In Re Challenge of Contract Award Solicitation 13-X-22694 Lottery Growth Management Services , 436 N.J. Super. 350 ( 2014 )

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-4629-12T4
APPROVED FOR PUBLICATION
IN RE CHALLENGE OF CONTRACT
AWARD SOLICITATION #13-X-22694 July 3, 2014
LOTTERY GROWTH MANAGEMENT APPELLATE DIVISION
SERVICES.
__________________________________
Argued March 24, 2014 – Decided July 3, 2014
Before Judges Yannotti, Ashrafi, and Leone.
On appeal from the New Jersey Department of
the Treasury, Division of Purchase and
Property.
Justin Schwam argued the cause for
appellants Communications Workers of
America, AFL-CIO, and CWA Locals 1033 and
1037 (Weissman & Mintz, L.L.C., attorneys;
Mr. Schwam, on the brief).
Beth Leigh Mitchell, Assistant Attorney
General, argued the cause for respondent New
Jersey Department of Treasury, Division of
Purchase and Property (John J. Hoffman,
Acting Attorney General, and Gibbons, P.C.,
attorneys; Ms. Mitchell, on the brief; Peter
J. Torcicollo, Damian V. Santomauro, and
Kevin W. Weber, on the brief).
Gage Andretta argued the cause for
respondent Northstar New Jersey Lottery
Group, LLC (Wolff & Samson, P.C., attorneys;
Mr. Andretta and David M. Dugan, on the
brief).
The opinion of the court was delivered by
ASHRAFI, J.A.D.
In this appeal, a union and its locals that represent State
employees challenge the constitutionality of the State's award
of a long-term contract to a private company to provide sales
and marketing services and to manage other functions of the New
Jersey State Lottery. The Communications Workers of America,
AFL-CIO, and CWA Locals 1033 and 1037 (collectively "the CWA")
represent employees of the New Jersey Department of the
Treasury's Division of the State Lottery ("Lottery Division").
On behalf of their members, they filed a protest of the contract
award to Northstar New Jersey Lottery Group, LLC. The Director
of the Treasury Department's Division of Purchase and Property
("DPP") rejected the protest in a detailed written decision.
On appeal to this court, the CWA contends that the contract
violates the amendment of the New Jersey Constitution that
authorized the State Lottery as well as a statutory provision of
the State Lottery Law, N.J.S.A. 5:9-1 to -25. It also argues
that Northstar's bid proposal did not conform to the bid
specifications because it included an unauthorized management
fee in addition to other compensation to be paid to Northstar.
We reject these arguments and affirm the Director's decision.
I.
Looking for ways to increase revenues from the Lottery
Division, the State Treasurer issued a Request for Information
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("RFI") on December 7, 2011, soliciting "recommendations to
improve any or all aspects of the Lottery's operation including:
sales and marketing strategies and functions; product offerings;
back office operations; information technology; and financial
management." The RFI provided some background information about
the New Jersey State Lottery:
The Lottery has a staff of approximately 150
employees organized around seven work
functions, including: Administration;
Operations; Management Information Systems;
Marketing; Sales; Security, Audit,
Licensing; and Finance.
. . . .
Sales revenues for [its current games]
totaled over $2.6 billion for the fiscal
year ending June 30, 2011. For the same
period, administrative expenses totaled
$22.3 million; sales commissions totaled
$147 million, vendor fees totaled $33
million, and prize expenses totaled $1.544
billion. As a result, the Lottery was able
to contribute $930 million to education and
institutions on a net revenue basis.
The RFI also explained that the lottery had three existing
contracts with third-party vendors, covering products and
services for advertising, instant games, and online games, and
it stated that "[a]ny proposed services or solutions may include
the use of third party providers."
The Treasury Department's Review Committee received several
substantive responses to the RFI that included the possible
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privatization of lottery functions. From these responses, the
Lottery Division and DPP developed and issued on August 10,
2012, an advertised Request for Proposal ("RFP") soliciting bids
for a contract for "Lottery Growth Management Services." The
fifteen-year "Services Agreement" would be for management
services, goods, and equipment for the sales and marketing
operations of the New Jersey State Lottery. Thirteen addenda
were later added to the RFP in response to questions from
potential bidders and as additional information.
As "Manager" for the State lottery, the successful bidder
would "run the Lottery's sales and marketing operations, oversee
its product development and sales channels and maintain and
update its information technology systems, website and social
media presence." At the time of the solicitation, the Lottery
Division or one of its subcontractors was performing these
duties.
According to the RFP's Section 1.2.1 (OVERVIEW), "the
State's primary objective" was for the Manager to "strengthen
and maximize the future funding for State institutions and State
aid for education by maximizing a growing revenue stream in a
responsible manner." The overview further described the
Manager's duties to include "the provision and maintenance of
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the Central Gaming System, game development, supply of goods and
services, marketing and advertising."
