Court: Court of Appeals for the Tenth Circuit; February 15, 1994; Federal Appellate Court
The appeal concerns Adarand Constructors, Inc.'s (Adarand) challenge to the constitutionality of a federal program aimed at awarding contracts to disadvantaged business enterprises. Adarand contests a district court summary judgment favoring the Government on three grounds. First, Adarand argues that the court improperly applied the legal standard from Fullilove v. Klutznick instead of the more stringent standard from City of Richmond v. J.A. Croson Co. Second, Adarand insists that the Central Federal Lands Highway Division (CFLHD) must demonstrate specific findings of past discrimination to justify its use of the disadvantaged business enterprise (DBE) program, which informs the race-conscious subcontracting compensation clause (SCC program). Third, Adarand claims that section 502 of the Small Business Act, which authorizes the SCC program, is unconstitutional as it allegedly delegates excessive authority to federal agencies regarding minority-participation goals.
The appellate court, while affirming the district court's judgment, does so based on different reasoning. Adarand, a highway construction company led by a white male, sought both declaratory and injunctive relief against Department of Transportation (DOT) officials, claiming the SCC program violates equal protection rights under the Fifth and Fourteenth Amendments, as well as privileges and immunities under 42 U.S.C. 1983 and Title VI. The original complaint incorrectly stated that the SCC program was authorized by two specific transportation acts, but both parties agree that it is instead authorized by section 502 of the Small Business Act. This section mandates federal agencies to set annual goals for small business participation in procurement contracts, emphasizing opportunities for businesses owned by socially and economically disadvantaged individuals. The SCC program was initiated in 1979 to help fulfill these statutory goals within the DOT.
The SCC program includes a Subcontracting Compensation Clause applicable to small-value contracts or contracts with small business prime contractors. Prime contractors that subcontract more than 10% of the contract amount to DBEs are eligible for incentive payments—up to 1.5% for one DBE or 2% for two or more DBEs. Hiring DBEs is not a requirement for small business prime contractors to be eligible for contract awards; they can choose to utilize DBEs and receive incentives or opt out. To qualify for the SCC program, small businesses must undergo an annual certification to prove they are socially and economically disadvantaged, in accordance with section 502 of the Small Business Act. Eligibility criteria originated from the DBE regulatory program established under STAA and STURAA transportation acts.
Small business prime contractors under CFLHD contracts are exempt from the 10% DBE set-aside mandated for states and localities receiving STURAA funds, although STURAA defines "socially and economically disadvantaged individuals" as per the Small Business Act. A small business must be over 51% owned and controlled by disadvantaged individuals to qualify, with certain minority groups and women presumptively considered disadvantaged, although this can be contested. Both minority-owned and women-owned enterprises risk decertification if they are found not to be disadvantaged, while non-minority-owned small businesses can also gain DBE certification if they meet the same criteria.
In 1989, CFLHD awarded Mountain Gravel Construction Company a prime contract exceeding $1 million for the West Dolores project. Since CFLHD is a DOT agency, Mountain Gravel was not contractually obligated to hire DBEs. Nevertheless, CFLHD included a 1% contingent payment in the contract, dependent on the contractor awarding 10% of subcontracts to DBEs. The Subcontracting Compensation Clause provided monetary compensation for subcontracting to socially and economically disadvantaged small businesses and included provisions for assistance in various business development aspects. Payment under this clause is contingent upon the dollar amount of DBE subcontracts exceeding 10% of the original prime contract value.
