City of Cleveland v. State of OH

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 07a0460p.06

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
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Plaintiff-Appellant, -
CITY OF CLEVELAND,
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No. 06-3611
v.
,
>
STATE OF OHIO; OHIO DEPARTMENT OF -
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Defendants and Third Party Plaintiffs-Appellees, -
TRANSPORTATION,

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v.
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FEDERAL HIGHWAY ADMINISTRATION, -
Third Party Defendant-Appellee. -
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Appeal from the United States District Court
for the Southern District of Ohio at Columbus.
No. 04-00805—Gregory L. Frost, District Judge.
Argued: April 18, 2007
Decided and Filed: November 21, 2007
Before: MERRITT and GRIFFIN, Circuit Judges; LAWSON, District Judge.*
_________________
COUNSEL
ARGUED: Pierre H. Bergeron, SQUIRE, SANDERS & DEMPSEY, Cincinnati, Ohio, for
Appellant. John J. Stark, ASSISTANT UNITED STATES ATTORNEY, Columbus, Ohio, for
Appellees. ON BRIEF: Pierre H. Bergeron, Ryan D. Walters, SQUIRE, SANDERS & DEMPSEY,
Cincinnati, Ohio, for Appellant. John J. Stark, ASSISTANT UNITED STATES ATTORNEY,
Columbus, Ohio, for Appellees.

*
The Honorable David M. Lawson, United States District Judge for the Eastern District of Michigan, sitting
by designation.

1
No. 06-3611 City of Cleveland v. State of Ohio, et al. Page 2

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OPINION
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DAVID M. LAWSON, District Judge. The City of Cleveland, Ohio (the City) challenges
a final decision by the Federal Highway Administration (FHWA) to withdraw federal funds from
a public works project initiated by the City that was intended to improve the aesthetic appearance
of a local thoroughfare. At the base of this dispute is a local ordinance known as the Lewis Law,
which mandates that contractors employing Ohio workers on public projects for the City ensure that
at least twenty percent of the work on that project is performed by Cleveland residents, and provides
that contractors who violate the requirement must post a substantial bond as a condition of receiving
subsequent contracts with the City. The City included Lewis Law compliance as a requirement in
its bid specifications but later withdrew that requirement when told to do so by the Ohio Department
of Transportation. However, the requirement reappeared in the contract signed by the successful
bidder. The FHWA determined that inclusion of the Lewis Law’s local hiring preference in the
contract violated certain federal requirements pertaining to competitive bidding and non-
discriminatory hiring, and therefore it withdrew federal funding that previously had been approved
for the project. The district court rejected the City’s challenge to the FHWA’s decision brought
under the Administrative Procedures Act on the grounds that the City’s local hiring preference
requirement frustrated 23 U.S.C. § 112’s goal of limiting anti-competitive bidding provisions and
procedures, and violated 23 C.F.R. § 635.117(b) by authorizing geographically-based
discrimination. The lower court also held that the ordinance’s enforcement mechanism violated 23
C.F.R. § 635.110(b) because the Lewis Law’s bond penalty for noncompliance could restrict
competition by deterring some contractors from bidding on City construction projects. Although
we disagree with the district court’s conclusion that the substance of the Lewis Law itself runs afoul
of 23 U.S.C. § 112(b) and some of the regulations cited by the FHWA, we affirm the district court’s
judgment because withdrawal of the funds was authorized under the discretion conferred on the
FHWA and by 23 U.S.C. § 112(b), which outlaws contract “requirement[s] or obligation[s]” that
are not “specifically set forth in the advertised specifications.” 23 U.S.C. § 112(b)(1). We also find
that the FHWA acted reasonably in determining that the Lewis Law’s bond penalty provision
violated 23 C.F.R. § 635.110(b).
I.
The source of the dispute in this case is a City construction project aimed at improving the
streetscape of Kinsman Road in Cleveland, Ohio. The City obtained most of the funds necessary
to complete this project through the Federal-Aid Highway Program (the Highway Program), which
is based on the Federal-Aid Highway Act (the Highway Act), 23 U.S.C. § 101, et seq., and
administered by the FHWA, 49 U.S.C. § 104; 49 C.F.R. § 1.48(b). The FHWA is an agency within
the United States Department of Transportation. 49 U.S.C. § 104(a).
The Highway Program provides States with financial assistance for a variety of
transportation-related construction projects. Under the Highway Program, States retain their
“sovereign rights . . . to determine which projects shall be federally financed.” 23 U.S.C. § 145(a).
States are eligible to receive funding if they have a state transportation department capable of
carrying out the duties required by the Program. 23 U.S.C. § 302. Because Ohio maintains the Ohio
Department of Transportation (ODOT), it meets this requirement. See Ohio Rev. Code § 5501.03.
To avail itself of federal funding and delineate the division of responsibilities between itself
and the FHWA, ODOT entered into a “Memorandum of Agreement” with the FHWA Ohio Division
Office on April 9, 2002. Although the Agreement delegates a great deal of responsibility to ODOT,
it states that “the FHWA ultimately is accountable for ensuring that the Federal-aid Highway
No. 06-3611 City of Cleveland v. State of Ohio, et al. Page 3

Program is delivered consistent with established requirements.” JA at 278. Pursuant to the
Agreement and relevant statutes and regulations, the FHWA provided ODOT with funding,
guidance, and technical assistance. ODOT may in turn delegate primary responsibility for the
administration of local projects to “local public agencies” (LPAs), such as the City. 23 C.F.R.
§ 635.105. This delegation, however, does not relieve ODOT of its responsibility to ensure that all
projects under its purview are completed in accordance with federal and state law. 23 C.F.R.
§ 635.105(a).
On December 4, 2002, the City passed an ordinance authorizing the Directors of Public
Service to apply to ODOT for a grant of federal Highway Project funds pertaining to the City’s
planned improvements of the Kinsman Road streetscape. Cleveland, Ohio, Ordinance 1530-02
(Dec. 4, 2002). The project was to encompass the area from East 130th Street to the City’s
corporation line and contemplated constructing a brick sidewalk, planting trees, and installing
pedestrian light poles.
In early December 2003, the City entered into an “LPA Federal Project Agreement” with
ODOT whereby ODOT delegated primary responsibility to the City for administration of the
Kinsman Road project. ODOT agreed to provide eighty percent of the funding for the project from
monies made available by the FHWA, up to a maximum of $696,000. The City agreed to furnish
the remaining funds. The project had an estimated cost of $870,000.
On December 23, 2003, the City sent ODOT a copy of the proposed bid package for the
Kinsman Road project. The bid package indicated that the selected contractor would be subject to
Cleveland’s Lewis Law. That law, enacted on June 10, 2003 and formally known as the Fannie M.
Lewis Cleveland Resident Employment Law, was passed in order “to alleviate the lack of use of
Residents on City of Cleveland construction projects found to exist by the Council of the City of
Cleveland.” Cleveland, Ohio Codified Ordinances § 188.07. The Lewis Law provides:
Where not otherwise prohibited by federal, state or local law or the terms of federal
or state grants, all Construction Contracts shall contain a provision that requires that
Residents of the City perform twenty percent (20%) of the total Construction Worker
Hours (“Resident Construction Worker Hours”) and shall contain a provision
detailing the penalties for failure to do so, which penalties are set forth in Section
188.05.
Cleveland, Ohio Codified Ordinances § 188.02(a).
In an apparent attempt to avoid conflict with the Privileges and Immunities Clause by
restricting the reach of this ordinance to Ohio residents only, see United Bldg. & Constr. Trades
Council v. Camden, 465 U.S. 208, 215-23 (1984) (in which the Court evaluated a Camden, New
Jersey ordinance mandating local hiring preferences on city projects and observed that “Camden
may, without fear of violating the Commerce Clause, pressure private employers engaged in public
works projects funded in whole or in part by the city to hire city residents. But that same exercise
of power to bias the employment decisions of private contractors and subcontractors against out-of-
state residents may be called to account under the Privileges and Immunities Clause”), the City
tailored the definition of “Construction Worker Hours” to exclude hours worked by non-Ohio
residents. Cleveland, Ohio Codified Ordinances § 188.01(c). Therefore, by comprising its
workforce entirely of out-of-state residents, a contractor would not be subject to the Lewis Law’s
requirements. On the other hand, if a contractor wished to use any Ohio workers, twenty percent
of those workers’ (i.e., the Ohio residents’) hours would have to be performed by Cleveland
residents. Cleveland, Ohio Codified Ordinances §§ 188.01(c) and 188.02(a).
No. 06-3611 City of Cleveland v. State of Ohio, et al. Page 4

