## F I L E D United States Court of Appeals Tenth Circuit 

### SEP 25 2000 

### PATRICK FISHER Clerk PUBLISH
UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

ADARAND CONSTRUCTORS, INC., a Colorado corporation, Plaintiff - Appellee, v. RODNEY E. SLATER, Secretary of the Department of Transportation; KENNETH R. WYKLE, Administrator of the Federal Highway Administration; VINCENT F. SCHIMMOLLER, Administrator of Region VIII of the Federal Highway Administration; LARRY C. SMITH, Engineer of the Central Federal Lands Highway Division, Defendants - Appellants,

PACIFIC LEGAL FOUNDATION; ASSOCIATED GENERAL CONTRACTORS OF AMERICA, INC.; EMPLOYMENT LAW CENTER; MINORITY BUSINESS ENTERPRISE LEGAL DEFENSE AND EDUCATION FUND, INC., Amici Curiae. No. 97-1304

OPINION ON REMAND- 2 - Appeal from the United States District Court

for the District of Colorado (D.C. No. 90-K-1413)

Leslie A. Simon, Attorney, United States Departmentof Justice, (Nancy E. McFadden, General Counsel, Paul M. Geier, AssistantGeneral Counsel for Litigation, Edward V.A. Kussy, Acting Chief Counsel , Federal Highway Administration, Sara McAndrew, Trial Attorney, Pete r S. Smith, Trial Attorney, of the United States Department of Transportation, Washington, D.C.; Isabelle Katz Pinzler, Acting Assistant Attorney General, Wi lliam R. Yeomans, Acting Deputy Assistant Attorney General, Bill Lann Lee, A cting Deputy Assistant Attorney General, Thomas E. Perez, Deputy AssistantAttorney General, Mark L. Gross, Attorney, Louis E. Peraertz, Attorney, of th e United States Department of Justice, Washington, D.C., with her on the briefs), for Defendants - Appellants. William Perry Pendley (Todd S. Welch and J. Scott D etamore, with him on the briefs), Mountain States Legal Foundation, Denver, Colorado, for Plaintiff - Appellee. Robin L. Rivett, Sharon L. Browne, and Stephen R. M cCutcheon, Jr., for Pacific Legal Foundation, Sacramento, California, filed an amicus curiae brief. Julian A. Gross and William C. McNeill III, Legal A id Society of San Francisco, for the Employment Law Center, San Francisco, Calif ornia, and Franklin M. Lee and Tracie Anita Watkins for the Minority Business Enterprise Legal Defense and Education Fund, Inc., Washington, D.C., filed an am icus curiae brief. Michael E. Kennedy, General Counsel for Associated General Contractors of America, Inc., and John G. Roberts, Jr., David G. L eitch, and H. Christopher Bartolomucci of Hogan & Hartson, L.L.P., Washington , D.C., filed an amicus curiae brief for Associated General Contractors of America, Inc.

Before LUCERO , Circuit Judge, McKAY , Senior Circuit Judge, and MURPHY , Circuit Judge.

LUCERO , Circuit Judge.-3-

Following the Supreme Court’s vacation of our dismi ssal on mootness grounds, we address the merits of this appeal, name ly, the federal government’s challenge to the district court’s grant of summary judgment to plaintiff-appellee Adarand Constructors, Inc. In so doing, we must re solve the constitutionality of the use in federal subcontracting procurement of th e Subcontractor Compensation Clause (“SCC”), which employs race-conscious presumptions designed to favor minority enterprises and other “disadvantaged busin ess enterprises” (“DBEs”). Our evaluation of the SCC program utilizes the “str ict scrutiny” standard of constitutional review enunciated by the Supreme Cou rt in an earlier decision in this case, Adarand Constructors, Inc. v. Peña , 515 U.S. 200 (1995) (“ Adarand
III ”). In his concurring opinion in Adarand III , Justice Scalia succinctly articulated this Nation’s guiding aspiration: “In the eyes of government, we are just one race here. It is American.” Id. at 239 (Scalia, J., concurring in part and concurring in the judgment). Until that future daywhen national aspiration and national reality converge, the Court has made clearthat under certain circumstances the federal government may use race-c onscious means to remedy the effects of historical and present-day racial di scrimination. Inherently, we resolve whether the two branches of the government—the Legislative and the-4-

Executive—that have chosen to hasten that future day have met the constitutional standards enunciated by the third branch. Since th e district court last considered this case, and after lengthy congressional hearings in response to the Adarand III decision, the federal government has significantly changed the way in which it implements the challenged race-conscious programs i n highway construction contracting. It is ultimately our considered judgm ent that the SCC program and the DBE certification programs as currently structu red, though not as they were structured in 1997 when the district court last ren dered judgment, pass constitutional muster: They are narrowly tailored to serve a compelling governmental interest. Thus, exercising jurisdicti on pursuant to 28 U.S.C. § 1291, we reverse the judgment of the district cou rt below.
I The Supreme Court has characterized the facts of th is case as “fairly straightforward,” Adarand III , 515 U.S. at 206, summarizing the relevant facts a s follows: In 1989, the Central Federal Lands Highway Division (CFLHD), which is part of the United States Departm ent of Transportation (DOT), awarded the prime contract fo r a highway construction project in Colorado to Mountain Gravel & Construction Company. Mountain Gravel then solicited bids from subcontractors for the guardrail portion of the contract. Adarand , a Colorado-based highway construction company specializing in guardr ail work, submitted the low bid. Gonzales Construction Company also submitted a bid.-5-

Id. at 205. At the time, Gonzales was certified as a small business owned and controlled by socially and economically disadvantag ed individuals, while Adarand was not. See id. This litigation centers around the SCC, a clause which was included in CFLHD’s prime contract with Mountai n Gravel. The SCC provided “that Mountain Gravel would receive additi onal compensation if it hired subcontractors certified as small businesses contro lled by ‘socially and economically disadvantaged individuals.’” Id. (citation omitted). Adarand submitted an affidavit stating that but forthe additional compensation Mountain Gravel obtained by hiring Gon zales, a certified business, it would have hired Adarand for the guardrail work. See id. Adarand sued, arguing that the use of a race-conscious presumptio n in determining who is a socially and economically disadvantaged individual for purposes of the SCC violated its Fifth Amendment equal protection rights. See id. at 205-06. In Adarand Constructors, Inc. v. Skinner , 790 F. Supp. 240 (D. Colo. 1992) (“ Adarand I ”), the district court addressed Adarand’s challeng e to “the DBE program as administered by the CFLHD within Colorado.” Id. at 241 (footnote omitted). Without focusing specifically on the SCC and its operation, the court in Adarand I upheld as constitutional, under intermediate scrut iny, statutory provisions defining DBEs and setting goal s for DBE participation in government contracting. See id. at 241, 244-45 (relying on Fullilove v.-6-

Klutznick , 448 U.S. 448, 480 (1980); Metro Broadcasting, Inc. v. FCC , 497 U.S. 547, 598-601 (1990)). In Adarand Constructors, Inc. v. Peña , 16 F.3d 1537, 1539 (10th Cir. 1994) (“Adarand II ”), this Court affirmed the district court’s judgme nt on different grounds . We concluded that Adarand had standing to chall enge the SCC program as it pertains to minority business enterprises butnot women-owned business enterprises and addressed our inquiry to the SCC as a program implemented pursuant to § 502 of the Small Business Act of 1958 (“SBA”), Pub. L. No. 85- 536, 72 Stat. 384 (codified as amended, 15 U.S.C. § 631 et seq. ). See Adarand
II , 16 F.3d at 1543 (citing 15 U.S.C. § 644(g)). Lik e the district court, we relied on Metro Broadcasting , 497 U.S. at 565, applying intermediate scrutiny t o the SCC and holding “the SCC program . . . constitution al because it is narrowly tailored to achieve its significant governmental pu rpose of providing subcontracting opportunities for small [DBEs], as r equired under section 502 of the [SBA].” Adarand II , 16 F.3d at 1547. The Supreme Court reversed. It overruled Metro Broadcasting and cast doubt on Fullilove insofar as that case might be read to apply less than strict scrutiny to federal programs involving racial classifications. See Adarand III ,1 The principal focus of Adarand III was not an analysis of the particular

statutes and regulations before the Court under its newly-announced standard, but the far more abstract question of whether “benign” race-conscious programs are subject to the “strict scrutiny” doctrine, a questi on which the majority answered in the affirmative. See Adarand III , 515 U.S. at 225-27. In its enunciation of the strict scrutiny standard and its overruling of Metro Broadcasting , the Court accorded very little attention to the application o f the strict scrutiny test to the particular programs at issue in this case. -7- 515 U.S. at 227, 235. 1 On remand, the district court held the SCC program unconstitutional, finding it insufficiently narrowly tailored to further a compelling interest because the program was both over- and under-inclusive, inc luding minority individuals who were not in fact disadvantaged and excluding no n-minority individuals who were disadvantaged. See Adarand Constructors, Inc. v. Peña , 965 F. Supp. 1556 (D. Colo. 1997) (“ Adarand IV ”). With regard to the Court’s pronouncement in Adarand III that strict scrutiny is not “fatal in fact,” the d istrict court found it “difficult to envisage a race-based classification” that would ever be narrowly tailored, thereby effectively pronouncing strict scrutiny fatal in fact. Id. at 1580. The district court granted summary judgment to Adar and. Following Adarand IV , we considered the government’s contention that subsequent events had rendered the case moot. See Adarand Constructors, Inc. v. Slater , 169 F.3d 1292 (10th Cir. 1999) (“ Adarand V ”). Specifically, because Adarand applied for and was granted DBE certificati on by the Colorado-8-

Department of Transportation (“CDOT”), we concludedthat Adarand could no longer demonstrate an injury stemming from the SCC sufficient to confer standing. See id. at 1296-97. Hence, the case was moot. See id. The Supreme Court disagreed. See Adarand Constructors, Inc. v. Slater , 120 S. Ct. 722 (2000) (“ Adarand VI ”). Relying on its decision in Friends of the Earth, Inc. v. Laidlaw Environmental Services (TOC), Inc. , 120 S. Ct. 693 (2000), handed down on the same day as its Adarand VI remand, the Court stated it had “recently noted” that a possibility of a def endant “engag[ing] in (or resum[ing]) harmful conduct” might be too speculati ve to confer standing but not too speculative to overcome mootness. Adarand VI , 120 S. Ct. at 726 (quoting Friends of the Earth , 120 S. Ct. at 699). The Court held it was “far f rom clear” that DOT would not initiate proceedings to revoke A darand’s status and because “it is impossible to conclude that respondents have borne their burden of establishing that it is ‘absolutely clear that the allegedly wrongful behavior could not reasonably be expected to recur,’ petitioner’s cause of action remains alive.” Id. at 726-27 (quoting Friends of the Earth, Inc. , 120 S. Ct. at 708). With the reversal of our judgment in Adarand V , this appeal was remanded to us for consideration on the merits. See id. at 726-27. In the discussion that follows, we first dispose of three threshold concerns: (1) a determination of the appropriate versions of the statutes and regulations at-9-

issue in this case; (2) the scope of our review of the SCC program; and (3) a brief overview of the relevant statutory framework and of the SCC program. Then, in Part III we subject the SCC program to strict scrut iny, examining the compelling interest underlying the program as well as its narr ow tailoring, and addressing specific issues that the Supreme Court in Adarand III directed that we consider. Finally, in Part IV, we briefly discuss the governm ent’s request that we consolidate with the instant action a pending, pote ntially related case, originally filed under the name Adarand Constructors, Inc. v. Romer , No. CIV. A. 97-K1351 (D. Colo. June 26, 1997).
II We begin by addressing the scope of our inquiry in this appeal. It is essential that we decide which versions of the statutes and regulations at issue are properly before us, as well as which portions of th ose statutes and regulations are relevant to this appeal. Several statutes are implicated in this case, notab ly §§ 8(a), 8(d) and 502 of the SBA (codified as amended at 15 U.S.C. §§ 637 (a), (d), and 644(g)), § 106(c) of the Surface Transportation and Uniform Relocation Assistance Act of 1987 (“STURAA”), Pub. L. No. 100-17, 101 Stat. 132, 145 (1987), § 1003(b) of the Intermodal Surface Transportation Efficiency Ac t of 1991 (“ISTEA”), Pub. L. No. 102-240, 105 Stat. 1914, 1919-21 (1991), § 1101(b) of the Transportation2We have therefore requested and received suppleme ntary briefing from

the parties on intervening changes in the statutoryand regulatory scheme at issue in the instant action.

3 Although Adarand also seeks “such other and furth er relief as to the Court seems just and equitable,” this highly genera l language does not constitute a prayer for retrospective relief under the circums tances of this case. (Appellants’ App. at 10.) Moreover, on appeal Adar and seeks to uphold the district court’s grant of summary judgment and decl aratory and injunctive relief and has not filed a cross-appeal seeking damages oranother form of retrospective relief. -10- Equity Act for the 21st Century of 1998 (“TEA-21”), Pub. L. No. 105-178, 112 Stat. 107, 113 -15 (1998), as well as their accompanying administr ative regulations.
A. The Versions To Be Considered With regard to the foregoing statutes, regulations, and SCC, the parties disagree as to whether we may properly consider int ervening changes in the law between 1992 when Adarand I was handed down and the present. 2Our resolution of that dispute is ultimately compelled by the logic of the well-settled precedent of both the Supreme Court and this Circui t. Adarand seeks only prospective declaratory and injunctive relief. See Adarand III , 515 U.S. at 210. 3 Application of the intervening statutory and regulatory changes to this type of claim does not implicate any presumption against th e retroactive application of
statutes. See Landgraf v. USI Film Prods. , 511 U.S. 244, 273 (1994) (“Even absent specific legislative authorization, applicat ion of new statutes passed after-11-

the events in suit is unquestionably proper in manysituations. When the intervening statute . . . affects the propriety of prospective relief, application of the new provision is not retroactive.”); Jurado-Gutierrez v. Greene , 190 F.3d 1135, 1149 (10th Cir. 1999) (applying Landgraf ), cert. denied sub nom. Palaganas-Suarez v. Greene , 120 S. Ct. 1539 (2000); see also Jones v. Hess , 681 F.2d 688, 695 n.9 (10th Cir. 1982) (“Generally an appellate court must apply the law in effect at the time it renders its decision w here a change in law occurs while a case is on direct appeal, although there may well be an exception to this rule to prevent manifest injustice.” (citations omitted)); McMahan v. Hunter , 179 F.2d 661, 663 (10th Cir. 1950) (“[W]here a rule of law was changed after the decision in the trial court but before the decision in the Appellate Court, the decision in the Appellate Court must be according t o the new law.”); 13A Charles Alan Wright et al., Federal Practice & Procedure, Jurisdiction 2d § 3533.6 (1984) (“Ordinarily, courts . . . apply[] the law in force at the time of decision, unless a good reason appears for ignoring the change.”); cf. Kaiser Aluminum & Chem. Corp. v. Bonjorno , 494 U.S. 827, 836-37 (1990). To ignore interveni ng changes in the statutory and regulatory framework underlyin g this litigation would be to shirk our responsibility to strictly scrutinize the real-world legal regime against which Adarand seeks prospective relief. The change s in the law are squarely before us today, and we discern no reason to leave their scrutiny to future4Thus, we refuse the government’s invitation to ig nore the SCC program

by virtue of its citation to a March 29, 2000 memor andum from the Manager of the Federal Lands Program indicating that the SCC i s no longer in use in federal highway construction procurement contracts. We lik ewise reject the government’s argument, relying on Lawrence v. Chater , 516 U.S. 163, 165-66 (1996), that we must remand this case to the distri ct court for consideration of intervening statutory and regulatory changes. The government’s reliance on Lawrence is misplaced: That case involved the Supreme Court’s exercise of its power to “grant certiorari, vacate the judgment bel ow, and remand the case” to a “lower federal court ” in light of intervening regulatory changes, and n ot the power of a lower federal court to decide a case on remand from the Supreme Court. Id. (emphasis added). In the present case, the partie s have briefed intervening changes in the law, there are no disput ed factual issues, and we see no reason to delay this already protracted litigati on by remanding to the district (continued...) -12- litigation, in effect prolonging the instant litigation and fostering “both a wasteful expenditure of resources by courts and lit igating parties and the gradual undermining of public confidence in the judiciary—in short, Dickens’s Jarndyce v. Jarndyce syndrome.” McIlravy v. Kerr-McGee Coal Corp. , 204 F.3d 1031, 1035 (10th Cir. 2000). However, considering that we are reviewing a decisi on of the district court below that relied on older versions of the statutes , regulations, and SCC, and because we are mindful that future statutory and re gulatory changes may cause the government to “engage in (or resume) [the] harm ful conduct” in question earlier in this litigation so as to militate against a finding of mootness, Adarand
VI , 120 S. Ct. at 726 (quoting Friends of the Earth , 120 S. Ct. at 699), we consider the statutory and regulatory framework in its prior stages as well. 4See4 (...continued)

court, especially considering the district court’s statement that it would be “difficult to envisage a race-based classification” that would ever be narrowly tailored, thereby effectively pronouncing strict scrutiny fatal in fact, Adarand IV 965 F. Supp. at 1580, a view which we reject in the discussion that follows. -13- also Northeastern Fla. Chapter of Associated Gen. Contr actors of Am. v. City of Jacksonville , 508 U.S. 656, 662 (1993) (“[A] defendant’s volunt ary cessation of a challenged practice does not deprive a federal co urt of its power to determine the legality of the practice.” (quoting City of Mesquite v. Aladdin’s Castle, Inc. , 455 U.S. 283, 289 (1982))). It is not fanciful to suggest that the government may retreat to prior practice, but if the government di d so, this opinion expressly holds that such an action would be unconstitutional for the reasons discussed below. B. The Scope of the SCC Program Under Scrutiny We next clarify the scope of the SCC program under review. In that regard, we are bound by the Supreme Court’s ruling on Adarand’s standing in Adarand III as law of the case. Based on its conclusion that “CFLHD is likely to let contracts involving guardrail work that contain a[n] [SCC] at least once per year in Colorado, that Adarand is very likely to bi d on each such contract, and that Adarand often must compete for such contracts against small disadvantaged businesses,” the Court held Adarand has standing to challenge “the race-based-14-

