Racial, Ethnic and Gender Preferences in Public Contracting: A Review of Current Texas Programs and the Status of Constitutional Attacks on Them 10th Annual Construction Law Conference Austin, Texas February 20 and 21, 1997 William R. Allensworth Edwin M. Smith Virginia F. Heimsath Roller and Allensworth, L.L.P. 620 Congress Avenue, Suite 200 Austin, Texas 78701 Telephone (512) 708-1250 Facsimile (512) 708-0519
Table of Contents I. Introduction... 2 II. Statutory Overlay... 3 III. Operation of HUB Preference Programs... 6 A. HUB Certification... 6 B. Percentage Goals... 9 C. Good Faith Compliance... 10 1. State Requirements... 11 2. Local Good Faith Requirements... 12 D. Professional Procurement Contracts... 13 IV. Constitutional Analysis... 14 A. Equal Protection Clause... 14 1. Introduction... 14 2. Racial Classifications... 14 a. Compelling State Interest... 15 (1) The Discrimination Must Be to Remedy the Harm Caused by the Government Implementing the Plan... 16 (2) The Plan Must Be Directed to Remedy the Present Effects of Past Discrimination... 21 b. The Plan Must Be Narrowly Tailored to Achieve the Goal. 22 (1) Consideration of Race-Neutral Means... 22 (2) Flexibility... 23 (3) Geographical Scope... 23 (4) Realistic Goals... 24 (5) Impact on the Rights of Third Parties... 24 3. Gender-Based Classifications... 24 a. United States Constitution... 24 b. Texas Equal Rights Amendment... 25 B. Due Process... 26 V. Current Texas Litigation... 27 VI. Summary... 29 i
APPENDIX Statutory and Administrative Bases for Attacks on Preferences Under Texas Law... 31 A. Administrative Challenges... 31 B. Taxpayer Suits... 32 C. Tex. Civ. Prac. & Rem. Code 106.002... 32 ii
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Table of Authorities Cases Page Adarand Constructors, Inc. v. Pena, 115 S.Ct. 2097 (1995)...2, 3, 14, 15 Aiken v. City of Memphis, 37 F.3d 1155 (6th Cir. 1994)...16 Associated General Contractors of America v. Columbus, 936 F.Supp. 1363 (S.D. Ohio 1996)... 9, 10, 18-25 Associated General Contractors of California, Inc. v. Coalition for Economic Equity, 950 F.2d 1401 (9th Cir. 1991)...20 Black Fire Fighters Association of Dallas v. City of Dallas, Texas, 19 F.3d 992, 994(5th Cir. 1994)...22 Board of Regents v. Roth, 92 S.Ct. 2701 (1972)...26 Brunet v. City of Columbus, 1 F.3d 390, 404 (6th Cir. 1993)...25 City of Richmond v. J. A. Croson Co., 109 S.Ct. 706 (1989)... 2, 3, 9, 16, 17, 20, 22-24 Concrete Works of Colorado v. City of Denver, 36 F.3d 586 (10th Cir. 1994), cert den., 115 S.Ct. 135 (1995)... 18-20 Contractors Association of Eastern Pennsylvania v. Philadelphia, 91 F.3d 586, 597...16, 19, 21, Coral Construction Co. v. King County, 941 F.2d 910 (9th Cir. 1991)...20, 23 DRT Mechanical Corp. v. Collin County, Tex., 845 F.Supp. 1159 (E.D. Tex. 1994)...27 iv
Fullilove v. Klutznick, 100 S.Ct. 2578 (1980)...15 Hopwood v. State of Texas, 78 F.3d 932 (5th Cir. 1996)...15, 16, 21 Houston Contractors Association v. Metropolitan Transit Authority of Harris County, 945 F.Supp. 1013 (S.D. Tex. 1996)...3, 17, 24, 27, 28 In re McQueen, 725 S.W.2d 696 (Tex. 1987)...25, 26 Kossman Contracting v. City of Houston, Civil Action H-96-3100 (S.D. Tex. filed 1996)...28 Metro Broadcasting, Inc. v. FCC, 110 S.Ct. 2997 (1990)...15 Morrisey v. Brewer, 92 S.Ct. 2593 (1972)...26 Police Ass n of New Orleans v. City of New Orleans, 100 F.2d 1159, 1167 (5th Cir. 1996)..17 Smith v. State, 866 S.W.2d 760, 764 (Tex.App.--Houston [1st Dist.] 1993), writ ref d...26 Sweatt v. Painter, 70 S.Ct. 848 (1950)...21 Texas Water Commission v. Lindsey, 855 S.W.2d 750 (Tex. App.--Beaumont 1993, writ denied)...31 Three Rivers Cablevision, Inc. v. City of Pittsburgh, 502 F. Supp. 1118 (W.D. Penn. 1980) 26 United States v. Virginia, 116 S.Ct. 2264 (1996)...25 v
Urban Electrical Services, Inc. v. Brownwood I.S.D., 852 S.W.2d 676 (Tex. App.--Eastland 1993), no writ...27 Wangler v. Druggists Mutual Insurance Co., 100 S.Ct. 1540 (1980)...25 Wygant v. Jackson Board of Education, 106 S.Ct. 1842 (1986)...16, 24 Zilker Eagle, Inc. v. City of Austin, Texas, Cause No. A-96-613-JN (W.D. Tex. filed September 11, 1996)...28 vi
Statutes Tex. Civ. Prac. & Rem. Code Ann. 106.001, et seq.... 4-9, 12, 13, 32 Tex. Gov t. Code Ann. 2001.001, et seq....31 Tex. Gov t. Code Ann. 2254, et seq....13, 14 Tex. Gov t. Code Ann. 466, et seq....6 Tex. Gov t. Code Ann. 2161, et seq.... 5-8 Tex. Gov t. Code Ann. 465, et seq....6 Tex. Local Gov t. Code Ann. 262, et seq....32 Tex. Local Gov t. Code Ann. 271, et seq....27 Tex. Local Gov t. Code Ann. 351, et seq....6 Tex. Local Gov t. Code Ann. 375, et seq....6 Tex. Local Gov t. Code Ann. 381, et seq....6 Tex. Local Gov t. Code 252.061...32 Tex. Trans. Code Ann., 201, et seq...6 Vernon s Ann. Tex. Stat. 601, et seq...6 vii
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Codes, Rules and Regulations 1 Tex. Admin. Code 111, et seq....6, 7, 11, 31 49 Code Fed. Reg. 23, et seq....6, 8, 28 Constitutions Tex. Const., art. I, 3a...25 U.S. Const., amend. XIV, 1, et seq....14 Miscellaneous Austin, Tex., Code, 5-7, et seq...5, 7, 8, 12 City of Austin, Tex., Charter, art. VII, 15...5 v
Racial, Ethnic and Gender Preferences in Public Contracting: A Review of Current Texas Programs and the Status of Constitutional Attacks on Them I. Introduction During the 1960s and 1970s political subdivisions throughout the United States began enacting statutes, ordinances and regulations to implement affirmative action programs to increase the participation of women and selected minorities in public contracting. Judicial attacks were directed against some of them, primarily on United States constitutional grounds, ultimately producing the seminal Supreme Court decision in City of Richmond v. J. A. Croson Co., 109 S.Ct. 706 (1989) in which the Supreme Court struck down the City of Richmond s thirty percent minority set aside. Despite the Supreme Court s stated distaste for racially-based programs, Croson nevertheless was interpreted as providing a road map for the use of racial and ethnic preferences to redress prior discrimination, and countless affirmative action programs were redrafted to meet what were perceived to be the Supreme Court s requirements. These efforts met with uneven success in the lower federal courts, partly because of uncertainty as to the full import of the court s reasoning in Croson. In 1995, however, the Supreme Court revisited the issue in Adarand Constructors, Inc. v. Pena, 115 S.Ct. 2097 (1995), in which a majority of the Court struck down a federal plan, again on equal protection grounds. The plan struck down in Adarand was much more narrowly tailored than the Croson quota, however, and the Court s action made it clear that affirmative
