Jack Wood Const. Co., Inc. v. U.S. Dept. of Trans., CIV.A. 97-1123(PLF).

• Decision Date: 17 July 1998
• Docket Number: No. CIV.A. 97-1123(PLF).,CIV.A. 97-1123(PLF).
• Citation: 12 F.Supp.2d 25
• Court: U.S. District Court — District of Columbia
• Parties: JACK WOOD CONSTRUCTION CO., INC., Plaintiff, v. UNITED STATES DEPARTMENT OF TRANSPORTATION and Rodney E. Slater, Secretary of Transportation, Defendants.

12 F.Supp.2d 25

JACK WOOD CONSTRUCTION CO., INC., Plaintiff, v. UNITED STATES DEPARTMENT OF TRANSPORTATION and Rodney E. Slater, Secretary of Transportation, Defendants.

No. CIV.A. 97-1123(PLF).

United States District Court, District of Columbia.

July 17, 1998.

Robert Alton Mangrum, Winston & Strawn, Washington, DC, for Plaintiff.

Madelyn Elise Johnson, Gregory William Addington, Eric Mark Jaffe, U.S. Attorney's Office, Washington, DC, for Defendants.

OPINION

PAUL L. FRIEDMAN, District Judge.

Jack Wood Construction Company, Inc. brings this action under the Administrative Procedure Act to challenge the determination of the Department of Transportation affirming the decision of the Arkansas State Highway and Transportation Department ("AHTD") to deny certification to Jack Wood as a Disadvantaged Business Enterprise ("DBE"). Plaintiff claims that the DOT's determination that Jack Wood no longer meets the criteria to continue to participate in the DBE program is arbitrary and capricious, an abuse of discretion or otherwise not in accordance with the law; it therefore requests that the Court set aside the decision and enter a declaratory judgment that the company retain its DBE certification.

I. BACKGROUND

The Department of Transportation's Disadvantaged Business Enterprise program requires state and local recipients of DOT funds to prefer and assist companies owned and run by minorities or women in government contracts. See 49 C.F.R. Part 23. Anticipating that certain individuals might attempt to abuse the program, the DOT promulgated strict eligibility requirements for DBE certification. In particular, the eligibility requirements are meant to prevent businesses which facially appear to be owned and run by minorities or women but in fact are run by non-minority males from unfairly benefitting from the DBE program. See 49 C.F.R. § 23.53(a). State transportation agencies receive applications for the DBE program and grant or deny certification upon consideration of the requirements set forth in the regulations. 49 C.F.R. § 23.53(a). State decisions denying DBE certification may be appealed to DOT. See 49 C.F.R. § 23.55.

Jack Wood Construction Company is an asphalt paving, highway construction, railroad construction and maintenance and related contracting services firm located in Judsonia, Arkansas. The company was incorporated in 1964 by Jack and Marye Wood, who at the time were the sole shareholders, officers and directors; Mr. Wood was President and his wife was Secretary and Treasurer. In 1980, Mr. Wood transferred some of his shares in the company to his daughter, Martha Wood Tindell, which left Marye Wood as the majority shareholder and the company 72.3% owned by women. Mr. Wood died in 1987, leaving Ms. Wood and Ms. Tindell his 27.7% share in the company. As a result, women have owned 100% of Jack Wood since 1987. Admin. Rec. at 13-14 (Nov. 3, 1995 letter of appeal from Robert A. Mangrum to Antonio J. Califa, DOT).

Since the company's inception, Marye Wood has been involved in all of the corporate decision-making, including bidding on jobs, marketing, hiring, financing and employee relations. Admin. Rec. at 40 (Nov. 1, 1995 Affidavit of Marye H. Wood). Until his death, Mr. Wood provided the technical expertise for bidding on contracts. Ms. Wood now relies on Mr. T.D. Casey, the company's Vice-President, who has substantial construction and engineering experience, for advice on the technical aspects of the bid preparation process. Id. Ms. Wood, however, has ultimate control over the amount of the final bid. Admin. Rec. at 41. Ms. Wood's daughter, Martha Wood Tindell, has no role in the management of the company. Admin. Rec. at 114, 161.

