By Laurel R. Kretzing, Esq. and Christopher E. Vatter, Esq.
The start of a new year, with a new contracting season right around the corner, seems like an appropriate time to review what is new and notable in public bidding law in New York. In the last few years there has been a lot of attention from both the Courts and the Legislature on contract “specifications” which dictate who, rather than how, the work is to be performed. In 2011, the Court of Appeals, in Matter of L&M Bus Corp. v. New York City Department of Education, 17 N.Y.3d 149, 927 N.Y.S.2d 311 (2011), once again, turned its attention to a bid specification focused on the employees of the public contractor and found the specifications to be in violation of the public bidding laws as it was anti-competitive. Therefore, we write to update you on these developments as they relate to those contracts which contain these employee related bid specifications
The Purpose of Public Bidding
The basic principles behind General Municipal Law 103 and other public bid statutes are well known. GML 103 requires that all contracts for public work involving expenditures of more than $35,000 and all purchase contracts involving the expenditure of more than $20,000, be awarded “to the lowest responsible bidder” after competitive bidding, submitting a bid that is responsive to the bid specifications. The purpose of General Municipal Law 103 is (1) protection of public monies by obtaining the best work at the lowest possible price; and (2) prevention of favoritism or corruption in the awarding of public contracts. The Legislature provided that the contracting requirements in the General Municipal Law “shall be construed” to further this objective. See Gen. Mun. Law 100-a. Other statutes which require public bidding or govern procurement are similarly interpreted. “New York has a multitude of procurement statutes applicable to public entities, but the underlying purpose is uniform: to assure prudent use of public moneys and to facilitate the acquisition of high quality goods and services at the lowest possible cost”.
Employment Specifications: PLAs, Apprenticeship and other Employee Benefit Requirements
The Court of Appeals has consistently disapproved of bid specifications which do not directly serve the purposes of competitive bidding, particularly where the specification relates to the terms and conditions of employment of the employees of the Contractor. In 1986, in Associated Bldrs. and Contrs. v. City of Rochester, the Court of Appeals struck down a City of Rochester ordinance providing that in awarding municipal construction contracts in excess of $100,000, preference must be given to a contractor whose employees participated in a state-approved apprenticeship program. The Court noted that while apprentice training was “a desirable end,” it was not one that could “affect the qualification of an otherwise responsible low bidder”.
Notably, in response to the Court of Appeals decision in Associated Builders, the Legislature enacted Labor Law 816-b. Pursuant to Labor Law 816-b, a public entity may require, without violating General Municipal Law 103, that contractors and subcontractors have, prior to entering into a contract for a public construction project, “apprenticeship agreements appropriate for the type and scope of work to be performed” approved by the commission of the New York State Department of Labor. Labor Law 816-b is not a mandatory requirement. Each public entity is entitled to determine whether it wishes to impose such a requirement or not.
In 1996, in N.Y.S. Chapter, Inc., Assoc. Gen. Contractors of Am. v. N.Y.S. Thruway Auth., the Court of Appeals took up the issue of Project Labor Agreements, known as PLAs. A PLA in the public procurement context is a pre-bid specification establishing a particular labor union or unions as being the bargaining entity for all employees of the contractor which wins the bid to perform work on the public project. In that case, the Court of Appeals considered two public contracts which required the winning contractor to enter into a PLA. One contract, let by the New York State Thruway Authority for the refurbishment of the Tappan Zee Bridge was upheld as containing a valid use of a PLA and the other, let by the New York State Dormitory Authority (“DASNY”) was found to be in violation of GML 103.
The distinction which the Court relied upon was that in the Thruway Authority’s case, the Thruway Authority demonstrated that prior to including the PLA requirement it had conducted an extensive study and had evidence that demonstrated that the use of the PLA was supported by a history of labor unrest and would result in substantial cost savings to the public by introducing flexible work rules and scheduling benefits allowing toll revenue to be maximized. In contrast, DASNY, although it also conducted a study, failed to identify any cost savings by use of a PLA, failed to demonstrate a history of labor unrest and had as the focus of the PLA the enhanced hiring of woman and minorities by the winning bidder.
