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In re Challenge of Contract Award Solicitation #13-X-22694 Lottery Growth Mgmt. Servs.

Superior Court of New Jersey, Appellate Division

July 3, 2014


Argued March 24, 2014

Approved for Publication July 3, 2014.

Page 788

On appeal from the New Jersey Department of the Treasury, Division of Purchase and Property.

Justin Schwam argued the cause for appellants Communications Workers of America, AFL-CIO, and CWA Locals 1033 and 1037 ( Weissman & Mintz, L.L.C., attorneys; Mr. Schwam, on the brief).

Beth Leigh Mitchell, Assistant Attorney General, argued the cause for respondent New Jersey Department of Treasury, Division of Purchase and Property ( John J. Hoffman, Acting Attorney General, and Gibbons, P.C., attorneys; Ms. Mitchell, on the brief; Peter J. Torcicollo, Damian V. Santomauro, and Kevin W. Weber, on the brief).

Gage Andretta argued the cause for respondent Northstar New Jersey Lottery Group, LLC ( Wolff & Samson, P.C., attorneys; Mr. Andretta and David M. Dugan, on the brief).



Page 789

[436 N.J.Super. 353] ASHRAFI, J.A.D.

In this appeal, a union and its locals that represent State employees challenge the constitutionality of the State's award of a long-term contract to a private company to provide sales and [436 N.J.Super. 354] marketing services and to manage other functions of the New Jersey State Lottery. The Communications Workers of America, AFL-CIO, and CWA Locals 1033 and 1037 (collectively " the CWA" ) represent employees of the New Jersey Department of the Treasury's Division of the State Lottery (" Lottery Division" ). On behalf of their members, they filed a protest of the contract award to Northstar New Jersey Lottery Group, LLC. The Director of the Treasury Department's Division of Purchase and Property (" DPP" ) rejected the protest in a detailed written decision.

On appeal to this court, the CWA contends that the contract violates the amendment of the New Jersey Constitution that authorized the State Lottery as well as a statutory provision of the State Lottery Law, N.J.S.A. 5:9-1 to -25. It also argues that Northstar's bid proposal did not conform to the bid specifications because it included an unauthorized management fee in addition to other compensation to be paid to Northstar. We reject these arguments and affirm the Director's decision.


Looking for ways to increase revenues from the Lottery Division, the State Treasurer issued a Request for Information (" RFI" ) on December 7, 2011, soliciting " recommendations to improve any or all aspects of the Lottery's operation including: sales and marketing strategies and functions; product offerings; back office operations; information technology; and financial management." The RFI provided some background information about the New Jersey State Lottery:

The Lottery has a staff of approximately 150 employees organized around seven work functions, including: Administration; Operations; Management Information Systems; Marketing; Sales; Security, Audit, Licensing; and Finance.
. . . .
Sales revenues for [its current games] totaled over $2.6 billion for the fiscal year ending June 30, 2011. For the same period, administrative expenses totaled $22.3 million; sales commissions totaled $147 million, vendor fees totaled $33 million, and prize expenses totaled $1.544 billion. As a result, the Lottery was able to contribute $930 million to education and institutions on a net revenue basis.

[436 N.J.Super. 355] The RFI also explained that the lottery had three existing contracts with third-party vendors, covering products and services for advertising, instant games, and online games, and it stated that " [a]ny proposed services or solutions may include the use of third party providers."

The Treasury Department's Review Committee received several substantive responses to the RFI that included the possible privatization of lottery functions. From these responses, the Lottery Division and DPP developed and issued on August 10, 2012, an advertised Request for

Page 790

Proposal (" RFP" ) soliciting bids for a contract for " Lottery Growth Management Services." The fifteen-year " Services Agreement" would be for management services, goods, and equipment for the sales and marketing operations of the New Jersey State Lottery. Thirteen addenda were later added to the RFP in response to questions from potential bidders and as additional information.

As " Manager" for the State lottery, the successful bidder would " run the Lottery's sales and marketing operations, oversee its product development and sales channels and maintain and update its information technology systems, website and social media presence." At the time of the solicitation, the Lottery Division or one of its subcontractors was performing these duties.