rebuttable presumption used in some certifications under the Subcontracting Compensation Clause.” Adarand III , 515 U.S. at 212-13 (citation omitted). We recognize, however, that there are programs thatthe Supreme Court did

not hold Adarand has standing to challenge. First is the § 8(a) program, discussed below. See 15 U.S.C. § 637(a). Subsection 8(a) does not invo lve the use of SCCs, nor has Adarand made any showing that it has been injured by noninclusion in the § 8(a) program. Second, we specifically held in Adarand II that Adarand has not shown standing to challenge “the pr ovisions of the SCC program pertaining to women-owned business enterpri ses (WBE).” 16 F.3d at 1543. This conclusion was left undisturbed by the Supreme Court, see Adarand
III , 515 U.S. at 210-12, and remains law of the case, and we discern no clear error in that prior decision or manifest injustice sufficient to warrant overriding the law of the case doctrine, see Agostini v. Felton , 521 U.S. 203, 236 (1997); McIlravy , 204 F.3d at 1034-35. Furthermore, our decision in Adarand II , as well as the Supreme Court’s remand in Adarand III , was limited to the question of the constitutionality of the use of a race-conscious pr esumption in the SCC program.
See Adarand III , 515 U.S. at 237-38. This case does not involve, nor has Adarand ever demonstrated standing to bring, a gene ralized challenge to the policy of maximizing contracting opportunities for small disadvantaged businesses set forth in 15 U.S.C. §§ 637 and 644(g) , or to the various goals for-15-

fostering the participation of small minority-ownedbusinesses promulgated pursuant to 15 U.S.C. § 644(g), also discussed belo w. Nor are we presented with any indication that Adarand has standing to challen ge paragraphs (4)-(6) of 15 U.S.C. § 637(d). Finally, we agree with the govern ment that throughout the course of this litigation, Adarand’s challenge has been to the use of the SCC in direct federal highway procurement contracts entere d into by the CFLHD with funds appropriated under STURAA, ISTEA, and TEA-21. In the discussion that follows, we therefore address the constitutionalityof the relevant statutory provisions as applied in the SCC program, as well as their facial constitutionality. To the extent the district court’s judgment can be construed as having reached statutes, programs, and issues beyond the scope of Adarand’s standing and the Supreme Court’s remand in Adarand III , we reverse that judgment.

C. Overview of the Statutory Framework and the SCC We are now in a position to offer a brief overview of the statutory framework and the SCC underlying this litigation.

The [SBA] . . . declares it to be “the policy of the United States that small business concerns, [and] small bu siness concerns owned and controlled by socially and economically d isadvantaged individuals, . . . shall have the maximum practicab le opportunity to participate in the performance of contracts let by any Federal agency.” § 8(d)(1), 15 U.S.C. § 637(d)(1). The [S BA] defines “socially disadvantaged individuals” as “those who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regar d to their individual qualities,” § 8(a)(5), 15 U.S.C. § 637(a)(5), and it defines-16-

“economically disadvantaged individuals” as “those socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminish ed capital and credit opportunities as compared to others in the s ame business area who are not socially disadvantaged.” § 8(a)(6)(A), 15 U.S.C. § 637(a)(6)(A). In furtherance of the policy stated in § 8(d)(1), the Act establishes “[t]he Government-wide goal for partici pation by small business concerns owned and controlled by socially and economically disadvantaged individuals” at “not les s than 5 percent of the total value of all prime contract and subcon tract awards for each fiscal year.” 15 U.S.C. § 644(g)(1). It also requires the head of each federal agency to set agency-specific goals fo r participation by businesses controlled by socially and economically disadvantaged individuals. Id. Adarand III , 515 U.S. at 206. These goals must “realisticallyreflect the potential” of small disadvantaged businesses to perform subcontracts. See 15 U.S.C. § 644(g)(2), (h)(1). Under both § 8(a) and § 8(d), subcontractors can be certified as DBEs, qualifying them for the SCC prog ram at issue in this litigation. STURAA, ISTEA, and TEA-21, the transportation appro priations statutes at issue in this case, incorporate the presumption of disadvantage from SBA § 8(d). See STURAA § 106(c)(2)(B), ISTEA § 1003(b)(2)(B); TEA- 21 § 1101(b)(2)(B) (providing that the term “socially and economically disadvantaged individuals” has the meaning of such term under SBA § 8(d) “and relevant subcontracting regulations promulgated pur suant thereto.”). STURAA, ISTEA, and TEA-21 all set forth aspirational goals of 10% DBE participation in5 The relevant statutes have remained unchanged in all respects material to

this litigation from 1992 to the present, except as noted in the Appendix to this opinion. -17- federal subcontracting. See STURAA § 106(c)(1); ISTEA § 1003(b)(1); TEA-21 § 1101(b)(1). 5 The SCC is a means of implementing the various statutory goals and directives at issue in this litigation. This claus e provides a financial bonus of up to 10% of an approved subcontract (no more than 1.5 % or 2% of the original contract, depending on how many DBEs are employed) to a prime contractor for employing a DBE. ( See Appellants’ App. at 55-56.) Subcontractors must b e certified as DBEs by “the SBA, a state highway agen cy, or some other certifying authority acceptable to the contracting officer” pu rsuant to the “[§] 8(a) or [§] 8(d) program, or certification by a State under the DOT regulations.” Adarand
III , 515 U.S. at 209-10. In November of 1997, the SCC at issue in Adarand IV was revised, leaving the basic framework in place. At present, t he government maintains, and Adarand does not dispute, that SCCs are no longer in use. ( See Appellants’ Supp. Br. Attach. 1.) A discussion of the complex, cumbersome, and changi ng regulations promulgated pursuant to the foregoing statutes, as well as a more thorough summary both of the statutory framework itself and of the SCC, is incorporated as an Appendix to this opinion. Otherwise, changes in the relevant portions of-18-

the regulations and SCC are discussed in our applic ation of the strict scrutiny standard that follows.
III In reviewing the district court’s grant of summary judgment to Adarand, we employ our customary standard of review: We review a grant of a motion for summary judgment de novo, applying the same legal standard used by the distri ct court. See Byers v. City of Albuquerque , 150 F.3d 1271, 1274 (10th Cir. 1998). Summary judgment is appropriate “if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine i ssue as to any material fact and that the moving party is entitledto judgment as a matter of law.” Fed. R. Civ. P. 56(c). We view th e evidence, and all reasonable inferences drawn therefrom, in the lightmost favorable to the nonmoving party. See Byers , 150 F.3d at 1274. McGarry v. Board of County Comm’rs , 175 F.3d 1193, 1198 (10th Cir. 1999). At the very outset, before immersing ourselves in the intricacies of the issues before us, we emphasize our substantial agreement with muc h of the district court’s judgment as it pertains to the versions of the statutes and regulations in place in 1996. Insofar as the court’s judgment does not exc eed the proper scope of its review and with the significant caveat that we disa gree both with the court’s conclusion regarding the fatality in fact of strictscrutiny and with its ultimate result in light of the current version of the relev ant regulations, we take the district court’s view of the matter. And we share wholeheartedly its sentiment-19-

that the time has come for this litigation to come to an end. See Adarand IV , 965 F. Supp. at 1558. A. Evolution of Strict Scrutiny Standards The Supreme Court’s declarations in the affirmative action area are characterized by plurality and split opinions and b y the overruling of precedent. This fractured prism complicates the task of lower courts in both identifying and applying an appropriate form of equal protection re view. We therefore begin our analysis with a brief review of what we understand to be the current state of the law in this area. Twenty years ago, the Supreme Court addressed a dir ect precursor of the statutes at issue today in Fullilove , 448 U.S. at 448. Although Fullilove failed to produce a majority opinion, six Justices voted to a ffirm the program at issue—the “minority business enterprise” (“MBE”) provision of the Public Works Employment Act of 1977, Pub. L. 95-28, 91 Stat. 116, § 103(f)(2). See Fullilove , 448 U.S. at 453. The MBE provision required that, subjectto waiver by the Secretary of Commerce, “no grant shall be ma de under this Act for any local public works project unless the applicant giv es satisfactory assurance to the Secretary [of Commerce] that at least 10 per centumof the amount of each grant shall be expended for minority business enterprises.” Id. at 454 (quoting 42 U.S.C. § 6705(f)(2) (1976 ed., Supp. II)). For purposes of the MBE set-aside,-20-

MBEs were defined as businesses owned and controlle d by individuals who could be classified as “Negroes, Spanish-speaking, Orient al, Indians, Eskimos, and Aleuts.” Id. (quoting 42 U.S.C. § 6705(f)(2)). The MBE programwas a mandatory set-aside; under the relevant regulations , a request for waiver could be granted, among other circumstances, if a minority b usiness enterprise quoted an “unreasonable” price. Id. at 470-71 (internal quotation and citation omitted ). Chief Justice Burger, joined by Justices White and Powell, applied what appears to be a more deferential standard than whatthe Court often terms “strict scrutiny”: A program that employs racial or ethnic criteria, e ven in a remedial context, calls for close examination; yet we are bo und to approach our task with appropriate deference to the Congress , a co-equal branch charged by the Constitution with the power t o “provide for the . . . general Welfare of the United States’ and‘to enforce, by appropriate legislation,” the equal protection guar antees of the Fourteenth Amendment. Id. at 472 (quoting U.S. Const., art. I, § 8, cl. 1); see also City of Richmond v.
J.A. Croson Co. , 488 U.S. 469, 487 (1989) (Op. of O’Connor, J.) (“ The principal opinion in Fullilove , written by Chief Justice Burger, did not employ ‘ strict scrutiny’ or any other traditional standard of equa l protection review.”). Adarand III , 515 U.S. at 235, cast doubt on Fullilove . “[T]o the extent (if any) that Fullilove held federal racial classifications to be subject to a less rigorous standard, it is no longer controlling. Bu t we need not decide today6We note that the Adarand III Court’s qualified repudiation of Fullilove

would appear to leave in place other aspects of that case, most notably its factual determinations regarding congressional findings andthe legislative history of the SBA discussed in the Chief Justice’s opinion and fu rther elaborated upon in the concurring opinion of Justice Powell. See Croson , 488 U.S. at 488 (Op. of O’Connor, J.) (“In reviewing the legislative history behind the Act, the principal opinion focused on the evidence before Congress that a nationwide history of past discrimination had reduced minority participat ion in federal construction grants.” (citing Fullilove , 448 U.S. at 458-67 (Op. of Burger, C.J.)); id. at 489 (citing the concurring opinion of Powell, J., in Fullilove ). Thus, where Fullilove ’s factual findings bear on the factual underpinnin gs of this case, we so note in the discussion that follows. The separate question of whether those findings are adequately supported by evidence, pursuant to Adarand III ’s application of Croson to federal race-conscious programs, is one we cons ider at length in Subsection B below. -21- whether the program upheld in Fullilove would survive strict scrutiny as our more recent cases have defined it.” Id. We interpret that statement in Adarand
III as precluding reliance on Fullilove for either the standard of review or the result in this case. Otherwise, the programs at issue here would almos t certainly pass muster under the Fullilove standard because, in furtherance of substantially similar goals, the programs before us impose a sign ificantly more flexible and less intrusive remedy—a voluntary subsidy as oppose d to a fixed set-aside subject to waiver. 6 In 1989 the Court produced a majority for a portion of an affirmative action opinion. See Croson , 488 U.S. at 469. In Croson , the Court struck down under strict scrutiny a municipal plan requiring “p rime contractors to whom the city awarded construction contracts to subcontract at least 30% of the dollar7D espite overruling Metro Broadcasting and casting doubt on Fullilove ,

the majority opinion in Adarand III firmly rejected the suggestion “that any Member of this Court has repudiated in this case hi s or her previously expressed views on the subject” of Congress’s powers under § 5 of the Fourteenth Amendment. Adarand III , 515 U.S. at 231. -22- amount of the contract to one or more [MBEs].” Id. at 477. In so doing, Justice O’Connor, joined by Chief Justice Rehnquist and Jus tice White, rejected the competing arguments that a state’s power to remedy racial discrimination is equal to that of Congress under § 5 of the Fourteenth Ame ndment and that the Fourteenth Amendment effectively preempts state action in matters of race. See id. at 489-93 (Op. of O’Connor, J.). 7A plurality of the Court then proceeded to reject the proposition that the level of scrutiny v aries in cases of “benign” and invidious racial classifications, noting that blackAmericans constituted a controlling political majority in the city of Richm ond, a fact militating against the application of a more deferential standard of review. Id. at 495-96 (Op. of O’Connor, J.). What did produce a clear majority in Croson was the proposition that “the factual predicate offered in support of the Richmon d Plan suffers from the two defects identified as fatal in Wygant [v. Jackson Board of Education , 476 U.S. 267 (1986)],” Croson , 488 U.S. at 498, namely, failure to make findings specific to the market to be addressed by the remedy and to provide limits to the scope of8 Croson cannot be read, as Adarand would have it, as stand ing for the

proposition that findings of “the present effects o f past discrimination in the construction industry,” 488 U.S. at 498 (citation o mitted), are automatically insufficient to justify remedial action. This characterization of Croson overlooks a very significant difference between the Richmond Plan at issue in Croson and the congressional enactments at issue in the instan t case. The City of Richmond had no authority to remedy the present effects of p ast discrimination in the entire construction industry nationally, and the City was not permitted to simply infer that congressional findings as to the entire industry applied equally to the particular market within its jurisdiction. See id. at 504-05. The remediation of nation-wide problems, however, is particularly with in the purview of Congress, and findings of industry-wide discrimination are pr ecisely what is relevant to a federal decision to undertake remedial action. See id. at 490, 504. -23- that remedy due to only generalized findings of discrimination. 8 The Court stated that “[w]hile there is no doubt that the sorry hist ory of both private and public discrimination in this country has contributed to alack of opportunities for black entrepreneurs, this observation, standing alone, cannot justify a rigid racial quota in the awarding of public contracts in Richmond, Virginia.” Id. at 499. In particular, the majority noted it was “sheer specul ation” to simply guess how many firms there would be absent past discriminatio n and “[t]he 30% quota cannot in any realistic sense be tied to any injury suffered by anyone.” Id. After noting the City of Richmond’s failure to linkits remedial program to specifically identified past discrimination, the Croson majority made two additional observations explaining why the City’s p rogram was not narrowly tailored. See id. at 507. First, the Court noted “there does not ap pear to have been any consideration of the use of race-neutral m eans to increase minority-24-

business participation in city contracting.” Id. (citing United States v. Paradise , 480 U.S. 149, 171 (1987)). The Court suggested that race-neutral programs of municipal financing for small firms might increase minority participation without the use of a direct racial preference. See id. Second, the Court declared “[t]he 30% quota cannot be said to be narrowly tailored to any goal, except perhaps outright racia l balancing. It rests upon the ‘completely unrealistic’ assumption that minorities will choose a particular trade in lockstep proportion to their representation in the local population.” Id. (quoting Sheet Metal Workers v. EEOC , 478 U.S. 421, 494 (1986) (O’Connor, J., concurring in part and dissenting in part)). Adarand III , 515 U.S. at 235 (citing Fullilove , 448 U.S. at 496 (Powell, J., concurring)), followed and held that “[f]ederal rac ial classifications, like those of a State, must serve a compelling governmental inter est, and must be narrowly tailored to further that interest.” Now, informed by the Supreme Court’s directives pertaining to remand, and its multifacet ed jurisprudence on affirmative action programs, we turn to the task of assessing the application of racial presumptions in the SCC program under a strict scru tiny standard. B. Compelling Interest We “decide the question [of] whether the interests served by the use of [SCCs] are properly described as ‘compelling.’” Adarand III , 515 U.S. at 237.-25-

In so doing, our inquiry necessarily consists of fo ur parts: First, we must determine whether the government’s articulated goal in enacting the race-based measures at issue in this case is appropriately con sidered a “compelling interest” under the governing case law; if so, we must then s et forth the standards under which to evaluate the government’s evidence of comp elling interest; third, we must decide whether the evidence presented by the g overnment is sufficiently strong to meet its initial burden of demonstrating the compelling interest it has articulated; and finally, we must examine wether th e challenging party has met its ultimate burden of rebutting the government’s evide nce such that the granting of summary judgment to either party is proper. We beg in, as we must, with an inquiry into the meaning of “compelling interest.” 1. “Compelling Interest” in Race-Conscious Measure s Defined We know from Adarand III that, as a general proposition, there may be a compelling interest that supports the enactment of race-conscious measures. Justice O’Connor explicitly states: “The unhappy p ersistence of both the practice and the lingering effects of racial discrimination against minority groups in this country is an unfortunate reality, and government i s not disqualified from acting in response to it.” Adarand III , 515 U.S. at 237; see also Shaw v. Hunt , 517 U.S. 899, 909 (1996) (stating that “remedying the effect s of past or present racial discrimination may in the proper case justify a gov ernment’s use of racial-26-

distinctions” (citing Croson , 488 U.S. at 498-506)). Interpreting Croson , we have recognized that “the Fourteenth Amendment perm its race-conscious programs that seek both to eradicate discrimination by the governmental entity itself and to prevent the public entity from acting as a ‘“passive participant” in a system of racial exclusion practiced by elements of the local construction industry’ by allowing tax dollars ‘to finance the e vil of private prejudice.’” Concrete Works of Colo., Inc. v. City & County of Denver , 36 F.3d 1513, 1519 (10th Cir. 1994) (quoting Croson , 488 U.S. at 492) . The government identifies the compelling interest at stake in the use of racial presumptions in the SCC program as “remedyin g the effects of racial discrimination and opening up federal contracting o pportunities to members of previously excluded minority groups.” (Appellants’ Br. at 21.) The district court in Adarand IV , 965 F. Supp. at 1572, held this interest is prope rly described as compelling, reasoning that “it appears that Justice O’Connor’s assertion in
Croson , that Congress has the ability under Section 5 [of the Fourteenth Amendment] to recognize and address racial discrimi nation, has been left undisturbed.” Although we decline to address the p recise relationship between § 5 of the Fourteenth Amendment and the power of Co ngress, acting through the Executive branch, to address racial discrimination by the states, we readily conclude that the federal government has a compelli ng interest in not9Contractors Association of Eastern Pennsylvania, I nc. v. City of

Philadelphia , 6 F.3d 990 (3d Cir. 1993), cited by appellee, is distinguishable both (continued...) -27- perpetuating the effects of racial discrimination i n its own distribution of federal funds and in remediating the effects of past discri mination in the government contracting markets created by its disbursements. See Croson , 488 U.S. at 492 (Op. of O’Connor, J.) (“It is beyond dispute that any public entity, state or federal, has a compelling interest in assuring thatpublic dollars, drawn from the tax contributions of all citizens, do not serve to finance the evil of private prejudice.” (citing Norwood v. Harrison , 413 U.S. 455, 465 (1973))) ; Norwood , 413 U.S. at 463 (“That the Constitution may compel toleration of private discrimination in some circumstances does not mean that it requires state support for such discrimination.”). In its brief, Adarand cites general language from Adarand III in an attempt to limit the permissible scope of Congress’s power to redress the effects of racial discrimination, ignoring the substantial difference s between the scope of problems to be addressed by Congress and those to b e addressed by a city council such as that in Croson . The fact that Congress’s enactments must serve a compelling interest does not necessitate the conclu sion that the scope of that interest must be as geographically limited as that of a local government. See
Croson , 488 U.S. at 489 (Op. of O’Connor, J.). 9Although there is not a clear9 (...continued)

in that it involved a city-based rather than a nati onwide program, and in that the program at issue was based on far scantier evidence than that available in the instant case.