If a contractor fails to satisfy the Lewis Law’s requirement, a fine is imposed corresponding
to the degree of the shortfall. Cleveland, Ohio Codified Ordinances § 188.05(b). In addition, for
a period of five years after a violation, the City may require the offending contractor to post a surety
bond equal to twenty percent of the contract price for any future contract. Cleveland, Ohio Codified
Ordinances § 188.05(h).
After reviewing the bid package that included the local hiring requirement, the LPA
Coordinator for ODOT notified the Director of Public Service for the City by e-mail on February
3, 2004 that failure to remove the language referencing the Lewis Law would lead to the withdrawal
of federal funds. ODOT sent the City a letter to this effect on February 6, 2004. Both
correspondences cited 23 C.F.R. § 635.117(b) as the basis for their warnings. In response, the City
altered the contract and bid specifications by crossing out the references to the Lewis Law. Bids
were received on February 26, 2004, and the bid submitted by Perk Company, Inc. (Perk) was
approved by the City as the lowest responsible bid.
Although the bid specifications made no reference to the Lewis Law, the contract
subsequently executed between the City and Perk incorporated its requirements. When the FHWA
learned of this development, it sent a letter on July 12, 2004 to the director of ODOT, informing him
that the inclusion of the Lewis Law was in contravention of “federal regulations that prohibit the use
of local hiring preferences” and the federal funds were being withdrawn as a result. JA at 180. On
July 16, 2004, ODOT relayed this message to the City. The FHWA formally withdrew funding
approval on August 3, 2004.
On March 26, 2004, prior to executing its contract with Perk, the City filed suit against the
State of Ohio and ODOT in the Franklin County, Ohio Court of Common Pleas seeking a
declaratory judgment establishing that application of the Lewis Law to the Kinsman Road project
would not violate federal law or regulations as incorporated by the LPA Federal Project Agreement.
The City also sought an injunction to enable the enforcement of the Lewis Law and to compel
ODOT to pay the previously-committed federal funds.
On July 16, 2004, the State of Ohio and ODOT filed a third-party complaint against the
FHWA, asserting that ODOT had notified the City of the Lewis Law’s incompatibility with federal
law “[a]t the direction of [the] FHWA.” JA at 19. ODOT also declared that, “[a]s the agency
responsible for administering the FHWA funding for the subject project, [it] is merely a stakeholder
in this action.” Id. at 20. Accordingly, it took “no position on whether FHWA’s application of
[federal law] to the Lewis Law is correct.” Ibid.
On August 15, 2004, the FHWA removed the action to the United States District Court for
the Southern District of Ohio. On November 30, 2004, the magistrate judge to whom the matter had
been assigned directed the City and the FHWA to file cross-motions for summary judgment, and on
January 13, 2006, the district court issued its opinion and order denying the City’s motion and
granting summary judgment in favor of the FHWA.
The district court concluded that the State of Ohio and ODOT had standing to bring their
third-party claim against the FHWA; the court did not address the issue of the City’s standing.
Thereafter, the district court held that the FHWA did not act arbitrarily or capriciously in
determining that the Lewis Law’s local hiring provision violated 23 U.S.C. § 112 because the statute
seeks to limit both anti-competitive bidding procedures and substantive provisions in federally-
funded contracts. The court then found that the Lewis Law violated section 112(a) because its
substantive local hiring mandate discouraged bidding by otherwise qualified contractors who may
believe they would have difficulty complying with the local hiring preference. The district court
also found that the Lewis Law did not satisfy the exception to the competitive bidding requirement
No. 06-3611 City of Cleveland v. State of Ohio, et al. Page 5

found in section 112(b) because it was not an alternative method that is more “cost effective” than
typical competitive bidding.
In addressing the FHWA’s arguments based on certain federal regulations, the district court
held that the FHWA did not act arbitrarily or capriciously in determining that the Lewis Law
violated 23 C.F.R. § 635.110(b), which prohibits the imposition of bonding requirements that might
restrict competition. However, the court rejected the FHWA’s contention that the Lewis Law
contravenes 23 C.F.R. § 635.112(d), which outlaws contract requirements that could have the effect
of discriminating against contractors on a geographical basis, because the court believed that section
dealt with bidding procedures only. The court did find that the Lewis Law’s requirements violated
23 C.F.R. § 635.117(b), which proscribes procedures or requirements that “operate to discriminate
against the employment of labor from any other State, possession or territory of the United States,
in the construction of a Federal-aid project.” The court was unpersuaded by the City’s argument that
the Lewis Law only permits intrastate discrimination against non-Cleveland residents.
Finally, the court rejected the City’s argument that the “Common Rule,” found in 49 C.F.R.
Part 18, is the controlling regulation. That rule provides that States may spend federal funds using
the same procurement rules applicable to expenditures of their own funds. The district court
determined that the regulation requires ODOT to ensure that local governments abide by federal
contracting requirements, and since the court had already determined that the Lewis Law violates
some of those requirements, it held the City could not escape this result by appeal to the Common
Rule.
After the district court filed its opinion, the non-federal parties filed a stipulation on
February 10, 2006 agreeing that the Lewis Law does not violate state law and would not prohibit
the use of state funds on the Kinsman Road project. On February 13, 2006, the court entered
judgment in favor of the FHWA consistent with its opinion and the parties’ stipulation. That same
day, the City filed a motion to intervene as a plaintiff in the State of Ohio and ODOT’s third-party
complaint against the FHWA, ostensibly “to alleviate any concern that might exist as to [the City’s]
appellate standing.” App.’s Br. at 3. The district court summarily denied this motion on February
16, 2006, reasoning that it had “already entered judgment in this case.” JA at 151. Thereafter the
City filed this appeal.
II.
As a threshold matter, the FHWA presents a cursory challenge to the City’s standing to
proceed against it. According to the FHWA, the City lacks standing because it was merely a
subgrantee, i.e., the FHWA only gave approval of advance construction funding to ODOT, not the
City. The FHWA does not specifically address the issue whether the City has standing to appeal,
although the City contends in its brief that it does. The court will address both issues because it is
“under an independent obligation to police [its] own jurisdiction.” S.E.C. v. Basic Energy &
Affiliated Resources, Inc., 273 F.3d 657, 665 (6th Cir. 2001); see also Warth v. Seldin, 422 U.S. 490,
498 (1975) (stating that standing is a “threshold question in every federal case”); Zurich Ins. Co. v.
Logitrans, Inc., 297 F.3d 528, 531 (6th Cir. 2002) (holding that standing is a jurisdictional
requirement that cannot be waived and may be raised at any time in the proceeding).
We find that the City meets the three constitutional requirements for standing, see McConnell
v. Fed. Election Comm’n, 540 U.S. 93, 225-26 (2003) (reiterating that “the irreducible constitutional
minimum of standing” consists of “an injury in fact, which is concrete, distinct and palpable, and
actual or imminent,” “a causal connection between the injury and the conduct complained of – the
injury has to be fairly traceable to the challenged action of the defendant, and not the result of some
third party not before the court,” and a “substantial likelihood that the requested relief will remedy
the alleged injury in fact”) (internal quotes and citations omitted), as well as the prudential
No. 06-3611 City of Cleveland v. State of Ohio, et al. Page 6

