On Oct. 21, 2008, a federal appeals court in Ohio reinstated a lawsuit filed in 2003 by a consortium of Kentucky-based disadvantaged business enterprise (DBE) subcontractors against Kentucky Transportation Cabinet (KTC) officials. The lawsuit involved claims by the DBEs pursuant to federal racketeering statutes against two KTC officials, alleging they had committed fraud in the awarding of contracts under the federal DBE program on state-run projects.

The lawsuit claimed that the state officials committed fraud in the DBE program by falsely certifying as DBEs businesses that were not minority- or women-owned and operated; and by knowingly permitting properly certified DBEs not to perform the work or supply the materials for projects as required under their contracts, but to merely “broker” the supply of work and materials, with the actual work performed by or materials supplied by companies that were not eligible for DBE certification.

Examples of the types of fraud alleged were: certification of a DBE—over the objection of the state Office of Minority Affairs—that consisted of the wives of four executives of a major road-building company with little to no experience to operate a construction company; certifying a DBE even though the defendants knew the net worth of its owner exceeded the established DBE program limits; and scheming with a road builder to take a DBE contract away from a certified DBE and re-award it to an improperly certified DBE that was related to the road builder.

In addition, the DBE contractors alleged that they were harmed by the affirmative statements of the KTC officials (in letters, public speeches and private meetings) that they would fairly and legally administer the DBE program and that if the plaintiffs caused their companies to be certified as DBEs, they would be given an honest chance to compete for contracts administered by the KTC. Relying on those representations, the DBEs expended time and money to obtain DBE certification, to maintain their businesses as DBEs and to bid for contracts under the DBE program. The DBE contractors sought damages for those efforts and for profits lost on work that went to improper DBEs and otherwise would have been awarded to them.

Don’t game the system

The lawsuit highlights the problems some road and bridge contractors face in attracting bids from women and minority subcontractors on large projects to meet the government’s established goals. This problem is especially acute in rural locations. When this occurs, all the parties to the proc­ess (prime contractors, subcontractors and government agencies) need to refrain from taking extreme measures such as creating or becoming complicit with improperly certified DBEs. Instead of “gaming” the system by figuring out how to work around the program, all parties need to focus on how to make the program work.

The lawsuit also underscores the potential for real liability on the part of government officials and contractors in complying with DBE program requirements. The temptation to make a quick buck by “working” the DBE regulations to one’s own advantage must be avoided, otherwise substantial liabilities (civil and criminal) can be incurred. While this case remains undecided, its outcome could have a significant influence on future legal challenges by DBEs who believe they have been unfairly treated. The case is Chaz Concrete Co., LLC v. Codell, Civil Action No. 3:03-52-KKC (U.S. 6th Cir. Court of Appeals).