10 The parties and their respective amici curiae dif fer sharply as to the relevant geographical scope to be considered in ass essing the government’s basis in evidence for concluding that race-conscious reme dial action is necessary. Adarand and its amici argue based on Croson for the necessity of findings regarding both discrimination and the availability of qualified DBEs in a particular local market as a necessary prerequisite to any government action. We disagree, concluding that the absence of such findi ngs is more properly addressed in this case under the rubric of narrow tailoring. Quite apart from the question of Congress’s power under § 5 of the Fourteenth Amendm ent left unresolved by the Adarand III majority, see Adarand III , 515 U.S. at 230-31, the compelling interests to be addressed by Congress, whether unde r the Commerce Clause, Spending Clause, or Fourteenth Amendment, are neces sarily different in geographic scope than those properly addressed by a city. See, e.g. , Croson , 488 U.S. at 505 (focusing on lack of “identified discri mination in the Richmond construction industry”); Concrete Works , 36 F.3d at 1520 (identifying “the sixcounty Denver Metropolitan Statistical Area” as one acceptable geographical (continued...) -28- majority on the Court for the proposition that § 5 of the Fourteenth Amendment grants Congress broad remedial powers in the area o f discrimination, in Section II of Justice O’Connor’s opinion in Croson , Justice O’Connor and Chief Justice Rehnquist endorsed that proposition. See Croson , 488 U.S. at 490 (“That Congress may identify and redress the effects of so ciety-wide discrimination does not mean that, a fortiori, the States and their pol itical subdivisions are free to decide that such remedies are appropriate.”). The geographic scope of Congress’s reach in this regard is “society-wide” and therefore nationwide. See id. 1010 (...continued)

region for inquiry into an affirmative action measu re by the City and County of Denver). That said, Adarand’s concern with the ava ilability of DBEs in a particular market is certainly an important one, see Croson , 488 U.S. at 502, and, as discussed below, the lack of evidence provided b y the government regarding local availability and the government’s concomitantfailure to tailor contracting regulations accordingly constitute one of the chief barriers to finding the previous statutory and regulatory scheme narrowly t ailored. -29- 2. Evidence Required to Show Compelling Interest While the government’s articulated interest is comp elling as a theoretical matter, we must yet determine whether the actual ev idence proffered by the government supports the existence of past and prese nt discrimination in the publicly-funded highway construction subcontracting market. Generally, [a]bsent searching judicial inquiry into the justification for . . . racebased measures, there is simply no way of determini ng what classifications are . . . in fact motivated by ille gitimate notions of racial inferiority or simple racial politics. Inde ed, the purpose of strict scrutiny is to ‘smoke out’ illegitimate uses of race by assuring that the legislative body is pursuing a goal import ant enough to warrant the use of a highly suspect tool. Id. at 493 (Op. of O’Connor, J.); see also Shaw v. Reno , 509 U.S. 630, 643-44 (1993) (“A racial classification, regardless of purported motivation, is presumptively invalid and can be upheld only upon an extraordinary justification.” (quoting Personnel Administrator of Mass. v. Feeney , 442 U.S. 256, 272 (1979)) (further citations omitted)).-30-

Our “benchmark for judging the adequacy of the gove rnment’s factual predicate for affirmative action legislation [i]s whether there exists a ‘ strong basis in evidence for [the government’s] conclusion that remedial ac tion was necessary.’” Concrete Works , 36 F.3d at 1521 (quoting Croson , 488 U.S. at 500 (quoting Wygant , 476 U.S. at 277 (plurality))) (emphasis in Concrete Works ). Both statistical and anecdotal evidence are appropr iate in the strict scrutiny calculus, although anecdotal evidence by itself is not. See Concrete Works , 36 F.3d at 1520-21. Although Croson places the burden of production on the [government] to demonstrate a “strong basis in evid ence” that its race- and gender-conscious contract program aims to remedy specifically identified past or present discriminat ion, the Fourteenth Amendment does not require a court to make an ultim ate judicial finding of discrimination before [the government] m ay take affirmative steps to eradicate discrimination. Id. at 1522 (citing Wygant , 476 U.S. at 292 (O’Connor, J., concurring)). Aft er the government’s initial showing, the burden shifts to Adarand to rebut that showing: “Notwithstanding the burden of initial pr oduction that rests” with the government, “[t]he ultimate burden [of proof] remai ns with [the challenging party] to demonstrate the unconstitutionality of an affirmative-action program.” Id. (quoting Wygant , 476 U.S. at 277-78 (plurality)). “[T]he nonminor ity [challengers] . . . continue to bear the ultimate b urden of persuading the court that [the government entity’s] evidence did not sup port an inference of prior11 Post-enactment evidence is particularly relevant when, as here, it was

gathered specifically to respond to the Supreme Court’s Adarand III decision, which applied a new compelling interest standard to the federal government’s affirmative action programs. See Appendix—The Compelling Interest for Affirmative Action in Federal Procurement , 61 Fed. Reg. 26,050 (1996) (noting purpose of responding to Adarand III ). -31- discrimination and thus a remedial purpose.” Id. at 1522-23 (quoting Wygant , 476 U.S. at 293 (O’Connor, J., concurring)). In addressing the question of what evidence of disc rimination supports a compelling interest in providing a remedy, we consi der both direct and circumstantial evidence, including post-enactment e vidence introduced by defendants as well as the evidence in the legislative history itself. See Concrete Works , 36 F.3d at 1521, 1529 n.23 (considering post-enactment evidence). 11 Furthermore, we may consider public and private dis crimination not only in the specific area of government procurement contracts b ut also in the construction industry generally; thus, any findings Congress has made as to the entire construction industry are relevant. See id. at 1523, 1529; see also Croson , 488 U.S. at 492 (Op. of O’Connor, J.). It is with the foregoing principles in mind that we turn to an examination of the evidentiary basis on which Congress relied t o support its finding of discrimination and continuing effects of past discr imination against minorities in the publicly-funded and private construction industry.-32-

3. Evidence in the Present Case There can be no doubt that Congress repeatedly has considered the issue of discrimination in government construction procureme nt contracts, finding that racial discrimination and its continuing effects have distorted the market for public contracts—especially construction contracts—necessitating a raceconscious remedy. See, e.g. , Appendix—The Compelling Interest for Affirmative Action in Federal Procurement , 61 Fed. Reg. 26,050, 26,051-52 & nn.12-21 (1996) (“ The Compelling Interest ”) (citing approximately thirty congressional hearings since 1980 concerning minori ty-owned businesses). But the question is not merely whether the government has considered evidence, but rather the nature and extent of the evidence it has considered. Of course, statements made with regard to discrimin ation in the subcontracting industry by congressional reports an d by members of Congress are insufficient in themselves to support a finding of compelling interest. We must probe more deeply into the legislative history of the enactments at issue. We cannot merely recite statements made by members of Congress alleging a finding of discriminatory effects and the need to address those effects, such as the following: Where there are no DBE programs, women and minority -owned small businesses are shut out of the highway construction. The Federal DBE program serves to redress the inequality and redress the-33-

unfortunate fact that all across the country women and minorities would not otherwise have access to construction con tracts. 144 Cong. Rec. S1421 (March 5, 1998) (statement of Sen. Moseley-Braun). Such findings are not enough to satisfy strict scrutiny standards. See Croson , 488 U.S. at 500 (“[W]hen a legislative body chooses to emplo y a suspect classification, it cannot rest upon a generalized assertion as to the classification’s relevance to its goals.” (citing McLaughlin v. Florida , 379 U.S. 184, 190-92 (1964))). The question that Croson requires us to ask is whether there is a strong ba sis in evidence to support the legislature’s conclusion. In Concrete Works , we noted that Neither Croson nor its progeny clearly state whether private discrimination that is in no way funded with public tax dollars can, by itself, provide the requisite strong basis in ev idence necessary to justify a municipality’s affirmative action program . A plurality in Croson simply suggested that remedial measures could be j ustified upon a municipality’s showing that “it had essentia lly become a ‘passive participant’ in a system of racial exclusi on practiced by elements of the local construction industry.” Croson , 488 U.S. at 492. Although we do not read Croson as requiring the municipality to identify an exact linkage between its award of p ublic contracts and private discrimination, such evidence would at least enhance the municipality's factual predicate for a race- and ge nder-conscious program. Concrete Works , 36 F.3d at 1529. Unlike Concrete Works , the evidence presented by the government in the present case dem onstrates the existence of two kinds of discriminatory barriers to minority su bcontracting enterprises, both of which show a strong link between racial disparit ies in the federal12 In the discussion that follows, we take judicial notice of the content of

hearings and testimony before the congressional com mittees and subcommittees cited by the government. Furthermore, we note in p assing that there is an even more substantial body of legislative history supporting the compelling interest in the present case than that cited by the government. See, e.g. , Barriers to Full Minority Participation in Federally Funded Highway Contracts: Hearing Before a Subcomm. of the House Comm. on Gov’t Operations , 100th Cong. (April 1, 1998); Problems Facing Minority and Women-Owned Small Bus inesses in Procuring U.S. Government Contracts: Hearing Before the Commerce, Consumer, & Monetary Affairs Subcomm. of the House Comm. on Gov’t Operations , 103d Cong. (July 12, 1993). -34- government’s disbursements of public funds for cons truction contracts and the channeling of those funds due to private discrimination. The first discriminatory barriers are to the formation of qualified minoritysubcontracting enterprises due to private discrimination, precluding from the outs et competition for public construction contracts by minority enterprises. Th e second discriminatory barriers are to fair competition between minority and non-minority subcontracting enterprises, again due to private discrimination, p recluding existing minority firms from effectively competing for public constru ction contracts. The government also presents further evidence in the fo rm of local disparity studies of minority subcontracting and studies of local sub contracting markets after the removal of affirmative action programs. Discussion of each of those bodies of evidence follows. 12 a. Barriers to Minority Business Formation in Cons truction Subcontracting-35-

As to the first kind of barrier, the government’s e vidence consists of numerous congressional investigations and hearings as well as outside studies of statistical and anecdotal evidence—cited and discussed in The Compelling
Interest , 61 Fed. Reg. 26,054-58—and demonstrates that disc rimination by prime contractors, unions, and lenders has woefully imped ed the formation of qualified minority business enterprises in the subcontracting market nationwide. The evidence demonstrates that prime contractors in the construction industry often refuse to employ minority subcontrac tors due to “old boy” networks—based on a familial history of participati on in the subcontracting market—from which minority firms have traditionally been excluded. See H.R. Rep. 103-870 15 n.36 (1994) (“[T]he construction in dustry is . . . family dominated. Many firms are in their second or thirdgeneration operating structures. Minorities and women, unless they are part of construction families, have been and will continue to be excluded wheneverpossible.”); The Meaning and Significance for Minority Business of the Supre me Court Decision in the City of Richmond v. J.A. Croson: Hearing Before the Leg islative & Nat’l Sec. Subcomm. of the House Comm. on Gov’t Operations , 100th Cong. 111 (1990) (“The Significance of Croson ”) (statement of Manuel Rodriguez, President, R&D Development, Inc., specializing in mechanical construction, and past president and founder of the National Hispanic Association of Construction Enterprises)-36-

(“[F]ew [minorities] today have families from whom they can inherit a construction business.”); see also Minority Business Development Program Reform Act of 1987: Hearings on S. 1993 & H.R. 1807 Before the Senate Comm. on Small Bus. , 100th Cong. 127 (1988) (statement of Parren Mitch ell, Chairman, Minority Business Enterprise Legal Defense and Educ ation Fund) (noting the “harsh reality” of the “old-boy network” that preve nts minority-owned firms from breaking into the private sector); H.R. Rep. No. 10 3-870 15 & n.36 (1994) (discussing evidence of the discriminatory exclusio n of minority firms from business networks); The Compelling Interest , 61 Fed. Reg. at 26,057 & nn.82-83 (citing studies explaining minorities’ exclusion fr om the construction trades as a result of the lack of familial connections). Furthermore, subcontractors’ unions place before mi nority firms a plethora of barriers to membership, thereby effectively bloc king them from participation in a subcontracting market in which union membershi p is an important condition for success. See Minority Business Participation in Department of T ransportation Project: Hearing Before a Subcomm. of the House Com m. on Gov’t Operations , 99th Cong. 203 (1985) (testimony of James Haughton, President, Fight Back) (minority contractors continue to “suffer[] very he avily because they have been victims to that discrimination as practiced by the unions”); The Significance of
Crosonat 117-19 (statement of Manuel Rodriguez) (describ ing the way in which-37-

union discrimination prevents access to skills and experience needed to form a business); The Compelling Interest , 61 Fed. Reg. at 26,055-56 & nn.53 & 62 (citing studies of statistical and anecdotal eviden ce finding racism by construction trade unions in several cities and states and concl uding that racism is a major cause of the lack of minority business formation inthe construction industry). The government’s evidence is particularly striking in the area of the racebased denial of access to capital, without which th e formation of minority subcontracting enterprises is stymied. See, e.g. , Availability of Credit to Minority-Owned Small Businesses: Hearing Before the Subcomm. on Fin. Insts. Supervision, Regulation & Deposit Ins. of the House Comm. on Banking, Fin. & Urb. Affs. , 103d Cong. 19-20 (1994) (statement of Toni Hawkin s, Executive Director, National Black Business Counsel) (noting the existence and examples of discrimination in business lending); id. at 27 (statement of Wayne Smith, Chairperson, Black Urban Alliance: African AmericanChamber of Commerce of Newark, NJ) (stating that while perhaps more subtle than discrimination in mortgage lending, discrimination in business lending exists); id. at 209 (statement of M. Harrison Boyd, President/CEO, HBA Management Services Group, Inc.) (White bank employees “have been, and are continual ly, programmed to perceive minority business loans as bad business, and/or at a minimum, risky and less desirable.”); H.R. Rep. No. 103-870 7 (1994) (“Ther e is a widespread reluctance-38-

on the part of the commercial banking, venture capi tal, . . . and capital markets to take the same risk with a [minority] entrepreneur that they would readily do with a white one.” (quoting testimony of Sherman Copelin , President of the National Business League)); Disadvantaged Business Set-Asides in Transportatio n Construction Projects: Hearing Before the Subcomm. on Procurement, Innovation, and Minority Enter. Dev. of the House Comm. on Small Bus. , 100th Cong. 26 (1988) (statement of Joann Payne, President, PSM Co nsultants) (“[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 Fe deral-Aid Highway Act: Hearing Before the Subcomm. on Transp. of the Senat e Comm. on Env’t & Pub. Works , 99th Cong. 363 (1985) (statement of James K. Ladu cer, Director, North Dakota Minority Business Enterprise Programs, Unite d Tribes Educational Technical Center) (North Dakota banks “refuse to le nd monies to minority businesses from nearby Indian communities.”); Fiscal Economic & Social Crises Confronting American Cities: Hearings Before the Se nate Comm. on Banking, Housing, & Urb. Affs. , 102d Cong. 431 (1992) (statement of Anthony Robin son, President, Minority Business Enterprise Legal Defen se and Education Fund) (“[T]he legitimate capital needs of the minority bu siness community are ignored or held to such a higher underwriting standard and systematically denied venture-39-

