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Midwest Fence Corp. v. United States DOT

United States District Court, N.D. Illinois, Eastern Division

March 24, 2015

MIDWEST FENCE CORP., Plaintiff,
v.
UNITED STATES DEPARTMENT OF TRANSPORTATION, et al., Defendants

For Midwest Fence Corporation, A Delaware corporation, Plaintiff: James Raymond Dashiell, LEAD ATTORNEY, Dashiell Law Offices, LLC, Arlington Heights, IL USA; Courtney Dashiell Lorentz, Dashiell Law Offices, Arlington Heights, IL USA.

For United States Department of Transportation, Federal Highway Administration, Defendants: Andrew G Braniff, Toni Michelle Jackson, LEAD ATTORNEYS, Amy Mariko Kurren, United States Department of Justice, Washington, DC USA; Patricia Stasco, Sarah C Blutter, U.S. Department of Justice, Civil Rights Division, Washington, DC USA.

For Ray Lahood, in his capacity as the Secretary of the United States Department of Transportation, Victor Mendez, in his capacity as the Administrator of the Federal Highway Authority, Defendant: Andrew G Braniff, Toni Michelle Jackson, LEAD ATTORNEYS, United States Department of Justice, Washington, DC USA; Patricia Stasco, Sarah C Blutter, U.S. Department of Justice, Civil Rights Division, Washington, DC USA.

For Illinois Department of Transportation, Defendant: Michael T. Dierkes, Illinois Attorney General's Office, Chicago, IL USA; Sunil Shashikant Bhave, Thor Yukinobu Inouye, Illinois Attorney General, Chicago, IL USA.

For Illinois State Toll Highway Authority, Paula Wolff, in her capacity as Chairman of the Illinois State Toll Highway Authority, Patrick Quinn, Gov., James J Banks, Defendants: Christopher Michael Cascino, Pugh, Jones, & Johnson, P.C., Chicago, IL USA; Elizabeth M.S. Looby, Illinois Attorney General's Office, Downers Grove, IL USA; Jorge V. Cazares, Preston L Pugh, Rebecca Droller Fuentes, Pugh, Walter Jones, Jr., Jones & Johnson, P.C., Chicago, IL USA; Thomas John Bamonte, Tiffany Iussig Bohn, Illinois State Toll Highway Authority, Downers Grove, IL USA; Tiffany Mary Ferguson, Pugh, Jones & Johnson, P.C. Chicago, IL USA.

For George Pradel, Carl O Towns, James M. Roolf, Thomas Canham, Bill Morris, Tom Weisner, Maria N. Saldana, in their capacities as Directors of the Illinois State Toll Highway Authority, Defendants: Christopher Michael Cascino, Jorge V. Cazares, Preston L Pugh, Rebecca Droller Fuentes, Tiffany Mary Ferguson, Walter Jones, Jr., Pugh, Jones, & Johnson, P.C., Chicago, IL USA; Elizabeth M.S. Looby, Illinois Attorney General's Office, Downers Grove, IL USA; Thomas John Bamonte, Tiffany Iussig Bohn, Illinois State Toll Highway Authority, Downers Grove, IL USA.

Tom Weisner, Defendant, Pro se.

For Ann L. Schneider, her capacity as Acting Secretary of the Illinois Department of Transportation, Defendant: Sunil Shashikant Bhave, Thor Yukinobu Inouye, Illinois Attorney General, Chicago, IL USA; Walter Jones, Jr., Pugh, Jones & Johnson, P.C., Chicago, IL USA.

For Ann L. Schneider, Acting Secretary, in their capacities as ex officio members of the Tollway board, Defendant: Walter Jones, Jr., Pugh, Jones & Johnson, P.C., Chicago, IL USA.

For Miguel Saltijeral, Respondent: Peter Todd Berk, LEAD ATTORNEY, Law Offices of Peter T. Berk, Deerfield, IL USA; Joseph J Jacobi, McDonald Hopkins, LLC, Chicago, IL USA.

For Pacific Legal Foundation, Amicus: Ralph W. Kasarda, LEAD ATTORNEY, Pacific Legal Foundation, Sacramento, CA USA.

MEMORANDUM OPINION AND ORDER

Harry D. Leinenweber, United States District Judge.

