Sherbrooke Turf, Inc. v. Minnesota Department of Transportation, United States of America, Intervenor Gross Seed Company v. Nebraska Department of Roads, United States Department of Transportation, Intervenor
Docket: 02-1665
Court: Court of Appeals for the Eighth Circuit; October 6, 2003; Federal Appellate Court
In the case 345 F.3d 964, Sherbrooke Turf, Inc. and Gross Seed Company, both non-minority contractors, challenged the federal requirement mandating that ten percent of federal highway construction funds be allocated to small businesses owned by "socially and economically disadvantaged individuals." This requirement originated from the Surface Transportation Assistance Act of 1982. Sherbrooke filed its lawsuit against the Minnesota Department of Transportation (MnDOT), while Gross Seed filed against the Nebraska Department of Roads (NDOR). The United States and the Department of Transportation intervened as defendants due to the constitutional implications of the federal statute.
Both contractors, who provide landscaping services on federally assisted highway projects, claimed they suffered competitive harm when contracts were awarded to businesses under the Disadvantaged Business Enterprises (DBE) program. The district courts ruled that both plaintiffs had standing to assert their constitutional claims, agreeing that the plaintiffs had previously bid on similar projects and would continue to do so.
On the merits, the district courts found that the DBE program in both Minnesota and Nebraska met strict scrutiny standards, both in its overall application and its specific implementation. This finding aligned with the Tenth Circuit's conclusion in a related case, Adarand Constructors, Inc. v. Slater. Sherbrooke and Gross Seed appealed, arguing that the courts erred in their strict scrutiny analysis and in their conclusions regarding the necessity for Minnesota and Nebraska to demonstrate independent compliance with strict scrutiny. The appellate court affirmed the lower courts' decisions.
Prior to the 1982 statute mandating that ten percent of federal highway funds be allocated for minority small business contractors, a similar provision in the Public Works Employment Act of 1977 was upheld by the Supreme Court in Fullilove v. Klutznick. Subsequent decisions, particularly City of Richmond v. J.A. Croson Co. and Adarand Constructors, Inc. v. Pena, questioned the constitutionality of mandatory racial set-asides, leading to the invalidation of Minnesota's ten percent set-aside for federal highway funds in In re Sherbrooke Sodding Co. Consequently, the DBE program was suspended in Minnesota in 1999. Following these judicial outcomes, Congress enacted the Transportation Equity Act for the 21st Century (TEA-21), which maintained the ten percent allocation, allowing the Department of Transportation (DOT) to implement new regulations. The revised DBE program offers advantages to small businesses owned by socially and economically disadvantaged individuals, defined by criteria related to racial or ethnic prejudice and economic impairments. States must presume that women and most racial minorities are disadvantaged, while individuals with a personal net worth exceeding $750,000 are ineligible. Additionally, businesses with earnings over $16.6 million in the last three years do not qualify. Sherbrooke and Gross Seed allege that the DBE program violates the Fifth Amendment's equal protection clause. Under strict scrutiny, established by Adarand, any federal program using race-based classifications must be narrowly tailored to serve compelling governmental interests. While the DBE program aims to assist disadvantaged individuals, it is acknowledged to be subject to strict judicial scrutiny due to its race-based presumptions and measures. Courts are reminded that while strict scrutiny is stringent, it is not always determinative of unconstitutionality.
To meet the strict scrutiny standard, the government must establish a compelling interest, which Sherbrooke and Gross Seed do not contest in relation to the district court's findings that Congress and the Department of Transportation (DOT) acted to address racial discrimination in federal fund distribution and government contracting. The Tenth Circuit in Adarand II affirmed the federal government's compelling interest in preventing the continuation of racial discrimination effects and in remedying past discrimination.
In addition to identifying this compelling interest, the government is required to provide a "strong basis in the evidence" for implementing race-based remedial actions, as mere legislative good intentions are insufficient given the suspect nature of racial classifications. Sherbrooke and Gross Seed argue that Congress lacked robust evidence of prevalent intentional racial discrimination in the contracting industry while citing misrepresentations in a Department of Justice summary used to support the legislation (TEA-21). They contend that existing government reports and their expert findings question the ongoing presence of racial discrimination, asserting a need for de novo review of the legislative record.
Upon reviewing the evidence, it was concluded that Congress indeed had a strong basis for its actions, supported by decades of compiled evidence regarding discrimination in highway contracting and barriers faced by minority-owned businesses. Although Sherbrooke and Gross Seed presented arguments indicating that the data could be interpreted in various ways, they did not provide conclusive evidence that minority-owned businesses have equal access to highway contracts, thus failing to prove the unconstitutionality of the Disadvantaged Business Enterprise (DBE) program.
Lastly, Sherbrooke and Gross Seed claim that the Minnesota Department of Transportation (MnDOT) and the Nebraska Department of Roads (NDOR) must independently establish a compelling government interest. Previous rulings indicated that a contractor acknowledging the legitimacy of a federal program could not challenge a state grantee simply for adhering to federal law.
The government contends, supported by district courts, that participating States are not required to meet the strict scrutiny standard independently since the revised Disadvantaged Business Enterprise (DBE) program mandates compliance with Department of Transportation (DOT) regulations. In contrast, Sherbrooke and Gross Seed argue that previous cases are not applicable, asserting that the DBE programs in Minnesota and Nebraska must individually satisfy strict scrutiny requirements due to the discretionary nature of the current TEA-21 regime. This issue, however, was not addressed in the Tenth Circuit's Adarand II decision.
