Attorney General's Opinion

Attorney General, Richard Blumenthal

April 12, 2004

The Honorable Marc S. Ryan
Secretary
Office of Policy and Management
450 Capitol Avenue
Hartford, CT 06106-1308

Dear Secretary Ryan:

In June 2000, the Office of Policy and Management retained Spaulding & Slye ("S&S") as a consultant to assist in the development and marketing of the Norwich State Hospital property. The 2000 contract also gave S&S the right to offer to purchase the property. The contract with Spaulding & Slye terminated in December 2003 and in March 2004 OPM issued a Request for Proposals ("RFP") for the purchase and development of the hospital property. In a letter dated March 3, 2004 you have asked whether Spaulding & Slye may submit a proposal in response to the RFP and what the state's legal exposure would be from other bidders if S&S is allowed to submit a proposal or from S&S if a bid from them is precluded. Subsequently on March 5, 2004, you also asked whether the state may place a restriction on the property prohibiting it from being annexed by an Indian Tribe.

As discussed in detail, we conclude that S&S should not be allowed to respond to the RFP and should not be selected to develop the property. The three year relationship between S&S and the State – including S&S's exclusive access to highly relevant, valuable and confidential oral and undocumented information concerning other proposers' ideas and prices, and the preferences, reactions and expectations of State officials regarding those ideas and others concerning the development and sale of the Hospital -- has given S&S an irremediable competitive advantage over other proposers. S&S has the sole benefit of three years of undocumented and unreproducible spoken work product and a unique perspective on the project. This special inside knowledge is significant and unshareable. The factual circumstances of S&S's work for the state would likely give other proposers standing to challenge any award to S&S on the basis of favoritism, even if unintended. S&S, on the other hand, would likely not have standing to challenge the state's denial to them of an opportunity to submit a proposal. Additionally, we conclude that the state may prohibit the annexation of the Hospital property by an Indian Tribe.

BACKGROUND and SUMMARY

We understand from your letters that in October, 1996, the Department of Mental Health and Addiction Services advised OPM that it intended to close the Hospital and that the Hospital was surplus to its needs, pursuant to Conn. Gen. Stat. § 4b-21. OPM began searching for a purchaser for the Hospital and, in June 2000, entered into a Development Agreement ("Agreement") with Spaulding & Slye pursuant to which S&S would work with the State to develop a strategy for developing and marketing the Hospital. The Agreement further provided that S&S could itself make an offer to purchase the Hospital.

In November, 2003, S&S provided OPM with a list of parties that had expressed an interest in the Hospital and included its own preliminary draft proposal for developing the property in combination with the Mohegan Tribe. In December, 2003, OPM and S&S mutually agreed to terminate the Agreement and S&S has provided no further services to the State concerning the sale of the Hospital.

Recently, OPM issued an RFP to solicit proposals for the purchase and development of the Hospital. In an effort to ensure that all potential proposers are treated equally and fairly, OPM has created a library of documents, including historical information and records and/or data that S&S and any prior interested party may already have seen, that is available to all proposers for inspection. OPM's intent is to prevent any actual or perceived advantage to S&S because of its prior involvement in the attempted sale of the Hospital property.

In addition, you have asked whether the following deed restrictions, which you propose to be part of any transaction disposing of the Hospital property, conform to the law and are legally sufficient:

As discussed more fully below, we conclude that:

1. S&S should be precluded from submitting a proposal on the contract. Based on the facts provided to us, S&S, through its earlier relationship with the State, apparently has received knowledge that cannot be fully memorialized and shared with other proposers, despite OPM's current efforts to make all documents available to all proposers. S&S necessarily received knowledge of previous competing proposals, and the reaction of state officials to those proposals. Part of this knowledge is undoubtedly intangible and could not be fully transmitted to other competing proposers. Further, S&S has the advantage of access to this information far in advance of the time that it could be made available to other proposers. Thus, even if it could be made fully available, other proposers would have far less time than S&S to review, evaluate, or investigate such information prior to making a proposal.

2. Under the specific facts presented in this case, an award of the contract to S&S would likely establish a factual basis for a claim by other proposers of improper "favoritism," regardless of whether the State and S&S acted in good faith in the Development Agreement. If S&S were awarded the contract, competing proposers, and any proposers who refrained from submitting proposals because of the earlier perceived advantages accorded to S&S through its work on the Development Agreement, would likely have standing to seek an injunction and declaratory judgment barring the State from either awarding the contract to S&S or performing the terms of such a contract with S&S.

