If Maine cancels school funding mid-contract, does the state owe a vendor like Apple money for laptops already delivered?

Plain-English summary

Representatives Philip Cressey, Jr. and Brian Duprey asked the AG what Maine would owe Apple Computer if the Legislature failed to fund or de-appropriated funds for the Maine Learning Technology Endowment (MLTE) contract. The MLTE was the initiative that gave seventh- and eighth-grade students and teachers laptops; the December 27, 2001 contract was a multi-year deal between the Maine Department of Education and Apple, amended in April 2002.

AG G. Steven Rowe walked through the contract's structure. The amended contract has two payment components. The Hardware Purchase Component (the laptops and network cards) is a Master Lease Purchase Agreement, with DOE obligated to pay rent only for devices "accepted" and added to a schedule. As of the opinion, 2,868 devices had been accepted and 16,780 ordered but not accepted. The Services Component (wireless networks, training, software, support) is purchased under the basic contract on a payment schedule, with most work substantially complete.

Both components contain non-appropriation clauses. If the Legislature de-appropriates, DOE is relieved of further obligations under the Hardware Component except for rent already due, and must return the accepted devices to Apple at DOE's expense. Under the Services Component, DOE owes payments only as already scheduled.

Apple might still argue for unpaid services and equipment already delivered. The AG pointed to SC Testing Technology, Inc. v. Department of Environmental Protection, 688 A.2d 421 (Me. 1996), which held that the state was not liable when the Legislature repealed the Motor Vehicle Emissions Inspection Program. The Law Court said that "when a party enters into a contract with a state agency, it does so with the understanding that the Legislature may at some future time take action that nullifies the subject matter of the contract." Apple had expressly assumed the risk of program termination through the non-appropriation clauses. The AG concluded SC Testing's reasoning likely shielded DOE from damages for cancelled future obligations.

The AG closed with two cautions. First, the precise scenario had not been litigated, so prediction is uncertain. Second, even where no legal liability exists, defunding mid-contract carries non-legal costs: damage to the state's credit, reputational harm at the bargaining table, and higher prices on future contracts. These costs were noted by Justice Kermit Lipez in his SC Testing dissent.

Currency note

This opinion was issued in 2002. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Common questions

Q: What is a non-appropriation clause?
A: A contract provision that excuses a state from performance if the legislature does not appropriate the funds necessary to pay. Most multi-year state contracts contain one, because state agencies cannot legally commit future legislatures to spend money. Without the clause, the agency arguably could not enter the contract in the first place.

Q: What was the Maine Learning Technology Endowment?
A: A 2001 initiative (Public Laws 2001, ch. 358) to give portable computers to all Maine 7th and 8th grade students and teachers. The state contracted with Apple in December 2001 for laptops, wireless networks, training, and support. The amended contract bifurcated payments into a Hardware Purchase Component (Master Lease Purchase Agreement) and a Services Component.

Q: If Maine de-appropriated MLTE funding, what did the state owe Apple?
A: Per the AG: (1) rent already due and budgeted on the laptops accepted in the current quarter (about $100,000 for 2,000 devices at the time of the opinion), (2) the cost of returning the accepted devices to Apple, and (3) Services Component payments already scheduled. Apple could argue for more, but the non-appropriation clauses and SC Testing precedent likely cut off liability for future obligations.

Q: What about the 16,780 laptops ordered but not yet accepted?
A: Under the Master Lease Purchase Agreement, DOE is obligated to pay rent only on devices that have been accepted and added to a schedule. The 16,780 ordered-but-unaccepted devices generated no payment obligation. If they had been accepted before the de-appropriation, the AG noted Apple might argue for rent on those as well.

Q: What is the SC Testing Technology case?
A: SC Testing Technology, Inc. v. Department of Environmental Protection, 688 A.2d 421 (Me. 1996). The Maine Law Court held DEP was not liable for damages when the Legislature repealed the Motor Vehicle Emissions Inspection Program. The Court reasoned that contractors with state agencies bear the risk of program termination because legislatures retain plenary authority to change policy. The case is the leading Maine authority on state liability after program defunding.

