Rothe Development Corporation v. United States Department of Defense and United States Department of the Air Force
Docket: 00-1171
Court: Court of Appeals for the Federal Circuit; August 20, 2001; Federal Appellate Court
The case involves Rothe Development Corporation appealing a decision from the United States District Court for the Western District of Texas regarding the constitutionality of Section 1207 of the National Defense Authorization Act of 1987. This program allows the Department of Defense (DOD) to give preferential treatment in contract bidding to small businesses owned by socially and economically disadvantaged individuals (SDBs) by applying a price-evaluation adjustment that can increase the bid of non-minority-owned firms by up to ten percent.
Rothe contended that the program violated their equal protection rights under the Fifth Amendment due to a lack of an adequate evidentiary basis for its race-based classification. The government defended the program, arguing that Congress had sufficient evidence of the DOD’s passive role in perpetuating historical discrimination against minorities in defense contracting, justifying the need for race-based remedial measures.
The district court had applied a deferential standard of review and relied heavily on evidence gathered after the program's last reauthorization in 1992. However, the appellate court found that the district court should have applied "strict scrutiny" and improperly considered post-reauthorization evidence. Consequently, the appellate court vacated the district court's judgment and remanded the case for further proceedings.
The 1207 Program was enacted by Congress to increase Department of Defense (DOD) contract awards to small businesses owned and controlled by socially and economically disadvantaged individuals. Initially established for fiscal years 1987-1989, it set a goal of allocating five percent of total defense contract dollars to such businesses. The program allows the DOD to elevate bids from non-disadvantaged businesses by up to ten percent to meet this goal. Although the program was extended multiple times due to initial underperformance, it has succeeded in meeting the five percent target since its reauthorization in 1992. Key amendments include a 1998 requirement to suspend the price-evaluation adjustment for one year after meeting the goal, which the DOD did in 1998 and 1999. The program is set to expire at the end of fiscal year 2003 unless reauthorized. It incorporates elements of the Small Business Act to define disadvantaged businesses based on the racial or ethnic background of their owners.
A business qualifies as "small" if it is independently owned, not dominant in its field, and meets specific employee or revenue thresholds (15 U.S.C. 632(a)(1)). "Socially disadvantaged individuals" are defined as those facing racial or ethnic prejudice due to their group identity (15 U.S.C. 637(a)(5)). "Economically disadvantaged individuals" are socially disadvantaged individuals whose competitive ability is impaired by limited capital and credit opportunities compared to non-disadvantaged peers (15 U.S.C. 637(a)(6)(A)). Certain groups, including Asian-Pacific Americans, are presumed socially and economically disadvantaged (15 U.S.C. 637(d)(3)(C)). A socially disadvantaged business (SDB) must be at least 51% owned and controlled by a member of these groups (15 U.S.C. 637(d)(3)(C)(i)(ii)). Challenges to an individual's disadvantaged status can be made by contracting officers, unsuccessful bidders, or the Small Business Administration (48 C.F.R. 219.302-70). SDBs may choose to waive the price-evaluation adjustment (48 C.F.R. 219.7002(a)). To participate in the program, an SDB owner must have a net personal worth under $750,000, excluding business and residence value (13 C.F.R. 124.106(b)(2)). Non-presumptively disadvantaged individuals may still qualify for price-evaluation adjustments if they demonstrate social or economic disadvantage (13 C.F.R. 124.105(c)(1)(i)).
In the case at hand, Rothe, a business owned by Caucasian female Suzanne Patenaude, has contracted with the Air Force since 1987 for computer system maintenance at Columbus Air Force Base. International Computer and Telecommunications, Inc. (ICT), a Korean-American owned SDB with $13 million in annual revenue, is Rothe's primary competitor. The Air Force consolidated contracts for improved accountability, issuing a solicitation on March 6, 1998, for a combined contract under the 1207 program. Rothe submitted the lowest bid at $5.57 million, while ICT bid $5.75 million. Due to the price-evaluation adjustment, Rothe's bid was effectively raised to $6.1 million for selection purposes.