Before the Court is a constitutional challenge to federal and state programs designed to benefit disadvantaged business entities (" DBEs" ) in the highway construction industry. Plaintiff Midwest Fence (hereinafter, " Plaintiff" or " Midwest" ), a non-DBE fencing and guardrail contractor that is owned and controlled by white males, alleges that the DBE programs instituted by the United States Department of Transportation (" USDOT" ), the Illinois Department of Transportation (" IDOT" ), and the Illinois State Tollway Highway Authority (the " Tollway" ) violate its right to equal protection under the law.

Plaintiff's lawsuit targets three groups of Defendants: (1) USDOT, the United States Secretary of Transportation, and the Administrator of the Federal Highway Administration (" FHWA" ) (hereinafter, collectively, the " Federal Defendants" ); (2) IDOT and the Illinois Secretary of Transportation (hereinafter, collectively, the " IDOT Defendants" or " IDOT" ), and (3) the Tollway and its eleven-member board, which is headed by chairwoman Paula Wolff and also includes the Governor of Illinois and the Illinois Secretary of Transportation, who serve as ex officio board members (hereinafter, collectively, the " Tollway Defendants" or the " Tollway" ). Plaintiff has named all individuals in their official capacity.

Plaintiff and all three groups of Defendants have cross-moved for summary judgment. For the reasons stated herein, the Court grants the Federal Defendants', IDOT Defendants', and Tollway Defendants' Motions for Summary Judgment [ECF Nos. 369, 366, 378]. Midwest's Motion for Summary Judgment [ECF No. 372] is denied.

I. BACKGROUND

The Court has compiled the following factual record through thorough study of the parties' briefs, Local Rule 56.1 Statements of Material Facts, and supporting evidentiary materials. The Court takes judicial notice that certain public officials have changed during the course of this litigation.

A. The Parties

Midwest is a fencing and guardrail contractor incorporated in Delaware, with its principal place of business in Chicago, Illinois. White males own and control Midwest. Midwest is not a DBE under any of the DBE programs challenged in this lawsuit. From 2006--2010, Midwest generated average gross sales of approximately $18 million per year.

USDOT is an executive department of the federal government, headed by the United States Secretary of Transportation. At the time the operative Complaint was filed in this action (the " Complaint," ECF No. 217), Ray LaHood served as Secretary of Transportation. Anthony Foxx now fills this role. The FHWA is an agency within USDOT, headed by the FHWA Administrator. At the time of the Complaint, Victor Mendez served as FHWA Administrator. Gregory Nadeau now serves as Acting FHWA Administrator. The FHWA is charged with the design, construction, and maintenance of the nation's highways.

IDOT is an executive department of the Illinois government, headed by the Illinois Secretary of Transportation. At the time of the Complaint, Ann Schneider served as Acting Secretary of IDOT, having just replaced Gary Hannig. Erica Borggren later replaced Schneider. Randall Blankenhorn now serves as Acting Secretary of IDOT. IDOT is charged with the planning, construction, and maintenance of the state's transportation network. IDOT receives both federal and state funding to accomplish its goals. For administrative purposes, IDOT divides the state of Illinois into nine districts.

The Tollway is an instrumentality and administrative agency of the state of Illinois, governed by an eleven-member board of directors, which includes the Governor of Illinois and the Secretary of IDOT. At the time of the Complaint, Pat Quinn served as Governor of Illinois and Schneider served as Acting Secretary of IDOT. At present, Bruce Rauner serves as Governor of Illinois and Blankenhorn serves as Acting Secretary of IDOT. The Tollway is authorized to construct, operate, regulate, and maintain Illinois' system of toll highways. The Tollway does not receive any federal funding to accomplish its goals.

B. The Challenged DBE Programs

The Federal, IDOT, and Tollway Defendants have instituted programs intended to increase the flow of public road construction dollars to contractors who qualify as DBEs. The federal DBE program (the " Federal Program" ) sets an aspirational goal that USDOT expend at least 10% of its funds through DBEs. As a condition of receiving federal transportation funds, IDOT is required to implement the Federal Program in Illinois pursuant to the regulations contained in 49 C.F.R. pt. 26 (the " Federal Regulations" or the " Regulations" ). Although the Regulations do not require IDOT to implement the Federal Program on its state-funded projects, IDOT voluntarily does so. IDOT has also implemented a Target Market Program under which it may take additional measures " to remedy particular incidents and patterns of egregious race or gender discrimination" in certain districts. 20 ILCS 2705/2705-600. The Tollway voluntarily implements its own DBE program, which mirrors the Federal Program in many respects. The following sections describe the mechanics of each DBE program.

