Bridge Contractor Found Guilty in 15-Year DBE Scheme

Once again, the U.S. Department of Transportation’s DBE program is in the news, with a warning for contractors who might think they can evade the DBE rules applicable to federally funded public contracts. In April 2012, the owner of Schuylkill Products, Inc., a Pennsylvania bridge contractor, was found guilty on 26 of 30 charges in an indictment including conspiracy to defraud the U.S. DOT in a DBE fraud scheme.

Joseph W. Nagle, the contractor-owner, was convicted of participating in a 15-year-long scheme, where he and other executives at his firm diverted over 300 PennDOT and SEPTA construction contracts to the firm and a subsidiary firm that were reserved for DBE’s. The contractor owner and his co-conspirators executed the scheme by using Marikina Construction Corporation, a small Connecticut highway construction firm, as a “front” company to obtain these lucrative government contracts.

This prosecution is Exhibit A on why contractors should be especially wary of trying to circumvent the strict DBE rules on U.S. DOT-funded public contracts. If you happen to be caught, the penalties – both criminal and civil – can be severe, including jail time.

According to the press release issued by the United States Attorney’s Office for the Middle District of Pennsylvania, this recent prosecution is just one salvo in the federal government’s continuing battle to shut down DBE fraud schemes:

“Preventing and detecting DBE fraud are priorities for the Secretary of Transportation and the USDOT Office of Inspector General,” said Doug Shoemaker, OIG Regional Special Agent in Charge. “This significant conviction, in what is the largest reported DBE fraud case in USDOT history, will serve as a clear signal that severe penalties await those who would attempt to subvert USDOT laws and regulations. Prime contractors and subcontractors are cautioned not to engage in fraudulent DBE activity and are encouraged to report any suspected DBE fraud to the USDOT-OIG. Our agents will continue to work with the Secretary of Transportation, the Administrators of the Federal Highway and Transit Administrations, and our law enforcement and prosecutorial colleagues to expose and shut down DBE fraud schemes throughout Pennsylvania and the United States.”

The full press release explaining the prosecution and its background can be found here. This case has some similarities to the recent prosecution of an Ohio contractor which I commented about here.

Posted on June 28, 2012 by Christopher I. McCabe, Esq. in DBE/MBE/WBE, PennDOT Comments Off

Public Bidding 101: Bidder Responsibility

This is one in a continuing series of posts on the basic tenets of public bidding in Pennsylvania. The subject of today’s post is bidder responsibility.

“Responsibilty” refers to the qualifications, including competence and experience, of a bidder to perform a public contract. Whether a bidder is responsible or qualified to receive a contract award is ordinarily left up to the discretion of the government officials in charge of awarding the contract. The courts are extremely reluctant to overrule government decisions to disqualify a bidder as non-responsible.

The standards for bidder responsibility have been established for many years. The criteria include financial responsibility, integrity, efficiency, industry, experience, promptness, and ability to successfully perform and complete the contract. While some may believe that the ability to secure and post a bond is proof of their responsibility, a bond is not a substitute for the failure of a bidder to satisfy qualification criteria. Furthermore, a bidder cannot be rejected as non-qualified unless the government officials have also first conducted an investigation into all bidders’ respective qualifications.

Bidder responsibility can be determined before bids are received, via a pre-qualificaiton process, or after the bids are received. All bidders must be judged according to the same criteria. A pre-qualification process may be used only if one is mandated or allowed by statute or ordinance. Where there is no prescribed pre-qualification process, a municipal official may not exclude certain persons from bidding under the guise of a pre-qualification program.

In Harris v. City of Philadelphia, 299 Pa. 473, 149 A. 722 (1930), the Supreme Court of Pennsylvania had this to say about responsibilty determinations:

We again lay down the rule that all bidders on a municipal contract must be accorded the same treatment, for not otherwise can the requirements of the statute be complied with. The city may … accept and schedule all bids, and then, if acting in good faith, refuse to award the contract to one who is the lowest bidder, because he is not the ‘lowest responsible bidder.’ Or she may … determine in advance who are responsible bidders, and refuse to receive bids from those who, after treating all alike, she determines are not in that class. But she may not impose conditions on one prospective bidder, which are not imposed upon all; nor may she enforce a method by which, through favoritism, one person may be conclusively authorized to bid on a pending contract, while another, equally as responsible and perhaps more so, is wholly excluded from even submitting a bid.