action plans based upon race and ethnicity would be subject to very strict scrutiny, indeed. Since Adarand, several federal courts have examined affirmative action schemes in the public contracting arena, and their decisions have cast considerable doubt about the efficacy of post-croson attempts to tailor plans to meet the Supreme Court s equal protection analysis. One of these decisions, Houston Contractors Association v. Metropolitan Transit Authority of Harris County, 945 F.Supp. 1013 (S.D. Tex. 1996), struck down the use of Houston Metro s affirmative action program, in an opinion which illustrates judicial skepticism of race and ethnic-based affirmative action programs. Additionally, gender-based programs may be subject to an increasingly strict level of scrutiny, under both the federal and Texas constitutions. II. Statutory Overlay contracting: As a general rule, Texas prohibits consideration of race or gender in public (a) An officer or employee of the state or of a political subdivision of the state... may not, because of a person s race, religion, color, sex or national origin: * * * or (6) impose an unreasonable burden on the person; (7) refuse to award a contract to the person. Tex. Civ. Prac. & Rem. Code Ann. 106.001. There are, however, statutory exceptions 2
to the general rule. 1 One such exception is found at Tex. Civ. Prac. & Rem. Code 106.001(c)(2), which allows some home rule municipalities to adopt programs designed to reasonably increase the participation by [Historically Underutilized Businesses] 2 in public contract 1 This paper does not attempt to collect and/or discuss all of the enactments of cities, counties, school districts, state agencies or other governmental entities that create preference programs for minority or women owned businesses. Rather, this paper addresses the overriding statutory authority for such programs and discusses how the Texas General Services Commission (the largest state contracting authority) and the City of Austin (by way of local example) have chosen to implement that authority. When evaluating the validity of any particular public agency s preference program, the practitioner is cautioned to review the enabling statutes that created the public body, as well as any rules, charters or ordinances adopted by the public entity and the authority for adopting such rules, etc. 2 This paper uses the term Historically Underutilized Business or HUB generically to refer to all classifications of favored businesses. As will be noted infra, the names, descriptions and qualifications for HUB status vary depending on the source law (for instance, Tex. Civ. Prac. & Rem. Code, 106.001(c)(1) actually uses the term Minority business enterprise rather than HUB). 3
awards, including percentage goals for the award of public contracts to HUBs. Before a municipality can include percentage goals as part of its preference program, the municipality must first determine the number of HUBs available in the municipality to receive various kinds of public construction contracts, because the percentage goals cannot exceed the availability of HUBs in the municipality. 3 3 In 1991, the 72nd Legislature enacted two different versions of Tex. Civ. Prac. & Rem. Code 106.001(c)(2). Presumably, the courts will harmonize the two amendments. 4
The goals do not affect provisions of general law or a municipal charter that require competitive bidding of public construction contracts, but they do allow municipalities to require that all prospective bidders meet uniform standards designed to assure a reasonable degree of participation by [HUBs] in the performance of any public contract. Tex. Civ. Prac. & Rem. Code 106.001(c)(4). 4 The principal statutory basis for HUB preference programs in state construction contracts is found in Tex. Gov t. Code Ann. 2161.001, et seq.. This statute charges the Texas General Service Commission with certifying and maintaining a directory of HUBs, advising, assisting and training them in state procurement procedures, and encouraging state agencies to use them by adopting a statewide policy for increasing their participation in government contracts. In addition, each state agency is obligated to prepare a written plan for increasing the agency s use of HUBs, including the establishment of specific contracting goals and programs to meet those goals. The state agencies must report their success to the GSC, and the GSC must monitor and report on that progress to the legislature. Without reference to any empirical studies, this statute establishes a good 4 The City of Austin, for example, has adopted such a program by ordinance, the most recent version of which is found at Austin, Tex., Code art. I, 5-7. It establishes initial construction contract goals of 23.8 % for MBEs and 8.4% for WBEs. By its charter, the City of Austin must competitively bid any construction contract that exceeds $32,000. City of Austin, Tex., Charter, art. VII, 15. 5
faith goal that HUBs will receive not less than 30 percent of the total value of each construction contract award that any state agency expects to make during a fiscal year. Tex. Gov t. Code Ann. 2161.182. The General Services Commission has adopted rules to implement the Government Code mandate which are found at 1 Tex. Admin. Code 111.11-111.24. Of particular interest in the GSC rules is its adoption of a Disparity Study conducted by the National Economic Research Associates, Inc. which establishes overall good faith HUB participation goals of 11.9% for heavy construction contracts other than buildings; 26.1% for building construction contracts, including general contractors; 57.2% for special trade construction contracts; and 20% for professional services contracts. 1 Tex. Admin. Code 111.13. III. Operation of HUB Preference Programs Once a government entity decides to adopt a HUB participation preference program, there are three basic steps in its operation: HUB certification; goal establishment; and adoption of uniform standards to evaluate the good faith compliance with the goals in particular bid proposals. A. HUB Certification Not only does the name given to HUBs vary between programs, 5 so also 5 Compare historically underutilized business ( HUB ) (Tex. Gov t. Code Ann. 2161.001(2)), to a disadvantaged business enterprise ( DBE ) (49 C.F.R. 23.62; Vernon s Ann. Tex. Stat. 601i; Tex. Trans. Code Ann. 201.702; Tex. Gov t. Code Ann. 465.0081; Tex. Local Gov t. Code Ann. 375.003 and 351.1035), minority business enterprise 6
