Northern Contracting, Inc. v. State of Illinois, Illinois Department of Transportation, Kirk Brown, in His Capacity as the Illinois Secretary of Transportation

Citations: 473 F.3d 715; 2007 U.S. App. LEXIS 320Docket: 05-3981

Court: Court of Appeals for the Seventh Circuit; January 7, 2007; Federal Appellate Court

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Northern Contracting, Inc. (NCI) appealed a decision from the district court, which concluded that the Illinois Department of Transportation (IDOT) did not violate the U.S. Constitution in its administration of a program aimed at increasing the participation of socially and economically disadvantaged individuals in highway construction subcontracting. NCI argued that IDOT's disadvantaged business enterprise (DBE) program was not narrowly tailored to serve a compelling governmental interest. The appellate court affirmed the district court's judgment, finding that NCI had failed to prove a constitutional violation. 

NCI specializes in constructing guardrails and fences for highway projects and relies heavily on subcontracting for its revenue. The DBE program is rooted in federal policy, which mandates that a minimum of ten percent of federal highway funds be allocated to DBEs. IDOT, receiving about one-third of its funding from the federal government, is required to have an approved DBE program in compliance with federal regulations. The case was argued before the Seventh Circuit on April 13, 2006, and the decision was rendered on January 8, 2007.

To qualify as a Disadvantaged Business Enterprise (DBE), a company must be at least 51% controlled by socially and economically disadvantaged individuals, as defined by federal regulations. Socially disadvantaged individuals are those who face racial or ethnic prejudice, while economically disadvantaged individuals have impaired competitive abilities due to limited capital and credit opportunities compared to non-disadvantaged peers. A DBE owner's net worth must not exceed $750,000, and companies with gross revenues over $16.6 million do not qualify. NCI is not recognized as a DBE since it lacks ownership by women or racial minority group members.

Recipients of USDOT funds, like IDOT, are required to establish local DBE involvement goals based on the availability of DBEs. This involves calculating a "base figure" for DBE availability and adjusting it according to local evidence to arrive at a final goal. Once established, the DBE plan must be submitted to USDOT for approval, which cannot withhold funds unless bad faith is proven if goals are not met. During implementation, recipients must maximize DBE participation through race-neutral means, such as providing bonding assistance and conducting outreach programs.

IDOT initiates a new DBE (Disadvantaged Business Enterprise) plan annually, with National Economic Research Associates, Inc. (NERA) conducting a custom census for the Fiscal Year 2005 plan. Dr. Jon Wainwright led the analysis, focusing on the transportation infrastructure construction market in Illinois. He surveyed Dun & Bradstreet’s database and IDOT's DBE list, identifying inaccuracies that led to findings of 22.8% of minority or woman-owned firms being owned by white men, and 14.5% of non-minority firms actually being minority or woman-owned. This resulted in an adjusted DBE availability of 22.77%. Wainwright also ran a regression analysis, estimating that without discrimination, DBE availability would be 27.5%.

In setting the DBE goal for Fiscal Year 2005, IDOT considered various sources, including a previous NERA study for Metra, expert reports from a related court case, public hearing feedback, and its own historical DBE usage data, including a "zero goal" experiment where DBEs received 1.5% of contract values. IDOT's review also included the Illinois State Toll Highway Authority's voluntary DBE goal of 15%, with a 1.6% average usage rate.

While IDOT's overall DBE goal was set at 22.77%, individual project goals are determined based on project type and DBE availability. After selecting a prime contractor, there is a seven-day window for the contractor to submit a DBE utilization plan, with potential waivers for good-faith efforts to meet goals.

NCI's complaint at the onset of litigation contended that TEA-21 and USDOT regulations exceeded Congressional authority, violated the Fifth Amendment's equal protection clause, and that the Illinois statute implementing federal DBE requirements breached various civil rights statutes. NCI sought declaratory and injunctive relief. Following discovery, the district court granted summary judgment in favor of USDOT, affirming a compelling interest in addressing discrimination in highway contracting, while determining that further examination was required to assess whether IDOT's program was narrowly tailored.

During the bench trial, the State presented testimony from Wainwright, owners of Disadvantaged Business Enterprises (DBEs), and IDOT employee Colette Holt regarding the Fiscal Year 2005 DBE plan. NCI provided testimony from non-DBE prime contractors. The parties agreed on certain statistics regarding IDOT’s contracting expenditures to DBEs: 15.19% in 2003 and 18.05% in 2004 for total expenditures; 19% in 2003 and 17% in 2004 for contracts with DBE goals; and 2% for contracts without DBE goals in both years. Judge Pallmeyer concluded that IDOT's Fiscal Year 2005 DBE program was narrowly tailored to address the federal government's compelling interest in remedying racial and gender discrimination in highway construction, resulting in a judgment for the defendants. NCI is appealing this judgment.

