Colette Holt & Associates
Legal UpdateLegal Updateonon
Disadvantaged Business Enterprise Disadvantaged Business Enterprise ProgramsPrograms
2012 Missouri Department of Transportation2012 Missouri Department of TransportationEEO ConferenceEEO Conference
Colette HoltColette HoltAttorney at LawAttorney at Law
18 April 201218 April 2012
Colette Holt & Associates
Legal Standards
City of Richmond v. J.A. Croson Co. City of Richmond v. J.A. Croson Co. (1989)(1989) Strict constitutional scrutiny applies to race-based
government decision making Court struck down Richmond’s 30% MBE quota Government can use spending powers to eradicate
private discrimination Government must be “passive participant” in
discrimination marketplace No need to prove agency discriminated Motive cannot be racial stereotyping or politics
Colette Holt & Associates
Legal Standards, cont.
““Societal” discrimination not sufficientSocietal” discrimination not sufficient All racial & ethnic groups must suffer in local All racial & ethnic groups must suffer in local
marketplacemarketplace Disparities between population & agency utilization Disparities between population & agency utilization
of M/WBEs is insufficientof M/WBEs is insufficient Race-neutral measures must be seriously Race-neutral measures must be seriously
consideredconsidered Strict scrutiny not fatal in fact: some affirmative Strict scrutiny not fatal in fact: some affirmative
action programs are permissibleaction programs are permissible
Colette Holt & Associates
Legal Standards, cont.
Strict scrutiny as appliedStrict scrutiny as applied Strong basis in evidence of government’s “compelling
interest” in remedying discrimination Remedies must be “narrowly tailored” to that evidence
Purpose of strict scrutinyPurpose of strict scrutiny Expose “illegitimate notions of racial inferiority or simple
racial politics” Provide a “framework for carefully examining the
importance and the sincerity of the reasons” for using race
Colette Holt & Associates
Trends
Defendants named in their individual capacities Legal standard: does the conduct “violate clearly
established statutory or constitutional rights of which a reasonable person would have known”
No indemnification & payment of defense costs Increasing reliance on race-neutral programs &
going “race-neutral” pursuant to studies Very low estimates of availability findings of no
disparity due to poor research Lack of economy-wide analysis incorrect conclusion
that government affirmative action is no longer necessary
Colette Holt & Associates
Trends, cont.
Increased anti-affirmative action law firm interest Attacks continue through litigation, legislation &
state constitutional amendments Increased scrutiny of D/M/WBE annual and contract
goal setting Must be a defensible economic model of markets
Arithmetic is not econometrics Must reflect accepted scientific principles Apply a “but for” adjustment?
Colette Holt & Associates
Rothe Development Corp. v USDODRothe Development Corp. v USDOD
Federal Circuit Court of Appeals struck down DOD’s SDB program No per se rule on study data age Studies were insufficient to meet strict scrutiny Studies should have controlled for “relative capacity” but
capacity & qualifications may be affected by discrimination
Other statistical and anecdotal evidence was not enough for activist judges
Colette Holt & Associates
GEOD Corp v NJ TransitGEOD Corp v NJ Transit
“As applied” challenge to DBE Program rejected Court adopted the Illinois & Minnesota DOT case
standards Plaintiff has the burden of persuasion Insufficient to suggest other methods are possible Every race-neutral measure need not be exhausted first Although weaker for Asians, there was evidence of
discrimination against them Some impact on non-DBEs is permissible
Colette Holt & Associates
H.B.Rowe Co. v. NCDOT
State-funded M/WBE program upheld except for white women M/WBE ownership had a negative effect on revenues,
especially for Blacks, unrelated to “capacity” concerns “Unremediated markets” data were highly relevant Anecdotal evidence confirmed a “good ole boys” network,
different performance standards, perceptions of M/WBE incompetence, etc; evidence need not be “verified”
Every race-neutral measure need not be tried & fail
Colette Holt & Associates
Recent Litigation Outcomes
Kline v. Pocari & Maryland DOT Challenge to State MBE & USDOT DBE Program Settled with positive Program changes
Kevcon v. US Challenge to SBA 8(a) Program Extensive Congressional record proffered After expert reports were filed, case was dismissed by
plaintiff with prejudice
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Pending Cases
AGC of San Diego v. Caltrans Summary judgment in favor of Program Participation by DBE intervenors was crucial Appeal pending
Midwest Fence v. Illinois DOT & Illinois Tollway Pleading stage; motion to dismiss denied Controlling case law upheld IDOT’s DBE Program in