does the definition. Generally speaking, an HUB is a business enterprise that is 51 percent or more owned and controlled by women or by members of an identified minority group. See e.g., Tex. Civ. Prac. & Rem. Code 106.001(c)(1)(A), but the definitions of who qualifies as a minority and, for that matter, who qualifies as a woman vary significantly. For instance, 106.101(c)(1)(B) defines Minorities as including blacks, Hispanics, Asian-Americans, American Indians and Alaska natives, although a Minority business enterprise could also be owned by women. On the other hand, the Texas Government Code defines minorities as socially disadvantaged persons, meaning persons identified as a member of a certain group, including Black Americans, Hispanic Americans, women, Asian Pacific Americans, and Native Americans, and who has suffered the effects of discriminatory practices or other similar insidious circumstances over which the person has no control. Tex. Gov t. Code 2161.001(3). The General Service Commission rules expand on this definition by identifying specific countries and/or cultures of origin as the basis for ethnicity and, curiously, defines American Women as any woman except women of the identified ethnic groups (or, in other words, white women). 1 Tex. Admin. Code 111.12. The current City of Austin ordinance falls somewhere in between the Civil ( MBE ) (49 C.F.R. 23.5; Tex. Civ. Prac. & Rem. Code Ann. 106.001(c)(1); Tex. Local Gov t. Code Ann. 466.107; Local Gov t. Code 381.004), and women owned business enterprise ( WBE ) (Tex. Local Gov t. Code Ann. 381.004). 7
Practice and Remedies Code and the GSC rules, adding that the person must also be a U.S. citizen or a lawfully admitted resident alien. Austin, Tex., Code, art. I, 5-7-4(x). Regardless of the definition used to establish minority or women status, ownership by minorities or women alone is not sufficient to qualify a business as a HUB. Most statutes and ordinances require that the minority and/or women owners participate directly in the operation of the company, including direct supervision of company personnel and/or direct involvement in the day to day management of the company. See Tex. Civ. Prac. & Rem. Code Ann. 106.001(c)(1)(A) and Tex. Gov t. Code Ann. 2161.001. Moreover, the HUB cannot be a mere front or broker for subcontractors; they must provide a Commercially Useful Function to be counted toward the achievement of the HUB goals. See Austin, Tex., Code, art. I, 5-7-4; and its federal counterpart, 49 C.F.R. 23.47. Most of the definitions of HUBs have no requirement that a percentage of the company employees be minorities or women. 6 Also, there are generally no racial- or gender-neutral factors that can be considered in deciding whether a company needs or deserves preferential treatment, such as company size, business history, experience requirements, etc. (Although Tex. Gov t. Code Ann. 2161.001 could be interpreted as requiring HUBs to demonstrate that they have personally been the victim of 6 However, the City of Austin has recently included equal employment opportunity criteria in its selection matrix for professional services consultants, awarding points for total minority employees and for professional minority employees of the firms. 8
discriminatory practices.) Most preference plans include provisions that allow recognition of HUBs that have been certified by other governmental entities, especially if those other entities are providing part of the funding for the project. B. Percentage Goals In order to justify the use of percentage goals under either statutory authorizations or the federal constitutional opinions, discussed infra, the municipality typically will commission a study to establish the fact and extent of local discrimination, and the availability of locally-favored minorities in order to establish goals for the award of contracts to them. The Remedies Code allows smaller cities to conduct the study inhouse, but larger municipalities typically engage a firm in the rapidly-developing disparity study industry. 7 A description of this industry recently was articulated by Judge Graham, in Associated General Contractors of America v. Columbus, 936 F.Supp. 1363 (S.D. Ohio 1996):... in the aftermath of Croson, a disparity study industry has developed which as of May of 1995 had produced between $40 and $45 million dollars worth of studies with more commissioned every month. According to [disparity study expert George] LaNoue, this industry is dominated by consulting firms which specialize in disparity studies. There is very little participation by the kinds of organizations usually involved in independent research on major public policy issues, such as universities, large independent research organizations, or the Big Eight accounting firms. 7 See Tex. Civ. Prac. & Rem. Code Ann. 106.001(c)(2). Municipalities with a population of 1,000,000 or more must base their preference goals in the findings of a qualified independent source. 9
According to LaNoue, the branch of the consulting industry involved in disparity studies is characterized by results-driven research where the client makes it clear that it has a particular outcome in mind. Columbus, 936 F.Supp. at 1362-63. The percentage goals thereby established can become awkward when the bid requirements set out separate goals for specific categories of HUBs, usually womenowned HUBs. As noted supra, the GSC rules do not include most ethnic women in the definition of American Women, and the City of Austin does not allow a HUB to be counted as both minority-owned and women-owned. In effect, this may deny to minority women the preferences that are afforded other women on the basis of gender, because even though a minority woman-owned firm is performing enough of the work on a project to satisfy both the minority and women components of the stated goals, it will not be credited with both. C. Good Faith Compliance Of the three factors involved in the operation of preference programs, the most subjective is whether an apparent low bidder s response satisfies the HUB participation requirements. This determination usually is automatic when the low bidder meets or exceeds the preference goals. When the apparent low bidder has not met the goals, however, the HUB preference programs and competitive bidding requirements come into direct conflict. The contracting agency must then determine whether the bid is responsive; more specifically, whether the bidder has demonstrated a good faith effort 10