capital.”); Federal Minority Business Programs: Hearing Before the House Comm. on Small Bus. , 102d Cong. 89 (1991) (statement of Joshua I. Smith, Chairman, U.S. Commission on Minority Business Development) (attaching Interim Report
1990 of the United States Commission of Minority Busine ss Development, which states minority business owners’ “access to credit ha[s] been historically limited”); Minority Construction Contracting: Hearing Before the Subcomm. on SBA, the Gen. Econ. & Minority Enter. Dev. of the House Comm. on Small Bus. , 101 Cong. 26 (1989) (statement of Cleveland M. Chap man, President, Midwest Contractors For Progress) (citing statistics demons trating discrimination in lending in Chicago). For example, “[t]he average l oan to a black-owned construction firm is $49,000 less than the average loan to an equally matched nonminority construction firm.” The Compelling Interest , 61 Fed. Reg. at 26,058 & n.91 (citing Grown & Bates, Commercial Bank Lending Practices & the Development of Black-Owned Construction Companies. , 14 J. Urb. Aff. at 34 (1992)). “All other factors being equal, a black b usiness owner is approximately 15 percent less likely to receive a business loan than a white owner.” Id. at 26,058 & n.90 (citing Faith Ando, Capital Issues and the Minority-Owned Business , 16 Rev. Black Pol. Econ. at 97 (1988)). Another study surveyed 407 business owners in the Denver area. Itfound that African Americans were 3 times more likely to be re jected for business loans than whites. The denial rate for Hi spanic owners was 1.5 times as high as white owners. Disparities in the denial rate13 Lending discrimination alone of course does not j ustify action in the

construction market. See Croson , 488 U.S. at 510 (Op. of O’Connor, J.) (noting a municipality’s alternative remedy of taking direc t action against discrimination in the provision of credit). However, the persiste nce of such discrimination, which is already unlawful under federal law, supports the assertion that the formation, as well as utilization, of minority-owne d construction enterprises has been impeded. -40- remained significant even after controlling for oth er factors that may affect the lending rate, such as the size and net w orth of the business. The study concluded that “despite the fact that loan applicants of three different racial/ethnic backgrounds in this s ample (Black, Hispanic and Anglo) were not appreciably different as businesspeople, they were ultimately treated differ ently by the lenders on the crucial issue of loan approval or de nial.” Id. at 26,058 (footnotes omitted) (citing The Colorado Center for Community Development, University of Colorado at Denver, Survey of Small Business Lending in Denver v (1996)) . Such findings strongly support an initial showin g of discrimination in lending; and we take judicial notice of the obvious causal connection between access to capital and ability to implement public works construction projects. 13 b. Barriers to Competition by Existing Minority En terprises With regard to barriers faced by existing minority enterprises, the government presents evidence tending to show that d iscrimination by prime contractors, private sector customers, business networks, suppliers, and bonding companies fosters a decidedly uneven playing field for minority subcontracting enterprises seeking to compete in the area of feder al construction subcontracts.-41-

The government presents powerful evidence that [a]ll too often, contracting remains a closed netwo rk, with prime contractors maintaining long-standing relationships with subcontractors with whom they prefer to work. Because minority owned firms are new entrants to most markets, the e xistence and proliferation of these relationships locks them outof 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. The Compelling Interest , 61 Fed. Reg. 26,058 & nn.98-99 (footnotes omitted ) (citing studies of statistical and anecdotal eviden ce of minority business participation in state and local construction industries). The government has also presented sobering evidence that when minority firms are permitted to bid on subcontracts, prime contractors often resist working with them. This s ort of exclusion is often achieved by white firms refusing to accept lo w minority bids or by sharing low minority bids with another subcontractor in order to allow that business to beat the bid (a practice kno wn as “bid shopping”). Id. at 26,058-59 (citing studies of statistical and an ecdotal evidence detailing bid shopping in several localities). It is clear to us that Congress has devoted conside rable energy to investigating and considering this systematic exclu sion of existing minority enterprises from opportunities to bid on construction projects resulting from the insularity and sometimes outright racism of the non -minority firms in the construction industry. See, e.g. , How State and Local Governments Will Meet the-42-

Croson Standard (Minority Set-Asides): Hearing Befo re the Subcomm. on Civ. & Const. Rights of the House Comm. on the Judiciary , 100th Cong. 53-54 (1989) (statement of Marc Bendick, Bendick & Egan Economic Consultants, Inc.) (“[W]e must not for a moment underestimate the role of continuing pervasive blunt discrimination by the private market. . . . The sa me prime contractor who will use a minority subcontractor on a city contract and wil l be terribly satisfied with the firm’s performance, will simply not use that minori ty subcontractor on a private contract where the prime contractor is not forced to use a minority firm.”); The Significance of Croson at 121-22 (statement of Manuel Rodriguez); id. at 104-06 (statement of E.R. Mitchell, Jr., President of E.R. Mitchell Construction Company and President of the Atlanta Chapter of the Nationa l Association of Minority Contractors) (identifying racially discriminatory a ctions by federal and state government agencies in the bidding process on construction contracts). The government’s evidence strongly supports the the sis that informal, racially exclusionary business networks dominate th e subcontracting construction industry, shutting out competition from minority firms. See, e.g. , The Significance of Croson at 107 (statement of E.R. Mitchell, Jr.) (“[Q]uali fied black firms are outside the business network of establish ed white firms. By virtue of being outsiders to their communications loop, it is impossible to successfully bid because we remain forever strangers to white owners and developers.”); The-43-

Compelling Interest , 61 Fed. Reg. at 26,059-60 & nn.107, 109-110 (citi ng studies and articles on statistical and anecdotal evidence demonstrating discriminatory treatment in the bidding process). Minority subcontracting enterprises in the construc tion industry find themselves unable to compete with non-minority firm s on an equal playing field due to racial discrimination by bonding companies, without whom those minority enterprises cannot obtain subcontracting opportunities. The government presents evidence both that bonding is an essential requirem ent of participation in federal subcontracting procurement, see The Compelling Interest , 61 Fed. Reg. at 26,060 (citing 40 U.S.C. §§ 270a-270e), and a “vicious cir cle” whereby minority subcontractors cannot obtain bonding due to lack of experience, and “since they cannot get bonding, they cannot get experience,” The Compelling Interest , 61 Fed. Reg. at 26,060 (footnote omitted). Minority Business Participation in Department of Transportation Project: Hearing Befor e a Subcomm. of the House Comm. on Gov’t Operations , 99th Cong., 1st Sess. 159 (1985) (statement of Sherman Brown, President, MCAP, Inc.) (“Virtually e veryone connected with the minority contracting industry . . . apparently agre es that surety bonding is one of the biggest obstacles in the development of minority firms.”). The government additionally presents evidence of an insular “old-b oy” network in bonding that excludes minority firms. See, e.g. , H.R. Rep. No. 103-870 at 15 & n.36. There is-44-

also strong evidence of overt racial discrimination in the bonding market. See,
e.g. , Discrimination in Surety Bonding: Hearing Before the Subcomm. on Minority Enter., Fin. & Urb. Dev. of the House Comm. on Small Bus. , 103d Cong. 2 (1993) (statement of John B. Cruz, III, Pre sident, John B. Cruz Construction Co.) (describing racial discriminationhis company suffered in its efforts to obtain bonding); City of Richmond v. J.A. Croson: Impact and Response: Hearing Before the Subcomm. on Urb. & Min ority-Owned Bus. Dev. of the Senate Comm. on Small Bus. , 101st Cong. 40-41, 43 (1990) (statement of Andrew Brimmer, President, Brimmer and Company, Inc ., Economic and Financial Consultants) (presenting the results of astudy showing discrimination in bonding faced by African-American, Hispanic, andPacific-Islander-owned firms in the Atlanta area); id. at 165-66 (statement of Edward W. Bowen, Project Administrator, Prentiss Properties, Ltd.) (noting that unclear bonding standards permit denials of bonding that are arbitrary and capricious and racially-biased); Disadvantaged Business Set-Asides in Transportation Construction Projects , supra , at 107 (statement of Marjorie L. Herter, National President, Women Construction Owners & Executives, USA; President, V ee See Construction Co.) (“Discrimination against women and minorities in th e bonding market is quite prevalent.”); The Compelling Interest , 61 Fed. Reg. at 26060 & n.118 (citing studies of statistical and anecdotal evidence of wi despread racial discrimination in-45-

bonding). For example, the government cites a Loui siana study according to which “minority firms were nearly twice as likely t o be rejected for bonding, three times more likely to be rejected for bonding for ov er $1 million, and on average were charged higher rates for the same bonding poli cies than white firms with the same experience level,” The Compelling Interest , 61 Fed. Reg. at 26,060 & n.119 (citing D.J. Miller & Associates, 2 State of Louisiana Disparity Study at 35-57 (1991)), while an Atlanta study found similarly glaring disparities in the ability of minority versus non-minority construction firms to obtain bonding generally and “unlimited bonding” in particular, Andrew F. Brimmer & Ray Marshall, Public Policy and Promotion of Minority Economic Developme nt: City of Atlanta and Fulton County, Georgia at 19-20 (1990) (cited in City of Richmond v. J.A. Croson: Impact and Response: Hearing Before the Sub comm. on Urb. & Minorityowned Bus. Dev. of the Sen. Comm. on Small Bus. , 101st Cong. 193-94 (1990)). Finally, the government presents evidence of discri mination by suppliers, the result of which is that nonminority subcontract ors receive special prices and discounts from suppliers not available to minority subcontractors, driving up “anticipated costs, and therefore the bid, for minority-owned businesses.” Id. at 26,061; see also id. at n.123 (citing studies detailing discrimination by suppliers); The Significance of Croson at 106 (statement of E.R. Mitchell, Jr.) (“[C]ommo n-46-

suppliers working on projects routinely give white subs better prices for materials than they do black subs.”). Contrary to Adarand’s contentions, on the basis of the foregoing survey of evidence regarding minority business formation and competition in the subcontracting industry, the government’s evidence as to the kinds of obstacles minority subcontracting businesses face constitutes a strong basis for the conclusion that those obstacles are not “the same p roblems faced by any new business, regardless of the race of the owners.” ( Appellee’s Br. at 28.) c. Local Disparity Studies Following the Supreme Court’s decision in Croson , numerous state and local governments have undertaken statistical studi es to assess the disparity, if any, between availability and utilization of minori ty-owned businesses in government contracting. See The Compelling Interest , 61 Fed. Reg. at 26,061-62 (presenting the Urban Institute’s analysis of thirty-nine disparity studies); see also 144 Cong. Rec. S5413-14 (May 22, 1998) (statement of Senator Chafee) (discussing a disparity study conducted for CDOT th at found “a disproportionately small number of . . . minority-o wned contractors participating in Colorado’s transportation construction industry . . . . Hispanic firms received less than one-half of one percent (.26%). . . . Th e vast majority of contracts—more than 99 percent—went to firms owned by white men.”). The-47-

government’s review of those studies reveals that a lthough such disparity was least glaring in the category of construction subco ntracting, even in that area “minority firms still receive only 87 cents for eve ry dollar they would be expected to receive” based on their availability. The Compelling Interest , 61 Fed. Reg. at 26,062. In that regard, the Croson majority stated that “[w]here there is a significant statistical disparity betwee n the number of qualified minority contractors willing and able to perform a particular service and the number of such contractors actually engaged by the [government] or the [government’s] prime contractors, an inference of d iscriminatory exclusion could arise.” 488 U.S. at 509 (Op. of O’Connor, J.) (citations omitted). We are certainly mindful that “where special qualification s are necessary, the relevant statistical pool for purposes of demonstrating disc riminatory exclusion must be the number of minorities qualified to undertake the particular task.” Id. at 501- 02. But here, we are unaware of such “special qual ifications” aside from the general qualifications necessary to operate a construction subcontracting business. At a minimum, the disparity indicates that there h as been underutilization of the existing pool of minority subcon tractors; and there is no evidence either in the record on appeal or in the l egislative history before us that those minority subcontractors who have been utilized have performed inadequately or otherwise demonstrated a lack of ne cessary qualifications.14 We reject the decidedly vague urgings of Adarand’ s amici curiae to

reject disparity studies generally as biased and/orinsufficiently reliable. Certainly, the conclusions of virtually all social scientific studies may be cast into question by criticism of their choice of assumption s and methodologies. The very need to make assumptions and to select data se ts and relevant variables precludes perfection in empirical social science. However, general criticism of disparity studies, as opposed to particular evidenc e undermining the reliability of the particular disparity studies relied upon by the government, is of little persuasive value and neither compels us to discountthe disparity evidence presented in the government’s appendix nor does it create “a legitimate factual dispute about the accuracy of [the government’s] data.” Concrete Works , 36 F.3d at 1528 (refusing to grant summary judgment because of a legitimate factual dispute about the accuracy of disparity study data) . Moreover, a generalized assertion that disparity studies lack reliability is in conflict with Croson , which suggests that disparity studies are entirely relevant to an assessment of whether sufficiently strong evidence exists to support a co mpelling interest in a raceconscious remedy. See 488 U.S. at 501; Concrete Works , 36 F.3d at 1528 (“[O]nce credible information about the size or cap acity of the firms is introduced in the record, it becomes a factor that the court should consider.”). Adarand and its amici curiae misinterpret the case law they cite for the (continued...) -48- The disparity between minority DBE availability andmarket utilization in the subcontracting industry raises an inference that the various discriminatory factors the government cites have created that disparity. In Concrete Works , we stated that “[w]e agree with the other circuits which have interpreted Croson impliedly to permit a municipality to rely . . . on general data reflecting the number of MBEs and WBEs in the marketplace to defeat the challenger’s summary judgment motion,” and we do not see Adarand III as requiring any different standard in the case of an analogous suitagainst the federal government. 36 F.3d at 1528. 14 Although the government’s aggregate figure of a14 (...continued)

proposition that disparity studies are invalid. For example, with regard to Coral Construction Co. v. King City , 941 F.2d 910, 921 (9th Cir. 1991), we agree with the Ninth Circuit that the challengers of a DBE pro gram should have the opportunity to rebut statistical evidence. In the present case, Adarand has had such an opportunity both in the district court below, see Adarand IV , 965 F. Supp. at 1573-77, and before this Court on appeal, but has failed to present a rebuttal other than an unfocused attack on disparity studies generally. Relying on Coral Construction Co. , Adarand’s amici further argue the disparity studi es were not introduced into evidence and not rebutted; howe ver, the amici do not, and presumably cannot, cite the portion of the record w here Adarand objected on that ground to the introduction of the studies via The Compelling Interest , 61 Fed. Reg. 26,050, and their objection has been waived. See Lopez v. Behles (In re Am. Ready Mix, Inc.) , 14 F.3d 1497, 1502 (10th Cir. 1994) (holding thatwhere the appellant did not show, and the court of appeal s could not find, where the issue was raised in the trial court below, the issu e was not properly before the court of appeals and would not be considered); Walker v. Mather (In re Walker) , 959 F.2d 894, 896 (10th Cir. 1992) (holding that as a general rule, the court of appeals will not consider an issue that was not raised below). As for Associated General Contractors of California, Inc. v. Coalition for Economic Equity , 950 F.2d 1401, 1416 (9th Cir. 1991), the court in that case held the statistical evidence presented was sufficient on the facts to e stablish compelling interest. Contractors Association of Eastern Pennsylvania , 6 F.3d at 1005, stated that “[d]isparity indices are highly probative evidence of discrimination.” On further appeal in that case, the Third Circuit stated that whether disparity studies provided the requisite strong basis in evidence forupholding the race-conscious program at issue was a “close call” but did not decide the question. Contractors Ass’n of E. Penn, Inc. v. City of Philadelphia , 91 F.3d 586, 605 (3d Cir. 1996). Finally, Engineering Contractors Association of South Flori da, Inc. v. Metropolitan Dade County , 122 F.3d 895, 903-05, 924 (11th Cir. 1997), can b e distinguished on the grounds that the court of appe als affirmed the district court’s factual findings which rejected evidence from disparity studies under the deferential “clear error” standard of review. Here the district court committed no clear error in its finding of compelling interest b ased on the statistical evidence before it. To the extent the foregoing cases may b e otherwise interpreted, we reject their holdings. -49- 13% disparity between minority enterprise availabil ity and utilization is not15 Based on a comprehensive review of 1987 census data showing

disproportionately low minority business ownership and receipts for minorityowned business, the U.S. Commission on Minority Bus iness Development concluded that “minorities are not underrepresentedin business because of choice or chance. Discrimination and benign neglect is th e reason why our economy has been denied access to this vital resource.” UnitedStates Commission on Minority Business Development, Final Report 60 (1992).

