Why the DBE Program’s Appendix E process has to change

Recently, Rep. Michael Fitzpatrick (R-PA) introduced a bill that would define veteran owned businesses as “Disadvantaged Business Enterprises” or “DBEs”. This is a bad idea for several reasons including if it passes it could mean the end of the Department of Transportation’s DBE program. This is because the Supreme Court has held that programs like the DBE program are constitutional so long as they are “narrowly tailored” or, in other words, not overly inclusive.

Opponents of the bill argue that the amendment is not needed because individuals who are not women or ethnic minorities can obtain DBE certification on a case by case basis using the guidelines in Appendix E to Part 26 — Individual Determinations of Social and Economic Disadvantage. However, it is almost impossible for an individual to obtain DBE certification using the Appendix E process and for Disabled Veterans I would argue that it is even less likely that they could meet the requirements. There are several reasons for this.

First, it must be noted that the Appendix E recognizes that people with disabilities have disproportionately low incomes and high rates of unemployment and recognizes that many individuals with disabilities my be socially and economically disadvantaged. However, the evidence an individual has to produce in order to prove social an economic disadvantage is difficult at best to acquire.

For example, to show that they are socially disadvantaged, an individual has to describe “personal experiences of substantial and chronic social disadvantage in American society, not in other countries”. The agency receiving the application will consider the applicant’s education, employment and business history to see if the totality of circumstances shows disadvantage in entering into or advancing in the business world. The problem is most agencies read the regulations to mean that the applicant has to show disadvantages in all three areas: education, employment and business history. Of course, most veterans, disabled or not, will have a tough time showing that that they have “substantial and chronic social disadvantage in American society” since they’ve served in the U.S. military and presumably had access to education and employment. Normally, the analysis ends there. But even if the applicant successfully shows that he meets the social disadvantage prong of the test it is all but impossible to show economic disadvantage.

Under the normal process for obtaining DBE certification, to show economic disadvantage an applicant simply has to show that their personal net worth is less than $1.32 million (minus their personal residence and interest in the DBE business). Not so for the individual seeking certification using the Appendix E process. In addition to reviewing the applicant’s personal income, personal net worth, fair market value of all assets etc. the agency will “consider the financial condition of the applicant compared to the financial profiles of small businesses in the same primary classification, or, if not available, in similar lines of business, which are not owned and controlled by socially and economically disadvantaged individuals in evaluating the individual’s access to credit and capital”.

Agencies normally read this to mean that the applicant has to produce the profiles of other business for the agency to compare. This of course is next to impossible because it would require an individual to obtain the financial information (tax returns, profit and lost statements, balance sheets, etc.) of their competitors in order to prove economic disadvantage. Anyone in business knows that this is an insurmountable hurdle. (That’s why I have unsuccessfully argued in the past that because it is impossible for the applicant to obtain this information the onus necessarily has to be on the agency, who has access to such information to do the comparison.)

While I agree that Rep. Fitzpatrick’s bill would cause irreparable harm to the DBE program and subject it to constitutional challenge, those opposing the bill would be better served not to make the argument that individuals who are not women or minorities can obtain DBE certification on a case by case basis because it is, in fact, almost impossible to do so.