Proposed Reforms to Affirmative Action in Federal Procurement

SUMMARY: The proposal set forth herein to reform affirmative action in

federal procurement has been designed to ensure compliance with the

constitutional standards established by the Supreme Court in Adarand

Constructors, Inc. v. Pena, 115 S. Ct. 2097 (1995). The proposed

structure, which has been developed by the Justice Department, will

form a model for amending the affirmative action provisions of the

Federal Acquisition Regulation and the Defense Federal Acquisition

Regulation Supplement.

DATES: Comment Date: Reactions and views on the proposed model must be

submitted in writing to the address below by July 22, 1996.

ADDRESSES: Interested parties should submit written comments to Mark

Gross, Office of the Assistant Attorney General for Civil Rights, P.O.

Box 65808, Washington, D.C. 20035-5808, telefax (202) 307-2839.

FOR FURTHER INFORMATION CONTACT: Mark Gross, Office of the Assistant

Attorney General for Civil Rights, P.O. Box 65808, Washington, D.C.

20035-5808, telefax (202) 307-2839.

Introduction

In Adarand, the Supreme Court extended strict judicial scrutiny to

federal affirmative action programs that use racial or ethnic criteria

as a basis for decisionmaking. In procurement, this means that any use

of race in the decision to award a contract is subject to strict

scrutiny. Under strict scrutiny, any federal programs that make race a

basis for contract decisionmaking must be narrowly tailored to serve a

compelling government interest.

Through its initial authorization of the use of section 8(a) of the

Small Business Act to expand opportunities for minority-owned firms and

through reenactments of this and other programs designed to assist such

businesses, Congress has repeatedly made the judgment that race-

conscious federal procurement programs are needed to remedy the effects

of discrimination that have raised artificial barriers to the

formation, development and utilization of businesses owned by

minorities and other socially disadvantaged individuals. In repeated

legislative enactments, Congress has, among other measures, established

goals and granted authority to promote the participation of Small

Disadvantaged Businesses (SDBs) in procurement for the Department of

Defense, NASA and the Coast Guard. It also enacted the Surface

Transportation Assistance Act of 1982, the Surface Transportation and

Uniform Relocation Assistance Act of 1987 and the Intermodal Surface

Transportation Efficiency Act of 1991, each of which successively

authorized a goal for participation by Disadvantaged Business

Enterprises. Congress also included similar provisions in the Airport

and Airway Improvement Act of 1982 with respect to procurement

regarding airport development and concessions. Under Section 15(g) of

the Small Business Act, 15 U.S.C. 644(g), Congress has established

goals for SDB participation in agency procurement. Finally, in 1994,

Congress enacted the Federal Acquisition Streamlining Act (FASA), which

extended generally to federal agencies authority to conduct various

race-conscious procurement activities. The purpose of this measure was

to facilitate the achievement of goals for SDB participation

established for agencies pursuant to Section 15(g) of the Small

Business Act.

Based upon these congressional actions, the legislative history

supporting them, and the evidence available to Congress, this

congressional judgment is credible and constitutionally defensible.

Indeed, the survey of currently available evidence conducted by the

Justice Department since the Adarand decision, including the review of

numerous specific studies of discrimination conducted by state and

local governments throughout the nation, leads to the conclusion that,

in the absence of affirmative remedial efforts, federal contracting

would unquestionably reflect the continuing impact of discrimination

that has persisted over an extended period. For purposes of these

proposed reforms, therefore, the Justice Department takes as a

constitutionally justified premise that affirmative action in federal

procurement is necessary, and that the federal government has a

compelling interest to act on that basis in the award of federal

contracts.1

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\1\ Set forth as an appendix to this notice is a preliminary

survey of evidence establishing the compelling interest for

affirmative action in federal procurement.

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Subject to certain statutory limitations (that are discussed

below), Congress has largely left to the executive agencies the

determination of how to achieve the remedial goals that it has

established. The Court in Adarand made clear that, even when there is a

constitutionally sustainable compelling interest supporting the use of

race in decisionmaking, any such programs must be narrowly tailored to

meet that interest. We have focused, therefore, on ensuring that the

means of serving the congressionally mandated interest in this area are

narrowly tailored to meet that objective. This task must be taken very

seriously. Adarand made clear that Congress has the authority to use

race-conscious decisionmaking to remedy the effects of past and present

discrimination but emphasized that such decisionmaking must be done

carefully. This Administration is committed to ensuring that

discriminatory barriers to the opportunity of minority-owned firms are

eliminated and the maximum opportunities possible under the law are

maintained. Our focus, therefore, has been on creating a structure for

race-conscious procurement that will meet the congressionally

determined objective in a manner that will survive constitutional

scrutiny.

In giving content to the narrow tailoring prong of strict scrutiny,

courts have identified six principal factors: (1) Whether the

government considered race neutral alternatives and determined that

they would prove insufficient before resorting to race-conscious

action; (2) the scope of the program and whether it is flexible; (3)

whether race is relied upon as the sole factor in eligibility, or

whether it is used as one factor in the eligibility determination; (4)

whether any numerical target is reasonably related to the number of

qualified minorities in the applicable pool; (5) whether the duration

of the program is limited and whether it is subject to periodic review;

and (6) the extent of the burden imposed on nonbeneficiaries of the

program. Not all of these factors are relevant in every circumstance

and courts generally consider a strong showing with respect to most of

the factors to be sufficient. This proposal, however, responds to all

six factors.

The Department of Defense (DoD), which conducts a substantial

majority of the federal government's procurement, was the focus of

initial post-Adarand compliance actions by the federal government. In

particular, DoD, acting pursuant to authority granted by 10 U.S.C.

Sec. 2323,2 had developed through

[[Page 26043]]

regulation a practice known as the ``rule of two.'' Pursuant to the

rule of two, whenever a contract officer could identify two or more

SDBs that were qualified to bid on a project at a price within 10% of

fair market price, the officer was required to set the contract aside

for bidding exclusively by SDBs. Under section 2323, firms owned by

individuals from designated racial minority groups are presumed to be

SDBs.3 Others may enter the program by establishing that they are

socially and economically disadvantaged. After consultation with the

Department of Justice, DoD suspended use of the rule of two in October

1995.

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\2\ Section 2323 establishes a five percent goal for DoD

contracting with small disadvantaged businesses (``SDBs'') and

authorizes DoD to ``enter into contracts using less than full and

open competitive procedures * * * and partial set asides for

[SDBs].'' Section 2323 states that the cost of using such measures

may not exceed fair market price by more than ten percent. It

authorizes the Secretary of Defense to adjust the applicable

percentage ``for any industry category if available information

clearly indicates that nondisadvantaged small business concerns in

such industry category are generally being denied a reasonable

opportunity to compete for contracts because of the use of that

percentage in the application of this paragraph.''

\3\ 10 U.S.C. 2323 incorporates by explicit reference the

language of section 8(d) of the Small Business Act, which states

that members of designated racial or ethnic groups are presumed to

be socially and economically disadvantaged. Participants in the 8(a)

program are also presumed to be SDBs.

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Congress in 1994 extended the affirmative action authority granted

DoD by section 2323 to all agencies of the federal government through

enactment of the Federal Acquisition Streamlining Act (FASA), Public

Law No. 103-355, sec. 7102, 108 Stat. 3243, 15 U.S.C. 644 note.4

Because of Adarand and the effort to review federal affirmative action

programs in light of that decision, regulations to implement the

affirmative action authority granted by FASA have been delayed. See 60

Fed. Reg. 448258, 48259 (Sept. 18, 1995). This proposal provides the

basis for those regulations.

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\4\ FASA states that in order to achieve goals for SDB

participation in procurement negotiated with the Small Business

Administration, an ``agency may enter into contracts using--(A) less

than full and open competition by restricting the competition for

such awards to small business concerns owned and controlled by

socially and economically disadvantaged individuals described in

subsection (d)(3)(C) of section 8 of the Small Business Act (15

U.S.C. 637); and (B) a price evaluation preference not in excess of

10 percent when evaluating an offer received from such a small

business concern as the result of an unrestricted solicitation.''

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The proposed structure will necessarily affect a wide range of

measures that promote minority participation in government contracting

through race-conscious means. Taking DoD as an example, approximately

one-sixth of contracting with minority-owned firms in 1994 resulted

from use of the rule of two. The majority of dollars to minority firms

was awarded by DoD through other means: direct competitive awards, the

Small Business Administration's (SBA) section 8(a) program,

subcontracting pursuant to section 8(d) of the Small Business Act, and

a price credit applied pursuant to section 2323. With the exception of

direct competitive awards (which do not take race into account),

activities pursuant to all of these methods will be affected by the

proposed reforms.5

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\5\ This proposal addresses only affirmative action in the

federal government's own direct procurement. It does not address

affirmative action in procurement and contracting that is undertaken

by states and localities pursuant to programs in which such entities

receive funds from federal agencies (e.g., the Disadvantaged

Business Enterprise program that the Department of Transportation

administers pursuant to the Intermodal Surface Transportation

Efficiency Act of 1991, Pub. L. No. 102-240, section 1003(b), 105

Stat. 1919-1922, and the Airport and Airway Improvement Act of 1982,

49 U.S.C. 47101, et seq.).

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The 8(a) program merits special mention at the outset. This program

serves a purpose that is distinct from that served by general SDB

programs. The 8(a) program is designed to assist the development of

businesses owned by socially and economically disadvantaged

individuals. To this end, the program is targeted toward concerns that

are more disadvantaged economically than other SDBs (e.g. the standard

for economic disadvantage for entry into 8(a) is an owner's net worth

of $250,000 compared to $750,000 for SDB programs). Participants in the

program are required to establish business development plans and are

eligible for technical, financial, and practical assistance, and may

compete in a sheltered market for a limited time before graduating from

the program. Each of these aspects of the program is designed to assist

the business in developing the technical and practical experience

necessary to become viable without assistance. By contrast, the general

SDB program is a procurement program, designed to assist the government

in finding firms capable of providing needed services, while, at the

same time, helping to address the traditional exclusion of minority-

owned firms from contracting opportunities.

The operation of the 8(a) program will become subject to the

overall limitations in the measures described below. In addition, the

SBA is working to strengthen safeguards against fraud and to ensure

that the 8(a) program serves its purpose of assisting the development

of businesses owned by individuals who are socially and economically

disadvantaged.

Because the proposed reforms are broad and cover a number of

different subjects related to affirmative action in federal

procurement, the Justice Department is seeking comments on each of the

aspects of the proposal. Comments will be taken into account in the

formulation of revised procurement regulations.

Overview of Structure

The SDB reform outlined herein involves five major topics: (1)

Certification and eligibility; (2) benchmark limitations; (3)

mechanisms for increasing minority opportunity; (4) the interaction of

benchmark limitations and mechanisms; and (5) outreach and technical

assistance. The proposed structure incorporates these elements into a

system that furthers the President's commitment to ensuring equal

opportunity in contracting, responds to the courts' narrow tailoring

requirements, and is faithful to statutory authority.

I. Eligibility and Certification

At present, while a concern must have its eligibility certified by

the SBA to participate in the 8(a) program, there is no similar

certification requirement for participation in SDB programs. Under

current practice, firms simply check a box to identify themselves as

SDB's when bidding for federal contracts or 8(d) subcontracts. Reform

of this certification process is needed to assure that programs meet

constitutional and statutory objectives. While the basic elements of

eligibility under these programs are statutorily determined, agencies

have discretion to impose significant additional controls and to

establish mechanisms to assure that the statutory criteria are in fact

met.

The SBA will continue as the sole agency with authority to certify

firms for the 8(a) program. The following discussion, therefore,

concerns only certification of SDB's that are not participants in the

8(a) program.

Each bid that an SDB submits to an agency, or to a prime contractor

seeking to fulfill 8(d) subcontracting obligations, will have to be

accompanied by a form certifying that the concern qualifies as a small

disadvantaged business under eligibility standards that will be

published by the SBA. The standards and certification form will allow

8(a) participants to qualify automatically for SDB programs. Others

will be required to establish their eligibility by submitting required

statements and documentation.

When a concern has been certified by an agency as eligible for SDB

programs, its name will be entered into a central on-line register to

be maintained by SBA. That certification will be valid for a period of

up to three years during which time registered firms will have only to

complete a portion of the form confirming the continued validity of

that certification to participate in SDB

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programs at any agency. A full application will have to be submitted to

an agency every three years to maintain eligibility.

A. Social and Economic Disadvantage

Members of designated minority groups seeking to participate in SDB

and 8(d) programs will continue to fall within the statutorily mandated

presumption of social and economic disadvantage.6 This presumption

is rebuttable as to both forms of disadvantage. The form will ask the

applicant to identify the group identification triggering a presumption

of social and economic disadvantage.7 In addition, the form will

enumerate the objective criteria constituting economic disadvantage

according to SBA standards and advise the applicant that the

presumption of such disadvantage is rebuttable and any challenge to the

individual's SDB status will be resolved on the basis of these

criteria. Challenges would be processed through existing SBA challenge

mechanisms.

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\6\ Both FASA and 10 U.S.C. 2323 incorporate by explicit

reference the definition of social and economic disadvantage

contained in section 8(d) of the Small Business Act. Pursuant to

section 8(d), members of designated groups are presumed to be both

socially and economically disadvantaged; those presumptions are

rebuttable. By contrast, for the 8(a) program, members of identified

groups are rebuttably presumed to be socially disadvantaged, but

must establish that they are economically disadvantaged.

\7\ Members of minority groups do not have to participate in

the SDB program in order to bid on federal contracts.

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Individuals who do not fall within the statutory presumption will

be required to establish social and economic disadvantage by answering

a series of questions demonstrating such disadvantage. Questions

regarding social disadvantage will be included in the standard

certification form. Pursuant to current practice, individuals who do

not fall within a presumption must prove their social disadvantage by

clear and convincing evidence. That standard will be changed to permit

proof by a preponderance of the evidence.

The SBA currently has criteria for evaluating social disadvantage.

SBA will conduct training seminars designed to instruct personnel from

other agencies on the procedures for making eligibility determinations.

Individuals who do not fall within the statutory presumption will also

be required to demonstrate that they are economically disadvantaged

according to the criteria established by SBA.

Agencies will have discretion to decide which official within the

agency will have authority to determine whether ``non-presumed''

individuals are socially and economically disadvantaged.8 In most

instances, the contracting officer should not have final authority to

make the determination; the procedure must, however, facilitate quick

decisions so that the procurement process will not be delayed and

applicants will have a fair opportunity to compete. An agency may wish

to assign this responsibility to its Office of Small and Disadvantaged

Business Utilization. The SBA will answer inquiries regarding

eligibility determinations and the procuring agency will retain the

ability to refer applications to the SBA for final eligibility

determinations through the protest procedures now in place. In the

alternative, an agency may enter into an agreement with SBA to have SBA

make all determinations, including the initial determination of

eligibility.

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\8\ The form that such individuals are to complete will ask

whether they previously have applied for SDB certification and been

rejected or accepted. A rejected firm will not be permitted to re-

apply for certification for one year after rejection, unless it can

show changed circumstances.

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B. Ownership and Control

In addition to submitting the form described above, every applicant

will be required to submit with each bid a certification that the

business is owned and controlled by the designated socially and

economically disadvantaged individuals as those terms are defined by

the SBA's standards for ownership and control at 13 C.F.R. 124.103 and

124.104.9 Such a certification must come from an SBA approved

organization, a list of which will be maintained by the SBA. In order

to be approved by the SBA to certify ownership and control, (1) the

entity must certify ownership and control according to the standards

established by the SBA for the 8(a) program (13 C.F.R. 124.103 and

124.104); (2) the entity's certifications must have been accepted by a

state or local government or a major private contractor; and (3) the

entity must not have been disqualified by any government authority from

making certifications within the past five years. Such entities may

include private organizations, the SBA (i.e. through the 8(a) program),

entities that provide certifications for participation in the

Department of Transportation's disadvantaged business enterprise

(``DBE'') program, or states or localities, so long as the

certification addresses the standards for ownership and control

promulgated by the SBA.