On August 20, 1998, the Air Force awarded a contract to ICT, identified as the "fictionally" lowest bidder. The district court noted that Rothe lost the bid solely due to a price-evaluation adjustment. The contract, initially set to expire on September 30, 1999, was extended by the Air Force to September 30, 2001; however, ICT ceased work on April 30, 1999, due to a stay imposed by the Fifth Circuit and later by this court pending appeal. The Air Force subsequently issued a new solicitation for the work related to the disputed contract, affirming the lawfulness of the contract award to ICT was not in question.
Rothe filed a suit on November 5, 1998, against the DOD and the Air Force, challenging the constitutionality of the 1207 program under the Fifth Amendment's Due Process Clause. Rothe sought declaratory and injunctive relief to prevent contract awards under this program and claimed damages for bid preparation costs and attorney fees. The District Court for the Western District of Texas denied Rothe's preliminary injunction request on November 25, 1998, and granted summary judgment in favor of the government on April 27, 1999. Rothe timely appealed, but the Fifth Circuit dismissed the appeal for lack of jurisdiction and transferred it to this court. Oral arguments were heard on November 8, 2000.
The appellate review of the district court's summary judgment is conducted de novo, focusing on whether a genuine issue of material fact exists. Summary judgment is warranted if the evidence, including pleadings and affidavits, indicates that no rational trier of fact could find for the non-moving party. The case primarily revolves around legal issues based on undisputed facts, with significant disputes regarding the inferences and conclusions drawn from those facts.
Jurisdiction is established under 28 U.S.C. 1295(a)(2) and the Tucker Act, 28 U.S.C. 1346(a)(2), granting this court exclusive authority to hear appeals related to cases with district court jurisdiction based on the Tucker Act. The Tucker Act allows district courts to handle civil claims against the U.S. not exceeding $10,000, based on constitutional grounds, congressional acts, executive regulations, or contracts, including claims for bid preparation costs from unsuccessful bidders due to alleged unfair evaluation processes. Rothe's complaint, which seeks recovery of bid preparation costs, invokes the Tucker Act, affirming this court's exclusive jurisdiction over the appeal.
Regarding the burden of proof, the district court placed the responsibility on Rothe to prove the unconstitutionality of a price-evaluation adjustment, contrary to Rothe's argument that the government should justify its affirmative action program. The court upheld this allocation, stating that while the government must provide evidentiary support demonstrating a need for race-based remedial action, the ultimate burden remains on challengers to prove the evidence does not substantiate claims of prior discrimination or that the action is not narrowly tailored.
Congress derives its authority to implement race-based classifications through Article I of the Constitution, permitting the attachment of such conditions to federal program appropriations as long as they do not violate the Fifth Amendment's equal protection clause.
Section 5 of the Fourteenth Amendment grants Congress the authority to enact remedial racial classifications, specifically aimed at addressing state transgressions against individuals, and does not apply to private individuals or federal actors. The Supreme Court has not clearly defined the limits of Congress's authority under this section, as seen in the varying opinions expressed in cases like Adarand III. The 1207 program, enacted under Congress's Article I powers related to Armed Forces funding, affects private firms bidding for contracts with the Department of Defense (DOD). Consequently, the constitutionality of the 1207 program must be assessed in light of the limitations imposed by the Fifth Amendment on congressional power concerning racial classifications.
Historically, the Supreme Court applied different standards of review for racial classifications based on whether they originated from state or federal actions. Prior to 1995, classifications enacted by states were subject to strict scrutiny, requiring a compelling interest and narrow tailoring. In contrast, federal classifications were subject to intermediate scrutiny, where the classification needed to be substantially related to an important governmental objective. However, the 1995 Adarand III decision established that all racial classifications, regardless of their source, are subject to strict scrutiny, thereby eliminating the distinction between state and federal scrutiny levels. This ruling clarified that any governmental actor must justify racial classifications under the most rigorous judicial standards, aligning the treatment of federal and state racial classifications.
The Court's historical practice indicates that the analysis from Croson, which pertains to state and municipal classifications, serves as the standard for evaluating the constitutionality of federal racial classifications under the Fifth Amendment, paralleling precedents set by the Fourteenth Amendment. The district court acknowledged that strict scrutiny applies to federal racial classifications but argued for deference to Congress in defining a compelling purpose and demonstrating narrow tailoring. It emphasized that Congress should be allowed flexibility in addressing national issues and should receive deference regarding findings of ongoing discrimination. The court declined to apply Croson's standards rigidly, suggesting that its narrow tailoring factors should be adapted for Congress, as reflected in its reliance on Supreme Court plurality opinions regarding Congress's broader remedial powers under Section 5 of the Fourteenth Amendment. The district court noted that justices had expressed that Congress's remedial powers warrant greater deference than those of state or municipal bodies, citing instances in the Fullilove and Croson opinions, and concluded that the Supreme Court had not repudiated these positions, inferring that a majority would support a broader standard for congressional remedial measures.
