L&M Bus Corp. v. New York City Dept. of Educ., 17 N.Y.3d 152 (2011)

Employee protection provisions (EPPs) in public contracts that restrict a vendor’s autonomy in hiring are subject to heightened scrutiny and must be demonstrably designed to save public money, encourage competition, or prevent favoritism; otherwise, ordinary specifications are reviewed to determine if they have a rational basis.

Summary

This case concerns a challenge by transportation vendors to bid specifications issued by the New York City Department of Education (DOE) for school transportation contracts. The vendors argued that the inclusion of “Employee Protection Provisions” (EPPs) and other requirements violated public bidding laws. The Court of Appeals held that the EPPs, which mandated that new contractors give hiring priority to employees of prior contractors, were subject to heightened scrutiny because they are atypical and anticompetitive. The Court found that the DOE failed to demonstrate that the EPPs would save public money or encourage competition. However, the Court applied a rational basis review to the remaining bid specifications regarding pricing and discounts, finding them to be within the DOE’s discretion.

Facts

The New York City Department of Education (DOE) solicited bids for contracts to transport handicapped children participating in Pre-K and Early Intervention (EI) programs. The bid solicitation included “Employee Protection Provisions” (EPPs), requiring new contractors to give hiring priority to employees of previous contractors based on seniority from a master seniority list. Bids were required on a “per rider per day” basis. The contract offered a 2% discount for timely payment by DOE and increased reimbursement if ridership decreased by more than 30%. Twenty-three transportation vendors challenged the bid solicitation, arguing it was illegal and would lead to speculative bids and inflated costs.

Procedural History

The transportation vendors initiated a CPLR article 78 proceeding to prevent the DOE from implementing the bid solicitation. Supreme Court granted the petition in part, declaring the EPPs and certain other bid specifications unlawful and ordering DOE to include the addresses of children to be bused. The Appellate Division affirmed the relevant aspects of the Supreme Court’s order. The Court of Appeals granted leave to appeal.

Issue(s)

1. Whether the Employee Protection Provisions (EPPs) in the bid solicitation are subject to heightened scrutiny under public bidding laws.
2. Whether the DOE demonstrated that the EPPs were designed to save public money, encourage competition, or prevent favoritism.
3. Whether the remaining disputed bid specifications, including the “per rider per day” pricing scheme and the 2% discount for prompt payment, were rationally based.

Holding

1. Yes, because EPPs are atypical, restrictive, and comprehensive prebid specifications with the potential for anticompetitive consequences.
2. No, because the DOE failed to demonstrate how the EPPs would reduce costs or prevent disruption of service.
3. Yes, because the remaining specifications represented rational business judgments within the DOE’s discretion.

Court’s Reasoning

The Court reasoned that the EPPs were similar to Project Labor Agreements (PLAs) in that they are atypical, patently restrictive, and have the potential for anticompetitive consequences. Citing Matter of Council of City of N.Y. v Bloomberg, 6 NY3d 380 (2006), the Court stated that such procedures having an anticompetitive effect “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 disruption.” The Court found that the DOE had not met its burden of demonstrating how the EPPs would reduce costs or prevent disruption of service, noting that they tend to invite cost-inflation and discourage new bidders. The court distinguished between specifications that are common and those that are atypical and restrictive, holding that atypical specifications must be supported by a showing that they advance the interests embodied in competitive bidding statutes. Regarding the remaining bid specifications, the Court applied a rational basis review, stating that “petitioners have the burden of demonstrating that the contracting agency’s determination is unlawful or improper”. The Court found that the “per rider per day” pricing scheme and the 2% discount for prompt payment were rational business judgments within the DOE’s discretion, aimed at promoting efficiency and timely payments.