United States District Court, D. Minnesota
GEYER SIGNAL, INC. and KEVIN KISSNER, Plaintiffs,
MINNESOTA DEPARTMENT OF TRANSPORTATION, MARY PRESCOTT in her capacity as Acting Director of the Office of Civil Rights, and CHARLES A. ZELLE, Defendants, and UNITED STATES OF AMERICA, UNITED STATES DEPARTMENT OF TRANSPORTATION, and FEDERAL HIGHWAY ADMINISTRATION Intervenor Defendants.
Julie A. Doherty, FABYANSKE WESTRA HART & THOMSON, PA, and Hannah R. Stein, NIERENBERG EMPLOYMENT LAW, PLLC, for plaintiffs.
Andrew G. Braniff, UNITED STATES DEPARTMENT OF JUSTICE, CIVIL RIGHTS DIVISION, and Jeffrey Scott Thompson and Richard L. Varco, Jr., MINNESOTA ATTORNEY GENERAL'S OFFICE, for defendants Minnesota Department of Transportation, Mary Prescott and Charles A. Zelle.
Andrew G. Braniff, UNITED STATES DEPARTMENT OF JUSTICE, CIVIL RIGHTS DIVISION, 950 Pennsylvania Avenue Northwest, Room 4520, Washington, DC 20530, for defendants United States of America, United States Department of Transportation, and Federal Highway Administration.
MEMORANDUM OPINION AND ORDER
JOHN R. RUNHEIM, District Judge.
Geyer Signal, Inc. ("Geyer Signal") and Kevin Kissner (collectively, "Plaintiffs") bring this action against the Minnesota Department of Transportation, Alex Tittle, in his capacity as Interim Director of the Office of Civil Rights,  and Charles A. Zelle as Commissioner of Transportation, (collectively, "State Defendants" or "MnDOT"). Kissner is a white male and owns Geyer Signal, a small traffic control business. Plaintiffs challenge MnDOT's implementation of the United States Department of Transportation's ("USDOT") Disadvantaged Business Enterprise ("DBE") Program, which requires that a portion of federal highway construction funds be paid to small businesses owned and controlled by socially and economically disadvantaged individuals, as violative of the Equal Protection Clause. Plaintiffs also bring claims for violations of various federal statutes based on the allegation that the DBE Program unfairly discriminates against Geyer Signal because of its white male ownership. The United States of America, USDOT, and the Federal Highway Administration (collectively, "the Federal Defendants") intervened. The Federal Defendants move for summary judgment and the State Defendants move to dismiss, or in the alternative for summary judgment, arguing that the DBE Program on its face and as implemented by MnDOT is constitutional. Because the Court concludes that Plaintiffs have raised no genuine issue of material fact with respect to the constitutionality of the DBE Program facially or as applied, it will grant Defendants' motions in their entirety.
I. THE DBE PROGRAM
Congress first enacted the DBE Program in 1982. See Surface Transportation Assistance Act of 1982, Pub. L. No. 97-424, § 105(f), 96 Stat. 2097, 2100. Congress has reauthorized the DBE Program numerous times over the past three decades, most recently in 2012, while the present lawsuit was pending. Moving Ahead for Progress in the 21st Century Act, Pub. L. No. 112-141, § 1101(b), 126 Stat. 405 (2012). The DBE Program is implemented through federal regulations contained in 49 C.F.R. Part 26. In each reauthorization of the DBE Program, Congress has set an aspirational goal that USDOT spend at least ten percent of its funds with small businesses owned and controlled by "socially and economically disadvantaged individuals." See, e.g., Pub. L. No. 112-141, § 1101(b)(3). Rather than implementing a nationwide DBE Program, the regulations delegate to each state that accepts federal transportation funds the responsibility to implement and administer a DBE Program tailored to local needs.
