Transcript

IN THE SUPREME COURT OF THE UNITED STATES

ADARAND CONSTRUCTORS, INC. Petitioner v. FEDERICO PENA, SECRETARY OF TRANSPORTATION, ET AL.

No. 93-1841

January 17, 1995

The above-entitled matter came on for oral argument before the Supreme Court of the United States at 10:03 a.m.

APPEARANCES:

WILLIAM PERRY PENDLEY, ESQ., Denver, Colorado; on behalf of the Petitioner.

DREW S. DAYS, III, ESQ., Solicitor General, Department of Justice, Washington, D.C.; on behalf of the Respondents.

PROCEEDINGS

10:03 a.m.

CHIEF JUSTICE REHNQUIST: We'll hear argument first this morning in Number 93-1841, Adarand Constructors, Inc., v. Federico Pena, Secretary of Transportation.

Mr. Pendley.

ORAL ARGUMENT OF WILLIAM PERRY PENDLEY ON BEHALF OF THE PETITIONER

MR. PENDLEY: Mr. Chief Justice and may it please the Court:

Adarand is a small, family-owned corporation that does business in Colorado Springs, Colorado. It is owned by and operated by Randy Pech, his wife Valerie, his mom Ruth, and their friend and Partner, Steve Gaglan.

In the year surrounding the events that led to this action, Adarand's annual average gross receipts were approximately $900,000, but their average annual net profits was but $30,000. In fact, in the year before this event, they had a net negative cash flow of some $20,000.

Adarand specializes in the construction of highway guardrails, primarily as a result of the receipt of subcontracts from prime contractors. In 1989, Adarand submitted a bid to do the guardrail work on the subcontract as a subcontractor along 4.7 miles of highway in the San Juan National Forest in extreme Southwestern Colorado.

Although it submitted the lowest bid, and although it has an excellent reputation for doing quality work on a timely basis its bid was rejected by operation of the statute questioned here, a statute which presumes that all members of certain enumerated racial and ethnic groups are socially and economically disadvantaged.

Adarand challenged the constitutionality of the statute both on its face and as applied to him in the loss of this $20,000 contract.

QUESTION: Do we know that that was the reason for the rejection?

MR. PENDLEY: Absolutely, Justice Scalia. When we look at the statement by Mountain Sand and Gravel at page 30 and 31 of the joint appendix, Mountain Sand and Gravel says, but for the SCC, the subcontractor compensation clause, Adarand would have received the contract. But --

QUESTION: Does that clarify that it was the presumption that was crucial in this case?

MR. PENDLEY: No. That is clear by other means, Justice Souter. There are several means: 1) Adarand, Randy Pech testified that in fact it was the operation of the presumption. He said, Gonzales is a DBE because he is a minority.

In addition, we have the testimony that's contained in the appendix in the reply, at pages 7, 9 and 10, and 14, where three Government officials testified they knew of no circumstance under which anybody had been a DBE for any other reason than the operation of the presumption.

QUESTION: Did the judge take that -- make that a finding that that was an undisputed material fact?

MR. PENDLEY: There -- Justice Souter, there were no genuine issues of material fact remaining in the dispute. As page 31 of the appendix in our petition for writ of cert makes clear, both parties on cross-motions for summary judgment stipulated to all the facts, or agreed there were no genuine issues of material fact remaining in dispute. One of those issues would have been the subcontracting compensation clause's operation.

QUESTION: But you said the statute, and there are several statutes under which one can be certified. Can you tell us which of the statutes you are challenging in this proceeding?

MR. PENDLEY: Yes, Justice Ginsburg. We're challenging the -- several statutes. We're challenging section 502 of the Small Business Act, which is section 644(g), which is contained at page 11-A of the Government's brief.

In addition, that -- there is section 637(d), which is on page 11 of the Government's appendix, which sets out the presumption, and that presumption is applied to 644(g) because of the appropriation in the STURAA, what's called the STURAA, the Surface Transportation and Uniform Relocation Assistance Act, which is at page 16-A of the Government's brief.

QUESTION: But you're not challenging what has been called the 8(a) certification, or are you -- does that enter into this case?

MR. PENDLEY: No, Justice Ginsburg, it does not, simply the presumption under this Federal highway set-aside, which is a direct funding program.

QUESTION: May I ask, Mr. Pendley, the plaintiff is not suing for the -- for damages or any backward-looking relief for this particular contract, as I understand it.

MR. PENDLEY: We -- no, Justice O'Connor. We believe that we could go back and seek relief. We --

QUESTION: Well, but that was not sought, and is not sought in this suit?

MR. PENDLEY: We seek such other -- such other relief as may be just and equitable under the premises, and that's on page 24.

QUESTION: I thought you were seeking an injunction and forward-looking relief.

MR. PENDLEY: We are seeking both, Your Honor.

QUESTION: The Solicitor General takes the position that the petitioner lacks standing for a failure to show that the presumption was applied here, or if it was, that it was applied incorrectly.

MR. PENDLEY: Well, Justice O'Connor, we believe that there is plenty of evidence below to demonstrate that it was in fact a presumption. We have Mr. Pech's testimony, we have three Federal officials who were running that particular agency, the Central Federal Lands Highway Division, who testified that they know of no other basis that anyone in Colorado was certified as a DBE, except for the presumption.

And one of the reasons why that's very important, Justice O'Connor, is because section 108, the subcontracting compensation clause, requires the prime contractor to provide to the Federal Government a copy of the DBE certification, so the Federal officials involved in this program have known from the very beginning the basis upon which the certification took place, which adds increased importance to their testimony that they knew of no situation in which DBE's were certified by any other way than the presumption.

QUESTION: And what did the petitioner show would be his future damages, or the injury to be suffered in the future?

MR. PENDLEY: His injury, Justice O'Connor, is the fact that he cannot compete on an equal footing, as this Court held in the Jacksonville case, that that is the harm, that is the harm, direct harm --

QUESTION: Well, in Jacksonville, was there some backward-looking relief being sought?

MR. PENDLEY: I don't believe so, Justice O'Connor.

But what Mr. Pech has testified is, he bids on every single contract in Colorado. Every single guardrail contract in Colorado, he bids on those projects, and as long as there is a subcontractor compensation clause in the provision that prevents him from competing on an equal footing, he will be unable to compete.

