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In Re Protest of Award of New Jersey State Contract A71188 for Light Duty Automotive Parts

422 N.J. Super. 275, 28 A.3d 816 (App. Div. 2011)

PUBLIC BIDDING; COOPERATIVE PROCUREMENT —When the New Jersey Division of Purchase and Property utilizes the cooperative procurement process, wherein it takes advantage of another state’s master purchase agreements, it does not create a traditional perspective bidder and disappointed bidder categories, but aggrieved former suppliers and potential suppliers still have standing to challenge the Division’s adoption of such out-of-state master agreements.

Sometime before the expiration of its current contract for auto parts, the New Jersey Division of Purchase and Property (DPP) gave a new supplier the opportunity to present its proposal to supply auto parts to New Jersey under a cooperative purchasing agreement piggybacking on another state’s master agreement. Years earlier, the Legislature authorized the Director of the DPP to enter into cooperative purchasing agreements with other states whenever the Director determined such agreements to be the most cost-effective method of procurement. The legislature also authorized the Director to purchase goods and services through a contract already awarded by other states or through cooperative purchasing groups that utilized a competitive bidding process. When deciding to enter into a cooperative purchasing agreement, the Director is not required to comply with the law of New Jersey governing the award of public contracts other than the requirement to purchase all articles or supplies manufactured or produced by institutional labor.

The DPP entered into a contract with the new supplier, substantially adopting the terms of the other state’s master agreement with that supplier. The previous suppliers filed a protest with the Director, requesting that the award be set aside or a hearing be conducted. They requested a stay of the termination of their existing contracts. The Director denied their protest and their application for a stay. In doing so, she held that the previous suppliers had no standing to protest the award because they had not submitted a bid. Nevertheless, she addressed the merits of the protest, stating that the new contract complied with New Jersey law. She rejected the contention that the agency was required to adopt regulations to effectuate the authority granted to her and to the agency by the Legislature. The Director also found that the out-of-state master agreement had been competitively bid. As to the review required prior to award, the Director stated that she had reviewed the master agreement with the DPP’s staff. She rejected the notion that the DPP must approve the specifications of the master agreement prior to initiation of the out-of-state competitive bid process. She also declared that the contract price terms were not “illusory, illegal or based upon undefined competitive zones.” In fact, the Director noted that the price terms of the new contract were similar to the recently expired auto parts contract, and the pricing mechanism was based upon a firm, fixed discount. The Director also declared that the agency had not violated the master agreement or any state statutes by negotiating terms different from, and more favorable than, the base master agreement; she emphasized that the state did not receive a better price, but did receive the best price available under the agreement.

The previous suppliers appealed, arguing that the Director had exceeded her authority by negotiating a separate contract with the new supplier that did not conform to the terms of the master agreement; that the contract with the new supplier was ultra vires because it contained wholly new terms not mandated by New Jersey law or found in the master agreement; the procurement process by the other state was not the product of competitive bidding; and the new contract was not in the best interests of the citizens of the State of New Jersey. The Director responded that the previous suppliers lacked standing to challenge the contract, and the appeal should be dismissed. The new supplier supported this position.

The new supplier also argued that the appeal should be dismissed because it had not received timely notice of the appeal. Further, the Director and the new supplier contended that New Jersey had not received terms different from the master agreement and any terms negotiated by the Director were consistent with the terms of the master agreement. They also argued that the record fully supported the Director’s conclusion that the new Contract was the most cost-effective method of procurement. Another Appellate Division panel had previously denied the new supplier’s motion to dismiss.

In considering standing, the Court noted that the cooperative procurement process does not apply the traditional prospective bidder and disappointed bidder categories. Nonetheless, the old suppliers, having the most direct financial interest in the procurement process, raised significant issues that addressed the integrity of the public bidding process. Further, under the Director’s position, no party would have standing to challenge the specifications of a contract awarded by another public entity or a contract awarded through the cooperative procurement process. Thus, the Court found that the old suppliers had standing to challenge the contract award. Additionally, the Court held that once the Director decided to investigate use of the collective purchasing authority, notice had been given to current contract holders and to qualified bidders who could meet State needs for particular supplies, materials or services in order to allow timely challenges to the decision to utilize the collective purchasing process and the ultimate decision that the collective purchasing process would meet the statutory standard of the most cost-effective method of procurement.

The Court then found that the Director had not exceeded her authority to enter into a cooperative purchasing agreement through a contract awarded by another public entity. Even though other differences were discussed in a press release, the only difference between the master agreement and the new Contract was a free delivery term. The Court’s review of the master agreement suggested that such a deviation or modification was permissible and that the law governing procurement contracts authorized the Director to seek and to obtain such a modification. The master agreement stated that delivery would be priced as needed to meet the needs of the customer’s location, suggesting that further negotiations might occur between the new supplier and public agencies that adopted the agreement. Further, even in traditional bidding cases, New Jersey courts have approved post-bid modifications to an awarded public contract when the public entity negotiates more favorable terms.

Next, the Court found that although the other state had only directly solicited four bidders to respond to its request for proposal (RFP), it advertised on the Internet and in the newspaper. Also, the other state advertised the RFP on its website, which was accessible to all of its registered vendors and all public entities. Indeed, there was no indication in the record of any vendor that could have responded but did not do so due to lack of notice. The use of internet and newspaper advertisements of RFPs was consistent with the practice in that state. Thus, the out-of-state bidding was sufficiently competitive.

The previous suppliers also contended that the Director’s decision to enter into the contract was arbitrary, capricious, unreasonable, and an abuse of discretion because the pricing standards were unclear in that they were based on the undefined standard of “competitors in the zone.” The Court observed that there was nothing in the RFP or the master agreement that required prices to be based on a manufacturer’s price list. Furthermore, the Director, in her decision, declared that she had seen the firm’s lowest-zone price list or schedule applicable to all purchases executed on the basis of the contract, effective for the full, first year of the contract, and found that the state was likely to derive aggregate savings of at least 20% compared to the terms and conditions of the previous contract. However, that statement, as well as the Director’s statement that she had compared the new supplier’s prices with the prices under the current contract, were bald conclusions. The Court found nothing in the record to support those statements, and felt it was being asked to blindly accept that the other state had reasonably determined that the new supplier’s lowest zone prices were acceptable. There was nothing in the record to support the Director’s finding that the new contract was the most cost-effective method of procurement as required by state law. There was no information in the record showing what list the Director reviewed or what that review involved. In fact, it was not clear what prices the new supplier actually offered New Jersey before entering into the contract, or how the Director decided whether those prices, including free delivery, were more cost effective than the ones under the previous contracts. The Director offered no detailed explanation.

The Court pointed out that its standard of review was restricted to a determination as to whether the Director’s decision to award the auto parts supply contract to the new supplier was or was not founded on bad faith, corruption, fraud or gross abuse of discretion. In order to perform that review, the record needed to contain the relevant information for review. The record before the Court did not permit it to do so. As a result, the Court remanded the matter for further findings of fact as to the Director’s ultimate conclusion that the master agreement and the contract offered the most cost-effective procurement option. Upon completion of the remand, a supplemental record was ordered to be forwarded to the Appellate Division.


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