SHOULD THE GOVERNMENT CONFESS ERROR

IN ADARAND CONSTRUCTORS?

A Clarification About the 10th Circuit's "Critical Error"

[The August 20, 2001 article in the National Law Journal, Does India hold the key to affirmative action?, by Marcia Coyle refers to an assertion in the amicus brief filed by the Social Science and Comparative Law Scholars that the 10th Circuit Court of Appeals made a "critical error" in its interpretation of the regulations applicable to the affirmative action program at issue in the Adarand case. The following note clarifies the nature of this error, which remains unaddressed by the parties in the case: Adarand Constructors and the federal government.]

On September 25, 2000 the U.S. Court of Appeals for the 10th Circuit decided that recent modifications to a federal affirmative action program for highway construction contracts had made the program "narrowly tailored" so that it was constitutional under the "strict scrutiny" standard announced by the Supreme Court when it first reviewed the program in 1995. It is this 10th Circuit decision that will be examined by Supreme Court on October 31, 2001 in Adarand Constructors v Mineta.

The 10th Circuit particularly focused on the relationship between racial identity and the presumption of economic disadvantage. In order to be eligible for the affirmative action program, 51% of the ownership of a construction company must be held by persons who are both socially and economically disadvantaged. When the program was before the Supreme Court in 1995, it was clear that any person who was a member of one of five specified groups was automatically presumed to be BOTH socially and economically disadvantaged. The 10th Circuit said "presuming economic disadvantage based on membership in certain racial groups ... is not narrowly tailored insofar as it obviates an individualized inquiry into economic disadvantage." 228 F.2d at 1184. The Court of Appeals went on to say, "the government has eliminated [this] offending ... practice. The current regulations ... impose a new requirement on applicants with regard to an individualized showing: They must submit a narrative statement describing the circumstances of that purported economic disadvantage. ... [Thus] the main obstacle to a finding of narrow tailoring has disappeared." 228 F.2d at 1185.

As discussed in the amicus brief filed by the Social Science and Comparative Law Scholars (pp. 15-17), the 10th Circuit misinterpreted the "current regulations." In the affirmative action program now before the Supreme Court, the presumption of economic disadvantage remains in place with only one minor modification: the presumption is conclusively rebutted if a business owner's "personal net worth" exceeds $750,000. In calculating "personal net worth" the owner can exclude the value of ownership interest in the business itself and equity in his or her primary residence. 26 Code of Federal Regulations 26.67(a)(2) (2001). This $750,000 cap is NOT the modification that the 10th Circuit was describing as "narrow tailoring," although the 10th Circuit did mention the cap in an appendix to its opinion, 228 F.2d at 1193.

To understand the 10th Circuit's mistake, one needs to distinguish three different affirmative action programs: 1) The Section 8(a) Business Development Program of the Small Business Administration (SBA); (2) The Section 8(d) Small Disadvantaged Business Program of the SBA, and (3) The Disadvantaged Business Enterprises (DBE) Program of the Department of Transportation. The 8(a) program preceded the other two programs; as a result the 8(d) and DBE programs use many-- but NOT all -- of the Section 8(a) definitions. The Section 8(d) program encourages the use of minority subcontractors by prime contractors doing business directly with the federal government (including federal highway contracts). The DBE program primarily relates to the use of minority firms as prime and subcontractors for state and local highway contracts that receive federal funds. Although the Adarand case started as a challenge to the Section 8(d) program, it appears that the case now before the Supreme Court also includes the DBE program as well.