3. If the State either precludes S&S from submitting a proposal for the subject contract, or refuses to award the contract to S&S, the State should have no consequent liability to S&S, and S&S likely would lack standing to maintain any suit or claim against the State as a result of such preclusion or refusal.

4. The proposed deed restrictions are not contrary to law. However, in regard to the first proposed restriction, it should be noted that, in the event there is a breach of the sales agreement, the deed would not be tendered. Accordingly, it would be advisable to include the proposed language in the sales agreement rather than in the deed. As to the second proposed restriction, if it is OPM's intent to ensure that the new and subsequent owners of the property do not convert or attempt to convert it into an Indian reservation or into federal trust land, the proposed deed restriction should be augmented by a reverter provision, which should be included in the deed. Proposed language for such a reverter is set forth at the end of this letter.

Part I of this opinion will address your questions as to the RFP process; Part II will address your questions as to the legal sufficiency of the deed restrictions.

In order to answer your questions, we set forth some of the general legal principles that govern bidding and public contracting.

Under Connecticut law, it is well established that bidders have no protectable interest in the award of a State contract. See, e.g., Austin v. Housing Authority, 143 Conn. 338, 122 A.2d 399 (1956); 10 McQuillin, Municipal Corporations § 29.77 (3d Ed. Rev.). Instead, "a bid, even the lowest responsible one, submitted in response to an invitation for bids is only an offer which, until accepted by [the government contracting authority], does not give rise to a contract between the parties." Ardmare Construction Company, Inc. v. Freedman, 191 Conn. 497, 501-502 (1983). "An unsuccessful bidder, therefore, has no legal or equitable right in the contract." Id. at 502. Given the lack of such a legal or equitable right, "an unsuccessful bidder has no standing¹ to challenge the award of a public contract." Ardmare Construction Company, Inc. v. Freedman, 191 Conn. 497, 501 (1983) (footnote added), citing Joseph Rugo, Inc. v. Henson, 148 Conn. 430, 171 A. 2d 409 (1961); Austin v. Housing Authority, 143 Conn. 338, 122 A. 2d 399 (1956); 10 McQuillin, Municipal Corporations § 29.77 (3d Ed. Rev.).

This principle is particularly, although not exclusively, true when the contracting authority has reserved the right to reject any and all bids for the subject contract. For example, Connecticut's competitive bidding statutes expressly reserve the right for the contracting agency to reject any and all bids. See e.g., Conn. Gen. Stat. §§ 4b-94 and § 13a-95. A clause to this effect inserted into an RFP provides another ground for finding that no proposer is entitled to a contract award, even if he is the lowest proposer. See Ardmare, 191 Conn. at 501-502; Spiniello Construction Company v. Town of Manchester, 189 Conn. 539, 544 (1983); John J. Brennan Construction Corporation, Inc. v. Shelton, 187 Conn. 695, 704 (1982); L.G. DeFelice and Son, Inc. v. Argraves, 19 Conn. Supp. 491 (1955). We note that the RFP in the present case contains such a clause.²

Although a suit by a disappointed bidder against the contracting authority is generally subject to dismissal on the grounds that the bidder lacks standing; see, e.g., Stroiney v. Crescent Lake Tax District, 205 Conn. 290, 294 (1987); Reitger v. Board of Trustees of State Colleges, 2 Conn. App. 196, 201 (1989); the Connecticut Supreme Court has recognized a limited exception in those cases "where fraud, corruption or favoritism has influenced the conduct of the bidding officials or when the very object and integrity of the competitive bidding process is defeated by the conduct of [government] officials." Ardmare, 191 Conn. at 501 (emphasis supplied), quoting Spiniello, 189 Conn. at 544; see also Brennan, 187 Conn. at 703. In this context, "favoritism" does not require any bad faith on the part of the contracting authority. It may be established if the government authority has given certain information to the winning bidder prior to the bid that was not given to the other bidders, or allowed the winning bidder to bid in a manner not allowed to other bidders, thus providing an advantage to that bidder over other bidders in the process. See Ardmare; Spiniello Construction Company v. Town of Manchester, 189 Conn. 539, 544 (1983). Under such circumstances, the Connecticut Supreme Court has held that an unsuccessful bidder has standing to challenge the award of a public contract. Id.

