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NORTHERN CONTRACTING, INC. v. STATE

September 8, 2005.

NORTHERN CONTRACTING, INC., an Illinois Corporation, Plaintiff,
v.
THE STATE OF ILLINOIS, ILLINOIS DEPARTMENT OF TRANSPORTATION, KIRK BROWN, in his capacity as the Illinois Secretary of Transportation, and GORDON SMITH, in his capacity as the Bureau Chief of the Bureau of Small Business Enterprises, Defendants.



The opinion of the court was delivered by: REBECCA PALLMEYER, District Judge

MEMORANDUM OPINION AND ORDER

Plaintiff, Northern Contracting, Inc. ("Northern"), an Illinois highway contractor, challenges the constitutionality of state law provisions designed to guarantee the award of a portion of highway subcontracts to disadvantaged business enterprises ("DBEs"). Northern brought this action against the State of Illinois, the Illinois Department of Transportation ("IDOT"), the United States Department of Transportation ("USDOT"), and federal and state officials, seeking a declaration that the federal statutory provisions, federal implementing regulations, and state statute authorizing the Illinois DBE program, as well as the Illinois DBE program itself, are unlawful and unconstitutional. In an earlier order, the court granted summary judgment in favor of the Federal Defendants, but found that there was a material issue of fact regarding whether the Illinois DBE program is narrowly tailored to achieve the federal government's compelling interest. Following the issuance of the court's opinion, IDOT issued its fiscal year 2005 DBE program, which differed substantially from its earlier DBE programs. The court subsequently presided over a two-week bench trial in October 2004, focusing on this 2005 program. For the reasons set forth below, the court finds in favor of Defendants.

FACTUAL BACKGROUND

  I. Parties

  Defendant IDOT is the Illinois state agency responsible for planning, construction, and maintenance of Illinois's transportation network, including highways and bridges, airports, public transit, rail freight, and rail passenger systems. With an annual budget of approximately $5 billion, IDOT administers all state-funded and federal-aid highway construction projects in the State of Illinois, subject to USDOT Regulations and the state's own Business Enterprise for Minorities, Females and Persons with Disabilities Act, 30 ILCS 575/1, et seq. (West 1996) (hereinafter, the "Business Act").

  The individual Defendants include Kirk Brown, the Illinois Secretary of Transportation until December 2002; Timothy Martin, the current Secretary; Gordon Smith, Chief of the Bureau of Small Business Enterprises and the Liaison Officer for the IDOT DBE program from June 16, 2002 until April 30, 2003; and Carol Lyle, who holds that position today and is therefore responsible for developing and implementing all aspects of IDOT's DBE program and for promoting the utilization of women and minorities consistent with federal regulations. Plaintiff Northern Contracting, Inc. is a highway contractor specializing in guardrail and fencing work. Northern bids on both state and local government work, as well as commercial work, generally as a subcontractor. On average, Northern bids as a subcontractor on approximately 200 to 250 IDOT and county projects each year. In doing so, it competes against a number of minority contractors, though, as discussed in this court's summary judgment opinion, Plaintiff has presented little evidence that is has suffered anything more than minimal revenue losses due to the program. See Northern Contracting, Inc. v. State of Illinois, No. 00 C 4515, 2004 WL 422704, *24 (N.D. Ill. Mar. 3, 2004).

  II. Relevant Statutes

  A. TEA-21 and Federal Implementing Regulations

  Since 1982, federal highway statutes have required that ten percent of federal highway construction funds be paid to small businesses owned and controlled by "socially and economically disadvantaged individuals," as that term is defined in the Small Business Act. See Surface Transportation Assistance Act of 1982, Pub.L. No. 97-424 § 105(f), 96 Stat. 2097, 2100. In 1998, Congress passed the Transportation Equity Act for the 21st Century ("TEA-21"), which authorized USDOT to expend funds for federal surface transportation programs during fiscal years 1998-2003. Pub.L. No. 105-178, § 1101(b)(1), 112 Stat. 107, 113. Prior to the expiration of TEA-21, the President signed into law the Surface Transportation Extension Act of 2003, Pub.L. No. 108-88, 117 Stat. 1110, which extended the provisions of TEA-21 for an additional five months, through February 29, 2004. Two years later, Congress further extended the Act through passage of the Surface Transportation Extension Act of 2005, Pub.L. No. 109-14, 119 Stat. 324 (May 31, 2005).

