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

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

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86 Sherbrooke Turf, Inc. v. Minnesota Department In reversing the district court on the as applied challenge, the of Transportation court agreed with the analysis in Sherbrooke that although a recipient need not demonstrate an independent compelling Mn/DOT's implementation of Part 26, based on an avail- interest for its DBE Program, it is necessary to undertake an "as ability study, was held to be constitutional.374 After holding applied" inquiry into whether the state's program is narrowly that Congress had ample evidence of discrimination against tailored to its marketplace. While both sides and the court DBEs in the market for Federal-aid transportation contracts, agreed that WSDOT's program complied with Part 26, the the Eighth Circuit noted: court rejected the state's position that its "DBE program is con- Following promulgation of the current DOT regulations, stitutional because it comports with the federal statute and reg- MnDOT commissioned . . . [a] study [of] the highway contract- ulations."379 A recipient independently must meet the narrow ing market in Minnesota. . . . Based on NERA's study, MnDOT tailoring requirement. "To the extent the federal government adopted an overall goal of 11.6 percent DBE participation for delegates this tailoring function, a State's implementation federally assisted highway projects in fiscal year 2001. MnDOT becomes critically relevant to a reviewing court's strict predicted that it would need to meet nine percent of that overall goal through race- and gender-conscious means, based on the scrutiny."380 The Ninth Circuit was persuaded by U.S.DOT's fact that DBE participation in state highway contracts dropped argument that race-conscious goals can only be applied by from 10.25 percent in 1998 to 2.25 percent in 1999, when its pre- recipients in those localities where the effects of discrimination vious DBE program was suspended by the district court's injunc- are present. "As the United States correctly observed in its brief tion in Sherbrooke. . . . Sherbrooke presented evidence attacking and during oral argument, it cannot be said that TEA-21 is a the reliability of the data NERA used in determining its recom- mended overall goal. But Sherbrooke failed to establish that bet- narrowly tailored remedial measure unless its application is lim- ter data was [sic] available or that MnDOT was otherwise unrea- ited to those States in which the effects of discrimination are sonable in undertaking this thorough analysis and in relying on actually present."381 Grantees must proffer evidence of discrim- its results. The precipitous drop in DBE participation in 1999, ination to apply race-conscious measures to meet the annual when no race-conscious methods were employed, supports goal, apparently in addition to meeting the mandates of Part 26. MnDOT's conclusion that a substantial portion of its 2001 over- all goal could not be met with race-neutral measures. . . . On this Not only must WSDOT prove that discrimination has cur- record, we agree with the district court that the revised DBE pro- rent effects in its market but also that such discrimination must gram serves a compelling government interest and is narrowly have affected all of the presumptively socially disadvantaged tailored, on its face and as applied in Minnesota.375 groups included in Part 26.382 "We have previously expressed similar concerns abut the haphazard inclusion of minority In Sherbrooke's companion case, the Nebraska Department groups in affirmative action programs ostensibly designed to of Roads (NDOR) DBE goal based on an availability study376 remedy the effects of discrimination. . . . [E]ach of the princi- was upheld. "Having carefully reviewed the trial record, we pal minority groups benefited by Washington's DBE pro- conclude that Gross Seed, like Sherbrooke, failed to prove gram . . . must have suffered discrimination within the State."383 that the revised DBE program is not narrowly tailored as The court rejected WSDOT's approved goal-setting method- applied in Nebraska."377 ology that closely tracked the Sample Program384 developed by U.S.DOT. "Both Minnesota and Nebraska had hired outside Western States Paving Co., Inc. v. Washington State consulting firms to conduct statistical analyses of the availabil- Department of Transportation ity and capacity of DBEs in their local markets, and the Eighth Circuit relied upon those studies to hold that the States' DBE The Ninth Circuit Court of Appeals held while the DBE programs independently satisfied strict scrutiny's narrow tailor- Program's legislation and regulations satisfy strict constitu- ing requirement."385 In contrast, WSDOT had chosen option 1 tional scrutiny on their face, Washington State Department in 26.45(c) to determine its Step 1 base figure of DBE avail- of Transportation's (WSDOT's) FFY 2000 implementation of ability: divide the number of certified DBEs by the total the regulations was not sufficiently narrowly tailored.378 379 Id. at 996. 374 NERA Economic Consulting. September 2005. "Race, Sex, and Business 380 Id. at 997, citing Sherbrooke. Enterprise: Evidence from the State of Minnesota." 381407 F.3d at 998. 375Sherbrooke, 345 F.3d. at 97374. The consultant provided expert deposition 382The opinion recognizes in the discussion of Congress' narrow tailoring that testimony regarding the data, methods, and findings of its study during the dis- Part 26 does not permit disaggregated goals by race, ethnicity and gender. Id. trict court proceedings. at 990. 376MGT of America, Inc., September 2000, "Availability and Goal Setting Study." 383407 F.3d at 99899. 377Sherbrooke, at 974. The court did not opine on the method used to calculate avail- 384See http://osdbuweb.dot.gov/documents/pdf/dbe/SampleDB.pdf. (viewed ability for the NDOR, which was a bidders list approach at "capacity" adjustment. 12 December 2008). 378 385 407 F.3d 983 (9th Cir. 2005). 407 F.3d at 997.

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