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\9\ The standard certification form will accommodate one

eligibility criterion peculiar to the DoD's SDB program under 10

U.S.C. 2323--that the majority of earnings must directly accrue to

the socially and economically disadvantaged individuals that own and

control the concern. The standard certification form will

accommodate this criterion by including a DoD-specific section

requiring the concern to attest that the majority of the firm's

earnings do flow in this manner.

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This procedure is intended to take advantage of the extensive

network of certifying entities already in existence. At present, firms

may have to obtain several different certifications as they pursue a

mix of private and public contracts. While it is clear that a control

mechanism is needed to protect against fraud, it makes little sense to

create a new federal bureaucracy to perform work that is already being

done and to erect another hurdle that an SDB must clear before

qualifying for a federal contract. The limited resources of the federal

government and of SDBs make creation of such a bureaucracy

counterproductive.

To police the quality of certifications, SBA will conduct periodic

audits of certifying organizations. Any entity may submit information

to the SBA in an effort to persuade the agency to initiate such an

audit.

As a means of ensuring that the identified socially and

economically disadvantaged individuals retain ownership and control of

a firm, a certification of ownership and control will be valid for a

maximum of three years from the date it was issued. Certified firms

will be required to recertify their eligibility by submitting a full

application, including an updated certification of ownership and

control, every three years.

C. Challenges

Where an SDB is the apparent successful offeror on a contract, the

name of that firm and of the entity that certified its ownership and

control will be a matter of public record. SBA regulations currently

allow any concern that submitted an offer to protest the eligibility of

an SDB that receives a contract through an SDB program. The procuring

agency or SBA may also protest the eligibility of an SDB. Individuals

or organizations that did not submit a bid for the contract in question

may submit information to the procuring agency in an effort to convince

the agency to initiate a protest.10 The SBA's Division of Program

Certification and Eligibility will process any protest that contains

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specific factual allegations that the concern is not eligible for the

program.

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\10\ The protests contemplated in the discussion here relate

only to certification and eligibility. The discussion does not

relate to protests to other features of the proposed reforms that

might be raised through existing bid protest procedures or through

actions under the Administrative Procedure Act.

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Grounds for an eligibility protest may include, but are not limited

to, evidence that:

The owners of the firm are not in fact socially or

economically disadvantaged;

The firm is not owned and controlled by the individuals

who meet the definition of social and economic disadvantage;

The disadvantaged firm has acted, or is acting, as a front

company by failing to complete required percentages of the work

contracted to the concern.11

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\11\ The basis for such a challenge would be 48 C.F.R. 19.508,

which requires completion of a minimum percentage of contract

activities by the firm awarded a contract through a small business

set aside or the 8(a) program. A clause must be inserted in such

contracts that limits the amount of work that can be subcontracted.

48 C.F.R. 52.219-14. These requirements will be expanded to include

contracts awarded through the reformed SDB program as well.

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Upon receiving a protest supported by specific factual information,

the SBA will make an eligibility determination by examining

documentation from the SDB including, for example, personal and

business financial statements, business records, ownership

certifications, and other information deemed necessary to permit a

determination as to the eligibility of the firm. Current regulations

require the SBA to make a determination concerning the eligibility of

the firm within 15 days of the filing of the challenge or notify the

contracting officer of any delay.

D. Enforcement

Finally, there must be a concerted effort to enforce the law

against individuals who present fraudulent information to the

government. The existence of a meaningful threat of prosecution for

falsely claiming SDB status, or for fraudulently using an SDB as a

front in order to obtain contracts, will do much to ensure that the

program benefits those for whom it is designed. To this end, there will

be an enhanced effort by SBA and the Department of Justice to identify

and pursue individuals fraudulently misrepresenting information in

order to obtain contracts through an SDB program. Any individual may

forward specific factual information suggesting such a

misrepresentation to the procuring agency contracting officer or the

agency's inspector general. Similarly, the Inspector General of SBA

will refer evidence of misrepresentation that emerges through the

challenge procedure or otherwise to the Department of Justice. In its

enforcement, the Department of Justice will ensure that it pursues to

the extent permitted by law all of the parties responsible for

fraudulent or sham transactions.

Penalties for misrepresentations in this area were increased by the

Business Opportunity Development and Reform Act of 1988 and include:

(1) A fine of up to $500,000, imprisonment of up to 10 years, or

both;

(2) Suspension and debarment from Federal contracting (48 C.F.R.

pt. 9.4);

(3) Ineligibility to participate in any program or activity

conducted under the authority of the Small Business Act or the Small

Business Investment Act of 1958 for a period of up to three years; and

(4) Administrative remedies prescribed by the Program Fraud Civil

Remedies Act of 1986 (31 U.S.C. 3801-3812).

Knowing and willful fraudulent statements or representations may

subject an individual to criminal penalties, including imprisonment for

up to five years, pursuant to 18 U.S.C. 1001. In addition, knowing

misrepresentations to obtain payment from the federal government may

violate the False Claims Act, 31 U.S.C. 3729, and subject the claimant

to civil penalties and treble damages.

II. Benchmark Limits

Although Congress has made the judgment that affirmative race-

conscious measures are needed in federal contracting, the use of race

must be narrowly tailored. The federal government operates under a

general statutory mandate to achieve the ``maximum practical

opportunity'' for SDB participation and that overall mandate is

translated into specific agency-by-agency goals. Some specific programs

operate under statutorily prescribed goals.12 To the extent that

race-conscious measures (going beyond outreach and technical

assistance) are utilized to obtain these objectives, limitations must

be established to comply with narrow tailoring requirements.

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\12\ See, e.g., 10 U.S.C. 2323 (5% goal for DoD contracting with

SDBs); Intermodal Surface Transportation Efficiency Act of 1991,

Pub. L. No. 102-240, 105 Stat. 1914 (10% goal for highway

construction projects carried out directly by the Department of

Transportation).

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To this end, the proposal relies on development of a set of

specific guidelines to limit, where appropriate, the use of race-

conscious measures in specific areas of federal procurement. The

limits, or ``benchmarks'', will be set for each industry for the entire

government. The Department of Commerce, in consultation with the

General Services Administration (GSA) and SBA, will establish

appropriate benchmark limitation figures for each industry and report

them to the Office of Federal Procurement Policy (OFPP), which will

publish and disseminate the final benchmark figures. Each industry

benchmark limitation will represent the level of minority contracting

that one would reasonably expect to find in a market absent

discrimination or its effects. Benchmark limitations will provide the

basis for comparison with actual minority participation in procurement

in that industry (and, where appropriate, in a region).

In establishing the benchmark limitations, the first step is to

define whether industries operate according to regional or national

markets. In general, industries will be defined according to two-digit

Standard Industrial Classification (SIC) codes. Based on the evidence,

it appears that most federal contracting is conducted on a national

basis. We also start from the view, reflected in a variety of federal

policies, that federal contracting should encourage the development of

national markets wherever feasible. Where data indicate, however, that

an industry operates regionally, the benchmark limitations will be

established by region.

After identifying the markets, the system will then measure, using

primarily census data, the capacity of firms operating in each market

that are owned by minorities. In estimating capacity, a number of

factors will be examined. Most significant, of course, will be the

number of minority SDBs available and qualified to perform government

contracts.13 In general, it appears appropriate to look at the

industry in question and identify the smallest firm that has won a

government contract in that industry in the last three years. Firms

that are significantly smaller would be presumed to be unqualified to

perform government contracts in that industry. While keeping in mind

that capacity is not fixed, it will also be important to look at

measures such as the number of employees and amount of revenues.

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\13\ For these purposes, the calculation of the number of

minority-owned firms will not include corporations owned by

federally-recognized Native American tribes and Alaskan Native

villages. Bidding credits for such corporations are not subject to

the Adarand strict scrutiny standard.

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In addition to calculating the capacity of existing minority firms,

the proposed system will examine evidence, if any, demonstrating that

minority business formation and operation in a specific industry has

been suppressed by

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discrimination. This evidence may include direct evidence of

discrimination in the private and public sectors in such areas as

obtaining credit, surety guarantees and licenses. It may also include

evidence of discrimination in pricing and contract awards. In addition,

the evidence may include the results of regression analysis techniques

similar to those used in state studies of discrimination in

procurement. That form of analysis holds constant a variety of

variables that might affect business formation so that the effect of

race can be isolated.

The combination of existing minority capacity and, where

applicable, the estimated effect of race in suppressing minority

business activity in the industry will form the benchmark limitation.

Although there is no absolutely precise way to calculate the impact of

discrimination in various markets, the benchmark limitations represent

a reasonable effort to establish guidelines to limit the use of race-

conscious measures and to meet the requirement that such measures be

narrowly tailored to accomplish the compelling interest that Congress

has identified in this area.

Benchmark limitations will be adjusted every five years, as new

data regarding minority firms are made available by the Census Bureau.

Generally, census regions will be used in defining the scope of

regional markets.

III. Mechanisms for Increasing Minority Opportunity

Under the reformed structure, the federal government will generally

have authority, subject to the limitations discussed in the next

section, to use several race-conscious contracting mechanisms: SBA's

8(a) program; a bidding credit for SDB prime contractors; and an

evaluation credit for non-minority prime contractors that use SDBs in

subcontracting. In addition, at all times, agencies must engage in a

variety of outreach and technical assistance activities designed to

enhance contracting opportunities for SDBs (but that are not subject to

strict scrutiny). Those efforts will be expanded as described more

fully below.

The 8(a) program will continue to provide for sole source

contracting and sheltered competition for 8(a) firms. However, the

program will be monitored; and where the benchmark limitations

described more fully below warrant adjustments to the SDB program,

corresponding adjustments will be made to the 8(a) program to ensure

that its operation is subject to those limitations.

A second available race-conscious measure will be a bidding credit

in prime contracting for SDBs. Statutory authority for the use of such

a credit exists for DoD in 10 U.S.C. 2323 and for the remainder of the

government in FASA. Each statute permits use of such a credit so long

as the final price does not exceed a fair market price by more than

10%.

The use of the term ``credit'' is not meant to restrict utilization

by agencies of this mechanism to contracts where price is the primary

factor in selecting the successful bidder. Where the successful bidder

is selected based on other factors--such as the ability to produce a

contract that provides the ``best value'' to the agency--agencies may

build the value of increasing the participation of SDB contractors into

the evaluation of offers. For some contracts, a numerical credit may be

appropriate; in others, some form of nonnumerical assignment may make

more sense to the agency. This proposal does not restrict such options.

However, regardless how it operates, any bidding credit will be subject

to the overall limitations on race-conscious mechanisms described

herein.

Pursuant to 10 U.S.C. 2323 and FASA, agencies will also be

permitted to use, as a third race-conscious mechanism, an evaluation

credit with respect to the utilization by nonminority prime contractors

of SDBs as subcontractors. Such goals would be set by the agency for

each prime contract based on the availability of minority firms to

perform the work. The award of evaluation credits for prime contractors

that use SDBs as subcontractors will supplement the existing statutory

SDB subcontracting requirements in Section 8(d) of the Small Business

Act.14 In order to certify their eligibility as SDBs,

subcontractors will submit the same certification form to the prime

contractor that is described in the certification section of this

proposal.

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\14\ For certain types of procurement, Section 8(d) requires

agencies to negotiate an SDB subcontracting plan with the successful

bidder for the prime contract. The statute provides that each such

plan shall include percentage goals for the utilization of SDB

subcontractors.

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Such an evaluation credit can take a number of different forms,

depending on the circumstances of a solicitation.15 For example,

where it is practical for bidders to secure enforceable commitments

from SDB subcontractors prior to the submission of bids, agencies

should establish an SDB subcontracting goal for the contract, and award

an evaluation credit to bidders who demonstrate that they have entered

into such commitments as a means of achieving the goal. Where that is

not practical, agencies can award an evaluation credit to a bidder that

specifically identifies in a subcontracting plan those SDB

subcontractors that it intends to use to achieve the agency's SDB

subcontracting goal.16 Agencies may also award an evaluation

credit based on demonstrable evidence of a bidder's past performance in

using SDB subcontractors. Agencies may also grant bonus awards to prime

contractors to encourage the use of SDB subcontractors.17 This

proposal is not intended to limit agencies in developing or using

additional mechanisms to increase SDB subcontracting, but any such

mechanism will be subject to the limitations on race-conscious

mechanisms described herein.

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\15\ As was the case with respect to the use of the term

``credit'' in connection with bids from SDBs as prime contractors,

the use of that term here in connection with SDB subcontracting is

not intended to restrict the utilization of this mechanism to the

evaluation of prime contract bids for which price is the primary

factor in selecting the successful bidder.

\16\ In either case, a successful prime contractor should notify

the contracting officer of any substitution of a non-SDB

subcontractor for an SDB firm with which the prime contractor had

entered into enforceable commitments or that had been specifically

identified in the prime contractor's subcontracting plan.

\17\ See e.g., Department of Transportation Incentive

Subcontracting Program for Small and Small Disadvantaged Business

Concerns, 48 C.F.R. 52 219-10.

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In applying these bidding and evaluation credits, race will simply

be one factor that is considered in the decision to award a contract--

in contrast to programs in which race is the sole factor.

IV. Interaction of Benchmark Limits and Mechanisms

In determining how benchmark limitations will be used to measure

the appropriateness of various forms of race-conscious contracting, the

objective has been to develop a system that can operate with a

sufficient degree of clarity, consistency and simplicity over the range

of federal agencies and contracting activities. Where the use of all

available tools, including direct competition and race-neutral outreach

and recruitment efforts, results in minority participation below the

benchmark, race-based mechanisms will remain available. Their scope,

however, will vary and be recalculated depending on the extent of the

disparity between capacity and participation. Where participation

exceeds the benchmark, and can be expected to continue to do

[[Page 26047]]

so with reduced race-conscious efforts, adjustments will be made.

At the close of each fiscal year, the Department of Commerce will

review data collected by its GSA's Federal Procurement Data Center for

the three preceding fiscal years to determine the percentage of

contracting dollars that has been awarded to minority-owned SDBs in

each two-digit SIC code. Commerce will analyze minority SDB

participation for all transactions that exceed $25,000. This review

will include minority-owned SDBs participating through direct

contracting (including full and open competition), the 8(a) program,

and SDB prime and subcontracting programs.18 Data regarding

minority participation will be reviewed annually, but will include the

past three fiscal years of experience. Examining experience over three

year stretches should produce a more accurate picture of minority

participation, given short-term fluctuations and the fact that the

process of bidding and awarding a contract may span more than a single

fiscal year.

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\18\ In order to measure accurately SDB subcontracting

participation, it will be necessary to have information regarding

SDB subcontracting participation by two-digit SIC code. At the same

time, however, it is important to minimize the amount of new record-

keeping and reporting that these reforms may require. Prime

contractors such as commercial vendors that report SDB participation

through company-wide annual subcontracting plans will continue to be

able to use this reporting method, with some modification that

serves to facilitate SIC code reporting. Under one approach, prime

contractors could require all subcontractors to identify their

primary SIC code and then track, as most primes do now, the amount

of dollars that flows to each subcontractor.

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Commerce will analyze the data and, after consultation with SBA,

report to OFPP regarding which mechanisms should be available in each

industry and the size of the credits that can be applied. OFPP will

publish and disseminate the mechanisms that can be used by the agencies

in the upcoming year.

Pursuant to 15 U.S.C. 644(g), each agency now negotiates goals for

SDB participation with SBA for each year. Commerce would inform SBA and

agencies of the appropriate benchmark limits for the industries in

which the agency contracts and of the mechanisms available.