Q: Are there non-legal consequences to de-appropriating funds mid-contract?
A: Yes. The AG flagged three: damage to the state's creditworthiness, weakening of the state's bargaining position in future contracts, and likely cost increases as future vendors price in the political risk. Justice Lipez's SC Testing dissent collected several of these consequences.

Q: Would a court block the Legislature from de-appropriating?
A: No. The Legislature's appropriations power is plenary. Courts will not order the Legislature to appropriate money, and the SC Testing logic confirms that a contractor's expectations do not constrain future legislative choices.

Background and statutory framework

The Maine Learning Technology Endowment was created by Public Laws 2001, chapter 358, and its purpose statement appears at 20-A M.R.S.A. § 19102: to "enable the full integration of appropriate learning technologies into teaching and learning for the State's elementary and secondary students." The Commissioner of Education, advised by the MLTE Advisory Board, was to develop a Learning Technology Plan, beginning with 7th graders in school year 2002-2003 and extending to 8th graders in 2003-2004.

20-A M.R.S.A. § 19105(3) anticipated that the Commissioner would use the Endowment Fund to purchase portable computing devices "or acquire portable computing devices through appropriate financing arrangements, including leases." The DOE used the Apple Master Lease Purchase Agreement structure to spread payments over multiple fiscal years and align them with appropriations.

Two contract provisions did most of the work in the opinion's analysis. The Master Lease Purchase Agreement (Hardware Component) had a non-appropriation clause that relieved DOE from further rent payments after a de-appropriation and gave DOE the right to return the devices to Apple at its expense. Rider B of the basic contract (Services Component) had a similar clause excusing DOE from payment if the Legislature did not appropriate, did not authorize, or de-appropriated funds. Both clauses placed the risk of legislative defunding on Apple.

SC Testing Technology, Inc. v. Department of Environmental Protection, 688 A.2d 421 (Me. 1996), provides the legal backdrop for how Maine courts treat post-termination liability. SC Testing built and operated centralized emissions-testing facilities under contract with DEP. The Legislature later repealed the program. The Law Court held DEP not liable for damages because the contract language and surrounding circumstances showed SC Testing assumed the risk of program repeal. The Court's broader pronouncement, that "when a party enters into a contract with a state agency, it does so with the understanding that the Legislature may at some future time take action that nullifies the subject matter of the contract and, necessarily, the respective performance obligations of the parties," reaches beyond facts like SC Testing.

The opinion acknowledged uncertainty. SC Testing involved express assumption of repeal risk by the contractor; the MLTE non-appropriation clauses are functionally similar but not identical. Apple might frame a constructive-trust or quantum meruit argument for services and equipment already delivered. The AG could not predict how a court would handle that argument on novel facts.

Justice Lipez's dissent in SC Testing collected the non-legal costs of defunding mid-contract: creditworthiness, bargaining position, future contract pricing. The AG included these as policy considerations distinct from the legal analysis.

Source

• Landing page: https://www.maine.gov/legis/lawlib/lldl/agops/agops.htm
• Original PDF: https://lldc.mainelegislature.org/Open/AG/Opinions/2002/ag_20020802.pdf

Original opinion text

STATE OF MAINE
OFFICE OF THE ATTORNEY GENERAL
6 STATE HOUSE STATION
AUGUSTA, MAINE 04333-0006
G. STEVEN ROWE
ATTORNEY GENERAL

August 2, 2002

Representative Philip Cressey, Jr.
Representative Brian M. Duprey
Maine House of Representatives
2 State House Station
Augusta, Maine 04333

Re: State liability on Maine Learning Technology Endowment contract

Dear Representatives Cressey and Duprey:

This is in response to your request of July 9, 2002, regarding the State's liability to Apple Computer, Inc. ("Apple"), in the event the Legislature fails to appropriate funds or de-appropriates funds thereby precluding the Maine Department of Education ("DOE") from meeting its obligations under the contract for the Maine Learning Technology Endowment initiative between DOE and Apple.

