Federal Court Enjoins DOT Disadvantaged Business Enterprise Program On Equal Protection Grounds

In the wake of the U.S. Supreme Court's decision in Students for Fair Admissions, Inc. v. President & Fellows of Harvard College, there has been an increase in legal challenges to race and gender-based programs and initiatives in multiple contexts, including within government contracting. While the holding of Students for Fair Admissions did not address public contracting or disturb existing case law that considers the validity of similar government contracts programs, the decision has informed and reshaped the landscape for strict scrutiny challenges to these programs, and there has been a significant uptick in challenges to diversity-focused government procurement regulations.

Last month, in Mid-America Milling Company, LLC, et al., v. U.S. Department of Transportation, the U.S. District Court for the Eastern District of Kentucky temporarily enjoined the Department of Transportation ("DOT") from mandating the use of race- and gender-based presumptions for DOT contracts impacted by Disadvantaged Business Enterprise ("DBE") goals. The court found, among other things, that while DOT's DBE program intends to combat historical discrimination and its lingering effects on the ability of disadvantaged businesses to equally compete for government contracts, the plaintiff was likely to prevail on the merits of its argument that the program's "race and gender classifications" violate the Equal Protection clause.

Although the preliminary injunction currently remains geographically constrained to Kentucky and Indiana, the case is an important development for government contractors that are impacted by DBE related contracts. We summarize the key takeaways from the court's holding, as well as its implications for government contractors, below.

DOT's Disadvantaged Business Enterprise Program

Under DOT's DBE program, ten percent of federal highway construction funds are required to be paid out to small businesses owned and controlled by "socially and economically disadvantaged individuals" as defined by § 8(d) of the Small Business Act. Section 8(d) of the Small Business Act defines socially and disadvantaged individuals as "those who have been subjected to racial or ethnic prejudice or cultural bias within American society." Although anyone may qualify as socially and economically disadvantaged regardless of their race or gender, certain racial groups and women are rebuttably presumed to be disadvantaged.

Recipients of DOT federal financial assistance must establish DBE participation goals "based on demonstrable evidence of the availability of ready, willing and able DBEs relative to all businesses ready, willing and able to participate on" federally funded contracts. Where feasible, recipients attempt to meet these goals through race and gender neutral means, but to the extent they are unable to, they must utilize "contract goals" instead. "Contract goals" generally involve a recipient utilizing DBE subcontractor participation goals on specific contracts, or documentation that a bidder has made "good faith efforts" to meet specific DBE goals.

Case Background

Courts have found that programs that employ race-based government actions, like the DOT DBE program's rebuttable presumptions, are subject to strict scrutiny and must involve a compelling interest that "targets and seeks to remedy past, intentional discrimination" that the government had a hand in. If there is a compelling government interest, then DOT must prove that the use of race is narrowly tailored, or "necessary to achieve that interest." Narrow tailoring requires consideration of whether a racial classification is "necessary" and whether race-neutral alternatives could adequately achieve the governmental interest.

In the present case, Plaintiffs Mid-America Milling, LLC and Bagshaw Trucking Inc. sued DOT, arguing that they regularly bid on DOT funded contracts impacted by DBE goals in the Kentucky and Indiana area, but lost out on federally funded contracts to DBE firms even when their bids were lower because they do not receive the rebuttable presumption of disadvantage.

In response, DOT justified its DBE program by maintaining that it "targets and seeks to remedy past, intentional discrimination in the transportation industry-discrimination that the government has had a hand in." DOT also noted that "there is a strong basis in evidence that the DOT DBE program targets specific episodes of past, intentional discrimination" that it seeks to remedy.

Court Finds DOT's DBE Program Likely Not to Survive Strict Scrutiny

The court found that by relying on overly broad evidence of historical racial and gender discrimination to justify its DBE program, the plaintiffs were likely to succeed on the merits of their argument that DOT's program violated the Equal Protection clause. Specifically, the court ruled - at the PI stage - that the program's race and gender classifications likely would be found to lack a compelling government interest and not adequately narrowly tailored because the agency failed to provide specific evidence of discriminatory exclusion for each group to whom the race and gender presumptions would apply.

Although DOT cited to a collection of 200 disparity studies, congressional testimony, and other reports and studies that purported to document past discrimination and its effect on the ability of DBEs to equally compete for government contracts, the court found that DOT's evidence was likely to be too broad to serve as a compelling interest. Specifically, the court noted that while DOT's evidence pointed to societal discrimination against minority-owned businesses generally, it failed to offer evidence of past discrimination against the groups it grants a preference to in the DBE program. The court also found that if DOT wanted to grant preferences to certain groups, the agency must establish a compelling interest by specifically showing how it had previously discriminated against those groups.

Separately, the court found that DOT's DBE program was not as narrowly tailored as the agency proclaimed. In particular, it held that DOT's preferences for specific minorities without clear support "fails to articulate a meaningful connection between the means employed and the goals pursued." The court further concluded that the DBE program was not narrowly tailored because it lacked a "logical end point" and that the program's "racial preferences are not tethered to a foreseeable conclusion."

Implications of the Case

As this stage, the court's ruling imposed only a preliminary injunction within a limited geographic area. However, Mid-America Milling Company highlights the potential for other challenges that could result in similar, or wider-reaching findings and injunctions. It is unclear whether other courts will make the same demands for specificity of the evidence relied upon to justify programs with race- or gender-based classifications, but rulings of this type will undoubtedly impact governmental entities who administer similar programs that must assess the evidence used to justify these programs. Similarly, government contractors who participate in these programs will be impacted.

We will continue to monitor legal developments on DOT's DBE program, as well as developments involving other similar race and gender-based programs.