The Minnesota Supreme Court decided Rochester City Lines, Co. v. City of Rochester last week, applying the "unreasonable, arbitrary, or capricious" standard to the best value bidding of public contracts, describing how that standard works, and deciding that a disappointed bidder's protest should be allowed to go to trial.

History of Competitive Bid Challenges

In 1954, the Minnesota Supreme Court decided a case in which all submitted bids exceeded the budget for the project. To bring the project within budget, the owner revised the design and asked the bidders for new prices. The owner was not required to competitively bid the contract but, having done so voluntarily, was bound to follow the chosen procedure and could not do so in an unreasonable, arbitrary, or capricious manner. The Court voided the award because the owner let bidders make material changes to their bids after bids had been opened.

Most Minnesota cases since then addressed low-bid procurement, as most public entities award contracts to the lowest responsible bidder. In that process, all bids that materially vary from the agency's design and specifications must be rejected as non-responsive. The contract is then awarded to the lowest responsible bidder. In 2007, the Minnesota Legislature authorized best-value bidding for public construction projects. Under best-value bidding, proposals have both price and qualitative parts, such as technical design, technical approach, quality of personnel, or management plan. The owner evaluates and scores all parts and decides which bid provides the best value.

What Does Unreasonable, Arbitrary, or Capricious Mean in Best Value Bidding?

City Lines, the protester, had operated the Rochester municipal bus service for over 30 years. Rochester subsidized the work using state and federal grants. In 2011, the Federal Transit Administration told Rochester that it would need to competitively bid the contract to continue receiving federal funding. Rochester elected to follow a best value process. City Lines protested but also submitted a bid. City Lines lost the bid to a competitor and then filed another protest.

The Minnesota Supreme Court decided that, regardless of the bidding method, if no statute required another standard, courts must decide whether the chosen bidding method was applied in an arbitrary, capricious, or unreasonable manner. City Lines argued that courts had to look closely and invalidate any excessive exercise of discretion. Rochester disagreed and said that courts had to defer to value judgments made, only overturning results when significant errors cast doubt on project fairness and the public owner's good faith.

The Supreme Court rejected these approaches. According to the Court, a contract award is arbitrary and capricious if it represents an exercise of the owner's will, rather than its judgment. Courts must reject any procedure that undermines the safeguards of competitive bidding. The essential safeguard is limiting the discretion of owners to prevent abuses like fraud, favoritism, improvidence, and extravagance. In other words, courts must analyze bidding procedures to ensure that they follow a fair process and have enough controls to safeguard against those abuses, without substituting their own judgments for those of public officials. The Court identified several factors that can be considered when deciding what is arbitrary and capricious:

• Subjective bad faith on the part of the officials
• The absence of a reasonable basis for the administrative decision
• The amount of discretion entrusted to the procurement officials by applicable statutes and regulations
• Proven violation of pertinent statutes or regulations

All factors need not be present to establish unreasonable, arbitrary, or capricious conduct.

Putting the Standard to Use

Two issues raised red flags for the Court. First, the winning bidder listed two of City Lines' managers as personnel who would manage the bus system if that bidder were selected. This met Rochester's requirement that bidders make a good-faith effort to hire City Lines employees. During an interview process in which key managers had to be present, however, only the winning bidder received permission to substitute other employees for the listed managers. Rochester then gave points to both the winning bidder and to City Lines for the performance of those two City Lines managers during the interview of City Lines. Rochester never disclosed to bidders that it would allow the substitution or award the bidders points based on the performance of the City Lines managers.

Second, two City of Rochester employees who had agreed to serve as references for City Lines later refused to do so. They based their refusal on advice from Rochester, but neither employee told City Lines about it. This reduced the past performance points available to City Lines.

According to the Court, evidence supporting these irregularities raised the specter of pervasive bias against City Lines. As a result, the Supreme Court returned the case to the lower courts for a trial on these issues.

What Bidders and Public Owners Need to Know

In light of this decision, bidders and public owners should take note of the following:

• Once a competitive bidding process is chosen, the owner must follow it and cannot apply it in an unreasonable, arbitrary, or capricious manner.
• In deciding best value bid protests, Minnesota courts will consider evidence of bad faith, by public officials, absence of a reasonable basis for the decision, the amount of discretion given to officials, and violations of statutes or regulations.
• Interested bidders need to be ready to file pre-bid protests if they want to challenge the bid solicitation itself, and cannot wait to challenge the solicitation's terms after bids are opened and evaluated. Also, when a bidder decides to challenge a solicitation or award, it should consult counsel to make sure the right procedure for that protest is followed.