The United States Supreme Court handed down its much anticipated decision in Janus v. AFSCME .
(Because of my involvement with litigation related to this decision there is not much commentary that I can offer at this time. Stay tuned.)
A friend came to me with a question regarding a case he was working: “can a public owner require that bidders use a specific brand name product?” “Of course not,” I said “proprietary specifications are illegal.” Or, at least that’s what I assumed. To my surprise, the law in the Commonwealth of Pennsylvania is not as clear as it is in other jurisdictions.
What is a proprietary specification?
A proprietary specification lists a product by brand name, make, model and/model that a contractor must (shall) utilize in construction. A basic example of a proprietary specification would state:
“Air Handlers shall be “Turbo Max” as manufactured by Chiller Corp.”
There are two problems with a proprietary specification (other than potentially being illegal): (a) they limit competition, and (b) invite steered contract awards. They limit competition because it limits the type of material that can be used on the project. In the example above, there could be equivalent air handlers available at a better price but the contractor could not use that lower priced product in its bid. Thus, the taxpayers end up paying more for tile. Also, contractors may not be able to secure a certain brand name product because of exclusive distribution agreements. Again using the example above, contractor A’s competitor may have the exclusive distribution agreement with Chiller Corp.
Besides being more costly, this situation invites favoritism and fraud, which public bid laws are designed to prevent. If the design professional that is drafting the specification knows that a certain favored contractor has the exclusive right to distribute a product, the design professional can draft the specification in a way that steers the bid to that favored contractor.
Federal Law
Most federal agencies prohibit proprietary specifications. For example, with limited exceptions, FHWA regulations prohibit contracting state transportation agencies receiving federal funds from requiring the use of a patented or proprietary material, specification, or process. Likewise, under FAR’s “Material and Workmanship Clause,” “[r]eferences in the specifications to equipment, material, articles, or patented processes by trade name, make, or catalog number, shall be regarded as establishing a standard of quality and shall not be construed as limiting competition. The Contractor may, at its option, use any equipment, material, article, or process that, in the judgment of the Contracting Officer, is equal to that named in the specifications, unless otherwise specifically provided in this contract.”
New Jersey Law
Many states have also banned proprietary specifications. In New Jersey (where I frequently practice), the Local Public Contracts Law bans local government agencies from using proprietary specifications. However, on NJDOT projects that do not receive federal funding, proprietary specifications are not per se prohibited. But, a contractor can request substitution of the specific product.
Pennsylvania State Projects
In contrast, Pennsylvania does not expressly address proprietary specification by statute. However, under Department of General Services’ guidelines, which apply to state projects including PennDOT, proprietary specifications are strictly limited. Section 205.1 of DGS’s Project Procedure Manual states:
“Specifications for DGS projects are “or equal” specifications, and products available from a single manufacturer, or a limited number of manufacturers, are not to be used in project designs. DGS requires at least three (3) manufacturers of an available product to be specified, but bidders may use equal products/manufacturers as approved by the Professional, as per the General Conditions to the Construction Contract.”
Pennsylvania Local Projects
Pennsylvania Municipal and County projects are not subject to DGS’s guidelines. Instead, a patch work of statutes applying to Pennsylvania’s Byzantine system of Cities/Township of the First/Second/Third class, govern procurement at this level. All of those statutes require that bids be awarded to the lowest responsive and responsible bidder. However, none specifically restrict the use of proprietary specifications.
Therefore, bidders facing a proprietary specification at this level must rely upon the Pennsylvania common law public policy of assuring the best price possible for the taxpayers and guarding against favoritism, extravagance, fraud, and corruption in the awarding of municipal contracts.
What to do about it?
If you encountered a proprietary specification, whether on a Federal, New Jersey, or Pennsylvania contract, you need to act before the time of bidding or your claim may be barred by statute or waived. When and how that objection is lodged depends on the project and contracting authority. If the bids have been opened and a proprietary specification has resulted in you losing the award, the potential still exists to challenge the award but the burden could be higher. Therefore, understanding how to spot a proprietary specification and what the law is in the area is the best chance at successfully challenging it.
