On Appeal From the United States District Court For the Eastern District of Pennsylvania
(D.C. Civil Action No. 89-cv-02737) Argued December 7, 1995
BEFORE: STAPLETON, SAROKIN and ROSENN, Circuit Judges
City of Philadelphia, Elizabeth Reveal, as Director of Finance for the City of Philadelphia and Curtis Jones, Jr., as Director of the Minority Business Enterprise Council Appellants in
No. 95-1095 United Minority Enterprise Associates, Inc. Appellant in No. 95-1138
(Opinion Filed July 31, 1996)
The City of Philadelphia (City) and intervening defendant United Minority Enterprise Associates (UMEA) appeal from the district court's judgment declaring that the City's set-aside program for black construction contractors, Phila. Code Section(s) 17-500 et. seq. (Chapter 17-500 or Ordinance), violates the Equal Protection rights of the Contractors Association of Eastern Pennsylvania (CAEP) and eight other contracting associations (Contractors). We agree with the district court that Chapter 17-500 is not narrowly tailored to serve a compelling state interest, and we will affirm.
Chapter 17-500 was adopted by the Philadelphia City Council in November of 1982. As originally enacted, it contained a sunset provision calling for it to expire after seven years. In May of 1987, Council extended the Ordinance until January 1, 1998. In 1988, the program was amended inter alia to include the set-aside for handicapped persons.
The preamble of Chapter 17-500 set forth only the following general legislative findings:
WHEREAS, . . . in the City of Philadelphia Minorities constitute approximately forty-six percent of the population including thirty-eight percent Black, five percent Spanish surname, two percent Oriental and one percent Indian and women constitute approximately fifty percent of the population; and
WHEREAS, A pattern of past and present racial, sexual and economic discrimination have unfairly limited the ability of Minority and Female Owned Businesses to compete for an equitable share of such contracts with the City of Philadelphia; and
WHEREAS, The citizens of Philadelphia share a commitment to the eradication of present manifestations of such discrimination; and
WHEREAS, A series of goals for Minority and Female Owned Business participation would increase such participation and eradicate such manifestations and so that they will reach economic parity with majority businesses at large . . . .
The preamble of the 1987 Ordinance extending the program includes the following additional legislative findings:
WHEREAS, Economic parity with majority businesses at large has not yet been reached, and based on the progress already demonstrated, cannot be reached within the remaining effective period of this Chapter; and
WHEREAS, The Council desires to extend the effective period of this Chapter in order to more fully implement its goals program in the economic development of Minority and Female Owned Businesses, and to help eliminate the large amount of unemployment among the City's population -- particularly its minority population . . . .
No additional legislative finding relevant to the issues before us has been made.
Chapter 17-500, in its current form, seeks to increase the participation of "disadvantaged business enterprises" (DBEs) in City contracting. DBEs are businesses defined as those at least 51% owned by "socially and economically disadvantaged" persons. "Socially and economically disadvantaged" persons are, in turn, defined as "individuals who have . . . been subjected to racial, sexual or ethnic prejudice because of their identity as a member of a group or differential treatment because of their handicap without regard to their individual qualities, and whose ability to compete in the free enterprise system has been impaired due to diminished capital and credit opportunities as compared to others in the same business area who are not socially disadvantaged." Phila. Code Section(s) 17-501(11). As we found in Contractors Ass'n of Eastern Pa. v. City of Philadelphia, 6 F.3d 990, 999 (3d Cir. 1993) (Contractors II), *fn1 this definition "includes only individuals who are both victims of prejudice based on status and economically deprived." Businesses majority-owned by racial minorities (minority business enterprises or MBEs) and women are rebuttably presumed to be DBEs, see Section(s) 17-501(11)(a), but businesses that would otherwise qualify as DBEs are rebuttably presumed not to be DBEs if they have received more than $5 million in City contracts.
Chapter 17-500 sets participation "goals" for different categories of DBEs: racial minorities (15%), women (10%) and handicapped (2%). These percentage goals are percentages of the total dollar amount spent by the City in each of the three contract categories: vending contracts, construction contracts, and personal and professional service contracts. Dollars received by DBE subcontractors in connection with City financed prime contracts are counted towards the goals as well as dollars received by DBE prime contractors. *fn2
The 1982 Ordinance created the Minority Business Enterprise Council (MBEC) to oversee the set-aside program, promulgate regulations, and certify the eligibility of contractors to participate. *fn3 Under the program, each City agency is expected to meet the participation goal in each type of contract. The MBEC or an agency may recommend exempting individual contracts or groups of contracts from Chapter 17-500's requirements when there are insufficient DBEs in the Philadelphia Standard Metropolitan Statistical Area to ensure adequate competition and reasonable prices for the contracts. Section(s) 17-505(1) & (2).
