A recent California Court of Appeal decision, Roy Allan Slurry Seal, Inc. v. American Asphalt South, Inc. (“Roy Allan”), gives second-place bidders on public works projects a new cause of action for intentional interference with a prospective economic advantage (“intentional interference”) against ostensible winning bidders, if the low bid was due to the winning contractor’s failure to pay its workers the prevailing wage or other unlawful conduct.
In Roy Allan, the defendant, American Asphalt South (“American Asphalt”), obtained 23 public works contracts to perform roadwork in Southern California, but was allegedly only able to do so because its bids did not meet California’s prevailing-wage law requirements. Plaintiffs Roy Allan Slurry Seal (“Allan”) and Doug Martin Contracting (“Martin”) placed second to American Asphalt on 17 and 6 of the contracts, respectively. Plaintiffs filed multiple cases with similar allegations in multiple counties, suing American Asphalt on theories that included intentional interference.(Plaintiffs sued American Asphalt only, and did not pursue claims against the public entities directly.) On demurrer, the Riverside County trial court dismissed plaintiffs’ cause of action for intentional interference on the grounds that they failed to allege a proper economic relationship between themselves and the public agency, and plaintiffs appealed.
On appeal, the Court considered whether Allan and Martin had a relationship with the public agency that had awarded the contracts sufficient to state an intentional interference cause of action—an element of an intentional interference claim—and held that the plaintiffs did. The majority relied in large part on Korea Supply Co. v. Lockheed Martin Corp., a California Supreme Court Case involving a bid to supply military equipment to South Korea. In that case, the plaintiff was an agent of a military contractor that lost its bid to a company that had bribed state officials in order to obtain the contract. Because of the winning contractor’s unlawful conduct, the agent did not earn a commission from his principal, which had placed a superior bid. As a result, the winning contractor was held to have disrupted the agent’s business relationship with the second-place bidder, and to have been liable to the agent for intentional interference.
Because the plaintiffs in Roy Allan were the second-lowest bidders on various public works projects, they implicitly alleged that the public agencies “were required to award the contract to the lowest responsible bidder and that plaintiffs satisfied all the requirements necessary to qualify for those contracts.” The Court here expanded Korea Supply to apply to any situation in which, but for the wrongful conduct of the ostensibly lowest bidder, the second-place bidder would have obtained the contract. The Court rejected American Asphalt’s argument “that a disappointed bidder has no legally protectable expectancy interest in being awarded a contract.”
The Court focused its analysis less on the existence of a formal economic relationship between the plaintiffs and the public entity, and more on the actual expectations of the second-place bidders. Under Korea Supply, “any subcontractor plaintiffs had lined up would have at least as great an economic expectancy as did the plaintiff-agent in that case.” Implicitly, the Court reasoned, a second-place prime contractor must also have a cause of action for intentional interference against the wrongful winning contractor due to the fact that it had an economic expectancy from its relationship with the agency.
Although Roy Allan may assist law-abiding contractors seeking to vindicate their rights against less scrupulous competitors, the decision also leaves open a number of issues, and could have unintended consequences:
Much remains to be clarified about the scope of the intentional interference cause of action now available to second-place bidders on California public works projects. In the meantime, public entities and public works contractors alike enter a new era of uncertainty, and will learn together whether the Roy Allan dissent’s fear of increased litigation is justified.
The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.