There is a common misconception that all Philadelphia Public Works projects must be performed pursuant to a project labor agreement with various members of the Building and Construction Trades Council. This common misconception is even shared by the current Mayoral administration, who I saw in a recent court filing testified under oath that “project labor agreements are required for all construction projects in Philadelphia with a value of at least five million dollars.” (As is discussed below this is flat out false.)
No one has yet to step forward to challenge Philadelphia’s project labor agreement scheme. However, if someone did, I think the challenge would be successful for three reasons. First, contrary to the Mayor’s representative’s statement, there is no requirement that all projects in excess of $5 million be subject to a project labor agreement. Second, Philadelphia’s project labor agreement excludes signatories to collective bargaining agreements with the United Steel Workers (USW) from participating,which violates public bid laws. Third, the exclusion of the USW, also gives rise to a challenge that federal labor law preempts the project labor agreement.
A. Background on the Philadelphia PLA.
Under a project labor agreement (PLA), a contractor wishing to perform work on a project agrees to be bound by the terms and conditions of employment established by the public owner and certain construction unions. Each PLA varies, but typically PLA’s will require a contractor’s employees to become members of a union – if they are already not members – in order to work on a project or will require a contractor to hire labor from a union hiring hall. PLA’s are controversial because they exclude non-union contractors from performing work on a project subject to a PLA, unless of course that contractor agrees to become “union” for purposes of that project. For reasons beyond this blog post, a merit shop contractor would be crazy to do that.
The “Philadelphia PLA” that Mayor Kenney believes is required for all public projects over $5 million was instituted by Mayor Nutter through a 2011 Executive Order (Executive Order No. 15-11, Public Works Project Labor Agreements).
B. The Language of the Philadelphia PLA.
Few people, including the current Administration, have apparently actually read the Executive Order. If they did, they would realize that not only does it not require PLA’s it expressly states that they are not required. This subject is made clear in Section 3(c) of the Executive Order:
What it does require are certain prerequisites before a public project is subject to a PLA. Prerequisites that the current Administration and the one before it have ignored.
According to the Executive Order before any project is subject to a PLA, it must be reviewed to determine if a PLA would be appropriate for that particular project. The review must be performed by the City Agency procuring the contract and a written finding concerning the appropriateness of a PLA must be forwarded to the Mayor’s Office.
My understanding is that these City Agency evaluations backed by a written finding have never been done for any project in Philadelphia subject to a PLA. (However, if anyone has seen such a finding, please forward it to me.)
Moreover, the written recommendation that the City Agency makes must go further than simply saying “we think a PLA is good.” The Executive Order requires the Agency to “describe how it will benefit and enhance the interests of the City on the basis of costs, efficiency, quality, safety, and/or timeliness” and “shall specifically address” a number of other factors, including, safety, costs, dispute resolution, the need to skilled labor, and “the opportunity to provide significant employment opportunities for qualified City residents, including minority males and women, and for women – and minority owned businesses.” Basically, the exact opposite of the demographics of the unions in Philadelphia.
Once an Agency makes this written determination, the Mayor’s Office is supposed to review it and consult with the Agency. The City is also required establish a PLA “Advisory Committee” which is supposed “monitor and evaluate” PLA’s and “make periodic evaluations to the Mayor regarding the use of [PLA’s].” To my knowledge this Advisory Committee does not exist.
C. Challenge Pursuant to Public Bid Laws.
Because Philadelphia is not following its own law before instituting PLA’s, any project that is advertised as being the subject of a PLA is susceptible to a challenge. If a provision in bidding specifications denies the public the benefit of a fair and just competitive process, a taxpayer may bring a challenge.