The district court incorrectly determined that federal racial classifications should be evaluated using a less rigorous scrutiny compared to state or municipal classifications, which contradicts Supreme Court precedent and undermines equal protection principles. The court's approach resembled a diluted version of strict scrutiny, as seen in Croson, and should not apply in this context. The legality of the 1207 program, enacted under Article I, does not afford Congress deference in establishing a compelling interest for the racial classification. On remand, the district court is instructed to apply a detailed, skeptical analysis similar to that in Croson, ensuring it does not apply a lesser standard.
The district court's analysis of pre-reauthorization evidence for the 1207 program was superficial, focusing instead on post-reauthorization evidence. As the 1992 reauthorization constitutes a new statute, the court should evaluate whether there was a compelling interest for reauthorization without assessing the original statute's sufficiency. The court cited limited congressional documents to support Congress's compelling interest, referencing reports from the original enactment and last reauthorization, as well as statistics on minority ownership of businesses and the effectiveness of existing minority programs.
The district court's conclusion of discrimination against Asian-Pacific Americans was supported by findings from the Small Business Administration (SBA) prior to their inclusion in the SBA's presumption in 1980. Under the Croson standard, a reviewing court requires a "strong basis in evidence" to validate legislative claims of ongoing discrimination necessitating remedial actions. The district court must provide detailed findings on the scope and content of the evidence presented to Congress, as these findings are crucial for meaningful appellate review. Although the appellate court has access to the same reports, it emphasizes that the evaluation of whether these reports constitute a "strong basis in evidence" is primarily the district court's responsibility. The district court's mere listing of references before reauthorization was insufficient to demonstrate that Congress had a strong evidentiary basis for the 1207 program. Furthermore, under Croson, race-based classifications must address identified systematic discrimination, rather than rely on generalized claims or anecdotal evidence. The evidence cited did not establish that the 1207 program was intended to remedy a specific need linked to systematic discrimination against Asian-Pacific Americans. Although the SBA's findings suggested that Congress believed there was sufficient evidence for inclusion in the SBA presumption, this belief, originating in 1980, does not substantiate a strong evidentiary basis for continuing the presumption in the DOD program years later.
Statistical evidence is crucial in justifying race-based legislation, as established in *Croson*, where a significant statistical disparity between qualified minority contractors and those actually engaged can indicate discrimination. Courts upholding race-based classifications often rely on such evidence, as seen in cases like *Cone Corp. v. Hillsborough County* and *Adarand VII*, where disparities in construction industry participation suggested discriminatory practices.
However, the district court's reliance on a 1975 House report statistic indicating that only 3% of American businesses were minority-owned, while minorities constituted 16% of the population, is deemed insufficient to support the constitutionality of the reauthorized 1207 program. The report lacks data on the number of minorities seeking to own small businesses, does not account for the specific industry of the contracts in question, and fails to correlate the number of minority-owned businesses with their business volume. Additionally, the statistic is outdated, raising further concerns about its relevance.
While the district court may find other evidence sufficient for upholding the 1207 program’s constitutionality, it is ultimately the court's role to determine whether such evidence exists. The pre-reauthorization evidence cited does not meet the "strong basis in evidence" requirement from *Croson*, which is necessary to demonstrate a compelling interest in reauthorizing the program.
The district court also relied on post-enactment evidence, including findings from the Asian American Legal Defense and Education Fund, to support its conclusion regarding discrimination against Asian-Pacific Americans, indicating that Congress has recognized this issue in its findings.
