Request By:
Keith Hunter, Esq.
General Counsel
Kentucky Lottery Corporation
Two Paragon Centre, Suite 400
6040 Dutchmans Lane
Louisville, Kentucky 40205-3271
Opinion
Opinion By: FREDRIC J. COWAN, ATTORNEY GENERAL; Gerald R. Gerhard, Assistant Attorney GeneralNorman T. Lamarre, President
By letter of July 10, 1989, Associated Press Correspondent Mark R. Chellgren has appealed your July 7, 1989 partial denial, on behalf of the Kentucky Lottery Corporation, of his request to inspect documentation pertaining to the procurement process for an automated lottery gaming system and associated services.
FINDINGS IN BRIEF
While the procedure followed in denying inspection of public records was consistent with Open Records provisions, the basis of denial cannot be sustained. End prices submitted to a public agency for major elements of a procurement are not trade secrets. Accordingly, bids or proposals containing such information must be made available for inspection when all bids have been rejected or a contract has been awarded.
FACTUAL BACKGROUND
In May, 1989, the Kentucky Lottery Corporation ("KLC"), a public agency for purposes of Kentucky's Open Records laws, sent Requests for Proposals ("REP") to a number of vendors for the supply of services and equipment necessary to implement and operate "on-line" lottery games on a statewide basis in Kentucky. Responses were to be submitted by June 6, 1989.
In accordance with provisions 2.9 the RFP (RFP, p. 5, copy attached) , proposals submitted to the Kentucky Lottery Corporation were to become "property of the Corporation upon receipt and will not be returned to the vendor. " Under provision 2.10 of the RFP (also at P. 5), contents of the proposal of the successful bidder were to become part of any contract awarded as a result of the procurement process.
Provision 4.5 of the RFP called for vendors to quote prices for specific options and categories therein. Vendors were to provide the pricing section of their porposals separately bound and sealed. " (RFP, pp. 37-39, copy attached. )
On June 6, 1989, two vendors, Scientific Games, Inc., of Atlanta, Georgia, and GTECH, Inc., of Providence, Rhode Island, (hereinafter Scientific Games, and GTech, respectively) submitted proposals to the KLC. What might be termed technical and sales/marketing sections of the proposals were submitted, as were pricing proposals. The pricing proposals, as called for by the RFP, were separately bound and sealed.
As understood from an interview by this writer with KLC president Frank Keener, at KLC offices on July 26, 1989, enclosed with the pricing proposals of both Scientific Games, and GTECH, were statements requesting that pricing information, in view of the detail furnished, be held confidential (See Scientific Games' "Pricing" "Request for Confidentiality" p. "1" and, GTECH/VICTOR Markowicz June 6, 1989, letter to Frank O. Keener, President, copies of both attached).
Also understood from the interview with Mr. Keener (supra), was that pricing information furnished by the vendors in their proposals (and subsequent submissions) was of the following character: (1) Pricing detail furnished by the two vendors in their initial responses consisted of bid prices for those elements or items called for by the KLC's RFP (no additional pricing information was furnished beyond that called for by the RFP). (2) Pricing submissions in what might be termed the "second round" (after changes to the RFP, changing the time period from five years to two, adding television monitors, and calling for only a "bottom line" price), in the case of Scientific Games, was a re-do of its initial submission detail with additional prices added for the new items. GTech quoted a gross price (gave no itemization by category in the second round). (3) During final negitiations (apparently by telephone), a bottom line price was submitted by each vendor - There was no itemization by category or element.
At a KLC Board meeting on July 5, 1989 the KLC Board awarded the contract to GTECH.
What might be termed a "summary" of the evaluation process followed in selecting the contractor was made available to the media at the Board meeting on July 5, 1989 (copy attached) .
The two page "summary" described the KLC's process for evaluation of the "on-line" proposals. It also detailed the "scores" obtained in various evaluation topical areas, by both Scientific Games and Gtech, and indicated that the KLC staff Recommended that the "award for on-line lottery system be given to GTECH Corporation of Rhode Island."
