goal-setting methodology that takes into account these objec- tives meets not only the letter of the regulations but also the remedial objectives and spirit of the statute. It is not enough to merely replicate the outcomes of the discriminatory market- place Congress seeks to eliminate. The 1999 revisions to the DBE Program prescribe narrowly tailored methods for setting annual DBE goals to achieve a level playing field for DBEs.352 49 C.F.R. § 26.45 provides: (a) You must set an overall goal for DBE participation in your DOT-assisted contracts. (b) Your overall goal must be based on demonstrable evi- dence of the availability of ready, willing and able DBEs relative to all businesses ready, willing and able to partic- ipate on your DOT-assisted contracts (hereafter, the “relative availability of DBEs”). The goal must reflect your determination of the level of DBE participation you would expect absent the effects of discrimination. You cannot simply rely on either the 10 percent national goal, your previous overall goal or past DBE participation rates in your program without reference to the relative availability of DBEs in your market. Step 1 Analysis: Estimation of DBE Availability The process to set the overall annual DBE goal is divided into two steps: (c) Step 1. You must begin your goal-setting process by deter- mining a base figure for the relative availability of DBEs. The following are examples of approaches that you may take toward determining a base figure. These examples are provided as a starting point for your goal setting process. Any percentage figure derived from one of these examples should be considered a basis from which you begin when examining all evidence available in your jurisdiction. These examples are not intended as an exhaustive list. Other methods or combinations of methods to determine a base figure may be used, subject to approval by the concerned operating administration. (1) Use DBE Directories and Census Bureau Data. Deter- mine the number of ready, willing, and able DBEs in your market from your DBE directory. Using the Cen- sus Bureau’s County Business Pattern (CBP) database, determine the number of all ready, willing, and able businesses available in your market that perform work in the same SIC codes.353 Divide the number of DBEs by the number of all businesses to derive a base figure for the relative availability of DBEs in your market. (2) Use a bidders list. Determine the number of DBEs that have bid or quoted on your DOT-assisted prime con- tracts or subcontracts in the previous year. Determine the number of all businesses that have bid or quoted on prime or subcontracts in the same time period. Divide the number of DBE bidders and quoters by the num- ber for all businesses to derive a base figure for the rel- ative availability of DBEs in your market. (3) Use data from a disparity study. Use a percentage fig- ure derived from data in a valid, applicable disparity study. (4) Use the goal of another DOT recipient. If another DOT recipient in the same, or substantially similar, market has set an overall goal in compliance with this rule, you may use that goal as a base figure for your goal. (5) Alternative methods. Subject to the approval of the DOT operating administration, you may use other methods to determine a base figure for your overall goal. Any methodology you choose must be based on demonstrable evidence of local market conditions 82 349Harrison & Burrowes, 981 F.2d at 57, relying on Milwaukee County Pavers Ass’n v. Fiedler, 922 F.2d 419, 424 (7th Cir. 1991), cert. denied, 500 U.S. 954 (1991). 35064 Fed. Reg. 5108. 35149 C.F.R. §26.1. 352Adarand VII, 228 F.3d at 1182 (“The process by which recipients of federal transportation funding set aspirational goals is now much more rigorous [than the prior Part 23].”). 353See www.census.gov/epcd/cbp/view/cbpview.html for information about the CBP database.

83 and be designed to ultimately attain a goal that is rationally related to the relative availability of DBEs in your market. The commentary stresses the examples provided embody principles rather than rules “recipients are free to adopt in their entirety or to use as guidelines for how to devise their own measurement.”354 This flexible approach allows each recipient to use “the best data available.”355 As noted in the discussion about using example 1—dividing the DBE direc- tory over County Business Patterns data—“[a]ny recipient that believes it has available to it better sources of local data from which to make a similar calculation for its base figure is encouraged to use them.”356 As discussed in Chapter 2, the bidders list approach has been commonly used by state DOTs to estimate the Step 1 base figure. However, those courts that have addressed this approach directly have pointed out that lists can be either under-inclusive or over-inclusive. Bidders lists may be under-inclusive because they do not cast a broad net in the geographic market of the agency,357 and are possibly tainted by the effects of discrimina- tion.358 To the extent that minority- and women-owned firms have been encouraged to apply for the lists, such firms may be overrepresented and thus the lists are over-inclusive.359 Further, bidders lists rarely capture full data on subcontractors, who bid to the prime contractor not the agency. As noted in the com- mentary to Part 26, “[w]e realize that identifying subcontrac- tors, particularly non-DBEs and all subcontractors that were unsuccessful in their attempts to obtain contracts, may well be a difficult task for many recipients.”360 Step 2 Analysis: Examining Evidence of Disparities in DBE Opportunities After the state DOT has estimated its Step 1 base figure of DBE availability, it must estimate the level of DBE availabil- ity in a discrimination free market, that is, DBE availability “but for” discrimination. Step 2. Once you have calculated a base figure, you must examine all of the evidence available in your jurisdiction to determine what adjustment, if any, is needed to the base figure in order to arrive at your overall goal. (1) There are many types of evidence that must be con- sidered when adjusting the base figure. These include: (i) The current capacity of DBEs to perform work in your DOT-assisted contracting program, as meas- ured by the volume of work DBEs have performed in recent years; (ii) Evidence from disparity studies conducted any- where within your jurisdiction, to the extent it is not already accounted for in your base figure; and (iii) If your base figure is the goal of another recipient, you must adjust it for differences in your local market and your contracting program. (2) You may also consider available evidence from related fields that affect the opportunities for DBEs to form, grow, and compete. These include, but are not lim- ited to: (i) Statistical disparities in the ability of DBEs to get the financing, bonding and insurance required to participate in your program; (ii) Data on employment, self-employment, educa- tion, training, and union apprenticeship pro- grams, to the extent you can relate it to the oppor- tunities for DBEs to perform in your program. (3) If you attempt to make an adjustment to your base figure to account for the continuing effects of past discrimination (often called the “but for” factor) or the effects of an ongoing DBE Program, the adjust- ment must be based on demonstrable evidence that is logically and directly related to the effect for which the adjustment is sought.361 The case law is very sparse regarding the elements of the “but for” determination. The Western States opinion does not address it, and IDOT determined not to make a Step 2 adjust- ment since the Step 1 base figure was the “plausible lower bound estimate” of DBE availability. The Eight Circuit in Sherbrooke noted without further comment that “[b]ased upon [the Availability Study’s] analysis of business formation statistics, NERA next estimated that the number of participat- ing minority owned businesses would be 34 percent higher in a race-neutral market. Therefore, NERA adjusted its DBE availability figure from 11.4 to 11.6 percent.”362 In considering whether Part 26 has a strong basis in evidence, the Tenth Cir- cuit commented that while data showing that discriminatory 35464 Fed. Reg. 5109. 355Id. 356Id. at 5110. 357Associated General Contractors of America v. City of Columbus, 936 F. Supp. 1363, 1389 (S.D. Oh. 1996) (“This [list] is only a small fraction of the total num- ber of construction firms in the Columbus MSA, as shown by U.S. Census Bureau data.”). 358Philadelphia III, 91 F.3d at 604 (“if there has been discrimination in City con- tracting, it is to be expected that black firms may be discouraged from applying, and the low numbers may tend to corroborate the existence of discrimination rather than belie it.”). 359AGC v. Columbus, 936 F.Supp. at 1389 (City actively recruited MBEs but not majority-owned firms to register and the set aside program provided an incen- tive for them to do so). 36064 Fed. Reg. 5104–05. 36149 C.F.R. § 26.45(d). 362345 F.3d at 973.