requirements, see Coyne v. American Tobacco Co., 183 F.3d 488, 494 (6th Cir. 1999) (reviewing
the three elements that “a plaintiff must assert his own legal rights and interests,” the claim “must
be more than a generalized grievance,” and “in statutory cases, the plaintiff’s claim must fall within
the ‘zone of interests’ regulated by the statute in question”) (internal quotes and citations omitted).
The City has suffered an injury in fact because ODOT was forbidden by the FHWA from providing
previously-committed federal funds for the Kinsman Road project on the basis of the FHWA’s
objection to the application of the Lewis Law, thereby resulting in an injury that is both “concrete
and particularized” and “actual or imminent.” Lujan v. Defenders of Wildlife, 504 U.S. 555, 560
(1992). There also is a causal connection between the injury (the loss of project funding) and the
FHWA’s actions that would be redressable by a decision declaring that the Lewis Law’s
requirements would not contravene federal law, since the FHWA has identified no other problems
with the Kinsman Road project.
In examining the first prudential element, we believe the FHWA’s contention that its actions
were directed at ODOT and not the City – and therefore the City is attempting to stand in for ODOT
– elevates form over substance. The record demonstrates that ODOT viewed itself as little more
than a conduit, and the City’s goal is not to assert ODOT’s interest in receiving federal funds, but
its own. The City alleges an injury that is unique to itself and very specific – the denial of federal
funding based on its attempt to apply an ordinance that favors the use of local labor – which satisfies
the second prudential requirement. Finally, the City meets the third prudential requirement because
the interest sought to be protected is “arguably” within the “zone of interests” regulated by the
statute in question, 23 U.S.C. § 112. See Sault Ste. Marie Tribe of Chippewa Indians v. United
States, 288 F.3d 910, 914 (6th Cir. 2002).
The City’s standing to appeal presents a closer question in a context not previously addressed
by this court. “Standing may be a bar to an appeal even though a litigant had standing before the
district court.” United States v. Van, 931 F.2d 384, 387 (6th Cir. 1991). To have appellate standing,
“‘a party must be aggrieved by the judicial action from which it appeals.’” Vogel v. City of
Cincinnati, 959 F.2d 594, 599 (6th Cir. 1992) (quoting Vanguards of Cleveland v. City of Cleveland,
753 F.2d 479, 484 (6th Cir. 1985)). This court has held both that “Article III affords standing to
non-parties for the purposes of appeal in some circumstances,” United States v. Perry, 360 F.3d 519,
526 (6th Cir. 2004), and that “[p]ermission to intervene in a district court action does not
automatically confer standing to appeal,” Asssoc. of Banks in Ins. v. Duryee, 270 F.3d 397, 402 (6th
Cir. 2001). However, we have not addressed the question of the appellate standing of a party that
was denied formal intervention in the district court against a third-party defendant, where the
appellant seeks to attack the judgment in favor of the third-party defendant.
We start from the general premise that a party seeking to appeal must be “aggrieved” by the
judgment or order from which the appeal is taken. See, e.g., Deposit Guarantee Nat’l Bank v. Roper,
445 U.S. 326, 333 (1980); Parr v. United States, 351 U.S. 513, 516 (1956); Vogel, 959 F.2d at 599;
Vanguards, 753 F.2d at 484. Applying this rule, the Second and Ninth Circuits have held that a
litigant that is a party to the overall case may lack standing to appeal from a judgment that dismisses
a claim to which it was not a party. St. Paul Fire & Marine Ins. Co. v. Universal Builders Supply,
409 F.3d 73, 83 (2d Cir. 2005); Bryant v. Technical Research Co., 654 F.2d 1337, 1343 (9th Cir.
1981). In those cases, however, the appellants were not personally aggrieved by the judgment under
appeal and did not seek to protect their own interests. Although the present case parallels those
decisions insofar as the parties are similarly aligned, the actual interests of the parties distinguish
the decisions of our sister circuits and lead us to a different result.
We conclude that a rule conferring standing upon a plaintiff to challenge on appeal a decision
in favor of a third-party defendant against whom the plaintiff had no direct claim in the lower court
finds support in two lines of authority. The first, mentioned above, holds that non-parties have
standing to appeal when they have a sufficient stake in the outcome of the case. Bryant v. Yellen,
No. 06-3611 City of Cleveland v. State of Ohio, et al. Page 7

447 U.S. 352, 368 (1980); Perry, 360 F.3d at 526. In Bryant, the Supreme Court held that a group
of farm workers had standing to appeal despite the fact that they had only participated as amici in
the district court action. The United States brought suit against the Imperial Irrigation District, a
California irrigation agency, seeking a declaratory judgment that the Omnibus Adjustment Act of
1926 prohibited the supply of irrigation water to landowners owning more than 160 acres. If the
United States had been successful, many landowners possessing lands in excess of this amount in
all likelihood would have had to sell some of their land to retain their water rights. When the district
court rejected its position, however, the United States chose not to appeal. The amici farm workers
attempted to intervene for purposes of appeal (as they hoped to purchase the land that would have
become available), but the district court denied their motion. The Ninth Circuit reversed the denial
and held that the farm workers had standing to appeal. The Supreme Court agreed. Recognizing
that the farm workers had an interest in seeing the United States’s position vindicated, the Court held
they “had a sufficient stake in the controversy to afford them standing to appeal.” Id. at 368.
The City’s position also finds support in several cases holding that appeals may be taken by
non-parties who were treated on all sides as de facto parties but who never formally intervened. See
SEC v. Wencke, 783 F.2d 829, 834-35 (9th Cir. 1986); In re Grand Jury Proceedings, Subpoena to
Vargas, 723 F.2d 1461, 1464 (10th Cir. 1983); Martin-Trigona v. Shiff, 702 F.2d 380, 385-86 (2d
Cir. 1983); Beef Indus. Antritrust Litig., 589 F.2d 786, 788-89 (5th Cir. 1979); SEC v. Lincoln Thrift
Ass’n, 577 F.2d 600, 602-03 (9th Cir. 1978). In this case, the City actually was a party to the case,
and it was treated as a de facto party to the claim. We have little trouble concluding that the City
had “a sufficient stake in the outcome of the controversy” as required by Bryant v. Yellen. 447 U.S.
at 368. If it were not for the City, there would be no controversy in this case.
We recognize the general rule prohibiting a party who unsuccessfully filed a motion to
intervene from appealing anything but the order denying intervention. See In re Assoc. Press, 162
F.3d 503, 506 (7th Cir. 1998); B.H. by Pierce v. Murphy, 984 F.2d 196, 199-200 (7th Cir. 1993).
However, that rule presupposes that the would-be appellant was never a party to the action at all.
We hold that a party to an action in a district court has standing to appeal a judgment or order by
which it is actually aggrieved even though that litigant was not a party to the claim addressed by the
judgment or order, despite the denial of a motion to intervene in the clam, as long as the appellant
was treated as a de facto party to that claim in the lower court.
Because the City meets these requirements, we conclude that it has standing to appeal the
district court’s judgment in this case.
III.
When a district court upholds on summary judgment an administrative agency’s final
decision under the Administrative Procedure Act, this court “review[s] the district court’s summary
judgment decision de novo, while reviewing the agency’s decision under the arbitrary and capricious
standard.” Coalition for Government Procurement v. Fed. Prison Indus., Inc., 365 F.3d 435, 457
(6th Cir. 2004) (citing Sierra Club v. Slater, 120 F.3d 623, 632 (6th Cir. 1997)). An agency’s
decision is “arbitrary and capricious” when
the agency has relied on factors which Congress has not intended it to consider,
entirely failed to consider an important aspect of the problem, offered an explanation
for its decision that runs counter to the evidence before the agency, or is so
implausible that it could not be ascribed to a difference in view or the product of
agency expertise.
Motor Vehicles Mfrs. Assoc. v. State Farm Mutual Auto. Ins. Co., 463 U.S. 29, 43 (1983). Agency
action is “not in accordance with the law” when it is in conflict with the language of the statute
No. 06-3611 City of Cleveland v. State of Ohio, et al. Page 8

