A new Federal case could have lasting implications for certified disadvantaged small businesses
A U.S. judge ruled that the U.S. Department of Transportation’s consideration of race or gender when awarding federal highway and transit project funding set asides for disadvantaged small businesses is unconstitutional.
In granting the request for preliminary injunction made by the Mid-American Milliing Company, LLC and Bagshaw Trucking Inc., the U.S. District Court in Frankfort, Kentucky, held that the federal DBE program that treats businesses owned by racial minorities and women as presumptively disadvantaged and eligible for such funding violated the U.S. Constitution’s equal protection guarantees.
What is the DBE Program?
In 1983, the federal government enacted the Disadvantaged Enterprise (“DBE”) Program. Since then, the law has required that ten percent of federal highway construction funds be paid to small businesses owned and controlled by “socially and economically disadvantaged individuals,” as that term is defined in § 8(d) of the Small Business Act (15 U.S.C. § 637). Any person may qualify as socially and economically disadvantaged regardless of their race or gender, but under the law, certain racial groups and women are rebuttably presumed to be disadvantaged. DBEs are for-profit small business concerns at least 51% owned and controlled by socially and economically disadvantaged individuals. To be socially disadvantaged, the DBE owner must be a woman, African American, Hispanic American, Asia-Pacific Islander or another minority the Small Business Administration (SBA) has determined socially disadvantaged. This determination is done on a case-by-case basis.
The DBE program – administered through the Department of Transportation (DOT) – attempts “to level the playing field by providing small businesses owned and controlled by socially and economically disadvantaged individuals a fair opportunity to compete for federally funded transportation contracts.”
Under federal law, fund recipients, such as state departments of transportation, are required to have a DBE Program and must set a DBE participation goal “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. To the extent feasible, state-recipients of federal highway funds attempt to meet their overall goals through the use of race and gender-neutral means. But to the extent they cannot meet their overall goals, the state must utilize “contract goals” to meet its overall goal. On these particular contracts, the recipient sets goals for DBE subcontractor participation on specific contracts. On contracts with goals, states must meet the goal for DBE participation or otherwise document that a bidder has made “good faith efforts” to meet the DBE goal.
The program was reauthorized in 2021 through Democratic President Joe Biden’s signature Infrastructure Investment and Jobs Act, which set aside more than $37 billion for that purpose.
The Mid-American Milliing Company, LLC Case
According to the Court’s Opinion, Plaintiffs Mid-America Milling, LLC and Bagshaw Trucking Inc. operate within Kentucky and Indiana. Both Plaintiffs regularly bid on United States Department of Transportation (“DOT”) funded contracts impacted by DBE goals. But neither Plaintiff receives the rebuttable presumption of disadvantage. The Plaintiffs alleged that they had previously lost out on federally funded contracts to DBE firms, even when Plaintiffs’ bids were lower. Believing that they are denied the opportunity to compete for transportation contracts on equal footing, the Plaintiffs filed suit seeking a declaratory judgment and to permanently enjoin the Defendants from applying race- and gender-based classifications in the federal DBE program.
Impact of the Court Ruling on Your DBE Business
While the case will likely have a ripple effect we will only fully understand in months and years to come, this case at least has a very limited practical effect. For now, the injunction only applies to the contracts bid upon by two suing companies in Kentucky or Indiana. However, Judge Gregory F. Van Tatenhove said Mid-America Milling Co. and Bagshaw Trucking Inc. are likely to win on their merits that the program violates the US Constitution’s Equal Protections clause.
“The Court is keenly aware of the past discrimination that certain groups of people have faced in this country. And the Court is sure that the federal government has nothing but good intentions in trying to remedy past wrongs. But remedying those wrongs must still pass constitutional muster. The federal government cannot classify people in such a manner that violates the principles of equal protection.”
The judge relied in part on a ruling last year by the U.S. Supreme Court, which has a 6-3 conservative majority. The ruling effectively prohibited affirmative action policies long used in college admissions to raise the number of Black, Hispanic and other underrepresented minority students on American campuses.
A spokesperson for the Department of Transportation said it will continue to defend the program as the case moves forward but will comply with the court’s ruling in the meantime.
Other Recent Rulings Strike Blow to DBE Programs
The ruling in the Mid-American Milliing Company is only the latest blow to certification programs. In March, 2024, a federal judge in Texas ordered the Minority Business Development Agency to serve people regardless of race, siding with white business owners who claimed the program discriminated against them.
Judge Mark T. Pittman of the U.S. District Court of the Northern District of Texas, who was appointed by former President Donald Trump, ruled that the Minority Business Development Agency’s eligibility parameters violate the Fifth Amendment’s equal protection guarantees because they presume that racial minorities are inherently disadvantaged.
The U.S. Commerce Department agency was established during the Nixon administration with the intention of addressing discrimination in the business world. Through the Infrastructure Investment and Jobs Act in 2021, the Biden administration widened its scope and made it a permanent agency and increasing its funding to $550 million over five years.
What are the criteria for DBE eligibility?
A determination of whether an individual with a disability meets DBE eligibility criteria is made on a case-by-case basis and is a more detailed analysis, however essentially a business must meet the following criteria:
- Business Size Determination- A firm (including its affiliates) must be a small business as defined by SBA standards. It must not have annual gross receipts in excess of the DBE/ACDBE size limits.
- Personal Net Worth- Only disadvantaged persons having a personal net worth of less than $1.32 million can be considered as a potential qualified DBE. Items excluded from a person’s net worth calculation include an individual’s ownership interest in the applicant firm, and his or her equity in their primary residence.
- Independence- The business must not be tied to another firm in such a way as to compromise its independence and control.
- Control- A disadvantaged owner seeking certification must possess the power to direct or cause the direction of the management and policies of the firm. The owner must also have an overall understanding of, and managerial and technical competence and experience directly related to, the type of business in which the firm is engaged.
Should you have any questions about disadvantage business certification or other certification programs (WBE, MBE, VBT and LGBTBE certification), for your business or would like to schedule an initial consultation, please contact Navigant Law Group, LLC at (847) 253-8800 or email us at hello@navigantlaw.com.
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