Midwest Fence Corp. v. U.S. Dep't of Transp.

• Citation: 840 F.3d 932
• Decision Date: 04 November 2016
• Docket Number: No. 15-1827,15-1827
• Parties: Midwest Fence Corporation, Plaintiff–Appellant, v. United States Department of Transportation, et al., Defendants–Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)

840 F.3d 932

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

No. 15-1827

United States Court of Appeals, Seventh Circuit.

Argued January 12, 2016
Decided November 4, 2016

James R. Dashiell, Dashiell Law Offices, LLC, Arlington Heights, IL, for Plaintiff–Appellant.

Robert A. Koch, Andrew G. Braniff, Department of Justice, Washington, DC, Walter Jones, Jr., Christopher M. Cascino, Pugh, Jones & Johnson P.C., Chicago, IL, Richard S. Huszagh, Office of the Attorney General, Chicago, IL, for Defendants–Appellees.

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 Tollway).

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. Pena , 515 U.S. 200, 227, 115 S.Ct. 2097, 132 L.Ed.2d 158 (1995). Remedying the effects of past or present discrimination can be a compelling governmental interest. Shaw v. Hunt , 517 U.S. 899, 909, 116 S.Ct. 1894, 135 L.Ed.2d 207 (1996), citing City of Richmond v. J.A. Croson Co. , 488 U.S. 469, 498–506, 109 S.Ct. 706, 102 L.Ed.2d 854 (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. Ill. 2015). We affirm. We join other circuits in holding that the federal DBE program

840 F.3d 936

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, 106 S.Ct. 2505, 91 L.Ed.2d 202 (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

840 F.3d 937

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...