In fact, he presented evidence in response to the Government's interrogatory number 22 that showed he had lost some 12 contracts already as a result of the application of the socially and economically disadvantaged --

QUESTION: Had he issued about 83 bids over a period of some 9 years? Was that the testimony?

MR. PENDLEY: Yes, Your Honor, Justice Kennedy. The testimony from the Government in response to one of our interrogatories was there were some 87 contracts let that contained guardrail work.

Of those, 64 were given to subcontractors to do, and of that, 43 percent of that number went to DBE's, and that's consistent with the documents provided by the L. S. Lee amicus brief, where they point to the General Accounting Office report that shows that in many of these States -- for example in Colorado, 78 percent of the traffic signaling is going to DBE's. In Connecticut, 90 percent of the guardrails and fencing is going to DBE's.

QUESTION: Of those 83, or, I guess 64 where there were subcontractors, had your client bid on all of those?

MR. PENDLEY: He bids on every one that has a guardrail, depending on the bid.

QUESTION: Mr. Pendley, I'm still trying to get clear on the significance of what we have for the standing issue. Let me go back behind the summary judgment motion to the complaint. Did your complaint specify the presumption as being the flaw in the statutory scheme, or the clause as being the flaw?

MR. PENDLEY: The -- excuse me, Your Honor, the floor as to the --

QUESTION: No, I -- flaw --

MR. PENDLEY: Oh, flaw.

QUESTION: The constitutional infirmity. I'm sorry.

MR. PENDLEY: Excuse me, Your Honor.

QUESTION: It's my regional accent.

(Laughter.)

MR. PENDLEY: It's my hearing.

We assert that the flaw is the presumption. The presumption --

QUESTION: And you asserted that in the complaint?

MR. PENDLEY: I believe that we did, Your Honor, yes.

QUESTION: Okay.

QUESTION: Do you contend that Congress failed to make adequate findings concerning racial discrimination in the construction industry to support the legislation?

MR. PENDLEY: Yes, Your Honor. We think there's a dearth of findings when one examines the Congressional Record. Basically, what we're dealing with here are situations where there's a piggy-back on the SBA administrative relief that was fashioned, a piggy-back on the Public Works Employment Act that this Court considered in Fullilove, and a continuing piggy-back without any analysis as to what is the today situation.

QUESTION: Well, Fullilove spoke at some length on the adequacy of congressional findings. Do you think that has a bearing here?

MR. PENDLEY: I think that Fullilove is distinguishable, Your Honor, with regard to what the Court permitted. There, of course, as you know it was a facial challenge, and --

QUESTION: I'm talking about the findings of Congress.

MR. PENDLEY: Yes. Well, I'm trying to answer that, Justice -- excuse me. I hope this is the answer, and the answer is that it was a facial challenge, and so Justice -- Chief Justice Burger insisted that he had -- the Court had reasonable assurances that the administrative process would be operating effectively and properly, it would be narrowly limited, it would be limited to the situations in which it applied, in fact, as amicus Pacific Legal Foundation points out in footnote 44, it was very clear -- 44 of the Fullilove brief, opinion -- it was very clear that it was only going to apply to minorities who were disadvantaged.

QUESTION: Well, that goes to the tailoring. I don't think that goes to whether there were adequate findings of racial discrimination, and Fullilove spoke to the congressional findings of discrimination in the construction industry.

MR. PENDLEY: Your Honor, I don't think there's adequate findings here. I think what one has to look at -- the Court should look at is the appendix B of the Government's brief, where they set -- where it sets out what they think is the best -- its best shot at demonstrating the findings.

And one looks at pages 21 and 23, for example, and we hear again the litany of problems that small businesses like Adarand face, problems getting bonding, problems getting certification, problems dealing with Government paperwork, problems getting paid by prime on time, these are problems that cut, as the Court has said in the past, not across racial lines but across business on size lines. That's really the issue. When Congress makes findings like that, they are so amorphous as to be limitless.

In addition, the Government points to two specific things: 1) problems with trade unions in New York, and 2) problems with State officials in Illinois.

Now, it seems that those cry out for race-neutral resolution, that those are issues that can be dealt with on a case-specific basis to end whatever problems are occurring with trade unions or with State officials who are violating the law.

QUESTION: Suppose the Government interest here were to remedy the past effects of racial discrimination. Could the Government pass a statute to accomplish its interest without using race-conscious measures?

MR. PENDLEY: Oh, I think that's the aspirational goal, Justice Kennedy, that the Congress be victim-specific. I think when you look at the continuum that spreads out there, we have a victim-specific remedy, and at the other end we have a total indifference to the nature of the victims, if they are, and whether or not they've suffered. That's what we have here, total indifference.

I mean, we have a situation here where a Hong Kong banker, a Japanese electrical engineer, or the son of landed gentry from Spain could come to Colorado Springs, buy 51 percent of Adarand, and turn it into a DBE.

QUESTION: I don't see how it could do that, because I thought that the claim had to be one of specific injury to this particular subcontractor, by virtue of membership in some group.

MR. PENDLEY: That's the Government's --

QUESTION: I guess, to make it clear, I thought group membership was necessary, but it was not sufficient.

MR. PENDLEY: Your Honor, it is sufficient. Under the regulations the Government has set forward, and it's discussed on page --

QUESTION: Well, the way the statute is written, is it sufficient?

MR. PENDLEY: The way the regulations are. The way --

QUESTION: Well, let's start with the statute. Under the statute, would it be sufficient simply to be a member of a group?

MR. PENDLEY: Yes.

QUESTION: The regulations read as though the SBA will issue a certification only if the business shows it meets the definition of economic disadvantage, and does that mean that each participant has to personally demonstrate harm from discrimination to qualify?

MR. PENDLEY: In this situation, Justice O'Connor, the certification was by the States, and --

QUESTION: Well, what if that were the regulatory scheme --

MR. PENDLEY: Excuse me.

QUESTION: -- that each individual would have to show a demonstration of harm from discrimination to qualify? Does that meet your objections, if that were the case?

