Case Study: Coral Construction v. San Francisco

Law360, New York (August 19, 2010) -- On Aug. 2, the California Supreme Court issued a decision in the long-running Proposition 209 challenge to the San Francisco ordinance that provides preferential treatment based on race or sex in the award of city contracts. Coral Construction v. City and County of San Francisco 2010 S.O.S. 4449.

The decision rejected the city's challenge to Proposition 209 under the so-called political structure doctrine, a judicial interpretation of the federal Equal Protection Clause. The decision also rejected the city's argument that its ordinance was valid because the ordinance was necessary to avoid the loss of federal funding.

Finally, the decision allowed for a very narrow window of federal preemption under which the Equal Protection Clause may require a government to provide remedial measures to address past, intentional discrimination. Whether the city's ordinance falls within this narrow window was remanded to the Superior Court of the State of California for a factual determination.

Although Coral addresses governmental practices in public contracting, the decision is equally applicable to public employment matters because Proposition 209 prohibits preferential treatment based on race or sex in both public employment and public contracting. (Cal. Const., art I, § 31 (a).)

The Coral decision follows the line of post-209 public contracting and public employment cases prohibiting a range of affirmative steps to assist hiring minority applicants that might otherwise be lawful under the federal strict scrutiny standard. Rather, Proposition 209 has been interpreted to mean that California may not grant preferential treatment to racial minorities or women despite compelling reasons to do so, even where the U.S. Constitution would permit, but not require, the state to take such action. Connerly v. State Personnel Board (2001) 92 Cal.App.4th 16, 42 -43.

The Coral decision reviewed the history of San Francisco providing bid preferences (treating bids as lower than the actual bid amount) to minority-owned business enterprises and women-owned business enterprises seeking city contracts. The city has provided such preferences since 1984 under a series of ordinances adopted by the Board of Supervisors.

Richmond v. Croson (1989) 448 U.S. 469 brought into question the ongoing validity of the city's bid preference ordinance. In Croson, the court found that Richmond, Va.'s minority-owned business preference program violated the Equal Protection Clause. However, four justices suggested the possibility that in an "extreme case" where the facts showed a pattern of deliberate race-based discrimination by a public entity, narrowly tailored racial preferences might be warranted as a remedy.

In 1996, California voters approved Proposition 209, prohibiting governmental entities from providing preferential treatment based on race or gender in public employment, public education, and public contracting. (Cal. Const., art I, § 31 (a).) Following its adoption, San Francisco conducted investigations to determine whether it had discriminated on the basis of race or gender in the award of city contracts.

Based on facts from the investigations, the board found that city departments had discriminated against minority-owned and women-owned business enterprises. The board adopted an ordinance in 1998 that preserved bid preferences for such businesses.

In 2000, the state Supreme Court invalidated San Jose's bid preference program for minority-owned and women-owned business enterprises in Hi-Voltage v. San Jose (2000) 24 Cal.4th 537. The court held Section 31 does not tolerate race- and gender-based preferences that the equal protection clause does not require but merely permits.

However, like the plurality in Croson, the court held out the possibility that the Equal Protection Clause might sometimes require race-conscious remedies to counteract intentional discrimination.

In 2001, following the decision in Hi-Voltage, the Pacific Legal Foundation filed suit on behalf of Coral seeking declaratory and injunctive relief to invalidate San Francisco's 1998 bid preference ordinance. Coral asserted that the city's ordinance should be declared invalid because it violated Section 31's ban on preferential treatment based on race or gender.

While Coral's suit was proceeding in Superior Court, the city conducted additional investigations into its past and continuing contracting processes. Finding that race- and sex-based discrimination continued in city contracting, the board re-enacted its bid preference ordinance in 2003.

Shortly thereafter, Schram Construction filed a separate action challenging the validity of the 2003 ordinance. The Superior Court consolidated the Schram and Coral cases.

The parties filed cross-motions for summary judgment. San Francisco contended that its 2003 ordinance was valid despite the provisions of Section 31 on three bases. First, the city argued that Section 31 violated the federal "political structure doctrine" — an aspect of federal equal protection articulated in Washington v. Seattle School Dist. No. 1 (1982) 458 U.S. 457 and Hunter v. Erickson (1969) 393 U.S. 386 .

Second, the city argued that invalidation of its ordinance would lead to the loss of federal funds, and race and sex preference were not prohibited under Section 31 where the prohibitions would result in the loss of federal funding (federal funding exception).

Finally, the city argued that the Equal Protection Clause required it to address and remedy discrimination against minority-owned and women-owned business enterprises (federal compulsion argument).

The Superior Court granted plaintiffs' summary judgment motion and denied San Francisco's. The court held that the city's 2003 ordinance violated Section 31, that Section 31 did not violate the political structure doctrine and that the ordinance was not required to avoid a loss of federal funds.

The Court of Appeal upheld the determinations on the political structure doctrine and the federal funding exception; however, it found that the Superior Court did not reach the city's equal protection argument and remanded the case for a determination on that issue.

The plaintiffs appealed to the state Supreme Court, seeking to preserve the Superior Court's decision in their favor. The high court granted review.