The district court indicated reliance on AALDEF's brief and evidence to conclude that Congress had a compelling purpose to address discrimination in government contracting. It referenced a 1998 Department of Commerce "Benchmark Study," which revealed that although small disadvantaged businesses (SDBs) could handle 40.2% of federal contracting dollars, they received only 26.4%. Circuit courts generally agree on the permissible use of post-enactment evidence, allowing it to assess the constitutionality of programs when they are reenacted or modified. Such evidence can inform decisions on injunctive relief and the narrow tailoring of race-based programs. However, using post-enactment evidence to justify a program's constitutionality poses challenges, as the Supreme Court requires a "strong basis in evidence" for affirmative action programs to be upheld. There is debate among circuit courts regarding whether a legislature must possess this strong basis at the time of enacting a racial classification or if it can rely on subsequent evidence. Supreme Court rulings suggest that a legislative body must have some evidence of discrimination to constitutionally enact a race-based program, emphasizing the necessity for public employers to have convincing evidence before implementing affirmative action measures.
Circuit courts have established that a legislative body must possess evidence of discrimination before enacting any racial classification program; otherwise, the program is deemed unconstitutional. Programs adopted without legitimate evidence of discrimination are presumptively invalid. While it is clear that some evidence of discrimination is required for a legislature to constitutionally implement affirmative action, there is some ambiguity regarding the evidentiary standard that should apply at the legislative level versus during litigation. Key cases, such as *Croson* and *Wygant*, suggest that the evidentiary burden for legislatures may be lower than the "strong basis in evidence" standard required when the program is legally challenged.
In *Croson*, the Court emphasized the need for states to identify specific discrimination before implementing race-conscious measures. Similarly, *Wygant* required a showing of prior discrimination by the governmental unit to justify racial classifications. Some circuit courts interpret these precedents as allowing legislatures to act on a belief of ongoing discrimination without having strong evidence at the time of enactment. For instance, the *Ensley Branch N.A.A.C.P. v. Seibels* case indicated that if a state has good faith reasons to believe in systematic discrimination, the program would not be invalidated based on an insufficient record if later findings support the need for action.
However, recent Supreme Court rulings clarify that the evidentiary burden for legislatures must align with the "strong basis in evidence" standard applied in litigation. In *Shaw v. Hunt*, the Court ruled that a state must have a strong basis in evidence to justify racial gerrymandering in congressional redistricting, reinforcing that the institution making the racial distinction must have adequate evidence to conclude that remedial action is necessary.
The legislature must possess a "strong basis in evidence" before implementing or reauthorizing an affirmative action program, as established by the Court's interpretation of prior rulings in Wygant, Croson, and Shaw. The emphasis on "before" indicates that the evidence must be available at the time of enactment, not speculated upon later. A racial classification can only pass strict scrutiny if it reflects the actual motivations of the legislature, rather than conjectural motivations. This principle is reinforced by the Court's analysis in Croson, which aims to prevent illegitimate racial uses by ensuring that any race-based measures serve a significant governmental interest. Furthermore, in Bush v. Vera, the Court reiterated that post-enactment evidence, such as election results, cannot justify a prior redistricting plan, underscoring the necessity of pre-authorization evidence for upholding racial classifications. If the evidence prior to reauthorization is insufficient, it invalidates the program, regardless of subsequent evidence. This requirement is crucial to confirm that the program is genuinely remedial. The subsequent sections will address the district court's opinion on these matters.
The district court determined that it relied on post-enactment evidence from the AALDEF and the Benchmark Study to establish a compelling interest for Congress enacting racial classifications related to the 1207 program. The court supported the government's assertion of a compelling interest and the proportionality of the program's goal of five percent minority participation relative to the market. However, it was found that the district court improperly justified Congress's compelling interest using post-enactment evidence from 1987 and 1992. On remand, the court must reassess the constitutional validity of the 1207 program solely based on pre-reauthorization evidence, although post-enactment evidence may be used to evaluate the program's constitutionality as applied.
The remand requires an analysis under a strict scrutiny standard, similar to that for state or municipal racial classifications, particularly referencing the principles from Croson and Adarand III. The review must consider if the 1207 program was enacted as a remedial measure and ascertain the legitimacy of its purpose beyond mere racial stereotypes or non-racial factors. The district court is tasked with defining the injury's scope and the necessary remedy, determining if the program addresses current discrimination or merely the lingering effects of past discrimination. Additionally, the court should evaluate whether the government, especially the DOD, played a significant role in perpetuating discrimination or if it was a passive participant in a system of racial exclusion.