MR. PENDLEY: It goes a lot further than the current situation, which is totally indifferent to any -- any injustice, or --

QUESTION: I thought the regulations could be read to require just that and I wondered, if they did, what your view of them might be?

MR. PENDLEY: I don't think the regulations can be read that way. In fact, they specifically say, there's -- in the notice of proposed rulemaking that we discuss on page 22 of -- I believe it's page 22 of our brief, where the Government says -- talking about the proposed rulemaking coming out on certification, and it says, we've had inquiries from States saying, what do we do, do we inquire into the economic status of these organizations?

And the answer is, States, you don't do that. Once you have determined that this applicant is a member of one of the identified racial groups, the inquiry ends. That individual, that organization is certified.

QUESTION: Mr. Pendley, isn't it accurate to say that actual, personal harm from discrimination is necessary, but it is presumed? I mean, there -- isn't the scheme of the statute that technically it is necessary, but it is simply presumed to exist if the enterprise is a minority enterprise?

MR. PENDLEY: Absolutely, Justice Scalia.

QUESTION: Now, the Government says that that's good enough. If you have a problem with the presumption, you could have come in and showed that in your case, in the case of this contract, the presumption was not valid. Did you have such an opportunity?

MR. PENDLEY: The rules permit a third party to challenge the presumption, but as Pacific Legal Foundation points out in their amicus brief, that's not consistent with the real world.

I think the first question is, is it fair, is it right to ensure the equal protection guarantees be put on the back of an Adarand, rather than on the Government, which is dispensing these benefits, and the benefited party?

In addition, the difficulty an Adarand has, first of all, Judge Posner -- as the amicus Association of General Contractors' brief points out, discussing Judge Posner's point that what if we had a rebuttable presumption that blacks could not do highway construction work? That would be odious and offensive on its face, even if it was rebuttable.

The irony here, in comparison is in that situation, the black contractor is in possession of the knowledge necessary to rebut the presumption. Here an Adarand, without subpoena power, without any ability to gather the information, is incapable of challenging the presumption.

In addition, I think he exposes himself to being a litigious entity vis-a-vis other companies. The last thing you want in the highway contracting business is to know the guy you're dealing with is litigious. In addition, a possible lawsuit for deformation by the DBE -- as the Solicitor General points out in his brief, that's a criminal violation, to hold oneself out falsely as a DBE.

QUESTION: Of course, here, we're not presuming that black people can't work on highways. The presumption is that a person who is black has suffered prejudice or cultural bias. Do you think that that's an unreasonable presumption as a matter of fact, or is it that you're saying, assuming that it's reasonable as a matter of fact, nonetheless there is something in the law that forbids it?

I take it you're arguing the latter, and what, precisely, is it in the law that forbids making that presumption which might be reasonable as a matter of fact, and how many cases would this Court have to overrule, if any, in order to reach that proposition of law?

MR. PENDLEY: Justice Breyer, the problem with it is, it's an impermissible stereotype. It's a racial stereotype that presumes that every member of one of these listed groups -- and I want to point out that we have 26 nation -- member, individual --

QUESTION: You know I'm asking you a legal question.

MR. PENDLEY: Yes, sir.

QUESTION: The legal question I'm asking -- of course, you could take it on either ground.

I had assumed you were assuming as a matter of fact it is rational to assume that black people have suffered prejudice or cultural bias. If that's so, what is it in the law that would prohibit the Congress or the Department of Transportation from making that factual but rebuttable presumption, particularly given past Supreme Court cases?

In other words, what are you going to do about those? Are we supposed to overrule those past cases? Is it that it's unreas -- I'm trying to get your legal argument.

MR. PENDLEY: Yes, Your Honor.

I don't think the Court has to overrule any case. I think this is totally consistent with the traditional test that was espoused in a number of cases the Court has embraced with regard to equal protection, and it's consistent with all of those cases. I would distinguish Metro on the basis that we're not talking about a gross public benefit to the Nation, because the Court found there was a nexus between the ownership of television stations and what is broadcast --

QUESTION: Fullilove is the most obvious.

MR. PENDLEY: Your Honor?

QUESTION: Fullilove would seem the most obvious.

MR. PENDLEY: Fullilove does seem the most obvious, and as this Court indicated in the dissent -- some justices indicated in the dissent in Metro, at least six justices wanted something approaching strict scrutiny.

The triggering mechanism is, we have a stereotype that is so rarely relevant --

QUESTION: I'm sorry, I'm asking would this Court have to overrule Fullilove? Wouldn't it?

MR. PENDLEY: No.

QUESTION: Why not?

MR. PENDLEY: Because in Fullilove it was a totally different factual situation. It was an as-applied challenge. The regulations had come out in October, and in November the parties filed the lawsuit.

We have a situation where it's actually been applied. We have the testimony of the officials as to how it's being applied, the fact that they can't get waivers, they don't get waivers, the fact that we have a 15- to 18-percent set-aside, and the fact there's a presumption that operates, all of these things are distinguishable from the factual situation in Fullilove.

QUESTION: But Fullilove involved a straight-out set-aside, no flexibility at all, and it seems that this program is about the most flexible, rebuttable presumption -- I thought you were making both a facial challenge first --

MR. PENDLEY: Yes.

QUESTION: And let's just take that facial challenge.

MR. PENDLEY: Yes.

QUESTION: On the facial challenge, to agree with you, mustn't we overrule Fullilove?

MR. PENDLEY: No, Your Honor.

QUESTION: How can you take both statutes on their face and say the one that has an absolute 10-percent set-aside is good, and the other, that has a rebuttable presumption, that has a concept of economic disadvantage, that is not race-specific, that that one is no good?

MR. PENDLEY: In the Fullilove case, Justice -- Chief Justice Burger's opinion is filled with references to the flexibility of the program, the waivers in the program, how they can get out from under it, the ceilings of the program, how they could not give to DBE's in improper situations, so it was a very flexible program.

QUESTION: But here, the contractor doesn't even have to have anything to do with any DBE, the successful bidder on the Government project, isn't that right?

MR. PENDLEY: The prime contractor, Justice --

QUESTION: Yes.