1. The Federal Program

Under the Federal Program, which was first enacted in 1982, USDOT is to expend no less than 10% of authorized funds through DBEs -- " small business concerns owned and controlled by socially and economically disadvantaged individuals." Moving Ahead for Progress in the 21st Century Act (" MAP-21" ), Pub. L. No. 112-141, § 1101(b), 126 Stat. 405 (2012). The 10% goal is set at the national level and is aspirational. 49 C.F.R. § 26.41. Congress has reauthorized the Federal Program on numerous occasions, most recently in 2012 under MAP-21. In determining whether reauthorization was appropriate, Congress reviewed statistical evidence, testimony, reports, and other evidence. Based on this material, Congress concluded that " 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).

The Federal Regulations, along with the Small Business Act, 15 U.S.C. § 631 et seq., break down the definition of a DBE. First, a DBE must be a " small business concern" that falls within the size standards published by the Small Business Administration (" SBA" ). 49 C.F.R. § 26.65; 13 C.F.R. § 121.201. Second, a DBE cannot have average annual gross receipts in excess of $23.98 million over the past three fiscal years. 49 C.F.R. § 26.65. Third, a DBE must be at least 51% owned, managed, and controlled " by one or more socially and economically disadvantaged individuals." 15 U.S.C. § 637(d)(3)(C).

Socially disadvantaged individuals are persons " 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." Id. § 637(a)(5). " Economically disadvantaged individuals" are a subset of socially disadvantaged individuals whose ability to compete in the marketplace has been diminished by capital and credit opportunities that are poor in comparison to those afforded to persons who are not socially disadvantaged. Id. § 637(a)(6)(A). There is a rebuttable presumption that certain groups -- " women, Black Americans, Hispanic Americans, Native Americans, Asian-Pacific Americans, Subcontinent Asian Americans, or other minorities found to be disadvantaged by the SBA" -- are socially and economically disadvantaged. 49 C.F.R. § 26.67(a); Pub. L. No. 112-141 § 1101(b)(2)(B). Persons who fall outside these specific groups may still qualify as socially or economically disadvantaged, but must prove their disadvantaged status by a preponderance of the evidence. 49 C.F.R. § 26.67(d). Personal assets in excess of $1.32 million negate a claim to " economic disadvantage." See, id. § 26.67(a)(2)(i).

The Federal Regulations require recipients of federal transportation funds (" Recipients" ) to set an overall DBE participation goal pursuant to a two-step process. Id. § 26.45. Recipients set goals as a percentage of all federal transportation funds they plan to expend in the next three years. Id. § 26.45(e)(1). The end goal must reflect what DBE participation would be in the absence of discrimination. Id. § 26.45(b). As long as Recipients administer their DBE programs in good faith, USDOT cannot penalize them for failing to reach their goals. Id. § 26.47(a).

The first step in setting a DBE participation goal is to determine the " relative availability of DBEs" in the Recipient's local market. Id. § 26.45(b). This figure is based on " demonstrable evidence of the availability of ready, willing, and able DBEs" relative to all other businesses that would be " ready, willing, and able" to bid on federally funded contracts. Id. The regulations set out a number of techniques for arriving at the base availability figure, including the use of census data, DBE directories, or disparity studies. Id. § 26.45(c). The second step, if necessary, is to adjust the base availability figure in light of local evidence, such as data concerning DBEs' ability to form, grow, and compete in the marketplace. Id. § 26.45(d). If " demonstrable evidence" of past discrimination is available, Recipients may make an upward adjustment to the base figure to account for the continuing effects of past discrimination. Id. § 26.45(d)(3).

Once a Recipient sets its overall DBE participation goal, it must meet the " maximum feasible portion" of that goal using race-neutral means. Id. § 26.51(a). If the Recipient cannot meet its overall DBE participation goal through race-neutral means, the Recipient must establish DBE participation goals on individual federally funded projects that have subcontracting possibilities. Id. § 26.51(d)--(f). A Recipient may adjust its use of race-neutral or race-conscious means in a given year to ensure that it meets, and does not exceed, its overall participation goal. Id. § 26.51(f).

To secure a prime contract, bidders are not required to meet individual contract goals as long as they can demonstrate that they have made good faith efforts to do so. Id. § 26.53. Appendix A to the Regulations provides specific examples of good faith efforts, which it describes as " 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." Id. pt. 26, App. A. If a bidder demonstrates good faith efforts to fulfill the DBE participation goal, the Recipient " must not deny award of the contract on the basis that the bidder/offeror failed to meet the goal." 49 C.F.R. § 26.53(a)(2).

