Legal Updates on Supplier Diversity ProgramsColette Holt

April 10, 2019

M.K. Weeden Construction. v. Montana DOT

•Plaintiff failed to meet 2% DBE contract goal

•Summary judgment for agency•Plaintiff failed to make good faith efforts•Other bidders met the goal•Failure to make good faith efforts = non-responsiveness

•Obtained 6 MTDOT contracts over 6 years, so irreparable harm•No standing because plaintiff wasn’t subjected to race-based barrier to its ability to compete for prime contracts

Dunnet Bay v. Illinois DOT

•Narrow tailoring case

•Plaintiff low bidder failed to meet 20% DBE goal

•Made some but not all possible good faith efforts•Contacted DBEs; some follow up; didn’t contact supportive services

•Bid exceeded the program estimate

•Plaintiff was left off prequalified bidders list

•Did IDOT adopt a “no waivers” policy?

Dunnet Bay v. Illinois DOT

•Holding for IDOT•Plaintiff general contractor did not have standing to bring the lawsuit•Could compete on equal footing with other GCs•DBE program can include white males but is limited by size & PNW

limits plaintiff could not satisfy

•Contract was rebid so no injury from DBE program

• IDOT’s annual & contract goal setting method was reasonable & met Part 26•There was no “no waiver” policy•Plaintiff failed to make good faith efforts

Geyer Signal, Inc. v. Minnesota DOT

•DBE program is facially constitutional (again)•Program can be operated without “overconcentration”•Several approaches to address the problem

•MnDOT’s program is narrowly tailored•Plaintiff failed to prove that “better data” were available; that MnDOT was “unreasonable” in relying on existing data; or that discrimination no longer exists•Rejected challenge to methodology to set contract goals•Overconcentration analysis based on NAICS codes was reasonable

Midwest Fence v. Illinois DOT & Illinois Tollway

•Summary judgment for both agencies & USDOT•Controlling case law upheld IDOT’s DBE Program in 2007• Inadequate recent disparity study for the Tollway so counsel relied on a 2006 availability study; new disparity study recently completed• IDOT correctly applied Part 26•Tollway’s program largely mirrors Part 26, including accepting ILUCP certifications & adopting personable worth & size limits•Plaintiff has ample opportunities on contracts

Mountain West Holding Co. v. Montana DOT

•Trial court’s summary judgment in MTDOT’s favor •MTDOT’s disparity study found underutilization of DBEs for all groups in most categories & anecdotal evidence of continuing discrimination•Study recommended only race-neutral measures to meet 5.83% goal; relevant & probative that utilization then dropped from 13.1% to 2.8%•No requirement to distinguish between industries•Plaintiff cannot simply dispute the methodology•Private right of action under Title VI is available

Mountain West Holding Co. v. Montana DOT

•9th Circuit reversed & remanded•Plaintiff’s claims for equitable relief are moot because MTDOT no longer sets race-conscious contract goals

•Title VI claim is not moot •Factual disputes about disparity study findings

•Decline in participation not dispositive

•Anecdotal evidence standing alone is insufficient

•Remand to consider “appropriate” proceedings

•Opinion is not to be cited

Orion Insurance Group v. Washington State

•Plaintiff learned at age 40 he is 4% Black, 6% Indigenous American & 90% White•Applied for state MBE certification & UCP DBE certification

•State certification approved; DBE certification denied

•Court rejected claims under the Administrative Procedure Act; the 14th Amendment; 42 U.S.C. §1983; & Title VI

Race-Neutral/Small Business Programs

•Increasing defaults to SBE programs•No need for disparity studies because size & location are not protected classifications

•Inadequate to remove systemic race & gender barriers because the vast majority of firms are small

•BUT only remedies to increase access to prime contract opportunities

•What basis for annual or contract goal setting since the great majority of firms are “small”?

Race-Neutral/Small Business Programs

•DBE Program must include small business element (49 C.F.R. § 26.39)

•Possible strategies•Race-neutral small business setasides or points•Unbundling•On contracts without goals, mandated subcontracting•Fostering small business joint ventures•Disfavored: SBE contract goals added to D/M/WBE contract goals

Veteran Business Programs

•Federal goal is 3% for SDVOSBs; Veterans Administration’s goal is 7% for SDVOSBs

•Lower legal standard of “rational basis” review

•Vets not presumptively disadvantaged in DBE program

•Major problems with self-certification, pass throughs & ownership & control

•Equal Protection problem for disabled non-vets?