MR. PENDLEY: -- Ginsburg? The prime contractor is economically compelled. I would think it would be comparable to, say, the Arlington Heights case, where if the city, instead of passing a zoning change, actually said we're going to pay $1,000 to every homeowner, $1,000 more if that homeowner will not sell to a minority.

That's the situation we have here. The prime contractor is being told, you'll get a $10,000 bonus if you give this contract to one of our DBE's instead of the low-bidding Adarand.

QUESTION: Congress described that not as a bonus but -- am I wrong in recalling that it was supposed to be a cost compensation, recognizing that it would be an additional cost for the principal contractor to take on a subcontractor that didn't have secure credit and that might have to have some assistance in dealing with labor problems and the like?

MR. PENDLEY: The report that the Highway Department did, it's a 1985 report that's entered into the record, a 1985 highway report, they said their discussions with contractors, with prime contractors is that the subcontractors, they don't have to find them, the subcontractors, the DBE's come looking for them.

In addition, the DBE's testified, we don't need the help. That's all very nice to have the help, but we're fine. We're perfectly capable of doing this job. We don't need that assistance.

So in addition, I also think on its face that's an impermissible racial stereotype to say, jeez, all these DBE's out there are so incompetent that they need the help, when the fact is they don't.

QUESTION: Well, let's -- you said that on -- that although Fullilove was okay under the Constitution on its face, this arrangement is not. That's --

MR. PENDLEY: Justice -- Chief Justice -- this -- yes. This arrangement is not. Chief Justice Burger said -- if Fullilove pushes the outer limits -- he says, just because it pushes the outer limits, there's no reason to strike it. This is going over the edge. This Adarand program --

QUESTION: I don't see why this has gone beyond Fullilove. Fullilove had, what was it, a 10-percent set-aside, wasn't that it?

MR. PENDLEY: Yes.

QUESTION: What this has got is a presumption of specific harm to a specific subcontractor which in fact is rebuttable. How does that go beyond the limit of Fullilove?

MR. PENDLEY: Justice Souter, I believe it goes beyond because it puts the burden on the wrong party. It puts the burden on a party who's incapable of disproving it himself.

QUESTION: Well, you say it puts the burden. In fact, it gives an opportunity to rebut which in Fullilove did not exist, isn't that true?

MR. PENDLEY: No. They could be challenged in Fullilove. Certification could be challenged in Fullilove.

QUESTION: What would the challenge have consisted of? I just don't remember this. You'll have to help me.

MR. PENDLEY: Whether or not the parties participating were authorized to participate and fell within the definition, but the point here is --

QUESTION: And fell within the definition as --

MR. PENDLEY: Of a --

QUESTION: -- as a minority.

MR. PENDLEY: MBE.

QUESTION: Yes.

MR. PENDLEY: Yes, Your Honor.

QUESTION: So that in Fullilove, the criterion was simply class membership, whereas here the criterion is ultimately actual harm, isn't that correct?

QUESTION: The difference between MBE and DBE, then -- this is called disadvantaged.

MR. PENDLEY: Yes, Your Honor.

QUESTION: And in Fullilove you could show that the minority status claim was a sham, perhaps, but here, it's disadvantage, you can say. Minority, yes, but disadvantaged, no.

MR. PENDLEY: Here, the rebuttable presumption, the burden falls upon the Adarands of the world to challenge it. If the burden is upon the Adarands of the world to assure equal protection, that's not going to happen. They just simply --

QUESTION: But the presumption is of harm, i.e., to this particular contractor, isn't it?

MR. PENDLEY: The presumption, Your Honor, is of membership in the race, is a presumption of socially harmed and economically disadvantaged.

QUESTION: To this particular contractor. I mean, that was your answer, as I understood it, to Justice Scalia.

MR. PENDLEY: Yes.

QUESTION: Okay.

QUESTION: What is the standard we apply in reviewing this scheme? Is it strict scrutiny? Is that the position you take?

MR. PENDLEY: Yes, Your Honor, strict scrutiny.

Mr. Chief Justice, I reserve the remainder of my time.

QUESTION: Very well. Thank you, Mr. Pendley.

General Days, we'll hear from you.

ORAL ARGUMENT OF DREW S. DAYS, III ON BEHALF OF THE RESPONDENTS

GENERAL DAYS: Thank you, Mr. Chief Justice, and may it please the Court:

The subcontracting compensation clause challenged here is a means of effectuating a national policy designed by Congress and supported by Presidents of both parties to ensure to the greatest extent possible that Federal procurement programs do not compound the continuing effects of well-documented discrimination but, rather, serve to offset their consequences.

The process by which compensation is awarded is neither overinclusive, since members of certain designated racial and ethnic groups were not, in fact, disadvantaged or ineligible under the program, nor underinclusive, since some individuals who are not members of those designated groups may qualify as socially and disadvantaged persons under the regulatory scheme.

QUESTION: General Days, why couldn't Congress have done this without a presumption, and just said that if the DBE can show factual economic disadvantage, it gets the benefit, but not use any presumption?

GENERAL DAYS: Mr. Chief Justice, Congress could have done that, but I think what the record reflects here is a review by Congress over a number of years, looking at the degree to which Federal contracting dollars were going to contractors who had participated in some way or reinforced discrimination against members of certain racially and economically disadvantaged groups and decided that this was the appropriate way to do it.

QUESTION: So it's really a matter of administrative convenience? They figured it would come out this way in the majority of cases?

GENERAL DAYS: Well, I wouldn't characterize it as administrative convenience. It was simply a determination that if the results that Congress wanted to have occur were to occur, they would have to be done in this way. Congress --

QUESTION: And Congress, then, was indifferent to the fact that perhaps people who had not been in fact economically disadvantaged might, because of the presumption, nonetheless get the benefit of it?

GENERAL DAYS: Congress was, I think, concerned about that, but was aware that the administrative scheme that was in place or set up after the statute was amended would deal with those particular problems.

One has to understand that the Small Business Act, for example, was in existence for 25 years before Congress decided to focus, as it has in recent years, on the problems of members of certain racial and ethnic groups that were socially and economically disadvantaged, so there was some experience on the part of Congress with the way in which Federal procurement dollars were somehow not finding their way to people who were the victims of discrimination.