Recipients may apply to USDOT for exemptions or waivers releasing them from their obligations under the Federal Program. Id. § 26.15. USDOT may grant an exemption if special circumstances exist that make compliance with the Federal Regulations impractical, and it may grant a waiver if equal opportunity for DBEs can be achieved by other means. Id. Recipients must develop outreach programs that foster small business participation across the board, regardless of DBE status. Id. If DBEs begin to dominate a particular type of contracting work, Recipients must " devise appropriate measures" to address overconcentration. Id. § 26.33.

2. IDOT's Implementation of the Federal Program

As a condition of receiving federal transportation funds, IDOT must implement the Federal Program described above and set a DBE participation goal as a percentage of the federal transportation funds it will expend in the next three years. Id. § 26.45(e). In addition, the Illinois Business Enterprise for Minorities, Females and Persons with Disabilities Act (the " Business Enterprise Act" ) requires IDOT to implement a DBE program using the Federal Program standards " for the establishment of goals and [DBE] utilization procedures" on state-funded projects. 30 ILCS 575/6(d).

Since 2005, IDOT has adopted an overall DBE participation goal of 22.7% -- a figure it has never achieved in practice. For 2007 to 2011, IDOT reported DBE participation of 13.98%. IDOT initially set its 22.77% goal based on the findings of a 2004 NERA availability study (the " 2004 NERA Study" ), which was updated in 2005. An availability study determines how many DBEs are " ready, willing, and able" to perform construction work. To arrive at 22.77% availability, NERA followed the two-step goal-setting process set out in the Federal Regulations. Although IDOT later consulted with Mason Tillman & Associates (" MTA" ) to calculate its DBE participation goals, MTA employed the same two-step methodology.

In 2009, IDOT commissioned a disparity study from MTA, which was released in 2011 (the " 2011 MTA Study" ). A disparity study assesses whether a disparity exists between the utilization and availability of ready, willing, and able DBEs. The 2011 MTA Study examined the disparity between DBE utilization and availability on more than 4,000 prime contracts and more than 5,500 subcontracts that IDOT awarded between 2006 and 2008. The study also contained a regression analysis to determine if factors other than discrimination might explain any statistically significant disparity. MTA's regression analysis indicated that even after controlling for race- and gender-neutral factors such as age and education, minorities and women still experienced discriminatory business conditions, such as lower earnings. In addition to statistical evidence, the 2011 MTA Study examined anecdotal evidence concerning the difficulties DBEs faced in the business community and contracting process, including harassment and exclusion. The 2011 MTA Study concluded that, on both prime contracts and subcontracts in the Illinois road construction industry, DBEs were significantly underutilized.

IDOT sets individual contract goals to achieve the portion of its overall DBE participation goal that cannot be fulfilled by race-neutral means. To set individual contract goals, IDOT identifies what line items of work on a contract could be performed by at least two or more certified DBEs. IDOT adds the dollar value of these line items together, and then divides this amount by the total contract cost to arrive at a maximum DBE participation goal. IDOT then submits the goal to its Bureau of Small Business Enterprises for review. If the Bureau of Small Business Enterprises determines the goal is reasonable and can be supported in the project's locality, IDOT publishes the goal when the contract is let.

Prime contractors, which generally cannot perform more than 50% of the contracting work on their own, must make good faith efforts to subcontract work to DBEs to meet the individual contract goal. When submitting a bid, a prime contractor must submit a utilization plan showing either that it (1) met the DBE participation goal, or (2) did not met the goal, but made " good faith efforts" to do so. IDOT adheres to the guidance regarding good faith efforts contained in the Federal Regulations. See, 49 C.F.R. pt. 26, App. A. If a prime contractor demonstrates good faith efforts, IDOT may waive or modify the individual contract goal.

3. IDOT's Target Market Program

IDOT has also implemented a Target Market Program that applies to state-funded projects in certain parts of Illinois. Under 20 ILCS 2705/2705-600, IDOT's chief procurement officer has authority to implement a target market program " to remedy particular incidents and patterns of egregious race or gender discrimination." Each year, IDOT reviews evidence of discrimination related to transportation construction projects, including the various rates at which minority- and women-owned contractors are utilized, comparative rates of business formation, and anecdotal evidence. Based on this evidence, IDOT may " establish and implement a target market program tailored to address the specific findings of egregious discrimination made by the Department." 20 ILCS 2705/2705-600. The Target Market program authorizes a number of remedial measures that may be taken to address " egregious discrimination," including the reservation of specific work on a contract for DBEs, incentives for achieving DBE participation goals, and the set-aside of certain contracts for DBEs. Ill. Admin. Code tit. 44 § 6.830.

