HISTORICAL LOOK AT METRO S SMALL BUSINESS/DISADVANTAGED BUSINESS PROGRAM AND CONSIDERATIONS FOR A DISPARITY STUDY
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1 HISTORICAL LOOK AT METRO S SMALL BUSINESS/DISADVANTAGED BUSINESS PROGRAM AND CONSIDERATIONS FOR A DISPARITY STUDY August, 2018 Gene Locke Orrick, Herrington & Sutcliffe LLP
2 BACKGROUND In considering METRO s possible utilization of a disparity study, it may be helpful to understand some of the attendant legal issues and METRO s history with procurement programs. Presentation will focus on the following: Legal issues presented with utilizing affirmative action type procurement programs and small business programs METRO s history with various types of programs and how they came about Legal challenges and litigation involving METRO in 1990 s 2
3 BACKGROUND METRO s use of Small Business Program ( ) METRO s present Small Business/Disadvantaged Business Program Legal considerations if further changes to existing program are contemplated Overview of a disparity study what it examines and why? 3
4 BACKGROUND June 4, 1965 President Lyndon Johnson formed the concept underlying affirmative action in a speech at Howard University. You do not take a man who for years has been hobbled by chains, liberate him, bring him to the starting line of a race, saying you are free to compete with all the others, and still justly believe you have been completely fair. For the next 50 plus years, governments at every level have implemented various procurement programs designed to provide opportunities to minorities and women who have historically been the victims of exclusion and discrimination. 4
5 LEGAL ISSUES AT HAND The legal issues presented relate to certain constitutional protections found in the 14 th Amendment, the vestiges of historical discrimination, and the role and limits of government in addressing inequities. These legal issues arise from efforts to reconcile two legitimate interests: How to address the present day consequences of past discrimination and provide opportunities to disadvantaged groups? How to insure that governments provide equal opportunity for all and disadvantage none? 5
6 LEGAL ISSUES AT HAND In areas of government spending and procurement, two approaches have been employed: Race-based affirmative action programs: Usually require good faith efforts to utilize minorities and women in government procurement with specific goals for minority and women participation Courts use a strict scrutiny test to determine if race-based programs are lawful = high standard 6
7 LEGAL ISSUES AT HAND Race-neutral small business programs: Aimed at requiring good faith efforts to utilize small businesses, including disadvantaged minorities and women, in government procurement Courts use a rational basis test to determine if race-neutral programs (like small business) are permitted = lower standard 7
8 LEGAL ISSUES AT HAND In the 1970 s and 1980 s, the Supreme Court, in several cases, upheld a more narrow use of affirmative action and also restricted the use of racebased programs. Univ. of California v. Bakke (1978); Fullilove v. Klutznick (1980); Wygant v. Jackson Board of Education (1986) 8
9 LEGAL ISSUES AT HAND In 1989, in City of Richmond v. Croson, the Supreme Court laid out the standard for procurement programs using racial and gender classifications. The Court held: Affirmative action = highly suspect tool Must prove past discrimination within the jurisdiction (by the government itself?) before using any race-based measures Must prove the continuing effects of past discrimination (disparity study) Any remedial program using racial and gender classifications must be narrowly tailored to address past discrimination 9
10 METRO S HISTORY METRO was created in 1978 with election promises to create an affirmative action program. In 1979, METRO created the Minority Business Enterprise ( MBE ) Program fashioned after the City of Houston Affirmative Action Program. A race and gender-based program with annual goals of 20% minority participation and 3% non-minority women-owned businesses. However, in the late 1980 s and early 1990 s, federal court rulings forced the FTA to change rules, moving from minority business participation to disadvantaged business enterprises ( DBE ) (no longer exclusively racebased programs). 10
11 METRO S HISTORY In 1990, METRO adopted its Disadvantaged Business Enterprise Program in response to FTA changes to DBE program. Blacks, Hispanics, Native Americans, Asian Pacifics, Asian Indians and women were presumed disadvantaged Required 21% participation by disadvantaged businesses Certain contracts only given to disadvantaged businesses 11
12 LEGAL CHALLENGE TO METRO S PROGRAM Lawsuit in 1993 brought by Houston Contractors Association ( HCA ) The lawsuit alleged a violation of the equal protection clause of the Constitution on the grounds that white contractors were being deprived of equal opportunity to METRO contracts HCA alleged that METRO in fact operated its DBE program as a racebased program denying white contractors the opportunity to compete and win certain contracts 12
13 LEGAL CHALLENGE TO METRO S PROGRAM METRO denied the HCA allegations and argued: The program was correcting the results of historic discrimination The program lowered costs by increasing pool of subcontractors The program was carrying out METRO s obligations for federal funding Judge Lynn Hughes rejected METRO s argument and ruled against METRO. 13
14 LEGAL CHALLENGE TO METRO S PROGRAM April, 1996 Judge Lynn Hughes issued a preliminary injunction against METRO preventing it from: Accepting any data on participation of disadvantaged businesses Evaluating a bid or proposal using any race or sex related considerations Basing the acceptance of bids or contracts on race or sex related considerations Judge Hughes opinion was direct, pointed and strongly worded in opposition to METRO s program. 14
15 LEGAL CHALLENGE TO METRO S PROGRAM Because members of these disadvantaged groups are more likely than the average person to suffer the disadvantages that resulted from historical and social hostility, METRO concludes that it may discriminate in their favor. It may not. If a government has as part of its legitimate authority the redress of social ills, which METRO does not, it may seek remedies for the consequences of past governmental and individual wrongs, but its programs must address the past ills without inflicting new wrongs by new group disadvantages to someone else. Judge Lynn Hughes 15