The analysis reveals that neither party's arguments are wholly convincing. Compelling government interest must assess the statute or program on its face, typically on a national level for federal programs. If Congress or a federal agency operates with a legitimate purpose and strong evidential support, the program will meet the compelling interest standard, even if the evidence does not pertain to every State. The appellants' claim that the DBE program must be upheld based on evidence of race discrimination in Minnesota and Nebraska is rejected.
For a race-based program to be valid, it must also be narrowly tailored, meaning it should specifically address the asserted government purpose. The burden is on Sherbrooke and Gross Seed to demonstrate that the DBE program fails this standard. While the compelling interest analysis focuses on Congress's record, the narrow-tailoring inquiry evaluates the implementing agencies' roles. The facial challenge to the DBE program necessitates a thorough examination of DOT regulations to ascertain their constitutional applicability.
In assessing whether a race-conscious remedy is narrowly tailored, factors such as alternative remedies' effectiveness, the remedy's flexibility and duration, the relationship of numerical goals to the labor market, and the remedy's impact on third parties are considered. Under the revised DBE program, States receiving federal highway funds must annually submit a goal for DBE participation, which must be based on concrete evidence of available DBEs and can be adjusted for perceived discrimination effects.
The State is required to achieve the "maximum feasible portion" of its overall goal for minority business participation through race-neutral methods and must submit a projection for this approach. If race-neutral methods are insufficient, the State must prioritize certified Disadvantaged Business Enterprises (DBEs) without implementing quotas, and set-aside contracts are restricted to extreme cases of discrimination. Adjustments to race-conscious and race-neutral methods are required if the State's performance deviates from its goal during the year. The ten percent DBE participation goal is aspirational and not mandatory, meaning a State will not face penalties for failing to meet its goal unless there is evidence of bad faith. If a State meets its goal via race-neutral means for two consecutive years, it is not obligated to set a new annual goal until it fails to meet the prior goal. The Department of Transportation (DOT) can also grant waivers from program requirements. The regulations emphasize race-neutral strategies and prohibit quotas while allowing flexibility in program administration. The program limits preferences to small businesses with a net worth under $750,000, and can be dissolved if the State consistently meets its goals through race-neutral means. Additionally, the program is subject to congressional reauthorization, ensuring that deviations from equal treatment are temporary. Goals for DBE participation must reflect the number of minority contractors affected by past discrimination in relevant labor markets, requiring States to establish realistic participation goals.
The revised Disadvantaged Business Enterprise (DBE) program is contrasted with the previously invalidated program in Croson, which incorrectly assumed that minority participation would mirror their population representation. The current DBE program targets all socially and economically disadvantaged small businesses, with a rebuttable presumption for certain racial minorities. Wealthy minority individuals and firms are excluded, and certification is available for those demonstrating actual disadvantage. Race is relevant but not determinative in program implementation, as supported by legal precedents from Grutter and Gratz.
The program is deemed narrowly tailored based on its design, but challenges were raised regarding its application in Minnesota and Nebraska. States have discretion to set their own DBE goals based on local market conditions, independent of federal imposition. In Minnesota, the Minnesota Department of Transportation (MnDOT) commissioned a study by National Economic Research Associates (NERA), which found DBEs constituted 11.4% of contractors, with minority-owned businesses at 0.6% and women-owned at 10.8%. NERA suggested a race-neutral market could increase minority participation by 34%, adjusting the DBE availability figure to 11.6%. MnDOT established this as its goal for federally funded projects in fiscal year 2001, planning for 9% of that goal to be met through race- and gender-conscious efforts due to a significant drop in DBE participation following the suspension of the previous program.
MnDOT required bidders to make good faith efforts to subcontract with DBEs, determining the required portions based on factors such as DBE availability. The DOT approved MnDOT's program, while evidence from Sherbrooke questioning the reliability of NERA’s data was dismissed as they did not provide superior data or demonstrate unreasonable reliance on the analysis.
In 1999, a significant decline in Disadvantaged Business Enterprise (DBE) participation highlighted the inadequacy of race-neutral measures, leading MnDOT to conclude that substantial portions of its 2001 goals could not be achieved without race-conscious methods. The district court affirmed that MnDOT's revised DBE program is compelling and narrowly tailored, justifying the dismissal of Sherbrooke's claims. In Nebraska, the NDOR engaged MGT of America, Inc. to analyze DBE capabilities in highway construction, revealing that DBEs constituted 9.95% of available firms and received 12.67% of contract dollars during the previous set-aside period. MGT recommended a 9.95% DBE participation goal for NDOR, with 4.82% needing to be achieved through race- and gender-conscious means, which NDOR adopted. The DOT approved this program for fiscal year 2001, requiring prime contractors to allocate funds to DBE subcontractors. The court found that Gross Seed, similar to Sherbrooke, did not demonstrate that the DBE program was improperly tailored, leading to the dismissal of its claims as well. The district court judgments were affirmed, noting potential Eleventh Amendment immunity for state agencies but allowing state officials to be sued for injunctive relief. The document also references the constitutional considerations related to racial classifications under federal programs.