QUESTION: General Days, as a practical matter, how does a third party go about challenging the economic disadvantage presumption as applied to a particular contractor?

GENERAL DAYS: What a contractor, a subcontractor would do in a situation like this in Adarand's case is bring to the attention of the contracting officer or, if it were appropriate, to the SBA, the fact that it felt that a company that claimed to be a disadvantaged business enterprise was not a disadvantaged business enterprise. It could point to, for example, the amount of contracts, the number of contracts that that particular company had won.

QUESTION: How does he know that the company is claiming that status? Is it posted somewhere publicly that he would know whose claim to challenge?

GENERAL DAYS: Yes. Under the STURAA scheme disadvantaged business enterprises are listed by the States so that they can participate in programs that the State enters into with the Federal Government, so it is possible for one to look down that list and identify those who are claiming to be disadvantaged business enterprises.

QUESTION: But how would you know which one? I mean, you have a particular bid situation. There is a job going out for bid.

GENERAL DAYS: Yes.

QUESTION: And how does someone like petitioner know that from that long list a particular one is going to be trying to get the certification and therefore that's the one that should be challenged?

GENERAL DAYS: Well, it can be done at the time that that subcontractor comes forward. For example, in this subcontracting compensation clause situation, in the Adarand situation, once Mountain Gravel decided that it was going to participate in the SCC program and was seeking out disadvantaged business enterprises and Gonzales was identified as a DBE that could fulfill its needs, at that point --

QUESTION: How would the petitioner know that Gonzales had been identified?

GENERAL DAYS: One of the ways that Adarand would know, in fact, is that Gonzales has been involved in a number of contracts, and they're generally aware --

QUESTION: But there's no mechanism to let the petitioner know in a particular situation that this is the one to focus on?

GENERAL DAYS: I think that once the subcontract is let to Gonzales, Adarand can come in and say Gonzales does not qualify appropriately as a DBE.

QUESTION: That makes it much harder to upset, I suppose, after the fact.

Are you aware of any instances where third parties have successfully challenged --

GENERAL DAYS: Yes.

QUESTION: -- one of these certifications?

GENERAL DAYS: Yes, I am. We have cited in our brief, for example, a challenge that came through the SBA process in the Autek case, where a Native American firm had claimed social and economic disadvantaged status, and it was determined that because of the income of that particular company, it should not be permitted that status as a disadvantaged business enterprise. There are also --

QUESTION: Who determined that?

GENERAL DAYS: This was determined by the Small Business Administration.

QUESTION: In response to somebody's challenge, or on its own initiative?

GENERAL DAYS: It's not clear exactly how that was done, but --

QUESTION: Do you have any example where somebody in the position of Adarand successfully challenged, brought -- an individual successfully brought a challenge? Do you know of any?

GENERAL DAYS: It's very hard, Justice Scalia, to identify that, because --

QUESTION: You don't know of any.

GENERAL DAYS: That's correct, but the record does reflect that there have been many situations where that has happened.

QUESTION: When you say "that," what do you mean?

GENERAL DAYS: Well, by that I mean that there have been challenges to the certification of agencies as disadvantaged business enterprises.

QUESTION: By competing subcontractors?

GENERAL DAYS: I think the point, Mr. Chief Justice --

QUESTION: You can answer that yes or no, General Days.

GENERAL DAYS: No, I don't think that we have precisely pinned down, but the point is that the SBA and the State contracting agencies get information from a number of sources, and they are open to claims from any source, and then investigate those particular situations.

QUESTION: Well, Adarand says that as a practical matter that's a fantasy, that there's not enough time, there's not enough information, and besides which you blackball yourself by identifying yourself as a litigious individual.

No general contractor wants to hire somebody who's going to promote litigation, and if -- now, is that true or false?

Unless you can show me some -- you know, the fact that this presumption is really only that, and that it's a real, live, working system in which it's challenged with some regularity, it seems to me to be in effect a conclusive presumption.

GENERAL DAYS: Well, it is not, Justice Scalia. I'd like to point the Court to an amicus brief by the Latin American Management Association, which identifies at pages 24 to 26 a number of reported situations where challenges have been made. It's not clear from what particular source those challenges came, but challenges were successfully made to claims that certain organizations were disadvantaged business enterprises.

QUESTION: I might be wrong about this, but I -- correct me if I -- but my impression was under section 8(d), which is -- I take it is what they're challenging, it's the procurement officer who makes the challenge. The procuring agency contracting officer, and that what the other contractors do is, they submit information --

GENERAL DAYS: That's correct.

QUESTION: -- to that officer, and I take it that could be confidential, or not, I don't know on that.

GENERAL DAYS: Well, I don't know --

QUESTION: And I take it it's the procuring officer himself who undertakes the burden. The contractor doesn't have to do it.

GENERAL DAYS: That's correct.

QUESTION: The contractors go to the officer.

GENERAL DAYS: That's correct, and as I indicated, this information can be received from any source.

QUESTION: Is it open to one who challenges the certification to show that the individual that owns the certified firm has not him or herself been the victim of societal discrimination?

GENERAL DAYS: Yes, Justice Kennedy, but that I think is done in a practical sense through challenging economic disadvantage.

In other words, if a challenge can show that a claimed disadvantaged business enterprise is competing at the same level as companies that are not disadvantaged in any of the traditional terms, or traditional senses, then that can be a basis for disqualification.

As I indicated, in the Autek case that was the way the Court looked at the situation.

QUESTION: But under the act, at least it's theoretically possible to challenge the determination that this person has not in fact been subject to racial discrimination?

GENERAL DAYS: I think, Justice Kennedy, it's not correct to say that there can be a challenge to someone who says, I am an African American, that they in fact are not African American.

The real focus of this program is on disadvantage, and so the inquiry naturally focuses on whatever the problems this particular organization has had, if it's overcome those disadvantages and is competing as would any other agency or company, then it is not eligible for participation in the disadvantaged business enterprise program.

And let me just say on the question of whether there have been challenges, we view this particular lawsuit as a facial challenge. It is challenging not the specific operation of these schemes, but challenging the existence of the rebuttable presumption under this scheme that was set up by Congress.

