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2000 Term, Number 12 / March  26, 2001

Today the Supreme Court granted certiorari in three cases, two of which are of potential interest to the business community. Amicus briefs in support of the petitioners are due on Thursday, May 10, 2001, and amicus briefs in support of the respondents are due on Monday, June 11, 2001. The Court also invited the Solicitor General to express the views of the United States in two cases of potential interest to the business community. Any questions about these cases should be directed to Donald Falk (202-263-3245), Eileen Penner (202-263-3242) or Miriam Nemetz (202-263-3253) in our Washington office.

1. Affirmative Action — Federal Contracting. In Adarand Constructors, Inc. v. Pe a, 515 U.S. 200 (1995), the Supreme Court held that racial classifications imposed by the federal government, like those imposed by state and local governments, are subject to strict scrutiny — that is, the classification must be narrowly tailored to serve a compelling governmental interest. Today, the Supreme Court granted certiorari in Adarand Constructors, Inc. v. Slater, No. 00-730, to determine whether the Tenth Circuit properly applied that test on remand in upholding the constitutionality of a federal program that gave financial incentives for prime contractors to subcontract with disadvantaged business enterprises on federally aided highway projects. 

The federal program at issue, which was established by the Department of Transportation (DoT) pursuant to the Small Business Act ("SBA"), was designed to level the playing field for businesses owned and operated by "socially and economically disadvantaged" individuals bidding for federal subcontracts. The SBA rebuttably presumes that members of certain minority groups are "socially and economically disadvantaged." Despite that presumption, federal regulations currently require that, to be designated as Disadvantaged Business Enterprises ("DBEs"), businesses owned and operated by such minority individuals must certify that they have personally been socially and economically disadvantaged (49 C.F.R. § 26.67(a)(1)), i.e., that they have experienced racial or cultural prejudice (15 U.S.C. § 637(a)(5)) that has impaired their access to capital and credit opportunities (id. § 637(a)(6)(A)).

In 1989, a division of the DoT awarded the prime contract for a Colorado highway construction project to Mountain Gravel & Construction Company, which then solicited bids from subcontractors for the guardrail portion of the contract. Adarand submitted the lowest bid, but Mountain Gravel accepted a higher bid from Gonzales Construction Company, which, unlike Adarand, was certified as a DBE. Mountain Gravel submitted an affidavit stating that it would have accepted Adarand's bid had it not been for the additional incentive payment it received under its subcontractor compensation clause for hiring Gonzales. Adarand sued, arguing that the race-conscious presumption involved in the use of the subcontractor compensation clauses violated its Fifth Amendment equal protection rights.

The district court granted summary judgment to the DoT, and the Tenth Circuit affirmed, applying intermediate scrutiny, rather than the strict scrutiny applicable to State and local government race-conscious programs, on the ground that Section 5 of the Fourteenth Amendment gives Congress greater power than the States and local governments to remedy race discrimination. 16 F.3d 1537, 1545 (10th Cir. 1994). The Supreme Court reversed and remanded for application of strict scrutiny. 515 U.S. 200 (1995). On remand, the district court held that, although Congress had a compelling interest in remedying past and present discrimination in the construction industry, the program was not narrowly tailored. 965 F. Supp. 1556 (D. Colo. 1997). On appeal, the Tenth Circuit held that the case was moot, 169 F.3d 1292 (1999), but the Supreme Court reversed and remanded, ordering the Court of Appeals to resolve the dispute on the merits. 120 S. Ct. 722 (2000). 

On remand again, the Tenth Circuit ruled that, although the federal program was unconstitutional as it was structured in 1997 when the district court rendered judgment, the current program passed constitutional muster. 228 F.3d 1147 (2000). The court found that Congress had amassed strong evidence showing the need to "remedy[] the effects of racial discrimination and open[] up federal contracting opportunities to members of previously excluded minority groups." Id. at 1154; see id. at 1166-1175. The court cited evidence that minority construction businesses suffer discriminatory barriers to market entry and competition, including discrimination in lending, insurance, bonding, and contracting. This evidence included local disparity studies showing comparative underutilization of minority-owned construction businesses, and evidence that, absent affirmative action (id. at 1166-1173), "minority business participation in the relevant market drops sharply or even disappears." (id. at 1174).

The court of appeals held that the incentive system as it existed in 1997 (when the district court last considered the merits of the case) was not sufficiently narrowly tailored: the agency implementing the SBA had not adequately considered race-neutral measures as alternatives the subcontractor compensation clauses (id. at 1178); the program failed to "graduate" businesses that were no longer economically disadvantaged (id. at 1179); and the program was over-inclusive, lacking an individualized inquiry into the economic (as distinguished from social) disadvantage faced by each particular DBE (id. at 1184-1885). Because the DoT had eliminated the incentive system and altered the certification requirements to address these concerns while the appeal was pending, however, the court upheld the current DBE program as constitutional. 