Background. The Maine Learning Technology Endowment was created by enactment of Public Laws, 2001, chapter 358, to "enable the full integration of appropriate learning technologies into teaching and learning for the State's elementary and secondary students." 20-A M.R.S.A. § 19102. The law directed the Commissioner of Education with the advice of the Advisory Board of the Maine Learning Technology Endowment to develop a Learning Technology Plan, which was to begin in school year 2002-2003 "with a phase-in approach that begins with 7th grade students and extends in school year 2003-2004 to 8th grade students in public schools." Public Laws 2001, chapter 358, Sec. II-7(3). The law anticipated that the Commissioner would use the Endowment Fund to purchase portable computing devices or acquire portable computing devices through appropriate financing arrangements, including leases. 20-A M.R.S.A. § 19105(3).

The Contract. Pursuant to this law, the Commissioner entered into a contract with Apple on December 27, 2001, and into a subsequent amendment on April 4, 2002. Under the contract, Apple is to provide 7th and 8th grade students and teachers with personal, portable computers; install wireless networks in each school; provide intensive training to teachers; and provide support and warranty services. The amendment to the contract made significant changes to the payment provisions of the contract and bifurcated the contract for payment purposes. The first part, the Hardware Purchase Component, sets forth the terms and conditions for the purchase of the devices (the laptops), network cards and device software. The second part, the Services Component, sets forth provisions for payment for services and equipment other than devices, provided by Apple and third party software not included in the Hardware Purchase Component. The Services Component also includes the wireless networks installed in each school.

Hardware Purchase Component. The Hardware Purchase Component is being purchased under a Master Lease Purchase Agreement between Apple and DOE, although Apple has stated that it intends to assign the lease to a third party financer. The Master Lease Purchase Agreement provides for DOE to purchase the devices under one or more schedules, with DOE obligated to pay rent only for the devices that have been accepted and included on a schedule. This provision was intended to allow DOE to order devices only as needed. To date, DOE has ordered and accepted 2,868 devices; an additional 16,780 devices have been ordered but not accepted and therefore are not yet included on a schedule. Together, these 19,648 devices represent approximately 55% of the total devices to be ordered for the laptop program. As Commissioner Albanese explained in his July 11, 2002 letter to you, payments for these devices, as well as for services and equipment provided under the Services Component, are being made quarterly over the life of the contract. The first payment is due in the first quarter of fiscal year 2003.

The Master Lease Purchase Agreement includes a non-appropriation clause, which relieves DOE from the obligation to make further rent payments in the event the Legislature fails to appropriate funds or de-appropriates funds necessary for DOE to meet its payment obligations. In addition, DOE has the right to return the devices to Apple at its expense and "terminate the lease on the last day of the fiscal period for which sufficient appropriations were received without penalty or expense to [DOE]...." DOE would be obligated to pay "the portion of rent for which funds have been appropriated and budgeted."

For example, should the Legislature de-appropriate funds during the first quarter of FY03, thereby precluding DOE from meeting its obligations under the Hardware Purchase Component of the Master Lease Purchase Agreement, DOE would be obligated to pay Apple $100,000 for rental of the 2,000 of the 2,868 devices that it has already accepted. DOE could then terminate the contract and return the devices, at DOE's expense, to Apple. Apple may argue that DOE should also pay rental fees for the 868 devices accepted in the first quarter of FY03 and for the additional 16,780 devices if the devices are accepted prior to the end of the first quarter of FY03. The Agreement, however, does not require that additional rental payments be made to Apple in the event of de-appropriation.

Services Component. The Services Component of the contract, as amended, is being purchased under the terms of the basic contract and the associated payment schedule. According to DOE, Apple has substantially completed the work required under the Project Management/On-Site Training, Support and Spares, Network/Storage and Software categories of the Services Component of the contract.

Rider B of the contract contains a non-appropriation clause that states that: "[I]f the State does not receive sufficient funds to fund this Agreement and other obligations of the State, if funds are de-appropriated, or if the State does not receive legal authority to expend funds from the Maine State Legislature or Maine courts, then the State is not obligated to make payment under this Agreement. The State's failure to make payment as provided under this section shall be deemed to be a default under this Agreement."

Thus, should the Legislature decide not to appropriate funds or to de-appropriate funds, DOE would be relieved of the obligation of making further payments under the Services Component of the contract. Whether or not the State would incur further liability to Apple for services already provided under the Services Component of the contract as a result of failure of funding is not clear, however some guidance has been provided by the Law Court in the 1996 SC Testing Technology case.