Together with its Appendix A, the RFP's Section 3.0,
entitled "SCOPE OF WORK AND OPERATIONAL RESPONSIBILITIES OF THE
MANAGER," provided a more detailed "Description of Services" to
be performed by the Manager: (1) maintaining and modifying
lottery software and websites; (2) providing data and reports to
the Division; (3) assuming control over the installation of
retail hardware, instant ticket vending machines, and
establishing an on-line portal for internet gaming; (4) game
design and development; (5) distribution and warehousing
services; (6) recruitment, training and supervision of lottery
retailers, including recommended commissions for these
retailers; (7) most aspects of lottery marketing; (8)
maintaining customer service centers; (9) developing, operating
and maintaining a responsible gambling program; (10) engaging
subcontractors, and preparing, negotiating and monitoring their
contracts; and (11) maintaining compliance with state
regulations, and preparing game rules.
The RFP required each bid proposal to include a technical
proposal, a transition plan, a detailed account of the
qualifications and experience of the bidder, a business plan,
and net income targets.
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The RFP's financial model had three elements: an
accelerated guarantee payment by the successful bidder to the
State, net income targets, and shortfall payments. The winning
vendor was required to make a one-time $120 million payment to
the State upon executing the Services Agreement. The vendor was
also required to propose net income targets for each contract
year, and the contract would require shortfall payments to the
State, within capped limits, for any year in which the vendor
failed to meet the base income targets.
The vendor would receive compensation from the State
calculated as a rising percentage of the year's net income in
excess of the listed contract year's base level income set forth
in the RFP. The vendor's compensation would be capped at 5% of
the contract year's total lottery net income.
At least 30% of the total lottery revenues would have to be
contributed to the general fund for State institutions and State
aid for education. If necessary, the vendor's compensation
would be reduced to guarantee the 30% contribution.
With respect to decision-making authority, the RFP
expressly declared in Section 1.2.3, entitled OVERSIGHT BY THE
DIVISION OF LOTTERY:
At all times, the Lottery will continue to
be conducted under the control and oversight
and regulatory and step-in powers of the
Division of Lottery . . . . The Division of
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Lottery will exercise actual control and
oversight over all significant business
decisions, and will retain the authority to
direct and countermand the operating
decisions of the Manager as described in the
Services Agreement.
Only one vendor, Northstar, submitted a bid proposal.
Northstar is a joint venture comprised of: (1) GTECH
Corporation, an operator and provider of gaming technology and
services based in Rhode Island, which had an existing contract
with New Jersey's Lottery Division; (2) Scientific Games
International, a provider of lottery end-to-end gaming solutions
based in Georgia; and (3) OSI LTT NJ Holdings Inc., a pension
fund of the Ontario Municipal Employees Retirement Systems.
DPP reviewed Northstar's bid for compliance with the RFP's
mandatory elements, and then sent the bid to DPP's Evaluation
Committee for close review. On January 28, 2013, the Evaluation
Committee requested clarification from Northstar regarding: (1)
Northstar's Technology Plan; (2) the variance between
Northstar's projected net income targets and what Northstar had
termed its Pro Forma Net Income Calculations; and (3) a proposed
"Management Fee" included in Northstar's bid submission. On
January 31, 2013, Northstar submitted its responses with
attachments, and a few days later gave an oral presentation to
the Evaluation Committee.
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By letter dated February 4, 2013, the Evaluation Committee
requested that Northstar submit a best and final offer ("BAFO"),
increasing its net income targets and withdrawing the proposed
management fee. On February 7, 2013, Northstar submitted
increased net income targets by a cumulative value of $48.5
million and reduced its management fee to $4.75 million.
On March 8, 2013, DPP met with Northstar to clarify the
BAFO response and requested a second BAFO. After Northstar
declined to modify its BAFO, the technical advisor to the
Evaluation Committee requested additional information about the
management fee. Northstar's responses included confirmation
that invoices for the management fee would be prepared and
presented in accordance with the terms of the Services
Agreement. On March 27, 2013, DPP requested a final BAFO, and
Northstar responded with increases to its net income targets by
an aggregate of $3.4 million.
On April 2, 2013, the Evaluation Committee submitted its
report and recommended that the contract be awarded to
Northstar. It found "Northstar's proposal meets the objectives
of the RFP," and "that award of a contract to Northstar would
provide the State with proven and diversified lottery management
capabilities, comprehensive U.S. and international lottery
experience, expertise within the lottery industry, and a
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management team with extensive New Jersey and global lottery-
industry experience." Regarding the management fee, the
Evaluation Committee concluded it "is a justifiable expense,
necessary and reasonable for Northstar to achieve its business
plan."
After DPP issued a notice of intent to award the contract
to Northstar, the CWA filed its protest on April 17, 2013.
Northstar submitted a reply, and the parties to the protest made
an oral presentation before DPP's Director on May 3, 2013, and
final written replies a few days later. On May 20, 2013, the
DPP Director issued a forty-page written decision rejecting
CWA's protest, refusing to grant a stay, and authorizing DPP to
proceed with the contract.
