by Charles B. Daugherty
Easter & Cavosie
10455 N. College Ave.
Indianapolis, IN 46280
(317) 574-0828
cdaugherty@easterandcavosie.com
http://www.easterandcavosie.com/charles-b-daugherty

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For centuries, public entities have employed competitive bidding to form construction contracts for public projects. Public entities often prefer competitive sealed bidding because it promotes both the lowest and best price, and fair and open competition among all citizens. Indeed, the Indiana General Assembly enacted Indiana’s competitive bidding statute “to safeguard the public against fraud, favoritism, graft, extravagance, improvidence and corruption, and to insure honest competition for the best work or supplies at the lowest reasonable cost.” [1] That said, the competitive bidding system has faults. Owners sometimes use pre-bid arrangements and procedures to address perceived flaws in the competitive bidding process. Labor issues have been the subject of such pre-bid arrangements and procedures.

For instance, consider Pleasantville, a hypothetical Indiana city. Pleasantville plans to construct a new public building. Under Indiana Code sections 36-1-12-1 through 36-1-12-24, Pleasantville must open its project to competitive bidding and award the project to the “lowest responsible and responsive bidder.” [2] City officials express concerns that the presence of non-union workers on the jobsite will lead to disputes with union workers and work stoppages. In response to this concern, Pleasantville would like to institute a bid prequalification restricting non-union contractors from bidding on the project. Is this permissible under Indiana and federal law? Unfortunately for Pleasantville, there is no clear answer at this time.

Neither Indiana courts nor the Seventh Circuit have directly addressed whether public entities may restrict bidding based on union status. Other jurisdictions have addressed this issue with mixed results. Opponents of union-only prequalification restrictions have challenged these restrictions’ validity in other jurisdictions on both constitutional and anti-competitiveness grounds. [3] These challengers, using both federal and state constitutional grounds, argue such restrictions deprive non-union employers of equal protection, due process, and freedom of association. [4] As for anti-competitiveness, challengers argue that public bidding statutes are not designed to maximize competition because restricting qualified bidders to those who employ union labor undercuts competition decreases the pool of available bidders. [5]

I. Project Labor Agreements v. Prequalification Bid Restrictions at Issue

Project labor agreements (“PLAs”) address the problems Pleasantville seeks to avoid, but from a slightly different angle than Pleasantville’s proposal. PLAs are agreements reached in advance of bidding with local labor unions to establish certain hiring preferences for union employees and payment of union wages in exchange for labor peace. [6] Owners enter into PLAs with unions prior to bidding on projects and then require bidders, as a condition to bidding on the project, to abide by the PLAs. [7] The U.S. Supreme Court addressed PLAs in the “Boston Harbor” case. [8] The Court upheld PLAs under federal law, but left states to determine their enforceability on state law grounds. [9] Since the Boston Harbor decision, challengers have attacked PLAs as prohibited under state constitutions and competitive bidding statutes with mixed results.

PLAs are distinct from the proposed union-based prequalification in the Pleasantville hypothetical. First, PLAs, by definition, require an agreement with a union and, therefore, will always necessitate a union preference. Pleasantville’s bid restriction could require exclusively union or non-union employers; either accomplishes the goal of maintaining separation between union and non-union employees. Second, and more importantly, both union and non-union employers may bid jobs under PLA arrangements. Only union employers may bid jobs under Pleasantville’s proposed prequalification. Accordingly, the analysis of PLA enforceability may provide some insight into the Pleasantville problem, but it is not dispositive.

II. Opposition to Union-Based Restrictions

According to some commentators, “it is recognized that a bid proposal for public work may not limit bidders to those who agree to furnish union labor.” [10] Similarly, some have asserted that the prevailing judicial view is that “a proposal or advertisement limiting bidders to those who agree to employ union labor, or to furnish goods bearing the union label is invalid.” [11] Along these lines, several states prohibit the use of PLAs. For instance, in George Harms Construction Co. v. New Jersey Turnpike Authority, [12] the Supreme Court of New Jersey held that New Jersey’s competitive bidding law prohibited the New Jersey Turnpike Authority’s use of a PLA. The Court reasoned that under the competitive bidding law the Authority was prohibited from designating a “sole source of construction services,” which was the practical result of the PLA, and, therefore, the PLA was anticompetitive. [13] Several other jurisdictions prohibit PLAs finding they either violate constitutional safeguards or are anticompetitive.