relied upon by the agency. See 5 U.S.C. § 706(2)(A); Chevron v. Natural Resources Defense
Council, Inc., 467 U.S. 837, 842-43 (1984); Holland v. Nat’l Mining Assoc., 309 F.3d 808, 815
(D.C. Cir. 2002).
A.
The City first argues that the district court erred by failing to recognize that the limitations
imposed by 23 U.S.C. § 112 address only bidding procedures and do not reach the substantive bid
requirements. The City contends, therefore, that the FHWA could not withhold funds based on a
belief that the Lewis Law’s local hiring preference was anti-competitive because the Lewis Law
itself was not illegal and it did not affect the bidding process. The statute reads:
(a) In all cases where the construction is to be performed by the State transportation
department or under its supervision, a request for submission of bids shall be made
by advertisement unless some other method is approved by the Secretary. The
Secretary shall require such plans and specifications and such methods of bidding as
shall be effective in securing competition.
(b) Bidding requirements.--
(1) In general.-- Subject to paragraphs (2) and (3), construction of each project,
subject to the provisions of subsection (a) of this section, shall be performed by
contract awarded by competitive bidding, unless the State transportation department
demonstrates, to the satisfaction of the Secretary, that some other method is more
cost effective or that an emergency exists. Contracts for the construction of each
project shall be awarded only on the basis of the lowest responsive bid submitted by
a bidder meeting established criteria of responsibility. No requirement or obligation
shall be imposed as a condition precedent to the award of a contract to such bidder
for a project, or to the Secretary’s concurrence in the award of a contract to such
bidder, unless such requirement or obligation is otherwise lawful and is specifically
set forth in the advertised specifications.
23 U.S.C. § 112(a)-(b).
The City points to the language in subsection 112(a) referring separately to “plans and
specifications” and “methods of bidding” as evidence of a distinction between the substantive and
procedural components of the agency’s discretionary authority. The City argues that subsection
112(b) builds upon this distinction by erecting a framework that favors competitive bidding as the
process for awarding contracts but does not authorize the federal agency to regulate the substantive
obligations imposed upon successful bidders, except for the requirements that mandatory contract
obligations must be “set forth in the advertised specifications” and be “otherwise lawful.” The City
believes that the district court erred by relying on the general statutory purposes of promoting
competition and ensuring the efficient use of federal dollars as justification under subsection 112(b)
for allowing the FHWA to examine the substantive contract requirements and assess whether they
are sufficiently “competitive.” Rather, the City argues, the FHWA does not have discretion to
regulate specific contract terms and specifications that are “otherwise lawful,” and the hiring
preferences set forth in the Lewis Law satisfy that condition because they do not limit the field to
one bidder. Otherwise, a host of requirements that might make local construction projects more
expensive – such as insurance requirements, time of the essence clauses, and liquidated damages
provisions – could be used to support findings that a contract specification was anti-competitive and
justify withdrawal of federal funds.
The FHWA insists that concurrence in a contract is a discretionary, not ministerial, function,
and therefore section 112 confers broad discretion to determine which plans, specifications, and
No. 06-3611 City of Cleveland v. State of Ohio, et al. Page 9

methods of biding will be effective in securing competition. The FHWA takes the position that the
overall intent of section 112 is to ensure the efficient use of federal dollars, and section 112(b) serves
to effectuate this intent. As a consequence, it insists, any contractual mandate that disadvantages
a class of otherwise competent bidders undermines the competitive bidding process and therefore
is prohibited under section 112(b) absent a showing that the mandate enhances the cost-effective use
of federal funds. The Lewis Law falls short of that measure. Even if the Lewis Law is not illegal
per se, the FHWA does not believe it falls within the “otherwise lawful” allowance because that
language countenances only narrowly tailored socioeconomic programs that Congress has
specifically directed. In other words, the FHWA contends that in order to be “otherwise lawful,”
a contract requirement or obligation must be rooted in federal statute. Therefore, some hiring
preferences may be allowable (such as employment preference for Indians on projects near
reservations, 23 U.S.C. § 140(d), local employment and materials preferences for highway
construction in Appalachia, 40 U.S.C. § 14501(d), and contracting goals for “Disadvantaged
Business Enterprises,” Pub. L. 105-178, § 1101(b)(1), 112 Stat. 107, 113) but others, such as the
Lewis Law, are not.
Since the FHWA reads subsection 112(b) as authorizing its examination of substantive bid
specifications to determine whether they inhibit competition, we must accord the agency’s
interpretation a degree of deference. Chevron, 467 U.S. at 843. As the Supreme Court has stated,
“if the statute is silent or ambiguous with respect to the specific issue, the question for the court is
whether the agency’s answer is based on a permissible construction of the statute.” Ibid. However,
“[i]f the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency,
must give effect to the unambiguously expressed intent of Congress.” Id. at 842-43. “The Supreme
Court has explained that ‘[t]he judiciary is the final authority on issues of statutory construction and
must reject administrative constructions which are contrary to clear legislative intent.’” Battle Creek
Health System v. Leavitt, 498 F.3d 401, 408 (6th Cir. 2007) (quoting Chevron, 467 U.S. at 843 n.9).
In determining the meaning of section 112, we must first consider the overall purpose of the
Federal-Aid Highway Act as set forth in 23 U.S.C. § 101 and its other provisions. See Richards v.
United States, 369 U.S. 1, 11 (1962) (deeming it “fundamental that a section of a statute should not
be read in isolation from the context of the whole Act”). In passing the Act, Congress meant to
“accelerate the construction of the Federal-aid highway systems . . . to meet the needs of local and
interstate commerce, for the national and civil defense.” 23 U.S.C. § 101(b); Citizens Organized
to Defend Environ. v. Volpe, 353 F. Supp. 520, 526, 530-31 (S.D. Ohio 1972). Additionally,
Congress intended to promote highway safety, 23 U.S.C. §§ 101(a), 105(f), 109(a), (d), (e), (f), 116,
conformity to the particular needs of each locality, 23 U.S.C. § 109(a), the creation of an efficient
transportation network, 23 U.S.C. §§ 101(b), 103(b)(2)(D)-(E), 105(c), 109(b), the provision of
direct and convenient access to public facilities, 23 U.S.C. § 103(b)(1)(A), and the economical use
of federal funds, 23 U.S.C. §§ 101(e), 108(a), 109(a), 112. Citizens, 353 F. Supp. at 526 n.9. The
importance of this last purpose is beyond dispute. See State Highway Comm’n of Missouri v. Volpe,
479 F.2d 1099, 1112-14 (8th Cir. 1973); Centralia Plaza Dev. Corp. v. Topel, 622 F. Supp. 839,
839-40 (S.D. Ill. 1985); Citizens, 353 F. Supp. at 531 (“Economical use of public funds for highway
construction is one of the express interests recognized by the Highway Act.”).
The presumption in favor of the competitive bidding process reflected in section 112 furthers
Congress’s aim to ensure the cost-effective use of federal dollars. Competitive bidding, frequently
required in the letting of public contracts, is employed to prevent fraud and favoritism and to reward
the most efficient bidder. See Allis-Chalmers Corp., Hyrdo-Turbine Div. v. Friedkin, 635 F.2d 248,
253 (3d Cir. 1980) (explaining, in the context of a contract for the construction of a hydroelectric
power plant, that “[g]overnment contracts are awarded under a competitive bidding process to
reward the most cost efficient manufacture and thereby save public funds”).
No. 06-3611 City of Cleveland v. State of Ohio, et al. Page 10