-50- overwhelming evidence, it is significant. It is ma de more significant yet by the evidence showing that discriminatory factors discou rage both enterprise formation of minority businesses and utilization of existing minority enterprises in public contracting. Of course, it would be “she er speculation” to even attempt to attach a particular figure to the hypothetical n umber of minority enterprises that would exist without discriminatory barriers to minority DBE formation.
Croson , 488 U.S. at 499. However, the existence of evide nce indicating that the number of minority DBEs would be significantly (butunquantifiably) higher but for such barriers is nevertheless relevant to the a ssessment of whether a disparity is sufficiently significant to give rise to an infe rence of discriminatory exclusion. 15 d. Results of Removing Affirmative Action Programs We take notice of an additional source of evidence of the link between compelling interest and remedy. There is ample evi dence that when raceconscious public contracting programs are struck do wn or discontinued, minority-51-

business participation in the relevant market drops sharply or even disappears. See, e.g. , 144 Cong. Rec. S1421 (March 5, 1998) (statement of Sen. MoseleyBraun) (citing statistics); The Compelling Interest , 61 Fed. Reg. 26,062 & nn.130- 134 (citing studies). A lthough that evidence standing alone is not disposi tive, it strongly supports the government’s claim that there are significant barriers to minority competition in the public subcontracting m arket, raising the specter of racial discrimination. “Where there is a significant statistical disparity between the number of qualified minority contractors willin g and able to perform a particular service and the number of such contracto rs actually engaged by the locality or the locality's prime contractors, an in ference of discriminatory exclusion could arise.” Croson , 488 U.S. at 509 (Op. of O’Connor, J.) (citations omitted). In sum, on the basis of the foregoing body of evide nce, we conclude that the government has met its initial burden of presen ting a “strong basis in evidence” sufficient to support its articulated, co nstitutionally valid, compelling interest. Croson , 488 U.S. at 500 (quoting Wygant , 476 U.S. at 277). 4. Adarand’s Rebuttal Adarand and the amici curiae supporting it have utt erly failed to meet their “ultimate burden” of introducing credible, particul arized evidence to rebut the government’s initial showing of the existence of a compelling interest in16 We disagree with Adarand’s contention that the go vernment’s

“Appendix I” to its motion for summary judgment (Ap pellants’ App. at 44-53) is insufficient evidence of Congress’s findings. The Appendix references and discusses the long and comprehensive legislative hi story and findings on discrimination in the nationwide construction contr acting market. Adarand’s challenge to that history is too conclusory to meet its burden under Concrete Works

. -52- remedying the nationwide effects of past and presen t discrimination in the federal construction procurement subcontracting market. 16 Concrete Works , 36 F.3d at 1522 (quoting Wygant , 476 U.S. at 277). Its assertions as to the gener al impermissibility of a race-conscious remedy regardl ess of the compelling interest identified by Congress are not in accordance with e qual protection jurisprudence. It is simply an untenable interpretation of Equal P rotection Doctrine to insist that the Constitution requires Congress to acquiesce in the workings of an ostensibly free market that would direct the profits to be gle aned from disbursements of public funds to non-minorities alone. See Concrete Works , 36 F.3d at 1519 (“[T]he Fourteenth Amendment permits race-conscious programs that seek . . . to prevent the public entity from acting as a ‘“passiv e participant” in a system of racial exclusion . . .’ by allowing tax dollars ‘to finance the evil of private prejudice.’” (quoting Croson , 488 U.S. at 492)); see also Adarand III , 515 U.S. at 237 (“The unhappy persistence of both the practice and the lingering effects of racial discrimination against minority groups in th is country is an unfortunate reality, and government is not disqualified from acting in response to it.”).17 Adarand III called into question Fullilove ’s standard of review and

possibly its result. However , as far as we can ascertain, nothing in Adarand III undermines the conclusion of the lead Fullilove opinion that “Congress had abundant evidence from which it could conclude thatminority businesses have been denied effective participation in public contr acting opportunities by procurement practices that perpetuated the effects of prior discrimination.” Fullilove , 448 U.S. at 477-78 (Op. of Burger, C.J.); see also Croson , 488 U.S. at 504 (“[In the Fullilove case,] Congress was exercising its powers under § 5 of the Fourteenth Amendment in making a finding that past discrimination would cause federal funds to be distributed in a manner which r einforced prior patterns of discrimination . . . . Congress has made national findings that there has been societal discrimination in a host of fields.”). -53- We reject Adarand’s characterization of various con gressional reports and findings as conclusory and its highly general criti cism of the methodology of numerous “disparity studies” cited by the governmen t and its amici curiae as supplemental evidence of discrimination. 17 The evidence cited by the government and its amici curiae and examined in thi s opinion only reinforces the conclusion that “racial discrimination and its effe cts continue to impair the ability of minority-owned businesses to compete in the nati on’s contracting markets.” The Compelling Interest , 62 Fed. Reg. at 26,062. In Concrete Works , 36 F.3d at 1530-31, the plaintiff “specifically identified” an d “put forth evidence” showing “flaws” in the data justifying the City of Denver’s affirmative action program, thus precluding summary judgment on the issue of co mpelling interest. Here, by contrast, the government’s evidence permits a findi ng that as a matter of law Congress has the requisite strong basis in evidence to take action to remedy racial18 We likewise reject Adarand’s contention that Cong ress must make

specific findings regarding discrimination against every single sub-category of individuals within the broad racial and ethnic cate gories designated by statute and addressed by the relevant legislative findings. If Congress has valid evidence, for example that Asian-American individua ls are subject to discrimination because of their status as Asian-Ame ricans, it makes no sense to require sub-findings that subcategories of that cla ss experience particularized discrimination because of their status as, for example, Americans from Bhutan. “Race” is often a classification of dubious validity—scientifically, legally, and morally. We need not impart excess legitimacy to r acial classifications by taking notice of the harsh fact that racial discrimination commonly occurs along the lines of the broad categories identified: “Black Am ericans, Hispanic Americans, Native Americans, Asian Pacific Americans, and othe r minorities.” 15 U.S.C. § 637(d)(3)(C). The evidence at issue is not, as Adarand would have it, merely evidence of generalized societal discrimination. See Wygant , 476 U.S. at 276 (Op. of Powell, (continued...) -54- discrimination and its lingering effects in the con struction industry. This evidence demonstrates that both the race-based barr iers to entry and the ongoing race-based impediments to success faced by minoritysubcontracting enterprises—both discussed above—are caused either by continuing discrimination or the lingering effects of past dis crimination on the relevant market. Furthermore, Congress is not limited to si mply proscribing federal discrimination against minority contractors, as it has obviously already done. The Constitution does not obligate Congress to stan d by idly and continue to pour money into an industry so shaped by the effect s of discrimination that the profits to be derived from congressional appropriat ions accrue exclusively to the beneficiaries, however personally innocent, of the effects of racial prejudice. 1818 (...continued)

J.) (“Societal discrimination, without more, is too amorphous a basis for imposing a racially classified remedy.”). Rather, it is evidence of specific barriers to market entry and fair competition facin g actual and potential minority participants in the market for public construction contracts. In short, the construction contracting market is overwhelmingly c omposed of non-minorities due to the effects of racial discrimination. -55- We do not intend to suggest that the evidence citedby the government is unrebuttable. We merely point out that under our p recedent it is for Adarand to rebut that evidence, and it has not done so to the extent required to raise a genuine issue of material fact as to whether the go vernment has met its evidentiary burden. We reiterate that “[t]he ultim ate burden [of proof] remains with [the challenging party] to demonstrate the unc onstitutionality of an affirmative-action program.” Id. at 1522 (quoting Wygant , 476 U.S. at 277-78 (plurality)). “[T]he nonminority [challengers] . . . continue to bear the ultimate burden of persuading the court that [the governmententity’s] evidence did not support an inference of prior discrimination and thus a remedial purpose.” Id. (quoting Wygant , 476 U.S. at 293 (O’Connor, J., concurring)). Bec ause Adarand has failed utterly to meet its burden, the governme nt’s initial showing stands. In sum, guided by Concrete Works , we conclude that the evidence cited by the government and its amici, particularly that contained in The Compelling
Interest , 61 Fed. Reg. 26,050, more than satisfies the gove rnment’s burden of production regarding the compelling interest for a race-conscious remedy.-56-

Congress has a compelling interest in eradicating the economic roots of racial discrimination in highway transportation programs f unded by federal monies. We therefore affirm the district court’s finding of a compelling interest. C. Narrow Tailoring We turn now to the question of narrow tailoring. H ere, again, we must first define “narrow tailoring” for purposes of str ict scrutiny and then determine whether the SCC program in the present case falls w ithin that definition. 1. “Narrow Tailoring” in Race-conscious Programs D efined We are guided in our inquiry by the handful of Supr eme Court cases that have applied the narrow-tailoring analysis to government affirmative action programs. In applying strict scrutiny to a court-o rdered program remedying the failure to promote black police officers, a plurali ty of the Court stated that [i]n determining whether race-conscious remedies ar e appropriate, we look to several factors, including the necessityfor the relief and the efficacy of alternative remedies; the flexibili ty and duration of the relief, including the availability of waiver pr ovisions; the relationship of the numerical goals to the relevantlabor market; and the impact of the relief on the rights of third parties. Paradise , 480 U.S. at 171 (1986) (plurality op. of Brennan, J.) (citations omitted). Regarding flexibility, “the availability of waiver” is of particular importance. Id. As for numerical proportionality, Croson admonishes us to beware of the “completely unrealistic assumption that minorities will choose a particular trade in lockstep proportion to their representation in the local population.” 488 U.S.19 While Paradise only assumed without deciding that strict scrutinyis the

appropriate standard, see 480 U.S. at 166-67 (plurality), it nevertheless ap plied strict scrutiny to affirm a race-conscious relief measure, see id. at 185-86. Although the Paradise factors require some modification in order to be u sed for evaluating the nationwide legislative enactment andits implementing regulations and programs at issue here (as opposed to a judicia l order aimed at a particular police department) , they provide some general guidance on questions the Court considers relevant to the narrow tailoring inquiry. See also Adarand III , 515 U.S. at 237 (citing the opinions of Justices Brennan, St evens, and O’Connor in Paradise “to dispel the notion that strict scrutiny is ‘strict in theory, but fatal in fact’” (quoting Fullilove , 448 U.S. at 519 (Marshall, J., concurring))). -57- at 507 (quoting Sheet Metal Workers , 478 U.S. at 494 (O’Connor, J., concurring in part and dissenting in part)). In that context, a “rigid numerical quota” particularly disserves the cause of narrow tailoring. Id. at 508. 19 Finally, as for burdens imposed on third parties, a plurality of the Court in Wygant stated: As part of this Nation’s dedication to eradicating racial discrimination, innocent persons may be called upon to bear some of the burden of the remedy. “When effectuating a lim ited and properly tailored remedy to cure the effects of prior discri mination, such a ‘sharing of the burden’ by innocent parties is not impermissible.” 476 U.S. at 280-81 (Op. of Powell, J.) (quoting Fullilove , 448 U.S. at 484 (plurality)) (further quotations and footnote omitt ed). We are guided by that benchmark. Justice O’Connor’s majority opinion in Croson adds a further factor to our analysis: under- or over-inclusiveness of the DBE classification. In Croson , the Supreme Court struck down an affirmative action program as insu fficiently narrowly tailored in part because “there is no inqu iry into whether or not the-58-

particular MBE seeking a racial preference has suff ered from the effects of past discrimination . . . . [T]he interest in avoiding the bureaucratic effort necessary to tailor remedial relief to those who truly have s uffered from the effects of prior discrimination cannot justify a rigid line drawn on the basis of a suspect classification.” Croson , 488 U.S. at 508 (citation omitted). Thus, we mus t be especially careful to inquire into whether there ha s been an effort to identify worthy participants in DBE programs or whether the programs in question paint with too broad—or too narrow—a brush. More specific guidance is found in Adarand III . In remanding for strict scrutiny, the Court identified two questions appare ntly of particular importance in the instant case: (1) “[c]onsideration of the use o f race-neutral means;” and (2) “whether the program [is] appropriately limited [so as] not to last longer than the discriminatory effects it is designed to eliminate.” Adarand III , 515 U.S. at 237- 38 (internal quotations and citations omitted). We thus direct our attention to an analysis of the program in light of Adarand III ’s specific questions on remand, and the foregoing narrow-tailoring factors, in the following order: (1) the availability of race-neutral alternative remedies; (2) limits on the duration of the SCC and DBE certification programs; (3) flexibility ; (4) numerical proportionality; (5) the burden on third parties; and (6) over- or underinclusiveness.20 Although the standard of review and result of Fullilove have been called

into question by Adarand III , the district court noted, in our view correctly, that a square majority of the Court in Croson cited with approval the principal opinion in Fullilove for this factual finding. We fail to see how this factual aspect of Fullilove has been impaired; Adarand offers no authority to refute the finding that three decades of race-neutral measures failed to have any appreciable effect on the exclusion of minorities from the receipt of government highway largesse. Adarand offers no evidence to rebut the district co urt’s conclusion that Congress entertained and indeed attempted years of race-neutral measures without success before resorting to the programs at issue in this l awsuit. -59- 2. Race-neutral Alternative Remedies The first factor to be considered is that of the av ailability of alternative remedies to the race-conscious measures at issue. The district court in Adarand
IV found, and Adarand does not challenge its finding, that Congress over a period of decades attempted to correct by race-neutral means the problem of too few minority subcontractors for government construc tion contracts, and only after it continued to find discriminatory effects did it first implement a race-conscious remedy. See Adarand IV , 965 F. Supp. at 1582-83; see also Croson , 488 U.S. at 507 (noting the finding in Fullilove that “Congress . . . carefully examined and rejected race-neutral alternatives before enacting the MBE set-aside”). 20 That finding is law of the case and is not clearly erroneous. See Agostini , 521 U.S. at 236; McIlravy , 204 F.3d at 1034-35. The long history of discrim ination in, and affecting, the public construction procurement mark et—despite the efforts dating back at least to the enactment in 1958 of the SBA t o employ race-neutral-60-

measures—places a formidable burden on both existin g and would-be minority participants and thus justifies race-conscious acti on to address a decidedly racial disparity. A separate question, however, is whether the FLHP c onsidered other more narrowly tailored measures before deciding to imple ment 15 U.S.C. § 644(g) by means of the SCC, with its race-based presumptions of disadvantage. The government’s argument focuses on Congress’s consideration of race-neutral measures prior to enacting its policy of maximizing opportunity for minorityowned and controlled businesses and setting aspirat ional goals for the participation of such businesses in federal contracting. Although Congress considered the futility of race-neutral measures pr ior to incorporating the aspirational goals into the SBA and the relevant ap propriations measures, the government fails to address whether the FLHP considered either measures short of a race-conscious subsidy to prime contractors ora more refined means of assessing subcontractors’ eligibility for race-cons cious programs prior to promulgating the regulations implementing the SCC. The record persuades us that under the high degree of solicitude for indivi dual rather than race-based consideration mandated by the Court’s strict scruti ny standard, the government has not shown that the FLHP adequately considered s uch alternative measures in the 1996 SCC program .21 The regulatory changes discussed below resulted f rom several years of study and consideration of Croson and Adarand III . See 64 Fed. Reg. 5096, 5101-03 (1999) (discussing how regulatory changes a ddress the requirements of narrow tailoring). -61- Again, the situation has since changed dramatically. 21 A comparison of that previous SCC program with the new federal regu lations under TEA-21 is particularly instructive. The current, revised regulations instruct recipients that “[y]ou must meet the maximum feasible portion of yo ur overall goal by using race-neutral means of facilitating DBE participatio n,” 49 C.F.R. § 26.51(a) (2000); see also 49 C.F.R. § 26.51(f) (2000) (if a recipient can me et its overall goal through race-neutral means, it must implement its program without the use of race-conscious contracting measures) , and enumerate a list of race-neutral

measures, see 49 C.F.R. § 26.51(b) (2000). The current regulations also outline several race-neutral means available to program rec ipients including helping overcome bonding and financing obstacles, providing technical assistance, establishing programs to assist start-up firms, and other methods. See 49 C.F.R. § 26.51(b). We therefore are dealing here with rev isions that emphasize the continuing need to employ non-race-conscious method s even as the need for raceconscious remedies is recognized. The record before us does not indicate whether or not FLHP considered race-neutral measure s prior to resorting to the SCC. This absence weighs strongly against any finding of narrow tailoring. See-62-