D. The USW Issue.
The model PLA which is attached to the Executive Order states that the collective bargaining agreements of members of the Philadelphia Building and Construction Trades Council (BCTC) shall govern, notwithstanding the provisions of Local or International Agreements which may differ. Not every union is a member of the BCTC. Notably, the USW is not. Despite the name, the USW does not only represent steelworkers. In fact, they represent construction workers of varying trades.
A contractor signed with the USW wishing to bid on a Philadelphia Public Works project, finds itself in an irreconcilable predicament. If it agrees to the PLA, it will be in violation of its collective bargaining agreement with the USW which already governs the terms and conditions of its employees’ employment. Therefore, it cannot agree to be bound to another union’s agreement. Thus, Philadelphia PLA has the effect of excluding contractors who have CBA’s with the USW.
Pennsylvania public bid laws state that a public agency cannot exclude bidders from bidding on a project by “imposing conditions on one prospective bidder, which are not imposed upon all.” Requiring a a signatory to the USW to breach its CBA with the USW imposes such a condition.
Excluding the USW posses another issue. Under the National Labor Relations Act, employees have the right to form or be represented by a union. Under the Act, if the union is properly designated as the employees representative, an employer must deal exclusively with the union. Therefore, the Philadelphia PLA is in conflict with federal labor law. Why? Because a USW member cannot work on a Philadelphia Public Works project and be represented by the union of its chose. Also, a USW contractor would be forced to ignore the USW as the bargaining agent of its employees in order to work on a Philadelphia project. If a state or local ordinance has this effect, the Supreme Court has held it is preempted by the National Labor Relations Act. The Philadelphia PLA appears to have that effect.
On construction projects owned by the Commonwealth of Pennsylvania, a contractor may make a claim with the Board of Claims. But first, you must be aware of two limitations periods that could cause you to waive your claim if they are not met.
The first limitations period that you need to be aware of is the six month limitations period. Under the Procurment Code, a contractor must first file a claim with the contracting officer within six months of the claim accruing. The Commonwealth Court has said that a claim accrues when (1) you are first able to litigate your claim, e.g., “when the amount due under the claim is known and the claimant is capable of preparing a concise and specific written statement detailing the injury,” and (2) the owner affirmatively and unequivocally notified you that it will pay you. Wayne Knorr, Inc. v. Dep’t of Transp., 973 A.2d 1061, 1087–88 (Pa.Cmwlth. 2009).
Thus, once you put in a claim for payment and the Commonwealth affirmatively denies your claim, you have six months to file a claim with the contracting officer contesting the refusal to pay. If you do not make a claim with the contracting officer within six months, you waive your claim plain and simple.
2. The 15/135 day limitations period.
Like I said, but wait there’s more. Once you make your claim with the contracting officer, he or she has 120 days to make a decision on the claim. Once the claim is denied, you have 15 days from the mailing date of the denial to make a claim with the Board of Claims. However, the code also says that the claim must be made within 135 days of first making the claim with the contracting officer. For example, if you make a claim on June 1 and you receive no decision from the contracting officer and no extensions have been agreed to, then you must make your claim with the Board of Claims by November 6. You cannot sleep on your claim with the contracting officer.
Again, if any of these deadlines are missed you are deemed to have waived your claim and even meritorious compensable claims will be dismissed.
Ah yes, retainage, what could represent your profit on a project and something frequently abused by owners on private and public projects alike. Fortunately, Pennsylvania law offers public works contractors some protection from retainage abuse. The Public Prompt Payment Act dictates when retainage can be withheld and when it must be released. Agencies that fail to follow the Prompt Payment Act’s retainage rules can end up owing you interest, penalty, and attorneys fees.
