Arizona Supreme Court holds that Gift Clause does not require that a public entity maximize profit from arrangements entered with private parties.

For decades, an Arizona city entered into agreements with a non-profit corporation to operate a competitive youth swimming program at the city’s pools in exchange for a license for the use of the city’s pools when they weren’t being used for other public programs. Around 2006, a different entity began seeking to replace the non-profit as the operator of the swimming program and the license.

In 2016, the city renewed the license with the non-profit. A year later, the challenger entity complained that the license was granted for below-market rates, in violation of the Arizona Constitution’s Gift Clause, and asked that the license be rescinded. The city stood by its decision but, prior to the license’s 2019 expiration, issued a request for proposals regarding operation of the swimming program.

Both the non-profit and the challenger submitted bids that were scored both on financial and non-pecuniary factors. After the initial review of the proposals, the non-profit was awarded the license. The challenger submitted a bid protest, which was rejected, but then the challenger discovered that the proposals had been mis-scored and it had actually submitted the highest scoring proposal. After the challenger raised this issue with the city and demanded that it be awarded the license, the city cancelled the RFP process and later renewed the non-profit’s existing license.

The challenger then sued the city, alleging that the award of the license to the non-profit violated the Gift Clause. The superior court granted summary judgment for the city. On appeal, the court of appeals affirmed. The challenger then filed a petition for review in the Arizona Supreme Court.

The Arizona Supreme Court accepted review and affirmed the court of appeals’ conclusion that the grant of the license did not violate the Gift Clause. The essential question was whether the city’s “get” was excessively outweighed by its “give.” The challenger’s argument was that, by virtue of its own proposal being far more financially lucrative to the city, the city gave up too much when awarding the license to the non-profit. The Court noted that the challenger’s failed bid was relevant to the determination, but not dispositive. Ultimately, the Gift Clause is concerned with making sure the city’s get is proportional to the give—it does not ask whether the city could have got a better deal. This was particularly true here, where the city was attempting to provide a public service at lower rates to its citizens. In other words, maximizing profit was not the goal, and the Gift Clause does not dictate that maximizing financial profit must be the goal—nonpecuniary benefits count as consideration.

The Court also rejected a separate argument that the challenger was entitled to declaratory relief because the city had failed to perform a ministerial act by awarding the license to the highest-scoring bidder. The challenger’s argument was premised on a line of cases that involved bids that were required to be awarded to the lowest bidder. Here, in contrast, the city had no obligation to award the license to the proposal that would have maximized profit.

With all of this said, the Court did ultimately reverse the superior court’s entry of summary judgment based on the challenger’s argument that the city had acted arbitrarily and capriciously in awarding the license to the non-profit. While the Gift Clause did not require the license to go to the highest bidder, the city still could not award it to the non-profit purely out of favoritism. The Court noted that there were several anomalies in the process of the RFP process that raised fact questions as to whether the city had acted purely out of favoritism and thus remanded for additional proceedings.

Vice Chief Justice Timmer authored the opinion for a unanimous court.

Posted by: Joshua J. Messer