Midwest Fence Corp. v. United States Dept. of Transp.

• Decision Date: 27 June 2011
• Docket Number: Case No. 10 C 5627
• Parties: MIDWEST FENCE CORP., Plaintiff, v. UNITED STATES DEPT. OF TRANSPORTATION, et al., Defendants.
• Court: U.S. District Court — Northern District of Illinois

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

Case No. 10 C 5627

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

Date: June 27, 2011

Hon. Harry D. Leinenweber

MEMORANDUM OPINION AND ORDER

Before the Court are Defendant's Motions to Dismiss on various grounds. For the reasons that follow, the Court denies Defendants' Motions to Dismiss for lack of standing. The remainder of Defendants' Motions to Dismiss also are denied, with two exceptions. Counts V through VII are dismissed with prejudice in regard to the Illinois Department of Transportation. Counts XIV and XVI, seeking injunctive and monetary relief against the Illinois State Tollway Authority, are dismissed with leave to replead within 30 days from the date of this order.

I. BACKGROUND

Plaintiff Midwest Fence Corp. (hereinafter, "Midwest") is a Chicago-based guardrail and fencing contractor that bids on subcontracts for projects let by the Illinois Department of Transportation ("IDOT"). It brought the instant suit challenging the constitutionality of the U.S. Department of Transportation's("USDOT") Disadvantaged Business Enterprise ("DBE") program. Midwest similarly challenges IDOT's implementation of the federal DBE program for federally funded projects, its implementation of its own DBE program for state-funded projects, and the Illinois State Toll Highway Authority's (the "Tollway") separate DBE program.

The suit names USDOT, its Secretary, Ray LaHood ("LaHood"), in his official capacity; and the Federal Highway Administration (the "FHWA") and its Administrator, Victor Mendez ("Mendez"), in his official capacity (hereinafter, collectively, the "Federal Defendants"). Also named are IDOT and Gary Hannig ("Hannig"), in his official capacity as Illinois Secretary of Transportation (the "IDOT Defendants"); and the Tollway, its Chairwoman, Paula Wolff, in her official capacity; Gov. Patrick Quinn and Hannig in their capacities as ex officio members of the Tollway board, and various directors of the Tollway (the "Tollway Defendants"). Midwest is seeking declaratory and injunctive relief against all the defendants, and monetary damages from IDOT and the Tollway.

The facts are taken from Midwest's Complaint, and, when appropriate, the relevant portions of the various statutes and relevant background provided by the Defendants in their motions to dismiss. When considering Defendants' motions to dismiss for failure to state a claim under FED. R. CIV. P. 12(b), the Court will presume the facts in Midwest's complaint to be true.

A. Parties

Midwest is a Delaware corporation with its main office in Chicago, Illinois. It is owned and controlled by white males and does not qualify as a DBE under any of the challenged programs. Midwest bids primarily as a subcontractor on contracts let by IDOT and the Tollway.

The USDOT is responsible for the maintenance of the nation's roads and highways. The FHWA is an arm of USDOT that is responsible for carrying out highway design, construction, and maintenance duties. The IDOT performs a similar role in Illinois. The Tollway is an administrative agency of the state that constructs, regulates, and maintains Illinois' system of toll highways. It is governed by an 11-member board of directors and, unlike IDOT, receives no federal funding.

B. The DBE Programs

The goal of the DBE programs is to increase the flow of public dollars for road construction to businesses owned by individuals who are socially or economically disadvantaged.

The federal DBE program is authorized by the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users ("SAFETEA-LU"), Pub. L. No. 109-59, 119 Stat. 1144 (2005)(codified as amended in scattered sections of 23 U.S.C. and 49 U.S.C.). It provides, in relevant part, "[e]xcept to the extent that the Secretary determines otherwise, not less than 10 percentof the amounts made available for any program under Titles I, III, and V of this Act . . . shall be expended through small business concerns owned and controlled by socially and economically disadvantaged individuals." 23 U.S.C. § 101(b). Federal regulations interpret this provision as setting an aspirational goal, providing, in relevant part:

(a) The statutes authorizing this program provide that, except to the extent the Secretary determines otherwise, not less than 10 percent of the authorized funds are to be expended with DBEs.

(b) This 10 percent goal is an aspirational goal at the national level, which the Department uses as a tool in evaluating and monitoring DBEs' opportunities to participate in DOT-assisted contracts.