to meet the preference goals. The various standards that governmental entities have adopted for demonstrated good faith are even less uniform than the definitions they use for HUBs: 1. State Requirements The GSC has adopted procedures which, if followed by the contractor, can create a presumption that a contractor has made a good faith effort to meet the stated goals. See 1 Tex. Admin. Code 111.14. In the GSC s general conditions for building construction contracts, these procedures are called the Good Faith Effort Program (GFEP). The current GFEP for building construction contracts establishes an annual goal of awarding 25.1% of all state contracts to Black Americans, Hispanic Americans, and American Women and 1% to Asian-Pacific Americans and Native Americans. Generally speaking, to satisfy the GFEP requirements, a contractor must divide the contract work into reasonable lots and notify at least five certified HUBs, in writing, of the work the contractor intends to subcontract, in sufficient time for them to participate effectively. If a non-hub subcontractor is selected by any means other than competitive bidding, or if a HUB bidder submits the lowest price and is not selected, the contractor must document the selection process and explain why the HUB subcontractor was not used. The contractor must maintain records documenting its compliance with all aspects of the good faith program and submit that information to the GSC during the bidding phase and on a regular (monthly) basis during construction. Note that these requirements are considerably less onerous if the 11
contractor is itself a HUB. In that case, as long as the general contractor performs 25 percent of the contract work with its own employees (regardless of the gender or ethnicity of those employees), then the HUB prime contractor is free to subcontract with HUB or non-hub subcontractors and still be in compliance with the good faith effort program. 8 2. Local Good Faith Requirements While obviously burdensome, the GSC s good faith effort program is at least manageable in comparison to the requirements adopted by the City of Austin. See Austin, Tex., Code, art. I, 5-7-22. As part of its bid solicitation package, Austin identifies those parts of the work which it thinks are amenable to subcontracting, and issues a list of HUBs that the City deems qualified to do that work. In order to meet the City s good faith effort requirements, the general contractor must contact every HUB on the certified list. This is not only a time consuming and expensive task (for which some contractors now hire mass mailing companies to assist them), but the City often changes the certified list during the bid period. The general contractor must document the HUB s responses, and if the general contractor does not subcontract with a HUB that responds in writing to the notice, the general must provide a written explanation for rejecting the HUB. 8 This exception from reporting requirements for HUB general contractors may conflict with Tex. Civ. Prac. & Rem. Code Ann. 106.101(a)(6) which prohibits the imposition of an unreasonable burden on a person based on the person s race or sex. 12
There is some question as to whether the good faith effort requirements are not interpreted with the same degree of strictness in all cases by the City s office of Minority Business Affairs. In this respect, the good faith effort program may be subject to challenge as creating non-uniform requirements in contravention of Tex. Civ. Prac. & Rem. Code Ann. 106.001(c)(2). D. Professional Procurement Contracts Although the focus of this paper is on governmental contracts that are subject to competitive bidding requirements, it is worth noting that professional consulting contracts have also become targets of HUB preference programs. For instance, the GSC has adopted a professional services preference program that is similar to its public works program which sets annual hiring goals of 18.1% for Black American, Hispanic American, and American Women architects and engineers and 1.9% for Asian Pacific American and Native American architects and engineers. The City of Austin has taken a slightly different approach by including an Equal Employment Opportunity factor in its evaluation criteria for the selection of architects and engineers. Points are awarded to prospective service providers based on the percentage of overall minority employees of the firm and on the number of minority professionals of the firm. In addition, the City also makes potential service providers submit the same HUB good faith compliance reports regarding their consultants that general contractors use for their subcontractors. Such requirements may run afoul of Tex. Gov t. Code Ann. 2254.003, which mandates selection of professional service 13
providers on the basis of demonstrated competence and qualifications to perform the services, and which apparently does not contemplate using race or gender as a factor in determining whether a particular vendor is qualified to perform certain work. Tex. Gov t. Code Ann. 2254.003. IV. Constitutional Analysis A. Equal Protection Clause The Fourteenth Amendment of the United States Constitution includes within it the Equal Protection clause: No state shall... deny to any person within its jurisdiction the equal protection of the laws. U. S. Const., amend. XIV, 1. 1. Introduction Statutes, ordinances and regulations often result in unequal treatment of citizens. Historically, however, they will survive constitutional inquiry if there is any rational basis for their enactment. When the statutes involve racial or gender classifications, however, they are subject to a heightened level of judicial scrutiny. 2. Racial Classifications The Supreme Court, in Adarand, supra, held that...any person, of whatever race, has the right to demand that any governmental actor subject to the Constitution justify any racial classification subjecting that person to unequal treatment to the strictest judicial scrutiny. Adarand, 115 S.Ct. at 2113. In so holding, the Court dispelled any suggestion contained 14
