As we have previously discussed, a case filed in the Federal District Court for the Eastern District of Kentucky, Mid-America Milling Company, LLC, et. al. v. U.S. Department of Transportation, et. al., Case No. 3:23-cv-72, challenged the Department of Transportation’s use of a rebuttable presumption when the DOT determines “socially disadvantaged” applicants for purposes of the department’s Disadvantaged Business Enterprise program.

On September 23, the court found that the rebuttable presumption of social disadvantage in the DOT’s DBE program is unconstitutional. However, the court limited its ruling to the two contractor plaintiffs in that case, and did not order a nationwide injunction. It only barred the use of the rebuttable presumption for contracts the two plaintiffs were bidding on. As such, the immediate effect of the decision seems limited, though it might have a farther reach than its immediate implications, as discussed below. Mid-America might well provide a pathway and support for challenges to the DBE Program in other states and jurisdictions.

The program is designed to remedy ongoing discrimination and the continuing effects of past discrimination in federally assisted highway, transit, airport, and highway safety financial assistance transportation contracts. The program requires state and local transportation agencies that receive financial assistance to establish goals for the participation of disadvantaged business enterprises in their contracting programs, and it also sets contract-specific DBE subcontracting goals.

To participate in the program, a business must be considered “small” according to size standards set by the SBA and the DOT (which means that, generally speaking, a DBE must not exceed specific revenue thresholds), as well as be owned and controlled by socially and economically disadvantaged individuals.

DOT regulations provide that African Americans, Hispanics, Native Americans, Asian-Pacific and Subcontinent Asian Americans, and women are presumed to be socially and economically disadvantaged (i.e., a “rebuttable presumption”). Other individuals may also qualify as socially and economically disadvantaged on a case-by-case basis. To be regarded as economically disadvantaged, an individual must have a personal net worth that does not exceed $2.047 million.

The plaintiff in Mid-America challenged the DOT’s use of a rebuttable presumption in determining whether an individual is socially disadvantaged, and argued such an approach is unconstitutional racial and gender discrimination.

On September 23, the District Court for the Eastern District of Kentucky held the DOT’s use of a rebuttable presumption of social disadvantage is unconstitutional. After finding the plaintiffs had standing—because (1) they submitted evidence that they had bid on, and were ready to bid on, contracts governed by the DBE Program; and (2) once an injury is properly alleged, causation and redressability flow from that injury—the District Court found the DOT’s use of a rebuttable presumption to determine which applicants qualify as a DBE to be unconstitutional.

The District Court first rejected the DOT’s use of evidence of broad societal impacts and discrimination, and instead found that the DOT had failed to present evidence of specific instances of discrimination it sought to remediate:

The Court in no way doubts that racial barriers still persist when it comes to the success of minority-owned businesses. But the Government’s evidence here is too broad. It points to societal discrimination against minority-owned businesses generally, but does not offer much evidence of past discrimination against the many groups to whom it grants a preference via the DOT’s DBE program. As Vitolo explains, the preferences “for Pakistanis but not Afghans; Japanese but not Iraqis; Hispanics but not Middle Easterners—is not supported by any record evidence at all.” Id. The same is true here. Simply compiling an extensive portfolio of studies that show disparities exist for minority-owned businesses generally speaking does not support a government imposed racial preference for only some of those groups. The Government’s imprecision is its fatal flaw. If it wants to grant preferences to certain groups, it must specifically show how the Department of Transportation has previously discriminated against those groups. It cannot group all minority owned businesses into one gumbo pot but then try to scoop out only the sausage and not the okra.

The District Court also found that the DBE Program’s rebuttable presumption was not narrowly tailored because it is inconsistent in its treatment of different minority groups and did not have an “end point.” The District Court noted that:

. . . the Government has not shown how each of its favored groups suffered discrimination. Instead, it assesses past discrimination against minority-owned businesses broadly, but then carves out preferences for only some minority groups. A contract business owned by [a] man from Pakistan receives the rebuttable presumption, but the business owned [by] a man from Afghanistan does not. Why? The Government contends that this preference for only some minority groups prevents the DBE program from being overbroad. . . . But these preferences for specific minorities, without clear support, “fail[s] to articulate a meaningful connection between the means … employ[ed] and the goals … pursue[d].” Students for Fair Admissions, 600 U.S. at 186. This “unclear connection” amounts to a “scattershot approach” that “does not conform to the narrow tailoring strict scrutiny requires.” Id. at 187; Vitolo, 399 F.3d at 364. The Government’s argument is akin to saying that all bourbons are made up of at least 51% corn, but that only certain bourbons should actually be called “bourbon.” The Government also contends that the DBE program is not underinclusive because non-minority-owned firms may apply for DBE certification on a case-by-case basis. But this application process is a high hurdle. See 49 C.F.R. § 26.67(d). The fact of the matter is that some minority groups receive a presumption, albeit rebuttable, while others do not.

The court also took issue with the fact that the DBE Program did not have an end point, and applied Students for Fair Admission to “all race-conscious programs”:

The DOT’s DBE program has been around since the Cold War. It was implemented during the same year that the Space Shuttle Challenger launched its maiden voyage. Star Wars: Episode VI—Return of the Jedi was the top grossing domestic movie, and Kenny Rogers’s and Dolly Parton’s “Islands in the Stream” topped the country music charts for two straight weeks. Is there actually a “logical end point” for the DBE’s racial presumptions? Repeated Congressional approval is no cure. Students for Fair Admissions makes clear that periodic review does not make unconstitutional conduct constitutional. See 600 U.S. at 225 (“Grutter never suggested that periodic review could make unconstitutional conduct constitutional.”). Because the DBE program’s racial preferences are not tethered to a foreseeable conclusion, the race-based presumption fails to be narrowly tailored.

