Exley v. Village of Endicott — 51 N.Y.2d 426

Majority

p. 426

In the Matter of Gary Exley et al., Respondents-Appellants, v Village of Endicott et al., Respondents, and New York Telephone Company, Appellant-Respondent.

Argued November 10, 1980;

decided December 18, 1980

p. 427

POINTS OF COUNSEL

Leonard Joseph, David B. Howorth, George E. Ashley, John M. Clarke and N. Michael Grove for appellant-respondent.

I. The provision of PBX telephone service under the two-tier tariff is not a purchase contract under section 103. (Matter of Board of Water Comrs. of Vil. of White Plains, 71 App Div 544 , 176 NY 239 ; Bright Homes v Wright, 8 NY2d 157 ; Patrolmen’s Benevolent Assn. of City

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of N. Y. v City of New York, 41 NY2d 205 ; Board of Comrs. v New York Tel. Co., 271 US 23 ; Matter of Leitner v New York Tel. Co., 277 NY 180 ; People ex rel. Public Serv. Comm. of State of N. Y. v New York Tel. Co., 262 App Div 440 , 287 NY 803 ; Cardone v Consolidated Edison Co. of N. Y., 197 Misc 188 , 276 App Div 1068 , 277 App Div 769 ; Carter v American Tel. & Tel. Co., 365 F2d 486 , 385 US 1008 ; Palmero v Bell Tel. Co. of Pa., 415 F2d 298 ; Western Contr. Corp. v Commissioner of Internal Revenue, 271 F2d 694 .) II. The provision of PBX telephone service under the two-tier tariff is not a contract for public work under section 103. (Blank v Kearny, 44 App Div 592 .) III. Regulation of the rates and service of New York Telephone Company renders the construction of section 103 by the court below unnecessary to protect the public interest. (Harlem Gas-Light Co. v City of New York, 33 NY 309 ; Matter of Marino v Town of Ramapo, 68 Misc 2d 44 ; Matter of General Tel. Co. of Upstate N. Y. v Lundy, 17 NY2d 373 .) IV. Any application of section 103 to the company should be prospective only. (Chevron Oil Co. v Huson, 404 US 97 ; Phoenix v Kolodziejski, 399 US 204 ; Cipriano v City of Houma, 395 US 701 ; Harris v Jex, 55 NY 421 ; Childs v Childs, 69 AD2d 406 ; Flushing Nat. Bank v Municipal Assistance Corp. for City of N. Y., 88 Misc 2d 1047 ; Incorporated Vil. of Northport v Guardian Fed. Sav. & Loan Assoc., 87 Misc 2d 344 , 54 AD2d 893 .)

Keith J. Roland for respondents-appellants.

I. The strong public policy of this State requires that competitive bidding be pursued wherever possible. (Williams v Bryant, 53 AD2d 229 ; Harlem Gas-Light Co. v City of New York, 33 NY 309 ; Matter of Tele/Resources v Public Serv. Comm. of State of N. Y., 58 AD2d 406 ; Matter of Executon/Monroe County v Public Serv. Comm. of State of N. Y., 71 AD2d 138 ; Matter of Signacon Controls v Mulroy, 32 NY2d 410 ; Jered Contr. Corp. v New York City Tr. Auth., 22 NY2d 187 ; Matter of Sweet Assoc. v Gallman, 36 AD2d 95 , 29 NY2d 902 ; Matter of McNutt Co. v Eckert, 257 NY 100 ; Molloy v City of New Rochelle, 198 NY 402 .) II. The provision of telephone terminal eqüipment pursuant to two-tier tariffs is equivalent to a purchase contract for purposes of the

