Case 27:  Denver Quotas Struck Down!
Concrete Works v. City and County of Denver, Colorado
Last Updated March 25, 2001

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Denver's Concrete Works Wins!
Judge rules against Denver contracting quotas Mar. 7, 2001

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Summary:  The Concrete Works construction company submitted the low bid to Denver in 1992.  But a higher-cost minority owned firm was awarded the contract simply because the owners were the correct color.  Concrete Works sued, and after almost 10 years of litigation they have prevailed!

          On March 7, 2001 Judge Richard Matsch has finally determined that Denver's racial quotas are illegal.  Color-blind justice has ultimately prevailed in Denver, at least for contractors.


Denver MWBE Program Struck Down
Concrete Works v. City and County of Denver, Colorado

          A March 7, 2001 decision by veteran Chief Judge Richard Matsch, who earlier had presided over the Oklahoma City federal office bombing trial, has ended the two-decade old Denver City and County minority and woman-owned business (MWBE) program. 

          The Judge found that the Denver MWBE ordinances met neither the compelling interest nor the  narrowly tailoring 14th Amendment equal protection requirements.

          In his decision, the Judge criticized the methodological approaches typically found in disparity studies, elaborated on the growing judicial impatience with the eclectic list of minority groups preferred by these programs, and reinforced the judicial insistence that race neutral programs be tried before initiating race conscious programs.

          After losing several contracts despite being the low bidder, Concrete Works began this lawsuit in 1992 and lost on a motion for summary judgment at the District Court level 1993 (823 F. Supp. 821 (D. Colo.1993).  The Tenth Circuit reversed a year later because there were disputed facts (36 F.3d 1513 (1994)). 

          Judge Matsch’s 79 page opinion issued on Mar. 7, 2001 was based on two weeks of trial and on the $1.2 million dollars worth of expert’s reports Denver had commissioned since the remand.  Thus the case was an important test of the theory that if enough money is spent on high quality experts, MWBE programs can be defended.  Denver’s strategy was to inundate the Court and the plaintiffs with studies.

          Judge Matsch began by meticulously recapitulating the history of Denver MWBE programs.  As in many other places,   Denver’s program was initially a response to federal pressure to award work to MBEs in the Seventies, an era of very different judicial standards.

          When the litigation began in 1992, Denver’s quotas (set-asides) for construction projects were as follows: 

  • 16% of city and county contracts were exclusively reserved for certified Minority Business Enterprises (MBEs)
  • 12% of city and county contracts were exclusively reserved for Woman-Owned Business Enterprises (WBEs).

[Note: In the text below, MBEs and WBEs are collectively referred to as MWBEs.]

          Denver argued in court that the quotas were just "goals," but consistent with the trial evidence, the Judge found that the program actually prohibited white, male-owned firms from competing on 28% of the city and county construction contracts for reasons of race and gender.   (Stated another way, Denver's so-called "goals" restricted non-minority, non-woman-owned firms to competing for 72% of the contract dollars.)  In effect, Denver had created quotas, whatever they were called.

          The Judge, then, began his criticism of the various disparity studies on which Denver relied. He noted a 1990 study assumed that all MWBEs in the Denver area were qualified, willing and able to do the construction involved. He criticized census data relied on because MWBEs are defined differently in the census than in Denver’s certification process. Further he pointed out that all experts agreed that the 1987 census substantially overstates the number of MWBEs with employees. He found the other data offered by the Denver did not distinguish between the specializations and qualifications of firms. In reports on self-employment rates, the Judge noted the researchers did not consider marital status, veteran status, sources of income and hours worked. In examining the earning of firms, the Judge noted that no adjustments were made for the size of firms, construction specialties or whether the firm worked mainly as a prime or subcontractor. The court criticized the standard National Economic Research Associates (NERA) surveys on anecdotal discrimination because they did not limit responses to Denver, follow-up on any allegation, or ask white men about discrimination against them.

          The Court was not unsympathetic about the difficulties of doing disparity studies in the construction industry, but its comments cast doubt about the future viability of such studies.