Accordingly, the district court determined that the DBE Program’s use of a rebuttable presumption of social disadvantage as applied to some minority groups and women was unconstitutional, and that the contractor plaintiffs were entitled to a preliminary injunction.

The court only granted a seemingly narrow preliminary injunction, however. Recognizing that the Sixth Circuit Court of Appeals had previously narrowed a prior injunction issued by the District Court in a different case, the court concluded that a more limited injunction was appropriate:

Perhaps most compelling, however, is the Sixth Circuit’s review of this Court’s injunction in Commonwealth v. Biden. After granting the Plaintiffs’ motion for a preliminary injunction, the Court enjoined the federal government from enforcing a vaccine mandate for federal contractors and subcontractors in Kentucky, Ohio, and Tennessee—the plaintiff states. Biden, 571 F. Supp. 3d at 735. In reviewing the Court’s injunction, the Sixth Circuit held that the Court “abused its discretion in extending the preliminary injunction’s protection to non-party contractors in the plaintiff States.” Biden, 57 F.4th at 557. The Sixth Circuit found that “an injunction limited to the parties can adequately protect the plaintiffs’ interests while the case is pending disposition on the merits” and, consequently, modified the scope of the injunction to prohibit the federal government from enforcing the contractor mandate against the parties only. Id.

Given this discussion, the Court finds that redressability in the present case is properly limited to the parties before the Court. Thus, the scope of the preliminary injunction shall apply to the Plaintiffs in the states within which they operate, Kentucky and Indiana.

As such, the injunction issued by the District Court was limited to contracts impacted by DBE goals upon which the contractor plaintiffs bid and no other contracts:

The United States Department of Transportation, Peter Buttigieg, Shailen Bhatt, Todd Jeter, and any successors in office, are ENJOINED from mandating the use of race- and gender-based rebuttable presumptions for United States Department of Transportation contracts impacted by DBE goals upon which the Plaintiffs bid.

The decision in Mid-America Milling Company is not a surprise. The District Court followed the path shown both by other district courts (particularly the Ultima case, which declared unconstitutional a race-based rebuttable presumption of eligibility in the SBA’s 8(a) program), and by the United States Supreme Court since it has ruled the federal government must meet a high bar in its defense of the use of race and gender-based presumptions in evaluating a contractor’s eligibility for a federal contracting program. As such, Mid-America Milling Company is merely an extension of the general legal trend of courts that have struck down race and gender-based presumptions or preferences in federal programs.

That being said, what is particularly notable about Mid-America Milling Company is that the District Court attempted to limit the scope of its order. Unlike Ultima or other cases, the court did not issue a nationwide injunction or even an injunction that applied to other states in which the contractor plaintiffs operate. Instead, the court expressly ruled that the DOT is barred from using race and gender-based presumptions for DOT contracts “impacted by DBE goals upon which the Plaintiffs bid.” As such, the District Court’s ruling should, as a legal matter, only affect the contracts that these specific plaintiffs bid upon.

Notwithstanding, the District Court’s order does not take into account the practical aspects of government contracting. The language of the order would ostensibly allow the DOT to apply and implement the DBE program without limitation in most contract opportunities. But the government does not know which contracts the Mid-America plaintiffs may legally bid on, and thus the government might risk including DBE requirements on a government project with the hope that neither of the plaintiffs will bid on that work. If one of the plaintiffs attends a pre-bid walk-through, the government would at least have to consider changing the DBE requirements of that contract or risk violating the District Court’s injunction order. This could become a significant administrative hurdle for the government, because it would have to try to predict which projects can or cannot include DBE requirements. Since it is fundamental to government contracting that all contractors be treated fairly in the bidding process, the government could not hold plaintiffs and all other contractors to different standards—the DBE requirements would have to apply to all contractors or none . As such, if one of the plaintiff contractors bids on a project (or, for example, is a JV partner to a non-plaintiff contractor), the DBE requirements should not apply on that project. Thus it would seem the government might not be wise to include DBE requirements on many projects, in case one of the plaintiffs elects to bid on that specific government project. Given this uncertainty, it would not be surprising if we begin to see either plaintiff attending more and more pre-bid walk-throughs, or the DOT unilaterally reducing the number of contracts to which DBE requirements are applied.

It is also possible the DOT will see the proverbial writing on the wall and (to prevent the scenario described above) start to drop the race and gender-based rebuttable presumption, in anticipation of a total elimination of DBE requirements on government projects. There is also a risk of future successful legal attacks that could expand the scope of this injunction (or elicit newer and broader injunctions). For example, the DOT (and the state implementing agencies) may pivot to the approach used by the SBA in the 8(a) Program after Ultima, and solicit narrative descriptions of prejudice and discrimination from existing DBE-certified contractors, as a work-around to their inability to use rebuttable race and gender-based presumptions.

With regard to contractors owned by federally recognized tribes and Alaska Native Corporations, the effect of the District Court’s order is probably limited, because it only addresses the DOT’s use of a race and gender-based presumption of social disadvantage to be unconstitutional. Tribes and Alaska Native Corporations do not rely on the rebuttable presumption in order to establish their social disadvantage. As such, this order is similar to the impact of Ultima on Tribes and Alaska Native Corporations, in that it should not directly affect them but might have an indirect effect through changes to the DBE Program and subsequent administrative delays and issues as a result.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice with regard to your situation, you should contact an attorney.