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competitive bidding statute. (Matter of Tele/Resources v Public Serv. Comm. of State of N. Y., 58 AD2d 406 , 43 NY2d 647 ; Matter of Lefkowitz v Public Serv. Comm., 50 AD2d 338 , 40 NY2d 1047 ; Matter of Consolidated Edison Co. of N. Y. v New York State Public Serv. Comm., 53 AD2d 131 , 40 NY2d 803 ; Matter of Chenango & Unadilla Tel. Corp. v Public Serv. Comm. of State of N. Y., 46 AD2d 601 ; Matter of City of New York v Public Serv. Comm. of State of N. Y., 17 AD2d 581 , 13 NY2d 594 ; Matter of Brooklyn Union Gas Co. v Public Serv. Comm. of State of N. Y., 34 AD2d 71 ; Matter of Village of Rockville Centre v Public Serv. Comm. of State of N. Y., 30 AD2d 1013 , 23 NY2d 645 .) III. The provision of dimension PBX service under two-tier tariffs is a contract for public works. (Williams v Bryant, 53 AD2d 229 .) IV. “Pervasive regulation” by the Public Service Commission does not advance the policy underlying the competitive bidding statute. V. The decision of the court below should be given retroactive effect. (Gersof v Sweeney, 22 NY2d 297 ; Elia Bldg. Co. v New York State Urban Dev. Corp., 54 AD2d 337 ; Nance v Town of Oyster Bay, 54 Misc 2d 274 .)

OPINION OF THE COURT

The central issue on these cross appeals is whether a municipality violated a competitive bidding statute (General Municipal Law, § 103), when it did not offer competí-• tors of the New York Telephone Company the opportunity to bid for the right to provide the municipality with certain telephone terminal systems. The petitioners, Gary Exley and 753 Harry L. Drive Corp., argue that the modern tariff system under which the equipment was to be provided rendered the transaction the functional equivalent of a sale, and brought it within the strictures of the competitive bidding statute (General Municipal Law, § 103). The Appellate Division agreed, and declared that the agreement to install New York Telephone’s equipment was void.

There was a time when New York Telephone operated as a regulated enterprise completely outside the competí

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tive pressures of the marketplace. Since 1968, however, the Federal Communications Commission has permitted competition in a significant area of the field, the terminal interconnect industry, by allowing subscribers of telephone services to purchase and install their own phone terminal equipment (Matter of Use of Carterfone Device in Message Toll Tel. Serv., 13 FCC2d 420 ). This in turn put the regulated telephone companies in the position of facing a probable loss of a significant portion of the terminal equipment market.

New York Telephone sought to counteract this loss by new marketing strategies, but for reasons which need not concern us here, at the time of this bidding it had not yet been permitted by the Public Service Commission (PSC) to sell its equipment to the public. Instead, it participated in the development of an alternate rate system called the “two tier” rate, which has as a basic feature a separation of the rate into two parts, one to cover the cost of equipment actually provided, and the other to cover the recurring charges tied to the operation of the entire phone system.

Under traditional phone rate systems the subscriber pays a single monthly charge, subject to periodic increases, for so long as he enjoys the services. By way of distinction, the two-tier system selected by the municipality here incorporates and “A” rate, which is fixed^[1] at the time the equipment is provided, and which is paid in a lump sum or over a definite term of months selected by the subscriber. At the end of the “A” term the customer can continue using the equipment by paying only the “B” rate, and if he returns the equipment he receives a credit for its remaining useful life or salvage value. The customer who accepts the two-tier system agrees to pay the full amount of the “A” rate even if he cancels the service. It is conceded that the title to the equipment remains at all times in New York Telephone.

It is clear that the two-tier system is tailored to the needs of each particular subscriber, and generally it results in a lower rate than the traditional system. However, because it was designed in this way to compete with sellers of terminal

* The PSC, however, may alter the rate in narrow circumstances.

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equipment, it is not surprising that the two-tier system takes on some of the attributes of a sale. It is for this reason that respondents argue that the agreement of the municipality to use the two-tier system was within the scope of section 103 of the General Municipal Law.

At the time New York Telephone agreed to supply the system in question, that statute read in pertinent part: “1. Except as otherwise expressly provided * * * all contracts for public work involving an expenditure of more than thirty-five hundred dollars and all purchase contracts involving an expenditure of more than fifteen hundred dollars, shall be awarded * * * to the lowest responsible bidder furnishing the required security after advertisement for sealed bids in the manner provided by this section”.