The district court found significant differences between the 1207 program and the program analyzed in Croson, especially regarding geographic scope. Although these differences do not affect the application of strict scrutiny, they are relevant to assessing whether Congress had a "strong basis in evidence" for the 1207 program and if it is narrowly tailored. Unlike municipalities that must demonstrate local discrimination to justify race-based programs, Congress is not required to provide evidence of discrimination across all states. However, isolated instances of discrimination are insufficient to support a nationwide program. It is the district court's responsibility to determine the extent of evidence indicating pervasive discrimination across racial lines to justify preferences for the five disadvantaged racial groups under the 1207 program. The Supreme Court in Croson emphasized that a racial preference benefiting all minorities cannot be justified solely by identifying discrimination against one group. Therefore, Congress must demonstrate a broad pattern of discrimination affecting all groups receiving preferences under the 1207 program. While specific findings for each racial subgroup are not mandated, evidence of discrimination against broader categories, such as Asian-Pacific Americans, may suffice. Additionally, the district court must evaluate whether discriminatory practices were evident within the specific industry impacted, maintaining that courts should not defer blindly to government definitions of affected industries, as historical context demands careful scrutiny in equal protection cases.
The government supports the inclusion of the broad "business services" category for federal procurement as determined by the Benchmark Study, while Rothe advocates for a focus solely on computer maintenance and repair services within the defense sector. The court refrains from defining the relevant industry and directs the district court to evaluate the evidence used, including determining: (1) the appropriate industry classification, and (2) the adequacy of evidence concerning discrimination justifying racial preferences, taking into account the years 1992, 1998, and the present, especially if Rothe seeks injunctive relief. The district court must assess whether the evidence is timely and substantive enough to support the program's constitutionality, noting that much evidence was over a decade old by 1992.
Further, on remand, the district court is tasked with reevaluating the narrow tailoring of the 1207 program under strict scrutiny, considering six factors: necessity of relief, efficacy of race-neutral alternatives, flexibility of relief, relationship of numerical goals to the labor market, impact on third-party rights, and the appropriateness of racial classifications. The district court previously found the program flexible, limited in duration, and not unduly impacting third parties, but failed to thoroughly analyze three other factors. Specifically, it should conduct a rigorous examination of the effectiveness of race-neutral alternatives and explore any attempts made before the reauthorization of the 1207 program, as suggested by the Supreme Court, which emphasized the need for legislative findings on the enforcement of prior antidiscrimination measures.
The absence of any recorded enforcement of the city's antidiscrimination ordinance contradicts the dissent's assertion that a close-knit construction industry has obstructed African Americans from gaining necessary contracting experience. The district court's evaluation of a five percent participation goal for minority contractors relied solely on the Benchmark Study, which is deemed irrelevant for assessing the program's justification at the time of its reauthorization in 1992, as it was conducted afterward. The court must explore pre-reauthorization evidence to establish a connection between the five percent goal and the available pool of qualified socially disadvantaged businesses (SDBs). It may also consider post-enactment evidence, like the Benchmark Study, to assess the goal's continued relevance in 1998 and to decide on Rothe's request for injunctive relief.
Additionally, the district court deferred to Congress's conclusion that the 1207 program was not overinclusive, noting that all minority participants live in the U.S. and have faced discrimination. On remand, the court is required to evaluate if each of the five minority groups in the program has experienced discrimination sufficient to justify their inclusion in a racial preference program related to the defense industry. The court must also consider any constitutional issues with the enactment of 8(d), given that the Tenth Circuit's ruling in Adarand VII mandates individualized assessments of economic disadvantage for each minority group included under 8(d). The court noted that a tailored approach, requiring specific narratives of disadvantage, would address concerns from the Croson decision regarding the need for targeted remedial measures.
In conclusion, the district court's failure to apply strict scrutiny in analyzing the 1207 program's constitutionality, along with its reliance on irrelevant evidence, necessitates vacating the judgment and remanding the case for proper findings.
The legal document outlines critical aspects of legislation regarding Small Disadvantaged Businesses (SDBs) and affirmative action in federal contracting. The House bill originally mandated a ten percent set-aside of Department of Defense (DOD) procurement funds for SDBs, but the Senate bill, which was enacted, replaced this with a goal of five percent for contracts and subcontracts. Various methods to achieve this goal include technical assistance and partnerships with historically minority educational institutions.
