Legal Update on Disadvantaged Business Enterprise Programs

1. Legal UpdateonDisadvantaged Business Enterprise Programs 2012 Missouri Department of Transportation EEO Conference Colette Holt Attorney at Law 18 April 2012

2. Legal Standards • City of Richmond v. J.A. Croson Co. (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

3. Legal Standards, cont. • “Societal” discrimination not sufficient • All racial & ethnic groups must suffer in local marketplace • Disparities between population & agency utilization of M/WBEs is insufficient • Race-neutral measures must be seriously considered • Strict scrutiny not fatal in fact: some affirmative action programs are permissible

4. Legal Standards, cont. • Strict 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 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

5. 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

6. 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?

7. Rothe 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

8. GEOD 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

9. 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

10. 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

11. 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?

12. 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”

13. 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

14. DBE Program Revisions, cont. 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

15. DBE Program Revisions, cont. 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

16. DBE Program Revisions, cont. • 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

17. DBE Program Revisions, cont. 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

18. DBE Program Revisions, cont. 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

19. DBE Program Revisions, cont. 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

20. DBE Program Revisions, cont. 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

21. DBE Program Revisions, cont. 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

22. 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

23. Disparity Study Objectives Provide litigation defense Studies aren’t challenged; programs are challenged Meet regulatory requirements Set overall, annual D/M/WBE goal Develop D/M/WBE contract goals Make administrative improvements Obtain confidential customer feedback Create focus on data collection & monitoring 23

24. Recommended Disparity Study Elements • Determine utilization • Empirically 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%)

25. Recommended Disparity Study Elements, cont. • Use 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

26. Recommended Disparity Study Elements, cont. • 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

27. Recommended Disparity Study Elements, cont. 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 27

28. Recommended Disparity Study Elements, cont. Do 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 28

29. Recommended Disparity Study Elements, cont. Do 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 29

30. Recommended Disparity Study Elements, cont. • “Disparity” 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

31. Recommended Disparity Study Elements, cont. • Study 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

32. Recommended Disparity Study Elements, cont. • Conduct 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 survey • DBEs’ vs. non-D/M/WBEs’ business experiences on public & non-goals jobs • Must conduct non-response testing

33. Recommended Disparity Study Elements, cont. • Conduct 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

34. Recommended Disparity Study Elements, cont. • Include 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

35. Conclusion:Study Methodology Matters • Does the approach meet legal & social science standards? • Does the agency want a strong remedial program? • 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

36. 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

37. Colette Holt 225 Rishell Drive Oakland, CA 94619 773.255.6844 colette.holt@mwbelaw.com