Case Title: In the Matter of L&M Bus Corp.

Citation: 

Docket Number: 

State: new-york

Court: New York Appellate Court

Date: 2011-06-14T00:00:00Z

Document:
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This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 110  
In the Matter of L&M Bus Corp.,
et al.,
            Respondents,
        v.
The New York City Department of 
Education, et al.,
            Appellants,
Local 1181 of the Amalgamated 
Transit Union,
    Intervenor-Appellant.
Dona B. Morris, for appellants.
Richard A. Brook, for intervenor-appellant.
John F. Grubin, for respondents.
LIPPMAN, Chief Judge:
This appeal asks us to decide whether certain
specifications in the bid solicitation of the New York City
Department of Education (DOE) for a school transportation
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No. 110
contract comport with the public bidding laws.  We conclude that
the "Employee Protection Provisions" (EPPs) contained in the
solicitation are subject to heightened scrutiny, and hold that
DOE has not proven that the EPPs are designed to save the public
money, encourage robust competition, or prevent favoritism. 
However, we apply rational basis review to the remaining disputed
bid specifications and hold that DOE's actions regarding the
pricing of school transportation and discounted payment
arrangements are rational business judgments that lie within
DOE's discretion.  
I.
Prior to 1979, the Board of Education of the City of
New York (the Board) administered "Special Education" and
"General Education" contracts with private bus companies for the
transport of disabled children and the general population of
school-aged children to their respective schools.  Contracts were
awarded pursuant to the competitive bidding procedure under
Education Law § 305 (14) and included a provision requiring
"replacement" contractors to give hiring priority, according to
seniority, to employees of private bus companies who lost their
jobs as a result of the change in contractor.  When the Board
attempted to exclude this provision from certain bid
solicitations, members of Local 1181-1061, Amalgamated Transit
Union, AFL-CIO (Local 1181) went on strike.  
Following a court-ordered arbitration, the Board, Local
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1181, and major bus companies entered a settlement, which
required the 1979 contracts to include certain "Employee
Protection Provisions" (EPPs) in the specifications.  In
particular, the EPPs established a master seniority list,
requiring contractors with the Board to give priority in hiring
to employees on the list when such employees become unemployed
because of reassignment of busing contracts.  The New York City
Department of Transportation (DOT), however, had at the same time
been administering transportation contracts for young children in
the pre-kindergarten (Pre-K) and early intervention (EI) programs
by competitive, sealed bidding, without such EPPs.  
In 2006, DOT transferred its Pre-K and EI contracts to
DOE.  Local 1181, which represents approximately 325 drivers and
escorts who work for Pre-K and EI bus companies, requested that
DOE include the EPPs in its solicitation for contract bids.  DOE
agreed, and the solicitation provided that 
"[a]ny new contractors, i.e., those who did
not provide service pursuant to contract
expiring June, 2008 . . . shall give priority
in employment in July, 2008 or thereafter on
the basis of seniority to every operator
(driver), mechanic, dispatcher and attendant
(escort-matron) performing service pursuant
to such contract starting from the first
employee from the [master seniority list]
until such [master seniority list is]
exhausted" (Bid Solicitation ¶ 4.24.1.3).
A similar provision applied to existing contractors (see id. ¶
4.24.1.2).  
DOE invited bids for providing transportation between
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No. 110
home and school to handicapped children participating in Pre-K
and EI programs.  Bids were required to be submitted "on a per
rider per day basis" so that DOE could track transportation costs
per child for purposes of its own reimbursement.  DOE solicited
bids on a five-year contract to transport participants to
schools, not necessarily located in the same borough, based on an
estimate of the number of participants and the frequency and
level of transportation required at any given time.  The contract
also provided DOE with a 2% discount for timely payment and
vendors with increased reimbursement in the event of a reduction
in the number of children transported - but only if the decrease
were to exceed 30% of ridership.   
Petitioners, 23 transportation vendors, commenced this
CPLR article 78 proceeding to prevent DOE from implementing the
allegedly illegal bid solicitation.  Petitioners asserted that
the requirement that bids be submitted "on a per rider per day
basis" created such grave uncertainties, that potential bidders
would submit speculative bids, risk substantial economic harm, or
not bid at all.  Moreover, petitioners urged that inclusion of
EPPs would cause bidders to inflate their bids to protect against
the unknown costs of giving priority to whichever employees from
the master seniority list were unemployed after the DOE awarded
the contracts.  Likewise, petitioners claimed that the failure to
include in the solicitation the addresses or boroughs of children
to be bused, as had been included in DOT's prior solicitation,
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prevented bidders from calculating costs.  Petitioners also
sought revision or removal of nine specific provisions of the
solicitation.  Local 1181 was granted leave to intervene and
moved to dismiss for failure to state a cause of action insofar
as petitioners sought to bar the inclusion of EPPs. 
As relevant to this appeal, Supreme Court granted the
petition to the extent of declaring the following bid
specifications unlawful: (i) section 4.24, "Employee Protection
Provisions;" (ii) section 1.100(B), regarding DOE's right to
change the service requirements in the Contractor's Manual at any
time without prior notice; (iii) section 4.10, to the extent it
permitted DOE to add entire schools and programs in the vendors'
service requirements without adjusting the vendors' prices; (iv)
section 4.1, to the extent it provided for a price adjustment