factors discourage both the formation and utilization of minority firms was significant, “[o]f course, it would be ‘sheer speculation’ to even attempt to attach a particular figure to the hypothetical number of minority enterprises that would exist without discriminatory barriers to minority DBE forma- tion. [citation omitted] However, the existence of evidence indicating that the number of minority DBEs would be sig- nificantly (but unquantifiably) higher but for such barriers is nevertheless relevant to the assessment of whether a disparity is sufficiently significant to give rise to an inference of dis- criminatory exclusion.”363 We therefore look to cases construing state and local M/WBE Programs for guidance on the types of evidence that are relevant to whether discrimination continues to affect the Step 1 base figure. Much of the discussion in the case law on local programs has revolved around what type of evidence is sufficiently “strong” to establish the continuing existence and effects of economic discrimination against minorities resulting in diminished opportunities to do business with the govern- ment. Proof of the disparate impacts of economic factors on M/W/DBEs and the disparate treatment of such firms by actors critical to success is necessary to meet strict scrutiny. Discrimination must be shown using statistics and eco- nomic models to examine the effects of systems or markets on different groups, as well as by evidence of personal expe- riences with discriminatory conduct, policies or systems.364 Specific evidence of discrimination or its absence may be direct or circumstantial, and should include economic fac- tors and opportunities in the private sector affecting the success of M/W/DBEs.365 This framework is similar to that of the required and suggested Step 2 analysis. Judicial Review of DBE Goal Setting Under Part 26 To develop a model disparity or availability study for state DOTs, it is critical to understand the cases reviewing the application of Part 26 by state DOTs. We review these cases in the order they were decided.366 Northern Contracting, Inc. v. Illinois Department of Transportation Most recently, the Seventh Circuit Court of Appeals affirmed the district court’s trial verdict that the IDOT’s application of Part 26 was narrowly tailored.367 IDOT had a compelling inter- est in remedying discrimination in the marketplace for federally funded highway contracts, and its FFY 2005 DBE Plan was nar- rowly tailored to that interest and in conformance with the DBE Program regulations. Having affirmed that the regulations pass constitutional muster, the court turned to whether IDOT met its constitu- tional and regulatory burdens under Part 26. The court reviewed the Availability Study of DBEs in the state’s con- struction and design marketplaces, and evidence of discrim- ination against minority and women construction firms in the Illinois area, upon which IDOT relied in developing its DBE goals. The IDOT availability study included a “custom census” designed to provide an accurate calculation of the current relative availability of DBEs, employing a seven-step analy- sis that: • Created a database of representative IDOT projects; • Identified the appropriate geographic market for IDOT’s contracting activity; • Identified the appropriate product market for IDOT’s contracting activity; • Counted all businesses in those relevant markets; • Identified minority-owned and women-owned businesses in those markets; • Verified the ownership status of minority-owned and women-owned businesses; and • Verified the ownership status of all other firms. The IDOT Availability Study estimated that DBEs com- prised 22.77% of IDOT’s available firms.368 The IDOT Study next examined whether and to what extent there are dispar- ities between the rates at which DBEs form businesses rela- tive to similarly situated White men, as well as disparities in the relative earnings of those businesses. The presence of large and statistically significant disparities allowed an infer- ence of discrimination to be made. Controlling for numer- ous variables such as the owner’s age, education, and the like, the study found that in a race- and gender-neutral mar- ketplace the availability of DBEs would be approximately 84 363Adarand VII, 228 F.3d at 1174. As discussed above in Chapter 2, a high- quality disparity study can now go farther than this and actually provide a quan- titative estimate of how much higher DBE availability would be in a race-neutral marketplace. See Chapter 2, Economy-Wide Disparity Analysis, supra. 364Adarand VII, 228 F.3d at 1166 (“statistical and anecdotal evidence are appro- priate”). The study’s adjustment reflected the impact of discrimination on Black- owned firms. 365Id. 366Adarand VII did not review whether Colorado DOT’s application of Part 26 was narrowly tailored because the plaintiff did not litigate that issue before the Tenth Circuit. 367Northern Contracting, Inc. v. Illinois Department of Transportation, 473 F.3d 715 (7th Cir. 2007) (Northern Contracting III). 368This baseline figure of DBE availability is the “Step 1” estimate U.S.DOT grant recipients must make pursuant to 49 C.F.R. §26.45.

85 20.8% higher, yielding a “Step 2” estimate of DBE availability “but for” discrimination of 27.51%. In addition to the IDOT Study, the court also relied upon: • An Availability Study conducted for Metra, the Chicago commuter rail agency, designed to meet Part 26; • Expert reports relied upon by an earlier trial court in find- ing that the City of Chicago had a compelling interest in its minority and women business program for construction contracts;369 • Expert reports and anecdotal testimony presented to the Chicago City Council in support of the city’s revised M/WBE Program ordinance in 2004; • Anecdotal evidence gathered at IDOT’s public hearings on the DBE Program; • Data on DBE involvement in construction projects in mar- kets without DBE goals; • DBE utilization by the Illinois State Toll Highway Author- ity, which does not receive federal funding. “[T]hough the Tollway has a DBE goal of 15 percent, this goal is com- pletely voluntary—the average DBE usage rate in 2002 and 2003 was 1.6%;”370 and • IDOT’s “zero goal” experiment, where DBEs received approximately 1.5% of the total value of the contracts. This was designed to test the results of “race-neutral” contract- ing policies, that is, the utilization of DBEs on contracts without goals, which several courts have held to be highly relevant and probative of the continuing need for race- conscious remedies. Based upon the record produced at trial, the court of appeals agreed with the trial court’s judgment that the pro- gram was narrowly tailored. IDOT’s plan was based upon suf- ficient proof of discrimination such that race-neutral meas- ures alone would be inadequate to ensure that DBEs operate on a “level playing field” for government contracts. The stark disparity in DBE participation rates on goals and non-goals contracts, when combined with the statisti- cal and anecdotal evidence of discrimination in the relevant marketplaces, indicates that IDOT’s 2005 DBE goal represents a “plausible lower-bound estimate” of DBE participation in the absence of discrimination. . . . Plaintiff presented no per- suasive evidence contravening the conclusions of IDOT’s stud- ies, or explaining the disparate usage of DBEs on goals and non-goals contracts. . . . IDOT’s proffered evidence of dis- crimination against DBEs was not limited to alleged discrimi- nation by prime contractors in the award of subcontracts. IDOT also presented evidence that discrimination in the bond- ing, insurance, and financing markets erected barriers to DBE formation and prosperity. Such discrimination inhibits the ability of DBEs to bid on prime contracts, thus allowing the discrimination to indirectly seep into the award of prime con- tracts, which are otherwise awarded on a race- and gender- neutral basis. This indirect discrimination is sufficient to establish a compelling governmental interest in a DBE pro- gram . . . Having established the existence of such discrimi- nation, a governmental entity “has a compelling interest in assuring that public dollars, drawn from the tax contribu- tions of all citizens, do not serve to finance the evil of private prejudice.”371 Of particular importance for the present study, a key com- ponent of the plaintiff’s appeal of the lower court’s ruling was that IDOT miscalculated the availability of DBEs by relying on the “custom census” approach rather than simply counting the certified DBEs among IDOT bidders, prequalified contractors, and registered subcontractors. During the trial the data, meth- ods, and findings of IDOT’s Availability Study were subjected to intense scrutiny. The court of appeals rejected the plaintiff’s argument, noting: The gravamen of NCI’s first noncompliance argument is that IDOT miscalculated the number of DBEs that were ‘ready, willing, and able’ by utilizing the NERA custom census instead of a simple count of the number of registered and prequalified DBEs under Illinois Law. But as the district court correctly observed, NCI has pointed to nothing in the federal regula- tions indicating that a recipient must so narrowly define the scope of ready, willing, and available firms. The NERA custom census reflects an attempt by IDOT to arrive at more accurate numbers than would be possible through use of just the list. Indeed, the method used here by NERA is the very methodology that was used by the Minnesota Department of Transportation in the unsuccessful challenge to its program in Sherbrooke. We agree with the district court that the remedial nature of the federal scheme militates in favor of a method of DBE availability calcula- tion that casts a broader net. This conclusion is bolstered by guid- ance offered by USDOT on its website, where it suggests that recipients might supplement their DBE directories, for goal- setting purposes. . . . We are unpersuaded that NCI has demon- strated any noncompliance with 49 C.F.R. § 26.45(b).372 The “custom census” approach, which was also used by Mn/DOT in the Sherbrooke case, Denver in the Concrete Works case, and Chicago in the BAGC case, is the only measure of DBE or M/WBE availability that has survived strict scrutiny review at trial and on appeal.373 369Builders Association of Greater Chicago v. Chicago, 298 F. Supp. 2d 725 (N.D. Ill. 2003). 370Northern Contracting III, 473 F.3d at 719. 371Northern Contracting II, at 82 (internal citations omitted); see Croson, 488 U.S. at 492. 372Northern Contracting III, 473 F.3d at 723 (citations omitted) (emphasis added). 373The Eighth circuit did not address the availability method used by the study for the Nebraska Department of Roads.

