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Midwest Fence Corp. v. United States Department of Transportation

United States Court of Appeals, Seventh Circuit

November 4, 2016

Midwest Fence Corporation, Plaintiff-Appellant,
United States Department of Transportation, et al., Defendants-Appellees.

          Argued January 12, 2016

         Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 10 C 5627 - Harry D. Leinenweber, Judge.

          Before Bauer and Hamilton, Circuit Judges, and Peterson, District Judge. [*]

          Hamilton, Circuit Judge.

         Plaintiff Midwest Fence Corporation challenges federal and state programs that offer advantages in highway construction contracting to disadvantaged business enterprises, known as DBEs. For purposes of federally funded highway construction, DBEs are small businesses that are owned and managed by "individuals who are both socially and economically disadvantaged/' 49 C.F.R. § 26.5, primarily racial minorities and women, who have historically faced significant obstacles in the construction industry due to discrimination, § 26.67(a). Pursuant to the federal DBE program, states that accept federal highway funding must establish DBE participation goals for federally funded highway projects and must attempt to reach those goals through processes tailored to actual market conditions.

         Plaintiff Midwest Fence is a specialty contractor that focuses its business on guardrails and fencing. Because of its size and specialization, it usually bids on projects as a subcontractor. Midwest Fence is not a DBE. It alleges that the defendants' DBE programs violate its Fourteenth Amendment right to equal protection under the law. Midwest Fence named as defendants the United States Department of Transportation (USDOT), the Illinois Department of Transportation (IDOT), and the Illinois State Toll Highway Authority (the Toll way).

         Under the defendants' DBE programs, government contracting decisions may be made with reference to racial classifications, so these programs are subject to strict scrutiny. They can survive an equal protection challenge only if the defendants show that their programs serve a compelling government interest and are narrowly tailored to further that interest. Adarand Constructors, Inc. v. Vena, 515 U.S. 200, 227 (1995). Remedying the effects of past or present discrimination can be a compelling governmental interest. Shaw v. Hunt, 517 U.S. 899, 909 (1996), citing City of Richmond v. J. A. Croson Co., 488 U.S. 469, 498-506 (1989).

         The district court granted the defendants' motions for summary judgment. Midwest Fence Corp. v. U.S. Dep't of Transportation, 84 F.Supp.3d 705 (N.D. 111. 2015). We affirm. We join other circuits in holding that the federal DBE program is facially constitutional. The program serves a compelling government interest in remedying a history of discrimination in highway construction contracting. The program provides states with ample discretion to tailor their DBE programs to the realities of their own markets and requires the use of race-and gender-neutral measures before turning to race- and gender-conscious ones. The IDOT and Tollway programs also survive strict scrutiny. These state defendants have established a substantial basis in evidence to support the need to remedy the effects of past discrimination in their markets, and the programs are narrowly tailored to serve that remedial purpose.

         I. Legal and Factual Background

         A. The Federal DBE Program

         Because we review a grant of summary judgment, we base our decision on facts that are either undisputed or reflect disputed evidence in the light reasonably most favorable to the non-moving party, Midwest Fence. Stevens v. Interactive Financial Advisors, Inc., 830 F.3d 735, 739 (7th Cir. 2016); see also Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). We lay out in broad strokes the federal DBE program, which dates back to 1983 and has been reauthorized as recently as 2015 in the Fixing America's Surface Transportation Act, Pub. L. No. 114-94, § 1101(b), 129 Stat. 1312, 1323-25 (2015); see also Moving Ahead for Progress in the 21st Century Act, Pub. L. No. 112-141, § 1101(b), 126 Stat. 405, 414-16 (2012). After reviewing substantial data, testimony, and studies regarding highway construction markets across the United States, Congress determined that discrimination continued to "pose significant obstacles for minority- and women-owned businesses seeking to do business" in those markets. § 1101(b)(1)(A), 126 Stat, at 415. Congress found there was a strong basis to continue the DBE program to try to remedy the ongoing effects of discrimination. § 1101(b)(1)(E), 126 Stat, at 415.

         The DBE program establishes a national goal of spending at least 10% of federal highway funds in contracting with disadvantaged businesses. 49 C.F.R. § 26.41. DBEs are small businesses owned and controlled by socially and economically disadvantaged individuals. See § 26.5. Women and racial and ethnic minorities are presumed to be socially and economically disadvantaged, but they still must certify their disadvantaged status and provide economic evidence. § 26.67(a). The presumption can be rebutted. § 26.67(b). Presumption or not, no business can qualify as a DBE if the controlling owner's net worth exceeds $1.32 million or if the firm's gross receipts for the previous three fiscal years average more than $23.98 million per year. §§ 26.65(b), 26.67(a)(2)(i).