only in the event of a loss of ridership in excess of 30%; (v)
section 1.48, "Liquidated Damages"; and (vi) section 1.35; 2%
discount for DOE for "prompt payment."  Supreme Court
additionally ordered DOE to include in the specifications the
addresses of children who currently participated in Pre-K/EI
busing.1
1  In the original bid specifications, DOE did not provide
any information about the location of current participating
students' addresses.  Petitioners sought this information in the
courts below and Supreme Court ordered that DOE provide the
addresses.  The Appellate Division modified the order and instead
required DOE to provide the cross streets of the participating
children (see 71 AD3d 127, 138-139 [1st Dept 2009]).  The parties
have since settled this dispute; accordingly the issue is no
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The Appellate Division affirmed the relevant aspects of
Supreme Court's order (Matter of L & M Bus Corp. v New York City
Dept. of Educ., 71 AD3d 127 [1st Dept 2009]).  Discussing the
uncertainty inherent in various provisions of the bid
specifications, the court observed that the solicitation
"presents a considerable challenge to potential bidders due to
the complexity in ascertaining the extent of the transportation
services to be supplied" (id. at 132) and that further difficulty
arises in "the uncertainty surrounding the individual
contractor's responsibility for labor costs" (id. at 133).  In
striking the EPPs, the court reasoned, "the anticompetitive
impact resulting from the restriction of the vendors' autonomy to
hire nonunion workers subjects these arrangements to the same
scrutiny applied to [project labor agreements]" (id. at 135). 
We granted leave to appeal and now modify the Appellate
Division order.
II.
General Municipal Law § 103 (1) mandates that "all
contracts for public work . . . be awarded . . . to the lowest
responsible bidder."  Education Law § 305 (14) and Family Court
Act § 236 (3) (b), which governs the busing of children
participating in EI programs, similarly require that
transportation contracts be awarded to the lowest responsible
longer before this Court. 
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bidder.2  Dual aims underlie these requirements: "(1) protection
of the public fisc by obtaining the best work at the lowest
possible price; and (2) prevention of favoritism, improvidence,
fraud and corruption in the awarding of public contracts" (Matter
of New York State Ch., Inc., Associated Gen. Contrs. of Am. v New
York State Thruway Auth., 88 NY2d 56, 68 [1996] [hereinafter "New
York State Chapter"]). 
DOE contends that the Appellate Division erred by
applying to EPPs the heightened standard of review used to
evaluate Project Labor Agreements (PLAs).  A PLA is "a prebid
contract between a construction project owner and a labor union
(or unions) establishing the union as the collective bargaining
representative for all persons who will perform work on the
project" and typically "provides that only contractors and
subcontractors who sign a prenegotiated agreement with the union
can perform project work" (id. at 65).  Consistent with the goals
of public bidding laws, we held in Matter of Council of City of
N.Y. v Bloomberg (6 NY3d 380 [2006] [hereinafter "Council v
Bloomberg") that "PLAs and other procedures having an
anticompetitive effect on the bidding process can be justified
only by proof that they are designed to save the public money by
causing contracts to be performed at smaller cost or without
2 Because Pre-K contracts are awarded together with EI
contracts, they are equally subject to the competitive bidding
laws. 
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disruption" (id. at 392).
In New York State Chapter (88 NY2d at 65), we ruled
that the features of PLAs that trigger heightened scrutiny are
their atypical nature and comprehensive scope:
"Generally, when a public entity adopts a
specification in the letting of public work
that impedes the competition to bid for such
work, it must be rationally related to these
twin purposes.  Where it is not, it may be
invalid [citing Associated Bldrs. & Contrs. v
City of Rochester, 67 NY2d 854, 855 (1986)].
As applied particularly to 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"
(New York State Chapter, 88 NY2d at 68-69) (emphasis added).
Hence, we distinguish between common specifications
that, while challenged as having an anticompetitive effect, are
not anticompetitive on their face, and atypical ones that are
patently restrictive.  Even common specifications, like
construction materials or design criteria (see id. at 65) may
impede competition by excluding those who cannot meet them.  For
example, a bid specification that requires that a contractor only
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No. 110
use a certain shade of paint may not be anticompetitive on its
face.  But, if a bidder challenges the requirement on the ground
that only one store in the area sells the particular shade of
paint and the store exclusively sells that paint to one of the
bidders, then the public entity will have to show a rational
basis on review in order for the specification to withstand the
challenge.  Unlike a specification designating the color of paint
to be used in a public works project or the time frame for
completion of a project, EPPs are precisely the sort of atypical,
restrictive and comprehensive prebid specifications that invoke
the heightened scrutiny standard set forth in New York State
Chapter and Council v Bloomberg.  
In the first place, EPPs are unique.  DOE has not
pointed to any other municipality in the nation that has imposed
a requirement that successor contractors retain the employees who
were laid off when the previous contractor lost the bid at the
same salary and benefit levels that the predecessor contractor
provided.   
With regard to the comprehensiveness of EPPs as
compared to PLAs, EPPs are permanent and PLAs are job-specific. 
A PLA pertains to a single construction project and ends when the
project is completed.  By contrast, the EPPs that DOE introduced
to its School-Age contracts in 1979 impact the entire industry of
pupil transportation services provided under contract with DOE. 
They apply to all contracts for pupil transportation for all
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No. 110