III. Permitting Union-Based Prequalification

Some courts have upheld bid restrictions based on union status. For example, the Eighth Circuit, the United States District Court for the Western District of New York, and New York state courts have each held such bid restrictions are permissible. [15]

In Hanten v. School District of Riverview Gardens, [16] a Missouri school district sought bids to expand four grade schools and build a new facility. School officials preferred bidders who employed union labor because the officials were concerned the presence of non-union employees could result in picketing and work stoppages. [17] School officials expressed their preference in the bid specifications. [18] The school also required bidders to list all subcontractors so that it could determine the bidders’ union status. [19] A union contractor submitted the lowest bid, but its bid included two non-union subcontractors. [20] The school district’s architect contacted the contractor questioning the contractor’s proposed use of two non-union subcontractors. [21] In response, the contractor substituted two union subcontractors for a slightly elevated total bid price (though remaining the low bidder). [22] The school board awarded the contract to the union contractor. [23] Local taxpayers and one of the non-union subcontractors brought an action against the school district in federal court alleging, among other things, violations of non-union employees’ constitutional right to associate freely, due process, and Missouri’s “Open-Bidding” Statute. [24] The school district moved to dismiss these counts for failure to state a claim, which the district court granted. [25] The local taxpayers and the non-union subcontractor appealed. [26]

The Eighth Circuit affirmed the district court’s dismissal of all three counts. [27] Regarding freedom of association, the court applied both a direct and substantial interference test and a rational-basis test. [28] For the first test, the court reasoned it was “exceedingly unlikely” the school board’s preference would directly and substantially interfere with a non-union worker’s right to refrain from joining a union. [29] Rather, any interference would likely be indirect and incidental. [30] For the second test, the court reasoned that “[t]he preference for union labor at a construction project is based upon the desire to avoid expensive and time consuming workplace disruptions, and that purpose is clearly legitimate as well as rational.” [31]

Regarding due process, the court explained that establishing a procedural due process violation based on the loss of a property interest requires a plaintiff to demonstrate a property interest at stake. [32] The court recited Missouri’s state law rule that “an unsuccessful bidder on a construction project has no property right in the contract.” [33] The court reasoned the non-union subcontractor had, at most, an expectancy of being awarded the job, which does not constitute a property interest under the Due Process Clause. [34]

Regarding Missouri’s “Open-Bidding” Statute, the court noted the statute requires contracts be let to the “lowest responsible bidder.” [35] The court could find no allegation in the taxpayers’ complaint contending the lowest responsible bidder had not received the job. [36] Instead, the court reasoned the complaint alleged the lowest bidder did receive the job. That the total contract price would have been less with the non-union bids did not persuade the court any violation of the “Open-Bidding” Statute had occurred. [37]

IV. Indiana’s Approach

As indicated above, Indiana courts have not decided this issue. Without a definitive answer, public entities and construction participants face the risk of a legal challenge. Evaluating that risk requires an analysis of the likely outcome in a dispute with Hanten-like facts. Litigants challenging union-based prequalification restrictions would likely raise similar arguments as in the cases cited above. Indiana courts could follow a very similar analysis as the Hanten court and permit union-based prequalification.

However, some Indiana case law should be noted. The Indiana cases citing to or cited by the cases and commentary above address competitiveness generally, but do not specifically address union restrictions in prequalification. [38] However, these cases do indicate Indiana courts generally disfavors limitations on competition. [39]

Indiana’s competitive bidding statute contains language that is absent in Missouri. Indiana Code section 36-1-12-4 provides that “[t]he board shall prepare general plans and specifications describing the kind of public work required, but shall avoid specifications which might unduly limit competition.” [40] Unfortunately, Indiana courts have not interpreted this language in light of this issue.

Moreover, additional authority indicates the legal risk of adopting union-based prequalification techniques. The Office of the Indiana Attorney General addressed PLAs in 1997 and opined:

[S]tate laws regarding public contracting and bidding procedures neither require nor forbid the use of PLAs. Rather, where a state agency or commission is charged with discretion to formulate bid specifications and choose contractors to complete a project, it may lawfully use a PLA so long as the justification is economic, the provisions sought to be included in the PLA are reasonably calculated to solve specific problems associated with the project, and the bid specifications do not discriminate between union and non-union contractors. [41]

Opinions from the Attorney General’s office are not binding law, but they also should be ignored. Such authority raises the possibility that the Attorney General would oppose union-based prequalification.

Indiana’s Equal Privileges and Immunities Clause [42] provides another difference from other jurisdictions considering this issue. In Collins v. Day, [43] the Indiana Supreme Court departed from the familiar federal rational-basis standard in equal protection cases. Instead, the court held public actions should be reviewed under the following test: “First, the disparate treatment accorded by the legislation must be reasonably related to inherent characteristics which distinguish the unequally treated classes. Second, the preferential treatment must be uniformly applicable and equally available to all persons similarly situated.” [44] Under this rubric, it is possible an Indiana court could arrive at a different result than jurisdictions applying the rational-basis approach to equal protection challenges.