Chapter 17-500 and its implementing regulations call for City agencies and the MBEC to formulate an annual plan for achieving the established goal in the construction area. See MBEC Reg. Section(s) 5, 11. Two different strategies are authorized. When there are sufficient DBEs qualified to perform a City contract to ensure competitive bidding, a contract can be let on a sheltered market basis -- i.e., only DBEs will be permitted to bid. In other instances, the contract will be let on a non-sheltered basis -- i.e., any firm may bid -- with the goals requirements being met through subcontracting. The sheltered market strategy has seen little use. It was attempted on a trial basis, but there were too few DBEs in any given area of expertise to ensure reasonable prices, and the program was abandoned. *fn4 See App. at 262-63. Evidence submitted by the City indicates that no construction contract was let on a sheltered market basis from 1988 to 1990, see App. at 4493, and there is no evidence that the City has since pursued that approach. Consequently, the Ordinance's participation goals have been achieved almost entirely by insisting that bidding prime contractors subcontract work to DBEs in accordance with the goals.
When the goals are to be achieved by imposing subcontracting requirements, each would-be prime contractor must submit a "Schedule for Participation" (Schedule) of DBEs or a "Request for Waiver." See MBEC Reg. Section(s) 6.1. A Schedule details the names and addresses of participating DBE subcontractors, the type and amount of work they are to perform, and the dollar value of their services. A Request for Waiver consists of a statement that the contractor has made a good faith effort to utilize DBEs but has failed to meet the goals for the contract, along with documentation of the good faith effort and a list of those DBEs with whom the contractor was able to make commitments. Section(s) 6.1(C).
Compliance with Chapter 17-500's goals is to be considered "an element of responsiveness" of the bid when an agency awards a contract. Section(s) 6.1(A). The significance of complying with the goals is determined by a series of presumptions. Where at least one bidding contractor submits a satisfactory Schedule for Participation, it is presumed that all contractors who did not submit a satisfactory Schedule did not exert good faith efforts to meet the program goals, and the "lowest responsible, responsive contractor" gets the contract. Section(s) 6.1(D). Where none of the bidders submits a satisfactory Schedule, it is presumed that all but the bidder who proposes "the highest goals" of DBE participation at a "reasonable price" did not exert good faith efforts, and the contract is awarded to the "lowest, responsible, responsive contractor" who is granted a Waiver and proposes the highest level of DBE participation at a reasonable price. Section(s) 6.1(E). Non-complying bidders in either situation must rebut the presumption in order to secure a waiver.
The district court found that the practical effect of the regulations and the system of presumptions is to create a protected segment of City construction work for which non-DBE contractors could not compete. See Contractors Ass'n v. City of Philadelphia, 893 F. Supp. 419, 426 (E.D. Pa. 1995). During the late 1970s, the contractors who obtained the contracts for the bulk of all public works contracts in the Philadelphia SMSA tended to use their own workforces and equipment to perform the necessary work, and subcontractors were used only when special skills were required. Id. After the enactment of Chapter 17-500, non-MBE contractors had to engage in "creative subcontracting," carving out portions of the contract for DBEs that they would otherwise have done themselves. Id. at 426 n.5.The City's own records substantiate the effect of Chapter 17-500. MBEs have participated in nearly every public works contract let by the City, usually at or near the participation goal. *fn5 Prime contracts awarded to MBEs constituted only a small fraction of the contract amounts counted towards the participation goal. *fn6 Chapter 17-500 thus is essentially a subcontracting set-aside program.
This appeal is our third occasion to consider this challenge to Chapter 17-500. On the first appeal, we affirmed the district court's ruling that the Contractors had standing to challenge the set-aside program, but reversed the grant of summary judgment in their favor because UMEA had not been afforded a fair opportunity to develop the record. See Contractors Ass'n of Eastern Pa. v. City of Philadelphia, 945 F.2d 1260 (3d Cir. 1991) (Contractors I). On the second appeal, we reviewed a second grant of summary judgment for the Contractors. See Contractors II, 6 F.3d 990. We first concluded that the Contractors had standing to challenge the program only as it applied to the award of construction contracts. We then held that the pre-enactment evidence available to the City council in 1982 did "not provide a sufficient evidentiary basis" for a conclusion that there had been discrimination against women and minorities in the construction industry. 6 F.3d at 1003. We further held, however, that evidence of discrimination obtained after 1982 could be considered in determining whether there was a sufficient evidentiary basis for Chapter 17-500.