The state Supreme Court's decision explained that the political structure doctrine provides equal protection against a political structure that subtly distorts governmental processes in such a way as to place special burdens on the ability of minority groups to achieve beneficial legislation.

The city argued that the doctrine defeated Section 31 because those seeking race or sex preferences are burdened by being required to amend the state constitution to achieve their aims, while those seeking preferences on other bases (e.g., veteran status) need not.

The Supreme Court rejected the city's argument. While the doctrine provides equal protection against political obstructions to equal treatment, it does not provide equal protection against political obstructions to preferential treatment, it said.

Accordingly, the high court held that Section 31 does not violate the political structure doctrine.

The Supreme Court next considered San Francisco's argument that it should be able to present evidence to show that the city's minority-owned and women-owned business enterprise preference program was necessary to prevent the loss of federal funds. The high court rejected the city's argument there, as well, concluding that relevant federal regulations permit preferences but do not require them — as preferences are not required, failure to provide preferences cannot result in the loss of federal funds.

The city's final argument was that the Equal Protection Clause compelled it to provide bid preferences to remedy its own discrimination. The Supreme Court upheld the Court of Appeal judgment remanding the issue to the Superior Court for a factual determination.

The high court ruled that the city, on remand, could defeat the plaintiffs' motion for summary judgment only by showing that triable issues of fact existed on each element of the its federal compulsion argument: that the city has intentionally discriminated against minority-owned and women-owned business enterprises; the purpose of the city's bid preference ordinance is to remedy such discrimination; the ordinance is narrowly tailored to achieve that purpose; and race- and gender-based preferences are the only, or at least most likely, means of rectifying the past discrimination.

In a footnote, the Supreme Court identified a key dispute to be adjudicated by the Superior Court, which addressed whether the city's responses to Coral's requests for admission are properly part of the record. The city's admissions "appear to concede" that it has not been the policy of the city to discriminate against minority-owned and women-owned business enterprises since at least 1984, that the city cannot identify an instance of discrimination in the award of a specific contract after 1996, and the city has not identified discrimination by any specific contract-awarding authority after 1996.

The decision also discussed facts that seemed to present a daunting challenge to San Francisco. For example, in 1998, the Board of Supervisors found that minority-owned and women-owned business enterprises were not receiving a proportional share of city contracts and that the city's department heads and general managers were overwhelmingly Caucasian males operating under an "old boy network."

In contrast, the board found in 2003 that minority-owned and women-owned business enterprises now received a larger than proportional share of some types of contracts. For example, the city used African-American minority-owned business enterprises at 10 times the expected rate for professional services subcontracts, and the city used Latino minority-owned business enterprises at more than twice the expected rate for construction contracts.

Moreover, the board's 2003 findings conspicuously omitted the 1998 statement that decision-makers in the city's contracting process were overwhelmingly Caucasian males.

There is, of course, continuing tension between Proposition 209's guarantee of equal opportunity and societal pressure for equality to be shown by diversity of participation in public employment and public contracting.

In 2002, the California Legislature passed SB 1045, adding sections 11139.6 (public employment) and 11139.7 (public contracting) to the California Government Code. The legislation declared that Section 31 prohibited a government from granting preferential treatment based on race or sex, but, at the same time, stated the legislature's intent to reaffirm diversity as a public policy goal.

The legislature further stated its intent in Section 11139.6 for public entities to engage in general recruitment and outreach to all individuals to increase the size of the pool of applicants, and, within that broad effort, to allow focused and targeted outreach and recruitment targeted at minorities and women if they are underrepresented in entry-level positions of a public employer.

The statute provides that such targeted recruitment efforts may include, for example, advertisements in non-English media and media whose primary audience resides in minority and low-income communities and recruitment booths oriented to minorities or women. Section 11139.6 includes a statement of legislative intent to allow public sector employers to conduct outreach efforts that "should result in increasing diversity of the public sector workforce."

San Francisco's position in the Coral case is that the city is required to go beyond the targeted outreach allowed under sections 11139.6 and 11139.7 by providing preferences based on race and sex in order to address past, intentional discrimination.

The Coral case will continue to be closely watched on remand to the Superior Court to see whether San Francisco can demonstrate that its contracting practices embody the "extreme case" of intentional discrimination discussed in Croson and Hi-Voltage that would justify the city's continued use of minority-owned and women-owned business enterprise bid preferences in awarding city contracts.

The Coral case has implications beyond public contracting. The logic applied in the context of awarding public contracts will apply in the context of public employment recruiting. Accordingly, employment lawyers and human resources professionals, especially in the public sector, will be watching this case closely as well.

The city's self-alleged discriminatory practices in public contracting may be analogous to similar employment practices leading to a disparity in the numbers of minorities and women employed in comparison to their number in the general population or within the pool of applicants.

If San Francisco can meet the test to be allowed to continue providing preferences in public contracting, it stands to reason that the decision will provide a framework for similar considerations in employment matters.

By Randy O. Parent, Liebert Cassidy Whitmore

Randy Parent is an associate at Liebert Cassidy Whitmore in the firm's San Francisco office.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or Portfolio Media, publisher of Law360.

Reproduced with permission from Law360.