Supplemental Conditions

Is the City of Philadelphia’s DBE Program Unconstitional?

Posted in Construction Law

Probably.  Based on the City’s 2016 Disparity Study the City DBE program is no longer being used to remedy past discrimination but to further a political agenda designed to direct maximum public funds to female and minority owned businesses.  In doing so, the City’s current program runs afoul of the Supreme Court’s seminal decision in City of Richmond v. Croson Company, 488 U.S. 469, (1989) and its progeny, which blessed such programs.  However, they blessed them only when (a) there is evidence of discrimination, (b) the program is narrowly tailored to remedy that discrimination, and (c) all race neutral alternatives have been exhausted.

What are DBE Programs?

Like many public agencies, the City of Philadelphia maintains a program that is designed to funnel public fund to female and minority owned firms.  These programs are usually called “disadvantaged business enterprise” programs or DBE programs for short (Sometime they are referred to D/M/WBE the “M” standing for “minority” and the “W” for “woman.”)  DBE programs require that a prime contractor use its best efforts to subcontract a certain percentage of the contract price to DBE firms.  In certain cases, the public authority can restrict bidding to only DBE firms.

The DBE contracting goal will appear in the bid specifications.  (I have seen goals range anywhere from 4% to 30% of the contract.)  So, if a prime contractor is awarded a $1,000,000 contract and the DBE goal is 15%, the prime contractor will have to subcontract $150,000 of the prime contract to DBE owned firms.  In replying to the bid, the contractor will have to list the DBE owned firms it intends to enter into subcontracts with to meet the DBE goal.

The History of DBE Programs

One of the first DBE programs was the Department of Transportation’s DBE program, which is basically the godfather of all DBE programs.  All state and local DBE programs more or less track the DOT’s DBE program rules. The DOT’s DBE program started almost 40 years ago.  The program requires State Transportation agencies to establish a DBE program as a condition of receiving federal highway and transportation funding.

The DOT’s DBE program is an interesting paradox.  It is almost 40 years old.  It was designed to remedy past discrimination in the construction industry.  However, many of the firms and people that would have played a role in that discrimination are long gone.  Moreover, if the purpose is to remedy past discrimination and 40 years later discrimination still exists (dispute a rigorous regulatory scheme against it) then the program is doing a lousy job of achieving its goal.  Yet, DBE programs are more entrenched than ever.

City of Richmond v. J.A. Croson Co.

In Croson, the United States, Supreme Court provided the rules which all state and local DBE programs must be judged against. Richmond’s DBE plan required that prime contractors subcontract at least 30% of the dollar amount of the prime contract to certified DBE firms.  The Plan declared that it was “remedial” in nature, and enacted “for the purpose of promoting wider participation by minority business enterprises in the construction of public projects.”

The Supreme Court struck down Richmond’s program holding that Court’s must apply strict scrutiny to any racial preference program.  To survive strict scrutiny, a local or state authority advancing a DBE program must show that there exists a compelling state interest in the form of actual racial discrimination in the construction industry.  The agency must support its interest by evidence and it cannot be merely anecdotal.  Once the agency puts forth sufficient evidence of existing discrimination, then the remedy must be narrowly tailored to remedy that discrimination.  Finally, the agency must demonstrate that it exhausted race neutral means to remedy the discrimination.

In Croson, the Supreme Court first found that the City of Richmond introduced no evidence that there was racial discrimination in the Richmond area construction industry.  However, the Court said that if Richmond could show that there existed a significant statistical disparity between available minority owned firms and the percentage of subcontracts award to such firms that may support a finding of discrimination.  Second, the Supreme Court found that the 30% figure had no rational connection to the the alleged discrimination that it sought to remedy.  Indeed, the Court found the figure to be arbitrary.

Following Croson, state and local agencies that did not introduce statistical evidence of racial discrimination in the construction industry saw their DBE regimes struck down.  (One of those local government agencies that saw their DBE program struck down for lack of evidence was the City of Philadelphia.  Contractors Ass’n of E. Pennsylvania, Inc. v. City of Philadelphia, 945 F.2d 1260 (3d Cir. 1991))  Therefore, borrowing from Croson’s holding that a statistical disparity could be evidence of discrimination, local and state government began commissioning disparity studies to use as evidence to support their DBE program.  Preparing disparity studies has become a cottage industry.

While disparity studies come under attack for faulty methodology, if they tend to show a disparity between the number of minority firms available for subcontracting and the actual amount of subcontracted work, Courts tend to uphold them.  Thus, disparity studies showing an actual disparity usually satisfy the first prong of strict scrutiny that the government show that discrimination exists.  With the first prong satisfied, the government must then show that the subcontracting goal is narrowly tailored to remedy the discrimination.

Is it time to revisit Croson?

This bring us to the City of Philadelphia DBE program.  The program shows that it has been a resounding success in remedying any past discrimination that may have existed at least for public works (construction) projects.  For public works contracts, the City’s showing that there is an over-utilization of DBE firms.  This means the percentage of prime contract subcontracted to DBE firms exceeds the number of firms available.  The study makes no effort to hide this fact and highlights it in several areas.  This over-utilization is not an anomaly.  In fact, the over-utilization of DBE firms on public works contracts has now existed for several years.

However, if there is an over utilization of DBE firms on public works projects, what evidence does the City have to show that there is discrimination in the Philadelphia construction industry?  There appears to be none.  Without that evidence, the program would fail the first prong of strict scrutiny miserably.  Indeed, its hard to see how the program would survive a challenge applying Croson.

Yet, that has not stopped the City.  To the contrary, the City wants to increase the percentage even more. The City calls them “stretch” goals.  While maximizing DBE contracting might be good social policy, it is not “good constitution,” at least according to Croson.  Using a DBE program as a means to achieve a policy of increasing DBE participation to the maximum extent becomes untethered from Croson’s mandate that such programs be designed to remedy past discrimination and narrowly tailored to achieve those ends.  Croson rejects any percentage aimed towards “outright racial balancing.”  Other courts have held that the goal needs to be at the lower end of what is needed to bring the disparity into balance.  Thus, it is hard to see how the City’s current “stretch goals” could survive the narrowly tailored prong of strict scrutiny.

Conclusion 

The reality is while it appears to be completely unconstitutional and susceptible to a challenge, the City’s DBE program will likely remain in place.  The major players in the industry are too political entrenched to bring a case challenging a program designed to assist minority and female owned firms.  They risk being called “racist” at best and being blackballed by the City at worst.  However, if a brave enough firm wished to challenge the program it is ripe for the taking and would be likely see the Court require the City to pay its attorneys fees.