Judge Matsch stated:

          "All of the witnesses testifying about these studies recognized the inherent limitations in attempting to collect and measure useful information about the construction industry because of the nearly infinite number of variables affecting the fate of firms operating within the special business environment of the many submarkets for products and services called construction."

The Judge then explained why this was the case:

          "All of the witnesses in this case agreed that the construction industry is intensely risky and very risky. One distinguishing characteristic is that most firms have few full-time employees and must grow or shrink their performance capacity according to the volume of work they are doing. Their ability to expand to take on new contracts depends upon their access to increased resources, including workers with needed skills, equipment, material and operating capital. Obviously, these are not readily available off the shelf items--their acquisition depends, in part, on the expanding firms access to information, its reputation in the community, and the skills of its managers.

          "... While there are some large general service contracting companies, with many employees and much equipment giving them the capacity to perform on large projects, they commonly use small firms specializing in particular trades or skills as subcontracts. The decisions to subcontract particular work will vary greatly based on management philosophy, the need for specialized skills and knowledge of the availability and capacity of firms doing such work.

          "Most pricing of construction contracts is done by bidding, whether through a formal bidding process, as required by the City, or by a less formal process of subcontractor bids made to primes or higher tier subcontractors or by informal negotiations on particular projects. There is no regulatory authority setting general industry standards for this process and price advantages often depend upon the volume of work or material required as well as the prospect of continuing business relationships.

          "There is a high risk for business firms in these contract ventures. Errors made in calculating bid, loss of work days caused by weather delays, unexpected increases in the cost of fuel and material, scheduling delays and countless other variables will determine whether a particular contractor or subcontractor makes or loses money on any project. The risk of slow payment or non-payment is a significant factor in success or failure.

          "With these many uncertainties, risk aversion causes construction contractors to rely on their working knowledge of past performances of other business firms when looking for subcontractors and suppliers. Reasonable contractors will want to do repeat business with those with whom they have had previous success. There is therefore a significant disadvantage to anyone starting up a new a business in trying to become known to and accepted by established contracts who have an understandable reluctance to depend on new business with no performance record to do significant parts of a project. The degree of difficulty in establishing a new firm will vary according to the size and demographics of the market it seeks to enter. (47-49)"

          In short, the construction industry is varied and complex and there are many non-discriminatory reasons why a firm might chose to work consistently with a small set of subcontractors.

          Nevertheless, the Court held, quoting Croson, that "the probative force of statistical disparity studies depends upon whether the data  measured the number of minority firms "qualified" and "willing and able to perform a particular service" compared to the number of those firms employed.

          Denver experts sought to avoid measuring qualifications and capacity by stating that it could not be done objectively and instead assumed in their calculations that every firm in the census was equally available for every job. The Court replied that that was an "implausible assumption." Nor was the Court persuaded that all construction workers were equally likely to form businesses regardless of whether they were skilled or unskilled employees. Judge Matsch stated,"Such a presumption is contradicted by common sense" and is inconsistent with Croson at 506. Aggregating all of the MBEs and WBEs in estimating availability without regard for the size of the business or the particular type of services or work in which they specialize is a serious flaw in the methodology and impairs the value of the results." (55)

          The judge then articulated six questions he thought disparity studies should answer:

(1) Is there persuasive race, ethnic and gender discrimination through all aspects of the construction and professional design industry in the six county Denver MSA? [Or is the problem much more limited which would make the Denver MWBE program not narrowly targeted]
(2) Does the discrimination equally affect all of the racial and ethnic groups designated for preference by the Denver and all women? [Or is the Denver program over inclusive in its beneficiaries]
(3) Does such discrimination result from policies and practices intentionally used by business firms for the purpose of disadvantaging those firms because of race ethnicity and gender [Or are discriminatory acts contrary to policy and unknown to firm owners]
(4) Would Denver’s use of those discriminating firms without requiring them to give work to certified MBEs and WBEs in the required percentage of each project make Denver guilty of prohibited discrimination. [Or has Denver been a passive participant is discrimination]
(5) Is the compelled use of certified MBEs and WBEs in the prescribed percentages on particular projects likely to change the discriminatory policies and programs that taint the industry? [Or is Denver’s program an effective remedy for the discrimination that does exist?]
(6) Is the burden of compliance with Denver’s program preferential program a reasonable one fairly placed on those who are justly accountable for the proven discrimination? [Or does the Denver MWBE program punish the right people] (52)

          The Judge concluded that:   "The Denver studies do almost nothing to answer these questions because the consultant designing them made no effort to address them...." The Court did not find that the studies were results driven, but noted that they might be affected by a "litigation bias."