  Pursuant to these statutes, USDOT issued implementing regulations entitled "Participation by Disadvantaged Business Enterprises in Department of Transportation Financial Assistance Programs." 64 Fed. Reg. 5096 (Feb. 2, 1999) (codified in 49 C.F.R. Pt. 26) (the "Regulations"). The Regulations apply to all "Recipients" of federal highway funds, defined as "any entity, public or private, to which DOT financial assistance is extended, whether directly or through another Recipient, through the programs of the FAA, FHWA, or FTA, or who has applied for such assistance." 49 C.F.R. § 26.5. The parties agree that the State of Illinois and IDOT are Recipients within this definition. As a condition of receiving federal highway funds, Recipients must establish a DBE program to increase the participation of disadvantaged business enterprises in the construction industry, and must set an overall goal for DBE participation in USDOT-assisted contracts. 49 C.F.R. §§ 26.21; 26.45(a). The Regulations direct that at least ten percent of federal highway construction funds be paid to DBEs, though this provision represents "an aspirational goal at the national level." 49 C.F.R. § 26.41(b). This goal "does not authorize or require Recipients to set overall or contract goals at the 10 percent level, or any other particular level, or to take any special administrative steps if their goals are above or below 10 percent." 49 C.F.R. § 26.41(c). Moreover, USDOT may grant an exemption or waiver from nearly all aspects of the program, including any provision related to administrative requirements, overall goals, contract goals, or good faith efforts. 49 C.F.R. § 26.15(b).

  1. The Goal-Setting Process

  The Regulations outline the process for setting the Recipient's overall DBE participation goal. Under the Regulations, the goal "must be based on demonstrable evidence of the availability of ready, willing and able DBEs relative to all business ready, willing and able to participate" on its USDOT-assisted contracts (hereinafter, the "relative availability of DBEs"). 49 C.F.R. § 26.45(b). The goal must also reflect the Recipient's determination of the level of DBE participation it "would expect absent the effects of discrimination." Id. This determination is the result of a two-step process set forth in the Regulations. The first step directs the Recipient to determine "a base figure for the relative availability of DBEs." 49 C.F.R. § 26.45(c). The Regulations present a number of examples of approaches a Recipient may employ in determining a base figure, including: (1) use of DBE directories and census data; (2) use of a bidders list; (3) use of data from a disparity study; (4) use of the goal of another Recipient in the same, or a substantially similar, market, adjusted for differences in the Recipient's market and contracting program, as a base figure of the Recipient's goal; or (5) other methods to determine a base figure, as long as such methods are based on demonstrable evidence of local market conditions and are designed ultimately to attain a goal that is rationally related to the relative availability of DBEs in the relevant market. Id.

