Derailing Affirmative Action

Randy Pech says the government's disadvantaged business programs discriminated against his company. This fall, the U.S. Supreme Court will decide if he's right.

That presumption was underscored by the Tenth Circuit of the U.S. Court of Appeals, which as recently as last year noted that discrimination by prime contractors, unions and lenders had "woefully impeded" the formation of qualified minority business subcontractors across the nation. Under a wide variety of state and federal programs, DBEs were targeted for government assistance to help counteract discrimination.

But while this benefited DBEs, the programs had a negative impact on other businesses. Adarand, for example, usually bid on about 250 jobs a year and received 30 to 50 percent of the work, according to Pech. By the mid-'80s, however, the company was losing about ten jobs a year that it would otherwise have received as the low bidder -- and that added up to as much as $1 million of lost revenue annually.

Pech didn't care for these DBE programs, but he figured there was no way they would last. Some politician would recognize what was going on and stop them, he thought. Somebody would raise a fuss. He never thought the task would fall to him. Finally, in 1987, at the urging of his wife, Val, he testified before the state transportation department, which had begun holding public hearings about its disadvantaged business program. The Pechs were among a handful of critics in a room full of affirmative-action boosters. Randy Pech remembers, "You kind of come out of there saying, 'Are we missing something, or are we so backward that 95 percent of the people are against this?'"

Adarand Constructors has won more than $2 million in state guardrail subcontracts this year.
Brett Amole
Adarand Constructors has won more than $2 million in state guardrail subcontracts this year.
Ken Lacey owns C&K, one of the four guardrail companies that compete against Adarand.
Brett Amole
Ken Lacey owns C&K, one of the four guardrail companies that compete against Adarand.

The Pechs continued to attend hearings every six months or so, and although they rarely found anyone who agreed with them, they didn't give up. "The alternative was to not do anything," says Randy.

"If not us," asks Val, "who?"

So the Pechs contacted state legislators, who they say agreed that the affirmative action programs were wrong, but they were not prepared to take a public stand against them. The only concrete suggestion they could give the Pechs was to adopt a common, rule-bending scam: Randy could simply transfer ownership of Adarand to Val, and then it would qualify as a disadvantaged business. The Pechs refused. "It's fraudulent," says Val. "That to us was absolutely fraudulent."

The Pechs acknowledged that DBE programs probably had been started with good intentions, but they believed the issue had swerved out of control. So the couple approached the Mountain States Legal Foundation, a nonprofit, public-interest law firm dedicated to free enterprise. Mountain States told the Pechs they needed to wait for the right time to take action: If Adarand lost a contract funded entirely by the state or the feds, and not a mixture of the two, the foundation could pinpoint a legal attack.

In 1989, the Pechs saw their opportunity.

The term "affirmative action" was first used by President John F. Kennedy in 1961, as part of his call for greater integration of workforces for projects financed with federal money. Many modern affirmative-action programs were set in motion following the passage of the federal Public Works and Employment Act of 1977, which authorized $4 billion to be awarded to state and local governments for public-works projects. One provision of the act required that at least 10 percent of each grant go to minority business enterprises, or MBEs (later renamed DBEs).

A common feature in federal affirmative-action programs in the construction arena was a Subcontracting Compensation Clause. Under an SCC, the U.S. Department of Transportation and its subsidiary agencies awarded a bonus worth 10 percent of the value of the work to be subcontracted to the prime contractor if it used a DBE. This enabled a contractor to lower its bid by 10 percent, because it could count on the feds making up the difference.

The Central Federal Lands Highway Division, a division of the federal transportation department, adopted the SCC program in 1979. Ten years later, the CFLHD initiated a contract for the Dolores River Project, a highway project along the San Juan National Forest in southwestern Colorado. The primary contract went to a company called Mountain Gravel, which in turn solicited bids for a variety of subcontractor work, including guardrail construction.

The 4.7-mile job would be a nice one for Adarand, and the company bid $104,000 for the work. Dolores-based Gonzales Construction, a disadvantaged business, bid $106,000 -- and got the job. Officials at Mountain Gravel later told Pech that if it hadn't been for the SCC, Adarand would have won the contract. At Pech's request, they agreed to put that in writing.

Pech took the documentation to Mountain States. This was a case the foundation could work with, because the contract was entirely a federal project. Mountain States agreed to take the case pro bono, which it has continued to do throughout the years of litigation, and it filed suit against the U.S. Department of Transportation, claiming the federal program was unconstitutional.

Other legal challenges to affirmative action were already being made. Croson v. Richmond was filed after the city of Richmond, Virginia, which had a long and abominable record of discrimination, set a minority contracting goal of 30 percent. At the time, 50 percent of the city's population was black, but less than 1 percent of construction contracts were going to minority contractors. The plaintiff in the case, a non-DBE contractor, had been the sole bidder for a job, yet his company wasn't selected. In 1989, he filed suit under the Equal Protection Clause of the Fourteenth Amendment.

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