In SC Testing Technology, Inc. v. Department of Environmental Protection, 688 A.2d 421 (1996), the Law Court held that the Department of Environmental Protection was not liable for damages when the Legislature repealed the Motor Vehicle Emissions Inspection Program because the contract language and the circumstances surrounding the agreement showed that SC Testing Technology bore the risk of loss in the event of the repeal of the program. In the course of its opinion, the Court stated that: "[W]hen a party enters into a contract with a state agency, it does so with the understanding that the Legislature may at some future time take action that nullifies the subject matter of the contract and, necessarily, the respective performance obligations of the parties." Although SC Testing Technology involved the repeal of a program by the Legislature where the contractor had expressly assumed the risk of such repeal, the reasoning of the Court appears to apply to a situation where the Legislature fails to provide funding for a program and such failure effectively terminates the program. With regard to the Maine Technology Endowment contract, Apple expressly assumed the risk of program termination due to non-appropriation of funds and thus may have no recourse against DOE.

Summary. To summarize, the payment provision of the contract between DOE and Apple has two parts: one part is for the laptop devices and the other part for services and equipment other than laptops, third-party software, service support and training. With respect to the first part, the Hardware Purchase Component, in the event of non-appropriation, DOE is relieved from the obligation to make further rent payments except for the portion of rent for which funds have been appropriated and budgeted. In this event, DOE, at its expense, must also return the devices to Apple. With respect to the second part, the Services Component, if the Legislature does not appropriate funds, DOE is not obligated to make payments under the contract beyond what is owed under the payment schedule. Apple may well argue that, notwithstanding the non-appropriation provisions, DOE is obligated to pay for services and equipment already provided by Apple and that have been of a benefit to the State. The Law Court's holding in SC Testing Technology appears to apply here, and if so, DOE would have no obligation to pay Apple for any of the services or equipment beyond what is owed under the payment schedule.

While SC Testing Technology may provide some guidance in determining the financial impact on the State in the event of non-appropriation or de-appropriation of funds, there are obviously other consequences that may flow from such a course of action. In particular, failure to fund a program after a contractor has expended considerable resources in fulfilling its obligations under a contract may adversely affect the State's creditworthiness as well as its ability to contract in the future, undermine its credibility at the bargaining table and/or increase the costs of its agreements.

Finally, we must keep in mind that, because this precise situation has not been presented to the courts, we cannot predict with absolute certainty the outcome of any litigation. Moreover, depending on the circumstances that exist at the time of any non-appropriation or de-appropriation of funds, there could very well be new issues that we have not considered.

Sincerely,
G. Steven Rowe
Attorney General
GSR/djp

Footnotes:

1. These are the 19,648 laptops referenced in Commissioner Albanese's letter to you of July 11, 2002 (2,368 units for demonstration sites and teachers and 16,780 for the balance of 7th grade students).

2. However, in the event of such a termination, under the return section of the Agreement, DOE is obligated to return the devices.

3. The Master Lease Purchase Agreement states that failure to pay rent when due is a default under the agreement and that upon default title to the devices reverts to Apple free and clear of any interests the State may have.

4. The rent schedule attached to Commissioner Albanese's July 11, 2002 letter to you reflects $100,000 in rent for 2,000 devices due in the first quarter of FY03. According to the State Budget Office, $100,000 is also the amount that has been appropriated, budgeted and allocated for device rentals for the first quarter of FY03.

5. The value of these services is $5,645,000, which is to be paid over the life of the contract in accordance with the payment schedule.

6. It is our understanding that the last sentence in this section was intended to give Apple the opportunity to terminate the Contract in the event of non-appropriation or de-appropriation of funds. In such an event, Apple would have no further obligation to provide goods or services under the contract.

7. DOE's liability for payment to Apple under the non-appropriation section of the contract must be distinguished from its liability under the section of the contract that grants DOE the right to terminate the contract when DOE simply determines that termination "is in the best interest of the Department." If DOE terminates the contract under this latter provision, it is obligated to equitably adjust the contract to compensate Apple for such termination.

8. Several of these possible consequences were noted by then Maine Law Court Justice Kermit Lipez (now a Judge on the United States Court of Appeals for the First Circuit) in his dissent in the SC Testing Technology case.