After evaluating both the pre-enactment and post-enactment evidence in the summary judgment record, we affirmed the grant of summary judgment insofar as it declared to be unconstitutional those portions of the program requiring set-asides for women and non-black minority contractors. We further held that the two percent set-aside for the handicapped passed rational basis review and ordered the court to enter summary judgment for the City with respect to that portion of the program. Finally, we concluded that the portions of the program requiring a set-aside for black contractors could stand only if they met the "strict scrutiny" standard of Equal Protection review and that the record reflected a genuine issue of material fact as to whether they were narrowly tailored to serve a compelling interest of the City as required under that standard. The present appeal follows a nine-day bench trial and a resolution by the district court of the issues thus presented. That trial and this appeal thus concern only the constitutionality of Chapter 17-500's preferences for black contractors.
At trial, the City presented the work of Dr. Andrew F. Brimmer. *fn7 That work, which was done in 1992 after the filing of this suit, is reflected in two pretrial affidavits (Brimmer Affidavits I & II), *fn8 and his trial testimony. The core of his analysis concerning discrimination by the City centered on disparity indices prepared using data from fiscal years 1979-81. The disparity indices were calculated by dividing the percentage of all City construction dollars received by black construction firms by their percentage representation among all area construction firms, multiplied by 100. *fn9 Dr. Brimmer testified that the disparity index for black construction firms in the Philadelphia metropolitan area for the period studied was about 22.5. According to Dr. Brimmer, the smaller the resulting figure was, the greater the inference of discrimination, and he believed that 22.5 was a disparity attributable to discrimination. *fn10 A number of witnesses testified to discrimination in City contracting before the City Council, prior to the enactment of Chapter 17-500. Dr. Brimmer believed that his statistical evidence was corroborated by their testimony.
Based on information provided in an affidavit by John Macklin, a former City employee, Dr. Brimmer also concluded that black representation in contractor associations was disproportionately low in 1981 and that between 1979 and 1981 black firms had received no subcontracts on City-financed construction projects.
The City also offered evidence concerning two programs instituted by others prior to 1982 which were intended to remedy the effects of discrimination in the construction industry but which, according to the City, had been unsuccessful. The first was the Philadelphia Plan, a program initiated in the late 1960s to increase the hiring of minorities on public construction sites. The second was a series of programs implemented by the Philadelphia Urban Coalition, a non-profit organization (Urban Coalition programs). These programs were established around 1970, and offered loans, loan guarantees, bonding assistance, training, and various forms of non-financial assistance concerning the management of a construction firm and the procurement of public contracts. According to a former City Councilmember, Joseph Coleman, and the former General Counsel of the Urban Coalition, Oscar Gaskins, although both programs had some successes, neither program succeeded in eradicating the effects of discrimination.
The City pointed to the waiver and exemption sections of the Ordinance as proof that there was adequate flexibility in its program. Finally, the City contended that its fifteen percent goal was appropriate. Although greater than the percentage of minority contractors (2.4%) and black contractors (0.7%) in the Philadelphia SMSA, it is not tied directly to the proportion of minorities (41.8%) or blacks (37.9%) in the local population. The City maintained that the goal of fifteen percent may be required to account for waivers and exemptions allowed by the City, is a flexible goal rather than a rigid quota in light of the waivers and exemptions allowed by the Ordinance, and is justified in light of the discrimination in the construction industry.
The Contractors presented testimony from an expert witness, Dr. LaNoue, *fn11 challenging the validity and reliability of Dr. Brimmer's work and conclusions. Dr. LaNoue testified to many problems in the design of Dr. Brimmer's study, including, inter alia, the data used, the assumptions underlying the study, and the failure to include federally-funded contracts let through the City Procurement Department.
The Contractors relied heavily on the legislative history of Chapter 17-500, pointing out that it reflects no identification of any specific discrimination against black contractors and, indeed, no data from which a Councilperson could find that specific discrimination against black contractors existed or that Chapter 17-500 was an appropriate remedy for any such discrimination. They pointed as well to the absence of any consideration of race-neutral alternatives by the City Council prior to enacting the Ordinance. On cross-examination of Oscar Gaskins, the Contractors elicited testimony that indicated that the Urban Coalition programs were relatively successful, undermining the contention that race-based preferences were needed. Finally, the Contractors argued that the fifteen percent figure must have been simply picked from the air and had no relationship to any legitimate remedial goal because the City Council had had no evidence of identified discrimination before it.
At the conclusion of the trial, the district court made extensive findings of fact and conclusions of law. It determined that the record reflected no "strong basis in evidence" for a conclusion that discrimination against black contractors was practiced by the City, non-minority prime contractors, or contractors associations during any relevant period. 893 F. Supp. at 447. The court also determined that Chapter 17-500 was "not 'narrowly ...