To qualify as a DBE a firm must be a small business as defined by Small Business Administration Standards. 49 C.F.R. § 26.65(a); 13 C.F.R. § 121.201. Additionally, a firm's average gross annual receipts over the firm's previous three fiscal years must not exceed $22.41 million. 49 C.F.R. § 26.65(b). The business must also be one
(1) which is at least 51 per centum owned by one or more socially and economically disadvantaged individuals; or, in the case of any publicly owned business, at least 51 per centum of the stock of which is owned by one or more socially and economically disadvantaged individuals; and
(2) whose management and daily business operations are controlled by one or more of such individuals.
15 U.S.C. § 637(d)(3)(C).
Socially disadvantaged individuals are defined as "those who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities." 15 U.S.C. § 637(a)(5). Economically disadvantaged individuals are "socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same business area who are not socially disadvantaged." 15 U.S.C. § 637(a)(6)(A).
The DBE Program creates a rebuttable presumption that Black Americans, Hispanic Americans, Native Americans, Asian-Pacific Americans, Subcontinent Asian Americans, and women are socially and economically disadvantaged. 49 C.F.R. § 26.67(a). To obtain DBE status, these individuals must submit an affidavit attesting to the fact that "each presumptively disadvantaged owner is, in fact, socially and economically disadvantaged." 49 C.F.R. § 26.67(a)(1). Each owner must also certify that his or her personal net worth does not exceed $1.32 million. 49 C.F.R. § 26.67(a)(2). If an owner's personal net worth exceeds this amount, the presumption of economic disadvantage is rebutted. 49 C.F.R. § 26.67(b)(1). Additionally, recipients of federal funds are empowered to hold a proceeding if the recipient has "a reasonable basis to believe that an individual who is a member of one of the designated groups is not, in fact, socially and/or economically disadvantaged." 49 C.F.R. § 26.67(b)(2)-(3).
Individuals that own firms who are not from categories entitling them to a presumption of social and economic disadvantage may apply for DBE certification. 49 C.F.R. § 26.67(d). Recipients of federal funds must make determinations about such individuals on a case-by-case basis and "the applicant firm has the burden of demonstrating to [the recipient], by a preponderance of the evidence, that the individuals who own and control [the firm] are socially and economically disadvantaged." Id.
The Program is aimed not just at DBEs, but also at encouraging the participation of small businesses in general. As such, recipients of federal funds are required to include in their DBE Programs "an element to structure contracting requirements to facilitate competition by small business concerns, taking all reasonable steps to eliminate obstacles to their participation, including unnecessary and unjustified bundling of contract requirements that may preclude small business participation in procurements as prime contractors or subcontractors." 49 C.F.R. § 26.39(a). Such efforts can include arranging race-neutral set asides on prime contracts in a stated amount and ensuring that contracts include work in sizes feasible for small business to accomplish. 49 C.F.R. § 26.39(b).
A. The Program's Operation
1. Goal Setting
Recipients of federal transportation funds are required to set an annual aspirational goal for DBE participation that must be based upon evidence of available DBEs and the level of participation that would be expected of DBEs in the absence of discrimination. 49 C.F.R. § 26.45(a)-(b). Specifically, federal regulations provide that:
Your overall goal must be based on demonstrable evidence of the availability of ready, willing and able DBEs relative to all businesses ready, willing and able to participate 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.
49 C.F.R. § 26.45(b).
In setting its annual goals, recipients must follow the federally mandated two-step process. In step one, recipients are required to "determin[e] a base figure for the relative availability of DBEs." 49 C.F.R. § 26.45(c). The regulations describe use of DBE directories and Census Bureau Data, bidders' lists, data from a disparity study, or the goal of another substantially similar DOT recipient, as a non-exhaustive list of examples of approaches that recipients may use in determining a base figure. Id. In step two, recipients must adjust their base figure if necessary "to reflect the State's determination that more DBEs would be participating absent the effects of discrimination, including race-related barriers to entry." Sherbrooke Turf, Inc. v. Minn. Dep't of Transp., 345 F.3d 964, 971 (8th Cir. 2003) (citing 49 C.F.R. 26.45(d)). Any adjustment made "to account for the continuing effects of past discrimination... must be based on demonstrable evidence that is logically and directly related to the effect for which the adjustment is sought." 49 C.F.R. 26.45(d). After setting its goal, recipients are required to submit the goal and a description of the methodology used to arrive at the goal, to USDOT administration. 49 C.F.R. § 26.45(f). If the USDOT determines that the recipient's "overall goal has not been correctly calculated" or that the "method for calculating goals is inadequate" it may adjust the recipient's goal, or require that the recipient do so. 49 C.F.R. § 26.45(f)(4). Recipients are not allowed to subdivide their annual goals into "group-specific goals." 49 C.F.R. § 26.45(h). Rather, their annual goals "must provide for participation by all certified DBEs." Id.