Sherbrooke Turf, Inc. v. Minnesota Department of Transportation Mn/DOT’s implementation of Part 26, based on an avail- ability study, was held to be constitutional.374 After holding that Congress had ample evidence of discrimination against DBEs in the market for Federal-aid transportation contracts, the Eighth Circuit noted: Following promulgation of the current DOT regulations, MnDOT commissioned . . . [a] study [of] the highway contract- ing market in Minnesota. . . . Based on NERA’s study, MnDOT adopted an overall goal of 11.6 percent DBE participation for federally assisted highway projects in fiscal year 2001. MnDOT predicted that it would need to meet nine percent of that overall goal through race- and gender-conscious means, based on the fact that DBE participation in state highway contracts dropped from 10.25 percent in 1998 to 2.25 percent in 1999, when its pre- vious DBE program was suspended by the district court’s injunc- tion in Sherbrooke. . . . Sherbrooke presented evidence attacking the reliability of the data NERA used in determining its recom- mended overall goal. But Sherbrooke failed to establish that bet- ter data was [sic] available or that MnDOT was otherwise unrea- sonable in undertaking this thorough analysis and in relying on its results. The precipitous drop in DBE participation in 1999, when no race-conscious methods were employed, supports MnDOT’s conclusion that a substantial portion of its 2001 over- all goal could not be met with race-neutral measures. . . . On this record, we agree with the district court that the revised DBE pro- gram serves a compelling government interest and is narrowly tailored, on its face and as applied in Minnesota.375 In Sherbrooke’s companion case, the Nebraska Department of Roads (NDOR) DBE goal based on an availability study376 was upheld. “Having carefully reviewed the trial record, we conclude that Gross Seed, like Sherbrooke, failed to prove that the revised DBE program is not narrowly tailored as applied in Nebraska.”377 Western States Paving Co., Inc. v. Washington State Department of Transportation The Ninth Circuit Court of Appeals held while the DBE Program’s legislation and regulations satisfy strict constitu- tional scrutiny on their face, Washington State Department of Transportation’s (WSDOT’s) FFY 2000 implementation of the regulations was not sufficiently narrowly tailored.378 In reversing the district court on the as applied challenge, the court agreed with the analysis in Sherbrooke that although a recipient need not demonstrate an independent compelling interest for its DBE Program, it is necessary to undertake an “as applied” inquiry into whether the state’s program is narrowly tailored to its marketplace. While both sides and the court agreed that WSDOT’s program complied with Part 26, the court rejected the state’s position that its “DBE program is con- stitutional because it comports with the federal statute and reg- ulations.”379 A recipient independently must meet the narrow tailoring requirement. “To the extent the federal government delegates this tailoring function, a State’s implementation becomes critically relevant to a reviewing court’s strict scrutiny.”380 The Ninth Circuit was persuaded by U.S.DOT’s argument that race-conscious goals can only be applied by recipients in those localities where the effects of discrimination are present. “As the United States correctly observed in its brief and during oral argument, it cannot be said that TEA-21 is a narrowly tailored remedial measure unless its application is lim- ited to those States in which the effects of discrimination are actually present.”381 Grantees must proffer evidence of discrim- ination to apply race-conscious measures to meet the annual goal, apparently in addition to meeting the mandates of Part 26. Not only must WSDOT prove that discrimination has cur- rent effects in its market but also that such discrimination must have affected all of the presumptively socially disadvantaged groups included in Part 26.382 “We have previously expressed similar concerns abut the haphazard inclusion of minority groups in affirmative action programs ostensibly designed to remedy the effects of discrimination. . . . [E]ach of the princi- pal minority groups benefited by Washington’s DBE pro- gram . . . must have suffered discrimination within the State.”383 The court rejected WSDOT’s approved goal-setting method- ology that closely tracked the Sample Program384 developed by U.S.DOT. “Both Minnesota and Nebraska had hired outside consulting firms to conduct statistical analyses of the availabil- ity and capacity of DBEs in their local markets, and the Eighth Circuit relied upon those studies to hold that the States’ DBE programs independently satisfied strict scrutiny’s narrow tailor- ing requirement.”385 In contrast, WSDOT had chosen option 1 in § 26.45(c) to determine its Step 1 base figure of DBE avail- ability: divide the number of certified DBEs by the total 86 374NERA Economic Consulting. September 2005. “Race, Sex, and Business Enterprise: Evidence from the State of Minnesota.” 375Sherbrooke, 345 F.3d. at 973–74. The consultant provided expert deposition testimony regarding the data, methods, and findings of its study during the dis- trict court proceedings. 376MGT of America, Inc., September 2000, “Availability and Goal Setting Study.” 377Sherbrooke, at 974. The court did not opine on the method used to calculate avail- ability for the NDOR, which was a bidders list approach at “capacity” adjustment. 378407 F.3d 983 (9th Cir. 2005). 379Id. at 996. 380Id. at 997, citing Sherbrooke. 381407 F.3d at 998. 382The opinion recognizes in the discussion of Congress’ narrow tailoring that Part 26 does not permit disaggregated goals by race, ethnicity and gender. Id. at 990. 383407 F.3d at 998–99. 384See http://osdbuweb.dot.gov/documents/pdf/dbe/SampleDB.pdf. (viewed 12 December 2008). 385407 F.3d at 997.

87 number of establishments in the Census Bureau’s County Busi- ness Patterns database. In Step 2, it followed the U.S.DOT’s guidance and adjusted the base figure of 11.17% to 14%, based upon the average of the Step 1 estimate averaged with the median (18%) of prior years’ DBE participation;386 there was no explanation of how this figure reflected expected DBE availability in a race-neutral market. WSDOT did not have evidence upon which to make an adjustment for discrimina- tory barriers in obtaining bonding and financing or for the effects of past or present discrimination because it lacked sta- tistical studies of such discrimination. WSDOT then projected that it would achieve the 14% goal through 9% DBE partici- pation from race-neutral means, based upon its utilization on state-funded contracts without goals, and 5% DBE participa- tion from race-conscious subcontracting goals. Lacking other statistical evidence of discrimination, the state could only rely upon the gap between its estimate of 14% and the 9% DBE participation on contracts without affirmative action remedies. However, the court held that this 14% figure reflects the effects of the DBE Program, and thus is not indica- tive of DBE utilization in a race-neutral market. “Indeed, even in States in which there has never been discrimination, the pro- portion of work that DBEs receive on contracts that lack affir- mative action requirements will be lower than the share that they obtain on contracts that include such measures because minority preferences afford DBEs a competitive advantage.”387 Therefore, the only figure upon which WSDOT can “plausi- bly rely to demonstrate discrimination is the disparity between the proportion of DBE firms in the state (11.17%) and the per- centage of contracting funds awarded to DBEs on race-neutral contracts (9%). This oversimplified statistical evidence is enti- tled to little weight, however, because it does not account for factors that may affect the relative capacity of DBEs to under- take contracting work.”388 According to the Ninth Circuit, that DBEs may be smaller, less experienced, and more expensive than non-DBEs may explain the difference. To the extent that this “small disparity has any probative value, it is insufficient, standing alone, to establish the existence of discrimination against DBEs.”389 What is necessary is statistical significance.390 The state did not rely upon any anecdotal evidence of dis- crimination in Washington’s transportation marketplace in setting its goal. According to the Ninth Circuit, the affidavits required from applicants for DBE certification attesting that they have suffered discrimination established no more than general assertions of societal bias.391 “The record is therefore devoid of any relevant evidence sug- gesting that minorities currently suffer- or have ever suffered- discrimination in the Washington transportation contracting industry. . . . The ‘exact connection’ between means and ends that is a prerequisite to the use of racial classifications is demon- strably absent from Washington’s DBE program.”392 WSDOT’s program failed to meet strict scrutiny. How much evidence of discrimination in a recipient’s juris- diction is necessary is uncertain. While the regulations are con- stitutional, a grantee must still go beyond their terms to prove that discrimination requires a race-conscious goal. The court somewhat collapses the compelling interest requirement of “strong evidence” of discrimination with the requirement that the remedy be narrowly tailored to that evidence. The regula- tions the court holds to be constitutional explicitly disavow the need for grantees to conduct disparity studies, yet it demands evidence that closely resembles a disparity study. It also seems to confuse the setting of an overall agency goal—the expected DBE participation in a discrimination-free market—with the means used to achieve that goal—the use of race-conscious subcontracting goals. Even if a recipient concluded that its market was fully fair and open, that does not mean that it would not set a goal, only that it would not employ race-based measures to meet it. The constitutionally acceptable regula- tions provide for just such an outcome. Perhaps this merely illustrates that when a party presents no evidence and no expert testimony, the court then lacks guidance on the correct economic and legal analysis of discrimination. As a result, the Ninth Circuit made several serious errors: • Contrary to the court’s assertion that a state is “required” to adjust its base figure of DBE availability to account for the effects of discrimination, only consideration of such an adjustment is mandated.393 • Factors affecting the competitiveness of DBEs, such as firm revenues, length of time in operation, bonding capacity, etc., are infected by discrimination. As previously discussed, 386Tips for Goal Setting in the Disadvantaged Business Enterprise (DBE) Program, http://osdbuweb.dot.gov/business/dbe/tips.cfm (“[C]alculate your median past participation percentage and use that figure to adjust your Step One Base Figure by taking the average of your median past participation figure and your Step One Base Figure.”). 387407 F.3d at 1000. 388Id. 389Id. at 1001. 390We note that the court is wrong in its characterization of the disparity as “small.” In fact, this disparity is 0.8, which would be considered “large” pursuant to, for example, the Equal Employment Opportunity Commission’s four-fifths rule. See 29 C.F.R. § 1607.4(d). 391407 F.3d at 1002. 392Id. 393The court incorrectly states that grantees must apply a Step 2 analysis. 407 F.3d at 989 (“Under Step two, a State is required to adjust this base figure upwards or downwards to reflect the proven capacity of DBEs to perform work (as measured by the volume of work allocated to DBEs in recent years) and evidence of discrim- ination against DBEs obtained from statistical disparity studies.”); cf. 49 C.F.R. §26.45(d)(3) (“If you attempt to make an adjustment to your base figure to account for the continuing effects of past discrimination (often called the “but for” factor) or the effects of an ongoing DBE program, the adjustment must be based on demonstrable evidence that is directly and logically related to the effect for which the adjustment is sought.”) (emphasis added).

