Powerhouse Diesel Servs., Inc. v Hirst
Annotate this CaseDecided on October 26, 2009
Supreme Court, New York County
Powerhouse Diesel Services, Inc., Petitioner,
against
Martha K. Hirst, as Commissioner of the New York City Department of Citywide Administrative Services; EMILY LLOYD, as Commissioner of the New York City Department of Environmental Protection; WILLIAM THOMPSON, as New York City Comptroller, Respondents, and CITY OF NEW YORK, Defendant
108512/07
Seiff Kretz & Abercrombie, New York City (Walter E. Kretz of counsel), for petitioner. Michael A. Cardozo, Corporation Counsel, New York City (Susan Smollens of counsel) for respondents.
Lottie E. Wilkins, J.
Following this Court's earlier denial of petitioner's request for injunctive relief,
the issue remaining in this proceeding is an article 78 challenge to a determination by the
municipal respondents, NYC Department of Citywide Administrative Services (DCAS) and the
New York City Department of Environmental Protection (DEP), which [*2]disqualified Powerhouse Diesel Services (Powerhouse) from
bidding for a contract to supply replacement parts for large engines used by DEP at water
treatment plants around the City. In the vernacular of this particular administrative process, the
municipal respondents deemed Powerhouse to be a non-responsive bidder based on their
determination that the replacement parts Powerhouse supplied for these engines were not
"genuine" replacement parts (GRPs). Of equal concern to petitioner is respondents'
determination to categorize non-party Cooper Industries not only as a supplier of GRPs but also
as the original equipment manufacturer of the engines. As a result of these determinations,
Cooper Industries emerged from the competitive bidding process as the only viable supplier of
GRPs for the engines at issue. The municipal respondents (referred to alternately as "the City")
oppose the petition arguing that it was a rational exercise of administrative discretion to require
that bidders for this contract be capable of supplying only genuine replacement parts for its
engines, and that the determination to classify Cooper Industries a supplier GRPs had a rational
basis, as did the determination to deem petitioner's bid as "non-responsive" in light of the fact
that Powerhouse did not market GRPs. Since there was a rational basis for each of the
challenged determinations, the City contends petitioner's challenge must fail.
Procedural History and Facts
This matter originally came before the Court in 2007 when Powerhouse brought an order to
show cause seeking to enjoin respondents from awarding and/or registering a replacement parts
contract with Cooper upon conclusion of the competitive bidding process. However, by the time
petitioner's motion for injunctive relief came before the Court it was revealed that DCAS had
either suspended or withdrawn its contract award to Cooper making the threat of immediate
injury to petitioner unlikely. As a result, petitioner's request for injunctive relief was denied
leaving only the article 78 challenge to be resolved. The parties agreed that, notwithstanding the
fact the Cooper's bid had also been deemed non-responsive, the article 78 challenge should still
be submitted to the Court since the challenged determinations would continue to disqualify
Powerhouse from bidding for a contract if and when the competitive bidding process was
reopened at a later date. Due to an administrative oversight, there has been a significant gap in
time from denial of the request for injunctive relief to the present resolution of the article 78
challenge for which the Court has apologized to the parties. Nonetheless, both sides have
represented that the merits of the underlying dispute have not changed in the interim and,
therefore, the issue is still appropriate for resolution by the Court.
The engines at issue in this dispute are called Enterprise Engines. They were [*3]manufactured in the 1970's and 1980's by a company called IMO Delaval, Inc. These large engines generate power for use in a variety of private and public industrial settings, including powering pollution control equipment at the City's wastewater treatment plants. There are about 600 Enterprise Engines still in use around the world today with 22 of them operated by the New York City DEP at four of its water pollution control plants. According to the City, these engines provide power for critical wastewater treatment operations and would cost in excess of four million dollars each to replace.
The particular kind of Enterprise engine in use at DEP's water pollution control plants is no longer in production. According to petitioner, production of these engines ceased in 1988. At about the same time, non-party Cooper Industries purchased certain intellectual property and marketing rights relative to Enterprise engines from IMO Delaval including design specifications and schematics for various engines and replacement parts, as well as the Enterprise trademark and the right to market its replacement parts with the Enterprise trademark.
