Bid Protests Under the Kentucky Model Procurement Code, Common-Law Standards, and Yamaha

 By Larry C. Ethridge and Jeremy Beck

 Larry C. Ethridge is a past Chair of the Section and a member of the Louisville, Kentucky, firm of Ackerson & Yann, PLLC.

Jeremy Beck is a law clerk in the Louisville, Kentucky, firm of Ackerson & Yann, PLLC, and a 2007 J.D. candidate at the University of Louisville Brandeis School of Law (evening division).

I n 1988, the Kentucky Supreme Court asked “whether the KMPC 1 has changed the rules of the game, providing access not previously available to challenge and investigate the propriety of government purchasing contracts.” That court answered this question in the affirmative in the case of Pendleton Bros. Vending, Inc. v. Commonwealth of Ky., Finance and Administration Cabinet. 2 This landmark ruling expanded the grounds for challenging state procurement actions from the long-standing rule that “absent a showing of fraud, collusion or dishonesty, a disappointed bidder [as such] has no standing to judicially challenge the award of a public contract to another bidder.” 3Pendleton Bros. essentially allowed disappointed bidders to assert political interference as grounds for a protest to the state under the KMPC.

While acknowledging the common law rule, the Supreme Court ultimately concluded that “the purpose of the procurement code is to elevate state purchasing to a higher level of conduct. To accomplish this, the KMPC imposes rules with objective criteria in purchasing, criteria previously lacking, and provides enforcement for these standards.” 4 Consequently, the Supreme Court determined that the KMPC had indeed “changed the rules of the game.” 5

Specifically, the Supreme Court asked whether the KMPC had effected a statutory change so that procurement in Kentucky would now be a regulated administrative procedure, subject to court challenge if the state agency’s decisions were contrary to law, or arbitrary and capricious. The court decisively answered this question in the affirmative, allowing the appellants’ suit in that case to proceed based on allegations of improper political influence in the procurement process under review (vending contracts at interstate highway rest areas). To suggest caution in the application of its holding, the court noted that “every purchasing decision or alleged omission is not subject to judicial oversight.” 6

In an apparent retreat from the Kentucky Supreme Court’s ruling, a recent opinion of the Franklin Circuit Court (where most challenges to state procurement actions are filed) concluded that the decision in Pendleton Bros. fit within the common-law standard because the issues of political patronage present therein were tantamount to fraud. Moreover, the Franklin Circuit Court further stated that “the expansion set forth in Pendleton Bros. pertained only to ‘egregious and offensive political patronage on the part of the Commonwealth’; and that in order for standing to exist, the Appellants must make allegations of ‘fraud, collusion, dishonesty or political patronage on behalf of the Commonwealth.’”

The Kentucky Court of Appeals disagreed with the trial court’s finding late last year and stated as follows in Yamaha Motor Manufacturing Corp. of America v. Commonwealth of Ky., Finance and Administration Cabinet 7: “[W]e simply cannot conclude that this is a reasonable interpretation of the Pendleton Bros. decision given what we believe to be the Supreme Court’s clear conclusion that the KMPC had made procurement a regulated administrative procedure subject to judicial challenge.” 8 The court of appeals looked to the Pendleton Bros. decision itself, wherein the Supreme Court had noted, “[the] supremacy of law demands that there shall be opportunity to have some court decide . . . whether an agency administering a statutory regulatory scheme has applied ‘an erroneous rule of law’ . . . and whether the proceedings in which the facts were adjudicated was [sic] conducted regularly.” 9 The Supreme Court added, “[a]s in Humana, here it is the regulatory scheme which both establishes the rules which must be followed and provides standing to the aggrieved competitor to challenge the decision of the administrative agency in court if he can prove that the decision or award was made in violation of the statute.” 10 The challenge in Yamaha was to the state agency’s failure to follow the award procedures set forth in its Request for Proposals on golf carts for the state parks systems.