DBEs may be smaller, newer, and otherwise less competi- tive because of the very discrimination sought to be reme- died by the adoption of the program. It is simply wrong to use the outcomes of discrimination as the measure of a race-neutral market.394 • The disparity between the estimated 11.17% DBE avail- ability and the actual 9% utilization of DBEs on contracts without goals is not “small.” In fact, this disparity is 0.8, which would be considered “large,” or “substantively sig- nificant,” or “constitutionally significant” pursuant to, for example, the Equal Employment Opportunity Commis- sion’s four-fifths rule.395 Given the Ninth’s Circuit’s reliance on Sherbrooke, what WSDOT lacked was the type of expert statistical evidence pre- sented by Mn/DOT in support of its program.396,397 The Mn/ DOT Availability Study provided a comprehensive, market- wide estimate of DBE availability weighted by the geographic and products markets in which Mn/DOT did business. This addresses the Ninth Circuit’s concern that DBEs may not be located where WSDOT’s prime contractors awarded subcon- tracts. The study further provided a detailed Step 2 analysis of statistical disparities in DBEs’ formation and earnings relative to similarly situated non-DBEs and summarized the anecdotal evidence extant in that jurisdiction. Thus, the Sherbrooke court reviewed ample targeted evidence of DBEs’ availability to per- form on Mn/DOT’s contracts and subcontracts as well as evi- dence of the discriminatory barriers those firms face in pur- suing those contracts and subcontracts. Western States implies that when a recipient determines that not all the enumerated groups have suffered discrimination in its market, it must petition U.S.DOT for a waiver of the prohi- bition against separate goals for racial and ethnic minorities and white women. Waivers to remove some racial or ethnic groups or white women from credit toward meeting DBE contract goals have been filed by at least two state DOTs. The court’s concern about the application of TEA-21’s “laundry list” of racial and ethnic minorities to particular markets suggests that serious con- sideration must be given to a waiver petition to permit the use of subcontracting goals that exclude DBEs owned by members of minority groups for which insufficient evidence is found of dis- crimination from DBE goal credit.398 At a minimum, Western States counsels that Ninth Circuit state DOTs must significantly customize their goals to with- stand strict scrutiny. It is not enough to plug the Step 1 avail- ability estimate into a formula without consideration of the effects of discrimination on the analysis. While the opinion affirms that the Step 2 adjustment is the appropriate point at which to undertake this inquiry, a conceptually rigorous model must be applied. That does not mean that an adjustment is always warranted or supportable, but there must be evidence and discussion of discrimination in the goal setting submis- sion. The court’s analysis also casts doubt on the value of using the recipient’s past levels of DBE utilization as a measure of the availability of DBEs “but for” discrimination. In any event, any adjustment undertaken must be statistically valid. It must be a quantifiable representation of the qualitative judgment that the ongoing effects of past or current discrimination either do or do not continue to impede DBEs’ full and fair access to the recipient’s market. If WSDOT had presented a Sherbrooke-type study and proffered expert testimony in support of its analysis, the court may very well have approved the program. Whether addi- tional evidence of discrimination should be included in a dis- parity study for Ninth Circuit state DOTs is not clear. While the court suggests disparity study evidence is required, it also clearly relied upon cases where such evidence was not pre- sented. The Ninth Circuit’s misreading of a previous Seventh Circuit case399 led it to reject the proposition that meeting the requirements of a constitutional federal mandate by a recip- ient is sufficient. Perhaps the Seventh Circuit’s clarification, discussed below, of this misreading will affect the outcome of a future challenge to a Ninth Circuit grantee’s program. Additional Evidence of Discrimination Past Utilization of DBEs on State DOT Contracts Past utilization of DBEs on department contracts is useful in suggesting a “floor” of the availability of DBEs in that the award of prime contracts and subcontracts without doubt means the DBEs are “ready, willing and able.” Utilization can also form the basis for an analysis of whether there remain statistically significant disparities between the availability of 88 394See, e.g., Concrete Works VII, 321 F.3d at 981, 983 (“M/WBE construction firms are generally smaller and less experienced because of discrimination. . . . Addi- tionally, we do not read Croson to require disparity studies that measure whether construction firms are able to perform a particular contract.”) (emphasis in the original). 39529 C.F.R. § 1607.4(d). 396“Both Minnesota and Nebraska had hired outside consulting firms to conduct statistical analyses of the availability and capacity of DBEs in their local markets, and the Eighth Circuit relied upon those studies to hold that the states’ DBE Pro- grams independently satisfied strict scrutiny’s narrow tailoring requirement.” 407 F.3d at 997. 397To its credit, WSDOT had commissioned such a study during the litigation, which formed the basis for its FFY 2006, 2007, and 2008 DBE goal submissions. 398407 F.3d at 998 (“We have previously expressed similar concerns about the haphazard inclusion of minority groups in affirmative action programs ostensi- bly designed to remedy the effects of discrimination. . . . The overly inclusive des- ignation of benefited minority groups was a ‘red flag’ that the legislation is not narrowly tailored.”). 399Milwaukee County Pavers Ass’n v. Fiedler, 922 F.2d 419, 424 (7th Cir. 1991), cert. denied, 500 U.S. 954 (1991).

