This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its May 2018 decision in the Matter of Employee Benefits: Pharmacy Benefit Management Contract, the New Jersey Superior Court struck down a $6.7 billion contract that was awarded to a non-compliant conditional bid. The case dealt with a Request for Proposals (RFP) for the provision of pharmacy benefit services that was awarded to a $6,692,234,901 bid proposed by Optum Rx, Inc. The award was challenged by a losing bidder who claimed that the winning bid contained material price adjustments that rendered the bid non-compliant and resulted in an unfair process for the other bidders. The Court agreed:
Optum’s reservation of the right to modify its pricing based on Plan Design changes to the Formulary or the “carving out” of certain PBM services included in the Contract, not limited to those for Specialty Pharmacy, is undoubtedly material if we are to give effect to Section 3.7.1A, which requires the winning bidder to hold its pricing for the entire Contract period, and Section 5.4A of the State Standard Terms and Conditions, which permits the State sole discretion to reduce the scope of the work and, ultimately, impose a corresponding adjusted contract price. Applying the two-part River Vale test, Optum’s reservation of the right to change its pricing in response to Plan Design changes both deprived the State of the assurance the Contract would be entered into and performed according to the specified requirements of Section 3.7.1A and Standard Term 5.4A, and adversely affected competitive bidding by allowing Optum to bid with a pricing privilege not provided to other bidders.
The Court found that by “carving out” certain price conditions, the winning bidder was allowed to avoid the future price variation risks that were part of the tendered contract. This gave the bidder an unfair advantage over other bidders who had to accept those future price risks:
Optum’s additional language also provided it a clear competitive advantage over the other potential bidders by permitting it to offer price terms while reserving the right to change them in the event of anticipated Plan Design changes to the Formulary or any reduction in the scope of work, including but not limited to Specialty Pharmacy services. Plan Design changes “not contemplated by” the RFP obviously posed a significant risk to potential bidders in this procurement.
The Court noted that permitting “carve-outs” that enabled bidders to “hedge” their bids was a breach of long-recognized legal precedents that prohibited unfair bidding practices and required the equal treatment of bidders:
Optum’s additional language “reserv[ing] the right to modify Financial Contracted Terms based on changes by the State in formulary or any carve out of services set forth in the Agreement, including but not limited to Specialty Pharmacy services,” permitted it to “hedge” its bid, thereby reducing its financial risk from adverse Plan Design changes. That set it apart from the other bidders who agreed to be bound by all of the terms of the Bid Solicitation. See Weidner, 372 N.J. Super. at 325.
As the Supreme Court explained over sixty years ago, “[e]very element which enters into the competitive scheme should be required equally for all and should not be left to the volition of the individual aspirant to follow or to disregard and thus to estimate his bid on a basis different from that afforded the other contenders.” Hillside v. Sternin, 25 N.J 317, 322 (1957).
The Court ruled that these conditions rendered the bid non-conforming and legally incapable of acceptance, and, despite the government’s assertions that the new contract would save the state $1.6 billion, ordered the government to re-tender the contract due to irregularities in the award.
As this case illustrates, irrespective of the size of a contract, its operational significance, or its projected cost savings, bids submitted with conditional price offers that vary from the tendering process rules may be invalid and legally incapable of acceptance. Purchasing institutions should therefore apply extra due diligence in how they structure and enforce their pricing structures, since variations from those pricing rules can nullify the validity of any resulting contract award.