Thus, for example, in Spiniello Construction Company v. Town of Manchester, 189 Conn. 539 (1983), the court held that an unsuccessful bidder had standing to challenge the Town of Manchester's award of two public contracts to another bidder, Raymond, because the Town had informed Raymond, but not the plaintiff, that it would accept, in addition to separate bids on each contract, a reduced combined bid on both contracts. As explained by the Court:

Id. at 544-545. Accordingly, the Court upheld the issuance of a permanent injunction against the Town.

In contrast, the Court in Ardmare Construction Co. v. Freedman, 191 Conn. 497 (1983), concluded that an unsuccessful bidder had no standing to challenge the rejection of its bid on the grounds that the signature of its president was stamped on the bidding form, rather than signed. Although the administrative services department had in the past maintained the practice of rejecting all bids that did not have an original handwritten signature, the department had not informed any bidder of this requirement. Notably absent from the case, according to the Court, were the "elements traditionally thought to undermine the competitive bidding process. The commissioner did not apply its requirement inconsistently or in a discriminatory fashion [; n] or was there any proof that the commissioner was acting in bad faith. In short, the commissioner made a good faith interpretation of the competitive bidding statute requirements, and applied it in a consistent fashion." Id. at 506. Because there was no evidence of fraud or favoritism, the plaintiff bidder had no standing to challenge the award of the contract to another bidder.

Although Connecticut caselaw on bidding almost exclusively involves the failure to award a particular contract to the complaining bidder, there are numerous federal cases that involve the refusal to allow a contractor to submit a bid. While federal law does not govern State bidding matters, it is often instructive, and the Connecticut Supreme Court, on key issues of bidding law, has sometimes followed federal precedents. See, for instance, our Supreme Court's adoption, in Ardmare and other cases, of the holdings in the federal Scanwell line of cases (Scanwell Laboratories, Inc. v. Shaffer, 424 F.2d 859, 863, 866-869 (D.C. Cir. 1970)), concerning suits by disappointed bidders. Ardmare, supra, at 504.

Under federal law, a contractor has no property right in the eligibility to submit a bid on a government contract, but may, in very limited circumstances, have a protectable "liberty" interest in that eligibility. See, e.g., John Gil Construction, Inc. v. Miloriverso, 72 F. Supp. 2d 242, 251-254 (S.D.N.Y. 1990; Eastway Construction Corp. v. The City of New York, 637 F. Supp. 558 (E.D.N.Y. 1986) (awarding attorneys fees as sanctions against a construction company for filing a frivolous suit against a government entity, alleging a property right in eligibility to bid for government contracts); Transco Security, Inc. of Ohio v. Gaviglia, 639 F.2d 318, 321 (6th Cir 1981). The one instance in which a liberty interest is implicated under federal law is when the contracting authority (1) bars a company from bidding, or refuses to award it a contract, on grounds that impugn the integrity or morality of the company or its officers, and (2) publicizes its action and its "stigmatizing" rationale for taking it. Even so, the only right triggered in such an instance is the accused company's right to notice of the government's "charges" and an opportunity to address them. Old Dominion Dairy Products, Inc., 631 F. 2d 953 (D.C. Cir. 1980); John Gil Construction, Inc., 72 F. Supp. 2d at 253-256; Transco Security, Inc. of Ohio, 639 F.2d at 321.

Applying these principles to the present case, we conclude that the State may preclude S&S from submitting a proposal for the Hospital contract to avoid the appearance of even unintentional government favoritism.³ Through its role as Development Consultant for the state under the prior Agreement, S&S has a special advantage over other proposers. S&S has presumably been privy to unreproducible and unshareable oral and undocumented information concerning other potential proposers' ideas and prices, and the preferences, reactions and expectations of State officials and employees regarding those and other ideas concerning the development and sale of the Hospital.