Jack Wood Construction first qualified for the Disadvantaged Business Enterprise program in October 1980 when Mr. Wood transferred some of his shares to his daughter. Admin. Rec. at 11. The company was eligible for certification because a majority of its shares were owned by women, even though Mr. Wood, President and chief estimator, foreman and job superintendent, provided the technical expertise. Admin. Rec. at 15. For the next fourteen years, the AHTD continued to certify the firm. Admin. Rec. at 16. In 1994, the Office of the Inspector General for AHTD conducted an on-site inspection of Jack Wood Construction and concluded that Marye Wood, by then President of the company, did not meet the federal certification standards for control and economic disadvantage. Admin. Rec. at 16, 65-68. On April 21, 1995, AHTD held a hearing on the matter so that Jack Wood Construction could rebut the OIG's report. The company presented witnesses and testimony from Ms. Wood, Mr. Casey and others closely involved with the firm. Following the hearing, the AHTD ruled that Jack Wood Construction was ineligible to participate in the DBE program because Marye Wood did not control the company as required by 49 C.F.R. § 23.53(a)(3) and (4). Admin. Rec. at 116-17 (May 8, 1995 letter from Jane Wilson, AHTD, to Marye H. Wood). It determined that Mr. Casey, not Ms. Wood, controlled the major decisions of management, policy and operations, particularly in the bidding process. Admin. Rec. at 117. Jack Wood appealed the decision to AHTD on June 1, 1995, and AHTD affirmed its decision to deny certification on June 15, 1995. Admin. Rec. at 120.

On November 3, 1995, Jack Wood appealed the decision to the U.S. Department of Transportation pursuant to 49 C.F.R. § 23.55. DOT affirmed AHTD's decision, concluding that: (1) T.D. Casey was disproportionately responsible for the firm's operations, citing 49 C.F.R. § 23.53(a)(4), and (2) Marye Wood lacked the background and technical expertise to be able "to independently control the day-to-day operations of [the] business," as required by 49 C.F.R. § 23.53(a)(2) and (3).

II. DISCUSSION

A. APA Standard of Review

This Court may set aside DOT's decision to deny Jack Wood Construction DBE certification only if that decision was arbitrary and capricious, not in accordance with the law or unwarranted by the facts. 5 U.S.C. § 706(2)(A). This standard is highly deferential to the agency:

[T]he Court must consider whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment. Although this inquiry into the facts is to be searching and careful, the ultimate standard of review is a narrow one. The Court is not empowered to substitute its judgment for that of the agency.

Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 416, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971); see Motor Vehicle Manufacturers Ass'n v. State Farm Mutual Automobile Insurance Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983). "[T]here is a presumption in favor of the validity of administrative action," and courts are particularly deferential when an agency is interpreting its own statute or regulations. Ethicon, Inc. v. FDA, 762 F.Supp. 382, 386 (D.D.C.1991). The Court's "task is to determine `whether the agency's decisionmaking was reasoned,' ... i.e., whether it considered relevant factors and explained the facts and policy concerns on which it relied, and whether those facts have some basis in the record." National Treasury Employees Union v. Horner, 854 F.2d 490, 498 (D.C.Cir.1988) (quoting American Horse Protection Ass'n, Inc. v. Lyng, 812 F.2d 1, 5 (D.C.Cir.1987)).

Applying these standards, this Court concludes that the DOT's decision to affirm the denial of DBE certification to Jack Wood Construction Company was arbitrary and capricious and an abuse of discretion. The DOT decision therefore is vacated and set aside.

B. Control Over Jack Wood Construction

In deciding to revoke Jack Wood Construction's DBE status, DOT relied heavily on its conclusion that neither Ms. Wood nor her daughter are in "control" of the company pursuant to 49 C.F.R. § 23.53(a). DOT cited two reasons for this conclusion: (1) Mr. Casey was disproportionately responsible for the operations of the firm, and (2) Ms. Wood did not have sufficient technical expertise to control the day-to-day operations. Admin. Rec. at 2-3 (May 30, 1996 letter from Clement H. Monge, DOT, to Robert A. Mangrum). DOT based its decision in large part on 49 C.F.R. § 23.53(a)(4), which states:

If the owners of the firm who are not minorities or women are disproportionately responsible for the operation of the firm, then the firm is not controlled by minorities or women and shall not be considered an MBE within the meaning of this part.

It was impermissible for DOT to rely on this regulation at all because Mr. Casey is not an "owner" of the firm. The two owners are Ms. Wood and Ms. Tindell, both of whom are women. Regardless of how much control or responsibility Mr. Casey may have, this particular regulation is not implicated and can form no part of the rationale for the decision because Mr. Casey is not an "owner" of the firm. Defendants effectively concede this point.

The Court therefore turns to DOT's second enumerated reason for denial, the inability of Ms. Wood to control day-to-day operations because of her limited technical expertise. That reason as stated in the denial letter reads as follows:

The Department has consistently ruled that in order to be considered in control of a participating DBE firm the disadvantaged owner must have an overall understanding of, and managerial or technical competence and experience directly related to the type of business in which the business is engaged. The record evidence reveals that this business is engaged in asphalt paving and related contracting services. The record evidence clearly reveals that the disadvantaged owners do not possess the background and expertise to independently control the day-to-day operations of this business. While the Regulation does not require that the disadvantaged owner personally perform each and every function, it is required that they should be able to critically evaluate and...