Keyes Martin & Co. v. Director, Division of Purchase & Property, Department of Treasury

481 A.2d 572, 196 N.J. Super. 52, 1984 N.J. Super. LEXIS 1148

Opinions

The Opinion of the Court was Delivered by,

ANTELL, P.J.A.D.

This is an appeal from a determination by the Director of the Division of Purchase and Property, Department of the Treasury (“Division”), rejecting appellant’s low bid for a two year advertising contract with the New Jersey Lottery Commission. The action under review followed a recommendation by the Attorney General on the ground that to award the contract would erode public confidence in the Lottery Commission. The Attorney General’s recommendation was based on his belief that appellant had maintained a business relationship with the Chairman of the Lottery Commission.

On January 19, 1983 appellant and six other bidders submitted bid proposals in response to the Division’s request therefor from advertising and public relations agencies “to advertise, promote, market and generally further the development and financial growth of the New Jersey State Lottery____” Appellant was then already performing promotional and advertising services for the Lottery Commission under a two year contract which had been awarded by the Division in September 1980 and which was thereafter extended for six months by vote of the Lottery Commission on June 9,1982. An Evaluation Committee found that appellant was the best qualified bidder with a score of 84.2 out of a possible 100 under established technical evaluation criteria, 8 points higher than the next best qualified bidder. Appellant was also the lowest bidder.

Sometime in January or February 1983 it was publicly disclosed that Mr. Reese Palley, then Chairman of the Lottery Commission, had engaged in certain business activities with appellant and also with another company which was, in certain respects, subject to the jurisdiction of the Lottery Commission. On or about March 23, 1983 the Executive Commission on Ethical Standards filed a complaint against Reese Palley charging him with violations of the New Jersey Conflicts of Interest Law, N.J.S.A. 52:13D-12 et seq., and the Lottery Code of Ethics. On April 29, 1983 he was indicted by the State Grand Jury and on May 9, 1983 the Governor suspended him as a member of the Lottery Commission “pending disposition of the Indictment and resolution of the Conflicts of Interest charges____” It appears that the Code expressly prohibits members of the Lottery Commission from engaging in business relationships with vendors serving the Commission. It does not, however, contain a corresponding prohibition applicable to the vendors. Nevertheless, on May 16, 1983 the Attorney General wrote to the State Treasurer that because of the business relationship between Mr. Palley and appellant an award to appellant of the Lottery Commission’s advertising contract would “seriously erode public confidence and trust in the integrity of that agency.” The business relationship upon which the Attorney General rested his opinion can be briefly described.

(1) In July 1982, as a representative of China Interface Corporation (China Interface), a private company in which he was interested, Palley visited the Republic of China. Before leaving, he advised Daniel Gaby, president of appellant, that he was going to China and would let Gaby know if he saw anything which might be of interest to appellant. Gaby replied that this was “fine.” When he returned, Palley told Gaby that he had advanced $150 on appellant’s behalf to a consultant and $50 for an interpreter. Although these advances were unau thorized, Palley was reimbursed by appellant because, according to Gaby, of Palley’s “good intentions and the amount involved____”

(2) In August 1982 Palley proposed that Gaby participate as a 16V2% stockholder in China Interface. Although Palley’s diary shows that Gaby agreed to this, Gaby denies it, and it is clear that the transaction never materialized.

(3) In September and October 1982 appellant placed certain advertising in the Wall Street Journal on behalf of China Interface. China Interface was thereafter billed $812.50 for placing the ad and $96.55 for production costs. According to the evidence 15% was retained by appellant as its fee and the balance was remitted to the Wall Street Journal.

(4) In September and October of 1982 Palley recommended the services of appellant to certain third parties. Palley was then in the process of negotiating a beer importing agreement on behalf of China Interface and unsuccessfully tried to have appellant brought into the promotional end of the transaction.

(5) In response to Palley’s solicitation, appellant submitted a proposal to provide advertising services for a beer which China Interface was contemplating for import into the United States during November and December 1982. In doing so, appellant dealt directly with Nathan Rothman, the president of China Interface, and a member of his staff. The proposal was never accepted.