•Data that there is a problem? Effect on D/M/WBE programs?

LGBTQ Programs

•Lower legal standard of “intermediate scrutiny” for gender discrimination? Title VII coverage?•Certification issues•What type of proof of sexual orientation?•Full transition & change in legal status for transgendered persons?•Certify under the individual approach of Part 26?

•Collect contract data•Vendor applications?•Bidders lists?

Financial Services Programs

•Covers asset managers, bond underwriting, bond sales, etc.

•Assets under management versus annual gross receipts for size standards?

•Disparity studies?•Data sources?Different paradigm?

•Personal net worth limits?

•Contract goals? Points? Setasides?

Contract Goal Setting

•Increased scrutiny under narrow tailoring•Can you explain how the number was derived?•Must be based on the scopes of work of the contract (including the prime dollars) & availability in those scopes•Consider the size of the contract: subcontracting realistic?•Cannot use the same goal in every contract or rely on an overall annual goal• Is the process described & the determination documented?

•Apply a “but for” adjustment?•NY State complaint about how contract goal was derived

Commercially Useful Function

•What is acceptable while maintaining the DBE’s independence?•Use of prime’s equipment•Personnel•Common employees•Blurred roles• “Payroll jumping”?

•Suppliers• Joint checks?• Price negotiations?

•How much help is too much help?

Commercially Useful Function

•Role of joint venture partners•Capital contributions•Day-to-day management

•Installation only contracts

•Do not distinguish between primes & subs to determine CUF

•Goals on commodities contracts?

•Unrealistic goals?

Commercially Useful Function

•New DBE Program Guidance 8-22-18•Recipient must certify it has reviewed contracting records & monitored work sites•Document, date & sign

•CUF review meets this requirement

•Onsite must include:• Field staff review of scope of subcontracts

• Assurance DBE named on commitment performs work with its own forces

• Observations recorded in log book

• Signature to meet written certification mandate

Good Faith Efforts

•Litigation weak spot

•No need for GFEs if the goal is met

•How much notice to give D/M/WBEs?

•How many &/or what percentage must be contacted?

•What is the role of price?•Set percentage above lowest non-D/M/WBE price?

•Clear & accessible procedures critical

Good Faith Efforts

•When are requests due?•DBE program• ALL bidders must submit commitments/GFEs with sealed bid, as

matter of responsiveness; or within 5 days after bid opening as matter of responsibility•No extension beyond 5 days if apparent low bidder does not meet

goal or document GFEs• Losing bidders must submit GFEs

• Incentives to comply?• Affect prequalification?• Withholding of bid bond?

•Keep records of submittals & outcomes

“Overconcentration”

•Defined in Part 26 as DBEs are so heavily represented in a given type of work that non-DBEs are squeezed out

•If recipient finds overconcentration, it should take mitigating measures

•This issue has been raised unsuccessfully in some challenges

“Overconcentration”

•What is the definition?

•What is the response?•Drop for goal credit?

•SBE setasides?

•Additional supportive services?

“Overconcentration”

•What about overconcentration of non-DBEs?•DBEs are often “ghettoized”•237110- Highway, Street, and Bridge Construction

• Non-DBEs received 94 % of contract dollars from NCDOT; Blacks received 0.3%

• Non-DBEs received 88% of contract dollars from WSDOT; Blacks received 0.0%

•237990- Other Heavy and Civil Engineering Construction• Non-DBEs received 100% of contract dollars from NCDOT

• Non-DBEs received 94% of contract dollars from WSDOT; Blacks received 0.0%

Contract ComplianceMonitoring and Enforcement

•Prompt payment•Pay for sub’s completed work even if all subs have not invoiced the prime contractor?

•Diversity Management Software•Partial info in; incomplete data collection and monitoring out

•What about professional services?•Quality of work to DBEs?