Petitioner Powerhouse is in the business of servicing Enterprise engines and sells its own replacement parts for them. Although Powerhouse does not market its parts as "genuine" replacement parts, petitioner claims that it actually uses many of the same manufacturers as Cooper to produce its parts and that the technical specifications and tolerances for its parts are virtually identical to those sold by Cooper. The similarity between the companies' replacement parts is claimed to be a result of several factors including the fact that the specifications for many Enterprise engine parts are well known within the industry (or in the "public domain" as petitioner puts it) and that the current design of many parts are different from the original design specifications as a result of improvements and modifications that have been made to Enterprise engines over time.
When the City solicited bids in 2007 for a requirements contract to provide GRPs for its Enterprise Engines, Powerhouse was among the bidders for the contract, as was Cooper. Powerhouse claims, and the City does not dispute, that it submitted the low bid for the subject contract. Nevertheless, respondents deemed the bid by Powerhouse to be non-responsive because, in respondents' determination, Powerhouse was not a supplier of GRPs. That determination left Cooper as the only bidder that also qualified as a supplier of GRPs for Enterprise engines.
Notwithstanding the fact that Cooper was found to be the only supplier of GRPs for Enterprise engines and thus the only viable candidate for award of the subject contract, on July 17, 2007 the NYC Department of Citywide Administrative Services sent a letter to Cooper advising them that their bid had also been deemed non-responsive because, it its bid for the contract, Cooper had placed certain non-[*4]conforming limitations on its liability as a potential supplier. As recited earlier, Powerhouse had already commenced this proceeding seeking injunctive relief and article 78 review by the time the City informed Cooper that its bid was also deemed to be non-responsive. Notwithstanding Cooper's disqualification, the parties agreed to submit their article 78 dispute for resolution claiming that the issues were still ripe for judicial review.
This has been the status quo since 2007. The City has apparently been purchasing replacement parts for its Enterprise engines from Powerhouse on an interim "purchase order" basis. More recently, the City decided to abandon the competitive bidding process entirely and enter into a "single-source contract" for replacement parts with Cooper, now called Cameron Compression Systems. In its latest communication with the Court of September 15, 2009, the City now contends that the entire article 78 challenge is moot and should be dismissed. In a letter sent the following day, petitioner maintains that the article 78 challenge must still be adjudicated.
Since the decision to award a single-source contract is itself premised on a finding that there
is only one manufacturer from which to obtain the GRPs that the City seeks, the underlying
decision to disqualify petitioner as a supplier of GRPs is still a relevant issue. While this Court
does not believe that its decision in this proceeding would have any binding or preclusive effect
with respect to the single-source process already underway, a favorable determination here could
affect, or at least inform, the City's decision to pursue a single-source contract with Cooper.
Given this state of affairs, and the fact that the parties previously represented to the Court that
the underlying merits of the dispute had not changed since the matter was first submitted, the
Court will move on to consider the issues raised in petitioner's article 78 challenge.
Analysis
A court sitting in review pursuant to CPLR article 78 may not disturb an agency determination of the kind at issue in this proceeding absent a finding that the determination was arbitrary or capricious (see, Matter of Pell v Bd. of Ed. of Union Free School Dist., 34 NY2d 222 [1974]). A frequently employed inverse corollary to the "arbitary and capricious" standard is that the challenged determination must have some rational basis. Once it has been found that a rational basis for the challenged determination exists, the Court's prerogative to annul or modify the decision ends (Pell, supra at 231.; see also, Paramount Communications v Gibralter Casualty Co., 90 NY2d 507 [1997]). As has been frequently observed, even where a different conclusion could be reached on the same evidence, a Court may not substitute its own judgment for that of an administrative agency absent a finding that the challenged determination lacks a rational basis (Matter of Partnership 92 LP v New York State Div. of Housing anc [*5]Community Renewal, 46 AD3d 425 [1st Dept. 2007]).