On May 30, 2013, CWA filed a notice of appeal and then
promptly moved before this court for an emergent stay of the
awarding of the contract. On June 11, 2013, we denied a stay
but accelerated the appeal. On June 20, 2013, the Services
Agreement was executed, and sometime in 2013, Northstar paid
$120 million to the State Lottery Fund and began implementing
the contract.
II.
As a preliminary matter, DPP argues that the CWA lacked
standing to protest the awarding of the contract on
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constitutional and statutory grounds after Northstar submitted
its bid and the DPP accepted it. DPP argues those grounds could
only be raised as a protest to the RFP before a bid was
submitted. In response, the CWA cites In re Protest of Award of
New Jersey State Contract A71188 for Light Duty Automotive
Parts, 422 N.J. Super. 275, 289 (App. Div. 2011), and contends
that DPP cannot fault the CWA for failing to file a protest
before the contract was awarded because, pursuant to N.J.A.C.
17:12-3.2, only vendors and potential bidders could protest the
bid specifications. It cites the same case and O'Shea v. New
Jersey Schools Construction Corporation, 388 N.J. Super. 312,
318 (App. Div. 2006), in support of its argument that New Jersey
taxpayers, and organizations whose members include New Jersey
taxpayers, have standing to make a post-bid challenge to the
awarding of a public contract. See also Loigman v. Twp. Comm.
of Middletown, 297 N.J. Super. 287, 295-96 (App. Div. 1997)
("Generally, taxpayer intervention is appropriate where there
are claims of fraud or corruption, or other instances of
illegalities and ultra vires acts . . . [and] claims of illegal
bidding procedures." (citations omitted)).
Because DPP has not argued that a post-bid protest may only
be brought by an individual taxpayer, we will not address
whether an organization comprised of New Jersey taxpayers has
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standing to protest the contract award and pursue an appeal.
Given New Jersey's traditionally liberal view of standing to
seek judicial remedies, see, e.g., Jen Elec., Inc. v. Cnty. of
Essex, 197 N.J. 627, 645 (2009) (citing N.J. Builders Ass'n v.
Mayor of Bernards Twp., 219 N.J. Super. 539 (App. Div. 1986),
aff'd, 108 N.J. 223 (1987)); Crescent Park Tenants Ass'n v.
Realty Equities Corp. of N.Y., 58 N.J. 98, 107-12 (1971), we
reject DPP's contention that the CWA acted too late in
protesting the contract on constitutional and statutory grounds.
III.
We begin with a brief history of the New Jersey State
Lottery, its constitutional authorization, and the statutory
provisions that control its administration and operations.
A.
Constitutional Authorization and Creation of the Lottery
Lotteries existed in New Jersey in the early history of
this State. New Jersey's Constitution of 1844 banned them,
stating that "no lottery shall be authorized by this state; and
no ticket in any lottery not authorized by a law of this state
shall be bought or sold within the state." N.J. Const. of 1844
art. IV, § 7, ¶ 2. In 1897, an amendment of that constitution
prohibited gambling entirely. With the exception of parimutuel
betting at horse racing tracks, which was authorized in 1939,
11 A-4629-12T4
the prohibition on gambling was carried into New Jersey's
current Constitution adopted in 1947. See In re Petition of
Casino Licenses for Approval of New Game, Rulemaking & Auth. of
a Test, 268 N.J. Super. 469, 472 (App. Div.), aff'd o.b., 138
N.J. 1 (1993). The 1947 gambling ban required a majority vote
of the people to authorize by constitutional amendment any
exception.1 Such exceptions were made in 1953 for bingo games
and raffles held by charitable, religious, and other non-profit
organizations. N.J. Const. art. IV, § 7, ¶¶ 2(A) and 2(B).
In February 1969, the Legislature resolved in a concurrent
resolution to put the question of establishing a State lottery
to the voters. Assemb. Con. Res. 32, 193rd Legis. Sess. (1969).
In the general election of November 1969, a majority of voters
approved the constitutional amendment to permit a State lottery
by a vote of 81.4% to 18.6%. The amendment stated:
1
The 1947 Constitution states:
No gambling of any kind shall be authorized
by the Legislature unless the specific kind,
restrictions and control thereof have been
heretofore submitted to, and authorized by a
majority of the votes cast by, the people at
a special election or shall hereafter be
submitted to, and authorized by a majority
of the votes cast thereon by, the legally
qualified voters of the State voting at a
general election . . . .
[N.J. Const. art. IV, § 7, ¶ 2.]
12 A-4629-12T4
It shall be lawful for the Legislature to
authorize the conduct of State lotteries
restricted to the selling of rights to
participate therein and the awarding of
prizes by drawings when the entire net
proceeds of any such lottery shall be for
State institutions and State aid for
education . . . .
[N.J. Const. art. IV, § 7, ¶ 2(C) (emphasis
added).]