2. Goal Implementation
After setting its annual goal, a recipient is required to "meet the maximum feasible portion of [its] overall goal by using race-neutral means of facilitating DBE participation." 49 C.F.R. § 26.51(a). DBE participation is race-neutral if a DBE wins a prime contract through normal competitive procedures, is awarded a subcontract on a project that has no DBE goal, or wins a subcontract on a project with a DBE goal where the prime contractor did not consider its DBE status in awarding the subcontract. Id. Federal regulations provide a long list of non-exhaustive race-neutral means that may be used by recipients in meeting their annual goal, including arranging the solicitation, presentation, quantities and specifications of bids to make the bidding process more accessible to DBEs, providing assistance to DBEs to overcome barriers such as inability to obtain bonding or financing, providing technical assistance, ensuring that information about projects reaches DBEs, providing business support services, and establishing programs to assist new start-up firms. 49 C.F.R. § 26.51(b). A recipient's race-neutral means are subject to federal approval and must be submitted to USDOT along with the recipient's overall goal. 49 C.F.R. § 26.51(c).
If a recipient determines that it will be unable to achieve its goal solely through the use of race-neutral means, it must establish contract goals on USDOT-assisted contracts that have subcontracting possibilities to meet the remainder of its overall goal. 49 C.F.R. § 26.51(d), (e)(1). With respect to contract goals, federal regulations allow recipients great flexibility. Recipients are not required to set a contract goal for every USDOT-assisted contract, nor is the percentage level for each contract goal required to meet the overall goal. 49 C.F.R. § 26.51(e)(2). Percentage goals for each contract are to be set based upon such factors as "the type of work involved, the location of the work, and the availability of DBEs for the work of the particular contract." Id. Recipients are required to adjust their use of contract goals throughout the fiscal year, to ensure that the maximum amount of the overall goal is met through race-neutral means, and that use of contract goals does not result in attaining DBE participation beyond the overall goal. 49 C.F.R. § 26.51(f).
Goals set pursuant to the DBE Program are only aspirational. A recipient "cannot be penalized, or treated by [USDOT] as being in noncompliance" with the DBE Program because a recipient's "DBE participation falls short of [its] overall goal, " unless the recipient has not administered its DBE Program in good faith. 49 C.F.R. § 26.47(a). Similarly, prime contractors are not required to meet DBE participation goals on a contract for which a specific goal was set, provided they made good faith efforts to meet the goal. 49 C.F.R. § 26.53(a).