2007 Use of federal record for state-funded program?
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DBE Program Revisions49 C.F.R. Part 26
Program oversight: § 26.37 Must include specific monitoring & enforcement
mechanism DBEs must do work committed to at contract award or per
contract modification Recipient must review contract records & monitor work sites
Ensures against: Inadequate on site monitoring, including inadequate commercially
useful function determinations Unauthorized DBE substitutions Slow or no pay Balkanization of responsibility: “DBE compliance is somebody
else’s job”
Colette Holt & Associates
DBE Program Revisions, cont.
Small Business Participation: § 26.39 Program must include an element to facilitate competition
by small businesses, including unbundling Must be submitted to mode by 2/28/12 Possible strategies
Race-neutral small business setasides Identification by bidders of large projects of elements or
subcontracts for small businesses On contracts without goals, mandated subcontracting Fostering small business joint ventures Soliciting reasonable number of contracts that small firms can
perform Disfavored: SBE contract goals added to DBE contract goals
Colette Holt & Associates
DBE Program Revisions, cont.
Accountability & Goal Submission: § 26.47 If overall annual goal isn’t met at the end of the fiscal
year, recipients must: Analyze in detail the reasons for the shortfall between the goal &
awards & commitments Establish specific steps to correct the problems & enable goal
achievement
Recipients may be found in noncompliance if: No analysis is submitted Mode disapproves the analysis & corrective actions Corrective actions are not fully implemented
Goals must have sound method & include potential DBEs
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DBE Program Revisions, cont.
Good Faith Efforts: § 26.53 Primes must receive prior written agency approval to
substitute or terminate a DBE Good cause means:
Failure to execute a contract Failure to perform to normal industry standards Failure to meet reasonable bonding requirements Bankruptcy or credit unworthiness Suspension or debarment from pubic work Determination by the agency of lack of responsibility Voluntary withdrawal by the DBE Ineligibility for goal credit for work committed Death or incapacity of the DBE owner Other good cause determined by the agency, not the contractor
Colette Holt & Associates
DBE Program Revisions, cont.
Prime must provide written notice to the DBE DBE has 5 days to respond, unless a shorter period is
necessary for public necessity (e.g., public safety) Also applies to pre-award deletions or substitutions by
offerors in negotiated procurements
Colette Holt & Associates
DBE Program Revisions, cont.
Economic Disadvantage: § 26.67 Personal net worth test indexed annually for inflation to
correct reduction & harmonize Part 26 & Part 23 Currently $1.32M Raise threshold & eliminate loopholes?
“Illiquidity” argument for business & home equity is too broad: applies to many other types of assets
Total exclusion benefits the wealthiest & least disadvantaged DBEs racially disproportionate benefit to white women
Punishes partnerships & sole proprietors Promotes poor financial planning by DBEs
Colette Holt & Associates
DBE Program Revisions, cont.
DBE Certification: § 26.71 Amends determination regarding control
Certification in additional types of work requires the DBE owner(s) to control that new work
Work type must be described with the most detailed NAICS code available; additional classification systems may be added
DBE may request supplementation of NAICS code that is too broad or vague
DBE work type classifications may be changed if supported by the record
Colette Holt & Associates
DBE Program Revisions, cont.