The summary was accompanied by two pages (one for Scientific Games, and one for GTECH) labeled as "Kentucky Lottery Corporation On-Line Pricing Evaluation" with a subheading "Acquisition and Operations 1500 Terminals + 150 for repairs. Gross costs were set forth regarding "turn-key system acquisition," "2 year operations," and "total 2 year cost." No prices were shown for any the seven sub-categories comprising the "turn-key System acquisistion," or for the four sub-categories comprising the "2 year operations." A "bar graph" sheet also accompanied the "summary" giving a "side-by-side" comparison of the gross amounts bid by the two vendors for the major cost categories noted above.
By letter dated July 5, 1989, Mark Chellgren, of the Associated Press, requested:
[A]ccess to and copies of all documents submitted in relation to the corporation's on-line contract awarded this date to GTECH Corp.
Specifically this should include access to pricing data submitted by both GTECH and Scientific Games Inc. in conjunction with the lottery's initial request for proposal and later request for pricing information.
By letter of July 6, 1989 (copy attached) , Norman LaMarre, president of Scientific Games, Inc., wrote in part:
In order to arrive at a meaningful understanding of the evaluation, we concluded that it is necessary to review GTech's Proposal and subsequent amendments, particularly its pricing submissions. We request a copy of GTech's Proposal and subsequent amendatory submissions. We consent to your release of our Proposal and other submissions upon the release of the comparable portions of GTech's Proposal and submissions.
By letter of July 7, 1989 (copy attached) , GTech general counsel Cynthia Nebergall reaffirmed its "request" that pricing information furnished to the KLC on June 6, 1989 be kept confidential. Ms. Nebergall stated that "This information is proprietary trade secret information the disclosure of which would cause significant competitive harm to GTech."
By letter of July 7, 1989, you indicated to Mr. Chellgren that the KLC would make available, regarding both GTech Corporation and Scientific Games, Inc., those firms' management and technical proposals and appendices. You also indicated:
Price information for on-line services provided to the Kentucky Lottery Corporation by the aforementioned vendors was done so in strict confidence (see letters attached). Pricing data is a trade secret and exempt from disclosure under KRS 154A.040 (1) (b) and 61.878 (1) (j). Consequently, this information will not be provided.
You responded to Mr. LaMarre's request (supra) in substantially the same manner as your response to Mr. Chellgren.
You promptly forwarded a copy of your denial letter to the Attorney General.
By letter of July 10, 1989, Mr. Chellgren appealed to this office, your partial denial of records to which he had sought access.
OPINION OF THE ATTORNEY GENERAL
KRS 61.880(2) provides in part for the Attorney General to review, upon request, a denial of a request to inspect public records, and issue a written opinion stating whether an agency " . . . acted consistent with provisions of KRS 61.870 to 61.884."
The Kentucky Lottery Corporation is a public agency for purposes of applicability of Kentucky's Open Records statutes (KRS 154A.020(1)). Its records are, in general, subject to the provisions of those statutes. KRS 154A.040.
KRS 154A.040 provides in part:
(1) All records of the corporation shall be deemed open records and subject to public inspection, unless: (a) Such record is deemed privileged pursuant to KRS 61.870 to 61.884; (b) Such record involves a trade secret of the corporation or of a vendor;
By letter of July 7, 1989, you denied in part Mr. Chellgren's July 5, 1989 request to inspect certain records held by the Kentucky Lottery Corporation. Your letter cited a statutory basis (KRS 154A.040 (1) (b) "trade secret" ) for denial, together with the specific provision of the Open Records laws (61.878(1)(j)) providing for denial of inspection where disclosure is prohibited or restricted by enactment of the general assembly. Your letter contained the brief explanation that disclosure of the information was denied as a trade secret. You promptly forwarded a copy of your denial letter to the Attorney General. To this extent you "acted consistent with the provisions of KRS 61.870 to 61.884."
The question remains, however, whether the price information submitted by the two vendors is of "trade secret" character, so that inspection of records containing such information could be properly denied pursuant to KRS 61.878(1)(j) and 154A.040(1)(b). We believe it is not. Inspection must be permitted.
Inspection of records upon which vendors set out their bid prices for certain major elements of a public procurement was denied on the grounds that "price information for on-line services provided to the Kentucky Lottery Corporation was done so in strict confidence, " citing letters of the two vendors who responded to the RFP, and "pricing data is a trade secret exempt from disclosure pursuant to KRS 154A.040(1)(b) and KRS 61.878(1)(j)."