  Once the Recipient has identified its base figure, the second step of the goal-setting process requires the Recipient to examine all available evidence in the jurisdiction and adjust the base figure accordingly to arrive at the overall goal. 49 C.F.R. § 26.45(d). The Regulations mandate that "many types of evidence" be considered, including: (1) the current capacity of DBEs to perform work in the Recipient's contracting program, as measured by the volume of work performed in recent years, and (2) evidence from disparity studies within the jurisdiction, to the extent such evidence is not already accounted for in the base figure. Id. In addition, if available, the Recipient must consider evidence from related fields that affect the opportunities for DBEs to form, grow, and compete, including (1) statistical disparities in the ability of DBEs to obtain the financing, bonding, and insurance required to perform the work in the program, and (2) data on employment, self-employment, education, training, and union apprenticeship programs, to the extent they relate to the opportunities for DBEs to participate in the Recipient's programs. Id. If the Recipient attempts to make an adjustment to the base figure "to account for the continuing effects of past discrimination (often called the `but for factor') or the effects of an ongoing DBE program, the adjustment must be based on demonstrable evidence that is logically and directly related to the effect for which the adjustment is sought." Id. In setting the overall goal, the Recipient must provide for public participation, including consultation with minority, women's, and general contractor groups and community organizations which "could be expected to have information concerning the availability of disadvantaged and non-disadvantaged businesses, the effects of discrimination on opportunities for DBEs, and [the Recipient's] efforts to establish a level playing field for the participation of DBEs." 49 C.F.R. § 26.45(g)(1). If a Recipient does not have an approved DBE program or overall goal, or if it fails to implement its program in good faith, it is "in noncompliance with" the Regulations. 49 C.F.R. § 26.47(b). A Recipient cannot, however, be penalized, or treated by USDOT as being in noncompliance with the Regulations, merely because its DBE participation falls short of its overall goal, unless it has failed to administer its program in good faith. 49 C.F.R. § 26.47(a).

  When submitting its DBE goal to USDOT, a Recipient must include a description of the methodology used to establish the goal, including the base figure and the evidence with which it was calculated, as well as the adjustments made to the base figure and the evidence relied on for such adjustments. 49 C.F.R. § 26.45(f)(3). The Regulations also recommend the inclusion of a summary listing of the relevant available evidence in the jurisdiction and, where applicable, an explanation of why the Recipient did not use that evidence to adjust the base figure. Id. Further, the Recipient must include its projection of the portions of the overall goal it expects to meet through race-neutral and race-conscious measures. 49 C.F.R. §§ 26.45(f)(3); 26.51(c).

  2. Preferences for Race-Neutral Measures

  Under the Regulations, a recipient must meet the "maximum feasible portion" of its overall goal through race-neutral means.*fn1 49 C.F.R. § 26.51(a). Race-neutral means include providing assistance in overcoming limitations such as inability to obtain bonding or financing by simplifying the bonding process, reducing bonding requirements, eliminating the impact of surety costs from bids, and providing services to help DBEs and other small businesses obtain bonding and financing. 49 C.F.R. § 26.51(b).