Additional certification rules: § 26.73 Eligibility must be evaluated under current circumstances,
not solely historical info New firms otherwise eligible must be certified; no
exceptions for lack of project completions, profits or demonstrated potential for success
Colette Holt & Associates
DBE Program Revisions, cont.
Certification procedures: § 26.83 DBEs remain certified until certification is removed;
certification doesn’t “expire” DBEs can’t be required to “recertify” Certification review, including on site visit, 3 years from
most recent certification or if necessary because of changed circumstances, complaint or other info
Applicants must be advised within 30 days if application is complete & if not what additional info is needed
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DBE Program Revisions, cont.
Interstate certification: § 26.85 Non-home state may accept home state certification
without further procedures Non-home state may require complete copy of home
state application & documents & documents from applications to other states 60 days to determine any specific objections Applicant has burden of proof by preponderance of evidence to
respond Non-home state must issue written response in 30 days All states have good faith duty to cooperate with one another
Colette Holt & Associates
Additional Issuesfor
Future Rulemaking or Guidance
Proliferation of sham joint ventures Inadequate commercially useful functions DBELO reporting to CEO on paper only Inadequate staff resources & training Inconsistent regional & modal guidance Imposition of penalties for poor Program administration
Criminal prosecutions filling the void Commercially useful function investigations indictments Lack of expertise of prosecutors confusion of Program standards
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Disparity Study ObjectivesDisparity Study Objectives
Provide litigation defenseProvide litigation defense Studies aren’t challenged; programs are challenged
Meet regulatory requirementsMeet regulatory requirements Set overall, annual D/M/WBE goal Develop D/M/WBE contract goals
Make administrative improvementsMake administrative improvements Obtain confidential customer feedback Create focus on data collection & monitoring
Colette Holt & Associates 24
Recommended Disparity Study ElementsRecommended Disparity Study Elements
Determine utilizationDetermine utilization Empirically establish geographic & product marketplacesEmpirically establish geographic & product marketplaces
Use highest level of detail (4 digit NAICS vs. “construction”) to establish compelling interest & narrowly tailor program elements
Fill in missing non- D/M/WBE subcontractor data
Calculate race-neutral participation for DBE programs
Do not limit the size of contracts studied (e.g., >$500K)
Obtain large majority of contracts & contract dollars (e.g., 85%)
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Recommended Disparity Study Elements, Recommended Disparity Study Elements, cont.cont.
Use the “Custom Census” availability methodologyUse the “Custom Census” availability methodology Create a database of relevant agency projects Count all businesses in the relevant markets Identify firms’ industries & locations Identify & verify all listed M/W/DBEs in those markets
Colette Holt & Associates 26
Recommended Disparity Study Elements, Recommended Disparity Study Elements, cont.cont.
Use the “Custom Census” because it:Use the “Custom Census” because it: Provides dollar-weighted availability estimates to set
overall, annual D/M/WBE goals Provides detailed availability estimates to set DM/WBE
contract goals Casts a “broad net” as held by courts to meet
contracting affirmative action programs’ remedial purpose
Counts all businesses in relevant markets, not just those known to the agency or willing to respond to surveys
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Recommended Disparity Study Elements, Recommended Disparity Study Elements, cont.cont.
Do not determine availability by surveys unnecessarily lower estimates
Do not adjust for “capacity” unnecessarily lower estimates
Do not conduct separate prime & sub calculations Unrealistic, too simplistic & maintains barriers
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Recommended Disparity Study Elements, Recommended Disparity Study Elements, cont.cont.
Do not use the “Bidders List” ApproachDo not use the “Bidders List” Approach Existing discrimination may lead to under-representation Popularity of D/M/WBE program may lead to over-
representation “Apples to oranges” if lists are combined Remedial aspect of the Program is lost by looking
only at current results without regard to the continuing effects of discrimination
Colette Holt & Associates 29
Recommended Disparity Study Elements, Recommended Disparity Study Elements, cont.cont.