Adarand submitted a bid to Mountain Gravel for a subcontract on the West Dolores project but was passed over in favor of a certified Disadvantaged Business Enterprise (DBE) despite being the lowest bidder. Mountain Gravel's decision allowed it to receive a $10,000 bonus under the SCC program. In response, Adarand filed a lawsuit on August 10, 1990, challenging the constitutionality of the SCC program and its reliance on the STAA and STURAA acts, arguing that it violated equal protection rights under the Fifth and Fourteenth Amendments, as well as provisions of 42 U.S.C. 1983 and 42 U.S.C. 2000d (Title VI). Adarand contended that the SCC program could not pass strict scrutiny under the Croson standard, while the Government maintained that the Fullilove standard applied, asserting that Adarand lacked standing to challenge the SCC program which was based on the Small Business Act, not STURAA. The district court granted summary judgment for the Government, incorrectly assuming a constitutional challenge to the DBE program under STAA and STURAA without addressing the standing issue or properly considering the Small Business Act. The court erroneously concluded that CFLHD was mandated by federal regulations to adopt a 10% set-aside and applied the relaxed Fullilove standard, ultimately finding that the program was narrowly tailored to meet legitimate congressional purposes, thereby satisfying constitutional requirements.
Adarand's standing to challenge the constitutionality of section 502 of the Small Business Act is upheld, despite not explicitly alleging its unconstitutionality in the complaint. Both Adarand and the Government recognized section 502 as the basis for the SCC program, and the constitutional analysis is consistent with that applied to similar programs. The district court's ruling, affirming summary judgment for the Government while denying Adarand's motion, is deemed correct, even if based on a different rationale.
However, Adarand's challenge to provisions regarding women-owned business enterprises (WBEs) lacks merit, as it did not argue this point in its summary judgment motion or show a personal stake in the WBE provisions. Consequently, the review is confined to the constitutionality of the SCC program's racial preferences.
The appeal addresses the constitutional standard for race-conscious programs mandated by Congress. The decision emphasizes that the Fullilove standard applies, which permits a lenient scrutiny approach for congressional affirmative action programs aimed at remedying discrimination, as established in the Fullilove case. The court affirms that, based on previous rulings, Fullilove governs the constitutional evaluation of race-conscious measures authorized by Congress.
The ruling in Ellis affirmed that Utah's compliance with federal mandates under STAA and STURAA was constitutional. Adarand concedes that the CFLHD's actions, aligned with section 502 of the Small Business Act, are valid unless that legislation is itself unconstitutional. Adarand acknowledges that section 502 meets the evidentiary standards set in Fullilove and that CFLHD's use of the SCC program falls within its delegated powers. Adarand argues that CFLHD should provide specific findings of past discrimination to justify its race-conscious SCC program under Croson, which the court disputes, asserting that no such requirement exists for federal agencies implementing federally mandated programs. The ruling distinguishes between state and federal authority, stating that federal actions under congressional authority, as backed by Fullilove and reaffirmed in Metro Broadcasting, can engage in affirmative action more freely than states. Furthermore, Congress, through section 502, grants agencies discretion to set higher DBE goals than the minimum 5% requirement, reflecting legislative intent for agencies to exceed this baseline.
The SCC program is established under a congressional delegation aimed at ensuring maximum participation of disadvantaged small businesses in federal procurement. Adarand's assertion that the program's racial preference is discretionary overlooks the foundational presumption of minority disadvantage established by Congress. The SCC program's eligibility criteria derive from STAA and STURAA, which incorporate the Small Business Act's section 8(d) presumption that socially and economically disadvantaged individuals include various minority groups. This presumption reinforces Congress's intent to enhance federal procurement opportunities for qualified minority-owned businesses.
CFLHD's implementation of the SCC program aligns with the Small Business Act's objectives, as acknowledged by Adarand, which states that the agency's actions fall within its delegated authority. The SCC program is related to the legislative purpose of increasing subcontracting opportunities for minority-owned businesses. The argument that Congress must define specific percentage goals for minority participation is countered by precedent set in Fullilove, which upheld race-conscious measures that meet equal protection standards without requiring fixed quotas.
