Legal Update on Disadvantaged Business Enterprise Programs

Colette Holt & Associates

Legal UpdateLegal Updateonon

Disadvantaged Business Enterprise Disadvantaged Business Enterprise ProgramsPrograms

2012 Missouri Department of Transportation2012 Missouri Department of TransportationEEO ConferenceEEO Conference

Colette HoltColette HoltAttorney at LawAttorney at Law

18 April 201218 April 2012


Legal Standards

City of Richmond v. J.A. Croson Co. City of Richmond v. J.A. Croson Co. (1989)(1989) Strict constitutional scrutiny applies to race-based

government decision making Court struck down Richmond’s 30% MBE quota Government can use spending powers to eradicate

private discrimination Government must be “passive participant” in

discrimination marketplace No need to prove agency discriminated Motive cannot be racial stereotyping or politics


Legal Standards, cont.

““Societal” discrimination not sufficientSocietal” discrimination not sufficient All racial & ethnic groups must suffer in local All racial & ethnic groups must suffer in local

marketplacemarketplace Disparities between population & agency utilization Disparities between population & agency utilization

of M/WBEs is insufficientof M/WBEs is insufficient Race-neutral measures must be seriously Race-neutral measures must be seriously

consideredconsidered Strict scrutiny not fatal in fact: some affirmative Strict scrutiny not fatal in fact: some affirmative

action programs are permissibleaction programs are permissible


Legal Standards, cont.

Strict scrutiny as appliedStrict scrutiny as applied Strong basis in evidence of government’s “compelling

interest” in remedying discrimination Remedies must be “narrowly tailored” to that evidence

Purpose of strict scrutinyPurpose of strict scrutiny Expose “illegitimate notions of racial inferiority or simple

racial politics” Provide a “framework for carefully examining the

importance and the sincerity of the reasons” for using race


Trends

Defendants named in their individual capacities Legal standard: does the conduct “violate clearly

established statutory or constitutional rights of which a reasonable person would have known”

No indemnification & payment of defense costs Increasing reliance on race-neutral programs &

going “race-neutral” pursuant to studies Very low estimates of availability findings of no

disparity due to poor research Lack of economy-wide analysis incorrect conclusion

that government affirmative action is no longer necessary


Trends, cont.

Increased anti-affirmative action law firm interest Attacks continue through litigation, legislation &

state constitutional amendments Increased scrutiny of D/M/WBE annual and contract

goal setting Must be a defensible economic model of markets

Arithmetic is not econometrics Must reflect accepted scientific principles Apply a “but for” adjustment?


Rothe Development Corp. v USDODRothe Development Corp. v USDOD

Federal Circuit Court of Appeals struck down DOD’s SDB program No per se rule on study data age Studies were insufficient to meet strict scrutiny Studies should have controlled for “relative capacity” but

capacity & qualifications may be affected by discrimination

Other statistical and anecdotal evidence was not enough for activist judges


GEOD Corp v NJ TransitGEOD Corp v NJ Transit

“As applied” challenge to DBE Program rejected Court adopted the Illinois & Minnesota DOT case

standards Plaintiff has the burden of persuasion Insufficient to suggest other methods are possible Every race-neutral measure need not be exhausted first Although weaker for Asians, there was evidence of

discrimination against them Some impact on non-DBEs is permissible


H.B.Rowe Co. v. NCDOT

State-funded M/WBE program upheld except for white women M/WBE ownership had a negative effect on revenues,

especially for Blacks, unrelated to “capacity” concerns “Unremediated markets” data were highly relevant Anecdotal evidence confirmed a “good ole boys” network,

different performance standards, perceptions of M/WBE incompetence, etc; evidence need not be “verified”

Every race-neutral measure need not be tried & fail


Recent Litigation Outcomes

Kline v. Pocari & Maryland DOT Challenge to State MBE & USDOT DBE Program Settled with positive Program changes

Kevcon v. US Challenge to SBA 8(a) Program Extensive Congressional record proffered After expert reports were filed, case was dismissed by

plaintiff with prejudice


Pending Cases

AGC of San Diego v. Caltrans Summary judgment in favor of Program Participation by DBE intervenors was crucial Appeal pending

Midwest Fence v. Illinois DOT & Illinois Tollway Pleading stage; motion to dismiss denied Controlling case law upheld IDOT’s DBE Program in

2007 Use of federal record for state-funded program?


DBE Program Revisions49 C.F.R. Part 26

Program oversight: § 26.37 Must include specific monitoring & enforcement

mechanism DBEs must do work committed to at contract award or per

contract modification Recipient must review contract records & monitor work sites

Ensures against: Inadequate on site monitoring, including inadequate commercially

useful function determinations Unauthorized DBE substitutions Slow or no pay Balkanization of responsibility: “DBE compliance is somebody

else’s job”


DBE Program Revisions, cont.