The City respondents argue, and petitioner does not seriously dispute, that there were good reasons to require that contract applicants in the competitive bidding process be suppliers of genuine replacement parts, as opposed to so-called "or equal parts." As already mentioned, these engines play a critical role in the treatment of wastewater by the Department of Environmental Protection and they are not easily or inexpensively replaced. In order to "ensure the safe, trouble free operation" of these engines, the City rationally determined that it would use only genuine replacement parts which presumably can be relied upon to meet the original equipment manufacturer's tolerances and specifications. This constitutes a rational basis for the preliminary determination by respondents that a successful bidder for the subject contract should be one who supplied GRPs for the City's Enterprise engines. The more central dispute in this case, however, concerns the rationality of the two related determinations by the City that Powerhouse was not a supplier of GRPs and that non-party Cooper was. The resolution of this dispute ultimately determines whether Powerhouse can compete to supply replacement parts for Enterprise engines on an equal footing with Cooper.
Among its several arguments in support of its position that respondents acted arbitrarily and capriciously on the issue of who is a supplier of GRPs, Powerhouse gives considerable emphasis to its prior history as a contractor for DEP. For example, Powerhouse adverts the Court's attention to the fact that it was contracted to work on a project that involved Enterprise engines at the City's Newtown Creek water pollution control plant where, it is alleged, Powerhouse performed admirably without any complaints from the City. Powerhouse also worked on another project at the City's Owls Head water pollution control plant that involved Enterprise engines and, again, fulfilled its contract requirements without complaint. The municipal respondents challenge the relevance of these contracts because, on one job, the work done by Powerhouse did not involve the purchase or installation of replacement parts for Enterprise engines and, on the other, there was no opportunity to evaluate the quality of the replacement parts that were installed by Powerhouse because the engines were not used after the work was performed.
The Court has chosen to deal with the arguments concerning Powerhouse's history as contractor first because they are among the least relevant, and therefore the least persuasive, on the question of whether the City acted arbitrarily or capriciously in deeming Powerhouse not to be a supplier of GRPs. The fact that Powerhouse did work at DEP plants in the past — even work that involved installation of its own replacement parts for Enterprise engines — has no clear bearing on the question of whether the replacement parts it provides are "genuine" as respondents have chosen to define that [*6]term. At best, this evidence shows only that at some point in the past the City was willing to use Powerhouse replacement parts for its Enterprise engines. It does not show, however, that the subsequent decision to use only genuine replacement parts in its requirements contract was arbitrary and capricious. Nor does Powerhouse's history as a contractor demonstrate how or why Cooper was irrationally deemed to be a supplier of GRPs. There is no suggestion in the papers before the Court that the City retained Powerhouse in the past with an understanding that it was a supplier of GRPs. Thus the Court finds these arguments of no assistance in resolving the central issues in this dispute.
Petitioner gets closer to the heart of the matter in it arguments that deal directly with the differences between its replacement parts and those sold by its competitor, Cooper. From the papers submitted it appears that petitioner has elected to place more emphasis on challenging the rationality of the City's determination that Cooper was a supplier of GRPs and less so on the rationality of the determination that Powerhouse was not. Put another way, the thrust of petitioner's argument is not that it should have been deemed a supplier of GRP's but rather that, in light of the similarities between Cooper's and Powerhouse's replacement parts businesses, the determination that only Cooper was a supplier of GRPs was arbitrary and capricious. Thus, petitioner reasons, Cooper is no more a supplier of GRPs than Powerhouse is and their respective bids should have been considered as equals.
Additionally, petitioner asserts that the designation of Cooper as the original equipment manufacturer (OEM) of Enterprise engines — which lies at the core of Cooper's ability to market its replacement parts as genuine Enterprise parts — was also arbitrary and capricious considering that Cooper has never actually manufactured an Enterprise engine. In petitioner's view, Cooper's only claim to OEM status arises from its purchase of the Enterprise trademark and other intellectual property during the 1980's after Enterprise engines went out of production. Thus, according to petitioner, Cooper's designation as OEM and the related designation as a supplier of GRPs which flows from it is the result of a legal fiction.
In support of its argument that Cooper's replacement parts are entitled to no greater status than its own, Powerhouse points to the fact that Cooper only manufactures a small number of the replacement parts that it sells for Enterprise engines. Petitioner claims that the majority of Cooper's parts are supplied by outside manufacterers and then packaged and marketed with the Enterprise trademark. Interestingly, Powerhouse claims that it uses some of the very same manufacturers to supply the replacement parts that it sells for Enterprise engines and that it uses the same technical specifications for these parts as its competitor because that information is publicly available. Therefore, Powerhouse contends that the replacement parts it sells [*7]are functionally identical to the ones marketed by Cooper under the Enterprise trademark and that the City respondents have exalted form over substance by giving undue significance to the fact that Cooper uses the Enterprise trademark.