Adarand III , 515 U.S. at 237-38; Croson , 488 U.S. at 507. The district court was therefore correct, given the information before it at the time, that the SCC program was not narrowly tailored, and should the g overnment reinstitute the revised program without considering race-neutral me asures similar to those outlined in 49 C.F.R. § 25.51(a) and (b) (2000), th at program too would be insufficiently narrowly tailored. 3. Appropriate Limit on Duration A second important factor in any narrow-tailoring analysis is a limit on the duration of the race-conscious measures at issue. The district court declined to address this aspect of the Supreme Court’s inquiry on remand because of the court’s finding that the 1996 SCC program was not n arrowly tailored for other
reasons. See Adarand IV , 965 F. Supp. at 1584. Although we agree for diff erent reasons that the 1996 program the district court co nsidered was insufficiently narrowly tailored to pass constitutional muster, th e factor of limited duration is mentioned in Adarand III , 515 U.S. at 238, and we accept the Court’s invitation to consider this factor now. The duration of a particular company’s DBE status i s limited by statute and regulation to approximately ten-and-one-half years under the § 8(a) certification program. See 15 U.S.C. §§ 634(b)(6), 636(j)(10)(C)(i), 637(a), (d); 13 C.F.R. § 124.110 (1996); 13 C.F.R. § 124.2 (2000). Moreov er, each participant in the22 Notably, Gonzalez was certified through such a st ate program in the

present case, belying the government’s argument that there was no evidence of unconstitutional state certifications under the ver sion of § 8(d) in place at the time this litigation commenced . -63- § 8(a) program is required to annually submit finan cial and other information, on the basis of which the SBA reevaluates and may “gra duate” a small disadvantaged business from the program as no longe r qualified (e.g., because the criteria of economic disadvantage are no longer met). See 15 U.S.C. §§ 636(j)(10)(G), 637(a)(6)(B), (C). The § 8(a) pr ogram’s inherent time limit and graduation provisions ensure that it, like the program upheld in Paradise , is carefully designed to “endure[] only until . . . th e discriminatory impact” has been eliminated; once a DBE loses its economic disa dvantage, it loses its certification. Paradise , 480 U.S. at 178. As far as we can ascertain fromthe regulations previously in effect, the § 8(d) program did not have an analogous individual time limit . Therefore, insofar as the 1996 SCC program reli ed on § 8(a) criteria, those criteria increased the narro w tailoring of the program. However, insofar as the program relied on § 8(d) cr iteria, through state certifications, 22 we discern no evidence that the specific criteria of DBE eligibility provide a temporal limit to the program . Thus, insofar as the district court suggested that an SCC program based on § 8(a) criteria would be insufficiently narrowly tailored, we disagree; the court’s skepticism about the23 Although the § 8(a) program provides for annual r ather than tri-annual

review of DBE certification, for purposes of the “d uration” prong of the narrowtailoring inquiry, that difference is not so glarin g as to require striking down the § 8(d) program; rather, it is the periodic reevaluation of disadvantaged status that renders this aspect of the program narrowly tailore d because in that way, the program will not last longer than the situation it seeks to correct. -64- fatality in fact of strict scrutiny in the narrow-t ailoring context is contrary to the Supreme Court’s own pronouncements in both Adarand III , 515 U.S. at 237, and
Croson , 488 U.S. at 509. In this respect, too, we note that the government h as modified its unconstitutional practices. The current § 8(d) pro gram regulations specifically incorporate the certification requirements from the Small Business Administration regulations implementing the § 8(a) program. See 48 C.F.R. § 19.001 (2000) (incorporating certification requir ements of 13 C.F.R. pt. 124, subpt. B) ; 13 C.F.R. § 124.1002(a) (2000) (incorporating § 8 (a) criteria from 13 C.F.R. pt. 124, subpt. A) . The regulations incorporated into the § 8(d) pro gram provide for a certification of a business as social ly and economically disadvantaged for three years after either the init ial certification or other administrative determination. See 13 C.F.R. § 124.1014 (2000). If a business wishes to remain certified for longer than three ye ars, it must “submit a new application and receive a new certification.” Id. § 124.1014(c). 23 Therefore,-65-

with regard to appropriate limitations on duration, the current DBE certification programs are narrowly tailored. Finally, we note that Congress extensively debated whether to renew the DBE program prior to passing TEA-21 in 1998. See, e.g. , 144 Cong. Rec. S1481-06, S1481-96 (March 6, 1998); id. S1395-01, S1395-434 (March 5, 1998); id. H1885-04, H2000-11 (Apr. 1, 1998). These debates, in addition to the limited duration of the DBE program in accordance with the limited duration of TEA-21 and other highway appropriations statutes like it, indicate that the race-conscious programs at issue are “appropriately limited” to la st no longer than “the discriminatory effects [they are] designed to eliminate.” Adarand III , 515 U.S. at 238 (quotation omitted). 4. Additional Narrow-Tailoring Factors Although they were not emphasized by the Adarand III Court, we deem the other factors discussed in Paradise , 480 U.S. at 171, and Croson , 488 U.S. at 507-08, to be of value in the narrow tailoring anal ysis, and we turn to them now. a. Flexibility The 1996 SCC program, providing a subsidy for the u se of DBEs, is certainly more flexible than the set-asides considered in either Fullilove or Croson because the program is not mandatory. It does notrequire the use of DBEs in subcontracting against the will of the prime contractor. See Adarand24 None of the parties in this case contend that SBA § 8(d)(4), 15 U.S.C.

§ 637(d)(4), pertains to the SCC. However, even if § 8(d)(4) were relevant here, that would not change our conclusion that the SCC i s not mandatory in nature. Section 8(d)(4)(E) informs government agencies lett ing contracts that they are “authorized to provide such incentives as such Federal agency may deem appropriate in order to encourage such subcontracting opportun ities as may be commensurate with the efficient and economical perf ormance of the contract.” 15 U.S.C. § 637(d)(4)(E) (emphasis added). This language demonstrates that § 8(d)(4) merely authorizes, but does not require, the use of incentives (of whatever type) to further the aspirational goals of increased participation in government contracts by socially and economically d isadvantaged individuals. The fact that the FLHP has discontinued use of the SCC further demonstrates that § 8(d)(4) in no way requires an incentive clause in federal highway transportation contracts. -66- IV , 965 F. Supp. at 1583 (finding that the prime contractor’s choice to avail itself of the SCC is “more flexible than the ‘rigid racial quota’ struck down in Croson , 488 U.S. at 499, and the 10 percent set aside upheld in Fullilove , 448 U.S. at 513-14”). 24 Moreover, the 1996 SCC program incorporates an ad ditional element of flexibility—“the availability of waiver,” Paradise , 480 U.S. at 171—because any prime contractor is free not to take advantage of the clause and will never be required to make a “gratuitous” choice of subcontractors, id. at 178. With regard to flexibility, the 1996 program passes muster unde r a narrow-tailoring analysis. Nothing has changed in this regard from 1996 until the present that would militate the contrary conclusion. On the contrary, the present version of the regulations have increased the flexibility of the g overnment’s DBE programs: An express waiver provision has been added to the current regulations. See 49-67-

C.F.R. § 26.15 (2000) (allowing recipients of feder al highway construction funds to seek waivers and exemptions, despite the alreadynon-mandatory nature of DBE programs). b. Numerical Proportionality The essential question arising out of the numerical proportionality factor of Paradise is whether the aspirational goals of 5% in the SBA and 10% participation contained in STURAA, ISTEA, and TEA-2 1 are proportionate only if they correspond to an actual finding as to the n umber of existing minorityowned businesses. D espite involving a rigid quota rather than flexibl e and periodically adjusted aspirational goals, Croson may be read to suggest as much.
See Croson , 488 U.S. at 507 (characterizing as “completely un realistic” the “assumption that minorities will choose a particular trade in lockstep proportion to their representation in the local population” (citing Sheet Metal Workers , 478 U.S. 421 at 494 (O’Connor, J., concurring in part and dissenting in part))). However, because Congress has evidence that the eff ects of past discrimination have excluded minorities from the construction indu stry and that the number of available minority subcontractors reflects that discrimination, the existing percentage of minority-owned businesses is not nece ssarily an absolute cap on the percentage that a remedial program might legiti mately seek to achieve. Absolute proportionality to overall demographics is an unreasonable goal.-68-

However, Croson does not prohibit setting an aspirational goal abo ve the current percentage of minority-owned businesses that is sub stantially below the percentage of minority persons in the population as a whole. This aspirational goal is reasonably construed as narrowly tailored t o remedy past discrimination that has resulted in homogenous ownership within th e industry. It is reasonable to conclude that allocating more than 95% of all fe deral contracts to enterprises owned by non-minority persons, or more than 90% of federal transportation contracts to enterprises owned by non-minority male s, is in and of itself a form of passive participation in discrimination that Congre ss is entitled to seek to avoid.
See Croson , 488 U.S. at 492 (Op. of O’Connor, J.). Apart from the reasonableness of the goals, the rec ord before us supports the government’s contention that the 5% and 10% goa ls incorporated in the statutes at issue here, unlike the set-asides in both Fullilove and Croson , are merely aspirational and not mandatory. Cf. Croson , 488 U.S. at 508 (finding no need “for a rigid numerical quota”). Therefore, wh ile the goal may well be relevant to the numerical proportionality aspect of the Paradise strict scrutiny inquiry, we disagree with the district court that the goal itself is facially unconstitutional . Moreover, there is simply no showing that Adarand lost or will lose contracts due to the STURAA/ISTEA/TEA-21 10% g oals for DBE participation, but rather only due to the over- or under-inclusive race-based-69-

presumptions involved in certification for 1996 SCC eligibility. Therefore, we conclude both that Adarand is without standing to m ount any independent challenge to the 5% and 10% figures and that such achallenge is outside the scope of the Supreme Court’s Adarand III remand. See Adarand IV , 965 F. Supp. at 1566 n.11 (noting that “Defendants maintai n, and Adarand does not dispute, that the challenge in this action is basedonly on the use of the SCC to meet the various goals” established by the SBA, STU RAA, and ISTEA). We also conclude the government failed to carry its evidentiary burden in the district court insofar as the use of the 1996 S CC was based on an ill-defined 12-15% goal apparently adopted by the Federal Highw ay Administration (“FHA”). ( See Appellants’ App. at 187.) Unlike the congressiona lly-mandated goals that are supported by legislative history andsupplemental evidence, we can find no explanation in the record before us of the basis in evidence on which the FHA relied in adopting this 12-15% goal (if in factthere is one). That congressional findings support the 5% and 10% aspir ational goals in the SBA and transportation appropriation statutes, respecti vely, as well as the delegation of responsibility for setting individual goals to v arious agencies, does not vitiate the constitutional duty of those agencies to assure that the goals are supported by evidence that meets the requirements of Croson and Concrete Works . The complete absence of an explanation for the 12-15% g oal in the record would have-70-

required granting summary judgment in favor of Adar and on the question of whether use of the 1996 SCC is narrowly tailored to meet the compelling interest determined by Congress. Once again, however, comparison of the 1996 SCC to the current TEA-21 regulations is instructive and leads us to the conc lusion that the recent regulatory changes preclude ruling in favor of Adarand at the present time for reasons beyond the abandonment of use of the SCC in federal highway construction contracting. The process by which recipients of fe deral transportation funding set aspirational goals is now much more rigorous. The current regulation instructs each recipient that its “overall goal mus t be based on demonstrable evidence of the availability of ready, willing and able DBEs relative to all businesses ready, willing and able to participate o n [the recipient’s] DOT-assisted
contracts” and must make “reference to the relative availabili ty of DBEs in [the recipient’s] market.” 49 C.F.R. § 26.45(b) (2000). In addition, goal setting must involve “examining all evidence available in [the recipient’s] jurisdiction.” Id. § 26.45(c). Such evidence may include census data and valid disparity studies.
See id. § 26.45(c)(1)-(3). After examining this evidence, the recipient must adjust its DBE participation goal by examining the capacity of DBEs to perform needed work, disparity studies, and other evidence. See id. § 26.45(d). When submitting a goal, the recipient must include a description of the methodology and evidence-71-

used. See id. § 26.45(f)(3). Significantly, the rigidity of eve n those realistic goals is negligible. Once the goals have been set, there is no requirement that the recipient actually meet them, merely that it make agood faith effort to do so: So long as good faith efforts were made, failure to me et a goal will not subject a recipient to penalties or to being held in noncompliance. See id. § 26.47(a). These new requirements that federal agencies rigoro usly examine, in a verifiable manner, the reasonableness of DBE programs given particular local conditions further ensure that government agencies will heed Croson ’s mandate to avoid rigid application of DBE percentages in government contracting. See 488 U.S. at
507

. In sum, in conformity with the aspirational nature of the percentage goals of the relevant statutes, the current regulations e mphasize that the 10% figure is nothing more than “an aspirational goal at the nati onal level,” 49 C.F.R. § 26.41(b) (2000), which “does not authorize or req uire recipients to set overall or contract goals at the 10 percent level, or any other particular level,” id. § 26.41(c). Thus, in practice there are significant requirements currently in place that must be met by any recipient of federal highway construction funds before setting even an aspirational goal for DBE participation. There is little danger of arbitrariness in the setting of such goals, as was the case in Croson , 488 U.S. at
507.-72-

c. Burden on Third Parties As for the third Paradise factor, the burden on third parties is obviously significant enough to grant standing to Adarand. See Adarand III , 515 U.S. at 211-12. While there appears to be no serious burde n on prime contractors, who are obviously compensated for any additional burden occasioned by the employment of DBE subcontractors, at the margin, so me non-DBE subcontractors such as Adarand will be deprived of business opportunities. See Wygant , 476 U.S. at 280-81 (Op. of Powell, J.) (“When effectuat ing a limited and properly tailored remedy to cure the effects of prior discri mination, . . . a ‘sharing of the burden’ by innocent parties is not impermissible.” (quoting Fullilove , 448 U.S. at 484 (plurality)) (further quotations and footnote o mitted)). Insofar as the 1996 and current SCC programs are “limited in scope and duration, [they] only postpone[]” the hiring of non-DBEs, “impos[ing] a d iffuse burden . . . foreclosing only one of several opportunities.” Paradise , 480 U.S. at 183 (quoting Wygant , 476 U.S. at 283). These further limitations have been incorporated: ( 1) Compensation under the SCC above 1.5-2% of the total contract is prohibited ( see Appellants’ App. at 56); (2) under the revised SCC, there is also a monetary limit to compensation under the program of $50,000-$100,000 ( see Appellants’ Supp. Br. Attach. 2 at 3). Thus, the subsidy is capped in such a way as t o circumscribe the financial-73-

incentive to hire DBEs; after a fairly low threshol d, the incentive for the prime contractor to hire further DBEs disappears. Moreover, the current regulations are designed to i ncrease the participation of non-minority DBEs. As to those not falling into one of the categories to which a presumption of social disadvantage applies, the c urrent regulations retain procedures for non-minorities to participate in the DBE program. Consistent with the changes in SBA regulations, proof of social dis advantage by those not so presumed may be shown by a preponderance of the evi dence, rather than by the former “clear and convincing” standard. Compare 49 C.F.R. §§ 26.61(d), 26.67(d) (2000) and 13 C.F.R. § 124.105(c)(1) (2000) with 13 C.F.R. § 124.105(c)(1) (1996). The current regulations al so require recipients to ensure that DBEs are not “so overconcentrated in a certaintype of work as to unduly burden the opportunity of non-DBE firms to particip ate.” 49 C.F.R. § 26.33(a) (2000). While at the margin, some DBEs may be hired under the program in lieu of non-DBEs, the possibility that innocent parties wil l share the burden of a remedial program is itself insufficient to warrant the conclusion that the program is not narrowly tailored. To invalidate the 1996 and revised SCC and other government DBE programs on that basis would be to r ender strict scrutiny-74-

effectively fatal, in contravention of Justice O’Co nnor’s clear statements to the contrary. See Adarand III , 515 U.S. at 237. d. Over- or Under-Inclusiveness The last factor we must consider in applying strict scrutiny in this case is that of the over- or under-inclusiveness of the pro grams at issue. One factor in the Croson Court’s rejection of the Richmond Plan was the lac k of “inquiry into whether or not the particular MBE seeking a racial preference has suffered from the effects of past discrimination.” Croson , 488 U.S. at 508. Even if a race-conscious means of achieving the goal of increasing minority participation is necessary, in promulgatin g the SCC in use at the time of the district court’s decision in Adarand IV , defendants-appellants have not demonstrated that they considered the effectiveness of at least one other, less sweeping approach to implementing a race-conscious SCC program: disaggregating the presumptions of social and econo mic disadvantage, as is the case under the SBA § 8(a) program, to require a sep arate determination of social disadvantage and economic disadvantage. See 48 C.F.R. § 52.219-8 (1996). Requiring a separate showing as to each type of dis advantage would help address the Court’s concern in Croson that a government entity undertake the necessary administrative effort “to tailor remedial relief to those who truly have suffered from the effects of prior discrimination.” 488 U.S. at 508. The record does not-75-

disclose any evidence that defendants undertook, an d found to be unsuccessful, a program incorporating, as under § 8(a), a more indi vidualized inquiry as to economic disadvantage prior to implementing the particular SCC program at issue in this litigation. If the § 8(d) program in place prior to 1999 is int erpreted, as we conclude it must be, to accord a presumption of economic as well as social disadvantage to minority individuals under § 8(d), while not doing so under § 8(a), that fact suggests that another more carefully tailored appro ach is available, i.e., the § 8(a) approach of individualized inquiry into economic di sadvantage. The final section of Adarand III , 515 U.S. at 238-39, suggests the distinction is r elevant. If individualized inquiry into economic disadvantage i s sufficient to serve the purpose, why then dispense with such inquiry under § 8(d)? Indeed, if one can qualify under § 8(d), what is the significance of p ermitting qualification under § 8(a), aside from the practical matter of already including those DBEs enjoying § 8(a) benefits? At the time Adarand IV originally was appealed in 1997, the government argued that the more lenient approach of § 8(d) is acceptable because of the differing purposes of § 8(a) and § 8(d). The [§] 8(a) program is targeted towards a smaller number of firms and provides direct assistance and protection from open competition over a period of years to help such firms become vi able as prime contractors. By contrast, the [§] 8(d) program is focused on opening-76-

up federal subcontracting opportunities to a much l arger number of small disadvantaged firms, and thus imposes less re strictive qualifications. (Appellants’ Br. at 34 (citing 13 C.F.R. § 124.06(b ) (1997)).) That distinction, however, fails to identify why an individualized in quiry into economic disadvantage, which is admittedly practicable for § 8(a) purposes, was unnecessary for the particular purposes of § 8(d) p rior to 1999. To put it simply, presuming economic disadvantage based on membership in certain racial groups does make § 8(d) “less restrictive,” but it is not thereby narrowly tailored. The government fails to explain why it could not have u sed a non-race-based means of making § 8(d) “less restrictive.” Therefore, we must conclude, under Croson , that the § 8(d) method of certification reviewed by the district court in Adarand
IV is not narrowly tailored insofar as it obviates an individualized inquiry into economic disadvantage. See Croson , 488 U.S. at 508 (rejecting an affirmative action program in part because “there is no inquiryinto whether or not the particular MBE seeking a racial preference has suff ered from the effects of past discrimination . . .[, and] the interest in avoidin g the bureaucratic effort necessary to tailor remedial relief to those who truly have s uffered from the effects of prior discrimination cannot justify a rigid line drawn on the basis of a suspect classification” (citation omitted)).-77-

Requiring state certification standards to incorpor ate an individualized inquiry into economic disadvantage would certainly increase the burden on enterprises seeking DBE certification, as the government argues, and therefore would presumably reduce the pool of eligible enterp rises. That increased burden, however, is slight when compared with the constitut ional imperative to avoid over- or under-inclusive racial classifications—the “Sultan of Brunei” scenario that troubled the district court, Adarand IV , 965 F. Supp. at 1581 n.17—, and the § 8(d) certification process thus fails to satisfy the narrow tailoring prong of the strict scrutiny inquiry. Cf. Croson , 488 U.S. at 508. When faced with the readily available alternative approach under § 8(a) of requ iring would-be DBEs to provide a narrative statement of the economic disadvantage they have faced, combined with the various other more narrowly tailo red alternatives discussed above, we fail to see how the SCC approach to certi fication in use at the time of Adarand IV satisfies the rigorous narrow tailoring requiremen t of the strict scrutiny calculus. In short, by inquiring into eco nomic disadvantage on an individual basis, the program could avoid improperl y increasing the contracting opportunities of those minority entrepreneurs whose access to credit, suppliers, and industry networks is already sufficient to obvi ate the effects of discrimination, past and present.-78-