The Court has previously affirmed that even congressionally-mandated race-conscious programs must comply with equal protection requirements. Since Adarand concedes that section 502 meets Fullilove's evidentiary standards, the sole remaining issue is whether the SCC program is narrowly tailored to fulfill section 502's remedial purpose. The program, modeled after the one upheld in Fullilove, operates under DOT’s DBE program, satisfying important governmental objectives while remaining flexible in its implementation. The district court concluded that the SCC program meets the constitutional requirements by serving significant governmental interests and being sufficiently tailored to achieve its statutory objectives.
To qualify for Disadvantaged Business Enterprise (DBE) status, a business must demonstrate eligibility through an annual certification process, ensuring that only legitimate businesses participate in the program, avoiding both overinclusiveness and underinclusiveness. The SCC program, designed to provide subcontracting opportunities for small disadvantaged businesses, is constitutional as it is narrowly tailored to fulfill its governmental purpose under section 502 of the Small Business Act. Eligibility is determined by economic disadvantage rather than race, allowing non-minority-owned businesses to qualify as well. The program does not require small business prime contractors to have specific DBE goals in their subcontracting plans; rather, it encourages them to consider DBE subcontractors without compelling them to do so. This inducement approach aligns with equal protection requirements, as established in previous rulings. The court affirmed the district court’s decision, rejecting arguments from Adarand and upholding the constitutionality of the SCC program, noting that even if it may disappoint non-minority firms, this does not constitute a constitutional defect. The ruling emphasizes that a correct decision must be affirmed regardless of the reasoning provided by the lower court. Key agencies and acts involved are listed for clarity.
Section 502 of the Small Business Act mandates the President to set annual Government-wide procurement goals for small businesses, with a minimum target of 20% for small business contracts and 5% specifically for those owned by socially and economically disadvantaged individuals. Each federal agency must establish its own goals, reflecting the maximum practicable opportunity for these businesses to engage in contracts and subcontracts. The cumulative goals for all agencies must meet or exceed the Government-wide targets.
Federal regulations stemming from the DOT, initiated by the STAA in 1983 and continued under STURAA, focus on enhancing minority business participation through set-asides for qualified subcontractors. STURAA allocates $55 million annually for specific federal highway projects, while most funding aids state and local federally-assisted highway programs.
Socially disadvantaged individuals are defined as those facing racial or ethnic prejudice, while economically disadvantaged individuals are those whose competitive ability is hindered due to limited capital and credit opportunities. These definitions encompass various racial minorities, including Black, Hispanic, Native American, and Asian Pacific Americans, and extend opportunities to women-owned small businesses.
The CFLHD oversees a jurisdiction that includes multiple states and has set a DBE participation goal of 12% to 15% for contracts awarded at the time of the West Dolores Project.
The percentage goal reflects the proportion of CFLHD’s total procurement program, but neither CFLHD nor any federal agency faces sanctions for failing to meet this annual goal. Agency heads must justify any shortfall in an annual report to the Small Business Administration. The racial composition of Adarand’s ownership is unclear, though its general manager is a white male, and its stockholders include his wife and two other women. The 10.7% subcontracting compensation clause for Wyoming is based on STURAA’s set-aside but is an optional goal rather than a mandatory requirement. Prime contractors can choose to utilize this option or disregard it, forfeiting the associated monetary incentives for hiring Disadvantaged Business Enterprises (DBEs). Chief Justice Burger's criteria for evaluating the legislation includes determining Congress's power over the objectives and assessing the constitutionality of limited racial and ethnic criteria in relation to the Fifth Amendment’s Due Process Clause. The Fullilove Court's majority favored an intermediate scrutiny approach rather than strict scrutiny for analyzing race-conscious remedial programs established by Congress. The precedent Adarand relies on, H.K. Porter Co. v. Metropolitan Dade County, was vacated and is not relevant as it addressed a local rather than a federal program. Metro Broadcasting upheld a Federal Communications Commission program that considered race for broadcast station ownership, finding that enhancing broadcast diversity is a significant governmental interest that meets equal protection standards since the program was closely aligned with this objective.