Under the terms of the Agreement, S&S had the exclusive right to market the Hospital site to all prospective purchasers. (See, e.g., paragraph 1.1 of the Agreement.) S&S was required, among other things, to advise the State as to the strategy for sale; to meet with towns to get their input regarding the proposed uses of the Hospital Site; to assess development objectives and costs; to identify development approvals required for the marketing and sale of the Hospital; and to market the Hospital to prospective purchasers and end users. Importantly, S&S was also required to advise the State on all offers to purchase and to provide an analysis and recommendation regarding the nature of such offers. (Agreement, paragraph 1.1(f).)

S&S's prior contractual duties gave it the opportunity—indeed the duty—to evaluate and learn from the strengths and weaknesses of all previous proposals. Even more significantly, S&S presumably had the opportunity to learn the candid and confidential reactions and responses of state officials to earlier proposals, and to its evaluation and advice concerning those proposals.

In short, S&S has had more than three years as the exclusive State consultant to acquaint itself with the Hospital, and with the state agencies and officials involved in the project, with the market for the sale of that property, with possible uses for the property, and to exclusively be privy to all offers to purchase and provide in depth analysis and advice about them. Despite the efforts of OPM to make all information available to all of the proposers, it almost certainly cannot make available through documents all of the relevant communications and facts to which S&S was privy. Nor will competing proposers have nearly as much time as S&S has enjoyed to consider all of the information concerning the property before being called upon to make proposals for its development or sale.

Under these circumstances, we conclude that an impartial, objective observer would likely believe that S&S had an unfair advantage over other proposers. Given the fact that a refusal to allow S&S to submit a proposal for the Hospital contract would not entail either a finding or suggestion of nonresponsibility or of moral opprobrium on S&S's part, nor bar S&S from submitting proposals on other State contracts, no liberty interest of S&S would be implicated.⁴ Furthermore, S&S quite probably would not have standing to challenge the State's refusal to allow it to submit a proposal because "[t]he exercise of [governmental] discretion to accept or reject bids will only be controlled by the courts when necessary to prevent fraud, injustice or the violation of a trust." Adley v. Bridgeport, 3 Conn. Supp. 342, 349 (1936); 3 McQuillan, Municipal Corporations, (2nd Ed.) Sec. 1340. A decision to bar S&S from bidding on the contract to avoid even unintentional and favoritism discussed above would itself be an action taken to prevent "injustice or the violation of a trust."⁵ As a result, the probability of S&S having standing to sue the State in such an instance is remote.

We further conclude on these facts that if S&S were permitted to submit a proposal on the Hospital contract, the contract should not be awarded to S&S because competing proposers, and perhaps even certain non-proposers, would likely have standing to seek an injunction barring the State from awarding the contract to S&S. This conclusion results from S&S's prior years-long exclusive work on the development and marketing of the Hospital -- presenting the factual basis for a potential claim that S&S was given an irremediable advantage over other proposers. To award the contract to S&S under those circumstances would likely give other proposers standing to allege unlawful favoritism, albeit unintentional, and potentially subject any such award to a legal challenge.

You also ask whether two proposed deed restrictions are legally sufficient. Regarding the first, you propose to insert a clause in the deed stating that "the sale shall be terminated by the State of Connecticut in the event that Proposer or their grantees, heirs, successors and assigns is found to be in material breach of the executed sales agreement." We conclude that this restriction is not contrary to law. However, since in the event of a breach of the sales agreement, the deed would not be tendered, it would be advisable to include the proposed language in the sales agreement rather than in the deed.

In the second proposed deed restriction, you propose to include language stating that the sale of the property is subject to the "special limitation that the owner of such property... shall not convert or annex, or attempt to convert or annex, the subject property into an Indian reservation, as defined by 25 CFR 151.2(f) or into federal trust status for individual Indians and tribes, as defined in 25 CFR 151.2 (c) and 25 CFR 151.2 (b), respectively. Furthermore, owners shall be required to take affirmative steps to oppose any such actions." There is nothing in the proposed deed restriction that would bar an Indian tribe from bidding on or purchasing the property. The only restriction is that the purchaser may not seek to convert the property to trust land.⁶ We see nothing contrary to law in this proposed language.

Under 25 U.S.C. § 465, the United States Secretary of the Interior may take land into trust for the benefit of Indian tribes. The conversion of land into trust has significant impacts on states and municipalities. Once the land is converted to trust status, it is exempt from most local and state laws, including tax and regulatory laws.