During this litigation, the Target Market Program operated in IDOT Districts 4 and 8. IDOT concluded that race- and gender-based discrimination was particularly egregious in these districts based on two additional MTA disparity studies.

4. The Tollway Program

The Tollway has implemented its own DBE program (the " Tollway Program" ) since 2005. The Toll Highway Act, 605 ILCS 10/16.3, requires that the Tollway set aspirational goals in awarding contracts to DBEs. The Tollway's Special Provision for Disadvantaged Business Enterprise Participation (the " Special Provision," Ex. E to Tollway Defs.' L.R. 56.1 Stmt., ECF No. 384-5) details the program's operation. Although the Tollway is not obligated to follow the Federal Regulations, it borrows from them substantially. For instance, one of the bodies that certifies DBEs for participation in the Tollway Program, the Illinois Unified Certification Program (" ILUCP" ), employs the federal DBE criteria to determine DBE status.

Like IDOT, the Tollway has commissioned several disparity studies. In 2006, the Tollway commissioned a disparity study from NERA assessing DBE utilization on Tollway contracts from 2000 to 2005 (the " 2006 NERA Study" ). The 2006 NERA Study concluded that " statistically significant adverse disparities" were present among minority and women contractors eligible to perform Tollway work. The 2006 NERA Study also analyzed discrimination on a much broader level, examining disparities in the national construction industry from 1979 to 2002. Controlling for race- and gender-neutral variables, the study revealed a significant negative correlation between a person's race or sex and their earning power and ability to form a business. In 2008, the Tollway commissioned a disparity study from MTA, which was released in 2011. However, the Tollway ultimately rejected the study because its analysis was limited to contracts of $1 million or less, while approximately 60% of the Tollway's construction contracts are valued at over $1 million. In 2013, the Tollway commissioned an additional disparity study from Colette Holt & Associates, which is currently in progress.

The Tollway sets DBE participation goals on individual contracts as a percentage of the contract's total value. In placing a bid, a prime contractor must submit a utilization plan indicating that it has either " obtained sufficient DBE participation commitments to meet the contract goal" or made good faith efforts to do so. (Special Provision, Ex. E to Tollway Defs.' L.R. 56.1 Stmt., ECF No. 384-5, at 28.) The Tollway follows the Federal Regulations in assessing good faith efforts. If the Tollway determines that a bidder has in fact made a good faith effort to meet the contract's goal -- but has been unable to do so -- the Tollway may waive or modify the goal.

C. Complaint

On July 20, 2012, Midwest filed an eighteen-count Complaint against the Federal, IDOT, and Tollway Defendants alleging that the DBE programs described above violate the Equal Protection clause of the United States Constitution, the Civil Rights Act of 1866, the Civil Rights Act of 1964, and the Illinois Civil Rights Act of 2003. (Compl., ECF No. 217.) This Court dismissed Count XVIII, seeking punitive damages against the Tollway, on September 27, 2012. (ECF No. 243.)

As to the Federal Defendants, Midwest seeks a declaration that the Federal Program is unconstitutional on its face (Count I), a declaration that the Federal Program lacks congressional authorization (Count III), a declaration that the Federal Program's authorizing statute is unconstitutional (Count IV), and corresponding injunctive relief (Count VIII). Because Midwest's as-applied challenge to the Federal Program ultimately concerns IDOT's implementation of the program, the Court interprets Count II as applying to IDOT only. See, Sherbrooke Turf, Inc. v. Minn. Dep't of Transp., 345 F.3d 964, 973 (8th Cir. 2003) (explaining that because Federal Program affords recipients substantial discretion in setting goals based on local conditions, plaintiff's as-applied challenge required the court to examine state implementation of the program).

With respect to the IDOT Defendants, Midwest seeks a declaration that IDOT's implementation of the Federal Program is unconstitutional as applied (Counts II & VI), a declaration that Section 4(b) of the Business Enterprise Act is unconstitutional on its face because it imposes a quota (Count V), a declaration that the Target Market Program is unconstitutional on ...


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