It is evident that the initiative in pursuing whatever relationship existed was at all times undertaken by Palley and that appellant’s role therein was almost entirely passive. The Attorney General also claimed that during the period of the earlier contract between appellant and the Lottery Commission Palley took part in monthly evaluations of appellant’s performance and voted on June 9, 1982 to extend appellant’s contract for an additional six months. Palley’s vote on appellant’s contract is a matter of record, but appellant notes that it occurred prior to the other events previously recounted. Appellant denies that there were any claimed monthly evaluations of its performance. As to this, the Director made no findings, although the hearing officer appointed by the Director found that both the Commission and Palley “did have implicit review authority” of appellant’s performance.

On May 31,1983 the Deputy Director rejected appellant’s bid, as recommended by the Attorney General and the Lottery Commission by resolution of May 25, 1984. The latter was also based on the Attorney General’s opinion and asked that the contract be awarded to the second lowest bidder. Appellant petitioned the Director for a hearing June 9, 1983. A hearing officer was appointed and after an informal conference on June 26, 1983 his report was filed July 7, 1983. On July 26, 1983, after it examined the hearing officer’s report, the Lottery Commission by resolution concluded

that based on the business relationship between Reese Palley and Keyes Martin, an award to Keyes Martin would not be in the public interest in that any appearance of wrong doing may impair public confidence in the integrity of the operation of the State lottery which is based primarily upon public confidence and whose operations are essential to the fiscal health of the State____

The Director’s determination, from which this appeal is taken, is dated July 29, 1983. He concluded that appellant’s bid was not the most advantageous “under the circumstances,” grounding this decision in the same rationale as that expressed in the July 26, 1983 resolution of the Lottery Commission. The contract was awarded instead to the second lowest bidder.

It should be emphasized that the action under review rests upon what the Director conceived was the “appearance of wrong doing;” nowhere is a claim of actual wrongdoing suggested. The hearing officer, in fact, specifically found that what occurred was a “legitimate business arms-length relationship between two firms, Keyes Martin and China Interface, both of which happen to have some involvement with Mr. Palley,” and that “no decision in [appellant’s] business transactions included special favors based on Mr. Palley’s position.” Furthermore, both the hearing officer and the Director made it a point to say that appellant would not be precluded from bidding on future Lottery contracts. It is therefore clear that the Director’s action was in no way colored by a belief that appellant’s conduct evidenced a lack of moral responsibility.

The question presented is whether it lay within the lawful discretion of the Director to reject appellant’s low bid for the sole reason that the business relationship which he found to exist between appellant and the Chairman of the Lottery Commission gave rise to such an appearance of wrongdoing as, in the Director’s mind, to erode public confidence in the integrity of the Lottery Commission. The answer must be found under the terms of the Public Bidding Statute, N.J.S.A. 52:34-6, which provides that all contracts to be paid out of State funds may be awarded only after public advertisement for bids. N.J.S.A. 52:34-12(d) insofar as applicable directs that the

award shall be made with reasonable promptness by written notice to that responsible bidder whose bid, conforming to the invitation for bids, will be most advantageous to the State, price and other factors considered. Any or all bids may be rejected when the State Treasurer or the Director of the Division of Purchase and Property determines that it is in the public interest so to do.

Our appellate function is clearly circumscribed. The Director and the State Treasurer have been vested with a broad discretion and we are not free to substitute our judgment for theirs. Commercial Clean. Corp. v. Sullivan, 47 N.J. 539, 548-549 (1966). In the absence of bad faith, corruption, fraud or gross abuse of discretion we are not free to interfere. Id. at 549. No claim is here made of bad faith, fraud or corruption and the issue must therefore be resolved in terms of whether the Director’s action constituted a gross abuse of discretion. “It is firmly settled that arbitrary and capricious action by an administrative or executive agency should be overturned.” Worthington v. Fauver, 88 N.J. 183, 204 (1982). Although the statute does not mandate that the contract be awarded to the lowest responsible bidder, Id. 47 N.J. at 548; Blondell Vending v. State, 169 N.J.Super. 1, 11 (App.Div.), certif. den. 81 N.J. 333 (1979), “[tjhis is not to say the low bid may be ignored or treated as a minor consideration. It is a factor of great importance and not to be lightly discarded.” Commercial Clean. Corp. v. Sullivan, supra, 47 N.J. at 548.