Small Business Participation: § 26.39 Program must include an element to facilitate competition

by small businesses, including unbundling Must be submitted to mode by 2/28/12 Possible strategies

Race-neutral small business setasides Identification by bidders of large projects of elements or

subcontracts for small businesses On contracts without goals, mandated subcontracting Fostering small business joint ventures Soliciting reasonable number of contracts that small firms can

perform Disfavored: SBE contract goals added to DBE contract goals



Accountability & Goal Submission: § 26.47 If overall annual goal isn’t met at the end of the fiscal

year, recipients must: Analyze in detail the reasons for the shortfall between the goal &

awards & commitments Establish specific steps to correct the problems & enable goal

achievement Recipients may be found in noncompliance if:

No analysis is submitted Mode disapproves the analysis & corrective actions Corrective actions are not fully implemented

Goals must have sound method & include potential DBEs



Good Faith Efforts: § 26.53 Primes must receive prior written agency approval to

substitute or terminate a DBE Good cause means:

Failure to execute a contract Failure to perform to normal industry standards Failure to meet reasonable bonding requirements Bankruptcy or credit unworthiness Suspension or debarment from pubic work Determination by the agency of lack of responsibility Voluntary withdrawal by the DBE Ineligibility for goal credit for work committed Death or incapacity of the DBE owner Other good cause determined by the agency, not the contractor



Prime must provide written notice to the DBE DBE has 5 days to respond, unless a shorter period is

necessary for public necessity (e.g., public safety) Also applies to pre-award deletions or substitutions by

offerors in negotiated procurements



Economic Disadvantage: § 26.67 Personal net worth test indexed annually for inflation to

correct reduction & harmonize Part 26 & Part 23 Currently $1.32M Raise threshold & eliminate loopholes?

“Illiquidity” argument for business & home equity is too broad: applies to many other types of assets

Total exclusion benefits the wealthiest & least disadvantaged DBEs racially disproportionate benefit to white women

Punishes partnerships & sole proprietors Promotes poor financial planning by DBEs



DBE Certification: § 26.71 Amends determination regarding control

Certification in additional types of work requires the DBE owner(s) to control that new work

Work type must be described with the most detailed NAICS code available; additional classification systems may be added

DBE may request supplementation of NAICS code that is too broad or vague

DBE work type classifications may be changed if supported by the record



Additional certification rules: § 26.73 Eligibility must be evaluated under current circumstances,

not solely historical info New firms otherwise eligible must be certified; no

exceptions for lack of project completions, profits or demonstrated potential for success



Certification procedures: § 26.83 DBEs remain certified until certification is removed;

certification doesn’t “expire” DBEs can’t be required to “recertify” Certification review, including on site visit, 3 years from

most recent certification or if necessary because of changed circumstances, complaint or other info

Applicants must be advised within 30 days if application is complete & if not what additional info is needed



Interstate certification: § 26.85 Non-home state may accept home state certification

without further procedures Non-home state may require complete copy of home

state application & documents & documents from applications to other states 60 days to determine any specific objections Applicant has burden of proof by preponderance of evidence to

respond Non-home state must issue written response in 30 days All states have good faith duty to cooperate with one another


Additional Issuesfor

Future Rulemaking or Guidance Proliferation of sham joint ventures Inadequate commercially useful functions DBELO reporting to CEO on paper only Inadequate staff resources & training Inconsistent regional & modal guidance Imposition of penalties for poor Program administration

Criminal prosecutions filling the void Commercially useful function investigations indictments Lack of expertise of prosecutors confusion of Program standards

Colette Holt & Associates 23

Disparity Study ObjectivesDisparity Study Objectives

Provide litigation defenseProvide litigation defense Studies aren’t challenged; programs are challenged

Meet regulatory requirementsMeet regulatory requirements Set overall, annual D/M/WBE goal Develop D/M/WBE contract goals

Make administrative improvementsMake administrative improvements Obtain confidential customer feedback Create focus on data collection & monitoring


Recommended Disparity Study ElementsRecommended Disparity Study Elements

Determine utilizationDetermine utilization Empirically establish geographic & product marketplacesEmpirically establish geographic & product marketplaces Use highest level of detail (4 digit NAICS vs. “construction”) to

establish compelling interest & narrowly tailor program elements Fill in missing non- D/M/WBE subcontractor data Calculate race-neutral participation for DBE programs Do not limit the size of contracts studied (e.g., >$500K) Obtain large majority of contracts & contract dollars (e.g., 85%)


Recommended Disparity Study Elements, Recommended Disparity Study Elements, cont.cont.