89 minority- and women-owned firms and the utilization of such firms in the department’s contracting activities. “Where there is a significant statistical disparity between the number of qualified minority contractors willing and able to perform a particular service and the number of such contractors actu- ally engaged by the locality or the locality’s prime contrac- tors, an inference of discriminatory exclusion could arise.”400 This is known as the “disparity index” or “disparity ratio.” This index is calculated by dividing the utilization of M/W/ DBEs by the availability of M/W/DBEs. Courts have looked to disparity indices in determining whether Croson’s eviden- tiary foundation is satisfied.401 An index less than 100% indi- cates that a given group is being utilized less than would be expected based on its availability. The government need not prove that the statistical infer- ences of discrimination are “correct.” For example, in uphold- ing Denver’s M/WBE Program, the Tenth Circuit noted that strong evidence supporting Denver’s determination that remedial action was necessary need not have been based upon “irrefutable or definitive” proof of discrimination. Statistical evidence creating inferences of discriminatory motivations was sufficient and therefore evidence of marketplace discrim- ination was properly used to meet strict scrutiny. It is the plaintiff who must prove by a preponderance of the evidence that such proof does not support those inferences.402 That DBEs are utilized on the agency’s contracts at greater percentages than the Step 1 headcount does not end the inquiry into whether discrimination still creates barriers to equal contracting opportunities. Where the government has been implementing affirmative action remedies like the long- standing U.S.DOT DBE Program, DBE utilization reflects those efforts; it does not signal the end of discrimination. In denying the plaintiff’s motion for summary judgment against the IDOT’s program, the court was “convinced that the rela- tively high (or appropriately high) level of DBE participation on goals contracts has resulted not from a lack of discrimina- tion, but from the success of IDOT’s DBE Program. . . . Plain- tiff presented no persuasive evidence contravening the con- clusions of IDOT’s studies.”403 Likewise, the Tenth Circuit held that Denver’s overutiliza- tion of M/WBEs on city projects with goals went only to the weight of the evidence because it reflected the effects of a remedial program. Denver presented evidence that goals and nongoals projects were similar in purpose and scope and that the same pool of contractors worked on both types. “Partic- ularly persuasive” was evidence that M/WBE participation declined significantly when the program was amended in 1989. The “utilization of M/WBEs on City projects has been affected by the affirmative action programs that have been in place in one form or another since 1977. Thus, the non-goals data is [sic] the better indicator of discrimination in public contracting” and supports the position that discrimination was present before the enactment of the ordinances.404 While § 26.45(d) clearly defines “capacity” as past utiliza- tion, some agencies have added a gloss of “capacity analysis” to lower the Step 1 base figure.405 They note that DBEs are often smaller and newer than established white male-owned businesses406 and may lack the qualifications needed for DOT work (prior DOT track record, high bonding capacity, own- ership or long term leases of equipment, existing union agree- ments, etc.). The agency therefore lowers the remedial goal to reflect the “real world” effects of discrimination.407 The Ninth Circuit has further confused the issue by reject- ing the only type of “capacity” marker required to be consid- ered by the regulations it held to be constitutional: past state DOT DBE utilization. WSDOT argued that DBE capacity should reflect the relationship between its Step 1 availability estimate and its past utilization. The court, however, held that was “no evidence of discrimination” because utilization was affected by the imposition of DBE contract goals.408 DBE “Capacity” Some cases have stated that DBE “capacity,” usually as meas- ured by firm size, number of contracts awarded, etc., must be controlled for to determine availability. For example, the Ninth Circuit rejected the disparity between DBE availability and WSDOT’s utilization because the availability measure did not statistically control for “factors that may affect the relative capacity of DBEs to undertake contracting work. Indeed, the fact that DBEs constitute 11.17% of the Washington market does not establish that they are able to perform 11.17% of the 400Croson, 488 U.S. at 509; see Webster, 51 F.Supp.2d at 1363, 1375. 401Scott, 199 F.3d at 218; Concrete Works II, 36 F.3d at 1526–1527; O’Donnell v. District of Columbia, 963 F.2d at 426; Cone Corp. v. Hillsborough County, 908 F.2d 908, 916 (11th Cir. 1990), cert. denied, 498 U.S. 983 (1990). 402Concrete Works IV, 321 F.3d at 971. 403Northern Contracting II, 2004 U.S. Dist. Lexis at *81. 404Concrete Works IV, 321 F.3d at 987–88; see also Western States, 407 F.3d at 992; Hershell Gill Consulting Engineers, Inc. v. Miami-Dade County, Florida, 333 F.Supp.2d 1305, 1318 (S.D. Fla. 2004) (“[The court] will keep the potential effect of the MWBE programs in mind when analyzing the evidence presented by the County”). 405But cf. Western States, 407 F.3d at 1000 (rejecting WSDOT’s upward capacity adjustment as influenced by the operation of the program goal). 406See, e.g., the 2002 Survey of Business Owners, Geographic Area Series: Economy-Wide Estimates of Business Ownership by Gender, Hispanic or Latino Origin, and Race: 2002 (available online at http://factfinder.census.gov/ servlet/IBQTable?_bm=y&-geo_id=D&-ds_name=SB0200A1&-_lang=en, and http://factfinder.census.gov/servlet/IBQTable?_bm=y&-geo_id=&-fds_name= EC0200A1&-ds_name=SB0200CSCB01&-_lang=en.) 407For example, Maine DOT lowered its FFY 2008 goal by the percentage of DBEs that reported difficulties with obtaining bonding or cash flow or other business issues, based on its interpretation of § 26.45(d)(2)(i). 408Western States, 407 F.3d at 1000.

work.”409 Rothe VII likewise discusses the lack of capacity con- trols as problematic for the six local studies relied upon by DOD, although it does not refer to Western States.410 Neither court addressed opinions that reject using the effects of dis- crimination, that is, DBEs’ size and experience, as “neutral” outcomes. There is also no discussion of the effects of the pro- gram on DBE “capacity” (that is, supply) by creating more opportunities to work (that is, demand) by the application of contract goals. Northern Contracting II and III, the most recent decisions examining the DBE program, cut through this analytical fog. The trial court accepted the testimony of IDOT’s expert that capacity measures are themselves reflective of discrimina- tion.411 The Seventh Circuit agreed: lack of DBE “capacity” reflects the taint of discrimination; it is not an argument for limiting the cure. Size, longevity, bonding limits, past bidding history, etc. have been affected and reduced by the discrimi- nation the legislation seeks to cure, and therefore cannot be used to dilute the remedy. The court agreed with IDOT that “such discrimination indirectly affects the ability of DBEs to compete for prime contracts, despite the fact that they are awarded solely on the basis of low bid, cannot be doubted.”412 Proper statistical analysis should not control for the variables affected by the behavior sought to be isolated. As recognized by the Tenth Circuit in the Denver case, while there was: uncontroverted evidence that M/WBEs are generally smaller and less experienced than majority firms . . . M/WBE construction firms are generally smaller and less experienced because of dis- crimination. In addition, Denver’s expert . . . testified that dis- crimination by banks or bonding companies would reduce a firm’s revenue and the number of employees it could hire. . . . Additionally, we do not read Croson to require disparity studies that measure whether construction firms are able to perform a particular contract. . . . Based on the uncontroverted evidence presented at trial, we conclude that the district court did not give sufficient weight to Denver’s disparity studies because of its erro- neous conclusion that the studies failed to adequately control for size and experience. Denver is permitted to make assumptions about capacity and qualification of M/WBEs to perform con- struction services if it can support those assumptions. The assumptions made in this case are consistent with the evidence presented at trial and support the City’s position that a firm’s size does not affect its qualifications, willingness, or ability to per- form construction services and that the smaller size and lesser experience of M/WBEs are, themselves, the result of industry discrimination.413 Moreover, the construction industry—by far the most common target of M/W/DBE challenges—is particularly elas- tic, such that any firm’s “capacity” today is not its “capacity” tomorrow, as the award of new contracts, the completion of existing projects, and the ability to employ temporary workers and rent equipment make the ability to perform a contract impossible to determine. “At trial, Denver introduced evidence that the median number of employees of all construction firms in the Denver MSA is three and presented testimony that even firms with few permanent employees can perform large, pub- lic contracts by hiring additional employees or subcontractors and renting equipment.”414 In fact, at least one court has noted that the plaintiff in the case was a “small firm whose only employee other than the owner is the secretary.”415 If WSDOT and DOD had presented expert testimony on proper statistical modeling, the elasticity of the construction industry, and business formation and earnings and credit mar- ket disparities, in conjunction with anecdotal testimony,416 then perhaps those programs would likewise have met strict scrutiny. Unremediated Markets Data It is critical to measure the participation of minority- and women-owned firms in the absence of affirmative action goals, if such evidence is available. Evidence of race and gender dis- crimination in relevant “unremediated”417 markets provides an important indicator of what level of actual DBE participation can be expected in the absence of government-mandated affir- mative efforts to contract with M/W/DBEs.418 For example, in finding that Congress had strong evidence of discrimination in the construction industry, the Tenth Circuit noted that: The government presents powerful evidence that “[a]ll too often, contracting remains a closed network, with prime contrac- tors maintaining long-standing relationships with subcontractors 90 409Id. 410545 F.3d at 1043. 411Northern Contracting II, 2004 U.S. Dist. Lexis at *76 (“IDOT presented an array of statistical studies concluding that DBEs face disproportionate hurdles in the credit, insurance, and bonding markets.”). 412Id. at *77. 413Concrete Works IV, 321 F.3d at 981, 983. 414Id. 415North Shore v. City of New York, 1998 U.S. Dist. Lexis 6785 at *25 (“plaintiff North Shore is a small firm whose only employee other than the owner is a sec- retary. It, however, has bid on projects worth over $1 million, including the [con- tract] which is at issue in this litigation”). 416Concrete Works IV, 321 F.3d at 981 (anecdotal testimony about discrimination bolstered the statistical evidence); Northern Contracting II, 2004 U.S. Dist. Lexis at *76 (“The results of these [statistical] studies were consistent with the testi- mony of DBE owners.”). 417“Unremediated market” means “markets that do not have race- or gender- conscious subcontracting goals in place to remedy discrimination.” Northern Contracting II, at *36. 418See, e.g., Western States, 407 F.3d at 992 (Congress properly considered evidence of the “significant drop in racial minorities’ participation in the construction industry” after state and local governments removed affirmative action provi- sions); Adarand VII, 228 F.3d at 1186 (evidence included “studies of local sub- contracting markets after the removal of affirmative action programs”); H.B. Rowe, Inc. v. Tippett, 2008 U.S. Dist. LEXIS 100569, * 25 (E.D. N.C. 2008) (“evi- dence relied upon by the legislature demonstrated a dramatic decline in the uti- lization of MBEs during the program’s suspension”).