The RFP makes no mention of confidentiality of proposals. It does indicate that "All proposals become the property of the [Kentucky Lottery] corporation and will not be returned to the vendor. " RFP, p. 5, § 2.9. The RFP further indicates that "The contents of the proposals of the successful bidder will become part of any contract awarded as a result of this procurement. " RFL, p. 5, § 2.10. Such terms weigh against the proposals, including pricing information therein, being treated as trade secrets, since the proposals submitted become the "property" of the KLC.
"Trade secret" as used in KRS 154A.040(1)(b) is not defined by statute. In
Progress Laundry Co. v. Hamilton, Ky., 270 S. W. 834, at 835, (1925), Kentucky's then highest court adopted a definition of "trade secret" which provides:
A trade secret is a plan or process, tool, mechanism, or compound, known only to its owner and those of his employees to whom it is necessary to confide it. It is a property right which equity, in the exercise of its power to prevent breach of trust, will protect. It differs from a patent in that as soon as the secret is discovered, either by an examination of the product or in any other honest way, the discoverer has the full right to use it.
This definition indicates that a "trade secret" is something integral to a product or its production. The definition makes no mention of "price," which necessarily is conveyed to others each time the product is sold.
In OAG 88-1 we upheld denial of inspection of certain pricing schedules we believed set forth "costing and pricing strategy," but we noted that the total price of the contract there involved was a matter of public record. We noted further that prices for certain major elements of the contract were furnished to the requesting party.
There is no contention here that the prices quoted for certain key elements or categories of the procurement (e.g. central system hardware, communication equipment, terminals, etc.,) involve "costing and pricing strategy" for those elements or categories. The " price detail" or " price information" here involved are the end prices bid for certain major contract elements. Such information may be clearly distinguished from "costing and pricing strategy information" for which denial of inspection was upheld in OAG 88-1.
It is axiomatic that the public is entitled to scrutinize procurements of public agencies. Where pricing for major elements or categories of a procurement has been submitted to a public agency by a vendor or competing vendors, in the course of a public procurement process, the original records regarding such information must be made available for public inspection, so that the public may make meaningful analysis of a procurement. End prices bid for major elements of a contract or potential contract simply are not trade secrets, particularly after final rejection of all proposals, or the acceptance of a proposal and the award of a contract. OAG 85-68.
The originals of the bids or proposals (and any amendments thereto) submitted by the vendors here involved should be promptly made available for Mr. Chellgren's inspection, and for inspection by others upon request. Of course to protect the integrity of the literal original of certain public documents, for example contracts and related documentation, the furnishing of a copy of the original, certified to be a true and accurate copy thereof, might suffice, subject to the original being made available if demanded.
The findings herein are in keeping with the principle that "[T]he Kentucky lottery corporation shall be accountable to . . . the people of the Commonwealth . . . through thorough financial disclosure . . ." set forth in the statutes establishing the corporation. KRS 154A.020(1).
We note also that one having inspected records is entitled to be furnished copies of them upon payment of a reasonable fee. Such fee shall not exceed the actual cost of copying, and may not include the cost of staff required. KRS 61.874.
As required by statute, a copy of this opinion is being sent to Mr. Mark R. Chellgren, the requesting party.
Your agency may have a right to challenge this opinion in the Jefferson Circuit Court pursuant to KRS 61.880(5) and KRS 154A.040(2).
proposals by the Issuing Office prior to the time specified for the receipt of proposals. Any proposals received beyond the specified date and time will be rejected by the Corporation.
2.9 VENDORS' PROPOSALS
In order to be considered for selection, vendors are requested to submit a complete response to all specifications contained in this Request for Proposal. That response should consist of a document with one original copy and six copies of each proposal being submitted to the Issuing Office. No other distribution of the proposals will be made by the vendor submitting the proposal. There will be no opening and reading of the proposals. All proposals become the property of the Corporation upon receipt and will not be returned to the vendor.
By submitting a proposal, the Contractor covenants and agrees that it fully understands and will abide by the terms and conditions of this RFP and will not make any claims for, or have any rights to, cancellation or relief without penalty due to any misunderstanding or lack of information.