In reviewing the appeal, the court must determine whether NCI can demonstrate that IDOT's DBE program fails constitutional scrutiny, utilizing strict scrutiny due to the racial classifications involved. A government program using such classifications must be narrowly tailored to serve a compelling governmental interest. NCI appears to have conceded the compelling interest aspect and focused on whether the program is narrowly tailored. The court concurs with the district court's finding that IDOT has met its burden of proof regarding the compelling interest, primarily based on the federal government's interest in addressing historical discrimination in the construction market. Other circuits support that states can rely on federal compelling interests when implementing local DBE plans. The inquiry for federally mandated programs is generally national, and as long as the federal government acted with a valid purpose and strong evidence, the program satisfies the compelling interest requirement.

NCI has not provided justification for diverging from precedents established by sister circuits regarding the federal government's interest in addressing discrimination in highway construction contracting through a Disadvantaged Business Enterprise (DBE) program. The court previously concluded that compliance with federal law does not subject a state to equal protection challenges, as states acting under federal mandates are considered agents of the federal government. As NCI has not contested the constitutionality of the relevant federal statutes on appeal, the compelling interest analysis must favor the Illinois Department of Transportation (IDOT). The court affirms that IDOT's program is narrowly tailored to achieve this compelling interest, reiterating that a state is insulated from constitutional challenges unless it exceeds its federal authority. The Supreme Court's ruling in Adarand confirmed the necessity for strict scrutiny of federal programs involving racial classifications but did not invalidate the principle that challenges to state applications of federally mandated programs should focus on whether the state overstepped its authority. NCI's reliance on the Builders Association case is deemed inappropriate, as it pertains to state-created affirmative action programs rather than federally mandated ones. Thus, any challenges to IDOT's program are effectively collateral attacks on the federal regulations themselves, which NCI is barred from pursuing.

IDOT's authority under federal law is scrutinized based on NCI's three arguments of noncompliance. First, NCI claims IDOT violated 49 C.F.R. 26.45(c) by incorrectly calculating the availability of Disadvantaged Business Enterprises (DBEs) in Illinois. Second, NCI contends that IDOT did not adequately adjust its base figure for local market conditions. Third, NCI asserts that IDOT failed to achieve the maximum feasible portion of its overall goal through race-neutral methods as required by 49 C.F.R. 26.51. The court found all three arguments unpersuasive. 

The regulation 49 C.F.R. 26.45(c) outlines methods for calculating the local base figure as part of the goal-setting process, indicating that the provided examples are not exhaustive and other methods may be used with approval. The available methods include using DBE directories, bidders lists, disparity study data, or goals from other DOT recipients. Relative availability is defined as the proportion of willing and able DBEs compared to all businesses capable of participating in DOT-assisted contracts.

NCI's primary argument focuses on IDOT's use of the NERA custom census, which NCI claims misrepresents the number of "ready, willing, and able" DBEs compared to a simple count of registered firms. However, the court noted that no federal regulations mandate such a narrow definition. Instead, IDOT's broader calculation method, as employed in the Minnesota Department of Transportation's similar context, was upheld as appropriate. Furthermore, guidance from USDOT encourages the inclusion of broader data sources for goal-setting. The court concluded that NCI failed to demonstrate any violation of the federal regulations concerning DBE availability calculations.

NCI's objection regarding IDOT's failure to adjust its goal based on local market conditions is rejected. IDOT is permitted, but not required, to adjust the base figure after its initial calculation according to 49 C.F.R. 26.45(d). NCI's claim that IDOT abused its discretion by not separating prime contractor from subcontractor availability lacks regulatory support, as the regulations focus on overall DBE participation in DOT-assisted contracts, not on separation of contractor types. Furthermore, NCI's argument that IDOT violated 49 C.F.R. 26.51 by not maximizing race-neutral DBE participation is also unfounded. Race-neutral participation includes instances where DBEs win contracts without consideration of their DBE status. NCI contends that IDOT miscalculated race-neutral participation by not accounting for certain subcontract awards; however, IDOT's methods were consistent with regulatory requirements, and NCI failed to provide evidence to invalidate IDOT's participation figures. IDOT's projections did not indicate that it could meet its goals solely through race-neutral means, and the agency has employed various methods to enhance DBE participation, including informational sessions and training. Ultimately, NCI did not prove that IDOT's DBE program violates constitutional standards, leading to the affirmation of the district court’s judgment.

Northeast Illinois Regional Commuter Railroad Corporation, known as Metra, is a state entity responsible for public railway transportation in the Chicago area. NCI did not contest the summary judgment favoring USDOT. The Supreme Court has not clarified if a more lenient standard applies to gender-based programs, but IDOT does not advocate for such a standard, leading to the application of strict scrutiny across the program. The issue of preferential treatment standards for gender compared to race remains unresolved, but since IDOT does not seek a different standard, the women's program must meet the same criteria as the minority program. IDOT claims a compelling interest in addressing ongoing discrimination effects, although the constitutionality of this interest is not assessed here. The Ninth Circuit, in Western States Paving, acknowledged the potential for as-applied challenges to a state's DBE program, suggesting that the precedent from Milwaukee County Pavers did not encompass such challenges. The Eighth Circuit's Sherbrooke case indicated that previous rulings were affected by the earlier mandatory federal set-aside law, but it was clarified that all recipients must maintain compliant DBE programs to access federal transportation funds, with the current regulations allowing compliance without DBE utilization if justified by good faith efforts. NCI proposes using the "bidders list" method for calculating relative availability, as outlined in federal regulations.