Federal Court Upholds Disadvantaged Business Enterprises Regulations

Federal Court Upholds Disadvantaged Business Enterprises Regulations

Nora Cusick - Querrey & Harrow, Ltd. – Chicago, Illinois

The United States government established the Disadvantaged Business Enterprises (DBE’s) program in 1983, in order to remedy past discrimination in the construction industry. “DBE’s are small businesses that are owned and controlled by socially and economically disadvantaged individuals.”  Midwest Fence Corp. v. United States DOT, 840 F.3d 932, 935 (2016). The federal DBE program set a national goal of spending at least 10% of federal highway funds in contracting with DBEs.

Under the federal program, a state will receive federal funding for transportation projects, in exchange for establishing their own goals for DBE participation. The federal program establishes a way for states to implement their own DBE programs and goals for transportation projects which are federally funded. States must first use race and gender neutral means to meet their goals; the program provides a non-exhaustive list of such techniques for promoting DBE participation that are race and gender-neutral.

While Illinois uses many of the techniques on that list, Illinois has never met its participation goal through those means. Therefore, the Illinois Department of Transportation (IDOT) sets individual DBE participation goals on contracts for federally funded transportation projects. These goals are only set on contracts for projects where subcontracting is possible. This is because so many DBEs are smaller businesses, and often only have subcontracting capabilities. Based on the project, IDOT evaluates the type of work that could be performed by a DBE subcontractor and sets a DBE participation goal for the contract. 

When bidding on federally funded contract with DBE participation goals, prime contractors are required to either meet the goals by subcontracting a percentage of the contract to DBE’s or show they made good faith efforts using good business judgment to subcontract to non-DBEs. Upon a showing of good faith efforts, a prime contractor will be granted a front-end waiver and win the bid for the contract. If their front-end waiver is denied, a prime contractor can appeal for reconsideration. However, if the appeal is denied, the contract will go to the next lowest bidder.

While the front-end waivers are practical in theory, one non-DBE subcontractor challenged the constitutionality of the waivers, and the entire DBE program itself. In Midwest Fence, a contractor filed a lawsuit challenging the constitutionality of the DBE programs. Midwest Fence was smaller in size, as a specialty contractor who dealt with mostly guardrails and fencing; thus, most of their work came from subcontracting. However, they did not qualify as a DBE.

Midwest Fence argued that the DBE program was not fair to non-DBE subcontractors and therefore unconstitutional. Because DBE contract goals were only placed on contracts with subcontracting possibilities, they reasoned that non-DBE subcontractors were losing business to DBE subcontractors because of the goals. However, prime contractors were not losing business because there were no DBE goals on the prime contract itself. Therefore, the burden was greater on non-DBE subcontractors than any other type of contractor, and therefore unconstitutional.

Midwest Fence further argued that the program was unconstitutional because the standard of a prime contractor’s “good faith efforts” for a front-end waiver was too vague. They reasoned that because the “good faith efforts” standard was too vague, prime contractors were meeting DBE contract goals in fear of losing the bid, instead of attempting to show “good faith efforts” for a waiver. The vagueness created a de facto quota system, which rendered the program unconstitutional.

However, the U.S. Seventh Circuit Court of Appeals found that on its face, the program was constitutional. First, the program did not, on its face, place a greater burden on non-DBE subcontractors, and therefore was not unconstitutional. The court noted that the undue burden that non-DBE subcontractors, such as Midwest Fence, could be facing was just a theory. Midwest Fence failed to provide any actual evidence that non-DBE subcontractors were losing money or business opportunities due to the DBE program.

The court reasoned they could not find the program unconstitutional based on a theory, and therefore held the program constitutional. Further, while the court said that non-DBE subcontractors would have to bear some of the burden in order to remedy past discrimination, that burden did not make the program unconstitutional.

The court found Midwest Fence’s vagueness argument to have no merit. Because each contract had different requirements, the good faith efforts standard was based on the need for flexibility from contract to contract. The program called for a prime contractor to rely on their good business judgment when dealing with DBE contract goals and whether to subcontract to DBEs or not. Because of the need for that flexibility, the court reasoned that the standard was not vague or unconstitutional.

Further, the court noted that the program specifically prevented states from denying prime contracting bids because a prime contractor did not meet the DBE contracting goal. The court also looked at IDOT’s history in dealing with the front-end waivers; while it was true IDOT had not granted a large number of waivers, it was also true they had not denied a large number of waivers. (In 2007, IDOT granted 57 out of 63 front end waivers and in 2012 it granted 21 out of 35). Midwest Fence could not argue that IDOT was responsible for denying waivers that prime contractors had not requested. Thus, the court found the program was constitutional. 

Puma RihannaSports brands | NIKE HOMME