This rule of public bidding is as applicable today as it was in 1930.

Posted on June 26, 2012 by Christopher I. McCabe, Esq. in Bidder Responsibility, Public Bidding 101 Comments Off

$590 Million Deal on Philadelphia Sludge Plant Exposed

In 2008, the City of Philadelphia reached a deal to award a multi-million dollar contract to a private firm to operate a City sludge plant, known as the Biosolids Recycling Center. After reading a recently-issued opinion by U.S. District Court Judge Stewart Dalzell, it would appear that the deal and the manner in which it was obtained have a stink as bad as the sludge.

According to a front-page report in The Philadelphia Inquirer, the winning contractor used a team of not-so illustrious political consultants to secure the deal:

To win the prize, the contract winner, Houston’s Synagro Technologies Inc., had a team of political consultants, including a man later convicted of bribing a Detroit city councilwoman to help win Synagro a $1 billion contract in that city by a single vote.

Synagro also brought in an Atlanta man, Hiriam Hicks, who Dalzell said paid a Philadelphia community activist $55,000 to round up 175 people – some of them from homeless shelters – to cheer on City Council as it approved Synagro’s contract by a 15-2 vote, with the backing of Mayor Nutter.

Judge Dalzell’s opinion, according to the Inquirer, goes on to recount a variety of insider machinations that cemented the deal and resulted in a broken promise of a substantial payout for one of the hired consultants. The opinion came in a suit brought by the consulting firm of Mr. Hicks who alleges that his firm was stiffed on a promise to pay it $400,000 a year over the life of the deal. Needless to say, Judge Dalzell’s opinion shines a much-needed light on the City’s process of awarding contracts where sealed, competitive bidding is not required. It’s not a pretty sight or for the faint of heart.

The Inquirer article can be found here. Judge Dalzell’s opinion can be found here.

Posted on June 14, 2012 by Christopher I. McCabe, Esq. in City of Phila. Comments Off

Denial of WBE Certification Non-Reviewable

Late last year, the Commonwealth Court ruled in Wilco Mechanical Services, Inc. v. Department of General Services that a DGS decision denying a company’s application for certification under DGS regulations as a Women’s Business Enterprise (WBE) was not reviewable. Certification as a WBE would have allowed the company to participate on state contracts as a subcontractor, with the prime contractor receiving credit for using the company.

The Court found that WBE certification process did not operate pursuant to either a regulation or a statute but as part of a general statement of policy. Moreover, the company seeking certification did not have a personal right or a property right in such a certification. Therefore, the rejection of the WBE certification application was not an adjudication and was not appealable.

As a result of this ruling, certification decisions regarding MBEs and WBEs are now vested within the sound discretion of the public officials reviewing such applications, and the courts are unavailable for relief in the event of a rejection of an application for MBE or WBE status.

The Commonwealth Court decision can be found here. The website for the DGS Bureau of Minority and Women Business Opportunities can be found here. Instructions on how to become an MBE or WBE under the DGS program can be found here.

Posted on June 12, 2012 by Christopher I. McCabe, Esq. in DBE/MBE/WBE, DGS Comments Off

City of Phila. Retains Firms for $6.5 Billion Airport Expansion Project

The City of Philadelphia has selected a joint venture of three companies to manage the planning and construction of a $6.5 billion and 12- to 15-year expansion project at the Philadelphia International Airport. The lead firm is CH2M HILL, a Denver-based engineering and construction firm with offices in Philadelphia. The management contract is valued at $25 million for the first four years. The Philadelphia Inquirer article on the selection can be found here.

Posted on June 7, 2012 by Christopher I. McCabe, Esq. in City of Phila. Comments Off

No Contract Formed Where Contractor Uses Subcontractor Quote on Public Bid

If a prime contractor bids to a public entity, uses a quote from a subcontractor, and identifies the subcontractor in its bid, is a contract formed between the prime and the sub if the public entity awards a contract to the prime? In Pennsylvania the answer is NO, according to a recent Commonwealth Court decision.