After considering the legislative purpose, structure, and plain meaning of the statutory text,
we must conclude that the discretion afforded the FHWA to accept or reject specific contract terms
is neither as broad as the agency contends nor as limited as the City maintains. We believe that the
City is correct in its assertion that subsection 112(b) draws a distinction between bidding “methods”
and “requirements,” but incorrect in its contention that this subsection mandates that the FHWA
approve any substantive requirement that is “otherwise lawful” and “set forth in the advertised
specifications.” The former conclusion is required by the statute’s plain language, and the latter is
a necessary corollary to the broad discretion invested in the FHWA to approve contracts involving
the expenditure of federal highway funds.
There is no dispute by the parties that subsection 112(a) gives the FHWA the authority to
review “plans and specifications” with an eye toward “securing competition” within the public
bidding process. However, subsection 112(b) specifically addresses itself to “bidding
requirements.” It draws a distinction between bidding procedures and substantive contract
requirements, stating that “construction of each project . . . shall be performed by contract awarded
by competitive bidding, unless the State transportation department demonstrates, to the satisfaction
of the Secretary, that some other method is more cost effective or that an emergency exists.” 23
U.S.C. § 112(b)(1) (emphasis added). A “method” is defined as “a means or manner of procedure,
especially a regular and systematic way of accomplishing something.” The American Heritage
Dictionary of the English Language (Houghton Mifflin Co. 2004). Plainly, this clause deals only
with the process of how bids are awarded – competitive bidding or “some other method” – not the
substance of the underlying contracts themselves. The clause establishes a strong presumption in
favor of competitive bidding as the “method” of choice, and provides that a different “method” can
only be employed when the State has demonstrated, to the satisfaction of the FHWA, that the
alternative “method” is more cost effective or necessary due to an emergency. Examples of other
“methods” would include a sole source award or “best value” procurement that might result in
awarding a contract to someone other than the lowest bidder.
After setting forth the presumption in favor of competitive bidding as the method for
awarding contracts, subsection 112(b)(1) then proceeds to deal with the substantive requirements
contained in contract specifications: “No requirement or obligation shall be imposed as a condition
precedent to the award of a contract . . . unless such requirement or obligation is otherwise lawful
and is specifically set forth in the advertised specifications.” A “requirement” is “something
obligatory; a prerequisite.” The American Heritage Dictionary of the English Language (Houghton
Mifflin Co. 2004). Much the same, an “obligation” is “a social, legal, or moral requirement, such
as a duty, contract, or promise that compels one to follow or avoid a particular course of action.”
The American Heritage Dictionary of the English Language (Houghton Mifflin Co. 2004).
Although Congress could have used more precise language, it is clear enough that this clause deals
with substantive requirements or obligations imposed upon contractors who successfully bid on a
project. Such substantive requirements or obligations are “condition[s] precedent to the award of
a contract” because, if a contractor does not agree to comply with them, the award presumably will
go to another. We find it abundantly clear that the public body awarding the contract need not
justify these “requirements or obligations” as “more cost effective” than competitive bidding or
necessitated by emergency because those conditions only apply when the body awarding the contract
seeks to depart from competitive bidding as the method for awarding a contract. We must therefore
reject the FHWA’s interpretation and the district court’s conclusion to the contrary, which is in
conflict with the plain language of the statute.
Subsection 112(b) by itself confers no authority upon the FHWA to evaluate substantive
contract requirements to determine whether they might inhibit competition or disqualify otherwise
qualified bidders. But the fact that section 112(b)(1) draws a distinction between bidding “methods”
and contract “requirements” does not compel the conclusion that any requirement or obligation must
receive the blessing of the FHWA as long as it is “otherwise lawful” and “specifically set forth in
No. 06-3611 City of Cleveland v. State of Ohio, et al. Page 11

the advertised specifications.” Rather, the “otherwise lawful” language establishes a necessary but
not sufficient condition for approval of contract specifications: unless the contract requirement is
“otherwise lawful” and properly advertised, it cannot be applied in the context of a federally-funded
project. It does not follow, however, that if a bid specification is lawful, the FHWA must accept it
and approve funding.
Consistent with other provisions in the Act, subsection 112(d) requires “the prior
concurrence of the Secretary” before a local governmental unit may enter into any contract awarded
by competitive bidding. That proviso has been interpreted by the Third Circuit to confer broad
discretion upon the FHWA in deciding whether to approve contracts. Glasgow, Inc. v. Fed.
Highway Admin., 843 F.2d 130 (3d Cir. 1988). In that case, the court stated:
There are several reasons why we conclude that 23 U.S.C. § 112 accords the FHWA
discretion in determining whether to concur in a contract award. But we must say
preliminarily in this regard that it would be astounding to find that Congress has
limited the FHWA’s function in a situation involving the expenditure of tens of
millions of federal tax dollars to that of rubber-stamping a contract award decision
by a state agency.
In any event, there is nothing in 23 U.S.C. § 112(d) which suggests that “the prior
concurrence” of the FHWA to an award of a contract must be given merely upon the
presentation of documents. The Act, in general, indicates that the FHWA is to have
discretion in its administration. Thus 23 U.S.C. § 105(a) reads in pertinent part:
“The Secretary [of Transportation] may approve a program in whole or in part, but
he shall not approve any project in a proposed program which is not located upon an
approved Federal-aid system.” (Emphasis added.) Similarly, 23 U.S.C. § 106(a)
provides that the Secretary exercises his approval on the basis of “surveys, plans,
specifications, and estimates . . . as the Secretary may require.” (Emphasis added.)
Further, it is clear that the FHWA must have discretion in setting standards for
proposed projects. 23 U.S.C. § 109. In addition, 23 C.F.R. § 635.111(d) (1987)
provides that if a state highway agency proposes to reject a low bid due to an
irregularity it must, with certain exceptions, submit justification for non-waiver of
these requirements to enable the division administrator to evaluate the refusal to
accept the low bid. If the division administrator determines that the justification is
insufficient, he may withhold concurrence to the award of the contract to another
bidder at the same letting. Obviously, there is discretion in such a determination.
...
Thus the FHWA determines whether to concur in the award of a contract on a case
by case basis upon consideration of relevant laws, regulations and policy
considerations. This view accords with our view of Congressional intent gleaned
from the statute as a whole.
Glasgow, 843 F.2d at 136-37 (footnote omitted).
We agree with our sister circuit’s rationale. Although the FHWA may not act “for reasons
totally collateral and remote to the Act itself,” Missouri, 479 F.2d at 1114, Congress has conferred
upon the Secretary of Transportation, and through her the FHWA, discretionary authority to
effectuate the Act’s purposes. Just as the FHWA engages in a discretionary rather than ministerial
function in determining whether to concur in a contract award, Glasgow, 843 F.2d at 136-37, the
FHWA likewise enjoys the discretion under subsections 112(a) and (b) to decide whether to approve
No. 06-3611 City of Cleveland v. State of Ohio, et al. Page 12