According to the RFP's Section 1.2.1 (OVERVIEW), " the State's primary objective" was for the Manager to " strengthen and maximize the future funding for State institutions and State aid for education by maximizing a growing revenue stream in a responsible manner." The overview further described the Manager's duties to include " the provision and maintenance of the Central Gaming System, game development, supply of goods and services, marketing and advertising."

Together with its Appendix A, the RFP's Section 3.0, entitled " SCOPE OF WORK AND OPERATIONAL RESPONSIBILITIES OF THE MANAGER," provided a more detailed " Description of Services" to be performed by the Manager: (1) maintaining and modifying lottery software and websites; (2) providing data [436 N.J.Super. 356] and reports to the Division; (3) assuming control over the installation of retail hardware, instant ticket vending machines, and establishing an on-line portal for internet gaming; (4) game design and development; (5) distribution and warehousing services; (6) recruitment, training and supervision of lottery retailers, including recommended commissions for these retailers; (7) most aspects of lottery marketing; (8) maintaining customer service centers; (9) developing, operating and maintaining a responsible gambling program; (10) engaging subcontractors, and preparing, negotiating and monitoring their contracts; and (11) maintaining compliance with state regulations, and preparing game rules.

The RFP required each bid proposal to include a technical proposal, a transition plan, a detailed account of the qualifications and experience of the bidder, a business plan, and net income targets.

The RFP's financial model had three elements: an accelerated guarantee payment by the successful bidder to the State, net income targets, and shortfall payments. The winning vendor was required to make a one-time $120 million payment to the State upon executing the Services Agreement. The vendor was also required to propose net income targets for each contract year, and the contract would require shortfall payments to the State, within capped limits, for any year in which the vendor failed to meet the base income targets.

The vendor would receive compensation from the State calculated as a rising percentage of the year's net income in excess of the listed contract year's base level income set forth in the RFP. The vendor's compensation would be capped at 5% of the contract year's total lottery net income.

At least 30% of the total lottery revenues would have to be contributed to the general fund for State institutions and State aid for education. If necessary, the vendor's compensation would be reduced to guarantee the 30% contribution.

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[436 N.J.Super. 357] With respect to decision-making authority, the RFP expressly declared in Section 1.2.3, entitled OVERSIGHT BY THE DIVISION OF LOTTERY:

At all times, the Lottery will continue to be conducted under the control and oversight and regulatory and step-in powers of the Division of Lottery . . . . The Division of Lottery will exercise actual control and oversight over all significant business decisions, and will retain the authority to direct and countermand the operating decisions of the Manager as described in the Services Agreement.

Only one vendor, Northstar, submitted a bid proposal. Northstar is a joint venture comprised of: (1) GTECH Corporation, an operator and provider of gaming technology and services based in Rhode Island, which had an existing contract with New Jersey's Lottery Division; (2) Scientific Games International, a provider of lottery end-to-end gaming solutions based in Georgia; and (3) OSI LTT NJ Holdings Inc., a pension fund of the Ontario Municipal Employees Retirement Systems.

DPP reviewed Northstar's bid for compliance with the RFP's mandatory elements, and then sent the bid to DPP's Evaluation Committee for close review. On January 28, 2013, the Evaluation Committee requested clarification from Northstar regarding: (1) Northstar's Technology Plan; (2) the variance between Northstar's projected net income targets and what Northstar had termed its Pro Forma Net Income Calculations; and (3) a proposed " Management Fee" included in Northstar's bid submission. On January 31, 2013, Northstar submitted its responses with attachments, and a few days later gave an oral presentation to the Evaluation Committee.

By letter dated February 4, 2013, the Evaluation Committee requested that Northstar submit a best and final offer (" BAFO" ), increasing its net income targets and withdrawing the proposed management fee. On February 7, 2013, Northstar submitted increased net income targets by a cumulative value of $48.5 million and reduced its management fee to $4.75 million.