  If a Recipient projects it will not be able to meet its overall goal through solely race-neutral means, it must establish contract goals to the extent necessary to achieve the overall goal. 49 C.F.R. § 26.51(d). Contract goals may be used only on those USDOT-assisted contracts that have subcontracting possibilities. 49 C.F.R. § 26.51(e)(1). Further, a Recipient must adjust its use of race-neutral and/or race-conscious measures if it determines during the course of the year that it will exceed or fall short of its overall goal. 49 C.F.R. § 26.51(f)(2). If a Recipient has succeeded in meeting or exceeding its overall goals through solely race-neutral means for two consecutive years, it need not make a projection of the amount of its goal it can meet using race-neutral means in the next year. 49 C.F.R. § 26.51(f)(3). If the Recipient obtains DBE participation that exceeds its overall goal in two consecutive years through the use of contract goals, it must reduce its use of contract goals proportionately in the following year. 49 C.F.R. § 26.51(f)(4). The Regulations provide, further, that a Recipient may not use quotas for DBEs on USDOT-assisted contracts and may not set aside contracts for DBEs on USDOT-assisted contracts except in limited circumstances "when no other method could be reasonably expected to redress egregious instances of discrimination." 49 C.F.R. § 26.43. Once a DBE goal has been set, a Recipient may only award a prime contract to a bidder/offeror that documents that it has either (1) obtained enough DBE participation to meet the goal, or (2) made adequate good faith efforts to meet that goal, even if it did not succeed in obtaining enough DBE participation to do so. 49 C.F.R. § 26.53(a). Examples of the types of actions a Recipient should consider as part of the bidder's good faith efforts to obtain DBE participation include soliciting interest of DBEs at pre-bid meetings; advertising and/or written notices; breaking out contract work items into economically feasible units to facilitate DBE participation, even where the prime contractor might otherwise prefer to perform these work items with its own forces; providing interested DBEs with adequate information about the plans, specifications, and requirements of the contract; negotiating in good faith with interested DBEs; declining to reject DBEs as unqualified without sound reasons based on a thorough investigation of their capabilities; making efforts to assist interested DBEs in obtaining bonding, lines of credit, or insurance as required by the Recipient or contractor; making efforts to assist interested DBEs in obtaining necessary equipment, supplies, materials, or related assistance or services; and effectively using the services of available minority/women community organizations, contractors' groups, and government business assistance offices. 49 C.F.R. pt. 26, Appendix A § IV. A higher bid from a DBE than from a non-DBE is not a sufficient reason for a prime contractor's failure to meet the DBE goal on a contract, unless the difference is "excessive or unreasonable." 49 C.F.R. pt. 26, Appendix A § IV(D)(2). DBEs who make bids on prime contracts are also bound by these requirements. 49 C.F.R. § 26.53(g). In determining whether a prime contractor has met a contract goal, the Recipient is directed to "count the work the DBE has committed to performing with its own forces [that is, the amount of work that the prime contractor is not subcontracting out to other firms] as well as the work that it has committed to be performed by DBE subcontractor and DBE suppliers." Id.

  3. Qualifications for DBE Status

  To qualify as a DBE, a contractor must be independently owned and operated, not dominant in its field of operation, and at least 51 percent owned and controlled by one or more socially and economically disadvantaged individuals. TEA-21 § 1101(b)(2); 15 U.S.C. §§ 632(a)(1); 637(a)(6)(A); 637(d). "Socially disadvantaged individuals" are "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 "those socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capacity 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). Recipients "must rebuttably presume" that women and members of certain racial minority groups are socially and economically disadvantaged individuals and must require each presumptively disadvantaged business owner to submit a signed, notarized certification that he or she is, in fact, socially and economically disadvantaged. 49 C.F.R. § 26.67(a)(1). A firm does not qualify for DBE status, however, if its average annual gross receipts over the preceding three fiscal years exceed $16.6 million, as adjusted by USDOT for inflation. TEA-21 § 1101(b)(2)(A). Further, any individual whose personal net worth exceeds $750,000 is not economically disadvantaged. 49 C.F.R. § 26.67(b)(1). Nevertheless, a firm owned by an individual who is not presumptively disadvantaged may qualify as a DBE if it can demonstrate that "the individuals who own and control" the firm are in fact socially and economically disadvantaged. 49 C.F.R. § 26.67(d). Recipients have the responsibility to ensure that DBEs attest to the accuracy of the information provided to the Recipient and continue to meet the requirements for that status. 49 C.F.R. § 26.83(c)(7)(ii). Recipients must require each individual owner of a firm applying to participate as a DBE to certify that he or she has a personal net worth that does not exceed $750,000. 49 C.F.R. § 26.67(a)(2). Any person may file with the Recipient a written complaint alleging that a DBE-certified firm is ineligible for specific reasons. 49 C.F.R. § 26.87(a). When such a complaint is made, the Recipient must review all available information concerning the firm and, if it determines that there is reasonable cause to believe the firm is ineligible, provide written notice to that firm setting forth the reasons for the proposed determination and give the firm an opportunity for an informal hearing on the matter. 49 C.F.R. § 26.87(a), (d)-(k).