In Ribarchak v. Municipal Authority of the City of Monongahela, a prime contractor submitted a bid to a public authority, and identified a specific subcontractor in its bid. The public authority accepted the prime’s bid and awarded it a contract. The prime later substituted the named subcontractor with another subcontractor. The named subcontractor then sued for breach of contract, claiming that a valid contract had been formed with the prime when the prime included the sub in its bid and when the authority accepted the prime’s bid. The trial court rejected this claim, and the Commonwealth Court affirmed.

The Commonwealth Court followed the reasoning of many other jurisdictions that have rejected the notion that a contractor’s use of a subcontractor’s quote constitutes acceptance of the quote. The Commonwealth Court held that there must be affirmative evidence that the prime expressly accepted the subcontractor’s quote before a contract can be formed. The Commonwealth Court decision can be found here.

While this case concerned the public contracting context, it would seem that the rule is equally applicable in the private contracting context. A hat tip to my friend and former colleague Wally Zimolong who brought this decision to my attention in his blog Supplemental Conditions.

Posted on June 4, 2012 by Christopher I. McCabe, Esq. in Court Decisions Comments Off

Philadelphia School District Sued Over Contract Award To Minority Firm

The Philadelphia School District has been sued by a suburban, white-owned firm which lost out on a School District contract in favor of a minority-owned firm. The Philadelphia Inquirer has reported that the firm, which lost a $7.5 million surveillance-camera project after former Philadelphia School Superintendent Arlene C. Ackerman allegedly intervened on behalf of a minority-owned firm, has filed a federal civil rights lawsuit against the School District and Ackerman.

The firm may have an uphill battle in its suit. It is well-established that disappointed bidders have no standing to sue public entities for lost profits due to the loss of a contract award. Moreover, the federal courts have held that disappointed bidders have no claims for due process violations for alleged bidding irregularities because the bidders themselves have no personal or property rights in the lost contract.

On the other hand, if the firm can establish that, but for the actions of Ackerman and due to the race of its owner or the race of the owner of the minority-owned firm, it would have obtained the contract, it may be able to prevail against the School District. This suit in such case would be no different that the challenges to minority “set-aside” laws which were viewed as quotas and which were struck down by the courts. If successful, the suit will result in an award of attorney’s fees in favor of the firm.

The suit is the fourth brought against the district in the aftermath of the decision to award an emergency, no-bid contract to a minority-owned firm to install surveillance cameras in 19 city schools the state had deemed dangerous. The School District justified bypassing its normal bidding requirements by calling the camera installation an “emergency.”

The Philadelphia Inquirer article can be found here. An Inquirer article on a whistleblower suit by a former School District official arising out of the same contract award can be found here.

Posted on June 1, 2012 by Christopher I. McCabe, Esq. in Phila. School District Comments Off

Should Disappointed Bidder Be Allowed to Recover its Bid Preparation Costs?

In Pennsylvania, a general rule of public bidding is that a disappointed bidder cannot recover lost profits or other costs for the reason that the bidding laws are for the benefit of the taxpayers and not the bidders themselves.

But what of the disappointed bidder, whose bid is wrongfully rejected but where injunctive relief is denied to the taxpayer who has sought such relief? If it is later determined that the taxpayer was indeed correct, but it is too late for the wrongful decision to be undone and for the contract to be awarded to the bidder instead, or at least enjoined, should the disappointed bidder be allowed to recover, if not its lost profits, at least its bid preparation costs?

In the case of Meccon, Inc. v. Univ. of Akron, the Ohio Supreme Court held in 2010 that, when a rejected bidder establishes that a public entity violated competitive-bidding laws in awarding a public contract, the bidder may recover reasonable bid preparation costs as damages if (a) the bidder promptly sought, but was denied, an injunction to suspend work on the project, pending resolution of the bid dispute, and (b) it is later determined that the bidder was wrongfully rejected and injunctive relief is no longer available.