in Metro Broadcasting, Inc. v. FCC, 110 S.Ct. 2997 (1990) that a lower level of scrutiny would be applied to benign classifications. Adarand, 115 S.Ct. at 2113. The Court s rationale was that... because classifications based on race are potentially so harmful to the entire body politic, it is especially important that the reasons for any such classifications be clearly identified and unquestionably legitimate, and that [r]acial classifications are simply too pernicious to permit any but the most exact connection between justification and classification. Adarand, 115 S.Ct. at 2117; citing Fullilove v. Klutznick, 100 S.Ct. 2578, 2803-04 (1980) (J. Stephen s dissenting opinion). Stated differently, under the strict scrutiny analysis, the courts ask two questions: (1) Does the racial classification serve a compelling government interest; and (2) Is it narrowly tailored to the achievement of that goal? Hopwood v. State of Texas, 78 F.3d 932, 940 (5th Cir. 1996), cert. denied, 116 S.Ct. 2581. a. Compelling State Interest Even if the Supreme Court s pronouncements as to what constitutes compelling state interest may be less than clear, the Fifth Circuit has rejected diversity--for the sake of diversity--as being a legitimate state interest sufficient to justify a race-based affirmative action plan, and instead has held that... there is essentially one compelling state interest to justify racial classifications: remedying past wrongs. Hopwood, 78 F.3d at 944. Moreover, while remedying the effects of past discrimination may be a legitimate compelling interest, there must be a strong basis in the evidence for its conclusion that remedial action was necessary. Croson, 109 S.Ct. at 15
725, citing Wygant v. Jackson Board of Education, 106 S.Ct. 1842, 1849 (1986), and the proponents of the affirmative action plan have the burden of coming forward with evidence... that the legislatively identified discrimination in fact exists or existed and that the race-based classifications are necessary to remedy the effects of the identified discrimination. Contractors Association of Eastern Pennsylvania v. Philadelphia, 91 F.3d 586, 597 (3rd Cir. 1996). (1) The Discrimination Must Be to Remedy the Harm Caused by the Government Implementing the Plan The existence of societal discrimination alone cannot support a racial or gender classification, Aiken v. City of Memphis, 37 F.3d 1155 (6th Cir. 1994). Stated differently,... the state s use of remedial racial classifications is limited to the harm caused by its specific state actor. Hopwood, 78 F.3d at 949. There must be showing of prior discrimination by the government or governmental unit involved, either as an active or passive participant. Croson, 109 S.Ct. at 721. Since few governmental entities will admit to having participated in active discrimination since the 1950s or 1960s (and indeed many of them, such as Houston Metro, Capital Metro or Dallas Area Rapid transit did not even exist until the 1980s), the justification for the racial classifications typically come from proof that the governmental entity had essentially become a passive participant in the system of racial exclusion practiced by elements of the local construction industry. Croson, 109 S.Ct. at 721; Police Ass n of New Orleans v. City of New Orleans, 100 F.2d 1159, 1167 16
(5th Cir. 1996); c.f., Houston Contractors Association v. Metropolitan Transit Authority of Harris County, 945 F.Supp. 1013 (S.D. Tex. 1996). Using this analysis, the proponent of the plan must prove (1) that the local construction industry was discriminatory, and (2) that the city s policies fostered the discrimination. (a) Evidence of Local Discrimination A generalized assertion that there has been past discrimination in an entire industry provides no guidance for a legislative body to determine the precise scope of the injury it seeks to remedy, Croson, 109 S.Ct. at 724-25. The Supreme Court went on to say, however, that Croson, 109 S.Ct. at 706. where there is a significant statistical disparity between the number of qualified minority contractors willing and able to perform a particular service and the number of such contractors actually engaged by the locality or the locality s prime contractors, an inference of discriminatory exclusion could arise. The statistical disparity typically is proven through the use of a disparity study commissioned by the municipality to prove that minority participation is lower than their numbers would suggest. 9 9 There is some question as to whether this evidence must necessarily be pre-enactment; that is, whether the municipality can, after its ordinance is attacked, commission a study to prove that the disparity existed at the time of the enactment. Whether post-enactment evidence of discrimination is admissible to provide the strong basis in evidence is a matter about which there is some dispute, but most courts which have been presented with the question... have held that it is admissible, particularly where the plaintiff s claim is for injunctive relief. Columbus, 936 F.Supp. at 1382; Concrete Works of 17
Colorado v. City of Denver, 36 F.3rd 1513 (10th Cir. 1994), cert. denied, 115 S.Ct. 135 (1995). As the Court in Columbus noted, however, there is a concern that it is not possible to ensure that the program is remedial if cause for the remedy is not discovered until the ordinance takes effect. Columbus at 1383. 18