Cases are numerous in which the Director’s action in rejecting a low bid have been sustained. However, we have been cited to no authority where, absent a finding of actual wrongdoing, the Director was permitted to reject the lowest responsible bid by the best qualified bidder only on his subjective perception that the public might otherwise discern an appearance of wrongdoing. Cases where the discretion was found to be lawfully exercised “in the public interest” seem to be based on matters internal to the bidding process itself or related in some way to inadequacies of the bidder. In Commercial Clean. Corp. v. Sullivan, supra, the bid was rejected because of the bidder’s lack of experience and sufficient equipment to handle the building maintenance contract there involved. In Trap Rock Industries, Inc. v. Kohl, 59 N.J. 471 (1971), cert. den. 405 U.S. 1065, 92 S.Ct. 1500, 31 L.Ed.2d 796 (1972), corporate bidders had been suspended by the State Department of Transportation from bidding on its contracts for the reason that criminal indictments were then pending against their principals. The Supreme Court upheld this action on the ground that the circumstances revealed a lack of moral responsibility on the part of the bidder, reasoning that the “moral responsibility of a corporation is one and the same with the moral responsibility of • the individuals who give it direction.” Id. 59 N.J. at 482. In Motorola Com. & Electronics v. O’Connor, 115 N.J.Super. 317 (App.Div.1971) the low bid rejected was found by the Director to be inferior in quality to that of others in terms of equipment to be supplied.

Basic to the doctrine of judicial deference to the policy views of an agency action is the premise that the agency is endowed with special insights beyond the competence of the judiciary to understand technical matters at issue. Close v. Kordulak Bros., 44 N.J. 589, 599 (1965); Bergen County Freeholder Bd. v. Bergen Cty. Pros’r, 172 N.J.Super. 363, 369 (App.Div.1980); In re application of Howard Savings Bk., 143 N.J.Super. 1, 11 (App.Div.1976). In our view, the “appearances” criterion is in no way validated by the Director’s expertise as chief contracting officer for the State. The expertise which renders his actions proof against judicial intervention relates to matters of business judgment, In re Honeywell Information Systems, Inc., 145 N.J.Super. 187, 200 (App.Div. 1976), certif. den. 73 N.J. 53 (1977), and we cannot conceive that the Legislature intended him to act on the basis of his personal view of what the “public interest” requires outside the scope of business considerations.

Permitting the Director to reject bids where he opines, without finding any substantiating facts, that the “public” will question the Lottery Commission’s integrity presupposes his infallibility over matters as to which all judgments are subjective and one person’s guess is as good as another’s. It removes all meaningful restraints on his discretion. Unless we are prepared to make the arbitrary judgment that only business relationships, and not other kinds of relationships, can create the appearance of wrongdoing, we see no limit to the kind of associations which could form the basis for similar action in other cases involving not only the Lottery Commission, but other agencies as well. It would seem to follow as a matter of principle that bidders having social, political, ethnic or family relationships or close friendships with members of a user agency could also be rejected, notwithstanding that their bid is clearly the most advantageous to the State. Membership in the same country club or in the same athletic, religious, recreational or civic organization could also logically form the basis for such action, as would, certainly, financial contributions to a particular political party. All that need be found to support such results is an unreasoned belief on the part of the Director that “people will think” the contract was improperly awarded because of the bidder’s relationship to an agency official even though the relationship involves, as here, no suggestion of favoritism, corruption or any other form of legal or moral wrongdoing. In our view this is unacceptable, and we observe that the agency official, ironically, does not even award the contract. This is done by the Director as the head of an entirely separate agency.

At the heart of the problem is the complete obscurity of the standard on which the Director acted. The “appearance of wrongdoing” standard is no standard at all. It is completely non-objective. “Appearances” exist only in the eye of the beholder. Whether certain circumstances give rise to an appearance of wrongdoing merely provokes the further question of “appearance to whom?” Do we speak of a cynical public or a trusting public? a public which is informed as to the facts, partially informed or uninformed? Do we speak of a reasonable public or one with a fixed mind as to how the public business is carried out? How can an appropriate factual record be prepared, and how does a reviewing court determine whether this vague finding is supported by substantial credible evidence in the record? While there can be no question as to the high ethical plane on which the Director has made his judgment, it is equally true that his chosen standard is beyond the reach of meaningful appellate review. No one but the Director can know precisely what was decided and why.

