City of Cleveland v. Ohio

• Decision Date: 21 November 2007
• Docket Number: No. 06-3611.,06-3611.
• Parties: CITY OF CLEVELAND, Plaintiff-Appellant, v. State of OHIO; Ohio Department of Transportation, Defendants and Third Party Plaintiffs-Appellees, v. Federal Highway Administration, Third Party Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

508 F.3d 827

CITY OF CLEVELAND, Plaintiff-Appellant, v. State of OHIO; Ohio Department of Transportation, Defendants and Third Party Plaintiffs-Appellees, v. Federal Highway Administration, Third Party Defendant-Appellee.

No. 06-3611.

United States Court of Appeals, Sixth Circuit.

Argued: April 18, 2007.

Decided and Filed: November 21, 2007.

ARGUED: Pierre H. Bergeron, Squire, Sanders & Dempsey, Cincinnati, Ohio, for Appellant. John J. Stark, Assistant United States Attorney, Columbus, Ohio, for Appellees. ON BRIEF: Pierre H. Bergeron, Ryan D. Walters, Squire, Sanders & Dempsey, Cincinnati, Ohio, for Appellant. John J. Stark, Assistant United States Attorney, Columbus, Ohio, for Appellees.

Before MERRITT and GRIFFIN, Circuit Judges; LAWSON, District Judge.^*

OPINION

DAVID M. LAWSON, District Judge.

The City of Cleveland, Ohio (the City) challenges a final decision by the Federal Highway Administration (FHWA) to withdraw federal funds from a public works project initiated by the City that was intended to improve the aesthetic appearance of a local thoroughfare. At the base of this dispute is a local ordinance known as the Lewis Law, which mandates that contractors employing Ohio workers on public projects for the City ensure that at least twenty percent of the work on that project is performed by Cleveland residents, and provides that contractors who violate the requirement must post a substantial bond as a condition of receiving subsequent contracts with the City. The City included Lewis Law compliance as a requirement in its bid specifications but later withdrew that requirement when told to do so by the Ohio Department of Transportation. However, the requirement reappeared in the contract signed by the successful bidder. The FHWA determined that inclusion of the Lewis Law's local hiring preference in the contract violated certain federal requirements pertaining to competitive bidding and nondiscriminatory hiring, and therefore it withdrew federal funding that previously had been approved for the project. The district court rejected the City's challenge to the FHWA's decision brought under the Administrative Procedures Act on the grounds that the City's local hiring preference requirement frustrated 23 U.S.C. § 112's goal of limiting anti-competitive bidding provisions and procedures, and violated 23 C.F.R. § 635.117(b) by authorizing geographically-based discrimination. The lower court also held that the ordinance's enforcement mechanism violated 23 C.F.R. § 635.110(b) because the Lewis Law's bond penalty for noncompliance could restrict competition by deterring some contractors from bidding on City construction projects. Although we disagree with the district court's conclusion that the substance of the Lewis Law itself runs afoul of 23 U.S.C. § 112(b) and some of the regulations cited by the FHWA, we affirm the district court's judgment because withdrawal of the funds was authorized under the discretion conferred on the FHWA and by 23 U.S.C. § 112(b), which outlaws contract "requirement[s] or obligation[s]" that are not "specifically set forth in the advertised specifications." 23 U.S.C. § 112(b)(1). We also find that the FHWA acted reasonably in determining that the Lewis Law's bond penalty provision violated 23 C.F.R. § 635.110(b).

I.

The source of the dispute in this case is a City construction project aimed at improving the streetscape of Kinsman Road in Cleveland, Ohio. The City obtained most of the funds necessary to complete this project through the Federal-Aid Highway Program (the Highway Program), which is based on the Federal-Aid Highway Act (the Highway Act), 23 U.S.C. § 101, et seq., and administered by the FHWA, 49 U.S.C. § 104; 49 C.F.R. § 1.48(b). The FHWA is an agency within the United States Department of Transportation. 49 U.S.C. § 104(a).

The Highway Program provides States with financial assistance for a variety of transportation-related construction projects. Under the Highway Program, States retain their "sovereign rights . . . to determine which projects shall be federally financed." 23 U.S.C. § 145(a). States are eligible to receive funding if they have a state transportation department capable of carrying out the duties required by the Program. 23 U.S.C. § 302. Because Ohio maintains the Ohio Department of Transportation (ODOT), it meets this requirement. See Ohio Rev.Code § 5501.03.