Yet again, the government has eliminated its offend ing 1996 practices. In particular, it has eliminated the discrepancy betwe en the individualized determination of economic disadvantage characterizi ng the § 8(a) program and the non-individualized presumption of economic disa dvantage characterizing the § 8(d) program. See 48 C.F.R. § 19.001 (2000) (providing that the § 8( d) program regulations expressly incorporate the defin itions of “small disadvantaged business concern” contained in 13 C.F.R. pt 124, su bpt. B); 13 C.F.R. § 124.1002(a) (2000) (incorporating § 8(a) criteriafrom 13 C.F.R. pt. 124, subpt. A); see also 48 C.F.R. § 19.703 (2000) (eliminating the race-ba sed presumption of economic disadvantage of the former regulation); id. § 52.219-8. The current regulations also impose a new requirement on applic ants with regard to an individualized showing: They must submit a narrati ve statement describing the circumstances of that purported economic disadvantage. See 13 C.F.R. § 124.104(b)(1) (2000); see also 49 C.F.R. § 26.67(b)(1) (2000) (providing a net worth limit for DBEs under ISTEA and TEA-21); id. § 26.65(b) (stating that businesses exceeding a certain amount of gross rece ipts are ineligible for the DBE program). With the individualized determination of § 8(a) e xtended to economic disadvantage under § 8(d), the main obstacle to a f inding of narrow tailoring has disappeared.-79-

Thus, one of Adarand III ’s “unresolved questions” has been answered, namely, whether the § 8(d) DBE certification program requires an individualized showing of economic disadvantage or whether the pre sumption applies to both social and economic disadvantage. Adarand III , 515 U.S. at 238. The 1996 § 8(d) certification program did not require an ind ividualized showing of economic disadvantage, whereas the current § 8(d) c ertification program does require such an individualized showing. There remains a further question of over- and under -inclusiveness that we must consider. The district court, Adarand IV , 965 F. Supp. at 1580, found that the 1996 SCC program was not narrowly tailored in p art due to a failure to inquire into discrimination against each particularminority racial or ethnic group. The district court’s opinion cites Adarand’s argume nts that “there is no evidence that Aleuts, Samoans or Bhutans [sic] have been dis criminated against in the Colorado construction industry.” Id. Insofar as the district court held that the scope of the inquiry into the statutes generally wa s the Colorado construction industry alone, this is at odds with our holdings r egarding compelling interest and Congress’s power to enact nationwide legislation. Furthermore, as discussed below, because of the unreliability of racial and e thnic categories and the fact that discrimination commonly occurs based on much b roader racial classifications, extrapolating findings of discrimi nation against Native25 Nonetheless, the geographic scope of the remedial powers of a local

government, as in Croson , and that of Congress’s remedial powers under § 5 of the Fourteenth Amendment differ. See Croson , 488 U.S. at 488 (Op. of O’Connor, J.). In Croson , the City ignored the fact that Congress, unlike any State or political subdiv ision, has a specific constitutional mandate to enforce the dict ates of the Fourteenth Amendment. The power to “enforce” may at times also include the power to define situations which Congre ss determines threaten principles of equality and to adopt prophy lactic rules to deal with those situations. (continued...) -80- Americans, Asian-Pacific Americans, and Asian-Ameri cans to include Aleuts, Samoans, and Bhutanese, respectively, is more a que stion of nomenclature than of narrow tailoring. The Constitution does not ere ct a barrier to the government’s effort to combat discrimination based on broad racial classifications that might prevent it from enumerat ing particular ethnic origins falling within such classifications. While the con cept of classifying human beings by race is distasteful, the fact remains that discrimination occurs based on such classifications, and engaging the classificati ons in order to eradicate such discrimination is a necessary evil which constitute s a compelling government interest. We agree in principle that the 1996 SCC program wou ld be more narrowly tailored had the CFLHD conducted an inquiry into th e scope of discrimination within the region it administers as the current regulations mandate. 25 However,25 (...continued)

Id. at 490 (Op. of O’Connor, J.) (citations omitted). -81- the district court’s ensuing conclusion appears to stem from a premise that a classification, to be narrowly tailored, must not o nly include minority individuals who have themselves suffered discrimination, but mu st also automatically include all non-minority individuals who have suffered disadvantage as well. Cf. Fullilove , 448 U.S. at 486 (“There has been no showing in th is case that Congress has inadvertently effected an invidious di scrimination by excluding from coverage an identifiable minority group that h as been the victim of a degree of disadvantage and discrimination equal to or greater than that suffered by the groups encompassed by the MBE program.”). Requirin g that degree of precise fit would again render strict scrutiny “fatal in fact.” Id. at 507 (Powell, J., concurring). We hold that such fatality is inconsistent with Adarand III , which re-affirmed Paradise , in its declaration that strict scrutiny was not f atal in fact.
See Adarand III , 515 U.S. at 237. There can be a permissible midd le ground in appropriate circumstances between the entirely indi vidualized inquiry of a Title VII lawsuit, for example, and an unconstitutionallysweeping, race-based generalization. Indeed, the police officers receiv ing the benefit of the promotion26 Although the viability of Fullilove is uncertain, the Fullilove majority

rejected a very similar overinclusiveness challenge to the 1977 10% MBE setaside: It is also contended that the MBE program is overin clusive—that it bestows a benefit on businesses identified by racia l or ethnic criteria which cannot be justified on the basis of competiti ve criteria or as a remedy for the present effects of identified prior discrimination. It is conceivable that a particular application of the pr ogram may have this effect; however, the peculiarities of specific applications are not before us in this case. Fullilove , 448 U.S. at 486. -82- policy in Paradise were not required to prove that they themselves individually were victims of past discrimination. 26 Although we disagree with the district court’s effe ctively fatal standard of scrutiny, we again note that comparison with the cu rrent SBA § 8(d) and TEA-21 regulations illustrates how the more careful tailor ing now in place avoids some of the problems identified by the district court—again , the court’s conclusion that the “Sultan of Brunei,” should he have the temerityto apply, could qualify for DBE status. Adarand IV , 965 F. Supp. at 1581 n.17. See 13 C.F.R. § 124.104(c)(2) (2000); 48 C.F.R. §19.001 (2000); 4 9 C.F.R. §§ 26.65, 26.67(b) (2000) (providing for an individual net worth limitfor DBE certification). The current regulations more precisely identify the pro per minority recipients of DBE certification by periodically re-screening for econ omic disadvantage all candidates for such certification. See 48 C.F.R. § 19.1014 (2000).-83-

Mindful of the Supreme Court’s mandate to exercise particular care in examining governmental racial classifications, we c onclude that the 1996 SCC was insufficiently narrowly tailored as applied in this case and is thus unconstitutional under Adarand III ’s strict standard of scrutiny. Nonetheless, after examining the current SCC and DBE certificati on programs, we conclude that the 1996 defects have been remedied, and the r elevant programs now meet the requirements of narrow tailoring. D. “Unresolved Question” As a final matter, inasmuch as Adarand III suggests that an additional “unresolved question[]” concerning one of “the deta ils of the complex regulatory regimes,” 515 U.S. at 238, bears on the constitutio nality of the SCC program, we address that question now: namely, whether there ar e differing definitions of economic disadvantage under § 8(a) and § 8(d). The 1996 regulations establish that § 8(a) certification requires, for determinati on of economic disadvantage, comparison with “others in the same or similar line of business who are not socially disadvantaged.” 13 C.F.R. § 124.106(a) (1 996). Subsection 8(d) certification, however, apparently requires compari son with “others in the same or similar line of business” generally, presumably with all others, socially disadvantaged or not. 13 C.F.R. § 124.106(b) (1996 ). Because under 1996 programs based on § 8(d) economic disadvantage is t o be presumed for27 We reject the contention that two slightly differ ent definitions of

economic disadvantage for purposes of two differentcertification methods create uncertainty as to who is a DBE, thus necessarily pr ecluding any finding of narrow tailoring. -84- minorities, the § 8(d) comparative analysis would appear to arise only in the event of either a challenge to the presumption in the case of a particular minority DBE, or application for DBE status by a socially-di sadvantaged non-minority subcontractor (the classic example being the white subcontractor from rural Appalachia). We are unable to discern the constitu tional relevance of these two slightly different methods of comparison. 27 Moreover, the distinction between the two has disappeared in the current version of the regulations. The current regulation retains the more precise definition prev iously applicable to the § 8(a) program, requiring a comparison of the applicant to those who are not socially disadvantaged. See 13 C.F.R. § 124.104(a) (2000); see also 48 C.F.R. § 19.001 (2000) (incorporating the definitions of “small dis advantaged business concern” contained in 13 C.F.R. pt. 124, subpt. B); 13 C.F.R. § 124.1002(a) (2000) (incorporating 13 C.F.R. pt. 124, subpt. A, in dete rmining social and economic disadvantage).
IV As a final matter, the government argues that we sh ould remand this case in light of a pending, potentially related lawsuit originally filed under the name28 Decisions arising out of the Romer litigation include: Adarand

Constructors, Inc. v. Romer , 174 F.R.D. 100 (D. Colo. 1997) (denying the feder al government’s motion to intervene); Adarand Constructors, Inc. v. Romer , No. 97- 1285, 1999 WL 770176 (10th Cir. Sept. 29, 1999) (unpublished) (permitting intervention by the federal government); and Adarand Constructors, Inc. v. Owens , No. CIV. A. 97-K-1351, 2000 WL 490690 (D. Colo. Apr. 24, 2000) (unpublished) (dismissing the governor of Colorado as a defendant). -85- Adarand Constructors, Inc. v. Romer , No. CIV. A. 97-K-1351 (D. Colo.) (filed June 26, 1997). 28 Romer involves a challenge by plaintiff in the instant c ase to use of race-conscious policies in highway construct ion projects by CDOT. Adarand has conceded that its challenge in the inst ant case is to “the federal program, implemented by federal officials,” and notto the letting of federallyfunded construction contracts by state agencies. ( Appellee’s Br. at 24 n.23.) We do not have before us a sufficient record to enable us to evaluate the separate question of CDOT’s implementation of race-conscious policies. The propriety of potential consolidation of the instant action and Romer following our remand is a question to be considered by the district court in the first instance, should that question arise.
V The judgment of the district court is REVERSED . This matter is remanded for further proceedings consistent with th is opinion.29 The relevant language in the statutes and regulat ions did not change in

any material way between Adarand I and Adarand IV , and therefore references to regulations are to 1991 regulations unless otherwis e indicated. -86- APPENDIX As noted, several statutes are implicated in this c ase, notably the Small Business Act of 1958 (“SBA”), Pub. L. No. 85-536, 7 2 Stat. 384, as amended, 15 U.S.C. §§ 631 et seq. , § 106(c) of the Surface Transportation and Uniform Relocation Assistance Act of 1987 (“STURAA”), Pub. L. No. 100-17, 101 Stat. 132, and § 1003(b) of the Intermodal Surface Transp ortation Efficiency Act of 1991 (“ISTEA”), Pub. L. No. 102-240, 105 Stat. 1914, the Transportation Equity Act for the 21st Century of 1998 (“TEA 21”), Pub. L . No. 105-178, 112 Stat. 107,
113 , as well as their accompanying administrative regu lations. In the discussion that follows, we outline the statutory and regulato ry scheme as it was at the time of the first and second district court decisions. 29 Then we discuss the relevant changes in that scheme after 1997.
A. SBA Subsection 8(d)(1) of the SBA states “[i]t is the p olicy of the United States that small business concerns, and small business co ncerns owned and controlled by socially and economically disadvantaged individu als, . . . shall have the maximum practicable opportunity to participate in the performance of contracts30 The SCC defines Disadvantaged Business Enterprise s (“DBEs”) as those

concerns owned and operated by socially and economi cally disadvantaged individuals.

31 It appears that the 1996 regulations implementing the § 8(d) certification program provide that the showing of d isadvantage requires a general comparison “to others in the same or similar line o f business.” 13 C.F.R. § 124.106(b)(1) (1996). Justice O’Connor suggests that this distinction may have constitutional significance. See Adarand III , 515 U.S. at 238. -87- let by any Federal agency.” 15 U.S.C. § 637(d)(1). 30 “Socially disadvantaged individuals” are defined as “those who have been su bjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities.” 15 U.S.C. § 637(a)(5). The SBA further defines “economically disadvantaged individ uals” as “those socially disadvantaged individuals whose ability to compete in the free enterprise system has been impaired due to diminished capital and cre dit opportunities as compared to others in the same business area who are not soc ially disadvantaged.” 15 U.S.C. § 637(a)(6)(A). 31 15 U.S.C. § 637(d)(2) requires that all federal con tracts, with certain exceptions not relevant here, contain a clause stat ing it is the government’s policy for small disadvantaged businesses to have “ the maximum practicable opportunity to participate” as contractors or subcontractors. See 15 U.S.C. § 637(d)(3). The required clause includes the foll owing language: “The contractor shall presume that socially and economic ally disadvantaged32 15 U.S.C. § 637(d)(4) provides for certain additi onal requirements for

contracts to be awarded “pursuant to the negotiatedmethod of procurement” and exceeding certain dollar amounts. These requiremen ts include an approved plan providing maximum opportunity for small business concerns, see id. § 637(d)(4)(D), and provision for agencies to offerincentives to encourage subcontracting opportunities for small business con cerns owned and controlled by socially and economically disadvantaged individuals, see id. § 637(d)(4)(E). The parties have not addressed paragraph (4) of § 8 (d) at all, and, because there is no indication from the parties that Adarand has or will bid for contracts governed by that paragraph’s requirement, we do notaddress it in great detail.

33 Section 644(g)(1) provides in relevant part that [t]he President shall annually establish Government -wide goals for procurement contracts awarded to small business con cerns and small business concerns owned and controlled by socially and economically disadvantaged individuals . . . . The Government-wide goal for participation by small business concerns o wned and controlled by socially and economically disadvantag ed individuals shall be established at not less than 5 percent of the total value of all prime contract and subcontract awards for each fisc al year. . . . Notwithstanding the Government-wide goal, each agen cy shall have an annual goal that presents, for that agency, the maximum practicable opportunity . . . for small business co ncerns owned and controlled by socially and economically disadvantag ed individuals to (continued...) -88- individuals include Black Americans, Hispanic Ameri cans, Native Americans, Asian Pacific Americans, and other minorities, or any other individual found to be disadvantaged by the Administration pursuant to section 8(a) of the Small Business Act [15 U.S.C. 637(a)].” 15 U.S.C. § 637(d)(3)(C). 32 15 U.S.C. § 644(g)(1) provides for a government-wid e goal of 5% minimum minority business participation calculated on the basis of “the total value of all prime contract and subcontract awards for each fiscal year.” 33 The33 (...continued)

participate in the performance of contracts let by such agency.

34 Although Adarand lacks standing to challenge the constitutionality of the § 8(a) program per se, we consider its provisio ns insofar as they are relevant to the use of racially-conscious presumptions in de termining certification of DBEs for the SCC program challenged here. -89- Federal Highway Administration appears to have adop ted, pursuant to 15 U.S.C. § 644(g)(2), goals of 12-15% participation for the period of time pertinent to this litigation. (Appellants’ App. at 187.) These goals are aspirational rather than mandatory and must “realistically reflect the poten tial” of small disadvantaged businesses to perform subcontracts. See 15 U.S.C. § 644(g)(2), (h)(1). Section 644(h) further mandates annual reports to the Admin istration and Congress on the results of government agency efforts to increas e contracting participation by small businesses, including those owned and control led by socially and economically disadvantaged individuals. 1. Subsection 8(a) The § 8(a) program provides numerous benefits to di sadvantaged businesses aside from eligibility for the SCC program. 34 Eligibility requires “small” size and 51% ownership by individuals socia lly and economically disadvantaged. See 13 C.F.R. § 124.103. Subsection 8(a) regulations incorporate a presumption that enumerated minoritie s are socially disadvantaged,

see 13 C.F.R. § 124.105(b)(1), and others can prove so cial disadvantage by clear35 There is no indication from any of the parties in their briefs or

elsewhere that the particular requirements of parag raphs (4)-(6) of § 8(d) are at issue in the instant lawsuit or that Adarand has an d will continue to bid for contracts or subcontracts covered by those paragraphs. See 15 U.S.C. § 637(d)(4)-(6).

36 The relevant state DBE program at the time of the contract at issue, under which Adarand’s competitor was certified as aDBE, provided that “persons who are members of [specified racial/ethni c minorities] are ‘rebuttably presumed’ to be socially and economically disadvant aged.” (Appellants’ App. at 131.) Pursuant to Adarand VI , because Colorado’s revised program may be (continued...) -90- and convincing evidence, see id. § 124.105(c). The presumption of disadvantage is in theory rebuttable by a third party. See 49 C.F.R. § 23.69. All businesses must separately prove economic disadvantage. See id. § 124.106(a). Eligibility for the § 8(a) program confers an automatic presump tion of disadvantage under § 8(d). See 15 U.S.C. § 637(d)(3)(C). 2. Subsection 8(d) The relevant portions of § 8(d) in themselves requi re only the inclusion of a provision in federal contracts stating the govern ment’s policy of maximizing contracting opportunities for small businesses, inc luding those owned and controlled by socially and economically disadvantaged individuals. See 15 U.S.C. § 637(d)(1)-(3). 35 Subsection (d) is relevant to this litigation, ho wever, insofar as the definition set forth therein serves as a basis for certifying small businesses as disadvantaged for purposes of compens ating prime contractors under the SCC. See 49 C.F.R. § 23.53. 36 Like § 8(a), § 8(d) includes language36 (...continued)

inconsistent with federal requirements, we direct o ur inquiry to the possibility of reinstatement of the prior state DBE certification requirements, as informed by federal law and regulation.