Where Commerce determines that participation by SDB's in government

contracting in an industry is below the relevant benchmark limitation,

it may report to OFPP that agencies should be authorized to grant

credit to SDB bidders and to prime contractors for SDB subcontracting.

Commerce will set a percentage cap of up to ten percent on the amount

the credit can allow the price of a contract to deviate from the fair

market price. That percentage will represent the maximum credit that

each agency may use in the evaluation of bids from SDBs and prime

contractors who commit to subcontracting with SDBs. The size of the

credit will depend, in part, on the extent of the disparity between the

benchmark limitations and minority SDB participation in federal

procurement and industry. It also will depend on an assessment of

pricing practices within particular industries to indicate the effect

of credits within that industry. Commerce's determinations would be

published and disseminated by OFPP.

Where the bidding and evaluation credits have been used in an

industry and the percentage of dollars awarded to SDBs in that industry

exceeds the benchmark limit, Commerce, in consultation with SBA, must

estimate the effect of curtailing the use of race-conscious contracting

mechanisms and report to OFPP. If Commerce determines that the minority

participation rate would fall substantially below the benchmark limit

in the absence of race-conscious measures,19 it need not require

agencies to stop using such measures, but may, as described below,

require agencies to adjust their use.

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\19\ More than three ``standard deviations'' will generally be

viewed as ``substantial'' for these purposes. Under applicable

Supreme Court decisions, a disparity in the range of two or three

standard deviations is strong evidence of a prima facie case of

discrimination in the employment context. A standard deviation is a

measure of the departure from the level of activity that one would

expect in the absence of discrimination.

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Agencies will report the number of contracts that were awarded

using a bidding or evaluation credit as well as the amount of those

credits. These figures will allow an estimate of the effect on SDB

participation of adjusting or removing the credit. In the absence of

that objective measure, Commerce will have to estimate and report to

OFPP how much minority contracting resulted from the application of

these race-conscious measures. One indication may be the success of

minorities in winning contracts through direct competition in which

race is not used in the decision to award a contract. It may also be

useful to examine comparable experience in private industries operating

without affirmative action programs.

Even when agencies are not required to terminate bidding and

evaluation credits, they may be required to adjust their size in order

to ensure that the credits do not lead to the award of a

disproportionately large numbers of contracts to SDBs. Statutory

authority for this adjustment exists in both FASA and section 2323.

Because the size of credits will affect industries differently, it is

impossible to prescribe a set of specific rules to govern adjustments.

Responsibility will rest with Commerce to analyze the impact of credits

by industry category and make adjustments where appropriate, which

would then be published and disseminated by OFPP.

In addition, in some circumstances, an agency may use less than the

authorized bidding or evaluation credit where necessary to ensure that

use of the credits by a specific agency does not unfairly limit the

opportunities of non-SDB contractors seeking contracts from that

agency. While the size of the maximum credits will be determined on an

industry-wide basis and apply across all agencies, it remains important

to maintain flexibility at the agency level to ensure against any undue

concentrations of SDB contracting and unnecessary use of race-conscious

credits. Thus, for example, where an agency has been particularly

successful in reaching out to SDB contractors, it may find its use of

the full credits unnecessary to achieve its goals, in which event it

could, subject to approval by Commerce, depart downward from the

authorized credits. The exercise of this discretion will be

particularly important to avoid geographic concentrations of SDB

contracting that unduly limit opportunities for non-SDBs.

When Commerce concludes that the use of race-conscious measures is

not justified in a particular industry (or region), the use of the

bidding credit and the evaluation credit will cease. Suspending the use

of race-conscious means will not affect the continued use of race-

neutral contracting measures. The limits imposed by the benchmarks also

would not affect the applicability of statutorily mandated goals, but

would limit the extent to which race-conscious means could be used to

achieve those goals. For example, DoD would retain its five percent

overall statutory goal and would continue to exhort prime contractors

to achieve goals for subcontracting with SDB's. Prime contractors,

however, would no longer receive credit in evaluation of their bids for

signing up or identifying SDB subcontractors. Likewise, outreach and

technical assistance efforts would continue and minority bidders on

prime contracts would continue to seek and win competitive awards; but

there would no longer be any bidding credit for minority firms.

It should be emphasized that the benchmarks are not a limit on the

level

[[Page 26048]]

of minority contracting in any industry that may be achieved without

the use of race-conscious measures. Conversely, there is, of course, no

assurance that minority participation in particular industries will

reach the benchmark limitations through the available race conscious

measures. Minority participation will depend on the availability of

qualified minority firms that successfully win contracts through open

competition, subcontracting, the 8(a) program or through the

application of price or evaluation credits. The system described herein

is a good faith effort to remedy the effect of discrimination, but it

is not a guarantee of any particular result.

The affirmative action structure described herein does not utilize

the statutory authorization under FASA to allow federal agencies (or in

the case of DoD its direct authorization under 10 U.S.C. 2323) to set

contracts aside for bidding exclusively by SDBs. If federal agencies

use race-conscious measures in the manner outlined above, together with

concerted race-neutral efforts at outreach and technical assistance as

described below, we believe the use of this additional statutory

authority should be unnecessary. Following the initial two-year period

of the reformed system's operation (and at regular intervals

thereafter), however, Commerce, SBA and DoD will evaluate the operation

of the system and determine whether this statutory power to authorize

set-asides should be invoked. In making that determination, those

agencies will take into account whether persistent and substantial

underutilization of minority firms in particular industries or in

government contracting as a whole is the result of the effects of past

or present discriminatory barriers that are not being overcome by this

system.

Such periodic reviews should also consider whether, based on

experience, further limitation of the use of race-conscious measures is

appropriate beyond those outlined herein. In that regard, it should be

noted that the reformed structure is inherently and progressively self-

limiting in the use of race-conscious measures. As barriers to minority

contracting are removed and the use of race-neutral means of ensuring

opportunity succeeds, operation of the reformed structure will

automatically reduce, and eventually should eliminate, the use of race

in decisionmaking. In addition, the statutory authority upon which the

use of bidding and evaluation credits is based expires at the end of

fiscal year 2000. Congress will determine whether that authority should

be extended. See 10 U.S.C. 2323; FASA, Sec. 7102.

Section 8(a) Program

Contracts obtained by minority firms through the 8(a) program will

count toward the calculation whether minority participation has reached

or exceeded the benchmark in any industry.20 The Administrator of

SBA will be under an obligation to monitor the use of the 8(a) program

in relation to the benchmark limits. Thus, where Commerce advises that

the use of race-conscious measures must be curtailed in a specific

industry on the basis of the benchmarks, the Administrator would take

appropriate action to limit the use of the program through one or more

of the following techniques: (1) Limiting entry into the program in

that industry; (2) accelerating graduation for firms that do not need

the full period of sheltered competition to satisfy the goals of the

program; and (3) limiting the number of 8(a) contracts awarded in

particular industries or geographic areas.

---------------------------------------------------------------------------

\20\ As with calculation of the benchmark limitations, see n.

13, supra, corporations owned by federally-recognized Native

American tribes and Alaskan Native villages will not be included in

this calculation.

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These same techniques should be used by the Administrator in

carrying out existing authority to ensure that 8(a) contracting is not

concentrated unduly in certain regions. Even where a market is defined

as national in scope, and 8(a) is being used within applicable national

benchmark limits, efforts should be made to guard against excessive use

of 8(a) contracting in a limited region.

As noted earlier, the 8(a) program is distinct from the general SDB

program in that it is animated by its own distinct purpose--to assist

socially and economically disadvantaged individuals to overcome

barriers that have suppressed business formation and development.

Consistent with its unique nature, the 8(a) program has features that

already reflect some of the factors that make up the narrow tailoring

requirement. Unlike other SDB's, individuals seeking admission to the

8(a) program must establish economic disadvantage without the benefit

of any presumption. The Small Business Act defines economically

disadvantaged individuals as ``those socially disadvantaged individuals

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.'' Furthermore, SBA employs objective criteria to measure

whether an individual is economically disadvantaged. In this sense, the

statute and regulations are targeted toward victims of discrimination;

the SBA is proposing to clarify the regulations implementing the

program to emphasize this fact. In addition, individuals are admitted

to the 8(a) program for a limited period--nine years--and their

performance is reviewed throughout. An individual may be required to

leave the program prior to the nine year graduation period if the

review reveals that the individual is no longer economically

disadvantaged or the firm meets other graduation criteria determined by

the SBA.

SBA has under consideration additional program changes designed to

ensure that the 8(a) program focuses on its central mission of

assisting businesses to develop and concentrates it resources on its

intended beneficiaries. These changes would further ensure that the

8(a) program is narrowly tailored to serve the compelling interest for

which it was enacted by Congress.

V. Outreach and Technical Assistance

At present, agencies undertake a variety of activities designed to

make minority firms aware of contracting opportunities and to help them

take advantage of those opportunities. As a general proposition, these

activities are not subject to strict scrutiny. The structure outlined

above for the use of race-conscious measures assumes that agencies will

continue such outreach and technical assistance efforts at all times,

so that race-conscious measures will be used only to the minimum extent

necessary to achieve legitimate objectives. Our review indicates that,

while there are a variety of good programs of this nature operated by

various federal agencies, there is a lack of consistency and sustained

energy and direction to these efforts.

SBA operates several assistance programs that are targeted toward

minority firms, but are also available to qualifying nonminority firms.

Notably, pursuant to section 7(j) of the Small Business Act, SBA

provides financial assistance to public and private organizations to

provide technical and management assistance to qualifying individuals.

13 CFR 124.403, 404. SBA also operates a program to provide assistance

to socially and economically disadvantaged businesses in preparing loan

applications and obtaining pre-qualification from SBA for loans. See 13

CFR 120. SBA also operates a surety bond program pursuant to which it

provides up to a 90% guarantee for bonds required of small contractors.

[[Page 26049]]

The Department of Commerce, through the Minority Business

Development Administration, sponsors several programs to provide

information, training and research that are targeted toward minority-

owned businesses. These programs include Minority Business Development

Centers around the country to provide hands on assistance to minority

businesses.

DoD has operated since 1990 the Mentor-Protege Pilot Program, which

provides incentive for DoD prime contractors to furnish SDB's with

technical assistance. See 10 U.S.C. 2301. Mentor firms provide a

variety of assistance, including progress payments, advance subcontract

payments, loans, providing technical and management assistance and

awards of subcontracts on a noncompetitive basis to the protege. DoD

reimburses the mentor firm for its expenses. The award of subcontracts

under this program is subject to strict scrutiny, but other portions of

the program are not.

The following are among the efforts that should be actively

pursued:

1. A race-neutral version of the mentor-protege program (that does

not guarantee the award of subcontracts on a non-competitive basis)

should be encouraged at all agencies.

2. DoD has proposed--and other agencies should follow DoD's lead--

eliminating the impact of surety costs from bids. Because SDB's

generally incur higher bond costs, this race-neutral change would

assist SDB's and address one of the most frequently cited barriers to

minority success in contracting. In this regard, agencies should also

examine the use of irrevocable letters of credit in lieu of surety

bonds.

3. Where agencies use mailing lists, a minimum goal should be set

for inclusion of SDB's on agency mailing lists of bidders.

4. The function of the Procurement Automated Source System (PASS),

currently maintained by SBA, should be continued. The system provides

contracting officers with a continuously updated list of SDB firms,

classified by interest and region.

5. A uniform system for publishing agency procurement forecasts on

SBA Online should be established. In addition, SBA should develop a

systematic means for publishing upcoming subcontracting opportunities.

6. Agencies should target outreach and technical assistance

efforts, including mentor-protege initiatives, toward industries in

which SDB participation traditionally has been low. Agencies should

continue to pursue strategies in which minority-owned firms are

encouraged to become part of joint ventures or form strategic alliances

with non-minority enterprises.

7. The SBA should enhance its technical assistance initiatives to

enhance the ability of SDBs to use the tools of electronic commerce.

8. Pursuant to Executive Order 12876, which directs agencies to

seek to enter into contracts with Historically Black Colleges and

Universities, agencies should attempt to increase participation by such

institutions in research and development contracts as means of

assisting the development of business relationships between the

institutions and SDB's.

9. Each agency should review its contracting practices and its

solicitations to identify and eliminate any practices that

disproportionately affect opportunities for SDBs and do not serve a

valid and substantial procurement purpose.

The foregoing is merely a partial list of possible measures. What

is required--both as a matter of policy and constitutional necessity--

is a systematic and continuing government-wide focus on encouraging

minority participation through outreach and technical assistance. It is

proposed in contracting, therefore, that agencies should report

annually to the President on their outreach and technical assistance

practices. These reports should present the actual practices and

experiences of federal agencies and include recommendations as to

approaches that can and should be adopted more broadly. The maximum use

of such race-neutral efforts will reduce to a minimum the use of race-

conscious measures under the benchmark limits described above.

Conclusion

The structure outlined above has been crafted with regard for each

of the six factors that courts have identified as relevant in

determining whether race-based decisionmaking is narrowly tailored to

meet an identified compelling interest. While courts have identified

these six factors as relevant in determining whether a measure is

narrowly tailored, they have not required that race-conscious

enactments satisfy each element or satisfy any particular element to

any specific degree. The structure proposed herein for SDB procurement,

however, measures up favorably with respect to each of the six factors.

The proposal requires that agencies at all times use race-neutral

alternatives to the maximum extent possible. An annual review mechanism

is established to ensure maximum use of such race-neutral efforts. Only

where those efforts are insufficient to overcome the effects of past

and present discrimination can race-conscious efforts be invoked.

The system is flexible in that race will be relied on only when

annual analysis of actual experience in procurement indicates that

minority contracting falls below levels that would be anticipated

absent discrimination. Moreover, the extent of any credit awarded will

be adjusted annually to ensure that it is closely matched to the need

for a race-based remedial effort in a particular industry.

Race will not be relied upon as the sole factor in SDB procurement

decisions. The use of credits (instead of set-asides) ensures that all

firms have an opportunity to compete and that in order to obtain

federal contracts minority firms will have to demonstrate that they are

qualified to perform the work.21

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\21\ The SBA's 8(a) program contains a variety of elements that

help to target the program on firms in need of special assistance,

including a requirement that applicants affirmatively demonstrate

economic disadvantage. Furthermore, the program is not limited to

minority-owned firms. These features of the program ensure that race

is not the sole factor in determining entry into the program.

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Application of the benchmark limits ensures that any reliance on

race is closely tied to the best available analysis of the relative

capacity of minority firms to perform the work in question--or what

their capacity would be in the absence of discrimination.

The duration of the program is inherently limited. As minority

firms are more successful in obtaining federal contracts, reliance on

race-based mechanisms will decrease automatically. When the effects of

discrimination have been eliminated, as demonstrated by minority

success in obtaining procurement contracts, reliance on race will

terminate automatically. The system as a whole will be reexamined by

the executive branch at the end of two years and at regular intervals

thereafter. In addition, the principal enactments that this proposal

implements, FASA and the Department of Defense Authorization Act,

expire at the end of the fiscal year 2000. Congress will have to

examine the functioning of this system and make a determination whether

to extend the authority to continue its operation.

Finally, the proposal avoids any undue burden on nonbeneficiaries

of the program. As a practical matter, the overwhelming percentage of

federal procurement money will continue to flow, as it does now, to

nonminority businesses. Furthermore,

[[Page 26050]]

implementation of the benchmark limitations will ensure that race-based

decisionmaking cannot result in concentrations of minority contracting

in particular industries or regions and will thereby limit the impact

on nonminorities.

The structure of affirmative action in contracting set forth herein

will not be simple to implement and will undoubtedly be improved

through further refinement. Agencies will have to make judgments and

observe limitations in the use of race-conscious measures, and make

concentrated race-neutral efforts that are not required under current

practice. The Supreme Court, however, has changed the rules governing

federal affirmative action. This model responds to principles developed

by the Supreme Court and lower courts in applying strict scrutiny to

race-based decisionmaking. The challenge for the federal government is

to satisfy, within these newly-applicable constitutional limitations,

the compelling interest in remedying the effects of discrimination that

Congress has identified.