91 with whom they prefer to work. Because minority owned firms are new entrants to most markets, the existence and proliferation of these relationships locks them out of subcontracting opportuni- ties. As a result, minority-owned firms are seldom or never invited to bid for subcontracts on projects that do not contain affirmative action requirements.”419 The courts are clear that the government has a compelling interest in not financing the evil of private prejudice with public dollars.420 If DBE utilization is below availability in unremediated markets, an inference of discrimination may be supportable. The virtual disappearance of M/W/DBE par- ticipation after programs have been enjoined or abandoned strongly indicates substantial barriers to minority subcon- tractors, “raising the specter of racial discrimination.”421 This analysis addresses whether the government has been and con- tinues to be a “passive participant” in such discrimination, in the absence of affirmative action remedies.422 The results of nongoals contracts can help to demon- strate that, but for the interposition of remedial affirmative action measures, discrimination would lead to disparities in government contracting. The “dramatic decline in the use of M/W/DBEs when an affirmative action program is terminated, and the paucity of use of such firms when no affirmative action program was ever initiated,” was proof of the government’s compelling interest in employing race- and gender-conscious measures.423 Evidence of unremediated markets “sharpens the picture of local market conditions for MBEs and WBEs.”424 Economy-Wide Utilization of DBEs In addition to data for other governments’ utilization of DBEs in the absence of affirmative remedies, courts have held that evidence of discriminatory barriers in the private sector or economy-wide activities is relevant. [T]he evidence presented by the government in the present case demonstrates the existence of two kinds of discriminatory bar- riers to minority subcontracting enterprises, both of which show a strong link between racial disparities in the federal government’s disbursements of public funds for construction contracts and the channeling of those funds due to private dis- crimination. The first discriminatory barriers are to the forma- tion of qualified minority subcontracting enterprises due to pri- vate discrimination, precluding from the outset competition for public construction contracts by minority enterprises. The sec- ond discriminatory barriers are to fair competition between minority and non-minority subcontracting enterprises, again due to private discrimination, precluding existing minority firms from effectively competing for public construction contracts.425 Thus, if DBEs are suffering discrimination in the private markets, the government has an interest in ensuring that it ameliorates this pattern to the best of its abilities in its own contacting activities. In holding that the City of New Haven’s M/WBE Program lacked a sufficient evidentiary basis, the court noted that: [w]hat is lacking is information which would suggest that a rea- sonable level of minority contract awards would not continue, absent a set aside. For example, statistics or other evidence might show that a level of private contracts commensurate with the number of MBEs/WBEs available and able to do the work are not and/or will not be awarded to them now or in the future. By pro- ducing evidence that MBEs and WBEs attempted to win private contracts and were systematically rejected despite their bids hav- ing been the lowest, the city might have shown that discrimina- tion exists and, thus, that the need for a set aside existed. There was some evidence that in 1987–88 WBEs and MBEs received only 17% and 27%, respectively, of their income from private contracts. Though it has not been shown if private contracts exceed, in dollar amount, public contracts, MBEs and WBEs would not seem to be getting contracts from the private sector in any proportion close to the percentage of their participation in public contracts. Without set asides, it could then be argued that contractors on public contracts will award subcontracts more closely following patterns of private subcontract awards in pri- vate contracts, i.e., at a lower rate to MBEs and WBEs, perhaps so low as to constitute the requisite disparity. Such a practice, and likelihood in the future, however, is not established in the record.426 Economy-wide evidence has consisted of various types. Bar- riers to the formation of DBE subcontractors have included the following: • Exclusion from “good old boy” networks, often the result of several generations of family participation in the industry; • Barriers to union membership; and • Race-based denial of access to start-up and working capital.427 419Adarand VII, 228 F.3d at 1170 (quoting The Compelling Interest, 61 Fed. Reg, 26,058, nn.98–99). 420See, e.g., Drabik, 214 F.3d at 734–735. 421Adarand VII, 228 F.3d at 1174; cf. AGC v. New Haven, 791 F.Supp. at 947 (“The record does not reflect whether the existing MBEs and WBEs will be able to attract and obtain business on the basis of relevant competitive criteria, such as price, quality, reliability, without being excluded on the basis of discrimination. What is lacking is the information which would suggest that a reasonable level of minor- ity contract awards would not continue, absent a set aside.”). 422See also Philadelphia III, 91 F.3d at 599–601. 423BAGC v. Chicago, 298 F. Supp.2d at 737; see also Concrete Works IV, 321 F.3d at 987–988. 424Concrete Works II, 36 F.3d at 1529. 425Adarand VII, 228 F.3d at 1167–68. 426AGC v. New Haven, 791 F.Supp at 947. 427Id, at 1168–70, n.13 (While “[l]ending discrimination alone of course does not justify action in the construction market . . . discrimination, which is already unlawful under federal law, supports the assertion that the formation, as well as utilization, of minority-owned construction enterprises has been impeded.”).