16 LEGAL CHALLENGE TO METRO S PROGRAM With Judge Hughes preliminary injunction in place, METRO faced the dilemma of how to proceed (downtown street project in place). In August 1997, METRO adopted its Business Development Program trying to comply with the injunction. Business Development Program ( ) Race-neutral small business program 35% goal for small businesses No minority or women or disadvantaged business goals On appeal, the Fifth Circuit vacated Judge Hughes injunction in 1999 and remanded back to the District Court. METRO and plaintiffs settled the lawsuit in
17 LEGAL CHALLENGE TO METRO S PROGRAM Minority business participation at METRO decreased under the Business Development Program. Between 1998 and 2005, METRO received constant criticism that the new race-neutral small business program failed to attract and utilize minority businesses. METRO s numbers on minority participation were both low and suspect (only collected data on race at end of contract). 17
18 18
19 2005 SMALL BUSINESS/DISADVANTAGED BUSINESS PROGRAM In 2005, Board members expressed concerns about the lack of minority participation in small business program. METRO engaged Gene Locke to evaluate the program and offer possible options. Locke s report to the Board in 2005 confirmed lack of minority participation: [G]iven existing federal law, it would be difficult for METRO to return immediately to a race-based program without significant legal exposure; and [i]t was possible to revamp the existing program to promote greater diversity and heighten minority participation. 19
20 2005 SMALL BUSINESS/DISADVANTAGED BUSINESS PROGRAM The Board authorized revisions to the program and, in December 2005, established the Small Business/Disadvantaged Business Program. Program changes included the following: Adopted a Non-Discrimination Mandate as a basic policy of METRO Defined small businesses to include minority-owned disadvantaged businesses that are small businesses Returned to allowing program participants to identify themselves by race or sex, i.e., minority-owned or women-owned 20
21 2005 SMALL BUSINESS/DISADVANTAGED BUSINESS PROGRAM Established an annual goal of 35% for overall small business participation, including a 21% annual goal for disadvantaged businesses Recognized that small business participation goals can be satisfied by use of disadvantaged businesses Required that bidders and proposers submit a "Contractor Utilization Plan" as part of the bid or proposal showing small business and/or disadvantaged business participation Added procedures to insure that the program operates in conformity to its race and gender-neutral mandates 21
22 2005 SMALL BUSINESS/DISADVANTAGED BUSINESS PROGRAM Utilized FTA s methodology for calculating disadvantaged businesses capacity and availability Added procedures that significantly increase METRO's outreach to disadvantaged businesses in minority neighborhoods Added sanctions and dispute resolution procedures to assist in effective operation 22
23 2005 SMALL BUSINESS/DISADVANTAGED BUSINESS PROGRAM Several operational changes were recommended and were employed. These changes were narrowly tailored and consistent with court recognized methods to attempt to increase minority or women owned business participation, i.e., mentoring program, unbundling contracts, host networking forums, increased outreach, etc. The revised 2005 program significantly increased participation of minority business over the participation before the revisions in
24 EXISTING PROGRAMS In 2012, METRO established two separate programs to match changes in the FTA s DBE Program. Small Business Enterprise Disadvantaged Business Enterprise Both programs promote equal opportunities and significant outreach for participation. In general, over the past several years, using rate-neutral measures, METRO has consistently met or exceeded its goals for disadvantaged businesses. Presently, the goal for small business participation is 35%, and the goal for disadvantaged business participation is 17% 24
25 LEGAL CONSIDERATIONS REQUIRED FOR FURTHER CHANGES As adopted, METRO s program follows federal case law by seeking to utilize race-neutral measures prior to using race and gender-based remedies. United States v. Paradise (1987). As adopted, METRO s program adheres to present federal rules and directives to transit agencies: (a) You must meet the maximum feasible portion of your overall goal by using race-neutral means of facilitating race-neutral DBE participation. 49 C.F.R
26 LEGAL CONSIDERATIONS REQUIRED FOR FURTHER CHANGES (b) Any change to a race-based procurement program will require a clear showing that race-neutral measures have failed and the resulting disparity can only be remedied with race-based measures. Western States Paving Co. v. Washington State Dept. of Transportation (2005) 26
27 DISPARITY STUDY A disparity study has been commonly used after the 1989 Croson case to: Establish the existence and patterns of discrimination against certain groups in a particular jurisdiction Establish the lingering vestiges of such discrimination and its resulting impact on present day marketplace Contrast the availability of certain groups in certain industries with the utilization of these same groups in the industry and by the governmental body 27
28 DISPARITY STUDY Examine specific industries where governmental bodies spend money and availability/utilization ratio in those industries Make appropriate recommendations based on data analyzed 28
29 DISPARITY STUDY Examples of areas studied in a disparity study (City of Houston 2006): A statistical analysis of prime contracts to determine the level of minority and women-owned business enterprise ( MWBE ) prime contractor availability compared to non-mwbe prime contractor utilization for the relevant study period (excludes goods and services) A statistical analysis of subcontractor records to determine the level of minority and women-owned business enterprise subcontractor availability compared to non-mwbe prime subcontractor utilization for the relevant study period 29
30 LEGAL STANDARD REQUIRED FOR FURTHER CHANGES Determine the relevant market area defined according to Croson and other case law Determine the number of available MWBE and non-mwbe businesses that are willing and able to provide good and services Determine what level of MWBEs were utilized on prime contracts to arrive at the disparity ratio per contract award type Determine what level of MWBEs were utilized on subcontracts to arrive at the disparity ratio per contract award type 30
31 LEGAL STANDARD REQUIRED FOR FURTHER CHANGES Benefit of disparity study: if done properly it gives a picture of the status of the program and where improvements are needed. In lawsuits challenging procurement programs using race-based classifications, the quality and thoroughness of the underlying disparity study is usually the first target for attack. 31
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