Michael C. Small,

Deputy Associate Attorney General.

Appendix--The Compelling Interest for Affirmative Action in Federal

Procurement: A Preliminary Survey

Under the Supreme Court's ruling last year in Adarand Constructors,

Inc. v. Pena, 115 S. Ct. 2097 (1995), strict scrutiny applies to

federal affirmative action programs that provide for the use of racial

or ethnic criteria as factors in procurement decisions in order to

benefit members of minority groups. Such programs satisfy strict

scrutiny if they serve a ``compelling interest,'' and are ``narrowly

tailored'' to the achievement of that interest. Strict scrutiny is the

most exacting standard of constitutional review. It is the same

standard that courts apply when reviewing laws that discriminate

against minority groups. The Supreme Court in Adarand did not decide

whether a compelling interest is served by the procurement program at

issue in the case (or by any other federal affirmative action program),

and remanded the case to the lower courts, which had not applied strict

scrutiny.1 Nevertheless, a strong majority of the Court--led by

Justice O'Connor, who wrote the majority opinion--admonished that even

under strict scrutiny, affirmative action by the federal government is

constitutional in appropriate circumstances.2 Without spelling out

in precise terms what those circumstances are, the Court stated that

the government has a compelling interest in remedying ``[t]he unhappy

persistence of both the practice and the lingering effects of racial

discrimination against minority groups in this country.'' 115 S. Ct. at

2117.

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\1\ Adarand involved a constitutional challenge to a Department

of Transportation (``DOT'') program that compensates prime

contractors if they hire subcontractors certified as small

businesses controlled by ``socially and economically disadvantaged''

individuals. The legislation on which the DOT program is based, the

Small Business Act, establishes a government-wide goal for

participation of such concerns at ``not less than 5 percent of the

total value of all prime contract and subcontract awards for each

fiscal year.'' 15 U.S.C. Sec. 644(g)(1). The Act further provides

that members of designated racial and ethnic minority groups are

presumed to be socially and economically disadvantaged. Id.

Sec. 637(a)(5)(6), Sec. 637(d)(2),(3). In Adarand, the Supreme Court

stated that the presumption constitutes race-conscious action,

thereby triggering application of strict scrutiny. 115 S. Ct. at

2105.

\2\ Adarand, 115 S. Ct. at 2117. The Court emphasized that point

in order to ``dispel the notion that strict scrutiny is `strict in

theory, but fatal in fact.''' Id. Seven of the nine justices of the

Court embraced the principle that it is possible for affirmative

action by the federal government to meet strict scrutiny. This group

included: (i) Justice O'Connor and two other justices in the

majority, Chief Justice Rehnquist and Justice Kennedy; and (ii) the

four dissenting justices (Stevens, Souter, Ginsburg, and Breyer).

Only Justices Scalia and Thomas, both of whom concurred in the

result in the case, advocated a position that approaches a near

blanket constitutional ban on affirmative action.

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At bottom, after Adarand, the compelling interest test centers on

the nature and weight of evidence of discrimination that the government

needs to marshal in order to justify race-conscious remedial action. It

is clear that the mere fact that there has been generalized, historical

societal discrimination in the country against minorities is an

insufficient predicate for race-conscious remedial measures; the

discrimination to be remedied must be identified more concretely. The

federal government would have a compelling interest in taking remedial

action in its procurement activities, however, if it can show with some

degree of specificity just how ``the persistence of both the practice

and the lingering effects of racial discrimination''--to use Justice

O'Connor's phrase in Adarand--has diminished contracting opportunities

for members of racial and ethnic minority groups.3

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\3\ Adarand did not alter the principle that the government may

take race-conscious remedial action in the absence of a formal

judicial or administrative determination that there has been

discrimination against individual members of minorities groups (or

minorities as a class). The test is whether the government has a

``strong basis in evidence'' for the conclusion that such action is

warranted. City of Richmond v. J.A. Croson Co., 488 U.S. 469, 500

(1989). Adarand also did not alter the principle that the

beneficiaries of race-conscious remedial measures need not be

limited to those individuals who themselves demonstrate that they

have suffered some identified discrimination. See Local 28, Sheet

Metal Workers' Int'l Ass'n v. EEOC, 478 U.S. 421, 482 (1986); Wygant

v. Jackson Bd. of Educ., 476 U.S. 267, 277-78 (1986) (plurality

opinion); id. at 287 (O'Connor, J., concurring).

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In coordinating the review of federal affirmative action programs

that the President directed agencies to undertake in light of Adarand,

the Justice Department has collected evidence that bears on that

inquiry. The evidence is still being evaluated, and further information

remains to be collected. As set forth below, that evidence indicates

that racially discriminatory barriers hamper the ability of minority-

owned businesses to compete with other firms on an equal footing in our

nation's contracting markets. In short, there is today a compelling

interest to take remedial action in federal procurement.4

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\4\ The term ``federal procurement'' refers to goods and

services that the federal government purchases directly for its own

use. This is to be distinguished from programs in which the federal

government provides funds to state and local governments for use in

their procurement activities. As part of those programs, Congress

has authorized recipients of federal funds to take remedial action

in procurement. Those programs are not the focus of this memorandum.

However, much of the evidence discussed herein that supports the use

of remedial measures in the federal government's own procurement

also supports the use of congressionally-authorized remedial

measures in state and local procurement.

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The purpose of this memorandum is to summarize the evidence that

has been assembled to date on the compelling interest question. Part I

of the memorandum provides an overview of the long legislative record

that underpins the acts of Congress that authorize affirmative action

measures in procurement--a record that is entitled to substantial

deference from the courts, given Congress' express constitutional power

to identify and redress, on a nationwide basis, racial discrimination

and its effects. The remaining sections of the memorandum survey

information from various sources: (1) Congressional hearings and

reports that bear on the problems that discrimination poses for

minority opportunity in our society, but that are not strictly related

to specific legislation authorizing affirmative action in government

procurement; (2) recent studies from around the country that document

the effects of racial discrimination on the procurement opportunities

of minority-owned businesses at the state and local level; and (3)

works by social scientists, economists, and other academic researchers

on the manner in which the various forms of discrimination act together

to restrict business

[[Page 26051]]

opportunities for members of racial and ethnic minority groups.5

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\5\ It is well-established that the factual predicate for a

particular affirmative action measure is not confined to the four

corners of the legislative record of the measure. See, e.g.,

Concrete Works v. City and County of Denver, 36 F.3d 1513, 1520-22

(10th Cir. 1994), cert. denied, 115 S. Ct. 1315 (1995); Contractors

Ass'n v. City of Philadelphia, 6 F.3d 990, 1004 (3d Cir. 1993);

Coral Constr. Co. v. King County, 941 F.2d 910, 920 (9th Cir. 1991),

cert. denied, 502 U.S. 1033 (1992).

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All told, the evidence that the Justice Department has collected to

date is powerful and persuasive. It shows that the discriminatory

barriers facing minority-owned businesses are not vague and amorphous

manifestations of historical societal discrimination. Rather, they are

real and concrete, and reflect ongoing patterns and practices of

exclusion, as well as the tangible, lingering effects of prior

discriminatory conduct.6

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\6\ Congress has also adopted affirmative action measures in

federal procurement, as well as in programs that fund the

procurement activities of state and local governments, that are

intended to assist women-owned businesses. At present, such measures

are subject to intermediate scrutiny, not the Adarand strict

scrutiny standard. Therefore, they have not been the focus of the

post-Adarand review that the Justice Department is coordinating.

However, some of the evidence collected by the Justice Department

bears on the constitutional justification for affirmative action

programs for women in government procurement. See, e.g., Interagency

Committee on Women's Business Enterprise, Expanding Business

Opportunities for Women (1996); National Foundation for Women

Business Owners and Dunn & Bradstreet Information Services, Women-

Owned Businesses: A Report on the Progress and Achievement of Women-

Owned Enterprises--Breaking the Boundaries (1995); Problems Facing

Minority and Women-Owned Small Businesses in Procuring U.S.

Government Contracts: Hearing Before the Subcomm. on Commerce,

Consumer and Monetary Affairs of the House Comm. on Government

Operations, 103d Cong., 2d Sess. (1994).

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It is important to emphasize that, even though the government has a

compelling interest in taking race-conscious remedial measures in its

procurement, their use must be limited. Under the requirements of the

``narrow tailoring'' prong of strict scrutiny, the federal government

may only employ such measures to the extent necessary to serve the

compelling interest in remedying the impact of discrimination on

minority contracting opportunity. The Justice Department's proposed

reforms to affirmative action in federal procurement (to which this

memorandum is attached) are intended to target race-conscious remedial

measures to markets in which the evidence indicates that discrimination

continues to impede the participation of minority firms in contracting.

Thus, the proposal seeks to ensure that affirmative action in federal

procurement operates in a flexible, fair, limited, and careful manner,

and hence will satisfy the requirements of narrow tailoring.

I. Survey of the Legislative Record

In evaluating the evidentiary predicate for affirmative action in

federal procurement, it is highly significant that the measures have

been authorized by Congress, which has the unique and express

constitutional power to pass laws to ensure the fulfillment of the

guarantees of racial equality in the Thirteenth and Fourteenth

Amendments.7 These explicit constitutional commands vest Congress

with the authority to remedy discrimination by private actors, as well

as state and local governments.8 Congress may also exercise its

constitutionally grounded spending and commerce powers to ensure that

discrimination in our nation is not inadvertently perpetuated through

government procurement practices.9 In exercising its remedial

authority, Congress need not target only deliberate acts of

discrimination. It may also strive to eliminate the effects of

discrimination that continue to impair opportunity for minorities, even

in the absence of ongoing, intentional acts of discrimination.10

Furthermore, in combatting discrimination and its effects, Congress has

the latitude to develop national remedies for national problems.

Congress need not make findings of discrimination with the same degree

of precision as do state or local governments. Nor is it obligated to

make findings of discrimination in every industry or region that may be

affected by a remedial measure.11

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\7\ See Croson, 488 U.S. at 488 (plurality opinion); Fullilove

v. Klutznick, 448 U.S. 448, 483 (1980) (plurality opinion); id. at

500 (Powell, J., concurring); see also Adarand, 115 S. Ct. at 2114;

Metro Broadcasting, Inc. v. FCC, 497 U.S. 547, 563 (1990); id. at

605-06 (O'Connor, J., dissenting); cf. Seminole Tribe of Florida v.

Florida, 116 S. Ct. 1114, 1125 (1996) (reaffirming that broad grant

of remedial power under Section 5 of the Fourteenth Amendment

enables Congress to override state sovereign immunity).

\8\ See Croson, 488 U.S. at 490 (plurality opinion); Fullilove,

448 U.S. at 476-78 (plurality opinion); id. at 500 (Powell, J.,

concurring); Runyon v. McCrary, 427 U.S. 160, 179 (1976); see also

Adarand, 115 S. Ct. at 2126 (Stevens, J., dissenting); Metro

Broadcasting, 497 U.S. at 605 (O'Connor, J., dissenting).

\9\ See Croson, 488 U.S at 492 (plurality opinion) (``It is

beyond dispute that any public entity, state or federal, has a

compelling interest in assuring that public dollars, drawn from the

tax contributions of all citizens, do not serve to finance the evil

of private prejudice.''); see also Metro Broadcasting, 497 U.S. at

563-64; Fullilove, 448 U.S at 473-76 (plurality opinion).

\10\ See Adarand, 115 S. Ct. at 2117 (Congress may adopt

affirmative action to remedy ``both the practice and the lingering

effects of discrimination''). Accord id. at 2133 (Souter, J.,

dissenting) (government may act to redress effects of discrimination

``that would otherwise persist and skew the operation of public

systems even in the absence of current intent to practice any

discrimination'').

\11\ Croson, 488 U.S. at 490, 504; Fullilove, 448 U.S. at 502-03

(Powell, J., concurring).

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Congress has repeatedly examined the problems that racial

discrimination poses for minority-owned businesses. A complete

discussion of the entire record of Congress in this area is beyond the

scope of this memorandum.12 The

[[Page 26052]]

theme that emanates from this record is unequivocal: Congress has

adopted race-conscious remedial measures in procurement directly in

response to its findings that ``widespread discrimination, especially

in access to financial credit, has been an impediment to the ability of

minority-owned business to have an equal chance at developing in our

economy.'' 13 Furthermore, Congress has recognized that expanding

opportunities for minority-owned businesses in government procurement

helps to bring into mainstream public contracting networks firms that

otherwise would be excluded as a result of discriminatory barriers. In

light of Congress' expansive remedial charter, it is a fundamental

principle that courts must accord a significant degree of deference to

those findings and the attendant judgment of the Congress that remedial

measures in government procurement are warranted.14

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\12\ Congressional hearings on the subject from 1980 to the

present include the following: The Small Business Administration's

8(a) Minority Business Development Program: Hearing Before the

Senate Comm. on Small Business, 104th Cong., 1st Sess. (1995);

Discrimination in Surety Bonding: Hearing Before the Subcomm. on

Minority Enterprise, Finance and Urban Development of the House

Comm. on Small Business, 103d Cong., 1st Sess. (1993); Department of

Defense: Federal Programs to Promote Minority Business Development:

Hearing Before the Subcomm. on Minority Enterprise, Finance and

Urban Development of the House Comm. on Small Business, 103d Cong.,

1st Sess. (1993); SBA's Minority Business Development Program:

Hearing Before the House Comm. on Small Business, 103d Cong., 1st

Sess. (1993); Problems Facing Minority and Women-Owned Small

Businesses in Procuring U.S. Government Contracts: Hearing Before

the Subcomm. on Commerce, Consumer and Monetary Affairs of the House

Comm. on Government Operations, 103d Cong., 1st Sess. (1993); Fiscal

Economic and Social Crises Confronting American Cities: Hearings

Before the Senate Comm. on Banking, Housing and Urban Affairs, 102d

Cong., 2d Sess. (1992); Small Disadvantaged Business Issues: Hearing

Before the Investigations Subcomm. of the House Comm. on Armed

Services, 102d Cong., 1st Sess. (1991); Federal Minority Business

Programs: Hearing Before the House Comm. on Small Business, 102d

Cong., 1st Sess. (1991); To Amend the Civil Rights Act of 1964:

Permitting Minority Set-Asides: Hearing Before the Senate Comm. on

Governmental Affairs, 101st Cong., 2d Sess. (1990); City of Richmond

v. J.A. Croson: Impact and Response: Hearing Before the Subcomm. on

Urban and Minority-Owned Business Development of the Senate Comm. of

Small Business, 101st Cong., 2d Sess. (1990); Minority Business Set-

Aside Programs: Hearing Before the House Comm. on the Judiciary,

101st Cong., 1st Sess. (1990); Minority Construction Contracting:

Hearing Before the Subcomm. on SBA, the General Economy and Minority

Enterprise Development of the House Comm. on Small Business, 101st

Cong., 1st Sess. (1989); Surety Bonds and Minority Contractors:

Hearing Before the Subcomm. on Commerce, Consumer Protection and

Competitiveness of the House Comm. on Energy and Commerce, 100th

Cong., 2d Sess. (1988); Twenty Years after the Kerner Commission:

The Need for a New Civil Rights Agenda: Hearing Before the Subcomm.

on Civil and Constitutional Rights of the House Comm. on the

Judiciary, 100th Cong., 2d Sess. (1988); Disadvantaged Business Set-

Asides in Transportation Construction Projects: Hearings Before the

Subcomm. on Procurement, Innovation and Minority Enterprise

Development of the House Comm. on Small Business, 100th Cong., 2d

Sess. (1988); Barriers to Full Minority Participation in Federally

Funded Highway Projects: Hearings Before a Subcomm. of the House

Comm. on Government Operations, 100th Cong., 2d Sess. (1988); The

Small Business Competitiveness Demonstration Program Act of 1988:

Hearings on S. 1559 Before the Senate Comm. on Small Business, 100th

Cong., 2d Sess. (1988); Small Business Problems: Hearings Before the

House Comm. on Small Business, 100th Cong., 1st Sess. (1987);

Minority Business Development Act: Hearing Before the Subcomm. on

Procurement, Innovation and Minority Enterprise Development of the

House Comm. on Small Business, 100th Cong., 1st Sess. (1987); A Bill

to Reform the Capital Ownership Development Program: Hearings on

H.R. 1807 Before the Subcomm. on Procurement, Innovation and

Minority Enterprise Development of the House Comm. on Small

Business, 100th Cong., 1st Sess. (1987); To Present and Examine the

Result of a Survey of the Graduates of the Small Business

Administration Section 8(a) Minority Business Development Program:

Hearings Before the Senate Comm. on Small Business, 100th Cong., 1st

Sess. (1987); Minority Enterprise and General Small Business

Problems: Hearings Before the Subcomm. on SBA and SBIC Authority,

Minority Enterprise and General Small Business Problems of the

Senate Comm. on Small Business, 99th Cong., 2d Sess. (1986); The

State of Hispanic Small Business in America: Hearings Before the

Subcomm. on SBA and SBIC Authority, Minority Enterprise and General

Small Business Problems of the House Comm. on Small Business, 99th

Cong., 1st Sess. (1985); Federal Contracting Opportunities for

Minority and Women-Owned Businesses: An Examination of the 8(d)

Subcontracting Program: Hearings Before the Senate Comm. on Small

Business, 98th Cong., 1st Sess. (1983); Minority Business and Its

Contribution to the United States Economy: Hearing Before the Senate

Comm. on Small Business, 97th Cong., 2d Sess. (1982); Small Business

and the Federal Procurement System: Hearings Before the Subcomm. on

General Oversight of the House Comm. on Small Business, 97th Cong.,

1st Sess. (1981); Small and Minority Business in the Decade of the

1980's (Part 1): Hearings Before the House Comm. on Small Business,

97th Cong., 1st Sess. (1981); Small Business and the Federal

Procurement System: Hearings Before the Subcomm. on General

Oversight of the House Comm. on Small Business, 97th Cong., 1st

Sess. (1981); To Amend the Small Business Act to Extend the Current

SBA 8(a) Pilot Program: Hearings on H.R. 5612 Before the Senate

Select Comm. on Small Business, 96th Cong., 2d Sess. (1980).

\13\ Affirmative Action Review: Report to the President 55

(1995).

\14\ See Croson, 488 U.S. at 488-90 (plurality opinion);

Fullilove, 448 U.S. at 472-73 (plurality opinion); id. at 508-10

(Powell, J., concurring); see also Metro Broadcasting, 497 U.S. at

563; id. at 605-07 (O'Connor, J., dissenting). This principle was

not disturbed by the Supreme Court's ruling in Adarand; thus, it

continues to have force, even under strict scrutiny. See Adarand,

115 S. Ct. at 2114; id. at 2126 (Stevens, J., dissenting); id. at

2133 (Souter, J., dissenting).

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The relevant congressional findings encompass a broad range of

problems confronting minority-owned businesses. They include

``deficiencies in working capital, inability to meet bonding

requirements, disabilities caused by an inadequate `track record,' lack

of awareness of bidding opportunities, unfamiliarity with bidding

procedures, pre-selection before the formal advertising process, and

the exercise of discretion by government procurement officers to

disfavor minority businesses.'' 15

---------------------------------------------------------------------------

\15\ Fullilove, 448 U.S. at 467 (plurality opinion).

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For example, in a report that led to the legislation that created

what has become known as the ``8(a)'' program at the Small Business

Administration,16 and that established goals for participation in

procurement at each federal agency by firms owned and controlled by

socially and economically disadvantaged individuals (SDB's),17 a

congressional committee found that the difficulties facing minority-

owned businesses were ``not the result of random chance.'' Rather, the

committee stated, ``past discriminatory systems have resulted in

present economic inequities.'' 18 In connection with the same

legislation, another committee concluded that a pattern of

discrimination ``continues to deprive racial and ethnic minorities * *

* of the opportunity to participate fully in the free enterprise

system.'' 19 Eventually, when it adopted the 8(a) legislation,

Congress found that minorities ``have suffered the effects of

discriminatory practices or similar invidious circumstances over which

they have no control,'' and that ``it is in the national interest to

expeditiously ameliorate'' the effects of this discrimination through

increased opportunities for minorities in government

procurement.20

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\16\ That program targets federal procurement opportunities for

small firms owned and controlled by individuals who are socially and

economically disadvantaged. See 15 U.S.C. Sec. 637(a). Members of

certain minority groups are presumed to be socially disadvantaged.

13 C.F.R. Pt. 124.

\17\ 15 U.S.C. Sec. 644(g).

\18\ H.R. Rep. No. 468, 94th Cong., 1st Sess. 2 (1975).

\19\ S. Rep. No. 1070, 95th Cong., 2d Sess. 14 (1978). See also

H.R. Rep. No. 949, 95th Cong., 2d Sess. 8 (1978).

\20\ Pub. L. No. 95-507, Sec. 201, 92 Stat. 1757, 1760 (1978).

See 124 Cong. Rec. 35,204 (1978) (statement of Sen. Weicker)

(commenting on the introduction of the conference report on the 8(a)

legislation and observing that the report recognizes the existence

of a ``pattern of social and economic discrimination that continues

to deprive racial and ethnic minorities of the opportunity to

participate fully in the free enterprise system''). In the same year

it passed the 8(a) legislation, Congress considered an additional

bill that sought to target federal assistance to minority-owned

firms. In introducing that measure, Senator Dole remarked that

``minority businessmen can compete equally when given equal

opportunity. One of the most important steps this country can take

to insure equal opportunity for its hispanic, black and other

minority citizens is to involve them in the mainstream of our free

enterprise system.'' 124 Cong. Rec. 7681 (1978).

---------------------------------------------------------------------------

When revamping the 8(a) program in the late 1980s, Congress again

found that ``discrimination and the present effects of past

discrimination'' continued to hinder minority business development.

Congress concluded that the program required bolstering so that it

would better ``redress the effects of discrimination on entrepreneurial

endeavors.'' 21

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\21\ H.R. Rep. No. 460, 100th Cong., 1st Sess. 16, 18 (1987).

See 133 Cong. Rec. 37,814 (1987) (statement of Sen. Bumpers)

(discussing proposed revisions to 8(a) program and commenting that

minorities ``continue to face discrimination in access to credit and

markets''); id. at 33,320 (statement of Rep. Conte) (discussing

proposed revisions to 8(a) program and commenting that effects of

discrimination continued to be felt, and that 8(a) amendments were

needed to ``create a workable mechanism to finally redress past

discriminatory practices''). See generally S. Rep. No. 394, 100th

Cong., 2d Sess. (1988); The Small Business Competitiveness

Demonstration Program Act of 1988: Hearings on S. 1559 Before the

Senate Comm. on Small Business, 100th Cong., 2d Sess. (1988); Small

Business Problems: Hearings Before the House Comm. on Small

Business, 100th Cong., 1st Sess. (1987); Minority Business

Development Act: Hearing Before the Subcomm. on Procurement,

Innovation and Minority Enterprise Development of the House Comm. on

Small Business, 100th Cong., 1st Sess. (1987); A Bill to Reform the

Capital Ownership Development Program: Hearings on H.R. 1807 Before

the Subcomm. on Procurement, Innovation and Minority Enterprise

Development of the House Comm. on Small Business, 100th Cong., 1st

Sess. (1987); To Present and Examine the Result of a Survey of the

Graduates of the Small Business Administration Section 8(a) Minority

Business Development Program: Hearings Before the Senate Small

Business Comm., 100th Cong., 1st Sess. (1987); Minority Enterprise

and General Small Business Problems: Hearings Before the Subcomm. on

SBA and SBIC Authority, Minority Enterprise and General Small

Business Problems of the Senate Comm. on Small Business, 99th Cong.,

2d Sess. (1986); The State of Hispanic Small Business in America:

Hearings Before the Subcomm. on SBA and SBIC Authority, Minority

Enterprise and General Small Business Problems of the House Comm. on

Small Business, 99th Cong., 1st Sess. (1985).

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In the same vein are congressional findings that underpin

legislation that sets agency-specific goals for participation by

disadvantaged businesses--including minority-owned firms--in

procurement and grant programs administered by those agencies. For

instance, in recommending the continued use of such goals as part of

programs through which the Department of Transportation provides funds

to state and local governments for use in highway and

[[Page 26053]]

transit projects, a congressional committee observed that it had

considered extensive testimony and evidence, and determined that this

action was ``necessary to remedy the discrimination faced by socially

and economically disadvantaged persons attempting to compete in the

highway industry and mass transit construction industry.'' 22

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\22\ S. Rep. No. 4, 100th Cong., 1st Sess. 11 (1987). The DoT

goals were initially established in the Surface Transportation

Assistance Act of 1982, Pub. L. No. 97-424, Sec. 105(f), 96 Stat.

2097 (1982). They were continued in the Surface Transportation and

Uniform Relocation Assistance Act of 1987 (``STURAA''), Pub. L. No.

100-17, Sec. 106(c)(1), 101 Stat. 132, 145 (1987). Congress held

further hearings on the subject after passage of STURAA. See

Minority Construction Contracting: Hearing Before the Subcomm. on

SBA, the General Economy and Minority Enterprise Development of the

House Comm. on Small Business, 101st Cong., 1st Sess. (1989);

Disadvantaged Business Set-Asides in Transportation Construction

Projects: Hearings Before the Subcomm. on Procurement, Innovation

and Minority Enterprise Development of the House Comm. on Small

Business, 100th Cong., 2d Sess. (1988); Barriers to Full Minority

Participation in Federally Funded Highway Construction Projects:

Hearing Before a Subcomm. of the House Comm. on Government

Operations, 100th Cong., 2d Sess. (1988). Congress subsequently

reauthorized the goals in the Intermodal Surface Transportation

Efficiency Act of 1991, Pub. L. No. 102-240, Sec. 1003(b), 105 Stat.

1914, 1919 (1991). See 137 Cong. Rec. S7571 (June 12, 1991)

(statement of Sen. Simpson) (expressing support for continuation of

disadvantaged business program at Transportation Department).

Congress has established comparable initiatives to encourage

disadvantaged business participation in grant programs administered

by the Environmental Protection Agency (EPA). For example,

recipients of grants awarded by EPA under the Clean Air Act are

required to set disadvantaged business goals. See 42 U.S.C.

Sec. 7601 note; see also 42 U.S.C. Sec. 4370d (establishing an SDB

goal for recipients of EPA funds used in support of certain

environmental-related projects); H.R. Rep. No. 226, 102 Cong., 1st

Sess. 48 (1991).

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Congress has also established goals for SDB participation in

procurement at the Defense Department, and authorized that agency to

use specific forms of remedial measures to achieve the goals.23

The Defense Department program too is predicated on findings that

opportunities for minority-owned businesses had been impaired.24

More fundamentally, in establishing the program, Congress recognized

that fostering contracting opportunities for minority-owned businesses

at the Defense Department is crucial, because that agency alone

typically accounts for more than two-thirds of the federal government's

procurement activities. Therefore, affirmative action efforts at the

Defense Department enable minority-owned businesses to demonstrate

their capabilities to contracting officers at that important procuring

agency and to the vast number of nonminority firms that provide goods

and services to the Pentagon. In turn, minority-owned businesses can

begin to break into the contracting networks from which they typically

have been excluded.25

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\23\ 10 U.S.C. Sec. 2323.

\24\ See H.R. Rep. No. 332, 99th Cong., 1st Sess. 139-40 (1985)

(if disadvantaged firms had been able to ``participate in the

`early' development of major Defense systems, they would have had an

opportunity to gain the expertise required to bid on such

contracts''); see also H.R. Rep. No. 450, 99th Cong., 1st Sess. 179

(1985); 131 Cong. Rec. 17,445-17,448 (1985); H.R. Rep. No. 1086,

98th Cong., 2d Sess. 100-01 (1984).

\25\ See 131 Cong. Rec. 17,447 (1985) (statement of Rep.

Conyers) (affirmative action needed to break down ``buddy-buddy

contracting'' at the Defense Department, ``which has the largest

procurement program in the Federal Government''); id. (statement of

Rep. Schroeder) (an ``old boy's club'' in Defense Department

contracting excludes many minorities from business opportunities);

see also Department of Defense: Federal Programs to Promote Minority

Business Development: Hearing Before the Subcomm. on Minority

Enterprise, Finance and Urban Development of the House Comm. on

Small Business, 103d Cong., 1st Sess. 49 (1993) (statement of Rep.

Roybal-Allard) (``Old attitudes and old habits die hard * * *.

Defense contracting has, traditionally, been a closed shop. Only a

select few need apply. Since the passage of the minority contracting

opportunity law, some progress has been made.''); H.R. Rep. No.

1086, 98th Cong., 2d Sess. 100-101 (1984) (low level of

participation by disadvantaged firms in Defense Department

contracting indicated a need to expand procurement opportunities at

that agency for such firms).

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Opportunities for minority-owned businesses to participate in

Defense Department procurement increased following the introduction of

the affirmative action program there in the late 1980s. However, the

effects of discrimination were still felt in federal procurement

generally. Based on information it obtained through a 1993 hearing, a

congressional committee reported the following year that this ``lack of

opportunity results primarily from discriminatory or economic

conditions,'' and that ``improving access to government contracts and

procurement offers a significant opportunity for business development

in many industry sectors.'' 26 In the Federal Acquisition

Streamlining Act of 1994, Congress saw fit to make available to all

agencies the remedial tools that previously had been granted to the

Defense Department, in order to ``improv[e] access to contracting

opportunities for * * * minority-owned small businesses.'' 27

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\26\ H.R. Rep. No. 870, 103d Cong., 2nd Sess. 5 (1994).

\27\ 140 Cong. Rec. H9242 (Sept. 20, 1994) (statement of Rep.

Dellums).

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Through its recurring assessments of the implications of

discrimination against minority-businesses, Congress has concluded

that, standing alone, legislation that simply proscribes racial

discrimination is an inadequate remedy. Congress also has attempted to

redress the problems facing minority businesses through race-neutral

assistance to all small businesses.28 Congress has determined,

however, that those remedies, by themselves, are ``ineffectual in

eradicating the effects of past discrimination,'' 29 and that

race-conscious measures are a necessary supplement to race-neutral

ones.30 Finally, based on its understanding of what happens at the

state and local level when use of affirmative action is severely

curtailed or suspended outright, Congress has concluded that minority

participation in government procurement tends to fall dramatically in

the absence of at least some kind of remedial measures, the result of

which is to perpetuate the discriminatory barriers that have kept

minorities out of the mainstream of public contracting.31

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\28\ Beginning with the Small Business Act of 1953, Congress has

authorized numerous programs to ``aid, counsel, assist, and protect

* * * the interests of small-business concerns'' and ``insure that a

fair proportion of the total purchases and contracts for supplies

and services for the government be placed with small-business

enterprises.'' Pub. L. No. 163, Sec. 202, 67 Stat. 232 (1953). After

recognizing in the 1960s the specific problems facing minority owned

businesses, Congress attempted to address them through race-neutral

measures. For example, in 1971, Congress amended the Small Business

Investment Act to create a surety bond guarantee program to assist

small businesses that have trouble obtaining traditional bonding. In

1972, Congress created a new class of small business investment

companies to provide debt and equity capital to small businesses

owned by socially and economically disadvantaged individuals. And

over the years, Congress has continuously reviewed and strengthened

programs to assist all small businesses through the Small Business

Act. See e.g. Pub. L. No. 93-386, 88 Stat. 742 (1974); Pub. L. No.