The Legislature then created a New Jersey State Lottery
Planning Commission ("Planning Commission") and directed it "to
formulate a report, including legislation and an administrative
program for the conduct of a State Lottery, for submission to
the Governor and the Legislature." Joint Res. No. 11, 193rd
Legis. Sess. (1969). The Planning Commission was to study
lotteries operated in other states "with the ends in view of
devising a lottery system of broad appeal with frequent
drawings, effective controls and such other features which will
achieve, to the maximum practicable extent, the objectives of
the constitutional amendment." Ibid.
Although the Planning Commission's research benefitted from
the experience of other states, its report to the Legislature
stated that the information it had gathered was "not adequate
. . . to define clearly the optimal lottery structure for New
Jersey." It added that "actual operating experience in this
State" was necessary to devise the best system, and "[t]he
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structure of this lottery, and the legislation which is to
govern its operation, must be adaptable to such new information
as may become available in the years ahead." Report of the
State Lottery Planning Commission at iv (Feb. 9, 1970).2
The Planning Commission divided the general "issues" to be
addressed by the Legislature into two categories: the
administrative structure and the operating structure of the
lottery. With respect to the administrative structure, the
Planning Commission stated:
There are two major criteria which must be
met by the administrative organization of
the lottery. First . . . to . . . attract
the confidence of the public. . . . Second
. . . to achieve the goals of the lottery
operation, as set by collective public
opinion . . . .
[Id. at 4.]
In pursuit of these objectives, the Planning Commission
proposed that the Legislature should:
Establish a lottery division in the
Department of the Treasury, to be
administered by a five-man commission and a
full-time operating director. These
officials will be appointed by, and
accountable to, the Governor of this State,
who shall have veto power over the decisions
of said commission. This administrative
structure is designed to ensure the complete
2
Available at http://dspace.njstatelib.org:8080/xmlui/
bitstream/handle/10929/32330/g1911970.pdf?sequence=1.
14 A-4629-12T4
integrity of, and full public confidence in,
the operation of the State lottery.
[Id. at v.]
Also, "to ensure the integrity of the lottery," the Planning
Commission recommended "that the State Auditor be required to
conduct an annual post-audit of the transactions and accounts of
the lottery division." Id. at 7.
Addressing the future financial success of the lottery, the
Planning Commission stated that the lottery "must be operated as
a public business enterprise" if it is to attain its full
potential as a source of revenue. Ibid. It recognized that
"promotion and advertising will be required." Ibid.
The Planning Commission placed the task of making policy in
the hands of the five-person commission it proposed, but a
Lottery Director would exercise executive authority and operate
the lottery:
A full-time operating director will likewise
be appointed by the Governor, with the
advice and consent of the Senate. To a
large extent, the task of implementing a
successful lottery system in the State will
be his. The director must, of course, be an
able administrator. However, he must be an
able businessman in other respects as well,
particularly to the extent that a successful
lottery will require successful marketing.
[Ibid. (emphasis added).]
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With respect to the lottery's operating structure, the
Planning Commission discussed a number of specific issues:
A number of decisions must be made before a
lottery can be put into operation . . .
includ[ing] the frequency with which
drawings should take place, the manner of
determining winners, the prices of lottery
tickets, the structure of prizes, the form
of ticket distribution, the types and
amounts of promotion and advertising, and
how winners shall be notified and paid.
[Id. at 4-5.]
To the Planning Commission, flexibility was a vital feature
in addressing the operating structure of the lottery. Id. at 5.
Its report stated that "the authority to specify and modify as
required the operating structure and characteristics of the
lottery should be delegated to the lottery commission rather
than specified in detail by the legislation." Id. at 8. Thus,
the Planning Commission proposed that any legislation should
"[p]rovide sufficient flexibility to the lottery division so
that it may make and implement those decisions which appear
necessary to best ensure that the lottery will succeed in
achieving its goals." Id. at vi.
The Planning Commission explained its reasoning further:
Only experience and experimentation in this
State can provide the information which is
required, and it is for this reason that
this [Planning] Commission recommends most
strongly that the permanent commission and
director which it proposes be allowed the
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maximum possible flexibility commensurate
with preserving the full trust and
confidence of the citizens of this State.
In particular, it is important to avoid
unnecessary rigidities in the legislation
which will inhibit the lottery commission's
ability to modify the lottery so as to
increase public interest and participation.
[Id. at 5 (emphasis added).]
Again with an eye to the future, the Planning Commission
mentioned one example of likely participation by private
entities in operating the lottery: "increasing mechanization of
the lottery . . . might be performed more efficiently by a
private contractor than by the State." Id. at 28.
The Planning Commission's proposed legislation implementing
these recommendations was passed by the Legislature with few
changes, and the State Lottery had its first drawing on January
7, 1971.
B.