QUESTION: General Days, I believe Mr. Pendley said he's not challenging the 8(a) certification program, and it does seem that there's a big difference when you get to economic disadvantage, that it's not automatic under 8(a). Am I right in that --

GENERAL DAYS: that's correct.

QUESTION: -- that there's a presumption under 8(d) that if nobody challenges it just sticks based on minority status, but that's not so for 8(a) certification?

GENERAL DAYS: That's correct. In fact, Justice Ginsburg, although it appears that under 8(a) one can challenge economic -- that there's a presumption of social disadvantage but not of equal economic disadvantage, and that under the 8(d) program there's a presumption with respect to both.

The fact is that the analysis under both regimes is that there can be an open challenge to the nature of the particular company as to whether it's economically disadvantaged, so the regimes and the challenges and the rebuttals are all directed at determining whether this particular company is economically disadvantaged, although it might satisfy the social disadvantage prong of the particular scheme.

QUESTION: General Days, what is the limit of -- if there is any, of the Government's ability to use race as a -- as the basis for a presumption in some of its programs?

Suppose the Government has a very important space program which just can't afford any mistakes, and it says, just looking over education statistics, whites generally have a higher level of education, and we are going to assume that any bidder that is white-owned is a more competent bidder -- it's just a presumption. It can always be refuted by nonwhite bidders -- and we're going to use that presumption for the program. Is that okay? A very --

GENERAL DAYS: I --

QUESTION: -- very serious, critical need for perfection in this program, and the Government says, we're just going to adopt this presumption.

Of course, it's rebuttable. No problem. If you want to come in and show that even though you're not white, you're very smart and very competent, that's okay, but you can come in and show it.

GENERAL DAYS: Justice Scalia, I think that the difference between this situation and the situation that you posed is a question of whether Congress is acting for remedial purposes, and what we have here is --

QUESTION: I don't know what that means. It's a good, valid governmental purpose in both cases.

GENERAL DAYS: No, but what I'm talking about is Congress either explicitly or by way of the operation of a statutory scheme is attempting to remedy the effects of prior racial discrimination, relying upon its authority under section 5 of the Fourteenth, or other provisions of the Civil War Amendment.

QUESTION: Well, but how can section 5 of the Fourteenth Amendment give Congress authority to lessen the effect of that amendment on congressional actions? There's -- I think there's a statement in the Katzenbach case that Congress can move in only one direction under the Fourteenth Amendment.

GENERAL DAYS: Correct.

QUESTION: It could make the standards more stringent, but not less stringent. But your argument is in effect that Congress can make the standards less stringent when applied to Congress.

GENERAL DAYS: That Congress can make the rules --

QUESTION: Yes.

GENERAL DAYS: -- less stringent?

QUESTION: Yes, that the equal protection component, let's say, of the Fifteenth -- of the Fifth Amendment would be less demanding on Congress.

GENERAL DAYS: I think what this Court has indicated in a number of decisions is that Congress possesses a unique and comprehensive power to legislate under section 5 of the Fourteenth Amendment, or section 2 of the Thirteenth, or of the Fifteenth Amendment, to remedy the effects of racial discrimination, or denial of equal protection, but particularly where racial discrimination is concerned, and the example that Justice Scalia gave indicates nothing about the desire of Congress to deal with discrimination and to remedy it.

QUESTION: It can do that, but can it do it by adopting race-based presumptions? I mean, there's no question that it can do it --

GENERAL DAYS: Yes.

QUESTION: -- that it can act to eliminate the effects of discrimination, but can it do it by simply adopting a presumption on racial lines?

GENERAL DAYS: Yes, it can. I think that the question came up about the role of Fullilove, but in the Fullilove case, the Public Works Employment Act that was at issue there in effect designated certain groups as being entitled to the 10-percent set-aside with no expectation that there would be the type of rebuttable presumption and searching inquiry that this scheme at issue here provides.

QUESTION: Congress made the determination in Fullilove, I suppose, that 10 percent was the adequate remedial number.

GENERAL DAYS: Mm-hmm.

QUESTION: One of the problems in this case, if I understand the scheme correctly, is that there is no particular number. It's up to the contractor. He can give preferential treatment to as many MBE's as he wants, isn't that right?

GENERAL DAYS: Well, I suppose that's correct in one sense, Justice Scalia, but one has to understand how the SCC works.

QUESTION: So the punishment doesn't fit the crime. I mean, it's really up to the individual contractor.

GENERAL DAYS: No, that's not correct. First of all, it is an optional program, as has already been pointed out.

QUESTION: Optional if you want to forgo the $10,000 --

GENERAL DAYS: The 10 percent. If one subcontracts above 10 percent, then one can get the benefit of the SCC, but it's not an open-ended program. In other words, the prime contractor cannot continue to gain more and more money by taking on more DBE subcontractors in that particular contract, because the compensation is limited to 1.5 percent of the overall contract, or 2 percent, if there are more than -- two or more subcontractors, but there's not an infinite ability of a prime contractor to just add on DBE's in order to gain compensation.

QUESTION: Is he more favored if he adds on more DBE's?

GENERAL DAYS: No, he is not. There's no indication that a prime contractor, Mountain Gravel in this case, would have lost a contract because it didn't take advantage of the SCC. It's purely optional, and therefore Mountain Gravel could have decided not to use the SCC at all, and would have kept the prime contract and would have carried it out in ways other than under the DBE program.

QUESTION: General Days, can I ask you a question about the regulations? Do the regulations contain any provisions requiring the States, or whatever the agency is that designates a particular business as a DBE to review its status from time to time, or is it once designated you have that privilege forever?

GENERAL DAYS: No, the regulations require that there be an annual review with respect to DBE certification. It's also the case that the Small Business Administration under its program conducts annual reviews of those businesses that have been admitted into the program.

What we have here, Justice Stevens, in fact is a continuing review by Congress and the agency with respect to this program. Under --

QUESTION: What do the States look for when they conduct their annual review, or is it possible to generalize as to all 50 States?

GENERAL DAYS: Well, I think what the review is supposed to do is identify on an annual basis the extent to which those who have been certified as DBE's are, in fact, DBE's.

QUESTION: That is, minority-owned, not necessarily disadvantaged. I mean, this inquiry isn't an annual inquiry into whether they have in fact been discriminated against. It's just an inquiry into whether they are minority-owned year by year.