Use the “Custom Census” availability methodologyUse the “Custom Census” availability methodology Create a database of relevant agency projects Count all businesses in the relevant markets Identify firms’ industries & locations Identify & verify all listed M/W/DBEs in those markets



Use the “Custom Census” because it:Use the “Custom Census” because it: Provides dollar-weighted availability estimates to set

overall, annual D/M/WBE goals Provides detailed availability estimates to set DM/WBE

contract goals Casts a “broad net” as held by courts to meet

contracting affirmative action programs’ remedial purpose

Counts all businesses in relevant markets, not just those known to the agency or willing to respond to surveys



Do not determine availability by surveys unnecessarily lower estimates

Do not adjust for “capacity” unnecessarily lower estimates

Do not conduct separate prime & sub calculations Unrealistic, too simplistic & maintains barriers



Do not use the “Bidders List” ApproachDo not use the “Bidders List” Approach Existing discrimination may lead to under-representation Popularity of D/M/WBE program may lead to over-

representation “Apples to oranges” if lists are combined Remedial aspect of the Program is lost by looking

only at current results without regard to the continuing effects of discrimination



Do not conduct a “capacity” analysisDo not conduct a “capacity” analysis No common definition Ignores the elasticity of supply, especially in construction What about subcontracts? Disparities persist even when “capacity” variables are controlled for Variables (revenues, years in business, bonding limits, etc.) are impacted by

discrimination Ignores the D/M/WBE program’s remedial nature by locking in the

results of past discrimination “Capacity” rejected by courts when explained by expert testimony



““Disparity” versus “availability” studyDisparity” versus “availability” study Availability is a subset of disparity (Part 26 step 1) Disparity elements (Part 26 step 2)

What would availability be in a discrimination free world? Qualitative determination Quantitative measurement

Statistical & anecdotal evidence of discrimination Program implementation review

Effect of the DBE program ≠ downward adjustment



Study scopeStudy scope Use 5 years of contract data Types of contracts

USDOT-funded if DBE program Locally-funded Informal procurements?

Include a program review Evaluate the effectiveness of race-neutral measures Examine utilization on no-goals contracts



Conduct an agency contracts disparity analysisConduct an agency contracts disparity analysis Necessary but not sufficient for D/M/WBE programs

because of the effect of remedial market intervention Necessary for state & local programs A finding of no disparity isn’t the end of the analysis

Effects of the D/M/WBE program Continuing impact of discrimination

Conduct a quantitative large scale surveyConduct a quantitative large scale survey DBEs’ vs. non-D/M/WBEs’ business experiences on

public & non-goals jobs Must conduct non-response testing



Conduct an economy-wide disparity analysisConduct an economy-wide disparity analysis Look outside agency’s own contracting activities D/M/WBEs’ vs. non-DM/W/BEs’ business formation rates

& earnings from Census data sources Credit market discrimination analysis based on Federal

Reserve & SBA surveys Critical element of legal defense for contracting

affirmative action programs


Recommended Disparity Study Elements, Recommended Disparity Study Elements,

cont.cont. Include anecdotal evidenceInclude anecdotal evidence

Necessary but not sufficient Explore current effects of past biases & exclusion Examine denials of full & fair access to government

contracts & subcontracts Evaluate existing programs for effectiveness in

remedying discrimination & providing opportunities


Conclusion:Conclusion:Study Methodology MattersStudy Methodology Matters

Does the approach meet legal & social science standards?Does the approach meet legal & social science standards? Does the agency want a strong remedial program?Does the agency want a strong remedial program? Do the results from prior studies comport with reality?Do the results from prior studies comport with reality?

Insufficient disparities for Blacks in Georgia Insufficient disparities for women in construction Insufficient disparities for Hispanics in California Contracts only under $1M subject to the program for city with a $50B

budget


Recommendations

Don’t lose sight of the D/M/WBE program’s remedial purpose; goals must pass the reality test

Focus on program implementation, not just program justification

Document, document, document Collect complete contract data NOW; get a good

electronic compliance system Conduct high quality studies; you get what you pay

for Know when to hold ‘em, know when to fold ‘em


Colette HoltColette Holt225 Rishell Drive225 Rishell DriveOakland, CA 94619Oakland, CA 94619773.255.6844773.255.6844colette.holt@[email protected]

Legal Update on Disadvantaged Business Enterprise Programs

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