The methodology used in many of the studies was described in Columbus, supra: [Disparity Expert] Dr. LaNoue testified that studies produced by the disparity study industry often follow certain common patterns. He says they frequently calculate availability on the basis of the total number of M/FBE firms in a given industry without consideration of differences in qualifications or willingness and ability to provide particular services. Where bidding is involved, they often omit information about the bidding process and ignore data which shows which firms actually submitted bids. Studies produced by these firms often focus on selected time periods, presenting data from a time frame that is most advantageous to the conclusions of the study, while ignoring larger patterns. Another characteristic of these studies is that they avoid making findings of discrimination against any specific person, agency, contractor, supplier, bonding company or bank, with the consequence that no one is in a position to rebut the findings. Finally, LaNoue says that these studies usually either ignore or fail to adequately evaluate race- and gender-neutral remedies. Columbus, 936 F.Supp. at 1362-63. 19
The disparity study [and the anecdotal evidence of local discrimination often included within it] must be strong enough to satisfy the proponents burden of coming forward with evidence providing a firm basis for inferring that the legislatively identified discrimination in fact exists. Philadelphia, 91 F.3d 586, 597; see Concrete Works of Colorado v. City of Denver, 36 F.3d 1513 (10th Cir. 1994), cert den., 115 S.Ct. 135 (1995). This subjects the methodology of the studies to cross-examination, and the opponents can also put on evidence of their own to rebut the conclusions, since the existence of gross disparity is not conclusive on the issue of discrimination. Columbus, supra, 936 F.Supp. at 1379. The primary focus of the attacks on the studies is that the number of minority contractors identified as eligible for local contracts is greater than the number who actually are qualified, and that the disparity between the amount of work they obtain and the total amount available in the local industry is explainable in non-racial terms. The most significant decision evaluating and criticizing use of disparity studies is in Columbus, supra, an 80-page opinion with a 20 page appendix. In it, Judge Graham discusses, in elaborate detail, the various challenges to the statistical findings of discrimination. (b) Passive Participation Even if the local government had not been guilty of overt discrimination, it nevertheless may have a compelling interest in remedying local discrimination: 20
Croson, 109 S.Ct. at 721. If the City could show that it had essentially become a passive participant in the system of racial exclusion practiced by elements of the local construction industry... the city could take affirmative steps to dismantle such a system. It is beyond dispute that any public entity... has a compelling interest in assuring that public dollars... do not serve to finance the evil of private prejudice. While the Supreme Court suggested--and some courts have found--that the mere infusion of tax dollars into a discriminatory industry may be sufficient governmental involvement to constitute passive participation, see Associated General Contractors of California, Inc. v. Coalition for Economic Equity, 950 F.2d 1401, 1413 (9th Cir. 1991); Coral Construction v. King County, 941 F.2d 910, 916 (9th Cir. 1991), cert denied, 112 S.Ct. 875 (1992) others have... noted the lack of evidence to demonstrate any linkage between the award of public contracts and the evidence of industry-wide discrimination, that is, whether the private discrimination was practiced by firms who received public contracts. Columbus, 936 F.Supp. at 1429; citing Concrete Works, 36 F.3d at 1529. Courts following this latter approach look for evidence that the prime contractors who regularly perform work for the city actually discriminated against minorities in the award of subcontracts, and in this regard, look to see whether the municipality ever had disciplined one of its contractors for violating its anti-discrimination provisions. See Philadelphia, 91 F.3d at 601. Other courts have looked for evidence that the city had adopted any institutional practices that facilitated 21
discrimination against minority construction firms and, finding none, refused to find the city had been a passive participant in them. See Columbus, 936 F.Supp. at 1430. (2) The Plan Must Be Directed to Remedy the Present Effects of Past Discrimination To show a compelling state interest in remedying past discrimination, there must be evidence that the race-conscious program be designed... to remedy the identified present effects of past discrimination. Hopwood, 78 F.3d at 951 (emphasis added). This is potentially a very difficult area for the proponent of a plan, even when, the plan was implemented by a government actor with a proven history of prior discrimination. In Hopwood, the University of Texas--which had categorically excluded all black applicants until the Supreme Court, in Sweatt v. Painter, 70 S.Ct. 848 (1950), forced the school to admit them--was unable to prove the necessity of a present affirmative action plan, because it could not prove that any current black applicants were suffering the present effects of the past discrimination. Although the school claimed to have had a bad reputation within the minority community, and said that the community perceived it as being a hostile environment for minorities, the court held that these contentions were an insufficient basis for a race-based remedial program. Hopwood, supra, 78 F.3d at 952. b. The Plan Must Be Narrowly Tailored to Achieve the Goal Once it has been established that there is a compelling state 22
interest behind racial classifications, any plan with such classifications must be narrowly tailored to achieve its goal. Croson, 109 S.Ct. at 728; Black Fire Fighters Assn of Dallas v. City of Dallas, Texas, 19 F.3d 992, 994 (5th Cir. 1994). Most post- Croson efforts to redraft plans have focused on Croson s requirement that the means chosen fit the compelling goal so closely that there is little or no possibility that the motive for the classification was illegitimate racial prejudice or stereotype. Croson, 109 S.Ct. at 710. The Supreme Court identified several requirements of a narrowly tailored plan: (1) Consideration of Race-Neutral Means Race-based classifications should not be used if alternative race-neutral means were available to achieve the desired result. These may include development of surety bond programs for economically disadvantaged businesses, educational and training programs, establishment of small business networking and technical assistance programs and small business goals programs. Columbus, 936 F.Supp. at 1379. These programs must be substantive in nature, however, rather than merely informational, and must have been considered or tried as alternatives to race-and-gender conscious legislation. Columbus, 936 F.Supp. at 1435. If they were available, but unused, at the time the plan was enacted, the municipality may be found not to have narrowly tailored the remedy it did adopt. Philadelphia, 91 F.3d at 609. (2) Flexibility The affirmative action plan in Croson was inflexible. 23