On March 8, 2013, DPP met with Northstar to clarify the BAFO response and requested a second BAFO. After Northstar declined to modify its BAFO, the technical advisor to the Evaluation [436 N.J.Super. 358] Committee requested additional information about the management fee. Northstar's responses included confirmation that invoices for the management fee would be prepared and presented in accordance with the terms of the Services Agreement. On March 27, 2013, DPP requested a final BAFO, and Northstar responded with increases to its net income targets by an aggregate of $3.4 million.

On April 2, 2013, the Evaluation Committee submitted its report and recommended that the contract be awarded to Northstar. It found " Northstar's proposal meets the objectives of the RFP," and " that award of a contract to Northstar would provide the State with proven and diversified lottery management capabilities, comprehensive U.S. and international lottery experience, expertise within the lottery industry, and a management team with extensive New Jersey and global lottery-industry experience." Regarding the management fee, the Evaluation Committee concluded it " is a justifiable expense, necessary and reasonable for Northstar to achieve its business plan."

After DPP issued a notice of intent to award the contract to Northstar, the CWA filed its protest on April 17, 2013. Northstar submitted a reply, and the parties to the protest made an oral presentation before DPP's Director on May 3, 2013, and

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final written replies a few days later. On May 20, 2013, the DPP Director issued a forty-page written decision rejecting CWA's protest, refusing to grant a stay, and authorizing DPP to proceed with the contract.

On May 30, 2013, CWA filed a notice of appeal and then promptly moved before this court for an emergent stay of the awarding of the contract. On June 11, 2013, we denied a stay but accelerated the appeal. On June 20, 2013, the Services Agreement was executed, and sometime in 2013, Northstar paid $120 million to the State Lottery Fund and began implementing the contract.

[436 N.J.Super. 359] II.

As a preliminary matter, DPP argues that the CWA lacked standing to protest the awarding of the contract on constitutional and statutory grounds after Northstar submitted its bid and the DPP accepted it. DPP argues those grounds could only be raised as a protest to the RFP before a bid was submitted. In response, the CWA cites In re Protest of Award of New Jersey State Contract A71188, 422 N.J.Super. 275, 289, 28 A.3d 816 (App. Div. 2011), and contends that DPP cannot fault the CWA for failing to file a protest before the contract was awarded because, pursuant to N.J.A.C. 17:12-3.2, only vendors and potential bidders could protest the bid specifications. It cites the same case and O'Shea v. New Jersey Schools Construction Corporation, 388 N.J.Super. 312, 318, 908 A.2d 237 (App. Div. 2006), in support of its argument that New Jersey taxpayers, and organizations whose members include New Jersey taxpayers, have standing to make a post-bid challenge to the awarding of a public contract. See also Loigman v. Township Comm., 297 N.J.Super. 287, 295-96, 687 A.2d 1091 (App. Div. 1997) (" Generally, taxpayer intervention is appropriate where there are claims of fraud or corruption, or other instances of illegalities and ultra vires acts . . . [and] claims of illegal bidding procedures." (citations omitted)).

Because DPP has not argued that a post-bid protest may only be brought by an individual taxpayer, we will not address whether an organization comprised of New Jersey taxpayers has standing to protest the contract award and pursue an appeal. Given New Jersey's traditionally liberal view of standing to seek judicial remedies, see, e.g., Jen Elec., Inc. v. Cnty. of Essex, 197 N.J. 627, 645, 964 A.2d 790 (2009) (citing New Jersey Builders Ass'n v. Mayor of Bernards Township, 219 N.J.Super. 539, 530 A.2d 1254 (App. Div. 1986), aff'd, 108 N.J. 223, 528 A.2d 555 (1987)); Crescent Park Tenants Ass'n v. Realty Equities Corp. of N.Y., 58 N.J. 98, 107-12, 275 A.2d 433 (1971), we reject DPP's contention that the CWA acted [436 N.J.Super. 360] too late in protesting the contract on constitutional and statutory grounds.


We begin with a brief history of the New Jersey State Lottery, its constitutional authorization, and the statutory provisions that ...

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