         The federal program provides a framework for states to implement their own programs. States establish their own goals for DBE participation in federally funded transportation projects by (1) determining the relative availability of DBEs "ready, willing and able" to participate in those projects; and (2) examining local conditions to adjust the base figure if necessary. See § 26.45.

         The regulations require states to use race- and gender-neutral means to the maximum extent possible to meet their goals, providing a non-exhaustive list of techniques for promoting DBE participation. See § 26.51; see also § 26.5 (defining "race-neutral" to include gender-neutral). If a state cannot meet its goal through neutral means, it must set contract-specific DBE subcontracting goals on projects with subcontracting possibilities. § 26.51(d)-(e). The federal program expects states to monitor their DBE participation continuously. If a state is on track to exceed its DBE goal, it must reduce or eliminate contract goals as necessary, § 26.51(f)(2), and states may adjust their overall goals at any time to reflect changed circumstances, § 26.45(f)(1)(ii).

         The federal program allows states to seek waivers of goal-setting provisions, §26.15, and permits states themselves to decide on an individual basis whether bidders have made good faith efforts to satisfy a specific contract goal when they fall short, § 26.53(a)(2). Guidance as to what constitutes good faith efforts is found in 49 C.F.R. pt. 26 app. A. The federal regulations also require states to address overconcentration, meaning that states must ensure that the use of DBEs in a particular sector does not unduly burden non-DBEs in that sector. 49 C.F.R. § 26.33. The federal program also requires periodic reauthorization by Congress.

         B. IDOT's Implementation of the DBE Program

         In exchange for federal funding, IDOT has implemented a DBE program. State law requires Illinois to follow the federal program for solely state-funded projects and federally funded projects alike. 30 Ill.Comp.Stat. 575/6(d).

         IDOT uses a number of race- and gender-neutral initiatives to facilitate DBE participation in its contracts, including a DBE mentoring program, a highway construction training program, a Small Business Initiative to encourage smaller firms to participate in competitive bidding on prime contracts, a Small Business Advisory Committee to provide IDOT with input on small business issues, and an "unbundling" effort to reduce contract size so that a greater range of businesses can bid. IDOT also operates DBE resource centers, works to eliminate barriers in the process required to qualify firms to bid on prime contracts, hosts networking and industry forums, and engages in numerous other efforts to draw DBEs into the market.

         These race- and gender-neutral initiatives have never enabled IDOT to reach its participation goal (which is 22.77%), so it also sets individual contract goals on many contracts. In compliance with the federal regulations, IDOT sets those goals on contracts that have subcontracting possibilities. An IDOT engineer identifies the types of work included in the prime contract and estimates the value of each line item. An IDOT compliance officer then determines whether at least two DBEs are available to perform the work for each line item. The compliance officer then adds up the estimated cost of the line items and divides it into the total contract cost to set a DBE participation goal for the contract. For example, if $100, 000 of line items on a $1 million contract could be performed by DBEs, the contract goal would be 10%. IDOT's Office of Business and Workforce Diversity examines the goal to determine whether it is realistic.

         These individual contract goals are important but not rigid. Prime contractors can still win contracts if they are unable to meet DBE participation goals. The bidding process requires each prime contractor to submit a sealed bid accompanied by a list of the DBEs the contractor will use to achieve the DBE goal. The lowest bidder is awarded the contract if it meets the DBE goal or if IDOT determines that the bidder has made good faith efforts to do so. In the latter instance, IDOT grants a "front-end waiver" to the prime contractor. Whether a front-end waiver is appropriate depends on a variety of factors, including the contractor's method of soliciting DBEs, the follow-up and assistance the contractor offered DBEs, work with local officials, and so on.

         Price also matters. According to IDOT, contractors need not use a more expensive DBE subcontractor if the price differential is too great. The unwritten "rule of thumb, " according to IDOT's former deputy director of business and workplace diversity is 5%.

         If a front-end waiver is denied, the prime contractor can appeal to IDOT's reconsideration officer. If reconsideration is denied, the contract goes to the next lowest bidder or is rebid. The practical availability of these front-end waivers is a focus of Midwest Fence's challenges to the Illinois program.

         C. The Tollway Program

         The Tollway adopted its own DBE program in 2005. Unlike IDOT, the Tollway received no federal funding during the relevant time, so it was not subject to the federal regulations. For the most part, though, its program mirrors IDOT's program. The Tollway treats a business as a DBE if it is certified under the federal regulations or if the City of Chicago or Cook County deems it a "Minority or Women-Owned Business."

         Like IDOT, the Tollway uses race- and gender-neutral measures such as unbundling contracts, implementing a Small Business Initiative, partnering with other agencies to provide supportive services, conducting seminars on doing business with the Tollway, and making information available on its website. Those measures have not produced substantial DBE participation, however, so the Tollway also sets DBE participation goals. It does so one contract at a time. Most of its goals are achieved through subcontract dollars. It sets those goals by comparing line items in its contracts to an availability table in a 2006 National Economic Research Associates study which identifies DBE availability by industry code and serves as evidence supporting the Tollway's DBE program.