The facts before us illustrate these difficulties. Appellant not only submitted the lowest responsible bid, it was also found by a significant margin to be the best qualified bidder to provide the solicited services. It had served the Lottery Commission for more than two years on the prior contract and during this time the Commission Chairman and the president of appellant became acquainted. As a result, Mr. Palley tried to develop a working relationship between a company with which he was affiliated and the appellant. No codified standard of law, regulation or ethics precluded a bid from firms having such a relationship and bidders could therefore only guess as to what was expected of them in this respect.

Footnotes

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* Apart from a reimbursement of $200 by appellant to Palley for expenses incurred in China and the placement of a newspaper ad by appellant for China Interface, for which appellant realized a commission of perhaps $120, there was little that came of their discussions. An impartial hearing officer found that their dealings were all arms-length transactions and that no favoritism was shown in deference to Palley’s position on the Lottery Commission. Because there had been no lapse of moral responsibility by appellant the Director decided that it would not be barred from bidding on future Lottery Commission contracts. Furthermore, as we pointed out earlier, neither Palley nor, for that matter, the Commission itself was authorized to decide upon the successful bidder. This could be decided only by the Director of the Division of Purchase and Property, so that any question of a conflict of interest seems not to be present. Indeed, at the time the Director made his decision Palley had already been removed from his position on the Lottery Commission. For the Director, or anyone else, to conclude that an ordinarily intelligent, reasonable person who has examined the facts might lose confidence in the integrity of the Lottery Commission if the contract were awarded to appellant would be wholly speculative. In our view, important governmental decisions should not be based on hunches such as this.

As we noted earlier, the source of authority relied on for the action under review is that language of N.J.S.A. 52:34-12(d) which permits the Director to reject bids when he determines it is in the public interest to do so. The concept of “public interest” is, of course, of great breadth and ordinarily only the legislature may decide what is required thereunder in the broad sense of the term. Although it is “settled that the Legislature may not vest unbridled or arbitrary power in the administrative agency...,” Ward v. Scott, 11 N.J. 117, 123 (1952) we do not suggest that this enactment is an unconstitutional delegation of legislative power since it is clear to us that the right to reject bids in the public interest may only be exercised within narrow limitations. It is equally clear that these limitations, which are essential to the law’s constitutionality, preclude so broad an interpretation of the “public interest” criterion that the Director may reject bids on his subjective determination that the public will otherwise perceive the appearance of misconduct. This will be shown in the discussion to follow.

Statutes using general empowering language such as “public interest” may be sustained where accompanied by standards giving clear direction as to how the power should be exercised. In Mt. Laurel Tp. v. Public Advocate of N.J., 83 N.J. 522, 532-33 (1980) Justice Clifford explained the need for such standards in the following way:

The requirement that standards accompany the delegation of power serves three basic purposes. First, it prevents the Legislature from abdicating its political responsibility and prevents undemocratic, bureaucratic institutions from wielding all-encompassing, uncontrollable government power. Second, limiting standards define the area in which the agency develops the experience and expertise that the legislature has neither the time nor resources to develop. With too broad a standard the agency stands in no better position than the legislature that created it. Third, and most important, standards facilitate judicial review of agency decisions, which guards against arbitrary and capricious governmental action. As long as the statutory standards achieve these purposes, such standards should be considered sufficiently definite to pass constitutional muster.

The question considered in Mt. Laurel Tp., supra, centered on the constitutionality of the language in N.J.S.A. 52:27E-29 which authorized the Public Advocate to represent the “public interest” in administrative and court proceedings. The Supreme Court there concluded that the statute’s constitutionality was satisfied by the fact that the “Public Advocate must look to court decisions and existing laws to determine a clear public interest and thus channel his discretion.” Id. at 533. The principle applied was that a delegation of legislative power is not unconstitutional so long as the discretion of administrative officers is “ ‘hemmed in by standards sufficiently definitive to guide its exercise,’ ” Id. at 532, citing Cammarata v. Essex County Park Comm’n, 26 N.J. 404, 410 (1958).

And in Elizabeth Federal S. & L. Ass’n v. Howell, 30 N.J. 190 (1959) the Court held that the “public interest” was constitutionally acceptable as a standard to guide the Commissioner of Banking and Insurance in granting applications to maintain a branch banking office where the term was considered within the statutory context. It was there found sufficiently specific in light of the “overall objective of the statute to achieve a sound banking structure, healthily competitive, and fully adequate for the needs of the community.” Id. at 194.