a contract requirement that is “otherwise lawful” and “specifically set forth in the advertised
specifications,” 23 U.S.C. § 112(b)(1), as consistent with the overall goals set forth in the Act.
The district court held that the FHWA properly withdrew federal funds from the Kinsman
Road enhancement project because “the City failed . . . to demonstrate to the Secretary’s satisfaction
that [inclusion of the Lewis Law’s requirements in the contract with the low bidder] is more ‘cost
effective’ than competitive bidding or that an emergency existed.” J.A. at 139. The district court
reasoned that “because the Lewis Law may operate to prevent contractors from placing bids due to
hiring requirements and related penalties, the actual bid selection process may not be competitive.”
J.A. at 140. That holding confounds the FHWA’s limited role in enforcing the competitive bidding
process with its broader discretion to decide whether to award federal funds based on a host of other
considerations that focus on policy and efficiency. We therefore must reject the district court’s
reasoning.
However, it is clear from the record that the City included the Lewis Law requirement in the
contract awarded to Perk, even after the City withdrew the reference to the Lewis Law from the bid
specifications at the behest of the LPA Coordinator for ODOT. By making the substantive local
hiring preference part of the contract with Perk, the City violated the part of subsection 112(b)(1)
that states “No requirement or obligation shall be imposed as a condition precedent to the award of
a contract to such bidder for a project . . . unless such requirement or obligation . . . is specifically
set forth in the advertised specifications.” The FHWA was well within its authority in refusing to
countenance the City’s attempt to seek forgiveness when it previously could not obtain permission.
Since compliance with the Lewis Law was not part of the formal bid specifications presented to
competing contractors, the FHWA’s decision to withdraw federal funds from the Kinsman Road
project when it saw that prerequisite in the final contract was justified under 23 U.S.C. § 112(b)(1)
and therefore was not arbitrary, capricious, or contrary to law.
B.
The City also contends that the Lewis Law’s requirements do not conflict with the federal
regulations upon which the FHWA relied to justify its withdrawal of federal funds. The FHWA
supported its decision to withdraw funding by reference to 23 C.F.R § 635.110(b), which prohibits
contract requirements for bonds and other features that might restrict competition; 23 C.F.R
§ 635.112(d), which renders inapplicable to federal-aid projects bidding procedures that
discriminate, inter alia, on the basis of national, state, or local boundaries; and 635.117(b), which
bars contract requirements that discriminate against labor from other states or territories. The City
argues in the alternative that if the local hiring preferences do run afoul of these regulations, then
the regulations conflict with the plain language of 23 U.S.C. § 112(b).
Congress has delegated to the Secretary of Transportation the authority “to prescribe and
promulgate all needful rules and regulations for carrying out the provisions” of the Act. 23 U.S.C.
§ 315. “Where Congress has left gaps in legislation to be filled in by an administrative agency, the
regulations promulgated pursuant thereto are accorded deference.” Nichols v. United States, 260
F.3d 637, 644 (6th Cir. 2001) (citing Chevron, 467 U.S. at 844). Congress may either implicitly or
explicitly delegate rule-making authority to an administrative agency. Nichols, 260 F.3d at 644
(citing Chevron, 467 U.S. at 843). When the delegation is explicit, as here, the agency’s regulations
are given “controlling weight unless they are arbitrary, capricious, or manifestly contrary to the
statute.” Chevron, 467 U.S. at 844.
In addition, an agency’s interpretation of its own ambiguous regulations is entitled to
deference. Beck v. City of Cleveland, 390 F.3d 912, 919 (6th Cir. 2004) (citing Auer v. Robbins, 519
U.S. 452, 462 (1997)). However, “[i]nterpretations such as those in opinion letters – like
interpretations contained in policy statements, agency manuals, and enforcement guidelines, all of
No. 06-3611 City of Cleveland v. State of Ohio, et al. Page 13

which lack the force of law – do not warrant Chevron-style deference.” Christensen v. Harris
County, 529 U.S. 576, 587 (2000). See also Spectrum Health Continuing Care Group v. Anna Marie
Bowling Irrecoverable Trust Dated June 27, 2002, 410 F.3d 304, 319 (6th Cir. 2005) (holding that
an “agency’s letter is not entitled to judicial deference. The letter does not appear to be a product
of the agency’s rule-making authority, and therefore was likely not subject to the rigors of the public
notice-and-comment process”) (citing United States v. Mead Corp., 533 U.S. 218, 230 (2001)).
When a regulation’s meaning is clear, the agency is bound by its terms and may not, “under the
guise of interpreting a regulation, . . . create de facto a new regulation.” Christensen, 529 U.S. at
588. Nonetheless, an agency’s interpretations of its own rules are entitled to deference “as long as
they are reasonable, are clear, and are clearly applicable in this case.” Littriello v. United States, 484
F.3d 372, 377 (6th Cir. 2007); Ammex, Inc. v. United States, 367 F.3d 530, 535 n.2 (6th Cir. 2004)
(stating that reasonable agency interpretations carry at least some added persuasive force when
Chevron deference is inapplicable).
1.
The district court held that the Lewis Law trenched upon the regulation governing bonding
provisions because of the penalty that the Lewis Law imposed on contractors who violate the local
hiring preference requirement. Under that provision, noncompliance could result in the obligation
to furnish a bond of twenty percent of the price of any subsequent contract awarded by the City. The
particular regulation reads:
No procedure or requirement for bonding, insurance, prequalification, qualification,
or licensing of contractors shall be approved which, in the judgment of the Division
Administrator [of the FHWA], may operate to restrict competition, to prevent
submission of a bid by, or to prohibit the consideration of a bid submitted by, any
responsible contractor, whether resident or nonresident of the State wherein the work
is to be performed.
23 C.F.R. § 635.110(b). The district court reasoned that the Lewis Law’s bond penalty provision
violates this section because it may discourage bid submissions by contractors who question their
ability to comply with the local hiring requirement. The court also determined that the local hiring
preference itself discouraged competition by favoring contractors who have knowledge of the local
labor market over those who might be required to incur the expense of acquiring such knowledge.
The City contends this regulation does not prohibit the Lewis Law’s bond penalty provision
because that provision only takes affect after a contractor fails to meet the local hiring requirement
and the penalty only applies to future contracts accepted by the defaulting contractor. According
to the City, section 110(b) only regulates conditions precedent.
We disagree with the district court’s conclusion that section 110(b) addresses local hiring
preference requirements, and therefore we must reject the rationale that the Lewis Law violates
section 110(b) by giving local contractors an edge over bidders who are unfamiliar with the local
labor market. The Lewis Law’s requirement that a fixed percentage of hours must be worked by
Cleveland residents is not a requirement for “bonding, insurance, prequalification, qualification, or
licensing of contractors.” However, we agree with the district court’s second determination that the
FHWA reasonably concluded that the bond penalty provision violated section 110(b). To be sure,
the bond penalty provision likely would not deter any contractor, even one who had no intentions
of complying with the local hiring requirement, from initially submitting a bid to the City. Because
the bond penalty provision only applies to contracts performed after the contractor defaults on its
first contract with the City, it does not serve as a disincentive to contractors bidding on their first
contract with the City under the Lewis Law regime. Nonetheless, the bond penalty provision
certainly could discourage contractors who had once defaulted from submitting subsequent bids
No. 06-3611 City of Cleveland v. State of Ohio, et al. Page 14