In sum, the Court of Appeals determined that a PLA, on its face, has such an anti-competitive effect on bidding that in order to justify its use, the public body must have strong evidence in its possession prior to letting the project out to bid that the use of the PLA would result in a cost savings to the public. The Court also held that PLAs would be subject to a stricter standard of review by the Courts. “PLAs, which are clearly different from typical prebid specifications in their comprehensive scope, more than a rational basis must be shown. The public authority’s decision to adopt such an agreement for a specific project must be supported by the record; the authority bears the burden of showing that the decision to enter into the PLA had as its purpose and likely effect the advancement of the interests embodied in the competitive bidding statutes. Judicial review, although limited, is not without importance in that it safeguards the interests protected by the competitive bidding mandate. PLAs may not be approved in a pro forma manner.”
The Legislature codified the analysis of PLAs employed in Associated General Contractors by enacting Labor Law 222(2)(a) in 2008. Thus, in contrast with Labor Law 816-b, governing apprenticeship requirements, which may be implemented at the discretion of the public agency, a bid specification requiring a PLA must be supported by evidence that the use of a PLA is justified. Notably, however, the Legislature provided an inducement to use PLA’s by allowing the public entity to avoid the Wicks Law requirement of separate prime contractors if it used a PLA. See Labor Law 222(2)(b).
In Council of City of New York v. Bloomberg, 6 N.Y.3d 380, 813 N.Y.S.2d 3 (2006), the Court of Appeals struck down the Equal Benefits Law of the City of New York (Administrative Code of the City of New York 6-126), which prohibited city agencies from awarding contracts above a certain value to any contractor that failed to provide the same employment benefits to its employees’ same sex partners that it provided to its employees’ spouses. In sum and substance, the Court of Appeals determined that the Equal Benefits Law violated GML 103 by reducing the competitive bidder pool. Id. at 391. Thus, once again the Court of Appeals declared public bid specifications, in the absence of a direct connection to cost savings to the public, cannot be used to implement social policy.
Recent Developments
In its most recent treatment of the issue the New York Court of Appeals in L & M Bus clarified appropriate and inappropriate bid specifications (the decision dealt specifically with a school transportation contract, however the decision is applicable to all publically bid contacts including construction contracts). See, e.g., Lancastar Developments, Inc. v. McDonald, 2011 N.Y. Slip. Op. 33402U (Sup. Ct., Albany Cty. 2011).
In L & M Bus, one of the bid specifications contained in a New York City Department of Education contract required the winning bidder to give preference in hiring to employees of the prior contractor whose jobs were lost by reason of the award to the new contractor, at the same salary and benefits as the employee had previously received. This specification was referred to as an Employee Protection Provision (“EPP”). Other bid specifications required the bidders to submit their bid based on a per rider per day basis, to provide the Department of Education with a basis to track its own reimbursement entitlements. The specification provided that there would be an increase in reimbursement to the contractor but only in the event that ridership decreased by 30%. Another specification required a 2% discount for timely payment.
A number of potential bidders challenged the bid specifications arguing that they were all in violation of the applicable public bidding law, in this case, Education Law 305 (14). The Court’s determination addressed the specifications separately and came up with varying results.
The EPP was found by the Court to be so comprehensively anti-competitive on its face that it was subjected to the same strict scrutiny analysis as a PLA. When subjected to strict scrutiny, the Court of Appeals found that the Department of Education not only failed to demonstrate that the EPP would result in any cost savings but that the EPP would result in bid inflation, favoritism and monopolization of the industry by a few large transportation companies. In sum, while finding that the EPP may encourage stability in the workforce and the hiring of experienced employees, the Court of Appeals once again found that the public interest in cost savings and open competition trumped these social benefits.