2.10 ACCEPTANCE OF PROPOSAL CONTENT
The contents of the proposal of the successful bidder will become part of any contract awarded as a result of this procurement process. The content of this RFP will also become part of the resulting contract.
2.11 ECONOMY OF PREPARATION
Proposals should be prepared simply and economically, and provide a straightforward, concise description of the vendor's include the specific recommendations of the vendor regarding other lottery games which can be added to the system.
4.5 PRICE SECTION
The Corporation wishes to evaluate several alternative approaches under which the Corporation would:
1. Acquire a turn key system from the Contractor;
2. Contract for all, or some portion of, the requisite operating goods and services in which event those goods and services not acquired from the Contractor would be provided by the Corporation or by one or more third parties.
The pricing options of interest to the Corporation are described in Option A and in Option B below:
OPTION A: Full Facilities Management: Under this pricing alternative, the vendor will provide a turn-key system and all requisite operating goods and services for a weekly fee consisting of two elements as follows:
1. A fixed weekly fee to be quoted by the vendor, plus
2. A percentage to be quoted by the vendor of that week's on-line sales.
The initial turn-key system shall include 1000 installed terminals, and the fee structure quoted by the vendor shall include the addition, at the Corporation's sole discretion, of up to 1000 additional installed terminals. The structure of the vendor's bid is a follows:
Total Weekly Fee = W + ( P X Sales)
Where: W is the fixed weekly fee to be quoted by the vendor; and
P is the percentage figure to be quoted by the vendor
OPTION B: Turn Key System Acquisition: The Corporation wishes to evaluate the alternative under which it may acquire the turn-key system.
For each category listed below, the vendor shall quote:
1. A one-time purchase price (payable upon system acceptance); as well as
2. An alternative monthly lease price.
The categories are:
a) All central computer and communication and management terminal equipment
b) A quantity of 1100 terminals consisting of 1000 installed terminals plus 100 spare terminals for the initial turn-key system. Additional terminals will be acquired in increments of 200.
c) All facilities proposed by the vendor including lease-hold improvements, purchased security and/or environmental and/or support equipment.
In addition, the vendor is requested to quote its fee for the granting to the Corporation of a license to use the vendor's software plus quote a fee for the turn-key system implementation.
For each of the operational categories listed below, the vendor shall quote:
1. A fixed weekly fee; plus
2. A percentage of sales for that week.
The categories are:
a) All central site operating goods and services, including equipment maintenance.
b) All terminal repair services.
c) All terminal supplies.
d) All field service related goods and services, including terminal swapping and delivering of terminal supplies.
e) Complete operation, consisting of all elements of categories a - d immediately above. The Corporation recognizes the economics that arise when a single vendor executes all aspects of an on-line operation. Accordingly, the fixed weekly fee quoted by the vendor for that category cannot exceed the aggregate of the fixed weekly fees quoted in categories a - d immediately above; nor can the percentage figure quoted for this category exceed the aggregate of the percentage figures quoted in categories a - d immediately above.
f) On-going software support and consulting service, including maintenance of supplied software, the development, implementation and maintenance of future software according to mutually agreeable specifications, and consulting in all areas of on-line lottery operation and management.
OPTION A: Fixed Weekly Fee& Percentage Full Facility Management XX OPTION B: PurchaseLease Fee Turn-Key System a. Central SystemX X b. TerminalsX X c. FacilitiesX X d. Software LicenseX e. ImplementationX Operations Fixed Weekly Fee& Percentage a. Central SiteXX b. Terminal RepairXX c. Terminal SuppliesXX d. Terminal SwappingXX e. All of aboveXX f. Software and ConsultingSupportXX
The Price Section is to be separately bound and sealed.
THE KENTUCKY LOTTERY CORPORATION PRICE SECTION
Pricing
Request for Confidentiality
The North American lottery industry has a relatively few number of suppliers of on-line systems and there is aggressive competition among vendors. When this condition is considered in light of the detailed pricing requirements of the KLC it becomes clear that serious competitive disadvantages could result from the release of the pricing section of a vendor's Proposal.
Therefore, Scientific Games, having complied with the detailed pricing requirements of the KLC on-line RFP, requests that the pricing section of our Proposal be held in confidence by the KLC. In particular, we request that the pricing section be held confidential from requests under the Freedom of Information Act. We believe that the release of the pricing information contained in our Proposal would place us at a serious competitive disadvantage.