because they uniquely would be required to provide a twenty percent bond. Under that scenario, the
Lewis Law’s bond requirement would operate to restrict competition and thereby run afoul of
section 635.110(b). That interpretation of the regulation is reasonable, and therefore the FHWA’s
application of the regulation to support its withdrawal of federal funds from the project was not
arbitrary, capricious, or contrary to law.
2.
The FHWA also maintains that the Lewis Law violates 23 C.F.R § 635.112(d), which states:
Nondiscriminatory bidding procedures shall be afforded to all qualified bidders
regardless of National, State or local boundaries and without regard to race, color,
religion, sex, national origin, age, or handicap. If any provisions of State laws,
specifications, regulations, or policies may operate in any manner contrary to Federal
requirements, including title VI of the Civil Rights Act of 1964, to prevent
submission of a bid, or prohibit consideration of a bid submitted by any responsible
bidder appropriately qualified in accordance with § 635.110, such provisions shall
not be applicable to Federal-aid projects. Where such nonapplicable provisions
exist, notices of advertising, specifications, special provisions or other governing
documents shall include a positive statement to advise prospective bidders of those
provisions that are not applicable.
23 C.F.R. § 635.112(d). The district court rejected that argument and held that the regulation deals
only with bidding procedures, not the consequences of substantive bid or contract specifications, and
the Lewis Law does not address bidding procedures. The FHWA argues this conclusion is
erroneous; it urges this court to find that the Lewis Law contravenes this regulation because it could
discourage responsible bidders from competing for business with the City when faced with the local
hiring mandate.
We agree with the district court’s interpretation of this regulation. By its own terms, the first
sentence of the regulation deals only with bidding procedures, and the Lewis Law’s local hiring
requirement is not such a procedure. Although the FHWA has failed to cite any agency documents
or other authority in support of its interpretation, one of the memoranda cited by the FHWA in
connection with section 635.117(b) (addressed below) does briefly discuss section 635.112(d).
However, the FHWA cannot claim deferential treatment by reference to agency memoranda or
letters citing this portion of the regulation as authority for the position that local hiring preferences
are illegitimate. Such documents are only entitled to deference to the extent they are persuasive, and
the letter submitted by the FHWA citing section 635.112(d) is not persuasive: it simply quotes the
first sentence of that regulation without any analysis whatsoever.
The applicability of the regulation’s second sentence, on the other hand, is a different matter.
That sentence reads: “If any . . . specifications . . . may operate in any manner contrary to Federal
requirements . . . to prevent submission of a bid, or prohibit consideration of a bid submitted by any
responsible bidder . . . such provisions shall not be applicable to Federal-aid projects.” 23 C.F.R.
§ 635.112(d). Although these words follow a sentence that deals only with bidding “procedures,”
they seem to encompass both procedural and substantive requirements since they speak to “any
provisions of State laws, specifications, regulations, or policies.” Nevertheless, we do not believe
the FHWA can base its rejection of the Lewis Law’s local hiring requirement on this language
because, as we explain below, the FHWA has not demonstrated the local hiring requirement is
“contrary to Federal requirements.” Although the FHWA has discretionary authority to decline to
approve contracts that may not reflect the efficient use of federal dollars, the FHWA has not
demonstrated that local hiring preferences styled in the manner of the Lewis Law are impermissible
per se due to their conflict with federal law.
No. 06-3611 City of Cleveland v. State of Ohio, et al. Page 15

3.
The district court also accepted the FHWA’s argument that the Lewis Law’s local hiring
preference requirement violated 23 C.F.R. § 635.117(b), which simply states: “No procedures or
requirement shall be imposed by any State which will operate to discriminate against the
employment of labor from any other State, possession or territory of the United States, in the
construction of a Federal-aid project.” The City contends this regulation cannot justify the FHWA’s
withdrawal of funds because the regulation does not prohibit local hiring preferences that
discriminate on an intrastate basis only, and the Lewis Law affects only contractors who hire Ohio
workers. The district court held that did not matter, since any discrimination, whether interstate or
intrastate, can restrict competition.
The FHWA advances that argument in this court, asserting that even though the regulation
does not expressly cover intrastate discrimination based on residency, the policy underlying the
regulation is equally applicable to intrastate discrimination. In support, the FHWA cites a series of
agency memoranda and a participant guidance manual that contain a gloss on the statutes and
regulations, all of which circle back to the idea that local hiring preferences violate the competitive
bidding requirements of 23 U.S.C. § 112.
The first memorandum was authored by the agency’s Chief Counsel on April 30, 1994 and
informed the director of the Department of Transportation’s civil rights office that local hiring
preferences “tend to undermine the competitive bidding process” because “[t]he exclusion of
nonlocal labor forces is noncompetitive and may increase the cost of the project.” JA at 308-09.
The second memorandum cited by the FHWA was written by the FHWA Infrastructure Program
Manager to the Montana Division Administrator on February 8, 1999, and explained that the
regulations would not permit proposed state legislation that would have restricted Canadian
contractors from bidding on federal-aid highway projects in Montana. The memorandum’s author
noted that the agency’s regulations were based on the competitive bidding requirements in the
statute, and the agency has applied the regulations consistently throughout the 1990s to discourage
the requirement of local hiring preferences by federal aid recipients. The third document is an
opinion by the FHWA’s acting chief counsel addressing local hiring preferences for the Alameda
Corridor Project, in which the author concluded that he did not believe the agency had the authority
to waive the prohibition “in the absence of an explicit statutory exemption by Congress.” JA at 304.
The last document submitted by the FHWA is a copy of the “Contract Administration Core
Curriculum Participant’s Manual and Reference Guide 2001.” JA at 200-02. In relevant part, the
manual states that “STAs [State Transportation Agencies] may not include in a Federal-aid contract
any provisions that require a contractor to give any preference in hiring. While the STAs (or local
governments) are precluded from enacting such preference requirements, this requirement does not
apply to the Federal Government.” JA at 202.
We do not believe that the foregoing amounts to persuasive authority that 23 C.F.R.
§ 635.117(b) prohibits the local hiring preference contemplated by the Lewis Law. Cleveland’s
ordinance was drafted to avoid reaching contractors who hire only out-of-state workers, so it does
not “discriminate against the employment of labor from [another] state.” 23 C.F.R. § 635.117(b).
The plain text of the regulation certainly prohibits much geographically-based discrimination, but
it does not prohibit all such discrimination. Conspicuously absent from the list “State, possession
or territory,” is the phrase “or political subdivision,” the word “locality,” and any other such term
that would express an intent to proscribe intrastate discrimination. Although the canon expressio
unius est exclusio alterius “has force only when the items expressed are members of ‘an associated
group or series,’ justifying the inference that items not mentioned were excluded by deliberate
choice, not inadvertence,” Barnhart v. Peabody Coal Co., 537 U.S. 149, 168 (2003), the language
in subsection 117(b) fits the bill quite neatly.
No. 06-3611 City of Cleveland v. State of Ohio, et al. Page 16

The inference therefore is unavoidable that the Secretary of Transportation deliberately
omitted in the regulation reference to cities or regions when it expressly listed “State[s],
possession[s] or territor[ies]” and nothing else. 23 C.F.R. § 635.117(b). That inference is bolstered
by White v. Mass. Council of Const. Employers, 460 U.S. 204 (1983), in which the Supreme Court
held that Boston’s local hiring preference did not violate the Commerce Clause because the city was
a market participant not a market regulator, and United Building and Construction Trades Council
v. City of Camden, 465 U.S. 208 (1984), where the Court held that Camden, New Jersey’s local
hiring preference ordinance could violate the Privileges and Immunities Clause because it
disadvantaged both in-state and out-of-state residents alike. In the latter case, the Court observed
that the in-state residents “have no claim under the Privileges and Immunities Clause.” Id. at 217
(citing The Slaughter-House Cases, 16 Wall. 36, 77 (1872)). Since the jurisprudence acknowledges
the distinction between interstate and intrastate discrimination based on residency, and the regulation
specifically does not include the latter, reading the regulation as expansively as the FWHA urges
would impermissibly “create de facto a new regulation” “under the guise of interpreting a
regulation.” Christensen, 529 U.S. at 588.
The Lewis Law does not operate to discriminate against the employment of labor from
another State. The Lewis Law mandates contractors to ensure that 20% of the construction hours
worked on a project performed by Ohio residents are worked by Cleveland residents. By excluding
from the definition of “construction worker hours” all work performed “by non-Ohio residents,”
Cleveland, Ohio Codified Ordinances § 188.01(c), the City has limited the impact of the Lewis Law
to Ohio residents alone. If a contractor wishes to employ any Ohio construction workers, 20% of
the hours performed by those Ohio workers must be worked by Cleveland residents. But if a
contractor wishes to employ all out-of-state labor, it can do so without employing any Cleveland
residents. The Lewis Law thus might disadvantage Ohio-based labor. But the Lewis Law has no
effect whatsoever on “the employment of labor from any other State, possession or territory of the
United States.” 23 C.F.R. § 635.117(b) (emphasis added). The FHWA’s determination that this
regulation was violated, therefore, cannot be sustained.
C.
The City next argues that the district court erred in evaluating the applicability of the
Common Rule, codified at 49 C.F.R. § 18.36. According to the City, the Common Rule enables
States to spend federal funds using the same procurement rules applicable to expenditures of their
own funds. Therefore, the City argues, since the State has stipulated that Ohio law does not prohibit
application of the Lewis Law to state-funded projects, the Common Rule dictates that the same
apply to federally-funded projects.
The district court held that 49 C.F.R. § 18.37, not section 18.36, was the governing
regulation. That rule directs States, when administering subgrants of federal funds to its political
subdivisions, to “[e]nsure that subgrantees are aware of requirements imposed upon them by Federal
statute and regulation.” 49 C.F.R. § 18.37(a)(2). Therefore, the district court reasoned, if a
subgrantee proceeds in a manner that violates federal law, its grant cannot be saved by the Common
Rule. We agree.
The Department of Transportation, like many other federal agencies, has adopted the
Common Rule to “establish[] uniform administrative rules for Federal grants and cooperative
agreements and subawards to State, local and Indian tribal governments.” 49 C.F.R. § 18.1. This
general rule of governance implements federalism principles by allowing States to expend and
account for grant funds in large part according to their own laws and procedures. Uniform
Administrative Requirements for Grants and Cooperative Agreements to State and Local
Government, 53 Fed. Reg. 8034, 8034-35 (March 11, 1988). But the Common Rule does not operate
to exempt States from complying with federal law simply because they normally do things
No. 06-3611 City of Cleveland v. State of Ohio, et al. Page 17