The Prompt Payment Act’s Retainage Provisions
The Prompt Payment Act deals with retainage in two sections: 3921 and 3941. Section 3921, 62 Pa.C.S.A. 3921, authorizes a government agency to withhold retainage. But, in general, it limits the amount of retainage withheld to 10%, which is industry standard. However, Section 3921 states that at 50% completion, the government agency must release 50% of the retainage withheld and retainage must be reduced to 5%. There are a two caveats. First, in order to receive the retainage reduction, there must not be a reason to hold retainage at 10%. Second, where the Department of General Services (DGS) is the owner, retainage is capped at 6% and must be reduced to 3% at 50% completion.
Section 3941, 62 Pa.C.S.A. 3941, the project’s architect or engineer must make a final inspection of the work within 30 days of your final payment request. If the work is found to be substantially complete, the government agency is required to make payment within forty-five days. If the architect or engineer finds certain work is incomplete, it must identify that work in detail and the government agency may withhold 1.5 times the amount to complete that work. The architect and engineer must also identify the estimated cost to complete the work.
The Prompt Payment Act’s Retainage Penalties
Under Section 3941(b), 10% interest is tacked on to retainage that is not paid within forty-five days of substantial completion. Under Section 3935, if the government agency is found to have withheld retainage in bad faith, it may be liable for a additional interest at 1% per month and reasonable attorneys fees.
Payment of Retainage to Subcontractors
The Prompt Payment Act contains an important provision regarding payment of retainage to subcontractors. Prime contractors are required to pay retainage to subcontractors within twenty days of receiving retainage from the owner. Therefore, if you are a subcontractor and have not received at least a 50% retainage reduction and you know the project is more than 50% complete, you need to start asking questions of the prime contractor.
My friend and colleague, Chris McCabe, recently published an opinion piece on Philly.com concerning the May 16 ballot question that asks Philadelphia voters to approve a change in the way Philadelphia awards public contracts.
Currently, Philadelphia, like all municipalities in Pennsylvania, uses an objective lowest responsible bidder standard in the award of public contracts. Under this approach, public contracts must be awarded to a bidder that responds to all of the criteria of the request for bids and offers the lowest price. Under this traditional approach the award of public contracts is completely transparent.
In my last post I discussed suing a local government for a substantive due process violation. In this post, I discuss a the right to procedural due process.
The Fourteenth Amendment of the United States Constitution protects prohibits the government from depriving an individual or business of life (in the case of an individual), liberty, or property without due process of law. Unlike the somewhat abstract and subjective concept of substantive due process, procedural due process is direct and objective. Generally, if an individual or business maintains a property or liberty interest, a local government must afford that individual or business notice that the government intends to deprive them of a liberty or property interest and a reasonable opportunity to be heard to contest the proposed deprivation. Unless there is an emergency, the notice and opportunity to be heard must be given before the government deprives an individual or business of a liberty of property interest. This is known as a pre-deprivation hearing. Because of the clear contours of the right, procedural due process violations are typically easier to prove than substantive due process violations.
The first step in determining whether a procedural due process violation has occurred is to determine whether an individual or business has been deprived of a liberty or property interest. Besides the obvious, what classifies as a liberty or property interest is a question of state law and, therefore, varies from state to state. (An obvious property interest would be ownership in a building. In a case, that I brought against the City of Philadelphia for demolishing my client’s building without notice or an opportunity to contest the proposed demolition, the federal court easily found that a procedural due process violation occurred. Bullard v. City of Philadelphia (E.D. Pa., 2012)) Other not so obvious things that courts have concluded amount to a liberty or property interest include: zoning permits, building permits, business licenses, a contractor’s pre-qualification to bid on government contracts, and the general beneficial use of land.
The second step is determining whether a party have been given notice and an opportunity to be heard. The notice the government provides must only be “reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” Actual notice is not required. The opportunity to be heard requires the government to provide an party to present objection to the proposed deprivation before it occurs.
While this may seem obvious and well-settled, local government actors frequently revoke licenses or cancel permits without a pre-deprivation hearing. It happens quite frequently in cities like Philadelphia, despite being chastised by both state and federal courts for doing it.