The federal regulations provide guidance on what constitute good faith efforts that must be demonstrated by prime contractors bidding on projects for which a specific contract goal has been set. A prime contractor can meet the good faith requirement in one of two ways. "First, the bidder can meet the goal, documenting commitments for participation by DBE firms sufficient for this purpose." 49 C.F.R., pt. 26, App. A, I. If, however, the prime contractor is unable to meet the contract goal "the bidder can document adequate good faith efforts. This means that the bidder must show that it took all necessary and reasonable steps to achieve a DBE goal... which, by their scope, intensity, and appropriateness to the objective, could reasonably be expected to obtain sufficient DBE participation, even if they were not fully successful." Id. The efforts taken by the bidder "should be those that one could reasonably expect a bidder to take if the bidder were actively and aggressively trying to obtain DBE participation sufficient to meet the DBE contract goal. Mere pro forma efforts are not good faith efforts to meet the DBE contract requirements." 49 C.F.R., pt. 26, App. A, II. The regulations then list examples of good faith efforts such as (1) soliciting bids from all certified DBEs who have the capability to perform the work on the contract through reasonable and available means; (2) breaking up the contract work into economically feasible units to facilitate DBE participation; (3) providing interested and available DBEs with adequate information about the contract; (4) negotiating in good faith with DBEs; and (5) making efforts to assist DBEs in obtaining credit or meeting bonding requirements. 49 C.F.R., pt. 26, App. A, IV. Specifically, "the fact that there may be some additional costs involved in finding and using DBEs is not in itself sufficient reason for a bidder's failure to meet the contract DBE goal, as long as such costs are reasonable." 49 C.F.R., pt. 26, App. A, IV, D(2). "Prime contractors are not, however, required to accept higher quotes from DBEs if the price difference is excessive or unreasonable." Id.
3. Local Conditions
To increase local flexibility in Program implementation, the federal regulations allow recipients to apply for exemptions or waivers from almost any of the Program's requirements. 49 C.F.R. § 26.15. Specifically, recipients may obtain waivers of the provisions pertaining to overall goals, contract goals, or good faith efforts. 49 C.F.R. § 26.15(b). "Program waivers are for the purpose of authorizing [recipients] to operate a DBE program that achieves the objectives of [the Program] by means that may differ" from the existing requirements. Id.
Recipients are also required to monitor for overconcentration of DBEs within particular types of work in their localities. Specifically, the regulations provide that if a recipient determines that an overconcentration of DBE firms in a certain type of work is "unduly burden[ing] the opportunity of non-DBE firms to participate in" that type of work, the recipient "must devise appropriate measures to address this overconcentration." 49 C.F.R. § 26.33(a).
These measures may include the use of incentives, technical assistance, business development programs, mentor-protege programs, and other appropriate measures designed to assist DBEs in performing work outside of the specific field in which [the recipient has] determined that non-DBEs are unduly burdened. [The recipient] may also consider varying [its] use of contract goals, to the extent consistent with § 26.51, to [e]nsure that non-DBEs are not unfairly prevented from competing for subcontracts.
49 C.F.R. § 26.33(b). Recipients are required to seek federal approval of their overconcentration determination as well as any measures they devise to address the problem. 49 C.F.R. § 26.33(c). Once approved, the measures become part of the recipients' DBE Programs. Id.
B. Reasons for the Program and Evidentiary Support
The DBE Program is aimed at, among other goals, "ensur[ing] nondiscrimination in the award and administration of DOT-assisted contracts, " "creat[ing] a level playing field on which DBEs can compete fairly for DOT-assisted contracts, " and "help[ing remove barriers to the participation of DBEs in DOT-assisted contracts." 49 C.F.R. § 26.1(a)-(b), (e). The Program also has a goal of "provid[ing] appropriate flexibility to recipients of Federal financial assistance in establishing and providing opportunities for DBEs." 49 C.F.R. § 26.1(g).
The 2012 reenactment of the DBE Program states that "while significant progress has occurred due to the establishment of the disadvantaged business enterprise program, discrimination and related barriers continue to pose significant obstacles for minority-and women-owned businesses seeking to do business in federally-assisted surface transportation markets across the United States." Pub. L. No. 112-141, § 1101(b)(1)(A).
In each reauthorization of the DBE Program, Congress has considered a plethora of evidence documenting the continued presence of discrimination in transportation projects utilizing federal dollars. Specifically, in reauthorizing the most current version of the DBE Program, Congress held at least forty hearings and roundtables to discuss the discrimination faced by minority- and women-owned businesses, and
received and reviewed testimony and documentation of race and gender discrimination from numerous sources, including congressional hearings and roundtables, scientific reports, reports issued by public and private agencies, news stories, reports of discrimination by organizations and individuals, and discrimination lawsuits, which show ...