In contrast, the other specifications, the per rider per day bid basis, the 30% decrease in ridership necessary to trigger a higher reimbursement rate and the 2% prompt payment discount were all upheld by the Court of Appeals. While the potential bidders argued that these specifications resulted in uncertainty on their part in the bid process, which would in turn result in inflated bids to cover any potential losses, these specifications were not considered facially anti-competitive by the Court of Appeals and thus were subjected to the traditional rational relationship review in which the courts are required to defer to the judgment of the public agency. In applying that deference, the Court of Appeals found that all of these provisions were a legitimate exercise of the Department of Education’s business judgment and the Court declined to disturb that judgment.
In Conclusion
What all this means to those preparing bid specifications or those considering a challenge to bid specifications, is that the impact of the specification must be considered in terms of how it relates to encouraging free and open competition and saving the public money as opposed to furthering some other benefit. A key practical first step is to consider whether the specification relates to benefits to be received by the employees of the contractor and thus which companies are eligible to perform the work as opposed to how the work is to be performed or how the bid is to be prepared.
Based on the current state of the law, where a bid requirement has patently restrictive or anti-competitive consequences such as a PLA or EPP the Court imposes a stringent review and burden shifting analysis and requires the public entity to demonstrate that the challenged bid restriction is designed to save the public money. That means that the public entity must have evidence – before it makes its determination to include the specification – that supports its determination that even though it will be restricting the pool of bidders the specification will still result in a cost savings to the public. These kind of pre-bid studies are themselves costly such that for smaller projects or contracts, economics dictate that the specification be foregone. Similarly, while the Legislature expressly permits apprenticeship program requirements it is wise to consider in advance whether the potential restriction of the bidders’ pool is practical when it comes to a smaller project.
This is contrasted with an ordinary rational basis review of a bid specification which, while it has the potential to inflate bids or limit competition, is not facially anti-competitive. An example of this is the per rider per day requirement. In this situation it is the bidder’s burden to prove that the bid specification lacks a rational relationship to the goals of public bidding, mindful that the courts will give deference to the public agency’s determination.
As the bidding season heats up we are available for your specific questions.
Footnotes:
1. Jered Contracting Corp. v. New York City Transit Authority, 22 N.Y.2d 187 (1968); Depot Constr. Corp. v. City of New York, 46 N.Y.2d 859, 414 N.Y.S.2d 511 (1979); LeCesse Bros. Contracting, Inc. v. Town Board of Town of Williamson, 62 A.D.2d 28, 403 N.Y.S.2d 950 (4th Dep’t 1978), aff’d 46 N.Y.S.2d 960 (1979); Spencer, White & Prentis, Inc. v. Southwest Sewer District, 103 A.D.2d 802, 477 N.Y.S.2d 681 (2d Dep’t 1984). Jered Contracting Corp. v. New York City Transit Authority, 22 N.Y.2d 187 (1968); Depot Constr. Corp. v. City of New York, 46 N.Y.2d 859, 414 N.Y.S.2d 511 (1979); LeCesse Bros. Contracting, Inc. v. Town Board of Town of Williamson, 62 A.D.2d 28, 403 N.Y.S.2d 950 (4th Dep’t 1978), aff’d 46 N.Y.S.2d 960 (1979); Spencer, White & Prentis, Inc. v. Southwest Sewer District, 103 A.D.2d 802, 477 N.Y.S.2d 681 (2d Dep’t 1984).
2. N.Y.S. Chapter, Inc., Assoc. Gen. Contractors of Am. v. N.Y.S. Thruway Auth., 88 N.Y.2d 56, 67, 643 N.Y.S.2d 480, 484 (1996).
3. 67 N.Y.2d 854, 501 N.Y.S.2d 653 (1986)
N.Y.S. Chapter, Inc., Assoc. Gen. Contractors of Am. v. N.Y.S. Thruway Auth., 88 N.Y.2d 56, 67, 643 N.Y.S.2d 480, 484 (1996).
4. 88 N.Y.2d at 68.