The Ohio Supreme Court’s reasoning in support of its decision is powerful:

If, for instance, a rejected bidder alleges that a public authority failed to comply with competitive-bidding laws and promptly seeks injunctive relief to delay the public-improvement project pending resolution of the dispute, denial of the requested injunctive relief means that determination of the allegation of wrongful conduct by the public authority will not take place until much later in the litigation. Under our precedent, once the public-improvement work commences or is completed, the rejected bidder will not be able to perform the public contract even if the bidder demonstrates that its bid was wrongfully rejected. In such circumstances, the wrongfully rejected bidder is left with no remedy for the public authority’s unlawful conduct, and injunctive relief will no longer serve to deter the public authority’s unlawful conduct.

Of course, this rule has never been applied by the Pennsylvania courts. The general rule here is that only injunctive relief is available and only if sought by a taxpayer. The disappointed bidder itself has no standing as a bidder to seek any relief against a public entity for the reason that the bidding laws are for the benefit of the taxpayers and general public.

In view of the Ohio decision, there may come a time that such a limited claim is asserted on behalf of a disappointed bidder. To allow such a claim, the rule on standing would need to be modified in Pennsylvania.

There are numerous instances where injunctive relief is denied to a taxpayer, but where there is a strong claim that the public entity acted in a wrongful manner (thereby harming the interests of the public, the taxpayers, and the participating bidders). And certainly, for many large public works projects, the costs of preparing a bid, for what the bidder believed would be a fair and open process, can be quite significant. If such costs cannot recouped and the public entity faces no threat of injunctive relief, how are the interests of taxpayer served, especially where the bidder is a taxpayer itself?

If the bid process is found to be unfair and wrongful, but if injunctive relief is no longer available, there is no real deterrent to the public entity if it chooses to repeat its same conduct on future bids. In such a case, should the potential remedy be limited solely to injunctive relief for a taxpayer, even where such relief is unavailable as a practical matter, because the project has already commenced, and where the bidder, in reliance upon what was expected to be a fair and open process, has expended significant costs? In such a case, it could be argued that a limited exception to the standing rule should be carved out to permit the disappointed bidder to at least recover its bid preparation costs.

The Meccon decision can be found here.

Posted on May 29, 2012 by Christopher I. McCabe, Esq. in General Comments Off

Public Bidding 101: Bid Mistakes and Bid Withdrawals

This post is one in a continuing series on the basic tenets of public bidding in Pennsylvania. The subject of today’s post is bid mistakes and withdrawal of bids. I am often asked whether a bidder can withdraw its bid due to a mistake in price. The answer is not so simple.

Typically, public bids are binding on the bidder for 60 days after bid opening, unless the bidder and the public entity execute a written consent for a longer period. If the bids are not accepted within that time frame, or if a contract is not executed within 60 days of the contract award, the bidder is permitted to withdraw its bid and escape liability on its bid and its bid security or bid bond. Otherwise, the bidder is legally bound by its bid, and cannot withdraw its bid, unless it can satisfy the stringent requirements for a bid withdrawal. Read more

Posted on May 24, 2012 by Christopher I. McCabe, Esq. in Bid Withdrawal, Public Bidding 101 Comments Off

$500K Settlement for Ohio Contractor in DBE Case on Cleveland Airport Project

Federal prosecutors in Ohio recently announced that an Ohio contractor has agreed to pay the U.S. Justice Department $500,000 to settle complaints that the contractor improperly claimed credit for minority contractors on a $130 million runway expansion at Cleveland Hopkins International Airport.

Federal prosecutors accused the contractor of submitting false claims that made it appear that the contractor was in compliance with the U.S. Department of Transportation disadvantaged business enterprise program, which was required for the contractor to obtain and keep its contract. The contract was funded by the U.S. DOT.

A Cleveland Plain Dealer article on the complaints and the settlement can be found here.

This settlement is proof, once again, that contractors who evade the DBE rules on federally-funded transportation contracts are at serious risk for significant civil sanctions and potentially criminal penalties, including enforcement action under the federal False Claims Act. Rather than seeking to meet DBE goals by using questionable “pass-through” entities, contractors should remember that the U.S. DOT DBE rules require only good faith efforts to meet the specified contracting goals. The DBE goals cannot be enforced as quotas, and a contractor’s failure to meet the goals should not disqualify it from receiving a contract, so long as the contractor can show that it has expended reasonable and good faith efforts to meet the goals. A denial of the contract for failure to meet the goals, in the face of good faith efforts, could subject the public entity to an equal protection claim.