Adarand petitioned for certiorari, arguing that the Tenth Circuit found the government's evidentiary showing sufficient only by holding the federal government to a more lenient standard than would be applicable to a state or local government, and that such incongruity is constitutionally impermissible. Adarand also argues, inter alia, that the existing regulations are not narrowly tailored because they award relief based on membership in a racial group rather than on a particularized showing of disadvantage. 
This case is of great interest to state and local governments that have affirmative action programs, and to all companies that compete for federal contracts. The Court's decision likely will further define the types and amount of evidence necessary for any governmental body to demonstrate a compelling interest in adopting an affirmative action program, and illuminate in what, if any, respects the evidence the federal government may muster is different from that which a state or local government must produce to support such a program. The decision also likely will specify further what particular characteristics tend to make a program constitutionally permissible.

2. Employment Discrimination — EEOC — Arbitration Agreements. The Court granted certiorari today in EEOC v. Waffle House, Inc., No 99-1823, to decide whether an employee's agreement to arbitrate claims of workplace discrimination precludes the EEOC from obtaining individual remedies for the employee in an enforcement action against the employer in federal court.

Title VII of the Civil Rights Act of 1964, as amended, 42 U.S.C. § 2000e-5(b), (f), confers on the EEOC broad enforcement authority to investigate and bring suit concerning claims of employment discrimination. If, after investigation of a complaint of discrimination, the EEOC finds reasonable cause to believe that discrimination has occurred, it must attempt to conciliate the claim. If that effort is unsuccessful, the EEOC can bring a public enforcement action in its own name to obtain injunctive relief, as well as to obtain victim-specific remedies such as back pay, money damages, and reinstatement. The EEOC has similar enforcement powers under the Americans with Disabilities Act ("the ADA"). See 42 U.S. § 12101 et seq. However, the two statutes also preserve individual private remedies, resulting in a dual enforcement system and the availability of overlapping individual remedies.
The Federal Arbitration Act, 9 U.S.C. §§ 1-15 (1994) (the "FAA"), provides that written, valid arbitration clauses in contracts involving interstate commerce are enforceable. Just last week, the Supreme Court held that the FAA applies to employment agreements, except those of transportation workers. Circuit City Stores, Inc. v. Adams, No. 99-1379, 69 U.S.L.W. 4195 (March 21, 2001). In addition, the Court has long acknowledged a "federal policy favoring arbitration." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Co., 460 U.S. 1, 24 (1983). 

Eric Scott Baker, whose application for employment with Waffle House included a clause mandating arbitration of employment discrimination claims, was fired after suffering a seizure. Rather than seeking arbitration, Baker filed a complaint with the EEOC claiming that his discharge violated the ADA. The EEOC filed an enforcement action against Waffle House in federal court in its own name, seeking injunctive relief, as well as specific and monetary relief for Baker. Waffle House responded by petitioning to compel arbitration under the FAA, and for a stay or dismissal of the EEOC's enforcement action. The district court denied the petition on the ground that the parties had not entered an agreement to arbitrate. 

The Fourth Circuit reversed. 193 F.3d 805 (1999). The court of appeals found that Baker and Waffle House had entered an enforceable agreement to arbitrate. Id. at 809. It also concluded that, although the agreement could not preclude the EEOC from bringing an enforcement action (id. at 811), it did preclude the EEOC from obtaining any individual relief for Baker (id. at 812-813). The court reasoned that, although the EEOC's statutory interest in pursuing large-scale injunctive relief outweighed the federal policy favoring arbitration of individual claims, its statutory interest in pursuing victim-specific remedial measures did not. 

The decision of the Fourth Circuit accords with a decision of the Second Circuit concluding that a similar arbitration agreement precluded the EEOC from seeking purely monetary relief in federal court on behalf of the charging party, but not from seeking broad injunctive relief. EEOC v. Kidder, Peabody & Co., 156 F.3d 298 (1998). The Sixth Circuit has reached a contrary conclusion, holding that a private arbitration agreement does not affect the scope of the EEOC's power to obtain victim-specific remedies in federal court. EEOC v. Frank's Nursery & Crafts, Inc., 177 F.3d 448 (1999).

This case is of great interest to all businesses that use arbitration clauses in their employment agreements, and will clarify an area of considerable uncertainty in the employment litigation arena.

* * *

The Supreme Court invited the Solicitor General to express the views of the United States in two cases of potential interest to the business community:

  1.  Rush Prudential HMO, Inc. v. Moran, No. 00-1021, presents the question whether the Employee Retirement Income Security Act of 1974 (ERISA) preempts an Illinois statute that provides for independent review of disputes between primary physicians and health management organizations about the medical necessity of patient treatment. Many other States have similar statutes. 

  2. Edelman v. Lynchburg College, No. 00-1072, addresses the validity of an EEOC regulation that permits belated amendments to unverified (and therefore defective) administrative charges of employment discrimination under Title VII and, if the regulation is invalid, the existence of equitable tolling for the limitations period for bringing such charges.

This Mayer, Brown, Rowe & Maw Supreme Court Docket Report provides information and comments on legal issues and developments of interest to our clients and friends. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

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