Mr. Frank O. Keener, PresidentKentucky Lottery CorporationTwo Paragon CentreSuite 4006040 Dutchman's LaneLouisville, KY 40205Dear Mr. Keener:
Enclosed is GTECH's pricing for the on-line gaming system. The prices, broken out in the manner that you requested, are overly informative about certain of our costs and our operational approaches. Therefore, we offer these prices to you as proprietary information and we appreciate your confidential treatment.
Please be assured that the nature of the submission has my explicit approval. The handwritten submission arises from our attempts, to the very last minute, to refine and reduce the cost of our offering to you.
We are prepared to discuss these prices with you and your staff in whatever level of detail you desire, at your convenience.
KENTUCKY LOTTERY CORPORATION
On-Line Evaluation
July 5, 1989
PROCESS
In may, 1989, the Kentucky Lottery Corporation issued a Request for Proposals (RFP) for the implementation and operation of an on-line lottery computer system.
Copies of the RFP were sent to Control Data/Automated Wagering, Electronic Data Systems, General Instruments Corporation, GTECH Corporation, Intermark Wagering, Inc. and Scientific Games, Inc.
Two vendors (GTECH Corporation and Scientific Games, Inc.) submitted responses to the RFP for evaluation.
Prior to the issuing of the RFP, evaluation criteria and a 1000 point evaluation was determined. The areas of evaluation and points assigned to each area are as follows:1.Facilities Management Capabilities100 points2.Terminal Capabilities100 points3.System Capabilities100 points4.Software Capabilities100 points5.Security100 points6.Sales/Marketing Capabilities100 points7.Pricing Start-up cost200 points 2 year operations cost100 points
An evaluation team consisting of Kentucky Lottery Senior staff read the responses from each vendor, visited sites of operation of each vendor and attended a day-long presentation by each vendor. Each member of the evaluation team then scored their evaluation booklets for both vendors. Scoring was completed by each member without influence or consultation with other team members and without knowledge of the pricing. The vendor who scored the most points in a category received 100 percent of the points for that category and the other vendor received points proportionally. The points received by each vendor for all categories except price are as follows:GTECHScientific Games1.Facilities Management10097.932.Terminal Capabilities99.891003Systems Capabilities10098.694.Software Capabilities10099.635.Security10099.496.Sales/Marketing200197.82 TOTAL699.89692.56
After the completion of the technical and sales/marketing evaluations, the sealed pricing section of the proposals were opened. Both vendors were called in for clarification and negotiations of a best and final price. The points scored for each vendor are: GTECHPoints Start-up200Two year operation100 SCIENTIFIC GAMESPoints Start-up177.61 Two year operation68.23
RECAP GTECHSCIENTIFIC GAMES Technical499.89 points494.74 points Sales/Marketing200.00 points197.82 points Pricing300.00 points245.84 points TOTAL999.89 points938.40 points
RECOMMENDATION:
After a thorough analysis of the technical, sales/marketing, and pricing proposals submitted by both vendors, it is the recommendation of the Kentucky Lottery Corporation staff that the award for an on-line lottery system be given to GTECH Corporation of Rhode Island.KENTUCKY LOTTERY CORPORATIONON-LINE PRICING EVALUATIONACQUISITION AND OPERATIONS1500 TERMINALS + 150 FOR REPAIRSGTECH CORPORATION - ALL FIGURES BASED ON 2 YEAR PERIOD (104 WEEKS) *2 - ALL FIGURES BASED ON $ 350 MILLION OVER THE 2 YEAR PERIODTURN-KEY SYSTEM ACQUISITION2 YEAR OPERATIONSTOTAL 2 YEAR COST______________________________________________________________CENTRAL SYSTEM HARDWARECENTRAL SITE$ 16,266,000COMMUNICATION EQUIPMENTTERMINAL REPAIR=================TERMINALSTERMINAL SUPPLIES13' COLOR MONITORSTERMINAL SWAPPINGON-LINE SITE FACILITY_______________SOFTWARE$ 4,416,000IMPLEMENTATION FEE===============_______________$ 11,850,000===============