Barriers to competition by existing DBEs have included the following: • Nonsolicitation of DBEs in the absence of DBE goals; • Bid shopping of DBE quotes to non-DBEs; • Industry domination by “informal, racially exclusionary business networks”; • Discrimination by surety bonding companies; and • Price and delivery discrimination by suppliers.428 Anecdotal Evidence Anecdotal evidence of experiences with discrimination in contracting opportunities, including testimony from other governments’ studies and programs, is relevant since it goes to the question of whether observed statistical disparities are due to discrimination and not to some other nondis- criminatory cause or causes.429 Testimony about discrimina- tion by prime contractors, unions, bonding companies, sup- pliers and lenders has been found relevant regarding barriers both to minority subcontractors’ business formation and to their success on governmental projects.430 While anec- dotal evidence is insufficient standing alone, “[p]ersonal accounts of actual discrimination or the effects of dis- criminatory practices may, however, vividly complement empirical evidence. Moreover, anecdotal evidence of a [government’s] institutional practices that exacerbate dis- criminatory market conditions are [sic] often particularly probative.”431 Anecdotal proof “may bring cold numbers convincingly to life.”432 “[W]e do not set out a categorical rule that every case must rise or fall entirely on the suffi- ciency of the numbers. To the contrary, anecdotal evidence might make the pivotal difference in some cases; indeed, in an exceptional case, we do not rule out the possibility that evidence not reinforced by statistical evidence, as such, will be enough.”433 There is no requirement that anecdotal testimony be veri- fied. “Denver was not required to present corroborating evi- dence and [plaintiff] was free to present its own witnesses to either refute the incidents described by Denver’s witnesses or to relate their own perceptions on discrimination in the Den- ver construction industry.”434 Additional Elements of Narrowly Tailored DBE Goal Setting Definition of State DOT’s Marketplace Part 26 directs grantees to set goals based on the “relative availability of DBEs in your market.”435 State DOTs must therefore apply economic principles to empirically establish the geographic and industry dimensions of their contracting marketplace in order to ensure that the evidence is narrowly tailored. The studies relied upon by IDOT and Mn/DOT defined the geographic and industry markets as the location and industries that comprised over 80% of the contract dol- lars awarded. Race- and Gender-Neutral Remedies Race- and gender-neutral approaches are a necessary com- ponent of a defensible and effective DBE Program.436 They must be used to the maximum feasible extent and applied in good faith.437 Such measures include unbundling of contracts into smaller units, providing technical support, and address- ing issues of financing, bonding, and insurance important to all small and emerging businesses.438 Difficulty in accessing procurement opportunities, restrictive bid specifications, excessive experience requirements, and overly burdensome insurance and/or bonding requirements, for example, might be addressed by recipients without resort to using race or gen- der in their decision making. Further, governments have a duty to ferret out and punish discrimination against minori- ties and women by their contractors, staff, lenders, bonding companies, or others.439 Enforcement of anti-discrimination legislation is another race-neutral approach that has been implemented.440 Collecting data is another necessary race-neutral meas- ure. Agencies should track the utilization of M/W/DBEs as a measure of their success in the bidding process, including as subcontractors.441 Part 26 goes further in mandating the creation and maintenance of a “bidder’s list, consisting of all firms bidding on prime contracts and bidding or quoting 92 428Id. at 1170–72. 429Webster, 51 F.Supp.2d at 1363, 1379. 430Adarand VII, 228 F.3d at 1168–1172; see also AGC v. Coalition for Economic Equity, 950 F.2d at 1415. 431Concrete Works II, 36 F.3d at 1520. 432Id. at 1521. 433Engineering Contractors II, 122 F.3d at 926. 434Concrete Works IV, 321 F.3d at 989. 43549 CFR §26.45(b). 436Croson, 488 U.S. at 507 (Richmond considered no alternatives to race-based quota); Drabik, 214 F.3d at 738; Philadelphia III, 91 F.3d at 609 (city’s failure to consider race-neutral alternatives was particularly telling); Webster, 51 F. Supp.2d at 1380 (for over 20 years county never seriously considered race- neutral remedies). 437See 49 C.F.R. § 26.51(a). 43849 C.F.R. § 26.51(b). 439Croson, 488 U.S. at 503 n.3; Webster, 51 F.Supp.2d at 1380. 440Associated General Contractors of California, Inc. v. Coalition for Economic Equity, 950 F.2d 1401, 1417 (9th Cir. 1991) (San Francisco “continues to make efforts to enforce the anti-discrimination ordinance”). 441See, e.g., Virdi, 2005 U.S. App. LEXIS 11203 at n.8 (11th Cir. June 13, 2005).

93 on subcontracts . . . [including] (1) Firm name; (2) Firm address; (3) Firm’s status as a DBE or non-DBE; (4) The age of the firm; and (5) The annual gross receipts of the firm.”442 However, strict scrutiny does not require that every race- neutral approach must be implemented and then proven ineffective before race-conscious remedies may be utilized.443 While an entity must give good faith consideration to race- neutral alternatives, “strict scrutiny does not require exhaus- tion of every possible such alternative . . . however irrational, costly, unreasonable, and unlikely to succeed such alternative might be. . . . [s]ome degree of practicality is subsumed in the exhaustion requirement.”444 Annual and Contract Goal Setting Numerical goals or benchmarks for M/W/DBE participa- tion must be substantially related to the availability of such firms in the relevant market.445 One unanswered question is whether goals or benchmarks for overall agency contracting may be set higher than estimates of actual current availability. To freeze the goals at current head counts would set the results of discrimination—depressed M/W/DBE availability—as the marker of the elimination of discrimination. It therefore should be reasonable for the gov- ernment to seek to attempt to level the racial playing field by setting targets somewhat higher than current headcount. For example, 49 C.F.R. Part 26 requires grant recipients to deter- mine the availability of DBEs in their marketplaces absent the presence of discrimination.446 In upholding the DBE regula- tions, the Tenth Circuit stated that: because Congress has evidence that the effects of past discrimi- nation have excluded minorities from the construction industry and that the number of available minority subcontractors reflects that discrimination, the existing percentage of minority-owned businesses is not necessarily an absolute cap on the percentage that a remedial program might legitimately seek to achieve. Absolute proportionality to overall demographics is an unrea- sonable goal. However, Croson does not prohibit setting an aspi- rational goal above the current percentage of minority-owned businesses that is substantially below the percentage of minority persons in the population as a whole. This aspirational goal is reasonably construed as narrowly tailored to remedy past dis- crimination that has resulted in homogenous ownership within the industry. It is reasonable to conclude that allocating more than 95% of all federal contracts to enterprises owned by non- minority persons, or more than 90% of federal transportation contracts to enterprises owned by non-minority males, is in and of itself a form of passive participation in discrimination that Congress is entitled to seek to avoid. See Croson, 488 U.S. at 492 (Op. of O’Connor, J.).447 At least one court has recognized that goal setting is not an absolute science. In holding the DBE regulations to be nar- rowly tailored, the Eighth Circuit noted that “[t]hough the underlying estimates may be inexact, the exercise requires the States to focus on establishing realistic goals for DBE partici- pation in the relevant contracting markets. This stands in stark contrast to the program struck down in Croson.”448 On the other hand, “sheer speculation” cannot form the basis for an enforceable measure.449 A related issue is whether goals can be set to reflect the expected availability “but for” the continued effects of dis- crimination. The DBE regulations direct recipients to con- sider making this adjustment to the baseline “headcount” of DBEs, to reflect the results of a level playing field for DBEs. This embodies the fundamental remedial purpose of the pro- gram: “[u]ntil that future day when national aspiration and national reality converge, the [Supreme] Court has made clear that under certain circumstances the federal government may use race-conscious means to remedy the effects of historical and present-day racial discrimination.”450 In addition to the overall aspirational goals for their annual aggregate spending, state DOTs must set subcontracting goals for specific projects based upon the availability of DBEs to perform the anticipated scopes of subcontracting.451 As pro- vided in Part 26, goals should reflect the particulars of the con- tract, not reiterate annual aggregate targets.452 For example, in considering a challenge to the City of Baltimore’s M/WBE Program, the court noted that the new ordinance, in con- trast to an earlier program struck down as unconstitutional, specifically required that goals be set on a contract-by-contract and craft-by-craft basis.453 Not only is contract-specific goal setting probably necessary to ensure flexibility,454 but also set- ting goals that reflect the reality of the scopes of work of the job instead of overall agency spending targets reduces the need to conduct good faith efforts reviews because the goal will reflect the realities of actual subcontractable scopes of work as well as the temptation to create “front” companies and sham participation. 44249 C.F.R. § 26.11(c). 443Grutter, 529 U.S. at 339. 444Coral Construction, 941 F.2d at 923. 445Webster, 51 F.Supp.2d at 1379, 1381 (statistically insignificant disparities are insufficient to support an unexplained goal of 35% M/WBE participation in county contracts); see also Baltimore I, 83 F.Supp.2d at 621. 44649 C.F.R. § 26.45. 447Adarand VII, 228 F.3d at 1181 (emphasis in the original). 448Sherbrooke, 345 F.3d. at 972. 449Adarand VII, 228 F.3d at 1174; See Croson, 488 U.S. at 499. 450Adarand VII, 228 F.3d at 1155. 45149 C.F.R. § 26.51(d). 45249 C.F.R. § 26.51(e). 453Baltimore II, 218 F.Supp.2d at 751–52. 454See Western States, 407 F.3d at 990, 994; Sherbrooke, 345 F.3d at 972; Coral Construction, 941 F.2d at 924.