•On call or job order contracts•Task order goals or overall goal?•Transparency of the process

USDOT Program Update

•“New” prompt payment sample template•All subcontractors must receive payment & retainage no later than 30 days from prime’s receipt of payment

•No MWBE goals or state or local geographic preferences on federal aid contracts•Individuals who own multiple businesses must include value of ownership in all businesses•Regional reciprocity efforts•FHWA DBE Alternative Contracting Best Practices Manual issued

USDOT Program Update

•Compliance with timely processing of certification requirements•Recipient/UCP must inform DBE applicant whether application complete within 30 days of receipt• If more time is required, recipient must track & notify applicant within 30 days•Recipient must make decision within 90 days of date application deemed complete• If interstate application, once UCP receives all info, it has 60 days to certify or assert good cause to challenge home state certification

USDOT Program Waivers

•Disparity studies recommended dropping certain groups for goal credit (CalTrans, WSDOT, ORDOT, etc.)

•Challenges

•Certification status must be clear to primes (“UDBEs”)•Dropped groups remain “in the program” ➾ confusion

•Eligible under the individual approach?

•Tracking the results•Utilization

•Withdrawals from the program/bankruptcy

USDOT Program Waivers

•What is the standard•Statistical “overutilization”?•How to separate from the effect of the program

•Level playing field and equal opportunities?•Role of anecdotal information

•Confusion of cause (contract goals) with effect (utilization)•Where have racism and sexism been “fixed”?

•Pilot “no goals” contracts BEFORE seeking waiver?

Title VI Complaints

•Title VI requires non-discrimination in programs with federal funds; test is intent to discriminate

•Bay Area Rapid Transit•Failed to conduct an equity analysis •When ordered to do so, product was inadequate•FTA directed $70M to other uses

•California High Speed Rail Authority•DBE coalition filed complaint•Part of resolution was to conduct a disparity study

Title VI Complaints

•WSDOT Conciliation Agreement with FHWA•Prime JV ordered to make remedial actions

•Department required to file reports & take specified actions

•Additional complaints filed

•Private right of action by DBEs?

•Tort actions by DBEs?

Prosecutions for D/M/WBE Fraud

•Major focus of USDOJ Inspector General

•Local law enforcement interest is increasing

•Types of successful fraud prosecutions•False information in certification applications•Lack of independence from non-certified firm•Passthroughs/fronts•False business cards, vehicle decals•False certified payrolls, invoices, other documents•Failure to fully perform a commercially useful function

Disparity/Availability Studies

•National trends•Different methodologies ⇒ different outcomes•Different groups experience different degrees of discrimination•Blacks remain at the bottom• Sexism still constricts women in the construction industry

•Adding groups• VBEs; SBEs; LGBTQEs; PDBEs; LBEs

•Goals mostly determine utilization• Entrenched systems?• Poor contract goal setting?•Unprepared DBEs?

Where Are We Going?

•Little growth in minority-owned D/M/WBEs•Entrenched current effects of past racist policies• Post-WWII GI Bill•Home loans & redlining

• Educational exclusion•Discrimination in access to commercial credit

•Current issues• Exclusion from industry & professional networks• Stereotypes & perceptions of competency• Industry consolidation

• Inability to obtain prime contracts

Where Are We Going?

•Increased focus on the “racial wealth gap”•“Wealth” versus “income”•Role of home ownership in entrepreneurship•Development of political power

•New paradigms?•Black experience doesn’t translate fully to other groups•Outmoded definition's of “markets”•Effects of widening inequality•Small businesses vs. breakout entrepreneurs

Limits of Data

•Data = values•Unconscious bias•Life experiences•Choice of variables is critical•Amazon Prime refused to deliver to certain zip codes•Google searches show women lower paying jobs •Reinforcing Facebook feeds

•Data ≠ truth

•Data ≠ power

Defining Success

•Why isn’t the DBE program more effective, especially for Black contractors?•Capacity building versus “new” DBEs•Unrealistic and national size and PNW limits•Lack of focus and assistance to become prime contractors•Money, money, money

•What about agency imposed barriers?•Prequalification and experience standards/agency “skin in the game”•“Who’s in the club?”

Defining Success

•What does “success” mean?

•More DBEs get work?

•DBE’s revenues increase?

•DBEs take on prime contracts?

•DBEs enter new lines of business?

•Construction industry stratification•Only a tiny number of firms get large transportation contracts

• Explosion of very large national firms

•What does “level playing field” mean in the real world?