A revoked permit or suspended business license can significantly damage a business even if done for a short period of time. If its done with first having a hearing, an affected business could recover damages for a constitutional violation.
Because of my personal political persuasions (pro-freedom) and success in litigating cases against the government and other media about those cases businesses frequently approach me about bringing claims against local governments and agencies for interfering with their Constitutional rights. Actions by local government agencies that could give rise to a Constitutional violation include: treating a developer’s project differently than a similar project, revoking a previously issued zoning or building permit, disqualifying a contractor from bidding on a government contract, retaliating against a business owner for speaking out against the local agency or one of its members, or unnecessarily delaying the issuance of a permit. The Constitutional rights most typically implicated in these cases are those guaranteed by the 5th and 14th Amendments to the United States Constitution. However, the 1st Amendment is also frequently implicated.
Suing a local government agency for violating your Constitutional rights is not easy. However, the federal statute under which the cases are brought, 42 U.S.C. Section 1983, provides for the award of a successful plaintiff’s attorneys fees. This is true even if the Judge or jury awards a mere $1 is damages. Moreover, sometimes there can be a strategic value in the litigation.
This is the first in a series of blog posts exploring claims available to businesses harassed by local government agencies and officials and the challenges inherent in successfully bringing those claims. We will start with a claim for a substantive due process violation.
Under the 5th Amendment, businesses and individuals cannot be subject to arbitrary and capricious application of the law. In other words, there must be some objective standards for a laws application. Before 2003, substantive due process claims in the land use context were fairly common. a party could bring a substantive due process claim whenever there was an “improper motive” by the local government authority. However, the Third Circuit changed that standard in United Artists v. Township of Warrington, 316 F.3d 392 (3rd Cir., 2003), where it held that in land use cases, only those actions by a local government agency that “shock the conscious” could act as a basis for a substantive due process claim. The Third Circuit’s rationale is that it did not want to turn the federal courts into a super zoning board.
While determining what actions meet the “shock the conscious” standard is fact sensitive, Courts in the Third Circuit have set a high bar for plaintiffs bringing substantive due process claims. Under existing precedent, Courts in the Third Circuit have said the following could be conscious shocking:
A substantive due process claim is usually brought together with other claims such as an equal protection or procedural due process claim. So, even if the facts do not a support a claim for a violation of substantive due process rights, a person or business may still have a constitutional claim.
Because substantive due process claims are fact sensitive, a business that feels that its substantive due process rights are being violated should start to create a record and document those actions that it believes amount to a substantive due process violation. This record can then be used to defeat a motion to dismiss which likely will be filed by the defendants.
Yesterday, in a case that attracted wide spread media attention (stories here and here), a jury in federal court ruled that the City of Philadelphia violated my client’s first amendment free speech rights when a Philadelphia City Councilperson blocked the sale of two city owned vacant lots to him in retaliation for my client challenging him for office. The decision has been declared a landmark decision and the first of its kind. It is humbling that the jury agreed with my argument and ruled in favor of my client.
The case involved an official custom and practice in Philadelphia known as Councilmanic Prerogative, which requires anyone wishing to acquire land owned by the City of Philadelphia to first obtain permission from the City Councilmember in whose District the property is located. It then requires the same City Councilmember to introduce legislation approving the sale. Obviously, this practices gives City Councilmembers a vast amount of power of land sales in their respective district. If the City Councilmember does like you, you cannot acquire a parcel of land owned by the City.
In my case, my client was the highest bidder for two lots at a public auction for City owned land. At the time, my client was was in a pitched election campaign against the City Councilmember in whose District the land was located. When it came time for the City Councilmember to introduce legislation approving the sale, the City Councilmember did something he has never done before (nor since) he refused to introduce the legislation. After a two day trial, the jury agreed that the City Councilmember refused to introduce the legislation in retaliation against my client for engaging in protected political speech.
