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Public Works Contracts Provide Special Hurdle Against Recovery for Tort of Intentional Interference with Prospective Economic Advantage

In the recently-decided case Roy Allan Slurry Seal, Inc., et al. v. American Asphalt South, Inc. (2017 WL 631765), the Plaintiffs, Roy Allan Slurry Seal, Inc. and Doug Martin Contracting, Inc. (“Plaintiffs”), sued the Defendant, American Asphalt South, Inc. (“Defendant”), after the Defendant repeatedly outbid the Plaintiffs to receive public works contracts involving the application of a slurry seal coating on various roadways throughout Southern California. Plaintiffs alleged the cost of materials for the projects is essentially the same for all contractors, and the only way Defendant was able to submit underbids, which ranged from $3,842 to $140,794, was because it failed to pay prevailing wage and overtime compensation as required by statute. Plaintiffs alleged Defendant’s bids would have been rejected if its conduct in failing to pay its employees properly was made known to the public entities.

At the trial level, the court sustained Defendant’s demurrer to the entire case without leave to amend. On appeal, the Court of Appeal reversed the demurrer, stating Plaintiffs’ pleading was adequate as to the tort of intentional interference with prospective economic advantage claim. Unfortunately for Plaintiffs, the Supreme Court of California disagreed with the Court of Appeal, stating because the bids were sealed, the public entities could not, even if they wanted to, give preference to any bidder based on past dealing and were required to accept the lowest responsible bid. As such, the Court held Plaintiffs were unable to establish a concrete future economic benefit that they were denied because of Defendant’s conduct.

In order to establish a cause of action for intentional interference with prospective economic advantage, the Court must take into account five elements: (1) the existence, between the plaintiff and some third party, of an economic relationship that contains the probability of future economic benefit to the plaintiff; (2) the defendant’s knowledge of the relationship; (3) intentionally wrongful acts designed to disrupt the relationship; (4) actual disruption of the relationship; and (5) economic harm proximately caused by the defendant’s action. (Korea Supply, supra, 29 Cal.4th at pp. 1164–1165, 131 Cal.Rptr.2d 29, 63 P.3d 937.)

The Court focused on the first element, which presented a novel question in California. Particularly, the stated question was, “Can a disappointed bidder on a public works contract demonstrate the requisite economic relationship with the public entity?” After a review of the facts, the California Supreme Court opined Plaintiffs had “at most a hope for an economic relationship and a desire for future benefit” (citing Blank v. Kirwan (1985) 39 Cal.3d 311, 331, 216 Cal.Rptr. 718, 703 P.2d 58 (Blank)). The Court stated public works bidding is inherently speculative because the public entity is not required to accept the second lowest bid if it rejects the first bid. In this case, if the public works entities had rejected Defendant’s low-ball bids because the public works entities learned of its wage and compensation practices, Plaintiffs may still not have received the contracts. Moreover, the Court noted in at least two of the contracts at issue here, Defendant underbid the Plaintiffs by more than $100,000, and the public entities’ discretion to reject remaining bids would necessarily take into account the different between the bid amounts of the lowest and second lowest bidders.

The Court opined further that public works bidding presents some special issues because it was necessary for the Court to consider whether expanding tort liability in the area of public works contracts “would ultimately create social benefits exceeding those created by existing remedies for such conduct, and outweighing any costs and burdens it would impose.” (Citing Cedars–Sinai Medical Center v. Superior Court (1998) 18 Cal.4th 1, 8, 74 Cal.Rptr.2d 248, 954 P.2d 511.) The Court noted this area is already extensively regulated because prevailing wages are required by statute to be paid on all contracts, and if a contractor fails to pay these wages, the public entities may withhold payments, and the Department of Labor Standards Enforcement may recover said wages on behalf of employees through administrative means. As such, expanding tort liability to cover wrongful interference with the public contracts bid process would provide little additional benefit but might in fact result in frivolous lawsuits by second lowest bidders and risk draining government resources.

Based on its analysis, the California Supreme Court reversed the judgment of the Court of Appeal and remanded the case with directions the original trial court’s order sustaining the demurrer be reinstated. As one can see, the involvement of public entities nearly always presents special hurdles for various categories of litigants. Issues of sovereign immunity and the balancing and consideration of public resources are two of the most common issues that arise, and as analyzed in this case, courts are very careful not to impede too much on public entity processes when taking into account risks and benefits.

ABOUT THE AUTHOR: Craig Cox is an associate attorney in Tyson & Mendes’ San Francisco office. Mr. Cox specializes in general liability, employment, and construction litigation. Contact Craig at 415.464.4935 or ccox@tysonmendes.com.