It set a fixed quota with a limited waiver system, without an inquiry into whether or not the particular MBE seeking a racial preference had suffered from effects of past discrimination. Croson, 109 S.Ct. at 728. In order to pass constitutional muster, the plan should provide for possibility of waivers for non-minority contractors, and more than likely should limit the preferences to non-minorities who do not need preferences. Columbus, 936 F.Supp. at 1437. Furthermore, the plan must be of limited duration, and subject to periodic review. (3) Geographical Scope In order to be narrowly tailored, the plan must be limited in its geographical scope, because the relevant question is not one of business location, but of business participation. Coral Construction, 941 F.2d 925. Since the plan must be directed at redressing prior discrimination, its beneficiaries must be in the class of those against whom the city previously had discriminated. This requires an inquiry into whether the plan is limited in geographical scope to persons or entities who suffered discrimination in the local industry, and who attempted to become active participants in the local business community. Columbus, 936 F.Supp. at 1439. (4) Realistic Goals Any goals set to remedy the effects of prior discrimination must look to the number of qualified persons or entities rather than to the general population, in determining the availability of contractors for work. Croson, 109 S.Ct. at 709. Consequently, establishing a goal which reflects the racial balance of the 24
community, rather than availability and qualifications of the favored minorities in the local industry, is not narrowly tailored. See e.g., Columbus, 936 F.Supp. at 1438-39. (5) Impact on the Rights of Third Parties In determining the appropriate burden to be shouldered by non-minorities, courts must look to the extent to which the relief disrupts settled rights and expectations, Wygant, 106 S.Ct. at 1851. The imposition of a plan which necessarily has a significant impact on the rights and responsibilities of others seeking to bid on city contracts [as opposed merely to favoring some minorities] may meet with greater judicial hostility. See c.f., Houston, 945 F.Supp. at 1018; Columbus, 936 F.Supp. at 1439. 3. Gender-Based Classifications a. United States Constitution The failure of the states to ratify the equal rights amendment to the United States Constitution has meant that gender-based classifications have not necessarily been subject to strict scrutiny for constitutional infirmity. 10 Instead, genderbased classifications have been subject to an intermediate level of analysis, which is becoming increasingly more strict. In United States v. Virginia, 116 S.Ct. 2264 (1996) [the Citadel case], Justice O Connor stated that a two-pronged test would be applied: the challenged classification [must] serve important governmental objectives and that 10 Although in some circuits, strict scrutiny is applied to gender-based classifications. See e.g., Brunet v. City of Columbus, 1 F.3d 390, 404 (6th Cir. 1993) 25
the discriminatory means employed be substantially related to achieve those objectives. Virginia, 116 S.Ct. at 2275, citing Wangler v. Druggists Mutual Insurance Co., 100 S.Ct. 1540, 1545 (1980). The preferred justification must be exceedingly persuasive. Virginia, 116 S.Ct. at 2275. There are no post-virginia cases interpreting the extent of exceeding persuasive, but a likely inference from the decision is that gender-based classifications and preferences may be difficult for the governmental actor to justify. b. Texas Equal Rights Amendment Texas fundamental law was changed with its adoption, in 1972, of its Equal Rights Amendment: Equality under the law shall not be denied or abridged because of sex, race, color, creed or national origin. Tex. Const., art. I, 3a. The enactment of the Texas ERA elevated sex to a suspect classification, In re McQueen, 725 S.W.2d 696, 698 (Tex. 1987), and a law or statute which discriminates on the basis of a suspect class is subject to strict scrutiny, requiring that such an ordinance promote a compelling state interest. Smith v. State, 866 S.W.2d 760, 764 (Tex.App.--Houston [1st Dist.] 1993), writ ref d. Although there are no cases in which the Texas Equal Rights Amendment has been used to attack gender-based preferences, the import of In re McQueen, supra, and Smith, supra, would be that strict scrutiny should be applied to determine whether such a gender classification served a compelling governmental interest. 26
B. Due Process The Fifth Amendment guarantees due process of law, which in the context of public contracting means the protection of property interests under the entitlement doctrine. See Board of Regents v. Roth, 92 S.Ct. 2701 (1972). The entitlement doctrine requires that a court look to federal and state law to determine whether or not a property interest exists in a given case. The analysis of procedural due process is twopronged: (1) Was the plaintiff deprived of a personal liberty or property interest? (2) If so, is the nature of the process to which the plaintiff was entitled a prerequisite to any deprivation of an identified right? Three Rivers Cablevision, Inc. v. City of Pittsburgh, 502 F. Supp. 1118, 1128 (W.D. Penn. 1980); citing Morrisey v. Brewer, 92 S.Ct. 2593, 2600 (1972). A showing that both prongs of the test are affirmatively met entitles the plaintiff to due process protection. In the context of public construction contracts, the plaintiff must be able to prove that she was denied some property interest to which she was entitled. Whether a bidder for a public contract has a property interest in the bidding procedure depends upon the particular bidding statute of the governmental agency; if the governmental entity is limited in its discretion, the plaintiff may have a property interest if the statutory scheme is violated. Where the governmental entity has the option of rejecting any and all bids, however, the plaintiff will have a difficult time claiming any entitlement to the award of the contract. Most Texas purchasing statutes and ordinances entitle the governmental 27