By its own terms, the statute applies only to contracts for public work or purchase contracts, and makes no mention of leases or rental type arrangements. At the outset, we note our agreement with Special Term that the acquisition of the phone system cannot without contextual strain be classified as a public work contract. As Special Term noted, the installation of the system was not a substantial aspect of the contract, and the contract did not otherwise involve performance of services or specialized skills (Opns State Comp No. 79-762). However, the hybrid nature of the two-tier rate at least arguably brings the transaction within the meaning of the term “purchase contracts”.

In Matter of Signacon Controls v Mulroy ( 32 NY2d 410 ) this court reaffirmed the importance of competitive bidding statutes to safeguard the public interest, in that they invite competition, and discourage favoritism, improvidence, extravagance, fraud and corruption (10 McQuillin, Municipal Corporations, § 29.29). Nonetheless, although section 103 must be read in conjunction with this underlying purpose (see General Municipal Law, § 100-a) it also must be recognized that competitive bidding statutes constitute a substantial imposition on the activities of municipal governments. It is important, therefore, that we do not extend the coverage of the statute into areas unintended by the Legislature.

It has long been accepted that a municipality may lease equipment without complying with the competitive bidding

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requirements of section 103 of the General Municipal Law (see, e.g., Opns St Comp Nos. 78-519, 78-443). However, it is equally well recognized that one cannot avoid the effect of section 103 merely by casting an agreement which is truly a sale in terms of a lease (Opns St Comp No. 78-519; 18 Opns St Comp, 1962, p 176). The Appellate Division opined that this is exactly the nature of the transaction in this case. We disagree.

Without doubt neither the term “lease” nor the term “sale” can be absolute in meaning, and in the innumerable variations of contracts either a lease or a sale can possess attributes of one or the other. However, it is the total character of the arrangement which controls, and in making this assessment it is important to note that title for all equipment to be provided under the two-tier tariff always remains in the New York Telephone Company. The Appellate Division deemed this insignificant because in its view the useful life of the equipment was expended at the end of the “A” rate term, and, supposedly, the equipment over which New York Telephone retained ownership would then have been of little value. In support of this view, the Appellate Division employed as a useful life the term of years set forth in the Local Finance Law for telephone systems in general (see Local Finance Law, § 11.00, subd a, par 25). We believe this reliance on the Local Finance Law inappropriate because the useful life to which that statute refers does not necessarily have any close relationship with the equipment actually contemplated by the contract in this case.

It is also significant that the term of the “A” rate need not correspond to the useful life, because that term can be selected from various alternatives by the subscriber. This problem was answered below by noting that a subscriber who returns equipment receives a credit for the remaining useful life or salvage value. However, this credit is a fixed amount for the type of equipment, and does not have any direct relationship to the specific equipment involved.

Finally, we find it significant that New York Telephone, in addition to retaining title to the equipment, also assumes the risk of loss due to events not within the customer’s con

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trol, and also the obligation to service and repair the equipment. Moreover, there is not the slightest hint of subterfuge in this arrangement. On the whole, we believe that the two-tier arrangement is in the nature of a true lease (cf. Albion Ind. Center v Town of Albion, 62 AD2d 478 ) and therefore is not within the ambit of the competitive bidding statute.

In view of the disposition of this appeal, we affirm the denial by the Appellate Division of attorney’s fees to the petitioners. The order of the Appellate Division should be modified, with costs to New York Telephone Company to the extent of dismissing the petition, and, as so modified, affirmed.

Chief Judge Cooke and Judges Jasen, Jones and Meyer concur; Judges Gabrielli and Fuchsberg taking no part.

Order modified, with costs to New York Telephone Company, in accordance with the opinion herein, and, as so modified, affirmed.