State Lottery Law, N.J.S.A. 5:9-1 to -25
The Legislature's purpose in enacting the State Lottery Law
is stated in N.J.S.A. 5:9-2:
This act is enacted to implement the
amendment of Article IV, Section VII,
paragraph 2, of the Constitution of New
Jersey, approved by the people in the
general election of November, 1969, and to
carry out the mandate thereof by establish-
ing a lottery to be operated by the State,
the entire net proceeds of which are to be
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used for State institutions and State aid
for education.
[(emphasis added).]
The language of N.J.S.A. 5:9-2 has not changed since it was
proposed by the Planning Commission and enacted by the
Legislature in February 1970. L. 1970, c. 13, § 2.
The State Lottery Law "established in the Department of the
Treasury a Division of the State Lottery, which shall include a
State Lottery Commission and a director." N.J.S.A. 5:9-4. The
powers and duties of the Lottery Commission were set forth in
N.J.S.A. 5:9-7. Among them was the promulgating of rules and
regulations to implement the constitutional "mandate of the
people" and to "produce the maximum amount of net revenues for
State institutions and State aid for education." In addition to
a myriad of other subjects, the statute authorizes the Lottery
Commission to establish rules and regulations for:
the payment of costs incurred in the
operation and administration of the lottery,
including the expenses of the division and
the costs resulting from any contract or
contracts entered into for promotional,
advertising or operational services or for
the purchase or lease of lottery equipment
and materials . . . .
[N.J.S.A. 5:9-7(a)(11)(b) (emphasis added).]
The Lottery Director's powers and duties are set forth in
N.J.S.A. 5:9-8. They include supervising and administering the
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operation of the lottery, appointing or hiring employees of the
Lottery Division, advising the Lottery Commission, and
certifying each month to the State Treasurer and the Lottery
Commission the revenues, expenses, and prize disbursements of
the lottery. Ibid. In addition, subsection (h) of the statute
specifically authorized the Lottery Director to enter into
contracts for the operation and promotion of the lottery. L.
1970, c. 13, § 8 (codified at N.J.S.A. 5:9-8(h)).
In 1983, the Legislature amended N.J.S.A. 5:9-8(h), which
now reads:
Subject to the approval of the commission
and the applicable laws relating to public
contracts, to act on behalf of the
commission as using agency with respect to
purchases made by the Division of Purchase
and Property of goods and services required
in the operation of the lottery.
[L. 1983, c. 60, § 2 (codified at N.J.S.A.
5:9-8(h)) (emphasis added).]
The question on this appeal is whether a contract as broad-
ranging as that awarded to Northstar for fifteen years is within
the authorized powers of the Lottery Director and the Lottery
Division.
IV.
The CWA alleges the State's contract with Northstar
unlawfully privatizes many of the Lottery Division's duties
currently being performed by State employees. It contends the
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contract violates the State Constitution because the 1969
amendment authorizes only "the conduct of State lotteries,"
which the CWA argues means a lottery "conducted by the State."
Similarly, it contends the contract violates the State Lottery
Law because N.J.S.A. 5:9-2 authorizes only "a lottery to be
operated by the State," not by a private entity.
The CWA does not argue that the Lottery Division has no
power whatsoever to contract with outside vendors. It
acknowledges that for decades the Lottery Division has
contracted with privately-owned vendors for services such as
advertising, ticket printing, and instant and online game
management. See In re Protest of Award of On-Line Games Prod. &
Operation Servs. Contract, Bid No. 95-X-20175, 279 N.J. Super.
566 (App. Div. 1995) (five-year contract to implement and
operate on-line gaming system). Instead, the CWA argues that
the sales and marketing operations of the Lottery Division are
non-delegable functions of the State and may not legally be
conducted by a private entity. It contends the line has been
crossed with this contract, and that the Lottery Division and
the Lottery Director have relinquished "operation" of the
lottery to a private, profit-making interest.
DPP and Northstar respond that the Lottery Division and
Director continue to operate the lottery because they retain
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tight control over Northstar and any other subcontractor
involved in the implementation of the disputed contract.
Respondents rely on the history of the State Lottery Law and the
experience and decisions of other jurisdictions that have
addressed similar issues in awarding contracts to private
entities. They contend that neither the State Constitution nor
the State Lottery Law requires that all functions of the lottery
be performed by State employees, and that there is no logic to
the CWA's argument that the sales and marketing functions cross
a line when the Lottery Division has contracted lawfully in the
past with respect to other functions.
As to management functions that the contract delegates to
Northstar, respondents emphasize that a number of these
functions are already being performed by private vendors and
that the policy-making and overall administrative functions of
the lottery remain with the Lottery Commission and the Lottery
Director. They add that oversight, supervision, and veto power
over Northstar's business decisions are prominently retained by
the Lottery Division through the Services Agreement, thus making
the Lottery Division, not Northstar, the operator of the
lottery.