To avail itself of federal funding and delineate the division of responsibilities between itself and the FHWA, ODOT entered into a "Memorandum of Agreement" with the FHWA Ohio Division Office on April 9, 2002. Although the Agreement delegates a great deal of responsibility to ODOT, it states that "the FHWA ultimately is accountable for ensuring that the Federal-aid Highway Program is delivered consistent with established requirements." JA at 278. Pursuant to the Agreement and relevant statutes and regulations, the FHWA provided ODOT with funding, guidance, and technical assistance. ODOT may in turn delegate primary responsibility for the administration of local projects to "local public agencies" (LPAs), such as the City. 23 C.F.R. § 635.105. This delegation, however, does not relieve ODOT of its responsibility to ensure that all projects under its purview are completed in accordance with federal and state law. 23 C.F.R. § 635.105(a).

On December 4, 2002, the City passed an ordinance authorizing the Directors of Public Service to apply to ODOT for a grant of federal Highway Project funds pertaining to the City's planned improvements of the Kinsman Road streetscape. Cleveland, Ohio, Ordinance 1530-02 (Dec. 4, 2002). The project was to encompass the area from East 130th Street to the City's corporation line and contemplated constructing a brick sidewalk, planting trees, and installing pedestrian light poles.

In early December 2003, the City entered into an "LPA Federal Project Agreement" with ODOT whereby ODOT delegated primary responsibility to the City for administration of the Kinsman Road project. ODOT agreed to provide eighty percent of the funding for the project from monies made available by the FHWA, up to a maximum of $696,000. The City agreed to furnish the remaining funds. The project had an estimated cost of $870,000.

On December 23, 2003, the City sent ODOT a copy of the proposed bid package for the Kinsman Road project. The bid package indicated that the selected contractor would be subject to Cleveland's Lewis Law. That law, enacted on June 10, 2003 and formally known as the Fannie M. Lewis Cleveland Resident Employment Law, was passed in order "to alleviate the lack of use of Residents on City of Cleveland construction projects found to exist by the Council of the City of Cleveland." Cleveland, Ohio Codified Ordinances § 188.07. The Lewis Law provides:

Where not otherwise prohibited by federal, state or local law or the terms of federal or state grants, all Construction Contracts shall contain a provision that requires that Residents of the City perform twenty percent (20%) of the total Construction Worker Hours ("Resident Construction Worker Hours") and shall contain a provision detailing the penalties for failure to do so, which penalties are set forth in Section 188.05.

Cleveland, Ohio Codified Ordinances § 188.02(a).

In an apparent attempt to avoid conflict with the Privileges and Immunities Clause by restricting the reach of this ordinance to Ohio residents only, see United Bldg. & Constr. Trades Council v. Camden, 465 U.S. 208, 215-23, 104 S.Ct. 1020, 79 L.Ed.2d 249 (1984) (in which the Court evaluated a Camden, New Jersey ordinance mandating local hiring preferences on city projects and observed that "Camden may, without fear of violating the Commerce Clause, pressure private employers engaged in public works projects funded in whole or in part by the city to hire city residents. But that same exercise of power to bias the employment decisions of private contractors and subcontractors against out-of-state residents may be called to account under the Privileges and Immunities Clause"), the City tailored the definition of "Construction Worker Hours" to exclude hours worked by non-Ohio residents. Cleveland, Ohio Codified Ordinances § 188.01(c). Therefore, by comprising its workforce entirely of out-of-state residents, a contractor would not be subject to the Lewis Law's requirements. On the other hand, if a contractor wished to use any Ohio workers, twenty percent of those workers' (i.e., the Ohio residents') hours would have to be performed by Cleveland residents. Cleveland, Ohio Codified Ordinances §§ 188.01(c) and 188.02(a).

If a contractor fails to satisfy the Lewis Law's requirement, a fine is imposed corresponding to the degree of the shortfall. Cleveland, Ohio Codified Ordinances § 188.05(b). In addition, for a period of five years after a violation, the City may require the offending contractor to post a surety bond equal to twenty percent of the contract price for any future contract. Cleveland, Ohio Codified Ordinances § 188.05(h).

After reviewing the bid package that included the local hiring requirement, the LPA Coordinator for ODOT notified the Director of Public Service for the City by e-mail on February 3, 2004 that failure to remove the language referencing the Lewis Law would lead to the withdrawal of federal funds. ODOT sent the City a letter to this effect on February 6, 2004. Both correspondences cited 23 C.F.R. § 635.117(b) as the basis for their warnings. In response, the City altered the contract and bid specifications by crossing out the references to the Lewis Law. Bids were received on February 26, 2004, and the bid submitted by Perk Company, Inc. (Perk) was approved by the City as the lowest responsible bid.

Although the bid specifications made no reference to the Lewis Law, the contract subsequently executed between the City and Perk incorporated its requirements. When the FHWA learned of this development, it sent a letter on July...