94-305, 90 Stat. 663 (1976); Pub. L. No. 95-89, 91 Stat. 553 (1977).

\29\ Croson, 488 U.S. at 550 (Marshall, J., dissenting). Accord

Fullilove, 448 U.S. at 467 (plurality opinion); id. at 511 (Powell,

J., concurring); see also City of Richmond v. J.A. Croson: Impact

and Response: Hearing Before the Subcomm. on Urban and Minority-

Owned Business Development of the Senate Comm. on Small Business,

101st Cong., 2d Sess. 48 (1990) (statement of Ray Marshall); H.R.

Rep. No. 468, 94th Cong., 1st Sess. 32 (1975).

\30\ It bears emphasizing that race-neutral programs for small

businesses are important and necessary components of an overall

congressional strategy to enhance opportunity for small businesses

owned by minorities. For example, Congress has authorized

contracting set asides for small businesses generally--minority and

nonminority alike--as well as a host of bonding, lending, and

technical assistance programs that are open to all small businesses.

See 15 U.S.C. Sec. 631 et seq.

\31\ The Meaning and Significance for Minority Businesses of the

Supreme Court Decision in the City of Richmond v. J.A. Croson Co.:

Hearing Before the Legislation and National Security Subcomm. of the

House Comm. on Government Operations, 101st Cong., 2d Sess. 57, 62-

90 (1990); City of Richmond v. J.A. Croson: Impact and Response:

Hearing Before the Subcomm. on Urban and Minority-Owned Business

Development of the Senate Comm. on Small Business, 101st Cong., 2d

Sess. 39-44 (1990) (statement of Andrew Brimmer).

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[[Page 26054]]

The foregoing is just a sampling from the legislative record of

congressionally-authorized affirmative action in government

procurement. The remainder of the memorandum surveys evidence from

other sources regarding the impact of discrimination on the ability of

minority-owned businesses to compete equally in contracting markets.

This evidence confirms Congress' determination that race-conscious

remedial action is needed to correct that problem.

II. Discriminatory Barriers to Minority Contracting Opportunities

Developing a business that can successfully compete for government

contracts depends on many factors. To begin with, technical or

professional experience, which is typically attained through employment

and trade union opportunities, is an important prerequisite to

establishing any business. Second, obtaining financing is necessary to

the formation of most businesses. The inability to secure the twin

building blocks of experience and financing may prevent a business from

ever getting off the ground. Some individuals overcome these initial

obstacles and are able to form businesses. However, they subsequently

may be shut out from important contracting and supplier networks, which

can hinder their ability to compete effectively for contract

opportunities. And further barriers may be encountered when a business

tries to secure bonding and purchase supplies for projects--critical

requirements for many major government contracts.

While almost all new or small businesses find it difficult to

overcome these barriers and become successful, these problems are

substantially greater for minority-owned businesses. Empirical studies

and reports issued by congressional committees, executive branch

commissions, academic researchers, and state and local governments

document the widespread and systematic impact of discrimination on the

ability of minorities to carry out each of the steps that are required

for participation in government contracting. This evidence of

discrimination can be grouped into two categories:

(i) evidence showing that discrimination works to preclude

minorities from obtaining the experience and capital needed to form and

develop a business, which encompasses discrimination by trade unions

and employers and discrimination by lenders;

(ii) evidence showing that discriminatory barriers deprive existing

minority firms of full and fair contracting opportunities, which

encompasses discrimination by private sector customers and prime

contractors, discrimination by business networks, and discrimination by

suppliers and bonding providers.

The following provides an overview of both categories of evidence.

A. Effects of Discrimination on the Formation and Development of

Minority Businesses

A primary objective of affirmative action in procurement is to

encourage and support the formation and development of minority-owned

firms as a remedy to the ``racism and other barriers to the free

enterprise system that have placed a heavier burden on the development

and maturity of minority businesses.'' 32 That these efforts are

necessary is evident from the recent findings by the U.S. Commission on

Minority Business Development, appointed by President Bush. The

Commission amassed a large amount of evidence demonstrating the

marginal position that minority-owned businesses hold in our society:

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\32\ Small and Minority Business in the Decade of the 1980's

(Part 1): Hearings Before the House Comm. on Small Business, 97th

Cong., 1st Sess. 4 (1981). See also H.R. Rep. No. 870, 103d Cong.,

2d Sess. 5 (1994).

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Minorities make up more than 20 percent of the

population; yet, minority-owned businesses are only 9 percent of all

U.S. businesses and receive less than 4 percent of all business

receipts.33

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\33\ United States Commission on Minority Business Development,

Final Report 2-6 (1992). These statistics are based on 1987 census

data, the most recent full data available regarding the status of

minority-owned businesses. Preliminary reports from 1992 census data

reveal that the status of minority firms has not significantly

improved. For instance, African Americans are 12 percent of the

population but, in 1992, owned only 3.6% of all businesses (up from

3.1% in 1987) and received just 1 percent of all U.S. business

receipts (which is the same level as in 1987).

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Minority firms have, on average, gross receipts that are

only 34% of that of nonminority firms.34

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\34\ Id. at 3.

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The average payroll for minority firms with employees is

less than half that of nonminority firms with employees.35

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\35\ Id. at 4.

---------------------------------------------------------------------------

President Bush's Commission undertook an extensive analysis of the

barriers that face minority-owned business formation and development.

It concluded that ``minorities are not underrepresented in business

because of choice or chance. Discrimination and benign neglect is the

reason why our economy has been denied access to this vital resource.''

36 Further evidence of the effect of discrimination on minority

business development is revealed in recent studies showing that

minorities are significantly less likely than whites to form their own

business--even after controlling for income level, wealth, education

level, work experience, age and marital status.37 These findings

strongly indicate that minorities ``face barriers to business entry

that nonminorities do not face.'' 38

---------------------------------------------------------------------------

\36\ Id. at 60.

\37\ See Division of Minority and Women's Business Development,

Opportunity Denied: A Study of Racial and Sexual Discrimination

Related to Government Contracting in New York State, Appendix D, 53-

75 (1992) (finding that minorities in New York were 20% less likely

to enter self-employment than similarly situated whites); Timothy

Bates, Self-employment Entry Across Industry Groups, Journal of

Business Venturing, Vol. 10, at 143-56 (1995).

\38\ Timothy Bates, Self-employment Entry Across Industry

Groups, Journal of Business Venturing, Vol. 10, 149 (1995).

---------------------------------------------------------------------------

Since the inception of federal affirmative action initiatives in

procurement, policy makers have recognized that there are two principal

barriers to the formation and development of minority-owned businesses:

limited technical experience and limited financial resources. President

Nixon's Advisory Council on Minority Business Enterprise identified

these barriers in 1973 when it reported that ``a characteristic lack of

financial and managerial resources has impaired any willingness to

undertake enterprise and its inherent risk.'' 39 Two decades

later, a congressional committee found that minorities continue to have

``fewer opportunities to develop business skills and attitudes, to

obtain necessary resources, and to gain experience, which is necessary

for the success of small businesses in a competitive environment.''

40 Discrimination in two sectors of the national economy accounts,

at least in part, for the diminished opportunity: discrimination by

trade unions and employers, which has prevented minorities from

garnering crucial technical skills; and discrimination by lenders,

which has prevented minorities from garnering needed capital.

---------------------------------------------------------------------------

\39\ Samuel Doctors & Anne Huff, Minority Enterprise and the

President's Council 4-6 (1973) (quoted in Tuchfarber et al., City of

Cincinnati: Croson Study 150 (1992)).

\40\ H.R. Rep. No. 870, 103d Cong., 2d Sess. 5 (1994).

---------------------------------------------------------------------------

1. Discrimination by Trade Unions and Employers

President Nixon's Advisory Council on Minority Business Enterprise

determined that ``the lack of opportunity to participate in managerial

technical training has severely restricted the supply of [minority]

entrepreneurs,

[[Page 26055]]

managers and technicians.'' 41 A history of discrimination by

unions and employers helps to explain this unfortunate phenomenon.

---------------------------------------------------------------------------

\41\ Samuel Doctors & Anne Huff, Minority Enterprise and the

President's Council 4-6 (1973) (quoted in Tuchfarber et al., City of

Cincinnati: Croson Study 150 (1992)).

---------------------------------------------------------------------------

Prior to the civil rights accomplishments of the 1960s, labor

unions and employers were virtually free to practice overt racial

discrimination. Minorities were segregated into menial, low wage

positions, leaving no minority managers or white collar workers in most

sectors of our economy. Trade unions, which controlled training and job

placement in many skilled trades, commonly barred minorities from

membership. As a result, ``whole industries and categories of

employment were, in effect, all-white, all-male.'' 42 These

practices left minorities unable to gain the experience needed to

operate all but the smallest businesses, primarily consisting of small

``mom and pop'' stores with no employees, minimal revenue, located in

segregated neighborhoods, and serving an exclusively minority

clientele.43

---------------------------------------------------------------------------

\42\ Affirmative Action Review: Report to the President 7

(1995).

\43\ See, e.g., Joseph Pierce, Negro Business and Business

Education (1947); Andrew Brimmer, The Economic Potential of Black

Capitalism, Public Policy Vol. 19, No. 2, at 289-308 (1971); Kent

Gilbreath, Red Capitalism: An Analysis of the Navajo Economy (1973).

---------------------------------------------------------------------------

Discrimination by unions has been recognized as a major factor in

preventing minorities from obtaining employment opportunities in the

skilled trades. Title VII of the Civil Rights Act of 1964 (prohibiting

employment discrimination) was passed, in part, in response to

Congress's desire to halt ``the persistent problems of racial and

religious discrimination or segregation * * * by labor unions and

professional, business, and trade associations.'' 44 Even after

Title VII went on the books, however, unions precluded minorities from

membership through a host of discriminatory policies, including the use

of ``tests and admissions criteria which [have] no relation to on-the-

job skills and which [have] a differential impact'' on minorities;

45 discriminating in the application of admission criteria;

46 and imposing admission conditions, such as requiring that new

members have a family relationship with an existing member, that locked

minorities out of membership opportunities.47 As a result, unions

remained virtually all-white for some time after the enactment of Title

VII:

---------------------------------------------------------------------------

\44\ S. Rep. No. 872, 88th Cong., 1st Sess. 1 (1964). See,

e.g., Brimmer & Marshall, Public Policy and Promotion of Minority

Economic Development: City of Atlanta and Fulton County, Georgia,

Pt. VII, 11-17 (1990) (in 1963, minorities were prohibited from

joining Atlanta unions representing plumbers, electricians, steel

workers and bricklayers); TEM Associates, Minority/Women Business

Study: Revised Final Report, Phase I, Volume I 3-13 (``In 1963, not

one of the 1,000 persons in apprenticeship training in Dade County

was Black, and the Miami Sheet Metal Workers local, like most other

trade unions, was all white.'').

\45\ United States v. Iron Workers Local 86, 443 F.2d 544, 548

(9th Cir.) cert. denied, 404 U.S. 984 (1971). See also Hameed v.

International Ass'n of Bridge, Structural & Ornamental Iron Workers,

637 F.2d 506 (8th Cir. 1980) (selection criteria, including aptitude

test, and the requirement of a high school diploma as a condition of

eligibility were discriminatory).

\46\ United States v. Iron Workers Local 86, 443 F.2d 544, 548

(9th Cir.) (differential application and admissions requirements

between whites and blacks; spurious reasons given for rejections of

blacks), cert. denied, 404 U.S. 984 (1971); Sims v. Sheet Metal

Workers Int'l Ass'n, 489 F.2d 1023 (6th Cir. 1973) (union waived

requirements for white applicants).

\47\ United States v. United Bhd. of Carpenters and Joiners of

America, 457 F.2d 210, 215 (7th Cir.) cert. denied, 409 U.S. 851

(1972) (family relation requirement excluded minorities from

Carpenters trade); United States v. International Ass'n of Bridge,

Structural and Ornamental Iron Workers, 438 F.2d 679, 683 (7th Cir.)

(requiring family relationships between new and existing members

``effectively precluded non-white membership'') cert. denied, 404

U.S. 830 (1971); Asbestos Workers, Local 53 v. Vogler, 407 F.2d 1047

(5th Cir. 1969) (rule restricting membership to sons or close

relatives of current members perpetuated the effect of past

exclusion of minorities).

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In 1965, the President's Commission on Equal Opportunity

found that out of 3,969 persons selected for skilled trade union

apprenticeships in 30 southern cities, only 26 were black.48

---------------------------------------------------------------------------

\48\ Jaynes Associates, Minority and Women's Participation in

the New Haven Construction Industry: A Report to the City of New

Haven 24 (1989) (citing findings of President's Commission on Equal

Opportunity).

---------------------------------------------------------------------------

In 1967, blacks made up less than 1 percent of the

nation's mechanical union members (i.e. sheet metal workers,

boilermakers, plumbers, electricians, ironworkers and elevator

constructors).49

---------------------------------------------------------------------------

\49\ Steve Askin & Edmund Newton, Blood, Sweat and Steel, Black

Enterprise, Vol. 14, at 42 (1984).

---------------------------------------------------------------------------

In 1969, only 1.6 percent of Philadelphia construction

union members were minorities.50

---------------------------------------------------------------------------

\50\ Department of Labor Memorandum from Arthur Fletcher to All

Agency Heads (1969) (cited in Affirmative Action Review: Report to

the President 11 (1995)) (introducing the ``Philadelphia Plan''

requiring the use of affirmative action goals and timetables in

construction, Secretary Fletcher noted that ``equal employment

opportunity in these trades in the Philadelphia area is still far

from a reality. * * * We find, therefore, that special measures are

required to provide equal opportunity in these seven trades'').

---------------------------------------------------------------------------

Even when minorities were admitted to unions, discriminatory hiring

practices and seniority systems often were used to foreclose job

opportunities to them.51 These actions were the subject of

numerous civil rights suits, leading the Supreme Court to declare in

1979 that ``judicial findings of exclusion from crafts on racial

grounds are so numerous as to make such exclusion a proper subject for

judicial notice.'' 52 Well into the 1980s, courts, committees of

Congress, and administrative agencies continued to identify the

``inability of many minority workers to obtain jobs'' through unions

because of ``slavish adherence to traditional preference practices

[and] also from overt discrimination.'' 53

---------------------------------------------------------------------------

\51\ See Pennsylvania v. Operating Eng'rs, Local 542, 469 F.

Supp. 329, 339 (E.D. Pa. 1978) (unions held liable for racial

discrimination in employee referral procedures and practices);

Waldinger & Bailey, The Continuing Significance of Race: Racial

Conflict and Racial Discrimination in Construction, Politics and

Society, Vol. 19, No. 3, at 299 (1991) (``Despite rules and formal

procedures, informal relationships still dominate the union sector's

employment processes.''); Edmund Newton, Steel, The Union Fiefdom,

Black Enterprise, Vol. 14, at 46 (1984) (discrimination in operation

of hiring halls ``operated as impenetrable barriers'' to minority

job seekers). See generally Barbara Lindeman Schlei & Paul Grossman,

Employment Discrimination Law 619-28 (1983).

\52\ United Steelworkers of Am. v. Weber, 443 U.S. 193, 198 n.

1 (1979).

\53\ Taylor v. United States Dept. of Labor, 552 F. Supp. 728,

734 (E.D. Pa. 1982). See Minority Business Participation in

Department of Transportation Projects: Hearing Before a Subcomm. of

the House Comm. on Government Operations, 99th Cong., 1st Sess. 201

(1985) (testimony of James Haughton) (minority contractors continue

to ``suffer[] heavily because they have been victims to that

discrimination as practiced by the unions''); Division of Minority

and Women's Business Development, Opportunity Denied!: A Study of

Racial and Sexual Discrimination Related to Government Contracting

in New York State 41 (1992) (``At least seven reports were issued by

federal, state and city commissions and agencies between 1963 and

1982 documenting the pattern of racial exclusion from New York's

skilled trade unions by constitution and by-law provisions, member

sponsorships rules, subjective interview tests and other techniques,

as well as the complicity of construction contractors and the

acquiescence of government agencies in those practices.'').