GENERAL DAYS: No.

QUESTION: No?

GENERAL DAYS: That's not correct. It's an inquiry as to whether they continue to warrant the benefits under this program as disadvantaged business enterprises, so, for example --

QUESTION: What does that mean? Does it mean that there's an inquiry into whether they suffered discrimination in the past?

GENERAL DAYS: No, that's a determination that's made when they are certified, but after they're certified --

QUESTION: Is that determination made when they're certified? I thought they're certified so long as they're minority-owned and therefore come within the presumption?

GENERAL DAYS: That is not correct. The way that the States go about the certification process is to look not only at whether a company is in fact presumed to be economically and socially disadvantaged under the presumption, but also whether it continues to be economically disadvantaged. That is, has it continued to suffer the effects of discrimination from year-to-year.

So if there is a company -- there may be a situation --

QUESTION: Of the presumed discrimination?

GENERAL DAYS: It's true with respect to all DBE's.

QUESTION: General Days, let me give you --

QUESTION: Are you referring just to the --

QUESTION: May I ask about a specific hypothetical?

GENERAL DAYS: Yes.

QUESTION: Suppose a subcontractor repeatedly got preferential treatment for a year or so and increased its gross sales from 100,000 to 20 million. Would that be a factor that would -- and be exactly the same racial composition of the company. Would it be apt to lose its certification if it had that kind of business growth?

GENERAL DAYS: Absolutely. Absolutely. It could be decertified because it's no longer a small business, or it could be decertified because it had reached a level of economic take-off that would not justify its receiving whatever benefits were available under the program.

QUESTION: Where do we find the provision that would require or permit that in the regulations, or in the statute?

GENERAL DAYS: Well, Mr. Chief Justice, we have indicated on pages 14 to 16 and 17 of our brief the way in which the rebuttal process works, and the extent to which there can be an annual review.

QUESTION: But the -- a lot of that, at least 14 and 15, is initiated by a competitor. I gather in your answer to Justice Stevens that there is some Government-initiated process which reviews these certifications?

GENERAL DAYS: Yes. I can direct the Court to footnote 15 of our brief on page 15. It addresses the question of how there must be a filing annually by DBE's and if there's credible evidence coming to the attention of the administration, it may trigger a review, and the administration is required to investigate that.

QUESTION: But under the SBA regulations I take it that they look at the net worth of the certified contractor --

GENERAL DAYS: Yes.

QUESTION: -- but they exclude from the net worth the value of his residence and the value of his business, so if you had a business that's worth $4 million and a house that's worth $1 million, you'd have a net worth of zero under the regulations, as I understand it.

GENERAL DAYS: I don't understand that to be correct, Justice Kennedy, but in any event, the analysis is with respect to whether the business is competing in a way that would justify its being discharged from the program or whether it's competing in a way that reflects that it's continuing to suffer the consequences --

QUESTION: What are the criteria --

GENERAL DAYS: -- of the discrimination that Congress found.

QUESTION: I'm sorry. What are the criteria for determining whether it is sufficiently successful to be discharged? I understood that -- and I can't remember whether this was a matter of statute or reg, that if the average net income for a period, I think of 3 years, was above a certain multimillion-dollar amount, that there would no longer be qualification for an economically disadvantaged status.

Are there other criteria, perhaps considering a shorter period of time, for example, under which the States could refuse to continue certification? If, for example, a given contractor went from making a $500,000-a-year profit to a $100 million-a-year profit in 1 year, would that be a basis for withdrawing the designation?

GENERAL DAYS: Yes. Justice Souter, there are various ways in which a business can exit from this particular type of program. There's voluntary withdrawal, there's an expiration of a program that's actually set by Congress of 9 years, and once let out of the program, the company cannot come back.

QUESTION: Well, what about -- where are the -- where would we find the criteria which the State agencies would use to de-designate?

GENERAL DAYS: Right. Well, 113 C.F.R. 124.207 talks generally about --

QUESTION: Is that in the briefs?

GENERAL DAYS: Yes. Yes, I believe it is. It's not in the appendix, but it's certainly referred to in our brief.

QUESTION: General Days, could I ask --

GENERAL DAYS: Well, let me just finish my answer.

QUESTION: Oh, okay.

GENERAL DAYS: The regulations list 25 reasons why a firm can be terminated, and under this particular arrangement hundreds of firms have in fact been terminated under this disadvantaged business enterprise program.

Yes, Justice Scalia.

QUESTION: I was going to ask about the standing issue, which we haven't talked about this morning. You spent a bit of your principal brief on that issue. Was it raised in opposition to the petition? I looked quickly through that, and I didn't see that. Is there some reason why the Government didn't raise it then?

I mean, I hate to take a case and go through the labor of reading the briefs and then dismissing it because of no standing, when that issue was not raised at the outset, when it should have been. Did the Government raise it in the brief in opposition to the petition?

GENERAL DAYS: I think we in effect raised it by pointing out that there was no indication that Adarand had suffered as a result of the application of this particular provision.

QUESTION: Do you know off-hand where that was? I didn't find it in there, and I really don't like, you know, jurisdictional arguments that come after we've taken the case. It's not --

GENERAL DAYS: Well, Justice Scalia, we had raised this issue in the lower courts. The standing issue was in fact part of the record, and therefore was part of the record that came to this Court.

QUESTION: Well, that's very nice, but I don't read the record when I decide whether to vote to grant a petition for certiorari. I read the brief, and the brief in opposition -- the petition and the brief in opposition, and I didn't -- I don't recall that being an issue at the time, and then when I get the principal briefs, I find it is an issue and we may have a case here in which we can't decide the question that we thought we were going to decide.

QUESTION: Is part of your argument that there was no injury, that Adarand had the ability to challenge the standing of the successful subcontractor?

GENERAL DAYS: There certainly is injury. He lost -- Adarand lost the contract, but there's a question of whether there's traceability, or redressability with respect to this particular situation. There's no showing that Adarand lost this contract because of the rebuttable presumption.