differently. Rather, the Common Rule is a means to fill gaps in procurement and spending
administrative procedures where there is no governing federal rule. This is a sensible policy, since
deferring to state practices avoids the need by federal agencies to promulgate their own procedures
for States to follow, which often could be duplicative and breed confusion. The regulations plainly
state, however, that when federal statutes and regulations conflict with state law, federal law
prevails.
This point is made clear by 49 C.F.R. § 18.4, which states that the DOT’s Common Rule
shall “apply to all grants and subgrants to governments, except where inconsistent with Federal
statutes or with regulations.” 49 C.F.R. § 18.4(a). As noted above, state agencies that administer
subgrants must ensure that subgrantees follow federal procedures. 49 C.F.R. § 18.37. Therefore,
the fact that the Lewis Law is not inconsistent with Ohio law does not automatically clear its
procedures for federally-funded projects. If federal law stands in the way, the Common Rule cannot
be used to circumvent that obstacle. We have found that the City violated 23 U.S.C. § 112(b) when
it included the Lewis Law’s provisions in the contract to the successful bidder but previously had
withdrawn that requirement from the advertised bid specifications, and we have upheld the FHWA’s
conclusion that the Lewis Law’s bond penalty violated 23 C.F.R. § 635.110(b). The Common Rule
must yield to these findings, and it cannot save the funding for the City’s Kinsman Road
improvement project.
D.
Last, the City contends that the “clear statement rule” laid down in Pennhurst State Sch. &
Hosp. v. Halderman, 451 U.S. 1 (1981), precludes the FHWA from withdrawing federal funds. The
City posits that the FHWA’s regulations violate Pennhurst because they did not put the State of
Ohio on notice that in accepting federal funds it was also accepting limitations on its right to impose
various contract requirements. The FHWA insists that the City has waived this argument by failing
to raise it in the lower court. Although “[t]he general rule is that an appellate court will not entertain
an argument based upon a theory not litigated below,” Hutton v. United States, 501 F.2d 1055, 1062
(6th Cir. 1974), an exception exists “[w]hen a new argument presents a question of pure law,”
United States v. Butler, 207 F.3d 839, 850 (6th Cir. 2000). That exception applies here. The
Pennhurst argument presents a question of pure law requiring “no new or amplified factual
determination,” and both parties have had a chance to address the issue. See id. at 849 (internal
quotations omitted).
In Pennhurst, the Supreme Court held that when Congress “intends to impose a condition
on the grant of federal monies, it must do so unambiguously.” 451 U.S. at 17. This rule, known
as the Pennhurst “clear statement rule,” is based on the rationale that legislation enacted under
Congress’s spending power is in the nature of a contract:
[I]n return for federal funds, the States agree to comply with federally imposed
conditions. The legitimacy of Congress’ power to legislate under the spending
power thus rests on whether the State voluntarily and knowingly accepts the terms
of the “contract.” There can, of course, be no knowing acceptance if a State is
unaware of the conditions or is unable to ascertain what is expected of it.
Ibid. (citations omitted). The “crucial inquiry” in this analysis is “whether Congress spoke so
clearly that [the court] can fairly say that the State could make an informed choice.” Id. at 25.
Applying this rule, the Court in Pennhurst overturned a lower court ruling that would have
required Pennsylvania to cover the cost of treatment for disabled individuals in “the least restrictive
environment” as a condition of receiving federal funds under the Developmentally Disabled
Assistance and Bill of Rights Act. Although the case dealt with the imposition of an affirmative
No. 06-3611 City of Cleveland v. State of Ohio, et al. Page 18

obligation, the clear statement rule has been applied to negative obligations as well. See Barnes v.
Gorman, 536 U.S. 181, 186 n.1 (2002) (citing Davis v. Monroe County Bd. of Educ., 526 U.S. 629,
640 (1999), and Gebser v. Lago Vista Indep. Sch. Dist., 524 U.S. 274, 287 (1998)); Charles v.
Verhagen, 348 F.3d 601, 607 (7th Cir. 2003); United States v. Miami Univ., 294 F.3d 797, 808-09
(6th Cir. 2002). The rule that has emerged is that if Congress wishes to condition funding upon a
State’s promise to refrain from doing something it would otherwise have the legal right to do,
Congress must speak with a clear voice.
It is true that Congress has not prohibited the imposition of local hiring preferences on
federally funded highway projects. As discussed above, that limitation has resulted from the
agency’s interpretation of the statute mandating competitive bidding procedures. Although the
legality of local hiring preferences that discriminate against interstate employers has been
undermined by the Supreme Court’s decision in United Building and Construction Trades Council
v. City of Camden, discussed earlier, the Lewis Law does not fall within that prohibition, and it is
not clear that Congress would condemn it. However, it is clear to us that 23 U.S.C. § 112 fairly
apprises States that any contract specification, regardless of its substantive viability under the federal
regulations, cannot be “imposed as a condition precedent to the award of a contract . . . unless such
requirement or obligation . . . is specifically set forth in the advertised specifications.” 23 U.S.C.
§ 112(b)(1). This statute puts States on notice that substantive contract requirements must be
specifically advertised to prospective bidders before they can be incorporated into a federally-funded
contract. Moreover, Pennhurst does not speak to the discretion federal agencies enjoy in deciding
whether to fund construction projects initially. Those decisions may be based upon any lawful
factor that the agency deems relevant under its broad power to administer federal programs.
We conclude, therefore, that the FHWA’s decision to withdraw federal funds from the
Kinsman Road project did not violate Pennhurst’s clear statement rule.
IV.
Although we disagree with the district court’s reasoning that 23 U.S.C. § 112(b) provides
authority for the FHWA to evaluate substantive bid specifications on the basis of their
anticompetitive qualities, and we find that Cleveland’s local hiring preference ordinance does not
violate 23 C.F.R §§ 635.112(d) or 635.117(b), we conclude that the FHWA’s decision to withdraw
federal funding from the Kinsman Road improvement project was not arbitrary, capricious, or
contrary to law. The FHWA reasonably concluded that the City of Cleveland violated 23 U.S.C.
§ 112(b) when it included the Lewis Law’s provisions in the contract to the successful bidder after
the City previously had withdrawn that requirement from the advertised bid specifications, and that
the Lewis Law’s bond penalty violated 23 C.F.R. § 635.110(b).
For these reasons, we affirm the judgment of the district court.