What emerges is that the required standards may be found by examining “the entire act in the light of its surroundings and objectives” in recognition that a “ ‘statute often speaks as plainly by inference, and by means of the purpose which underlies it, as in any other manner. That which is clearly implied is as much a part of the law as that which is expressed.’ ” Ward v. Scott, supra, 11 N.J. at 123, quoting from Brandon v. Montclair, 124 N.J.L. 135, 143 (Sup.Ct.), aff'd 125 N.J.L. 367 (E. & A. 1940). See also Avant v. Clifford, 67 N.J. 496, 550 (1975).

Turning to the competitive bidding statute before us we see that its purpose is “to secure competition and to guard against favoritism, improvidence, extravagance and corruption.” Trap Rock Industries, Inc. v. Kohl, supra, 59 N.J. at 479; Hillside Twp. v. Sternin, 25 N.J. 317, 322 (1957); Weinacht v. Bd. of Chosen Freeholders of County of Bergen, 3 N.J. 330, 333 (1949).

The Director contends that his rejection of appellant’s bid should be affirmed because he thinks the public may see the appearance of wrongdoing even though there is no wrongdoing. But we find this sustainable under none of the foregoing broadly stated legislative purpose guidelines which are constitutionally essential to fix limits on the otherwise vaporous public interest test of N.J.S.A. 52:34-12(d). Simply stated, “public interest” may not be read to mean anything the Director chooses it to mean.

Absent a finding of actual wrongdoing by the bidder, rejection of the low bid on the Director’s perception that to do otherwise would undermine public confidence in the integrity of the Lottery Commission constituted the exercise of a power nowhere implied by the empowering statute. That the Division itself has recognized this is to be so is evidenced by its own regulations. N.J.A.C. 17:12-7.1 specifically provides for debarment hearings under the Administrative Procedure Act for numerous forms of actual misconduct by the bidder. We do not conceive that the Division would have made provision for hearings in cases involving a prospective bidder’s lack of moral responsibility and actual wrongdoing, but not where the mere appearance of wrongdoing is involved had the Division believed that the latter sufficed as a reason for debarment.

In arguing for affirmance of the Director’s action the State urges that we give special weight to the sensitivity of the Lottery Commission to public scrutiny. The State’s contention that this body must “be untainted by any suspicion of unethical conduct” has not been overlooked. But this much is expected of all State agencies, and we see no principled basis on which to say that the Director may reject bidders for contracts with the Lottery Commission under criteria distinctly different from those applicable to other user agencies. If bids may be rejected simply on the Director’s feeling that the contract may not “look good” to the “public” because the Chairman of the Commission, not the bidder, breached his obligations, it is difficult to con ceive that technically qualified contractors will long continue to invest their time and money in preparing bids for public contracts. By sanctioning a palpable injustice of the kind here presented we only encourage the growth of conditions under which the user agency will lose the benefit of genuinely competitive bidding. See Funderburg Bldrs. v. Abbeville Cty. Mem. Hosp., 467 F.Supp. 821, 825 (D.S.C.1979).

Moreover, although there can be no question of the necessity to protect the Lottery Commission’s image of unblemished integrity, this, like other meritorious objectives, may only be accomplished within recognized limitations and with due concern for the image of justice. Urgent as the necessity may be, it does not displace our first priority, to maintain the integrity of tested and settled legal principles.

In view of the fact that appellant is the best qualified and lowest responsible bidder, and no other reason appearing as to why its bid is not the most advantageous to the State, the Director’s award to the second low bidder is vacated and it is directed that the contract be awarded to appellant.

Reversed.

After the Director’s determination, and at the recommendation of the hearing officer, the Lottery Commission adopted an ethical standard which is made part of all requests for proposals to bid for Lottery Commission contracts which precludes its vendors from maintaining any “business relationship” with any Lottery Commissioner, officer or employee. The question arising therefrom is whether the vendors are now free to maintain other kinds of relationships with the Commissioners, or whether they may do so only at peril of having their bids rejected because the Director may later think their particular relationship may give rise to an appearance of wrongdoing.