(c) The national 10 percent goal does not authorize or require recipients to set overall or contract goals at the 10 percent level, or any other particular level, or to take any special administrative steps if their goals are above or below 10 percent.

49 C.F.R. § 26.41.

With respect to federal projects, IDOT's DBE program is governed by USDOT regulations. IDOT also follows the federal regulations for its own state-funded road projects. In regard to the federal program, IDOT must set an annual, overall DBE participation goal, which must be submitted to the FHWA. 49 C.F.R. §§ 26.45(a)(1), (f)(1). The regulations define a DBE as a "for profit small business concern":

(1) That is at least 51 percent owned by one or more individuals who are both socially and economically disadvantaged or, in the case of a corporation, in which51 percent of the stock is owned by one or more such individuals; and

(2) Whose management and daily business operations are controlled by one or more of the socially and economically disadvantaged individuals who own it.

49 C.F.R. § 26.5.

The regulations contain a rebuttable presumption that U.S. citizens who are "women, Black Americans, Hispanic Americans, Native Americans, Asian-Pacific Americans, Subcontinent Asian Americans, or other minorities found to be disadvantaged by the SBA [Small Business Administration] are socially and economically disadvantaged individuals." 49 C.F.R. § 26.67(a)(1). Applicants must submit a signed, notarized certification that each presumptively disadvantaged owner is in fact disadvantaged. Id. Members of these groups, then, are not required to prove they are socially and economically disadvantaged. 49 C.F.R. § 26.61(c). Individuals who do not fall within the presumptions must prove, by a preponderance of the evidence, that they are socially and economically disadvantaged. 49 C.F.R. § 26.61(d).

In order to show social disadvantage, individuals must demonstrate that they have been "subjected to racial or ethnic prejudice or cultural bias within American society because of their identities as members of groups and without regard to their individual qualities." 49 C.F.R. pt. 26, App. E. A number of factors must be shown to meet this requirement, for example, that "at least one objective distinguishing feature has contributed tosocial disadvantage, such as race, gender, disability, long-term residence in an environment isolated from the mainstream of American society, or other similar cases not common to individuals who are not socially disadvantaged." Id. To show economic disadvantage, individuals must be socially disadvantaged and demonstrate that their "ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same or similar line of business who are not socially disadvantaged." Id.

Additionally, to be eligible to be a DBE, a firm must meet the definition of a small business as defined by the Small Business Administration. 49 C.F.R. § 26.65(a). The limit on annual receipts varies by type of business, but Defendants argue that the applicable regulation here is the one for "all other specialty trade contractors," which is $14 million. 13 C.F.R. § 121.201. Additionally, in order to qualify as a DBE, the firm's average gross receipts over the prior three years must not exceed $22.41 million. 49 C.F.R. § 26.65(b). Any individual whose personal net worth exceeds $1.32 million is not economically disadvantaged. 49 C.F.R. § 26.67(b)(1).

Midwest contends that although subcontractors receive only about 25 percent of the total contract dollars spent by IDOT, DBE goals are met almost exclusively through subcontracting dollars. For example, in federal fiscal year 2007, $1,354,577,435 went toprime contractors as a whole, while $338,513,578 went to subcontractors. Companies classified as DBEs received $183,267,044 from IDOT, of which $146,532,174 came from subcontracting dollars. The reason for this, Midwest contends, is that the economic limitations on companies qualifying as DBEs make it impossible for them to bid on any but the smallest prime contracts. Midwest contends that recently IDOT has dramatically increased the DBE participation rates required by contract, to the point where its requirements threaten to drive non-DBE subcontractors out of the market.

The Tollway has instituted a voluntary program to increase participation of DBEs on its projects. The Tollway program mirrors the IDOT program, and the DBE certification requirements are the same as the federal requirements outlined above. Midwest contends that from 2006 to 2008, all contract dollars that went to DBEs from the Tollway flowed from prime contractors to their subcontractors. Again, because a company must be economically disadvantaged to qualify as a DBE, Midwest contends it is impossible for DBEs to bid on any but the smallest prime contracts.

C. The Complaint

Midwest's 17-count complaint is confusingly labeled in places. (For example, it labels Counts I through VII as seeking declaratory relief from IDOT, Hannig, LaHood, and Martinez.) However, in its response to IDOT's Motion to Dismiss, Midwest has clarified therelief it seeks. Counts I through IV seek declaratory relief against the Federal Defendants, specifically: (I) a declaration that the...