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Martin v. Director

Decided: September 5, 1984.


On appeal from a final determination of the Director of the Division of Purchase and Property.

Antell, McElroy and Brody. The Opinion of the Court was Delivered by, Antell, P.J.A.D. Brody, J.A.D., dissenting.


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 unauthorized,

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 16 1/2% 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), "[t]his 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 ...

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