There is a certain logic to the argument that the replacement parts for Enterprise engines sold by Powerhouse are not materially different — from an engineering perspective — than those marketed by Cooper. Assuming the rest of Powerhouse's factual assertions to be true, the major difference between its replacement parts and those marketed by Cooper is that the latter's products bear the Enterprise trademark and thus can be marketed as "genuine" whereas the parts marketed by Powerhouse cannot. The question for this Court, however, is not whether there is logic to petitioner's argument — or even whether petitioner's argument makes more sense than respondent's. The sole determining criterion in this type of review is whether there was any rational basis for respondent's decision to classify the replacement parts marketed by Cooper as "genuine" while reaching the opposite conclusion concerning parts sold by Powerhouse.
Trademarks, like the Enterprise name in this case, can have a value that transcends the objective quality of the product being marketed. For example, the producers of generic drugs might correctly claim that their products are virtually identical to name-brand drugs and yet name-brand products frequently command higher prices and greater customer loyalty than their generic counterparts. One need not study intellectual property law to recognize that the goodwill that comes with a trademark is an inherently valuable thing that can be bargained for in the commercial marketplace. That is precisely what appears to have happened in this case when Cooper purchased the Enterprise trademark from IMO Delaval. According to petitioner, Cooper has never actually produced an Enterprise engine, yet it owns the right to call itself the original equipment manufacturer of these engines and continues to provide parts and service for them. Having legally obtained the right to use the Enterprise trademark, no one could seriously question that Cooper has the right to reap the benefits of its bargain, even if that means Cooper has a competitive advantage in the marketplace over other products that may be identical, or even superior, to its own. Cooper's status as the original equipment manufacturer and its use of the Enterprise trademark is, in itself, an arguably rational basis on which to differentiate its replacement parts. Contrary to petitioner's assertion, Cooper's use of the Enterprise trademark on its products is not a meaningless distinction or a legal fiction. To the contrary, the exploitation of the Enterprise trademark and other intellectual property for a competitive advantage is a widely accepted and legally recognized concept.
Beyond the inherent advantage of owning the Enterprise trademark, there is merit to respondents' argument that in purchasing genuine replacement parts bearing [*8]the Enterprise name, the City can more reasonably assume — without the need for testing or in-use experience — that these parts meet the technical requirements and tolerances required for their engines. The City refers to this as a "guarantee" although it may not be quite so explicit as that. There is an inherent rationality to the City's decision to rely on the presumed suitability of the "genuine" replacement parts that Cooper sells for use in its engines which stands in contrast to petitioner's equally rational but entirely distinct claim that the City should acknowledge the suitability of Powerhouse replacement parts based on its past experience using them. It is not arbitrary or capricious for the City to assume that, because Cooper sells genuine replacement parts with the Enterprise name, those parts have been made in accordance with the original manufacturer's specifications and are suitable for their intended use. While Powerhouse offers many sound arguments why this assumption may not be justified in the particular circumstances of this case, those arguments do not go so far as to demonstrate that respondents' decision to rely on the genuineness of Cooper's parts was irrational.
While the Court is mindful of petitioner's argument that its replacement parts are functionally identical to those supplied by Cooper, even if that assertion were found to be true, there still remains a rational basis upon which to conclude that the replacement parts marketed by Cooper are "genuine" Enterprise parts while the parts sold by petitioner are not. Petitioner overstates the case when it claims that the distinction made by the City here exalts form over substance and thus was arbitrary and capricious. Respondents employed a rational and actually quite common means of distinguishing between petitioner's products and those marketed by Cooper Compression. Therefore the decision to disqualify Powerhouse from the competitive bidding process and the concomitant decision to classify Cooper as the original equipment manufacturer and a provider of GRPs had a rational basis. Accordingly, it is
Ordered and Adjudged that the petition by Powerhouse Diesel Services to annul the determination of the municipal respondents, and for injunctive relief, is denied in its entirety and the proceeding dismissed.
This constitutes the decision and judgment of the Court.
Dated:
_______________________________________
Lottie E. Wilkins, J.S.C.
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