  B. Illinois DBE Program

  Pursuant to these Regulations, IDOT is, as a recipient of federal highway funds, required to file an annual DBE goal and methodology with the Federal Highway Administration. The court's memorandum order and opinion on the parties' cross motions for summary judgment examined IDOT's DBE plans for fiscal years 2000, 2002, and 2003.*fn2 Since the issuance of that opinion on March 3, 2004, IDOT has completed and issued its fiscal year 2005 DBE plan. In light of the fact that Plaintiff is seeking prospective relief, and not specific damages for, say, loss of a contract in 2002, the court will focus on IDOT's fiscal year 2005 plan and consider whether there is a compelling need for such a program going forward, and whether the plan is a narrowly-tailored remedy for discrimination. See Builders Ass'n of Greater Chicago v. City of Chicago, 298 F.Supp.2d 725, 732 (N.D. Ill. 2003) (where plaintiff association sought to enjoin City's minority set-aside program, court focused on "whether there is sufficient evidence [at present] of a continuing need, and of narrow-tailoring, so as to cause the program to pass constitutional muster.").

  1. Fiscal Year 2005 DBE Plan

  In June 2004, IDOT retained Colette Holt as a consultant to assist with the formulation of its fiscal year 2005 DBE plan ("FY2005 Plan"). (Trial Transcript, hereinafter "T.T.," at 26.) Ms. Holt served as the principal drafter of IDOT's FY2005 Plan, and outlined the drafting process in her testimony before the court.*fn3 (Id. at 27.) In setting its overall goal for the FY2005 Plan, IDOT followed the two-step process set forth in 39 C.F.R. pt. 26: (1) calculation of a base figure for the relative availability of DBEs and (2) consideration of a possible adjustment to the base figure to reflect the effects of the DBE program and the level of participation that would be expected but for the effects of past and present discrimination. (IDOT's FY2005 Overall DBE Goal Submission, Defendant's Trial Ex. 28, hereinafter "FY2005 Submission," at 1; 49 C.F.R. § 26.45.)

  a. Step 1: Calculation of Base Figure

  In order to calculate the overall availability of DBEs for the FY2005 Plan, Holt and IDOT retained National Economic Research Associates, Inc. ("NERA"), a Chicago-based consulting firm. (T.T. at 37.) As explained above, 49 C.F.R. § 26.45(c), a Recipient may calculate its base estimate of DBE availability using one of five methods. In prior plans, IDOT had utilized a bidders list to calculate the relative availability of DBEs, pursuant to 49 C.F.R. § 26.45(c)(2). Under that approach, which IDOT believed to be the best available at the time, IDOT determined the relative availability of DBEs by reference to its existing list of pre-qualified and pre-registered*fn4 construction and professional consulting firms.*fn5 When determining the relative availability of DBEs for the FY2005 Plan, however, IDOT commissioned NERA to conduct a custom census to determine whether a more accurate means of determining the relative availability of DBEs might be available. Dr. Jon Wainwright, the economist who conducted the NERA study, testified that he did not believe that the "bidders list" approach was appropriate for measuring the availability of DBEs "because it imports potential bias on the part of recipients directly into the measure." (T.T. at 732.) Thus, if the recipient agency itself had discriminated against DBEs, their availability, as reflected in the bidders list, may be lower than their actual availability in the marketplace. (Id.)