public schools throughout the City and, in practice, have
remained in place continually from 1979 to 2011.  Moreover, the
consequences of EPPs are at least as far-reaching as those of
PLAs.  In the case of a new contractor, the EPPs proscribe the
use of the contractor's workforce altogether, as long as a single
employee of the predecessor contractor is available for
employment.  EPPs dictate who the contractor must hire and what
salary and benefits they must provide and makes these matters
non-negotiable. 
Accordingly, we hold that EPPs are comparable to PLAs
in their status as atypical, patently restrictive, comprehensive
pre-bid specifications and in their potential for anticompetitive
consequences.  We therefore employ the more stringent review and
turn to an assessment of whether, pursuant to Council v
Bloomberg, DOE has demonstrated "proof that [EPPs] are designed
to save the public money by causing contracts to be performed at
smaller cost or without disruption" (6 NY3d at 392).
III.
Appellants fail to refute the facially anticompetitive
features of the EPPs, which tend to invite cost-inflation and
discourage new bidders from attempting to compete with the long-
term contract holders.  As the Appellate Division noted, "[t]he
EPP provisions at issue raise the prospect that a vendor will be
required to assume a competing contractor's labor costs,
requiring that the vendor's bid reflect not only the known
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expense of compensating its own employees but also the unknown
and potentially much greater expense of compensating a
competitor's employees" (71 AD3d at 134).  Even if a new bidder
can ascertain the pay scale of the existing contractor, the
bidder does not know how many of the predecessor's employees will
need to be retained or the salaries of the individual employees,
which vary by seniority and other factors.  In these
circumstances, prudent bidders might inflate their bids to cover
the contingency of having to pay unspecified salaries for a large
number of a predecessor's workforce, and the small-scale
operations that currently hold the Pre-K/EI contracts might avoid
the contest altogether for fear of losing the gamble.
A brief look at the history of New York City's public
busing contracts since 1979 suggests that, in practice, the EPPs
have had anticompetitive and cost-inflating effects.  The
existence of EPPs has resulted in the School Age transportation
contracts being performed by the same companies with roughly the
same employees, year after year.  By contrast, Pre-K/EI
transportation, which lacks EPPs, has proceeded with competitive
bidding by a variety of small-scale companies, without serious
reports of corruption or labor disruption, and without threats
from the unions to strike or pressure to introduce EPPs.  In
short, the introduction of EPPs to the Pre-K/EI bid
specifications might eliminate the cost-saving, pro-competition
advantages Pre-K/EI busing has enjoyed and would likely introduce
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the same problems of favoritism and monopolization of the market
by large contractors that has beset the School Age contracts.
DOE counters the charges that EPPs are expensive and
anticompetitive with claims that the failure to introduce EPPs
into Pre-K/EI contracts will cause labor strikes, which will in
turn lead to disruption of contract performance.  As the courts
below noted, the likelihood of a strike disrupting Pre-K/EI
operations is not at all clear.  It would appear questionable
that employees of School Age transportation vendors would strike
in order to introduce EPPs into the Pre-K/EI bids, especially
since most of the current Pre-K/EI vendors are not unionized.
An additional rationale proffered for the inclusion of
EPPs is to promote a skilled, safety-conscious work-force
comprised of veteran bus drivers.  While anti-displacement
provisions might be viewed as socially beneficial, the bidding
laws are not the proper avenue for achieving such goals (see
Associated Bldrs. & Contrs. v City of Rochester, 67 NY2d 854, 856
[1986] [holding that apprenticeship training to foster a skilled
workforce "while a desirable end, was not intended by the State
Legislature to affect the qualification of an otherwise
responsible low bidder"]).   Indeed, this goal could be achieved
by substantially less restrictive measures, such as the
imposition of an experience requirement in the bidding
specifications.
Based on the foregoing, we find that DOE has not met
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its burden of demonstrating how EPPs reduce costs or prevent
disruption of service.
IV.
All but one of the remaining disputed bid
specifications is broadly related to DOE's implementation of a
modified "requirements contract" in its Pre-K/EI pricing scheme,
and the last is a specification granting DOE a 2% discount for
prompt payment of its bills.  These specifications are not
facially anticompetitive; rather they reflect the difficulty of
soliciting bids to meet the vast, constantly changing demands on
DOE to provide transportation to New York City school children. 
Accordingly, we apply the ordinary rational basis review for
Article 78 proceedings in assessing the validity of these
specifications.  Under this standard, petitioners have the burden
of demonstrating that the contracting agency's determination is
unlawful or improper (see e.g. Matter of Acme Bus Corp. v Bd. of
Educ. of Roosevelt Union Free School Dist., 91 NY2d 51, 55
[1997]).   
DOE maintains that the "per rider per day" scheme that
it seeks to implement in place of the "price per vehicle per day"
scheme, which the Pre-K/EI contracts have utilized for 15 years,
is equivalent to a requirements contract.  This new scheme, DOE
asserts, will motivate contractors to be efficient and hold down
unnecessary costs.  Petitioners counter that uncertainties as to
where each child will have to be bused to and from and how many
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schools will open or close during the contract period, as well as
legal restrictions that limit the amount of time a child can be
on a bus for each trip, make the per rider per day scheme
different from any ordinary requirements contract.  With so many
variables at work, petitioners insist that they will be forced to
inflate bids in order to cover the most costly scenarios. 
  