Cases cited

In re Board of Water Commissioners of White Plains 71 App Div 544 N.Y. App. Div. 1902-04-25 p. 427
In re the Petition of the Board of Water Commissioners of the Village of White Plains 176 NY 239 N.Y. 1903-10-13 p. 427
Bright Homes, Inc. v. Wright 8 NY2d 157 N.Y. 1960-07-08 p. 427
Board of Public Utility Commissioners v. New York Telephone Co. 271 US 23 SCOTUS 1926-04-12 p. 428
Leitner v. New York Telephone Co. 277 NY 180 N.Y. 1938-03-08 p. 428
People ex rel. Public Service Commission v. New York Telephone Co. 287 NY 803 N.Y. 1942-03-05 p. 428
Cardone v. Consolidated Edison Co. of New York, Inc. 197 Misc 188 N.Y. App. Term 1949-10-27 at 276 p. 428
Blank v. Kearny 44 App Div 592 N.Y. App. Div. 1899-11-28 p. 428
Harlem Gaslight Co. v. Mayor 33 NY 309 N.Y. p. 428
Marino v. Town of Ramapo 68 Misc 2d 44 N.Y. Sup. Ct. 1971-07-06 p. 428
General Telephone Co. of Upstate New York, Inc. v. Lundy 17 NY2d 373 N.Y. 1966-06-02 p. 428
Chevron Oil Co. v. Huson 404 US 97 SCOTUS 1971-12-06 p. 428
City of Phoenix v. Kolodziejski 399 US 204 SCOTUS 1970-06-23 p. 428
Cipriano v. City of Houma 395 US 701 SCOTUS 1969-06-16 p. 428
Harris v. Jex 55 NY 421 N.Y. 1874-01-20 p. 428
Childs v. Childs 69 AD2d 406 N.Y. App. Div. 1979-07-11 p. 428
Flushing National Bank v. Municipal Assistance Corp. 88 Misc 2d 1047 N.Y. Sup. Ct. 1977-02-23 p. 428
Incorporated Village v. Guardian Federal Savings & Loan Ass'n 87 Misc 2d 344 N.Y. Sup. Ct. 1976-04-26 p. 428
Williams v. Bryant 53 AD2d 229 N.Y. App. Div. 1976-07-12 p. 428, p. 429
Tele/Resources, Inc. v. Public Service Commission 58 AD2d 406 N.Y. App. Div. 1977-07-14 p. 428, p. 429
Executone/Monroe County, Inc. v. Public Service Commission 71 AD2d 138 N.Y. App. Div. 1979-11-29 p. 428
Signacon Controls, Inc. v. Mulroy 32 NY2d 410 N.Y. 1973-05-31 p. 428, p. 431
Jered Contracting Corp. v. New York City Transit Authority 22 NY2d 187 N.Y. 1968-05-29 p. 428
Sweet Associates, Inc. v. Gallman 36 AD2d 95 N.Y. App. Div. 1971-02-25 p. 428
Sweet Associates, Inc. v. Gallman 29 NY2d 902 N.Y. 1972-01-06 p. 428
Randolph McNutt Co. v. Eckert 257 NY 100 N.Y. 1931-07-15 p. 428
Molloy v. City of New Rochelle 198 NY 402 N.Y. 1910-05-10 p. 428
Lefkowitz v. Public Service Commission 50 AD2d 338 N.Y. App. Div. 1975-12-30 p. 429
Lefkowitz v. Public Service Commission 40 NY2d 1047 N.Y. 1976-12-28 p. 429
Consolidated Edison Co. of New York, Inc. v. New York State Public Service Commission 53 AD2d 131 N.Y. App. Div. 1976-07-08 p. 429
Chenango v. Public Service Commission 46 AD2d 601 N.Y. App. Div. 1975-02-27 p. 429
City of New York v. Public Service Commission 17 AD2d 581 N.Y. App. Div. 1963-02-08 p. 429
Brooklyn Union Gas Co. v. Public Service Commission 34 AD2d 71 N.Y. App. Div. 1970-04-13 p. 429
Gerzof v. Sweeney 22 NY2d 297 N.Y. 1968-06-06 p. 429
Albert Elia Building Co. v. New York State Urban Development Corp. 54 AD2d 337 N.Y. App. Div. 1976-11-12 p. 429
Nance v. Town of Oyster Bay 54 Misc 2d 274 N.Y. Sup. Ct. 1967-07-19 p. 429
Albion Industrial Center v. Town of Albion 62 AD2d 478 N.Y. App. Div. 1978-05-19 p. 433

Statutes and regulations cited

General Municipal Law p. 429, p. 431, p. 432