The Indiana General Assembly’s recent passage of the Right-to-Work statute [45] and repeal of the Common Construction Wage statute [46] provide additional indications of the current stance on union issues in Indiana. Taken together, these actions evidence an unmistakable aura of antipathy toward labor unions. The debate surrounding the latter in particular focused on the perception that union wages increase public construction costs. [47] Whether this hurts or favors union-based prequalification depends on whether public entities are prohibiting union bidders or non-union bidders from bidding. This factor could potentially cut both ways.

Conclusion

This Article is not intended to promote or discourage union-based prequalification techniques. Instead, it highlights the present risk facing public entities like Pleasantville. For the moment, public entities will have to make important decisions without clear guidance. Other jurisdictions are split. Public entities should consider this split of authority and lack of certainty before including bid restrictions in their specifications based on union-status.

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[1] Schindler Elevator Corp. v. Metro. Dev. Comm’n, 641 N.E.2d 653, 657 (Ind. Ct. App. 1994) (quoting Sch. City of Gary v. Cont’l Elec. Co., 273 N.E.2d 293, 296 (Ind. Ct. App. 1971)).

[2] Ind. Code § 36-1-12-4(b)(8) (2012).

[3] See, e.g., Hanten v. Sch. Dist. of Riverview Gardens, 183 F.3d 799 (8th Cir. 1999) (challenging under the Fourteenth Amendment Due Process Clause).

[4] See id. (due process); Associated Builders & Contractors, Inc. v. Contra Costa Water Dist., 37 Cal. Rptr. 2d 600 (Cal. Ct. App. 1995) (equal protection); Master Builders of Iowa, Inc. v. Polk Cty., 653 N.W.2d 382 (Iowa 2002) (freedom of association).

[5] See, e.g., Laborers Local No. 942 v. Lampkin, 956 P.2d 422, 432-36 (Alaska 1998).

[6] David J. Langworthy, Project-Labor Agreements After Boston Harbor: Do They Violate Competitive Bidding Laws?, 21 Wm. Mitchell L. Rev. 1103, 1107-08 (1996).

[7] Id. at 1108.

[8] Bldg. & Constr. Trades Council v. Associated Builders & Contractors of Mass./R.I., Inc., 507 U.S. 218 (1993).

[9] Id. at 232-33.

[10] Langworthy, supra note 6, at 1113 (citing Eugene McQuillin, The Law of Municipal Corporations § 29.48 (Gail A. O’Grady & Charity R. Miller eds., 3d ed. 1990)).

[11] Id.

[12] 644 A.2d 76, 79 (N.J. 1994).

[13] Id. at 94-95.

[14] 1 Bruner & O’Connor Construction Law § 2:58

[15] See, e.g., Glenwood Bridge v. City of Minneapolis, 940 F.2d 367 (8th Cir. 1991); E. Amherst Plumbing, Inc. v. Thompson, No. 12–CV–0195A, 2013 WL 5442263 (W.D.N.Y. Sept. 27, 2013); Albany Specialties, Inc. v. Cty. of Orange, 662 N.Y.S.2d 773 (N.Y. App. Div. 1997).

[16] 183 F.3d 799, 803 (8th Cir. 1999).

[17] Id.

[18] Id. at 804.

[19] Id.

[20] Id.

[21] Id.

[22] Id.

[23] Id.

[24] Id. at 805, 808-09.

[25] Id. at 801.

[26] Id.

[27] Id.

[28] Id. at 806.

[29] Id.

[30] Id.

[31] Id.

[32] Id. at 808.

[33] Id.

[34] Id. at 809.

[35] Id.

[36] Id.

[37] Id. at 810.

[38] See generally Engineered Steel Concepts, Inc. v. Gen. Drivers, 963 N.E.2d 62 (Ind. Ct. App. 2012).

[39] Id. Indiana courts have also expressed concerns with the anti-competitive effects of union-based preferences under Indiana’s Antitrust Act, Skyline Roofing & Sheet Metal Company, Inc. v. Ziolkowski Construction, Inc., 26 N.E.3d 1024 (Ind. Ct. App. 2015).

[40] Ind. Code § 36-1-12-4 (2012) (emphasis added).

[41] 1997 Ind. Att’y Gen. Op. No. 7 (Dec. 18, 1997) (emphasis added).

[42] Ind. Const. art. 1, § 23.

[43] 644 N.E.2d 72, 80 (Ind. 1994).

[44] Id.

[45] Ind. Code §§ 22-6-6-1 to -13 (2012).

[46] H.B. 1019, 119th Gen. Assemb., 1st Reg. Sess. (Ind. 2015).

[47] Tony Cook, Indiana Senate Narrowly Passes Repeal of Common Wage, Indianapolis Star (Apr. 15, 2015, 9:37 PM), http://www.indystar.com/story/news/politics/2015/04/15/indiana-senate-narrowly-passes-repeal-common-wage/25836535/ [perma.cc/RL27-XBV3].