---------------------------------------------------------------------------

The discriminatory conduct that was the subject of the Supreme

Court's decision in Local 28, Sheet Metal Workers v. EEOC,54 is

illustrative of the pattern of racial exclusion by trade unions and its

consequences for minorities. The union local operated an apprenticeship

training program designed to teach sheet metal skills. Apprentices

enrolled in the program received class-room training, as well as on-

the-job work experience. As the Supreme Court described it, successful

completion of the program was the principal means of attaining union

membership. But by excluding minorities from the apprenticeship program

through ``pervasive and egregious discrimination,'' 55 the local

effectively excluded minorities from the

[[Page 26056]]

union for decades. Such exclusion continued notwithstanding the passage

of Title VII and a series of administrative and judicial findings in

the 60s and 70s that the local had engaged in blatant discrimination in

shutting minorities out of the program. Indeed, even into the 80s, the

local persisted in violating court orders to open up the program to

minorities.56

---------------------------------------------------------------------------

\54\ 478 U.S. 421 (1986)

\55\ Id. at 476.

\56\ Id. at 433-34.

---------------------------------------------------------------------------

More recently, a Yale University economist prepared a report

documenting the history of discrimination by New Haven unions that

``confirms the nationwide pattern of discrimination.'' 57 Prior to

the passage of the Civil Rights Act of 1964, New Haven's unions

prohibited minority membership, and minority workers were almost

completely segregated into jobs that whites would not take because they

required working under conditions of extreme heat or discomfort.58

After passage of the Civil Rights Act, minorities were prevented from

entering unions by a rule requiring that at least three current members

sponsor the application of any new member.59 Although the policy

was race-neutral on its face, ``it was almost impossible to find three

members who would nominate a minority [and] stand up for him in a

closed meeting when other members would undoubtedly attack the

candidate and his sponsors.'' 60 This and other discriminatory

policies prevented all but five African Americans from joining the

1,216 white members of the highest paid skilled trade unions in 1967,

and throughout the mid-70s, unions and apprenticeship programs remained

virtually all-white.61 The report concluded that the history of

``blocked access to the skilled trades is the most important

explanation of the low numbers of minority and women construction

contractors today.'' 62

---------------------------------------------------------------------------

\57\ Jaynes Associates, Minority and Women's Participation in

the New Haven Construction Industry: A Report to the City of New

Haven 25-26 (1989).

\58\ Id. at 26-27.

\59\ Id. at 28.

\60\ Id. at 28.

\61\ Id. at 33; New Haven Board of Aldermen, Minority and Women

Business Participation in the New Haven Construction Industry:

Committee Report 7 (1990).

\62\ Jaynes Associates, Minority and Women's Participation in

the New Haven Construction Industry: A Report to the City of New

Haven 34 (1989). Comparable conclusions about the impact of trade

union discrimination have been reached in studies from other

jurisdictions around the country. See, e.g., D.J. Miller &

Associates, et al., The Disparity Study for Memphis Shelby County

Intergovernmental Consortium 11-46 (Oct. 1994) (``In Memphis, trade

unions have historically discriminated against African

Americans.''); Report of the Blue Ribbon Panel to the Honorable

Richard M. Daley, Mayor of the City of Chicago 43 (March 1990)

(``The Task Force specifically notes the exclusion of minorities and

women from the building trades.''); National Economic Research

Associates, et al., Availability and Utilization of Minority and

Women-Owned Business Enterprises at the Massachusetts Water

Resources Authority 72 (Nov. 1990) (``A number of M/WBE owners

complain that problems caused by unions are exacerbated by state

bidding requirements that make it difficult or impossible for non-

union firms to bid.''); Coopers & Lybrand, et al., State of Maryland

Minority Business Utilization Study 9 (Feb. 1990) (discussing

discriminatory union practices).

---------------------------------------------------------------------------

There is no doubt that trade unions have put much of the

discriminatory past behind them, and they now provide an important

source of opportunity for minorities. Some barriers to full opportunity

remain, however.63

---------------------------------------------------------------------------

\63\ See BPA Economics, et al., MBE/WBE Disparity Study of the

City of San Jose I-34 (1990) (``When trying to join unions,

minorities may face testing and experience requirements that are

waived in the case of relatives of current union members.'');

Waldinger & Bailey, The Continuing Significance of Race: Racial

Conflict and Racial Discrimination in Construction, Politics and

Society, Vol. 19, No. 3, at 296-97 (1991) (``In 1987, blacks

averaged less than 80 percent of parity for all skilled trades with

even lower levels of representation in the most highly paid crafts

like electricians and plumbers.''); The Meaning and Significance for

Minority Businesses of the Supreme Court Decision in the City of

Richmond v. J.A. Croson Co.: Hearing Before the Legislation and

National Security Subcomm. of the Comm. on Government Operations,

101st Cong., 2d Sess. 111-15 (1990).

---------------------------------------------------------------------------

A parallel history of discriminatory treatment by employers has

prevented minorities from rising into the private sector management

positions that are most likely to lead to self-employment. In 1972,

Congress found that only 3.5 percent of minorities held managerial

positions compared to 11.4 percent of white employees.64 Congress

attributed this underrepresentation to continued discriminatory conduct

by ``employers, labor organizations, employment agencies and joint

labor-management committees.'' 65 Evidence derived from caselaw

and academic studies shows a variety of discriminatory employment

practices, including promoting white employees over more qualified

minority employees; 66 relying on word-of-mouth recruiting

practices that exclude minorities from vacancy announcements; 67

and creating promotion systems that lock minorities into inferior

positions.68

---------------------------------------------------------------------------

\64\ H.R. Rep. No. 238, 92d Cong., 2d Sess. 3 (1972).

\65\ Id. at 7.

\66\ See, e.g., Winbush v. Iowa, 69 FEP Cases 1348 (8th Cir.

1995) (evidence was ``overwhelming'' that employer had engaged in

disparate treatment with respect to promotion of black employees);

(United States v. N.L. Industries, Inc., 479 F.2d 354 (8th Cir.

1973) (99 percent white management structure caused, in part, by

promoting lesser qualified white employees over more qualified

minorities).

\67\ See, e.g., EEOC v. Detroit Edison Co., 515 F.2d 301, 313

(6th Cir. 1975), vacated and remanded on other grounds, 431 U.S. 951

(1977) (finding discrimination in ``the practice of relying on

referrals by a predominantly white work force''); Long v. Sapp, 502

F.2d 34, 41 (5th Cir. 1974) (word-of-mouth recruitment serves to

perpetuate all-white work force); Thomas v. Washington County Sch.

Bd., 915 F.2d 922 (4th Cir. 1990). See also Univ. of Mass., Barriers

to the Employment and Work-Place Advancement of Latinos: A Report to

the Glass Ceiling Commission 52 (Aug. 1994) (word-of-mouth

recruiting methods that rely on social networks are a significant

``exclusionary barrier'' to employment opportunities for

minorities); Roosevelt Thomas, et al., The Impact of Recruitment,

Selection, Promotion and Compensation Policies and Practices on the

Glass Ceiling, submitted to U.S. Department of Labor Glass Ceiling

Commission, 14 (April 1994) (noting that ``recruitment practices

primarily consist[ing] of word-of-mouth and employee referral

networking * * * promote the filling of vacancies almost exclusively

from within. If the environment is already homogenous, which many

are, it maintains this same `home-grown' environment''); Gertrude

Ezorsky, Racism and Justice: The Case for Affirmative Action 14-18

(1991); U.S. Commission on Civil Rights, Affirmative Action in the

1980s: Dismantling the Process of Discrimination 8 (1981); Barbara

Lindeman Schlei & Paul Grossman, Employment Discrimination Law 571

(1983).

\68\ See, e.g., Paxton v. Union National Bank, 688 F.2d 552,

565-566 (8th Cir. 1982), cert. denied, 460 U.S. 1083 (1983); Sears

v. Bennett, 645 F.2d 1365 (10th Cir. 1981) (system requiring that

porters, all of whom were black, forfeit seniority when changing

jobs designed to prevent promotion of black employees), cert.

denied, 456 U.S. 964 (1982); Terrell v. U.S. Pipe and Foundry Co.,

644 F.2d 1112 (5th Cir. 1981) (seniority system created for clearly

discriminatory purposes), vacated on other grounds, 456 U.S. 955

(1982). See also Ella Bell & Stella Nkomo, Barriers to Workplace

Advancement Experienced by African Americans 3 (1994) (``African

Americans * * * are functionally segregated into jobs less likely to

be on the path to the top levels of management.'').

---------------------------------------------------------------------------

A study published earlier this year surveyed a broad range of

current labor market evidence and concluded that employment

discrimination is ``not a thing of the past.'' 69 Rather, race

still matters when it comes to determining access to the best

employment opportunities.70 Progress has been made, of course.

Yet, ``more than three decades after the passage of the Civil Rights

Act, segregation by race and sex continues to be the rule rather than

the exception in the American workplace, and discrimination still

reduces the pay and prospects of workers who are not white or male.''

71 The exclusionary conduct frequently is not deliberate, and the

people on top--who are mostly white and male--often believe that they

are behaving fairly. But old habits die hard: reliance on outmoded

stereotypes and group reputations, and the persistence of ``invisible

biases'' work to perpetuate a system that creates disadvantages in

employment for minorities today.72

---------------------------------------------------------------------------

\69\ Barbara Bergmann, In Defense of Affirmative Action 32-33

(1996).

\70\ Id. at 33.

\71\ Id. at 62.

\72\ Id. at 63-82.

---------------------------------------------------------------------------

The results of recent ``testing'' studies--in which equally matched

[[Page 26057]]

minorities and nonminorities seek the same job--are but one source of

evidence supporting this conclusion. These studies show, for instance,

that white males receive 50 percent more job offers than minorities

with the same characteristics applying for the same jobs.73 As

Justice Ginsburg described them, the testing studies make it abundantly

clear that ``[j]ob applicants with identical resumes, qualifications,

and interview styles still experience different receptions, depending

on their race.'' 74

---------------------------------------------------------------------------

\73\ Cross et al., Employer Hiring Practices: Differential

Treatment of Hispanic and Anglo Job Seekers (1990); Turner et al.,

Opportunities Denied, Opportunities Diminished: Discrimination in

Hiring (1991).

\74\ Adarand, 115 S. Ct. at 2135 (Ginsburg, J., dissenting).

---------------------------------------------------------------------------

Even when minorities are hired today, a ``glass ceiling'' tends to

keep them in lower-level positions. This problem was recognized by

Senator Dole who, in 1991, introduced the Glass Ceiling Act on the

basis of evidence ``confirming * * * the existence of invisible,

artificial barriers blocking women and minorities from advancing up the

corporate ladder to management and executive level positions.'' 75

That Act created the Federal Glass Ceiling Commission, which

subsequently completed an extensive study of the opportunities

available to minorities and women in private sector employment, and

concluded that ``at the highest levels of business, there is indeed a

barrier only rarely penetrated by women or persons of color.'' 76

Evidence released by the Commission paints the following picture:

---------------------------------------------------------------------------

\75\ Federal Glass Ceiling Commission, Good for Business: Making

Full Use of the Nation's Human Capital iii (1995) (citing 1991

statement by Senator Dole regarding 1991 Department of Labor Report

on the Glass Ceiling Initiative).

\76\ Id. at iii.

---------------------------------------------------------------------------

97 percent of the senior level managers in the nation's

largest companies are white.77

---------------------------------------------------------------------------

\77\ Id. at 9.

---------------------------------------------------------------------------

Black and Hispanic men are half as likely as white men to

be managers or professionals.78

---------------------------------------------------------------------------

\78\ Id. at iv-vi.

---------------------------------------------------------------------------

In the private sector, most minority managers and

professionals are tracked into areas of the company--personnel,

communications, affirmative action, public relations--that are not

likely to lead to advancement to the highest levels of

experience.79

---------------------------------------------------------------------------

\79\ Id. at 15-16.

---------------------------------------------------------------------------

Because private sector opportunities are so limited, most

minority professionals and managers work in the public sector.80

---------------------------------------------------------------------------

\80\ Id. at 13.

In light of the evidence that it considered, the Commission concluded

that, ``in the private sector, equally qualified and similarly situated

citizens are being denied equal access to advancement on the basis of

gender, race, or ethnicity.'' 81

---------------------------------------------------------------------------

\81\ Id. at 10-11.

---------------------------------------------------------------------------

In sum, there are two central means to gaining the experience

needed to operate a business. One is to be taught by a parent, passing

on a family-owned business. But the long history of discrimination and

exclusion by unions and employers means there are very few minority

parents with any such business to pass on.82 The second avenue is

to learn the skills needed through private employment. But the effects

of employment and trade union discrimination have posed a constant

barrier to that entryway into the business world.83

---------------------------------------------------------------------------

\82\ See, e.g., The Meaning and Significance for Minority

Business of the Supreme Court Decision in the City of Richmond v.

J.A. Croson: Hearing Before the Legislative and National Security

Subcomm. of the House Comm. on Government Operations, 100th Cong.,

2d Sess. 111 (1990) (statement of Manuel Rodriguez) (``[f]ew

[minorities] today have families from whom they can inherit'' a

business); H.R. Rep. No. 870, 103d Cong., 2d Sess. 15 n. 36 (1994)

(``[T]he construction industry is * * * family dominated. Many firms

are in their second or third generation operating structures.'');

New Haven Board of Aldermen, Minority and Women Business

Participation in the New Haven Construction Industry 10 (1990)

(``The exclusion of minorities from construction trades employment

before the 1970s resulted in an absence of a parent or family member

owning a construction business.'').

\83\ National Economic Research Associates, et al., The

Utilization of Minority and Women-Owned Businesses Enterprises by

Alameda County 176-77 (June 1992) (``A number of witnesses

identified historic union discrimination as a major limitation to

the formation and success of minority firms.''); Jaynes Associates,

Minority and Women's Participation in the New Haven Construction

Industry: A Report to the City of New Haven 34 (1989)

(discrimination has prevented minorities from ``gain[ing] experience

and skills'' necessary to operate a business and therefore has

``kept the pool of potential minority * * * contractors artificially

small'').

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2. Discrimination by Lenders

Without financing, a business cannot start or develop. There are

two main methods for a new business to raise capital. One is to solicit

investments from the public by selling stock in the company (public

credit); the other is to solicit investments from banks or other

lenders (private credit). Congress has heard evidence that ``since

small businesses have very limited or no access to public credit

markets, it is critically important that these entities, especially

minority-owned small businesses, have adequate access to bank credit on

reasonable terms and conditions.'' 84 The rub is that small

businesses owned by minorities find it much more difficult than small

firms owned by nonminorities to secure capital. Indeed, this is often

cited as the single largest factor suppressing the formation and

development of minority-owned businesses.85 The sad fact is that,

through countless hearings, Congress has learned that lending

discrimination plays a major role in this regard.86

---------------------------------------------------------------------------

\84\ Availability of Credit to Minority and Women-Owned Small

Businesses: Hearing Before the Subcomm. on Financial Institutions

Supervision, Regulation and Deposit Insurance of the House Comm. on

Banking, 103d Cong., 2d Sess. 6 (1994) (statement of Andrew Hove).

One reason that minorities starting small businesses are especially

reliant on bank lending is because they traditionally lack personal

wealth or access to other sources of private credit, such as loans

from family or friends. See generally Oliver & Shapiro, Black

Wealth/White Wealth (1993).