Focusing on the word "operated" in N.J.S.A. 5:9-2, both
sides argue that its meaning is plain, but each side claims the
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plain meaning leads to its own understanding of the word in the
context of this dispute. The CWA asserts that the only possible
interpretation of N.J.S.A. 5:9-2 is: "The creation of a State
Lottery, operated solely by the State, by State workers, with
proceeds flowing entirely to the State." It argues that the
phrase "operated by the State" is distinguishable from
"regulation and control by" the State, and that it is not enough
that the Division retains oversight over Northstar's actions and
decisions.
The CWA cites Atlantic City Racing Association v. Attorney
General, 98 N.J. 535, 546 (1985), to support its claim that all
provisions affecting an exception to the constitutional ban on
gambling must be narrowly interpreted and must follow the intent
of the original drafters. It objects to any reliance on
judicial decisions from other jurisdictions on the ground that
the laws of other states are distinguishable from New Jersey's
unique constitutional and statutory provisions applicable to the
lottery. Instead, the CWA asserts that we should compare our
lottery laws to our own Casino Control Act, N.J.S.A. 5:12-1 to
-233, where the State exercises only regulatory control over the
operations of privately-owned casinos. By that comparison, the
CWA contends the Legislature intended to require more than just
regulatory control and oversight of privately-owned entities
22 A-4629-12T4
when it enacted the State Lottery Law and required the State to
"operate" the lottery.
DPP responds that the CWA has inserted "solely" into the
wording of N.J.S.A. 5:9-2 as a limitation on how the Lottery
Division may "operate" the lottery, but the statute does not
contain that word and is not so restricted. DPP and Northstar
emphasize many specific provisions of the Services Agreement to
demonstrate the level of decision-making control that the
Lottery Division retains and the close oversight and supervision
of the Manager's activities that will remain in the hands of the
Lottery Director and the Lottery Commission. They also point
out that the Lottery Commission will continue to make all policy
decisions and the Lottery Division will retain many functions of
the lottery. Among the retained functions, the drawing of
winning tickets, identifying winners, and awarding prizes remain
functions of the Lottery Division and are not within the scope
of duties of the Manager under the Services Agreement.
Although we ordinarily give substantial deference to an
agency's decision to award or reject a bid proposal, Keyes
Martin & Co. v. Dir., Div. of Purchase & Prop., 99 N.J. 244, 252
(1985); On-Line Games, supra, 279 N.J. Super. at 591-92, the
issue before us is one of constitutional and statutory
interpretation, to which we apply a plenary standard of review.
23 A-4629-12T4
See Murray v. Plainfield Rescue Squad, 210 N.J. 581, 584 (2012);
Zabilowicz v. Kelsey, 200 N.J. 507, 512-13 (2009).
The court's "task . . . is to determine and effectuate the
Legislature's intent." Bosland v. Warnock Dodge, Inc., 197 N.J.
543, 553 (2009). Our analysis begins with the words of the
enactment, which are to be given their generally accepted
meaning, and are to be read in context of the legislation as a
whole. Ibid.; DiProspero v. Penn, 183 N.J. 477, 492 (2005).
When the Legislature's language is clear and unambiguous,
and subject to only one interpretation, we apply the statute's
plain meaning. Bosland, supra, 197 N.J. at 553-54; DiProspero,
supra, 183 N.J. at 492-93; O'Connell v. State, 171 N.J. 484, 488
(2002). But when the statutory language is ambiguous and
subject to more than one reasonable interpretation, we must look
to extrinsic evidence, such as legislative history, judicial
interpretation, and rules of statutory construction. Bosland,
supra, 197 N.J. at 553-54; DiProspero, supra, 183 N.J. at 493-
94; State v. Fortin, 178 N.J. 540, 607 (2004).
In our view, the phrases "the conduct of State lotteries"
in the constitutional amendment and "operated by the State" in
N.J.S.A. 5:9-2 are too ambiguous to resolve the dispute in this
appeal without resort to extrinsic sources. We agree with DPP's
assertion that the CWA's plain meaning argument adds an extra,
24 A-4629-12T4
modifying term to these phrases, that is, a requirement that all
State Lottery functions be performed solely or exclusively by
State employees. On the other hand, the constitutional and
statutory phrases are not meaningless, and ultimately the
lottery must be conducted and operated by the State, and not by
a private entity.
Looking at extrinsic evidence of the Legislature's intent,
it is clear from the Planning Commission's report that
flexibility was intended in developing optimal means of
operating the lottery through experiment and experience.
Viewing administration of the lottery from a broad perspective,
the Planning Commission envisioned a structure that included
policy-making and overall responsibility for the integrity of
the State Lottery and for accomplishment of the constitutional
objectives. As to the lottery's operating structure, the
Planning Commission considered the more immediate business
decisions pertinent to developing and managing a successful
lottery and urged flexibility and room for modification. It
recognized that certain functions would be contracted out to
private enterprise. The State Lottery Law enacted by the
Legislature in 1970 essentially mirrored the proposed
legislation recommended by the Planning Commission, and
25 A-4629-12T4
therefore, the Legislature adopted the Planning Commission's
views and objectives.