Some have asked if the jury’s verdict does away with Councilmanic Prerogative. It does not. However, it does mean that the City of Philadelphia can be held liable when it is used in an unconstitutional manner.
Of course, not everyone that is thwarted in an attempt to obtain City owned land happens to be a political candidate. But, the breadth of the jury’s verdict is not limited to that. The First Amendment protects both our right to free speech and not to speak at all. Although controversial, donating money to a campaign or using money for political purposes is a form of speech. Conversely, not giving money to a political candidate or cause is also free speech. In other words, you cannot be treated differently because you chose to remain neutral or disinterested.
Sadly, in the City of Philadelphia, the birth place of freedom, unequal treatment because of political affiliation and support is common place. Campaign contributors have a better chance of obtaining City owned land from City Councilmembers because the Citycouncilmembers support them. Under Councilmanic Perogative, if you have no support, you cannot obtain any land.
After yesterday, that is no longer possible. If a Philadelphia City Councilmember treats a person that is NOT a campaign contributor differently than the way they treat someone that DOES contribute, then they have violated that non-contributor’s First Amendment right not to speak. And, if they do the City will be liable for damages.
As we enter the New Year, here is a look at 5 areas that will be a hot bed of legal activity for contractors and their attorneys.
1. Aggressive Union Activity.
Decreasing membership and market share, will cause Big Labor to ramp up efforts to “persuade” public and private owners to use an all union workforce. This means increased picketing, bannering, and “ratting” of projects using non-union subcontractors. On public projects, labor will continue to lobby government officials for the use of union only project labor agreements. Owners and contractors need to be ready to combat labor’s tactics.
Union shop firms must be aware of their contribution requirements under their CBA. The 2008 stock market crash (from which union pension funds have never full recovered), increasing vested liabilities from an aging workforce, and decreasing membership have lead many union health and welfare funds to be underfunded. In fact, union pension funds may be the next big Washington bailout. In the meantime, unions will aggressively pursue delinquent contractors for contributions to health and welfare funds.
In Philadelphia (and perhaps around the country), eyes will be on jury’s verdict in the Ironworkers extortion trial involving former Ironworkers head, Joseph Dougherty. A conviction could lead to a wave of indictments against union leaders that have engaged in similar tactics across the country.
2. Increased Regulation of Contractors.
President Obama’s policy of creating a regulation nation continues unabated. In 2014, the Obama administration issued 78,978 pages of new federal regulations many which impact contractors. Any contractor or subcontractor performing work on a project receiving any form of federal funding assistance must be aware of the regulations that apply to them.
3. Rising Default Rates.
With the federal reserve signaling the era of free money coming to an end, interest rates will rise. Rising rates will make borrowing costs higher for both owners and contractors. Increased borrowing costs could lead many contractors to fail, especially firms that saw rapid expansion following the recession. Owners may increasingly default as projects are increasingly difficult to finance. Moreover, rising rates should slow the rapid increase in asset values, such as real estate. This could make development projects less attractive leading to many proposed projects being shelved. Bottom line for contractors, know you lien and bond rights.
4. Growing Comfort with Public Private Partnerships.
Cash strapped state and local governments will continue to look to public private partnerships (PPP) as a way to fund infrastructure projects. The success of high profile (and dollar) PPP projects in Florida, Pennsylvania, and Delaware will likely determine if the use of PPP as a source of infrastructure funding will increase in coming years.
5. Continued Growth in Health Care and Institutional Construction.
Whether you agree with it or not, our current public policy is that everyone has a right to a college degree and healthcare. Accordingly, the federal government has heavily subsidized higher education and healthcare. Increased dollars in the hands of administrators in higher education and healthcare has lead to a building boom in these two sectors. Eventually the music will stop, but in the near term contractors can expect increased work in these areas.
Authored by Philadelphia attorney Wally Zimolong, Supplemental Conditions provides keen insight and insider analysis of construction law developments, prominent construction litigation and labor law in the construction industry.
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