Even if we were to conclude that Gonzales was a disadvantaged business enterprise, there's nothing in this record that indicates that Gonzales was not, in fact, socially and economically disadvantaged, and therefore -- and there's no showing here that Adarand was socially -- or economically disadvantaged, and therefore --

QUESTION: Well, he -- they do ask for prospective relief.

GENERAL DAYS: It is true --

QUESTION: And I take it your argument is that it's always available to Adarand to challenge disadvantaged status by suing minority contractors, which I take it you think promotes racial harmony.

GENERAL DAYS: No, that's not the suggestion. Our point is that under this Court's precedents, Lujan and Lyons, for example, this Court has imposed very severe restrictions on the extent to which a person in an individual lawsuit can seek prospective, injunctive, or declaratory relief. This is a situation --

QUESTION: General Days, am I right that Adarand in fact couldn't bring such a lawsuit because it doesn't -- there, there would be no standing. Isn't it only the procurement officer in the 8(d) program? Does someone in the position of Adarand have a right to sue the successful bidder -- I mean, the successful DBE?

GENERAL DAYS: No, that would not be possible.

QUESTION: So the only thing that someone in Adarand's position could do is to say, procurement officer, there's a problem here. You look into it.

GENERAL DAYS: That's right, and to challenge the extent to which the contracting officer had not, in fact, done that and had allowed a DBE that was, in fact, not economically and socially disadvantaged to benefit from the operation of the subcontracting compensation clause.

QUESTION: Do you want to add anything about the limits of the -- the limits of the remedial efforts? That is, I think there are decisions of this Court that would say a legislature could take race into account in trying to cure past segregation in schools, for example -- skip it. That's all right.

GENERAL DAYS: That is correct, Your Honor.

QUESTION: Thank you, General Days. Mr. Pendley, you have 4 minutes.

REBUTTAL ARGUMENT OF WILLIAM PERRY PENDLEY ON BEHALF OF THE PETITIONER

MR. PENDLEY: Mr. Chief Justice, and may it please the Court:

With regard to the presumption, the reason the presumption wasn't opposed, Mr. Justice Scalia, is because from the beginning, from the get-go and the origin in this case, the Government knew the presumption worked, and that was the assumption all the way through --

QUESTION: Mr. Pendley --

MR. PENDLEY: -- this process. Excuse me, Your Honor.

QUESTION: -- may I ask you a question about the presumption, which is quite an important part of the case? Would you legal argument be different if, instead of a presumption, the statute said that the person seeking a DBA certification could put in evidence of discrimination against other members of that person's race to attempt to make the showing, and that the trial -- that the fact-finder would be entitled to rely on such evidence? Would that be a different case?

MR. PENDLEY: I think that would be an absolutely different case.

QUESTION: Would that be permissible, in your view?

MR. PENDLEY: To the extent that Congress set up some fact-finding that was necessary, some level that was necessary, some hurdle that had some meaning that there was -- so one could see if there was a tight fit between the discrimination and the remedy.

QUESTION: The tight fit would be that an Afro-American would prove that a lot of other Afro-Americans had been discriminated against, but this one never suffered any discrimination.

MR. PENDLEY: No, I -- that --

QUESTION: Would that be a permissible showing?

MR. PENDLEY: I don't think so.

QUESTION: You don't?

MR. PENDLEY: No.

QUESTION: So it really isn't --

MR. PENDLEY: I think it has to be -- excuse me, Your Honor.

QUESTION: It's not the presumption that is critical but, rather, the relevance of the discrimination against other members of the race?

MR. PENDLEY: Exactly, Your Honor. We --

QUESTION: That that's an irrelevant factor.

MR. PENDLEY: As I pointed out, we have people from Hong Kong who come to this country under this, 26 Asian nations that are listed.

The presumption was never challenged. The Federal officials testified it was the operation of the presumption. In our reply on pages 7, 9, 10, and 14, it's set forth where they said that, and they said that because they had the documents. They knew that it was the presumption that was working, and had it, and that's why they didn't raise it until this last point.

We did challenge STURAA in our complaint, because -- on page 22 of the complaint. The Solicitor General is correct, others may qualify for this program, but I draw the Court's attention to page 212 of part 23, subpart D, appendix A, where they list the Vietnam veteran, the Appalachian white, the ascetic Jews, but said it must be emphasized that these individuals are not determined to be socially and economically disadvantaged on the basis of their group membership, rather of the social and economic disadvantage of each must be determined on an individual, case-by-case basis.

QUESTION: And you have no problem with that?

MR. PENDLEY: No, Your Honor. That's victim-specific. That's what this Court has said is permissible, but here -- and that's the difference here. Those in the presumption group step forward, prove their race. Those in the nonpresumptive group step forward and prove, on a case-by-case basis, that they qualify.

The Government cites to its footnote 15, with regard to the State's annual review, this is a regulation that applies to the administrator of the SBA. Gonzales was certified by the State of Colorado, not under this program, and not under this.

In fact, the regulations are very clear with regard to what is required. I draw the Court's attention to page 23 of our brief, footnote 20. In making the certification decision, the recipient, that's the State, relies on this presumption and does not investigate the social and economic status of individuals who fall into one of the presumptive groups.

QUESTION: In the State of Colorado's presump -- certification, is that permanent, or is that subject to periodic review, when the State certifies?

MR. PENDLEY: I believe they come for it annually, Your Honor, but the form simply says, 1) is it what percent owned, 2) check your race, 3) --

QUESTION: Anything on the form about financial success?

MR. PENDLEY: It asks the question, is the applicant socially and economically disadvantaged under the SBA program, and in this case, Gonzales checked no.

The -- I want to say something about the challenge and the protest. First of all, when an Adarand challenges, what happens? The first thing that happens is the contracting officer stops the contract, and he infuriates the prime contractor.

Number 2, the DBE presumption continues in place, so this DBE continues to be able to bid on other projects until the process is over, and frankly, when one examines the amorphous basis upon which one is socially and economically disadvantaged under the statute and the regulations, it's hard to imagine how an Adarand could defeat the presumption.

Thank you, Your Honor.

CHIEF JUSTICE REHNQUIST: Thank you, Mr. Pendley.

The case is submitted.

(Whereupon, at 11:03 a.m., the case in the above-entitled matter was submitted.)