January, 2001

Proposition 209: DBE Preferences DOA? Intending to put an end to race or gender based affirmative action programs of California state and local agencies, Californians approved Ballot Proposition 209 in November 1996. Proposition 209 amended the California State Constitution to prohibit race or gender based discrimination or preferential treatment by state or local agencies. While most of the public's attention focused on the effect of the constitutional amendment on the state's public school system, the construction industry's eyes turned to Proposition 209's effects on programs designed to encourage greater participation in public contracting by disadvantaged business enterprises ("DBEs"), and particularly minority business enterprises ("MBEs") and women business enterprises ("WBEs"). It took four (4) years for the issue to wind its way through the court system, but on November 30, 2000, the California Supreme Court issued its decision in Hi-Voltage Wire Works, Inc. v. City of San Jose, 24 Cal.4th 537, 101 Cal.Rptr.2d 653 (2000) ("Hi-Voltage"), finding that the City of San Jose's MBE/WBE Program (a traditional program requiring documented "outreach/good faith efforts" or attainment of "participatory goals") violated Proposition 209 and the recently amended California State Constitution. As detailed below, while Hi-Voltage confirms a significant change in traditional MBE/WBE requirements on public projects, it does not completely eliminate DBE programs in California. Prime contractors will still need to be aware of DBE requirements on California public works projects, and particularly on those projects which are the subject of federal funding. The City of San Jose's MBE/WBE Program At issue in Hi-Voltage was the City of San Jose's Nondiscrimination/ Nonpreferential Treatment Program Applicable to Construction Contracts (the "Program") which was enacted after the passage of Proposition 209, and believed by the City of San Jose to be compliant with the recently amended California State Constitution. Similar to traditional MBE/WBE "good faith efforts" and "participatory goal" programs, the City of San Jose's Program required bidding prime contractors to fulfill and document "outreach" to specifically directed MBE/WBE subcontractors or list a certain percentage of MBE/WBE subcontractors in its bid. Under the Program, a prime contractor's bid would be deemed non-responsive if the prime contractor did not fulfill and document compliance with either the "outreach" or "participation" requirements of the Program. Hi-Voltage Wire Works' Non-Responsive Bid In 1997, Hi-Voltage Wire Works, Inc. ("Hi-Voltage Wire Works"), a non-MBE/WBE prime contractor, submitted a bid to the City for a project it proposed to staff entirely with its own workforce. Because Hi-Voltage Wire Works did not intend to subcontract any portion of the project, it did not comply with the Program. Although Hi-Voltage Wire Works was the low bidder, its bid was rejected as non-responsive for failure to comply with the Program. Hi-Voltage Wire Works filed suit against the City, claiming that both the "outreach" and "participation" requirements of the Program violated Proposition 209. The Supreme Court's Decision Following victories for Hi-Voltage Wire Works in both the Superior Court and Court of Appeals, the California Supreme Court agreed to hear the City's appeal "to settle this important question of state constitutional law." Hi-Voltage, supra, 24 Cal. 4th at 544, 101 Cal.Rptr.2d at 658. As did the previous courts, the Supreme Court found that both the "outreach" and "participation" requirements of the City's Program violated Proposition 209 and were unconstitutional. . . .[W]e conclude, as did the Court of Appeal, that the City's Program is unconstitutional because the outreach option affords preferential treatment to MBE/WBE subcontractors on the basis of race or sex, and the participation option discriminates on the same bases against non-MBE/WBE subcontractors as well as general contractors that fail to fulfill either of the options when submitting their bids. Id. at 560, 101 Cal.Rptr.2d at 669. The Future of DBE Programs in California Through its decision in Hi-Voltage, the California Supreme Court left little doubt that traditional MBE/WBE "outreach/good faith efforts" and "participatory goal" programs instituted by California state or local public agencies will be found invalid and unconstitutional. However, Hi-Voltage did not render a death-blow to all DBE programs in California. First, the Supreme Court's ruling in Hi-Voltage was expressly limited by the facts of the case, and did not examine every issue presented by Proposition 209. Indeed, Hi-Voltage expressly leaves open the question of whether other "outreach" programs might pass constitutional muster. Although we find the City's outreach option unconstitutional under section 31, we acknowledge that outreach may assume many forms, not all of which would be unlawful. Our holding is necessarily limited to the form at issue here, which requires prime contractors to notify, solicit, and negotiate with MBE/WBE subcontractors as well as justify rejection of their bids. Plainly, the voters intended to preserve outreach efforts to disseminate information about public employment, education and contracting not predicated on an impermissible classification. Id. at 565, 101 Cal.Rptr.2d at 673. For example, because Proposition 209 only prohibits preferential treatment given on account of "race, sex, color, ethnicity or national origin," programs aimed at other groups (i.e., small businesses) are unaffected by Proposition 209. Public agencies desiring to increase the participation of small businesses (many of which are minority or women owned) may enact programs aimed at small business concerns without violating Proposition 209. Equally important is the fact that Proposition 209 only prohibits preferential treatment and discrimination, and would not prohibit a race and gender neutral "outreach" program aimed at widespread participation in public contracting. The following examples of "outreach" programs were cited by the Supreme Court as being constitutional: Expanded advertising of bidding opportunities in newspapers and trade journals Establishment of public contracting hotlines Creating websites to disseminate information to previously nonparticipating subcontractors The most interesting example of an "outreach" program that the Court hinted would comply with Proposition 209 was set forth by Justice Mosk in his concurring opinion. The "outreach" program proposed by Justice Mosk would require prime contractors to: (i) document solicitation of ten (10) subcontractors of its choosing (noting the race/sex of the owners of the subcontractor) in each trade area, (ii) document good faith negotiations with each subcontractor interested in the project, and (iii) state the reasons for the rejection or acceptance of the bids. Such an "outreach" program, according to Justice Mosk, would allow public agencies to monitor the prime contractor=s subcontracting practices for non-discriminatory behavior and would not violate Proposition 209. No doubt, such a program would also impose a tremendous burden on prime contractors. Second, the language of Proposition 209 includes an important limitation, specifically: Nothing in this section shall be interpreted as prohibiting action which must be taken to establish or maintain eligibility for any federal program, where ineligibility would result in a loss of federal funds to the state. California State Constitution, Article I, Section 31(e). In other words, the inability for California public agencies to institute and enforce traditional MBE/WBE programs will only exist on those projects which do not require MBE/WBE participation for eligibility for federal funding. Thus, for those projects which have traditionally been the subject of federal funding, such as transportation projects, traditional MBE/WBE programs will continue to exist. Conclusion The Supreme Court in Hi-Voltage clearly held that traditional MBE/WBE programs requiring outreach to, or participation by, MBEs/WBEs violate Proposition 209 and are unconstitutional. However, the decision in Hi-Voltage was expressly limited to the City of San Jose's "outreach" and "participation" requirements on a project that did not receive federal funding, and it is important to recognize the limitations of Proposition 209 and the Hi-Voltage decision. First, MBE/WBE programs will continue to exist on California public contracts receiving federal funding where such funding is conditioned on MBE/WBE participation. Second, Proposition 209 only invalidates preferential treatment based on race or gender, and DBE programs which are race and general neutral (i.e., small business programs) are unaffected by Proposition 209. Third, it appears that the Supreme Court will find race and gender neutral "outreach" programs aimed at monitoring prime contractor non-discrimination, such as that proposed by Justice Mosk, constitutional. The full impact of Proposition 209 is still evolving and will not be known until public agencies respond to Hi-Voltage with new programs aimed at ensuring non-discrimination in public contracting. By John L. Antracoli & Erin-Leigh Henderson