Because the State Lottery must retain the confidence of the
public, the State Lottery Law must be read to maintain in the
Lottery Commission and the Lottery Director the power to
determine policy and to make major business decisions. Those
State officials are answerable to the Governor and to the
Legislature. However, we do not read the State Lottery Law as
requiring that day-to-day functions of the lottery, including
management functions, must be performed only by State employees.
Nor do we find a viable distinction in the sales and marketing
functions of the Lottery Division with other functions that have
historically been conducted through contracting with privately-
owned, profit-making vendors. Indeed, N.J.S.A. 5:9-7(a)(11)(b)
specifically anticipates that the State can issue contracts "for
promotional, advertising or operational services."
Other jurisdictions have reached the same conclusion when
considering similar issues regarding the authority of a state
agency to delegate operational functions of the state lottery to
private entities, or multi-state entities that operate games
such as Mega Millions. See State ex rel. Six v. Kansas Lottery,
186 P.3d 183, 189-94 (Kan. 2008); Dalton v. Pataki, 835 N.E.2d
26 A-4629-12T4
1180, 1197-98 (N.Y.), cert. denied, 546 U.S. 1032, 126 S. Ct.
739, 163 L. Ed. 2d 571 (2005).3
As DPP and Northstar point out, the Services Agreement
contains many provisions retaining control of the lottery's
operation with the Lottery Division and the Lottery Director.
Section 1.1 confirms as a purpose of the Services Agreement that
the State and the Lottery Division will "continu[e] to conduct
and maintain oversight and control over the Lottery." Section
2.2 describes the general responsibilities of the Lottery
Division to:
continue to have actual control and
oversight over the conduct of all Lottery
operations by retaining the authority to
direct or countermand Manager's operating
decisions, maintaining ready access to
information regarding all aspects of Lottery
operations, and retaining ownership of all
Lottery assets including all State
Intellectual Property.
Section 5.1, entitled "Governance," requires Northstar to
obtain approval of the Lottery Division before making "any
3
See also U.S. Department of Justice, Office of Legal Counsel,
"Scope of Exemption Under Federal Lottery Statutes for Lotteries
Conducted by a State Acting Under the Authority of State Law"
(Oct. 16, 2008) (concluding that a state could retain a vendor
to perform lottery management services without violating federal
law, which prohibits interstate advertisement or promotion of
lotteries except when conducted by a state under its laws, 18
U.S.C. §§ 1307(a)(1), 1307(b)(1), 1953(b)(4)) available at
http://www.justice.gov/olc/opiniondocs/state-conducted-
lotteries101608.pdf.
27 A-4629-12T4
material change from those business practices and decisions
already Approved by the Division of Lottery and/or the State."
The related Schedule 5.1 of the Services Agreement, entitled
"Governance Protocols," states that "[t]he Division of Lottery
must exercise actual control over all significant business
decisions made by Manager at all times." (emphasis added). It
specifically provides "Unconditional Veto Power" to the Lottery
Director over any decision of Northstar as the Manager.
Describing "actual control" by the Lottery Division as
"fundamentally imperative to a fully-compliant governance
structure," the Services Agreement states: "[T]he Parties
expressly agree that the Division of Lottery . . . shall have
the sole, absolute, and unconditional right to veto or
countermand, with or without conditions, any action taken by
Manager whatsoever . . . ."
Also, Section 13.2 permits the Lottery Division to
terminate the agreement "for convenience" upon ninety days'
notice to Northstar and payment of existing obligations under
the agreement and a termination fee. In the event of such
termination, the State is not liable to Northstar for loss of
future profits.
These provisions demonstrate that the lottery remains a
State operation, with certain functions and duties delegated to
28 A-4629-12T4
a private entity. In sum, we conclude that the Northstar
contract is not a violation of the constitutional amendment that
authorized our State lottery or the State Lottery Law.
V.
The CWA contends the contract must be rebid because
Northstar's annual management fee represents an unlawful
material deviation from the RFP's bid specifications. It claims
that the management fee of $4.75 million per year is for
services beyond the RFP's scope of work of the Manager, and that
its inclusion in Northstar's bid proposal and acceptance by DPP
is a deviation contrary to the salutary purposes of the
competitive bidding process.
As we previously stated, we defer to DPP's determination to
award or reject a bid proposal. Keyes Martin & Co., supra, 99
N.J. at 252; On-Line Games, supra, 279 N.J. Super. at 591-92.
Where, as in this case, the question is whether a bid deviated
from material requirements of the RFD, the Director's decision
is tested by the "ordinary standards governing administrative
action." On-Line Games, supra, 279 N.J. Super. at 593. More
specifically, these standards include:
whether the record contains substantial
evidence to support the findings on which
the agency based its action; and . . .
whether in applying the legislative policies
to the facts, the agency clearly erred in
reaching a conclusion that could not
29 A-4629-12T4
reasonably have been made on a showing of
the relevant factors.
