Perks for Minority-Owned Businesses Upheld

CHICAGO (CN) — The federal program that offers advantages for minority and women-owned businesses on highway construction contracts may disproportionately burden subcontractors, but it is still constitutional, the Seventh Circuit ruled.

Midwest Fence, a specialty contractor focused on guardrails and fencing, challenged the federal government's program that offers help for "disadvantaged business enterprises," small businesses owned and managed by racial minorities and women.

The DBE program, in effect since 1983, establishes a goal of spending at least 10 percent of federal highway funds on contracts with disadvantaged businesses. DBE business owners must certify their disadvantaged status, and qualify only if their net worth does not exceed $1.32 million.

Participation in the federal program is a requirement for states that want to use federal highway funds.

However, the program offers the states significant flexibility. Contractors bidding on highway construction work in Illinois cannot be automatically rejected for failure to meet diversity goals, and quotas are flat-out prohibited. Instead, the state must determine if the bidder has made good faith efforts to find DBE subcontractors that could perform 10 percent of the work.

Further, states need not set a contract goal on every contract that uses federal highway funds, and they may adjust their participation goals if circumstances change.

The Seventh Circuit upheld the DBE programs Friday, ruling that they serve the compelling government interest of "remedying a history of discrimination in highway construction contracting."

Judge David Hamilton, writing for the three-judge panel, acknowledged that the program can place a disproportionate burden on specialty subcontractors such as Midwest Fence because large contractors often seek to fulfill their DBE contract goals by hiring specialty subcontractors that fit diversity goals.

"This potential for a disproportionate burden, however, does not render the program facially unconstitutional. The constitutionality of the program depends on how it is implemented," Hamilton said.

Both the Illinois Department of Transportation and the Illinois Tollway presented evidence to justify their participation in the DBE program, particularly statistical studies showing significant under-utilization of minority-owned businesses as well as disparities in earnings and the formation of businesses by minorities and women.

Midwest Fence, on the other hand, presented no independent analysis to refute the government's evidence supporting the need to ameliorate past discrimination faced by minority-owned businesses.

"If Midwest Fence had presented evidence rather than theory on this point, the result might be different. Evidence that subcontractors were being frozen out of the market or bearing the entire burden of the DBE program would likely require a trial to determine at a minimum whether IDOT and the Tollway were adhering to their responsibility to avoid overconcentration in subcontracting," Hamilton wrote. "Midwest Fence has shown how the Illinois program could yield that result but not that it actually does so." (Emphasis in original.)

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