         In theory at least, the Tollway grants good faith efforts waivers based on criteria like those in the federal regulations. These criteria include whether the contractor solicited DBEs through all reasonable and available means, unbundled contract work items into economically feasible units, provided DBEs with sufficient information, engaged in good faith negotiations with DBEs, and so on. Cf. 49 C.F.R. pt. 26 app. A (federal guidance concerning good faith efforts). Midwest Fence again disputes the availability of those waivers in practice, calling the Tollway's contract goals de facto quotas.

         D. Procedural History

         Midwest Fence filed this lawsuit in 2010 alleging that the federal DBE program, IDOT's implementation of it, and the Tollway's own program violate its Fourteenth Amendment right to equal protection. Against the federal program, Midwest Fence asserts the following primary theories:

• The federal regulations prescribe a method for setting individual contract goals that places an undue burden on non-DBE subcontractors, especially certain kinds of subcontractors, including guardrail and fencing contractors like Midwest Fence.
• The presumption of social and economic disadvantage is not tailored adequately to reflect differences in the circumstances actually faced by women and the various racial and ethnic groups who receive that presumption.
• The federal regulations are unconstitutionally vague, particularly with respect to "good faith efforts" to justify a front-end waiver.

         Midwest Fence also asserts that IDOT's implementation of the federal program is unconstitutional for essentially the same reasons. Finally Midwest Fence challenges the Tollway's program on its face and as applied. Midwest Fence sought declaratory and injunctive relief from all defendants, and monetary relief from IDOT and the Tollway

         Both sides moved for summary judgment, and the district judge granted the defendants' motions. Midwest Fence Corp., 84 F.Supp.3d at 713. The judge found that Midwest Fence had standing to bring most of its claims. Id. at 722-23. On the merits, the district court upheld the facial constitutionality of the federal DBE program. Id. at 729.

         Turning to IDOT, the court concluded that Midwest Fence did not rebut the evidence of discrimination that IDOT offered to justify its program, id. at 733, and that Midwest Fence had presented no "affirmative evidence" that IDOT's implementation unduly burdened non-DBEs, failed to make use of race-neutral alternatives, or lacked flexibility, id. at 737.

         The court noted that Midwest Fence's challenge to the Toll-way's program paralleled the challenge to IDOT's program. Id. It concluded that the Tollway, like IDOT, had established a "strong basis in evidence" for its program. Id. at 739. Finally, the district court concluded that, like IDOT's program, the Tollway's program imposed a minimal burden on non-DBEs, employed a number of race-neutral measures, and offered substantial flexibility. Id. at 740. Midwest Fence has appealed the final judgment. We have jurisdiction under 28 U.S.C. § 1291.

         II. Standing

         A. Standing to Challenge the DBE Programs Generally

         Before addressing the merits of Midwest Fence's equal protection claims, we must address the defendants' argument that Midwest Fence lacks standing under Article III of the Constitution to bring them at all. See Northeastern Florida Chapter of the Associated General Contractors v. City of Jacksonville, 508 U.S. 656, 663 (1993) (standing is "an essential and unchanging part of the case-or-controversy requirement of Article III"), quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 560 (1992). The district court found that Midwest Fence has standing, with one narrow exception.

         Our standard of review depends on the procedural posture of the case, whether we are dealing with bare allegations in the pleadings, a paper record of evidence on summary judgment, or evidence at trial. The party invoking federal jurisdiction bears the burden of establishing standing, and the elements of standing must be supported with the quantum of evidence required at each successive stage of litigation. "At the summary-judgment stage, 'the plaintiff can no longer rest on ... mere allegations, but must set forth by affidavit or other evidence specific facts.'" Edgewood Manor Apartment Homes, LLC v. RSUI Indemnity Co., 733 F.3d 761, 771 (7th Cir. 2013) (internal quotation marks omitted), quoting Defenders of Wildlife, 504 U.S. at 561; accord, Six Star Holdings, LLC v. City of Milwaukee, 821 F.3d 795, 801-02 (7th Cir. 2016); Hummel v. St. Joseph County Board of Comm'rs, 817 F.3d 1010, 1016 (7th Cir. 2016). Here, defendants moved for summary judgment in part on the basis that Midwest Fence lacks standing, so the legal issue is whether Midwest Fence offered evidence that could support a finding of standing.

         To invoke a federal court's jurisdiction, a plaintiff must allege and then show (1) injury in fact, (2) a causal relationship between the injury and the challenged conduct, and (3) a likelihood that the injury will be redressed by a favorable decision. Northeastern Florida, 508 U.S. at 663-64. Northeastern Florida involved a race-conscious ordinance enacted to increase participation in public contracting. The issue was whether standing requires a plaintiff challenging ...

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