37 As noted, those portions of § 8(d) at issue here perhaps may be more properly characterized as a requirement that a clau se be included in contracts than as a discrete program. However, the Supreme Court has characterized the requirements as a discrete program, and we note that they are certainly relevant to the SCC program at issue because they inform the cr iteria for certification of DBE participants by state agencies. -91- instructing contractors to afford a presumption of social disadvantage based on
race. See id. The Court stated that certain regulations based o n § 8(d) “appear[] to require an individualized, although ‘less restri ctive,’ showing of economic disadvantage.” Adarand III , 515 U.S. at 207 (quoting 13 C.F.R. § 124.106(b)). However, other regulations provide for presumptions of both social and economic disadvantage. See Adarand III , 515 U.S. at 207-08 (citing 48 C.F.R. §§ 19.011, 19.703(a)(2)). The Court was thus “left with some uncertainty as to whether participation in the [§] 8(d) subcontracting program requires an individualized showing of economic disadvantage.” Adarand III , 515 U.S. at 208. 37 Both presumptions of disadvantage are theoretically rebuttable by a third party. ( See Appellants’ App. at 131.)

B. STURAA and ISTEA provisions STURAA and ISTEA are relevant insofar as they incorporate the presumption of disadvantage from SBA § 8(d). See STURAA § 106(c)(2)(B),38 The Supreme Court in Adarand III stated that “[f]ederal law requires

that a subcontracting clause similar to the one use d here must appear in most federal agency contracts, and it also requires the clause to state that ‘[t]he contractor shall presume that socially and economic ally disadvantaged individuals include Black Americans, Hispanic Ameri cans, Native Americans, Asian Pacific Americans, and other minorities, or any other individual found to be disadvantaged by the [Small Business] Administration pursuant to section 8(a) of the Small Business Act.’” 515 U.S. at 205 (quoting 15 U.S.C. §§ 637(d)(2), (3)). However, examination of the statute reveals that 15 U.S.C. § 637, while providing for inclusion in most federal agency contracts of a clause stating that “[i]t is the policy of the United States that . . . small business concerns owned and controlled by socially and economically disadvantaged individuals, . . . shall have the maximum practicable opportunity to partici pate in the performance of contracts let by any Federal agency,” 15 U.S.C. § 6 37(d)(3)(A), the relevant provisions of § 8(d) do not require the particular contract provision at issue here: “[m]onetary compensation . . . for awarding subcontracts to small business (continued...) -92- ISTEA § 1003(b)(2)(B) (providing that the term “soc ially and economically disadvantaged individual” has the meaning of such t erm under SBA § 8(d) “and relevant subcontracting regulations promulgated pur suant thereto.”). Both measures set forth aspirational goals of 10% DBE participation in federal subcontracting. See ISTEA § 1003(b)(1).

C. Subcontracting Compensation Clause The particular means of implementation of the vario us statutory goals and directives at issue in this litigation is the SCC. This clause provides a financial bonus of up to 10% of an approved subcontract (no m ore than 1.5% or 2% of the original contract, depending on how many DBEs are e mployed) to a prime contractor in return for employing a DBE. ( See Appellants’ App. at 55-56.) 3838 (...continued)

concerns owned and controlled by socially and econo mically disadvantaged individuals,” Adarand III , 515 U.S. at 209 (citation omitted). Cf. 15 U.S.C. § 637(d)(4)(E). Rather, that clause, the SCC, was established administratively by the Federal Lands Highway Program (“FLHP”) of the D epartment of Transportation (“DOT”) pursuant to the FLHP’s oblig ations under 15 U.S.C. § 644(g). ( See Appellants’ App. at 33.) In Adarand II , 16 F.3d at 1545-56, (“Adarand II ”), we concluded that the FLHP was acting within it s delegated power under § 644(g) in promulgating the SCC. The Supreme Court, in altering the equal protection standard of scrutiny applicable to federal action in Adarand III , did not disturb this statutory conclusion. There fore it remains law of the case that the SCC constitutes an exercise of the FLHP’s delegated authority under § 644(g), and we discern no clear error in that pri or decision or manifest injustice sufficient to warrant overriding the law of the case doctrine. See Agostini , 521 U.S. at 236; McIlravy , 204 F.3d at 1034-35. -93- Subcontractors must be certified as DBEs by “the SB A, a state highway agency, or some other certifying authority acceptable to th e contracting officer” pursuant to the “[§] 8(a) or [§] 8(d) program, or certificat ion by a State under the DOT regulations.” Adarand III , 515 U.S. at 209-10. D. Post-1996 Changes
1. SBA There have been no significant changes to § 637(a) or (d) relevant to the Adarand litigation after 1996. Virtually the only changes to these statutory sections were additions of language including othergroups in the SBA’s affirmative action program: 1995 (women); 1998 (“HU BZone small business concerns”); and 2000 (veterans). Likewise, the keylanguage in § 644(g)(1)—“The Government-wide goal for participation by small business39 The § 8(d) program regulations are located at 48 C. F.R. pt. 19, but they

specifically incorporate the definitions of “small disadvantaged business concern” contained in 13 C.F.R. pt. 124, subpt. B. See 48 C.F.R. § 19.001 (2000); 13 C.F.R. § 124.1002(a) (2000) (incorporating 13 C.F.R . pt. 124, subpt. A). -94- concerns owned and controlled by socially and econo mically disadvantaged individuals shall be established at not less than 5 percent of the total value of all prime contract and subcontract awards for each fisc al year”—has not changed. However, § 644(g)(1) has been amended at various ti mes during the litigation to include government-wide contracting goals for othergroups, such as women, service-disabled veterans, and HUBZone small busine ss concerns. Of the regulations implementing § 8(a) of the SBA, 13 C.F.R. §§ 124.1 et
seq. , 39 two regulations—those defining social and economic disadvantage—are relevant to this litigation and differ significantl y from their 1996 counterparts. The most extensive changes were made in 1998 and ar e present in the current regulations. The regulation defining social disadvantage are pre sently located at 13 C.F.R. § 124.103, and its language, preceding the l ist of presumptively socially disadvantaged groups, has changed. The current reg ulation states: “There is a rebuttable presumption that the following individua ls are socially disadvantaged . . . .” 13 C.F.R. § 124.103(b)(1) (2000); see also id. § 124.103(b)(3) (“The presumption of social disadvantage may be overcome with credible evidence to-95-

the contrary.”). This change reemphasizes that the presumption of social disadvantage based on group membership is not absol ute. In addition, the burden on members of unlisted groups to show they are socially disadvantaged has been reduced. Currently , social disadvantage may be established by a “preponderance of the evidence,” r ather than by the former “clear and convincing” evidentiary standard. Compare 13 C.F.R. § 124.103(c)(1) (2000) with 13 C.F.R. § 124.105(c)(1) (1997). The Small Busin ess Administration explains that this change was meant to more narrowl y tailor the § 8(a) program in light of Adarand III . See 8(a) Business Development/Small Disadvantaged Business Status Determinations , 63 Fed. Reg. 35,726, 35,728 (1998) (“In response to the Supreme Court’s decision in Adarand [III] . . . , the Department of Justice recommended the ‘preponderance of the evidence’ standard for government-wide disadvantaged business programs. [The Small Busine ss Administration] . . . continues to believe that the use of this standard strengthens the defense of the [§] 8(a) B[usiness]D[evelopment] program.”). The relevant regulations regarding economic disadvantage are presently located at 13 C.F.R. § 124.104. The Adarand III majority expressed concern about the “apparent discrepancy between the definit ions of which socially disadvantaged individuals qualify as economically d isadvantaged for the [§] 8(a) and [§] 8(d) programs.” Adarand III , 515 U.S. at 238-39. The new regulations-96-

rectify that discrepancy, retaining the more precis e definition previously applicable to the § 8(a) program, which requires co mparing the applicant to those who are not socially disadvantaged. See 13 C.F.R. § 124.104(a) (2000). The current regulations also impose a new requirement o n applicants: They must submit a narrative statement describing their economic disadvantage. See id. § 124.104(b)(1) (2000). As to duration of DBE certification, the current § 8(d) certification program regulations provide for certification of a business as socially disadvantaged for three years after either the initial certification or other administrative determination. See 13 C.F.R. § 124.1014 (2000). If a DBE wishes to r etain its certification for longer than three years, it must “submit a new application and receive a new certification.” Id. § 124.1014(c). 2. STURAA, ISTEA, and TEA-21 The language in STURAA, ISTEA, and TEA-21 concernin g the DBE program is similar. Notably, the requirement that “not less than 10 percent of the amounts” authorized under those Acts “shall be expe nded with small business concerns owned and controlled by socially and econo mically disadvantaged individuals” remains unchanged in all three statute s. TEA-21 § 1101(b)(1), 112 Stat. at 113; ISTEA § 1003(b)(1), 105 Stat. 1919; S TURAA § 106(c)(1), 101 Stat.
132.-97-

The only significant change in the transportation appropriations statutes is the addition in both § 1003(b) of ISTEA, 105 Stat. 1920-22, and § 1101(b)(6) of TEA-21, 112 Stat. 114-15, of a requirement that the Comptroller General conduct a study and report to Congress regarding several as pects of the DBE program. In ISTEA § 1003(b)(5), 105 Stat. 1920-22, the Comptroller General is given twelve months to study and prepare a report d iscussing: graduation from the program; the extent of out-of-state contracting with disadvantaged businesses by prime contractors; whether adjustments could be mad e “with respect to Federal and State participation in training programs and wi th respect to meeting capital needs and bonding requirements” to increase the suc cess of disadvantaged business enterprises; possible “revisions and addit ions to criteria used to determine the performance and financial capabilitie s of” DBEs; the costs and benefits of meeting the goal of 10% participation b y DBEs; the effect of the program on the construction industry; the certification process; and the implementation of the program by states. In TEA-21 § 1101(b)(6), 112 Stat. 114-15, the Comptroller General is given three years to study and prepare a report discussin g: the number, participation in prime contracts and subcontracts, gross receipts, and net worth of DBEs; the overall costs of the DBE program, “including admini strative costs, certification costs, additional construction costs, and litigatio n costs”; discrimination against-98-

DBEs in various markets including transportation co ntracting, financial, insurance, credit and bonding; the costs of any cou rt order striking down the DBE program; and the impact of the program on competiti on and the creation of jobs. The regulations implementing affirmative action pro grams of STURAA, ISTEA, and TEA-21 have undergone the most change of any of the relevant regulations at issue over the course of the instantlitigation. According to the federal Department of Transportation, the changes were made “primarily in response to the ‘narrow tailoring’ requirements of Adarand [III] ,” and the final rule “complies with the requirements that the court s have established for a narrowly tailored affirmative action program.” Participation by Disadvantaged Business Enterprises in Department of Transportation Programs , 64 Fed. Reg. 5096 (1999); see also id. at 5101-03 (discussing the requirements of narrow tailoring and the ways in which the new regulations attempt to meet those requirements). The current regulations, which appl y to any federal highway funds authorized under ISTEA or TEA-21, see 49 C.F.R. § 26.3(a) (2000), are located at 49 C.F.R. pt. 26. The current regulations specify that the presumptio n of economic disadvantage automatically is rebutted for any indi vidual whose net worth is above $750,000, without a requirement of further proceedings. See id. § 26.67(b)(1) (2000). This conforms with SBA regul ations concerning re-40 The term “recipient” is defined by the regulation s as “any entity, public

or private, to which DOT financial assistance is extended, whether directly or through another recipient, through the programs of the . . . FHWA.” 46 C.F.R. § 26.5 (2000). The FLHP is such a program and ther efore is a “recipient” for purposes of the relevant regulations. See 23 C.F.R. § 645.105(f) (2000). -99- certification of economic disadvantage. See 13 C.F.R. § 124.104 (2000). The current regulations also retain the requirement that businesses not exceed a certain amount of gross receipts in order to be eligible for the DBE program. See 49 C.F.R. § 26.65(b) (2000). Regarding the allocation of subcontracts to DBEs, the current regulations explicitly prohibit the use of quotas. See id. § 26.43(a). Similarly, the current regulations prohibit use of set-asides except in “l imited and extreme circumstances . . . when no other method could be r easonably expected to redress egregious instances of discrimination.” Id. § 26.43(b). Although acknowledging that ISTEA and TEA-21 set a goal of 10% DBE partici pation in government contracts, the current regulations term this “an as pirational goal at the national level,” id. § 26.41(b), which “does not authorize or require r ecipients to set overall or contract goals at the 10 percent level, or any other particular level,” id. § 26.41(c). 40 Extensive regulatory requirements must be met befor e goals may be set for DBE participation in a particular market. See id. § 26.45. Goals must be based on “demonstrable evidence of the availability of re ady, willing and able DBEs-100-

relative to all businesses ready, willing and able to participate” and must make “reference to the relative availability of DBEs in [the recipient’s local] market.” Id. § 26.45(b). In addition, goal setting must involv e “examining all evidence available in [the recipient’s] jurisdiction.” Id. § 26.45(c). Such evidence may include census data and valid disparity studies. See id. § 26.45(c)(1)-(3). After examining this evidence, the recipient must adjust its DBE participation goals by examining the capacity of DBEs to perform needed wo rk, disparity studies, and other evidence. See id. § 26.45(d). When submitting these goals, the reci pient must include a description of the methodology and e vidence used in setting them.
See id. § 26.45(f)(3). Finally, there is no requirement that the recipient actually meet its goals, merely that it make a good faith ef fort to do so; failure to meet goals will not subject a recipient to penalties or to being held in noncompliance as long as good faith efforts were made. See id. § 26.47(a). Wherever possible, the current regulations require recipients to use raceneutral means to “meet the maximum feasible portion ” of their overall DBE participation goals. Id. § 26.51(a); see also id. § 26.51(f) (if a recipient can meet its overall goals through race-neutral means, it mu st implement its program without the use of contract goals). The current re gulations also outline several race-neutral means available to program recipients including helping overcome-101-

bonding and financing obstacles, providing technica l assistance, establishing programs to assist start-up firms, and other methods. See id. § 26.51(b). For those not falling into one of the categories to which a presumption of social disadvantage applies, the current regulation s retain procedures for nonminorities to participate in the DBE program. Cons istent with the changes in SBA regulations, proof of social and economic disadvantage by those not so presumed may be shown by a preponderance of the evidence. See id. §§ 26.61(d), 26.67(d). Additionally, the current regulations re quire recipients to make sure DBEs are not “so overconcentrated in a certain type of work as to unduly burden the opportunity of non-DBE firms to participate.” Id. § 26.33(a). Finally, as to any part of the foregoing DBE statut ory and regulatory framework, the current regulations allow recipients to seek waivers and exemptions, despite the already non-mandatory nature of the DBE programs. See id. § 26.15. In this way, the statutory and regulatory scheme provides yet another means of ensuring that the program is not applied m ore broadly than warranted.
3. SCC The government maintains, and Adarand does not disp ute, that the SCC, which spawned this litigation in 1989, is no longer in use. ( See Appellants’ Supp. Br. Attach. 1 (memorandum from Arthur E. Hami lton, Federal Lands Program Manager to Federal Lands Highway Division E ngineers stating that41 It is unclear from the record whether the 1997 re vision to the SCC

entailed the addition of a new section or the repla cement of the previous one. The revision instructs those using the SCC to “[a]d d the following [revision],” (Appellants’ Supp. Br. Attach. 2 at 1), rather than replace the existing SCC, and we thus assume the 1997 revision is an addition to the SCC. However, in either case, our analysis in this opinion remains the same

. -102- “[t]he SCC will not be placed in any future invitat ions for bids” and “shall be removed by amendment from any invitations for bids where the bid opening has not taken place”).) In November 1997, before the discontinuation of its use, the SCC was revised by the addition of a new section 41 which creates further conditions of eligibility for the program. ( See id. Attach. 2 (new section of the SCC).) To begin with, subject to modification based on DBE av ailability, at least 10% of the prime contract must go to DBEs for SCC eligibility. If a DBE subcontractor is hired, that DBE may only contract out to non-DBEs “ for onsite work . . . incidental to, and necessary for the accomplishmentof,” the subcontract, in an amount not to exceed 50 percent of the value of the DBE’s subcontract. ( Id. at 2.) In addition to the 1.5-2% cap on the total amo unt of the prime contract that may be awarded pursuant to the SCC, the new section adds a further cap of $50,000 if subcontracting to one DBE and $100,000 i f subcontracting to more than one DBE.-103-

The revised SCC retains the provision furnishing pr ime contractors with “[c]ompensation . . . to locate train, utilize, ass ist, and develop DBEs to become fully qualified contractors in the transportation f acilities construction field,” but adds the explanation that this compensation is prov ided “to offset costs and anticipated risks associated with awarding subcontr acts to small business concerns owned and controlled by socially and econo mically disadvantaged individuals (DBE).” ( Id. at 1.) Finally, the new section provides an alternative ro ute to certification, “ad hoc certification” based on “self certification” ac companied by the requisite documents to demonstrate qualification for the prog ram, as well as “documentation showing the disposition of any previ ous application for certification the subcontractor has made to any Fed eral, State or local Government agency.” ( Id. ) If a would-be self-certified DBE has already bee n rejected by a government agency, ad hoc certificati on will not be granted “unless the reasons for [the previous] denial have been resolved.” ( Id. )