Unlike the Section 8(d) and DBE programs at issue in the Adarand case, the SBA's Section 8(a) program has for many years only presumed social disadvantage based on minority group membership and required an individualized determination of economic disadvantage for all applicants, including minority group members. Each applicant must submit a narrative statement describing how his or her access to capital and credit has been impaired due to social disadvantage, supported by personal financial information. The SBA examines personal income for the past two years, personal net worth, the value of all assets and the overall financial condition of the applicant. 13 Code of Federal Regulations 124 (b), (c) (2001). The 10th Circuit mistakenly thought that the recent modifications to the Section 8(d) and DBE programs had incorporated by reference this individualized determination from the Section 8(a) program. The 10th Circuit made this mistake by misreading the following new regulation in the Section 8(d) program:

"(a) Reliance on 8(a) criteria. In determining whether a firm qualifies as an SDB [Small Disadvantaged Business], the criteria of social and economic disadvantage and other eligibility requirements established in subpart A of this part apply, including the requirements of ownership and control and disadvantaged status, unless otherwise provided in this subpart." 13 C.F.R. § 124.1002(a) (2001) (emphasis added).

Despite the explicit warning, "unless otherwise provided in this subpart," the 10th Circuit did not keep reading the new Section 8(d) regulations. Had the Court of Appeals carefully reviewed the entire set of regulations, the court would have seen the following provision:

"Those individuals claiming disadvantaged status that are members of the same designated groups that are presumed to be socially disadvantaged for purposes of SBA's 8(a) BD program (see 124.103(b)) are presumed to be socially and economically disadvantaged for purposes of SDB certification." 13 C.F.R. § 124.1008(e)(1) (2001) (emphasis added)

The regulations for the DBE program also continue to presume that members of the designated minority groups are economically disadvantaged. 49 Code of Federal Regulations 26.67 (2000).

In its brief before the Supreme Court, the federal government does not mention the 10th Circuit's holding that the affirmative action program in Adarand passes strict scrutiny only because the race-based presumption of economic disadvantage has been replaced with an individualized determination of economic disadvantage. The government's brief could have defended the 10th Circuit interpretation or admitted that the government won below on a mistaken reading of the relevant regulations. The government brief does neither. Instead the government tries to show that there is an "individualized determination" by making much of a different regulation in the DBE program: "You must require applicants to submit a signed, notarized certification that each presumptively disadvantaged owner is, in fact, socially and economically disadvantaged. You must require each individual owner ... to submit a signed, notarized statement of personal net worth, with appropriate supporting documentation." 49 Code of Federal Regulations 26.67(a) (2000). The government describes this regulation as "limiting DBE status to those who certify that they are victims of discrimination in a notarized document." (Government Brief at 49, see also 39 and 50)

On May 8, 2001 the Department of Transportation published a DBE application form to be used nationwide; the "notarized certification" referenced in the government's brief appears at the end of this form. It is clear from examining this one-page affidavit that the presumption of economic disadvantage remains in place, modified only by the $750,00 net worth cap. Click here to see the Affidavit of Social and Economic Disadvantage. The top section is entitled "Social Disadvantage." This part is completed by checking off a box indicating group membership and by "certifying" that "I have held myself out as a member of that group" and that "I have experienced social disadvantage due to the effects of discrimination based upon my __race __ ethnicity __ gender ___other (explain)." Once the Social Disadvantage section is completed, the Economic Disadvantage section only requires "certification" that "my personal net worth does not exceed $750,000." The application does NOT require "a narrative statement describing the circumstances of that purported economic disadvantage" as the 10th Circuit stated. The applicant need not submit income tax returns or any other personal financial records if the application is supported by a statement from a CPA that the applicant's net worth does not exceed $750,000. See 66 Federal Register pp. 23210-11 (May 28, 2001) (explaining application form).

Although the reply brief filed by Adarand Constructors on September 10 says that the government's reliance on this "affidavit of disadvantage mocks the requirement for individualized inquiry," neither the reply brief nor Adarand Constructors' original brief specifically address the 10th Circuit mistaken interpretation of the relevant regulations. Therefore the "critical error" in the 10th Circuit decision before the Supreme Court has not been addressed by either party in the case.

September 14, 2001

Clark D. Cunningham
Professor of Law
Washington University School of Law
Campus Box 1120
One Brookings Drive
St. Louis, MO 63130-4899
Phone: 314-935-6413
Fax: 314-935-5356
Email: cunningc@wulaw.wustl.edu