Texas lawsuit challenges end to MWBE certification for state contracts

Changes to Texas' Historically Underutilized Businesses program that eliminated the participation of minority- and women-owned business enterprises are being challenged in court.

A lawsuit filed Monday in Travis County District Court on behalf of impacted businesses and a trade group contends Texas Acting Comptroller Kelly Hancock unilaterally dismantled the HUB program with an emergency regulation "removing all Black, Hispanic, and women-owned businesses from the program, and reducing the number of certified businesses" from more than 15,000 to approximately 500.

"Acting Comptroller Hancock took a program created by statute and rewrote it without any legal authority," Alphonso David, co-lead counsel for the plaintiffs, said in a statement. "His actions are baseless and unlawful and must be reversed."

The lawsuit claims Hancock's action "abused emergency rulemaking" and was based on "the false pretext that the statute is unconstitutional."

The court was asked to void the regulation and order the acting comptroller and the heads of other state agencies to restore "the HUB Program's statutorily mandated benefits to Texas' minority- and women-owned small businesses."

In December, Hancock said rule changes, which eliminated race- and sex-based preferences for state contracts and focused the renamed Veteran Heroes United in Business program on service-disabled veteran-owned-and-operated businesses, were done to bring it "into alignment with the Texas and U.S. constitutions."

In response to the lawsuit, Hancock pointed to the U.S. Supreme Court's 2023 decision ending affirmative action in higher education and a January non-binding legal opinion from Texas Attorney General Ken Paxton that affirmed the comptroller office's position the HUB program's race- and sex-based eligibility rules violated the Equal Protection Clause of the U.S. Constitution and the Texas Constitution's Equal Rights Amendment.

"State contracts should go to the business that delivers the best value for Texas taxpayers, period," Hancock said in a statement. "Not based on race. Not based on gender. Based on merit. The law is clear on this."

The complaint argues MWBE certification offered opportunities to seek state contracts with no guarantee of winning them. It also noted a bill that aimed to do what Hancock's rule changes accomplished failed to advance in the Texas Legislature last year.

The original HUB program had been cited in Texas Bond Review Board guidelines requiring state debt issuers to make good faith efforts to achieve 33% participation by certified MWBEs in bond underwriting. The current guidelines for negotiated sales say underwriters "should be able to show minority and women participation within their firms."

After Paxton's opinion was released, his office's public finance division advised state and local government debt issuers they must disclose the use of MWBE programs for bond deals seeking required attorney general approval and certify that bond proceeds will not fund "any unconstitutional purposes, including payments made pursuant to unconstitutional (diversity, equity, and inclusion) programs and including any such DEI programs established by local ordinances or policies."