[Ibid. (quoting George Harms Constr. Co. v.
N.J. Tpk. Auth., 137 N.J. 8, 27 (1994).]
Initially, the DPP Director was required to decide whether
Northstar's bid deviated from the RFP. See id. at 594. "If
there is no deviation, the bid must be deemed conforming. If
there is a deviation, a decision must be made as to whether it
is material and can be waived." Ibid. If a deviation is
material and non-waivable, the inquiry is:
"whether the effect of a waiver would be to
deprive [the agency] of its assurance that
the contract will be entered into, performed
and guaranteed according to its specified
requirements, and second, whether it is of
such a nature that its waiver would
adversely affect competitive bidding by
placing a bidder in a position of advantage
over other bidders or by otherwise under-
mining the necessary common standard of
competition."
[Id. at 594-95 (quoting Twp. of River Vale
v. R.J. Longo Constr. Co., 127 N.J. Super.
207, 216 (Law Div. 1974)).]
In its original bid proposal, Northstar included under the
category of its management expenses a $5 million "Management
Fee" that would increase by two percent annually. The
Evaluation Committee requested clarification and subsequently
asked Northstar to withdraw the management fee from its
proposal. In response, Northstar reduced the fee to $4.75
30 A-4629-12T4
million per year, and it increased its net income targets for
the lottery by an aggregate of more than $50 million.
Northstar described the purpose of the management fee as
follows:
The annual Management Fee compensates
Northstar for management services provided
by its stakeholders to Northstar for the
benefit of the Lottery. These management
services are not separately accounted for in
the supply contracts between Northstar and
its stakeholders (GTECH and Scientific
Games). . . .
[T]hese management services include, but are
not limited to:
 Support from corporate personnel of
Northstar's stakeholders related to:
o Application of international best
practices.
o National retail chain business
development and execution.
o Marketing activities and retail
best practices (including data
analytics, retailer design, and
merchandising).
o Player loyalty management.
o Finance and tax support.
o Legal and compliance.
o Responsible gaming program
support.
 Governance duties performed by the
Board of Directors.
Northstar reported that the management fee does not include
any compensation for bonuses paid to the employees or personnel
of the corporate stakeholders, and is not otherwise included in
31 A-4629-12T4
its overhead or subcontractor expenses. It assured the
Evaluation Committee that it would submit monthly invoices for
the management fee in accordance with the requirements of the
Services Agreement, and subject to restrictions on expenses in
excess of budgeted amounts. It stated in retrospect that the
management fee might have been better categorized as a
subcontractor expense, although the subcontractor would be
Northstar's own stakeholders. After further inquiry and
investigation, the Evaluation Committee acceded to Northstar's
inclusion of the management fee, finding the fee and its
included services "a justifiable expense, necessary and
reasonable for Northstar to achieve its business plan."
In her written decision, the DPP Director reviewed the
facts and "conclude[d] that Northstar NJ's inclusion of a
management fee is not an exception to the RFP, material or
otherwise." She specifically found "that the management fee as
clarified during the negotiations is an 'Operating expense' as
that term was defined in the RFP," and that "the services to be
performed in exchange for the management fee are within the
scope of services outlined in Appendix A of the RFP."
The CWA claims the Director erred because the services
covered by the management fee are outside the RFP's Scope of
Work of the Manager. We disagree. The RFP's Section 3.0 (SCOPE
32 A-4629-12T4
OF WORK AND OPERATIONAL RESPONSIBILITIES OF THE MANAGER)
includes the following provision:
Except for those functions or services
specifically defined in Schedule 2.2 of the
Services Agreement (which are reserved by
the Division of Lottery), Manager's
functions and responsibilities shall
include, but not be limited to, those
functions and responsibilities set forth in
Appendix A to the RFP and such other
functions which are an inherent, necessary
or customary part of the functions and
responsibilities associated with the Lottery
. . . .
[(emphasis added).]
Northstar's description of the work associated with its
management fee, to the extent not specifically described in the
Services Agreement, can be categorized within Section's 3.0
catchall language. Northstar explained to the satisfaction of
the Evaluation Committee and the DPP Director the reasons it
needed to charge a separate fee for the management services of
its stakeholders' corporate personnel in implementing its
business plan for managing the lottery. Whether described as a
management expense or a subcontractor expense, the DPP Director
viewed the management fee as an operational expense of Northstar
that was within the specifications of the RFP and would be
accounted for in accordance with the terms of the Services
Agreement. Furthermore, we note that DPP allowed the management
fee only after it was reduced and Northstar increased its net
33 A-4629-12T4
income targets. See State Contract A71188, supra, 422 N.J.
Super. at 296 ("Courts have approved post-bid modifications to
an awarded public contract when the public entity negotiates
more favorable terms.").
The DPP Director properly exercised her discretion in
determining that Northstar's bid proposal conformed to the bid
specifications.
Affirmed.
34 A-4629-12T4