entity either to reject any and all bids, see e.g., Tex. Local Gov t. Code Ann. 271.021, or to accept the bid being most favorable to the governmental entity. See, e.g., Urban Electrical Services, Inc. v. Brownwood I.S.D., 852 S.W.2d 676 (Tex. App.-- Eastland 1993), no writ. An unsuccessful bidder has no contract right to the bid and, therefore, has no property right in the outcome of the bidding process, and therefore no due process claim for its rejection. DRT Mechanical Corp. v. Collin County, Tex., 845 F.Supp. 1159, 1161 (E.D. Tex. 1994). V. Current Texas Litigation The farthest-advanced constitutional attack on a contracting preference program in Texas is Houston Contractors Association v. Metropolitan Transit Authority of Harris County, 941 F.Supp. 1013 (S.D. Tex. 1996). There, the Houston Contractors Association moved for, and obtained, a temporary injunction from Judge Lynn Hughes prohibiting Houston Metro from basing its acceptance of bids on race or sex related considerations [and from requiring the approval of the bid on non-technical grounds, including race and sex], and even from accepting data about the participation of disadvantaged businesses. Houston, 945 F.Supp. at 1020. Houston Contractors motion for summary judgment currently is pending. In the meantime, the federal government has refused to fund Houston Metro projects because of Metro s inability to utilize an affirmative action program [which is a prerequisite to federal funding, 49 C.F.R. 23.68(b)]. Also pending in Houston, but stayed until the disposition of Houston Contractors, 28
is Kossman Contracting v. City of Houston, Civil Action H-96-3100 (S.D. Tex. filed 1996), attacking the City of Houston s affirmative action plan, which is very similar to the one used by the Transit Authority. The award of the City of Austin s miniature railroad franchise is presently the subject of a constitutional attack, in Zilker Eagle, Inc. v. City of Austin, Texas, Cause No. A-96-613-JN (W.D. Tex. filed September 11, 1996). There, city staff used a selection matrix in evaluating proposals, which awarded points for the use of minority subcontractors: 29
The plaintiff s contention is that the use of the matrix violates the equal protection clauses of the Texas and federal Constitutions, for which it has sought injunctive relief and damages. VI. Summary The legality of racial, ethnic and sexual preferences in public contracting is one of the fastest-changing areas of constitutional law, and one which has an immediate impact on virtually all segments of the Texas construction industry. It is far from certain as to where this entire area is headed, based as it is on an apparently narrow majority at the United States Supreme Court level, and virtually untested by the Texas Supreme Court. In any event, it likely will be a matter of considerable interest to the construction bar for the next several years. 30
APPENDIX Statutory and Administrative Bases for Attacks on Preferences Under Texas Law Texas law provides both administrative and judicial remedies for aggrieved bidders which may be applicable to challenge either the operation or the validity of preference programs: A. Administrative Challenges The first step in challenging a bid award is to determine whether the public entity has adopted administrative protest rules. Generally speaking, administrative hearings will focus on alleged technical deficiencies in the award process and not on challenges to the validity of the underlying preference program. Most practitioners are familiar with the Texas Administrative Procedure Act (APA), and judicial review of agency decisions that are governed by it. See Tex. Gov t. Code 2001.001, et seq. However, the General Services Commission has not adopted the APA and, instead, has promulgated its own rules for bid protests which are found at 1 Tex. Admin. Code 111.3. These rules have strict formalistic requirements (e.g., a protest must be filed, in writing, within ten working days of the objectionable action), and there are various levels of review available, up to a full hearing in front of the Commission. Notably, there is no provision for judicial review of the Commission s final decision and, without such a provision, the courts generally do not have jurisdiction to do so. See Texas Water Commission v. Lindsey, 855 S.W.2d 750 (Tex. App.--Beaumont 31
1993, writ denied). The City of Austin has published its own protest rules as part of its Purchasing Office procedure manual. However, the city rules have not been adopted by ordinance and, therefore, they are merely advisory and do not establish a procedural entitlement to a particular review process. B. Taxpayer Suits Any property tax paying resident of a county or municipality can challenge the validity of a contract that is awarded in contravention of competitive bidding requirements. See Tex. Local Gov t. Code 252.061 and 262.033. These statutes allow a court to enjoin the performance of the challenged contract and are useful for delaying the contract award while an aggrieved bidder asserts his challenge to the bid process before an agency review board. These statutes only apply to projects that are funded by local tax dollars and will not support attacks on projects funded by federal dollars or by some other non-tax means, such as revenue bonds. C. Tex. Civ. Prac. & Rem. Code 106.002 Under Tex. Civ. Prac. & Rem. Code 106.002, a contractor who feels that he has been the harmed by illegal discrimination (which could be either a prohibited act or the improper use of preference programs), can sue for injunctive relief of any kind or for a declaratory judgment that the preference program does not meet the statutory or constitutional requirements. This provision can be especially useful to attack the underlying assumptions of the preference program, such as evidence of past discrimination or the availability of minority business enterprises in the municipality. 32