          The Court continued in its discussion of compelling interest: "The most fundamental flaw in the effort to support Denver’s preferential use of race, ethnicity and gender by statistical evidence is that no objective criteria define who is entitled to the benefits of the program and who is excluded from those benefits." Judge Matsch reviewed Denver’s use of  "presumptive eligibility" which is the same concept with the same definitions used in federal programs. After examining the definition of African-American, Hispanic, Asian-American, and Native American, he noted that"one group was defined by race, another by culture, another by country of origin and another by blood." The Court concluded "While all of these classifications may be considered immutable in that they are not within an individual’s control, the aggregation of them as equally victimized by discrimination and equally entitled to preferential remedies is particularly problematical for Fourteenth Amendment equality analysis. Denver had no justification for the equal inclusion of all these racial and ethnic groups. The Court said: "Denver has failed to identify any difference among the protected groups as to their relative need for this remedy.... It is contrary to common sense to believe that racial prejudice affects all racial and ethnic groups equally or that all of those who are certified will be free from bias or prejudice against other racial groups." (74) 

Judge Matsch noted:

"The studies show that there are major difference in business formation rates of different groups and within the same identified group. The leading group forming businesses in the United States has been Korean-Americans with formation rates almost twice as high as Chinese Americans, who were exactly at the national average, and major differences exist within the Hispanic category and within European or white categories." (59)

          In sum, the Court concluded about Denver’s very expensive investment in disparity studies: that the methodology was not designed to answer relevant questions, the collection of data was flawed, important variables were not accounted for in the analyses and the conclusions were based on unreasonable assumptions. (61)

          The Court next turned to anecdotal evidence which was provided in the second week of trial. The judge paid little or no evidence of the anecdotes in the studies, but some of those who appeared before him seemed to have some credibility. But the Court stated that some of the allegations, if true, were only evidence of societal discrimination. Where the allegations were against city officials (inspectors, for example), the Judge noted that there was  "no evidence of any investigation or discipline of any inspectors." The Judge also said that, if prime contractors committed the discrimination, the City could "take direct action by making them ineligible to bid on any of its public works contracts." (71)

          In the end, Judge Matsch was unconvinced that Denver's preference program had any relationship to the appropriate remedies.  Denver, the Judge noted, could have done several race neutral things to assist small developing firms but instead "The City has pursued a mandatory goals program as a first, rather than as a last resort." (Citing Engineering Contractors Ass’n v. Metropolitan Dade County, 122 F.3rd 895, 927 (11th Cir. 1997)).


          Concrete Works was represented by Mountain States Legal Foundation lawyers Scott Detamore and Todd Welsh.  George La Noue of the University of Maryland and John Lunn of Hope College served as experts for the plaintiff.  Denver was represented by City Attorney Dan Muse and his staff.    Among the many experts the City employed were two who have been involved in many other disparity studies around the country:  David Keen of Brown, Bortz and Coddingham and David Evans of the National Economic Research Associates.

          This article is based on the report from the Project on Civil Rights and Public Contracts at the University of Maryland, Baltimore County, phone 410-455-2180, fax 410-455-1172.

          Send e-mail to glanoue@umbc2.umbc.edu (Professor George R. La Noue, Director and John C. Sullivan, Esq. Associate Director.)

          This report may be distributed without permission.  As a courtesy, authors La Noue and Sullivan would like to know if there further distribution. 


Additional Reading / Related:

For older background news about this landmark case, please visit the following link:
[link http://www.adversity.net/citysetasides_1.htm#xxconcrete_works_older]


END Case 27:  Denver Quotas Struck Down!

 

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