  In developing its own methodology, NERA relied on 49 C.F.R. § 26.45(c)(5), which authorizes a Recipient to utilize alternative methods (beyond those specifically identified in the Regulations) to determined the relative availability of DBEs, so long as the alternative methodology is "based on demonstrable evidence of local market conditions and . . . designed to ultimately attain a goal that is rationally related to the relative availability of DBEs in [the Recipient's] market." 49 C.F.R. § 26.45(c)(5). Pursuant to these instructions, NERA conducted a "custom census," in which it employed a six-step analysis to determine the baseline level of DBE availability. (T.T. at 731.) In the first step, NERA identified the appropriate and relevant geographic market for IDOT's contracting activity and its prime contractors as the State of Illinois. (T.T. at 731, 737-38; NERA Disadvantaged Business Enterprise Availability Study, Defendant's Ex. 27, hereinafter "NERA Study," at 8.) Second, NERA identified the relevant product markets in which IDOT and its prime contractors contract (i.e., concrete work or transportation). In so doing, NERA identified the specific industries from which IDOT draws its contractors — highway, engineering consulting, and aviation — as well as the relative amount of money spent in each of these industries. (T.T. at 739-40.) To do this, NERA worked with IDOT officials to assign one or more Standard Industrial Classification System Codes ("SIC Codes") to every contractor and subcontractor that had successfully completed work for IDOT or its prime contractors in the previous five years. (Id. at 741.) SIC Codes are the government's means of categorizing firms by their specific industry. (Id.)*fn6 NERA then estimated the relative amount of dollars flowing into each industry category. (Id. at 740.) NERA also worked with IDOT officials to assign SIC Codes to specific pay items within all IDOT contracts over the five years leading up to the study. (Id. at 741.) NERA used these figures to determine the relative amount of contracting dollars spent in each industry, and thus the relative weight/importance of each industry in which IDOT contracts. (Id. at 738-40.)

  In step three, NERA sought to identify all available contractors and subcontractors in the relevant industries within the State of Illinois using Dun & Bradstreet's Marketplace, which Mr. Wainwright described as "one of, if not the most comprehensive microbusiness establishment lists available."*fn7 (T.T. at 747-48.) The Marketplace list identified minority- and women-owned businesses. (Id. at 751-52.) These businesses were classified according to the SIC Codes, as listed above. (Id.) Using this information, NERA determined the total number of businesses operating in the relevant geographic and product markets. (NERA Study, at 16.) NERA then identified the number of DBE businesses within the relevant geographic and product markets. In doing so, NERA felt it necessary to go beyond a mere reliance on DBE businesses listed in Marketplace because, in NERA's experience, the Marketplace "does not adequately identify businesses owned by minorities or women." (NERA Study, at 21.) NERA therefore also collected lists of DBEs from IDOT as well as approximately twenty other public and private agencies in and around Illinois, including the Indiana, Wisconsin, Iowa, and Missouri Departments of Transportation, as well as a number of other state and local agencies. (Id.; T.T. at 751-52.) From these sources, NERA compiled a list of Illinois-based DBEs, classified based on SIC Codes. (NERA Study, at 22-25.)

  In the final two steps, NERA attempted to correct for what it considered to be two common biases in DBE lists: (1) the possibility that certain businesses listed as DBEs no longer qualify for that status, due to ownership change, recording errors, or misrepresentation, or, on the other hand, that certain businesses are not listed as DBEs, but qualify as such under the federal Regulations, and (2) the possibility that not all DBE businesses are listed in the various directories. (NERA Study, at 30; T.T. at 754-55.) To correct for these biases, NERA employed standard statistical sampling procedures. (NERA Study, at 30.) With regard to the possibility that a business is incorrectly classified as a DBE or non-DBE, NERA surveyed a large random sample of relevant businesses to measure how often they were misclassified. (Id.) Overall, NERA found that 22.8 percent of listed DBE businesses were actually owned by white males. (Id. at 31.) Finally, NERA attempted to determine the ownership of unclassified firms (those not listed in any of the consulted directories) by polling a random sample of such businesses. (Id. at 37.) The result of this random sample revealed that the vast majority — 85 percent — were owned by white men. (Id. at 39.) Separate DBE availability calculations (on a percentage basis) were then made by SIC Code grouping and by race and gender. (Id. at 41.)

  Combining the information and weighted averages obtained in each of these six steps, NERA estimated an overall weighted average DBE availability of 22.7 percent. (T.T. at 762; NERA Study, at 45.) This weighted average adjusted the DBE availability for the relative amount of IDOT funds spent in each industry and each county. (T.T. at 766-67.) Thus, the average DBE availability figure gave proportionately higher weight to those industries and counties where IDOT spends a higher proportion of its total ...


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