A Challenge to Maryland's Minority Contracting Laws

Maryland is currently undergoing a significant challenge to the constitutionality of its Disadvantaged Business Enterprise (DBE) contracting laws, which may very well impact the future of Maryland MBE/WBE set aside contracts, particularly those awarded under and in connection with BRAC. The case, Kline v. Porcari, case number 1:08-cv-03197-RDB, is currently pending in the US District Court for the District of Maryland, Baltimore Division.

In the case, Kline was bidding as a prime contractor on a $10 million Maryland Department of Transportation (MDOT) construction project. The solicitation initially contained a 10% goal for DBE participation, but the goal was increased to 30%. Kline used good faith efforts to meet the goal, but selected bids from subcontractors offering the lowest prices to the State, rather than merely basing his choice on DBE qualifications. As a result, Kline’s price was lower by over a million dollars, but Kline was able to achieve only 10.8% DBE participation. After bid opening, but before award, Kline was asked to submit a DBE waiver request – which he did. After nine months, the State denied the waiver request. After some additional administrative proceedings, Kline filed an action in federal court challenging the constitutionality of Maryland’s DBE laws as written and as applied.

The Kline case is worth watching because it will undoubtedly have an impact on future MDOT projects to build the additional transportation infrastructure necessary to support BRAC in Maryland, and whether local minority and woman-owned contractors will benefit from MDOT contracts set aside to increase minority and female participation in Maryland BRAC contracting opportunities.

Maryland is not the only regional jurisdiction facing a challenging to state minority/female contracting statutes, however. The Fourth Circuit Court of Appeals just yesterday issued a ruling partially overturning North Carolina’s H.B. Rowe Co., Inc. v. Tippett, 4th Circuit No. 09-1050 (July 22, 2010).

North Carolina, like Maryland and many other states, has enacted non-mandatory regulations to promote minority and women representation in state construction projects. Specifically, North Carolina encourages state-funded road construction projects to meet Minority Business Enterprise and Woman Business Enterprise (MWBE) program goals of 10% minority-owned and 5% woman-owned subcontractor participation (or, in the absence of MWBE goal attainment, at least demonstrable evidence of good faith efforts towards achieving those goals). In 2002, the appellant, H.B. Rowe Co., Inc. (Rowe), submitted the low bid on a State road construction project. The State rejected Rowe’s bid because it failed to at least demonstrate good faith efforts to achieve the MWBE subcontracting goals. Rowe challenged the State MWBE contracting requirements under the 14th Amendment Equal Protection clause of the U.S. Constitution, among other grounds.

The District Court ruled for the State on all points. On appeal, the Fourth Circuit affirmed, under strict scrutiny standards, the statutory provisions for African American and Native American subcontractors. However, the Court partially reversed the District Court ruling, finding that the State has failed to justify its application of the statutory scheme to women, Asian American, and Hispanic American subcontractors. Rowe won and now the constitutionality of the North Carolina MWBE program, at least with respect to female, Asian American and Hispanic American small business owners, is in doubt. One of the many interesting aspects of this case is that the court refused to accept the presumption, without strict evidence to support it, that woman-owned construction firms face discrimination in the construction industry, of all places.

Cases challenging contracting programs for minority-owned and other small disadvantaged businesses are not limited to the state minority contracting regulations, either. In late 2008, the Department of Defense (DoD) lost its Small Disadvantaged Business (SDB) program, after a disappointed bidder launched a successful constitutional challenge to the program. In Rothe Development Corporation v. Department of Defense, 545 F.3d 1023 (Fed. Cir. 2008), the U.S. Court of Appeals for the Federal Circuit ruled that the DoD SDB program was unconstitutional because Congress failed to adequately justify the program when enacting the legislation authorizing it. To briefly summarize, the DoD has a policy goal to award 5% of its total contracting dollars to small businesses owned and operated by socially and economically disadvantaged individuals. The DoD SDB program permitted DoD to apply a pricing preference to the bids or offers of minority-owned businesses, and other small businesses whose owners that could demonstrate historical social and economic disadvantage. The appellant, Rothe Development Corporation challenged the constitutionality of the SDB program after losing a contract to a Korean-American-owned business, which received the benefit of the 10% price evaluation preference under the SDB program. The Federal Circuit found that DoD’s SDB program was unconstitutional because, when it re-enacted the SDB program in 2006, Congress lacked a “strong basis in evidence” for concluding that race-conscious contracting was necessary to remedy discrimination in the defense industry. The DoD SDB program is still suspended, and will remain so until Congress decides to collect sufficient evidence of historical discrimination the defense contracting industry and re-enact the SDB program.

Do these cases signal the end of federal and state minority contracting programs?

- Heather James