The property at issue here is owned by the State and is not part of an historic Indian reservation of any present federally recognized tribe or of any state recognized tribe or other group currently seeking federal recognition. Under these circumstances, we are not aware of any federal law that would preclude the State, as the owner and seller of the property, from requiring, as a condition of the sale, the purchaser to agree not to seek to place the land into trust.

Moreover, the deed restriction is wholly consistent with state law opposing the conversion of any land into trust, particularly land outside of the boundary of a reservation. The General Assembly has expressly stated as the public policy of this state that the conversion of state land into trust for Indian tribes is contrary to the state's interests. In particular, Conn. Gen. Stat. § 31-57e(c) provides:

We make one suggestion. Because it appears to be the intent of this restriction to ensure that neither the purchaser nor subsequent owners of the property will attempt to convert the property into such federal trust status, we believe that including a reverter provision in the deed restriction would best accomplish this goal. We suggest the following language:

In sum, we conclude that given S&S's role as the State's Development Consultant under the prior Agreement, charged with marketing and securing potential purchasers and developers of the property, and its exclusive access to material, significant information concerning the Hospital property and the State's goals and thought processes of state officials in marketing or developing the property during that process: (1) S&S should be precluded from proposing or being awarded the Hospital contract, in order to avoid claims of even inadvertent government favoritism; (2) if S&S were permitted to submit a proposal for the contract or were awarded the contract, competing proposers may well have standing to seek an injunction stopping the proceedings from going forward on the grounds of favoritism, regardless of whether the State and S&S had acted in good faith in the Development Agreement; (3) if the State bars S&S from submitting a proposal for the contract, or refuses to award the contract to S&S, S&S would in all probability not have standing to challenge the State's action; and (4) the proposed deed restrictions are not contrary to law. The first proposed restriction should more appropriately be included in the sales agreement, and the second, augmented by a reverter provision as set forth above, is properly included in the deed.

I trust this answers your inquiry.

Very truly yours,

RICHARD BLUMENTHAL
ATTORNEY GENERAL

RB

¹"Standing is a legal right to set judicial machinery in motion. One cannot rightfully invoke the jurisdiction of the court unless [one] has, in an individual or representative capacity, some real interest in the cause of action, or a legal or equitable right, title or interest in the subject matter of the controversy." Tomlinson v. Board of Education, 226 Conn. 704, 717 (1993), quoting Ardmare, 191 Conn. at 501; see also Hiland v. Ives, 28 Conn. Supp. 243, 245 (1966).

²The clause states that: "The State reserves the right, at its sole and absolute discretion, to extend any of the actual or proposed dates in the time schedule applicable to all proposers, and further reserve[s] the right to reject any and all submissions from any or all proposers and to republish the RFP." Norwich Hospital RFP, p. 21 (2004)(emphasis added).

³Although the Agreement gave S&S the express right to submit an offer to purchase the Hospital, (see paragraph 5.1), such right had to be exercised within the term of the Agreement. A right to continue to affirmatively perform under the contract (as opposed to performing merely to cure a defect created prior to contract termination) -- such as the right to purchase property under the terms of the contract—does not, "by [its] nature survive termination or completion of the [a]greement." (See, Agreement paragraph 10.15, Survival.) Such a right to perform or exercise an option to perform ends, of its nature, with the termination or completion of the contract. The Agreement expired by its terms prior to the issuance of the present RFP. S&S did not offer to purchase the Hospital property during the term of the Agreement. Even assuming arguendo that such provision could properly have been enforced during the term of the Agreement, it cannot now be enforced following the Agreement's termination.

⁴Indeed, at the end of the term of the Agreement, OPM expressed its appreciation and gratitude to S&S for its expertise and professionalism in its efforts to market the Hospital site.

⁵Many of the bidding law principles described above were treated by the Connecticut Supreme Court in Unisys Corporation v. Department of Labor, 220 Conn. 689 (1991), as being applicable not only to classic competitive bidding situations, but also to the State's issuance of an RFP and to the State's subsequent acceptance or rejection of responsive proposals.

⁶Although the Mohegan Tribe initially expressed an interest in purchasing the property, it is has apparently withdrawn from consideration. The Mohegan Tribe did not indicate that it would seek to convert it to trust status if it purchased the property.

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