\85\ See The Wall Street Journal Reports: Black Entrepreneurship

R.1 (1992) (Roper Organization poll of 472 minority business owners

listed access to capital as the primary barrier to their business

development); United States Commission on Minority Business

Development, Final Report 12 (1992) (``One of the most formidable

stumbling blocks to the formation and development of minority

businesses is the lack of access to capital.'').

\86\ See Availability of Credit to Minority and Women Owned

Small Businesses: Hearing Before the Subcomm. on Financial

Institutions Supervision, Regulation and Deposit Insurance of the

House Comm. on Banking, 103d Cong., 2d Sess. 27 (1994) (statement of

Wayne Smith) (while perhaps more subtle than discrimination in

mortgage lending, discrimination in business lending exists); H.R.

Rep. No. 870, 103d Cong., 2d Sess. 7 (1994) (``There is a widespread

reluctance on the part of the commercial banking * * * and capital

markets to take the same risks with a [minority] entrepreneur that

they would readily do with a white one.''); Disadvantaged Business

Set-Asides in Transportation Construction Projects: Hearing Before

the Subcomm. on Procurement, Innovation, and Minority Enterprise

Development of the House Comm. on Small Business, 100th Cong., 2d

Sess. 26 (1988) (statement of Joann Payne) (``[b]ecause of the

ethnic and sex discrimination practiced by lending institutions, it

was very difficult for minorities and women to secure bank

loans.''); The Disadvantaged Business Enterprise Program of the

Federal-Aid Highway Act: Hearing Before the Subcomm. on

Transportation of the Senate Comm. on Environment and Public Works,

99th Cong. 1st Sess. 363 (1985) (statement of James Laducer) (North

Dakota banks ``refuse to lend monies to minority businesses from

nearby Indian communities''); see also Fiscal Economic and Social

Crises Confronting American Cities: Hearings Before the Senate Comm.

on Banking, Housing, and Urban Affairs, 102d Cong., 2d Sess. (1992);

Federal Minority Business Programs: Hearing Before the House Comm.

on Small Business, 102d Cong., 1st Sess. (1991); City of Richmond v.

J.A. Croson: Impact and Response: Hearing Before the Subcomm. on

Urban and Minority-Owned Business Development of the Senate Comm. on

Small Business, 101st Cong., 2d Sess. (1990); Minority Construction

Contracting: Hearing Before the Subcomm. on SBA, the General Economy

and Minority Enterprise Development of the House Comm. on Small

Business, 101 Cong., 1st Sess. (1989).

---------------------------------------------------------------------------

Over and over again, studies show that minority applicants for

business loans are more likely to be rejected and,

[[Page 26058]]

when accepted, receive smaller loan amounts than nonminority applicants

with identical collateral and borrowing credentials:

The typical white-owned business receives three times as

many loan dollars as the typical black-owned business with the same

amount of equity capital.87 In construction, white-owned firms

receive fifty times as many loan dollars as black-owned firms with

identical equity.88

---------------------------------------------------------------------------

\87\ Timothy Bates, Commercial Bank Financing of White and Black

Owned Small Business Start-ups, Quarterly Review of Economics and

Business, Vol. 31, No. 1, at 79 (1991) (``The findings indicate that

black businesses are receiving smaller bank loans than whites--not

because they are riskier, but, rather, because they are black-owned

businesses.'').

\88\ Grown & Bates, Commercial Bank Lending Practices and the

Development of Black-Owned Construction Companies, Journal of Urban

Affairs, Vol. 14, No. 1, at 34 (1992).

---------------------------------------------------------------------------

Minorities are approximately 20 percent less likely to

receive venture capital financing than white firm owners with the same

borrowing credentials.89

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\89\ Bradford & Bates, Factors Affecting New Firms Success and

their Use in Venture Capital Financing, Journal of Small Business

Finance, Vol. 2, No. 1, at 23 (1992) (``The venture capital market *

* * differentially restricts minority entrepreneurs from obtaining

venture capital.'').

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All other factors being equal, a black business owner is

approximately 15 percent less likely to receive a business loan than a

white owner.90

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\90\ Faith Ando, Capital Issues and the Minority-Owned Business,

The Review of Black Political Economy, Vol. 16, No. 4, at 97 (1988).

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The average loan to a black-owned construction firm is

$49,000 less than the average loan to an equally matched nonminority

construction firm.91

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\91\ Grown & Bates, Commercial Bank Lending Practices and the

Development of Black-Owned Construction Companies, Journal of Urban

Affairs, Vol. 14, No. 1, at 34 (1992).

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A comparable pattern of disparity appears in the most recent study

on lending to minority firms, which was released earlier this year.

That study surveyed 407 business owners in the Denver area. It found

that African Americans were 3 times more likely to be rejected for

business loans than whites.92 The denial rate for Hispanic owners

was 1.5 times as high as white owners.93 Disparities in the denial

rate remained significant even after controlling for other factors that

may affect the lending rate, such as the size and net worth of the

business.94 The study concluded that ``despite the fact that loan

applicants of three different racial/ethnic backgrounds in this sample

(Black, Hispanic and Anglo) were not appreciably different as

businesspeople, they were ultimately treated differently by the lenders

on the crucial issue of loan approval or denial.'' 95

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\92\ The Colorado Center for Community Development, University

of Colorado at Denver, Survey of Small Business Lending in Denver v.

(1996). See Michael Selz, Race-Linked Gap is Wide in Business-Loan

Rejections, Wall St. J., May 6, 1996, at B2.

\93\ The Colorado Center for Community Development, University

of Colorado at Denver, Survey of Small Business Lending in Denver v.

(1996).

\94\ Id.

\95\ Id.

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In sum, capital is a key to operating a business. Without

financing, no business can form. Once formed, restricted access to

capital impedes investments necessary for business development.

Minority-owned firms face troubles on both fronts. And in large part,

those troubles stem from lending discrimination.96 As President

Bush's Commission on Minority Business Development explained, the

result is a self-fulfilling prophecy:

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\96\ There is also evidence that minorities face discrimination

in mortgage lending. See Munnell et al., Mortgage Lending In Boston:

Interpreting the HMDA Data, 86 Am. Econ. Rev. 25 (1996) (finding

that minority applicants were 60 percent more likely to be rejected

for a mortgage loan than white males with identical characteristics,

including age, income, wealth, and education). This serves to

aggravate the problems that minorities face in seeking business

loans, because an important source of collateral for such loans to a

new firm is the home of the owner of the firm. Thus, mortgage

discrimination that impedes the ability of minorities to obtain

loans to purchase homes (or drives them to purchase less valuable

homes than they otherwise would) diminishes their ability to post

collateral for business loans.

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Our nation's history has created a ``cycle of negativity'' that

reinforces prejudice through its very practice; restraints on capital

availability lead to failures, in turn, reinforce a prejudicial

perception of minority firms as inherently high-risks, thereby reducing

access to even more capital and further increasing the risk of

failure.97

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\97\ United States Commission on Minority Business Development,

Final Report 6 (1992). While the nation has made great strides in

overcoming racial bias, the Commission's apt characterization of the

debilitating effects of lending discrimination mirrors the

description of the problem in a landmark monograph written over one-

half century ago:

The Negro Businessman encounters greater difficulties than

whites in securing credit. This is partially due to the marginal

position of negro business. It is also partially due to prejudicial

opinions among whites concerning business ability and personal

reliability of Negroes. In either case a vicious circle is in

operation keeping Negro business down.

Gunnar Myrdal, An American Dilemma: The Negro and Modern

Democracy 308 (6th ed. 1944).

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B. Discrimination in Access to Contracting Markets

Even when minorities are able to form and develop businesses,

discrimination by private sector customers, prime contractors, business

networks, suppliers, and bonding companies raises the costs for

minority firms, which are then passed on to their customers. This

restricts the competitiveness of minority firms, thereby impeding their

ability to gain access to public contracting markets.

1. Discrimination by Prime Contractors and Private Sector Customers

In the private sector, minority business owners face discrimination

that limits their opportunities to work for prime contractors and

private sector customers. All too often, contracting remains a closed

network, with prime contractors maintaining long-standing relationships

with subcontractors with whom they prefer to work.98 Because

minority owned firms are new entrants to most markets, the existence

and proliferation of these relationships locks them out of

subcontracting opportunities. As a result, minority-owned firms are

seldom or never invited to bid for subcontracts on projects that do not

contain affirmative action requirements.99 In addition, when

[[Page 26059]]

minority firms are permitted to bid on subcontracts, prime contractors

often resist working with them. This sort of exclusion is often

achieved by white firms refusing to accept low minority bids or by

sharing low minority bids with another subcontractor in order to allow

that business to beat the bid (a practice known as ``bid

shopping'').100 These exclusionary practices have been the subject

of extensive testimony in congressional hearings.101

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\98\ See New Haven Board of Aldermen, Minority and Women

Business Participation in the New Haven Construction Industry 10

(1990) (``The construction industry in New Haven remains to a large

extent a closed network of established contractors and

subcontractors who have close long-term relationships and are highly

resistant to doing business with `outsiders.'''); Brimmer &

Marshall, Public Policy and Promotion of Minority Economic

Development: City of Atlanta and Fulton County, Georgia, Pt. II, 61

(1990) (member of trade association testified that ``contractors

develop good working relationships with certain subcontractors and

tend to use them repeatedly, even in a few cases when their prices

are just a little bit higher than other subcontractors'').

\99\ See National Economic Research Associates, The State of

Texas Disparity Study: A Report to the Texas Legislature as

Authorized by H.B. 2626, 73rd Legislature 148 (1994) (``African

American owner * * * told by an employee of a prime contractor that

the contractor prefers to work with [nonminority-owned firms] and

works with [minority-owned firms] only when required to do so.'');

D.J. Miller & Associates, Disparity Study for Memphis/Shelby County

Intergovernmental Consortium VII-10 (1994) (``Majority companies

will not do business with [minority-owned businesses] because they

lack confidence in [them] and are not willing to go beyond those

businesses with whom they have a 10 to 15 year relationship.'');

Brown, Botz & Coddington, Disparity Study: City of Phoenix VIII-10

(July 1993) (``From the responses of a number of MBE/WBEs, another

form of marketplace discrimination that severely hampers their

access to the marketplace is denial of the opportunity to bid. This

may occur in a variety of ways, including, but not limited to, the

use of non-competitive procurement and selection procedures, as well

as intentional acts of rejection.''); National Economic Research

Associates, The Utilization of Minority and Woman-Owned Businesses

by Contra Costa County: Final Report ix, xiii (1992) (70 percent of

minority-owned firms reported seldom or never being used for

contracts that do not contain affirmative action requirements);

National Economic Research Associates, The Availability and

Utilization of Minority-Owned Business Enterprises at the

Massachusetts Water Resources Authority 74 (1992) (55 percent of

minority-owned construction firms reported that prime contractors

that use their firms on contracts with affirmative action

requirements seldom or never used their firms on projects that do

not contain such requirements); A Study to Identify Discriminatory

Practices in the Milwaukee Construction Marketplace 125 (Feb. 1990)

(``Only 18% of black contractors currently have private sector

contracts with primes with which they have worked on public sector

contracts with MBE requirements.''); see also Coral Constr. Co. v.

King County, 941 F.2d 910, 916 (9th Cir. 1991), cert. denied, 502

U.S. 1033 (1992) (noting reports that nonminority firms in the

county refused to work with minority firms); Cone Corp. v.

Hillsborough County, 908 F.2d 908, 916 (11th Cir.), cert. denied,

498 U.S. 983 (1990) (noting reports that when minority contractors

in the county ``approached prime contractors, some prime contractors

either were unavailable or would refuse to speak to [the minority

contractors]'').

\100\ See Associated Gen. Contractors v. Coalition for Economic

Equity, 950 F.2d 1401, 1416 (9th Cir. 1991), cert. denied, 503 U.S.

985 (1992) (noting reports that local minority firms were ``denied

contracts despite being the low bidder,'' and ``refused work even

after they were awarded the contracts as low bidder''); Cone Corp.

v. Hillsborough County, 908 F.2d 908, 916 (11th Cir.), cert. denied,

498 U.S. 983 (1990) (``[c]ontrary to their practices with non-

minority subcontractors,'' local prime contractors would take

minority subcontractors' bids ``around to various non-minority

subcontractors until they could find a non-minority to underbid [the

minority firm]''); BBC Research and Consulting, Regional Disparity

Study: City of Las Vegas IX-12 (1992) (low bidding Hispanic

contractor told that he was not given subcontract because the prime

contractor ``did not know him'' and that the prime ``had problems

with minority subs in the past''); BPA Economics, MBE/WBE Disparity

Study for the City of San Jose (Vol. 1) III-1 (1990) (describing

practices contributing to low utilization in construction contracts

as including ``bid shopping, insufficient distribution of notices of

contracts [and] insufficient lead time to prepare bids''); BBC

Research and Consulting, The City of Tucson Disparity Study IX-9-IX-

11 (June 1994) (same).

\101\ See, e.g., How State and Local Governments Will Meet the

Croson Standard: Hearing Before the Subcomm. on Civil and

Constitutional Rights of the House Comm. on the Judiciary, 100th

Cong., 1st Sess. 54 (1989) (statement of Marc Bendick) (``[t]he same

prime contractor who will use a minority subcontractor on a city

contract and will be terribly satisfied with the firm's performance,

will simply not use that minority subcontractor on a private

contract where the prime contractor is not forced to use a minority

firm.''); The Meaning and Significance for Minority Businesses of

the Supreme Court Decision in the City of Richmond v. J.A. Croson

Co.: Hearing Before the Legislation and National Security Subcomm.

of the Comm. on Government Operations, 101st Cong., 2d Sess. 57

(1990) (statement of Gloria Molina); id. at 100-101 (statement of

E.R. Mitchell); id. at 113 (statement of Manuel Rodriguez); A Bill

to Reform the Capital Ownership Development Program: Hearings on

H.R. 1807 Before the Subcomm. on Procurement, Innovation and

Minority Enterprise Development of the House Comm. on Small

Business, 100th Cong., 1st Sess. 593 (1987) (statement of Edward

Irons); Small Disadvantaged Business Issues: Hearings Before the

Investigations Subcomm. of the House Comm. on Armed Services, 100th

Cong., 1st Sess. 19-23 (1991) (statement of Parren Mitchell).

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An Atlanta study revealed evidence of the effect of discrimination

by private sector customers and prime contractors on minority

contracting opportunities. The study found that 93 percent of the

revenue received by minority-owned firms came from the public sector

and only 7 percent from the private sector. In sharp contrast, the

study found that nonminority firms receive only 20 percent of their

revenue from the public sector and 80 percent from the private

sector.102 In addition, the study reported that nearly half of the

black-owned firms worked primarily for minority customers, and minority

firms rarely worked in a joint venture with a white-owned firm.103

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\102\ Brimmer & Marshall, Public Policy and Promotion of

Minority Economic Development: City of Atlanta and Fulton County,

Georgia, Pt. I, 9-10 (1990). See also D.J. Miller & Associates, City

of Dayton: Disparity Study 183 (1991) (``A small percentage of Black

firms' revenues come from private sector projects.'').

\103\ Brimmer & Marshall, Public Policy and Promotion of

Minority Economic Development: City of Atlanta and Fulton County,

Georgia, Pt. III, 15, 34 (1990).

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Customer prejudices are sometimes graphically expressed. African

American business owners have reported arriving at job cites to find

signs saying ``No Niggers Allowed,'' 104 and ``Nigger get out of

here.'' 105 Other potential customers have simply refused to work

with a business after discovering that its owner is a minority. In a

recent encounter, a black business owner arriving at a home-site was

told to leave by a white customer, who commented ``you didn't tell me

you were black and you don't sound black.'' 106

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\104\ New Haven Board of Aldermen, Minority and Wom

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