The court of appeals thus noted that “[b]ecause the administrative remedies in [Pendleton Bros.] had been exhausted, the Court concluded that it was ‘ripe’ for judicial review. The appellants are entitled to a forum and an opportunity to prove their case.’” 11 In view of this language, the court of appeals significantly held that “we are compelled to find that the Supreme Court intended its decision [in Pendleton Bros.] to reach beyond the scope of alleged political patronage.” 12 In so finding, the court of appeals noted that the Supreme Court had framed its inquiry in Pendleton Bros. by stating, “We must decide whether the KMPC has effected a statutory change so that procurement is now a regulated administrative procedure subject to a court challenge if the decision was contrary to law, or arbitrary and capricious. This includes challenge on grounds that statutory procedures were disregarded for reasons of political patronage.” 13 The court of appeals then concluded “this language serves as an indication that the Court considered the specific allegations of political patronage in that case to be an issue that was encompassed by the more general inquiry being undertaken as to the availability of judicial relief under the KMPC for disappointed bidders.” 14

The court of appeals further stated that “KRS 45A.280 supports the principle that judicial review is available to disappointed bidders under the KMPC.” 15 That statute provides:

The decision of any official, board, agent, or other person appointed by the Commonwealth concerning any controversy arising under, or in connection with, the solicitation or award of a contract, shall be entitled to a presumption of correctness and shall not be disturbed unless the decision was procured by fraud or the findings of fact by such official, board, agent or other person do not support the decision.

The court of appeals noted that “[t]he latter part of the statute specifically supports the conclusion that a decision of the Finance and Administration Cabinet, while presumed correct, is subject to ‘disturbance’ by a court in the event that the Cabinet’s findings of fact do not support its decision. This standard does not differ in any significant way from the general rule that decisions of administrative agencies are reviewed by courts with the question of arbitrariness in mind.” 16 In so noting, the court of appeals ultimately held that the Franklin Circuit Court “erred in concluding that Appellant Cunningham Golf Car Company, Inc., as a disappointed bid contractor, did not have standing to challenge the decision of the Finance and Administration Cabinet on the grounds that it was arbitrary and capricious, and we must therefore reverse and remand for further proceedings.” 17

As is clear from the court of appeals’ decision in Yamaha, the scope of the 1988 Kentucky Supreme Court decision in Pendleton Bros. is to be broadly applied to the bidding process in Kentucky, expanding the grounds under which disappointed bidders may now allege “arbitrary and capricious” procurement actions contrary to the KMPC. Such a broad application is a change from the common law, in that it provides a greater opportunity for equity in the procurement protest arena—one of the major goals of the ABA’s Model Procurement Code for State and Local Governments and its successor, the MPC 2000.

Endnotes

1. Kentucky Model Procurement Code, Ky. Rev. Stat. Ann. ch. 45A (enacted 1978).

2. 758 S.W.2d 24 ( Ky. 1988).

3. Id. (citing HealthAmerica Corp. of Ky. v. Humana Health Plan, Inc., 697 S.W.2d 946, 948 ( Ky. 1985)); see also PIE Mut. Ins. Co. v. Kentucky Med. Ins. Co., 782 S.W.2d 51, 54 (Ky. Ct. App. 1990) (“The common law rule in Kentucky is that absent allegations of fraud, bad faith, or collusion, a competitor qua competitor has no standing to challenge the granting of a license or permit to another competitor by an administrative agency.”) (citations omitted)).

4. Pendleton Bros., 758 S.W.2d at 27.

5. Id. at 24.

6. Id. at 30.

7. No. 2004-CA-001172-MR, 2005 WL 3003076 at *5 ( Ky. Ct. App. Nov. 10, 2005) (as modified Dec. 9, 2005).

8. Id.

9. Pendleton Bros., 758 S.W.2d at 28 (citing Humana of Ky., Inc. v. NKC Hospitals, Inc., 751 S.W.2d 369, 374 ( Ky. 1988)).

10. Pendleton Bros., 758 S.W.2d at 28.

11. Yamaha, 2005 WL 3003076 at *5 (citing to Pendleton Bros., 758 S.W.2d at 28–29).

12. Yamaha, 2005 WL 3003076 at *5.

13. Id. (citing to Pendleton Bros., 758 S.W.2d at 25).

14. Yamaha, 2005 WL 3003076 at *5.

15. Id. at *6.

16. Id. at *6 (citing to American Beauty Homes Corp. v. Louisville & Jefferson County Planning & Zoning Comm’n, 379 S.W.2d 450, 456 (Ky. Ct. App. 1964)).

17. Yamaha, 2005 WL 3003076 at *6.