Third, program remedies should be limited to those firms that have some nexus to the harms sought to be ameliorated. Some courts have held that state and local programs must provide proof that the individual owner of a firm seeking to benefit from the program has suffered discrimination.455 In considering the eligibility of individual firms to participate in the remedial benefits of the DBE Program, the rebuttable presumptions of social and economic disadvantage have been central to the courts’ holdings that Part 26 is narrowly tai- lored. “While TEA-21 creates a rebuttable presumption that members of certain racial minorities fall within that class, the presumption is rebuttable, wealthy minority owners and wealthy minority-owned firms are excluded, and certification is available to persons who are not presumptively disadvan- taged but can demonstrate actual social and economic dis- advantage. Thus, race is made relevant in the program, but it is not a determinative factor.”456 Moreover, anyone can challenge the disadvantage of any firm.457 Finally, each firm’s owner is reg- ularly reviewed to ensure that his or her economic disadvantage has not exceeded the personal net worth limit.458 Flexibility of Contract Goals It is imperative that remedies not operate as fixed quotas. The ability of a prime contractor that has made good faith efforts to meet a contract goal to receive a waiver has been central to the holding that the DBE Program meets the nar- row tailoring requirement. State DOTs should collect data on the frequency and circumstances of waivers to ensure that its implementation of Part 26 is flexible. Implications of Western States The implications of Western States have been profound. All grantees in the Ninth Circuit have been directed to comply by suspending the use of subcontracting goals until the evidentiary standards are satisfied. How to meet those standards led in large part to TRB’s commissioning of this Report. U.S.DOT Guidance for Ninth Circuit Recipients In response to Western States, the General Counsel of the U.S.DOT in 2005 provided guidance to Ninth Circuit grantees on how to meet the new test imposed by the opin- ion. After summarizing the opinion, the guidance describes the actions recipients should take regarding their next DBE goal submissions. • “Recipients should examine the evidence they have on hand of discrimination and its effects. Does this evidence appear to address successfully the problems the 9th Circuit’s deci- sion articulated concerning the Washington State DOT DBE Program? • If the recipient currently has sufficient evidence of discrim- ination or its effects, the recipient should go ahead and sub- mit race- and gender-conscious goals where appropriate, as provided in Part 26. (This submission would include the normal race-conscious/race-neutral ‘split’ in overall goals.) • If the evidence of discrimination and its effects pertains to some, but not all, of the groups that Part 26 presumes to be socially and economically disadvantaged, then these race- and gender-conscious goals should apply only to the group or groups for which the evidence is adequate. • If necessary, the Department may entertain program waivers of Part 26’s prohibition of group-specific goals in this situation. • If the recipient does not currently have sufficient evidence of discrimination or its effects, then the recipient would submit an all race-neutral overall goal for FY 2006. The recipient’s submission would include a statement concern- ing the absence of adequate evidence of discrimination and its effects. • A race-neutral submission of this kind should include a description of plans to conduct a study or other appropri- ate evidence-gathering process to determine the existence of discrimination or its effects in the recipient’s market. An action plan describing the study and time lines for its com- pletion should also be included.” If a recipient lacks sufficient evidence of discrimination or its effects, it “should immediately begin to conduct a rigorous and valid study to determine whether there is evidence of discrimi- nation or its effects. . . . this evidence-gathering effort [should be] completed expeditiously. . . . [A study should] be designed to determine, in a fair and valid way, whether evidence of the kind the 9th Circuit decision determined was essential to a DBE program including race-conscious elements exists.” In particular: • “The study should ascertain the evidence for discrimination and its effects separately for each of the groups presumed by Part 26 to be disadvantaged. 94 455See, e.g., Drabik II, 50 F.Supp.2d at 766 (no “consideration given to whether the particular MBE seeking a racial preference has suffered from the effects of past discrimination by the state or prime contractors.”); Main Line Paving, 725 F.Supp. at 1362 (“program contains no provisions to identify those who were victims of past discrimination and to limit the program’s benefits to them”). 456Sherbrooke, 345 F.3d at 973; see also Grutter, 539 U.S. at 341; Adarand VII, 228 F.3d at 1183–1184 (personal net worth limit is element of narrow tailoring); cf. Associated General Contractors v. City of New Haven, 791 F.Supp. 941, 948 (D. Conn. 1992), vacated on other grounds, 41 F.3d 62 (2nd Cir. 1992) (defini- tion of “disadvantage” was vague and unrelated to goal). 45749 C.F.R. §26.87. 458Adarand VII, 228 F.3d at 1186–87 (“The current regulations more precisely identify the proper minority recipients of DBE certification by periodically re- screening for economic disadvantage all candidates for such certification.”).

95 • The study should include an assessment of any anecdotal and complaint evidence of discrimination. • Recipients may consider the kinds of evidence that are used in “Step 2” of the Part 26 goal-setting process, such as evi- dence of barriers in obtaining bonding and financing, and disparities in business formation and earnings. • With respect to statistical evidence, the study should rigor- ously determine the effects of factors other than discrimi- nation that may account for statistical disparities between DBE availability and participation. This is likely to require a multivariate/regression analysis. • The study should quantify the magnitude of any differ- ences between DBE availability and participation, or DBE participation in race-neutral and race-conscious contracts. Recipients should exercise caution in drawing conclusions about the presence of discrimination and its effects based on small differences. • In calculating availability of DBEs, the study should not rely on numbers that may have been inflated by race-conscious programs or that may not have been narrowly tailored. • Recipients should consider, as they plan their studies, evidence-gathering efforts that Federal courts have approved in the past. These include the studies by Minnesota and Nebraska cited in Sherbrooke Turf . . . [and] the Illinois evi- dence cited in Northern Contracting.” DBE Goal Setting While the Guidance provided the contours of the types of evidence to be analyzed, precisely what evidence a defensi- ble study should analyze in the Ninth Circuit is not clear. If WSDOT had presented a Sherbrooke/IDOT-type availability study and proffered expert testimony in support of its analysis, the court may have approved the program. Whether additional evidence of discrimination of the type presented at the North- ern Contracting trial should also be included is uncertain because while the Western States court suggests disparity evi- dence is required, it also relied upon Sherbrooke where such evidence was not presented. The Seventh Circuit explained the Ninth Circuit’s misreading of a previous Seventh Circuit case, but the IDOT trial presented evidence of the type referred to by the Ninth Circuit, so it again is impossible to know the out- come had Illinois relied solely upon its Availability Study. What is certain is that at a minimum, Ninth Circuit state DOTs, and perhaps all recipients, must significantly customize their goals to withstand strict scrutiny. It is not enough to plug the Step 1 availability estimate into a formula without consid- ering the effects of discrimination. Western States also casts doubt on the value of using the state DOT’s past levels of DBE utilization as a measure of the availability of DBEs “but for” discrimination because of the interposition of the DBE Pro- gram. While the opinion affirms that the Step 2 adjustment is the appropriate point at which to undertake this inquiry, a con- ceptually rigorous model must be applied. Any adjustment must be a quantifiable representation of the qualitative judg- ment that the ongoing effects of past or current discrimination either do or do not continue to impede DBEs’ full and fair access to the recipient’s market. Western States further implies, and the U.S.DOT Guidance provides, that when a recipient determines that not all the enu- merated groups have suffered discrimination in its market it must petition U.S.DOT for a waiver of the prohibition against separate goals for racial and ethnic minorities and white women. If a group is not found to suffer discrimination in the state DOT’s marketplace, certified DBEs owned by such persons cannot be counted by a prime contractor toward meeting a DBE contract goal. DBE directories must be revised to provide race and gender information and clearly spell out which firms are eligible for goal credit. Waivers to remove some racial or ethnic groups or white women from credit toward meeting DBE contract goals have been filed by at least two state DOTs.

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Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program Get This Book
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TRB’s National Cooperative Highway Research Program (NCHRP) Report 644: Guidelines for Conducting a Disparity and Availability Study for the Federal DBE Program explores guidelines for state departments of transportation (DOTs) on how to conduct effective and legally defensible disparity and availability studies to meet the requirements of the Disadvantaged Business Enterprise (DBE) program for federally funded projects. The report includes guidance designed to assist DOTs in determining when and if a disparity or availability study is recommended, a model scope of work that may be used in a request for proposals, and detailed recommendations on how to design and implement disparity and availability studies.

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