Do not conduct a “capacity” analysisDo not conduct a “capacity” analysis No common definition Ignores the elasticity of supply, especially in construction What about subcontracts? Disparities persist even when “capacity” variables are controlled for Variables (revenues, years in business, bonding limits, etc.) are impacted by
discrimination Ignores the D/M/WBE program’s remedial nature by locking in the
results of past discrimination “Capacity” rejected by courts when explained by expert testimony
Colette Holt & Associates 30
Recommended Disparity Study Elements, Recommended Disparity Study Elements, cont.cont.
““Disparity” versus “availability” studyDisparity” versus “availability” study Availability is a subset of disparity (Part 26 step 1) Disparity elements (Part 26 step 2)
What would availability be in a discrimination free world?
Qualitative determination
Quantitative measurement Statistical & anecdotal evidence of discrimination Program implementation review
Effect of the DBE program ≠ downward adjustment
Colette Holt & Associates 31
Recommended Disparity Study Elements, Recommended Disparity Study Elements, cont.cont.
Study scopeStudy scope Use 5 years of contract data Types of contracts
USDOT-funded if DBE program Locally-funded Informal procurements?
Include a program review Evaluate the effectiveness of race-neutral measures Examine utilization on no-goals contracts
Colette Holt & Associates 32
Recommended Disparity Study Elements, Recommended Disparity Study Elements, cont.cont.
Conduct an agency contracts disparity analysisConduct an agency contracts disparity analysis Necessary but not sufficient for D/M/WBE programs
because of the effect of remedial market intervention Necessary for state & local programs A finding of no disparity isn’t the end of the analysis
Effects of the D/M/WBE program Continuing impact of discrimination
Conduct a quantitative large scale surveyConduct a quantitative large scale survey DBEs’ vs. non-D/M/WBEs’ business experiences on
public & non-goals jobs Must conduct non-response testing
Colette Holt & Associates 33
Recommended Disparity Study Elements, Recommended Disparity Study Elements, cont.cont.
Conduct an economy-wide disparity analysisConduct an economy-wide disparity analysis Look outside agency’s own contracting activities D/M/WBEs’ vs. non-DM/W/BEs’ business formation rates
& earnings from Census data sources Credit market discrimination analysis based on Federal
Reserve & SBA surveys
Critical element of legal defense for contracting affirmative action programs
Colette Holt & Associates 34
Recommended Disparity Study Elements, Recommended Disparity Study Elements,
cont.cont. Include anecdotal evidenceInclude anecdotal evidence
Necessary but not sufficient
Explore current effects of past biases & exclusion
Examine denials of full & fair access to government
contracts & subcontracts
Evaluate existing programs for effectiveness in
remedying discrimination & providing opportunities
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Conclusion:Conclusion:Study Methodology MattersStudy Methodology Matters
Does the approach meet legal & social science standards?Does the approach meet legal & social science standards?
Does the agency want a strong remedial program?Does the agency want a strong remedial program?
Do the results from prior studies comport with reality?Do the results from prior studies comport with reality? Insufficient disparities for Blacks in Georgia
Insufficient disparities for women in construction
Insufficient disparities for Hispanics in California
Contracts only under $1M subject to the program for city with a $50B
budget
Colette Holt & Associates
Recommendations
Don’t lose sight of the D/M/WBE program’s remedial purpose; goals must pass the reality test
Focus on program implementation, not just program justification
Document, document, document Collect complete contract data NOW; get a good
electronic compliance system Conduct high quality studies; you get what you pay
for Know when to hold ‘em, know when to fold ‘em
Colette Holt & Associates 37
Colette HoltColette Holt
225 Rishell Drive225 Rishell Drive
Oakland, CA 94619Oakland, CA 94619
773.255.6844773.255.6844
[email protected]@mwbelaw.com
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