As featured in the April 1, 2005 issue of Portland Business Journal in their special section Law Today, titled "Specialties and Practice Areas"

Women and Minorities in Construction

Representation of DBE, MBE, and WBE companies is an important niche in Oregon construction law. Even though public construction subcontracting goals for participation by disadvantaged, minority, and women-owned businesses are arguably illegal in many public contracting situations, the programs remain strong, and their participants often flourish. One of the most satisfying aspects of my legal career has been to help some of the region's most successful woman and minority-owned companies form, compete, and prosper in an era when equal access to business is an important value of the construction industry.

Set-asides and subcontracting goals involving companies that qualify as a disadvantaged business enterprise (DBE), minority business enterprise (MBE), or woman owned business enterprise (WBE) began about thirty years ago. Special preferences in contracting have been a highly charged political and social issue ever since. In 1995, the U.S. Supreme Court used Adarand Constructors, Inc. v. Peña to extend to all levels of government an earlier holding in the City of Richmond v. J.A. Croson Co. case requiring that race-based preference programs demonstrate:

• a compelling governmental interest in remedying prior discrimination on the part of the public body;
• that such discrimination cannot be remedied by race-neutral means; and
• that the remedy is narrowly tailored to the level of race discrimination found.

Adarand did not kill DBE programs. Instead, the Court established legal criteria for analyzing whether a given program is constitutional. Even though very few governmental bodies have justified their DBE goals through statistically valid disparity studies showing prior discrimination — let alone meeting the other two prongs of the Croson test — jump starting equal access to the construction business through goals and set-asides remains a cornerstone of public contracting in Oregon.

Certification of minority and woman-owned construction companies as disadvantaged business enterprises in Oregon is handled by the Office for Minority, Women and Emerging Small Business (OMWESB). This central clearing house "one-stop shop" implements state and federal rules and statutes to facilitate orderly certification and oversight of the DBE/MBE/WBE programs in Oregon.

To survive OMWESB scrutiny, and qualify for the full range of programs, the business must be owned and controlled by a disadvantaged person. To be "disadvantaged" one must be both socially and economically disadvantaged. Social disadvantage requires that the person has been subjected to racial or ethnic prejudice or cultural bias. Economic disadvantage requires both social disadvantage and impairment of the ability to compete in the free enterprise system. Ethnic minorities and women are presumed to be socially and economically disadvantaged, although, by definition, there is no economic disadvantage if the qualifying individual's personal net worth exceeds $750,000, exclusive of home and business.

The disadvantaged owner must make a real and substantial financial contribution in purchasing and/or capitalizing the company. Over the years, a series of published and unpublished opinions have refined what it means to "own" the business, and what a "real and substantial" financial contribution means. Successful certification may require a woman owner to separate her finances from those of her husband, revamping of corporate bylaws to meet requirements of control and resolution of deadlock, assurance that the disadvantaged owner is the highest paid person in the company, and a number counter-intuitive business practices and procedures.

Many of the special rules governing DBE/MBE/WBE businesses arose out of early abuses of the system. At one time it was not uncommon for qualified individuals to form an apparently disadvantaged business that was really a "front" for a majority-owned company, or merely a broker for work performed by others. Such abuses did not advance the goal of allowing minorities and women to enter the mainstream of the construction business. In response, state and federal agencies — including the Oregon legislature (with the support of the mainstream construction industry) — codified the areas of inappropriate conduct and created significant sanctions for rule violations.

Prohibited conduct includes the exercise of management and decision-making control over the internal operations of the company by someone other than the qualifying individual. The DBE/MBE/WBE business is also required to perform a "commercially useful function", necessitating not only that the business actually perform the work, but that the work is something for which there is a demand in the marketplace, and for which payment is not disproportionate to the work performed. Serving as a broker, or utilizing the prime contractor's workers or equipment, will run afoul of the commercially useful function rules. The sanctions for violating these standards can be monetarily significant to both the majority contractor and the DBE/MBE/WBE business, and may also result in having the right to bid on public contracts suspended.

Although the statutes, rules, and regulations governing minority and women-owned businesses can be challenging, and opinions about the equal access to business programs strongly held, the practice area is important and very rewarding.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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