The lower courts did not strike down the per rider per
day pricing scheme, but did strike the bid specifications that
gave DOE: (1)"power and sole discretion to add, delete, revise
update, reissue and/or otherwise change any or all rules,
procedures, and/or requirements contained in the Contractor's
Manual at any time without prior notice to the Contractor . . 
."; (2) power to delete entire schools and programs in the
vendors' service requirements without an adjustment in the
vendors' unit prices; (3) power to require a contractor to
service any new school after the contract is entered into, at the
same unit price originally bid; and (4) the advantage of not
having to adjust prices except in the event of a loss of
ridership in excess of 30%.
We now reverse the Appellate Division's order as it
pertains to these bid specifications and hold that petitioners
have failed to meet their burden to show that DOE's decisions
regarding its implementation of the per rider per day pricing
scheme are irrational.  We decline to second-guess DOE's business
judgment that the public interest and the aims of the bidding
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laws are served by a system that allocates the risks of the
inevitable changes in the needs of the busing system over the
length of the contract to the vendors, rather than to DOE.  
Likewise, we reverse that part of the Appellate
Division order that struck DOE's inclusion of a 2% discount for
all payments made within 30 days of receipt of the vendor's
invoice.  The Appellate Division reasoned that the provision
encouraged vendors to inflate their bids by 2% in anticipation of
the deduction and, as such, contravened the goal of securing the
lowest possible bids.  Yet, DOE has offered the rational
explanation that these discounts encourage DOE to make prompt
payments, which in turn benefits vendors, who might otherwise be
compelled to borrow to cover on-going expenses.  Furthermore,
since the prompt payment provision applies equally to all
bidders, there is no anticompetitive aspect of this
specification.  Again under rational basis review, we find the 2%
discount to represent a legitimate exercise of DOE's business
judgment, which should not be disturbed.  
Accordingly, the order of the Appellate Division,
insofar as appealed from, should be modified, without costs, in
accordance with this opinion and, as so modified, affirmed. 
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Order, insofar as appealed from, modified, without costs, in
accordance with the opinion herein and, as so modified, affirmed.
Opinion by Chief Judge Lippman.  Judges Ciparick, Graffeo, Read,
Smith, Pigott and Jones concur.
Decided June 14, 2011
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