The document also specifies the groups considered as SDBs, which include Black Americans, Hispanic Americans, Native Americans, Asian-Pacific Americans, and Subcontinent Asian Americans. Additionally, it notes legal precedents regarding equal protection under the Fifth and Fourteenth Amendments, referencing significant cases such as Schneider v. Rusk and Croson, which addressed discrimination and affirmative action in contracting. The constitutionality of race-conscious programs, like those discussed in Adarand, is examined, focusing on their legislative origin and implications for federal contracting practices.
The Department of Transportation (DOT) awarded a prime contract for a highway construction project in Colorado to Mountain Gravel Construction Company, which then sought subcontractor bids for the guardrail segment. Adarand, a local highway construction firm, submitted the lowest bid but lost the contract to a company owned by an Hispanic American. The Tenth Circuit initially upheld the district court's ruling on the constitutionality of the program in Adarand Constructors, Inc. v. Pena (Adarand II). However, the Supreme Court later reversed this decision (Adarand III) and remanded the case. Upon remand, the district court deemed the Small Contractor's (SCC) program unconstitutional for lacking narrow tailoring (Adarand IV). On September 25, 2000, the Tenth Circuit acknowledged Congress's compelling interest in enacting the SCC program but noted the 1996 version was not narrowly tailored, unlike the current program (Adarand VII). The Supreme Court granted certiorari on March 26, 2001, to address two issues: the application of the strict scrutiny standard regarding Congress's compelling interest in legislation to remedy racial discrimination and the narrow tailoring of the Department of Transportation's current Disadvantaged Business Enterprise (DBE) program. The Supreme Court's opinion in Adarand III was mostly a majority opinion, except for a plurality opinion on one part authored by Justice O'Connor. The Court did not specify the exact analysis for federal racial classifications but vacated the Tenth Circuit's decision for further consideration based on its announced principles. The excerpt also references the Fullilove case, which applied intermediate scrutiny to congressional racial classifications, emphasizing a need for close examination while acknowledging Congress's role in enforcing equal protection under the Fourteenth Amendment. Additionally, it notes that while Congress's conclusion on the necessity of race-based relief may not warrant deference, its fact-finding is entitled to some level of deference, as discussed in the Croson case.
Legislative bodies are presumed to act regularly and their decisions receive deference from the judiciary. When Congress reauthorizes a statute, it has the opportunity to review all relevant evidence that emerged after the initial enactment but before reauthorization. This process is akin to allowing a statute to lapse and then re-enacting it, which permits courts to evaluate all evidence available prior to the latest reauthorization when assessing a statute's constitutionality, particularly in equal protection cases.
In the case at hand, the contract in question was awarded in 1998, necessitating consideration of evidence available to Congress preceding the 1992 reauthorization of the relevant program. The 8(a) program, designed to support disadvantaged minorities, requires participants to have a personal net worth below $250,000. The district court's evidentiary record may be insufficient even under rational basis scrutiny, which requires only a rational relationship between treatment disparities and legitimate government purposes. Citing the Supreme Court's decision in Board of Trustees of the University of Alabama v. Garrett, the court indicated that the evidence supporting a disability classification was inadequate due to insufficient historical patterns of discrimination.
Despite differing factual scenarios, precedents regarding racial classifications from other contexts are relevant for evaluating the constitutionality of racial classifications in public contracting. The court referenced Associated General Contractors of Ohio, which underscored that sufficient evidentiary justification must exist before the enactment of a racially conscious statute, rather than during legal challenges.
The document addresses the use of post-enactment evidence in assessing legislative intent regarding discrimination, particularly in the context of the "strong basis in evidence" standard established by the Supreme Court. It references a disagreement among courts, with one court asserting that using post-enactment evidence to determine if a legislative body had a strong basis for past discrimination contradicts equal protection principles. However, it allows such evidence to supplement existing statistical data that demonstrates the presence of discriminatory practices. The district court's reliance on post-enactment evidence from the AALDEF was scrutinized, concluding that this reliance was intended to fulfill the legislative duty under the Croson standard, rather than merely to bolster the record. Additionally, the 2000 regulations revised the criteria for economic disadvantage determinations, eliminating race-based presumptions and requiring individual narratives for claims of economic disadvantage, although this was not a requirement in 1998 at the time of the contract award in this case.
