Bidder Beware: California court recognizes intentional interference claims for second place bidders in public works contracts

February 25, 2015

Construction Law Alert

Author(s): Matthew Struhar, Matthew A. Richards

Introduction and Case Summary

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.[1] Plaintiffs Roy Allan Slurry Seal (“Allan”) and Doug Martin Contracting (“Martin”) placed second to American Asphalt on 17 and 6 of the contracts, respectively.[2] Plaintiffs filed multiple cases with similar allegations in multiple counties, suing American Asphalt on theories that included intentional interference.[3](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.[4]

Key Holdings

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.,[5] 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.[6]

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.”[7] 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.[8] The Court rejected American Asphalt’s argument “that a disappointed bidder has no legally protectable expectancy interest in being awarded a contract.”[9]

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.”[10] 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.[11]

Open Questions for California Public Works Contractors

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:

  • Risk of increased litigation: The majority cautioned that its holding was limited “to losing bidders who can show that they were the actual and lawful lowest bidders on a public works contract,”[12] and dismissed the dissent’s concerns that this would open the litigation floodgates. However, all winning bidders must be prepared to defend themselves against intentional interference complaints by dissatisfied second-place contractors, at least through the pleadings stage, regardless of the merits of the claim.
  • Uncertain pleading standard: Can second-place bidders generally allege that the first-place bidder’s costs estimates were illegally low (whether due to a prevailing wage violation or other allegedly illegal act), or must a losing bidder meet a higher pleading standard, and specifically plead facts detailing the first-place bidder’s allegedly illegal conduct?
  • Uncertain remedies and measure of damages: Will second-place bidders be able to obtain temporary or permanent injunctions to prevent public works projects from proceeding until their rights are adjudicated? What measure of damages will second-place bidders that prevail on intentional interference claims be able to recover against winning bidders?

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.

  1. Roy Allan Slurry Seal, Inc. v. Am. Asphalt S., Inc., No. B255558, 2015 Cal. App. LEXIS 158 at *2 (2d Dist. Feb. 20, 2015). [Back to reference]
  2. Id. [Back to reference]
  3. Id. at *3. [Back to reference]
  4. Id. at *3-4. [Back to reference]
  5. 29 Cal.4th 1134, 1156-57 (2003).[Back to reference]
  6. Id. at 1162-63. [Back to reference]
  7. Roy Allan, 2015 Cal. App. LEXIS at *11. [Back to reference]
  8. Id. [Back to reference]
  9. Id. [Back to reference]
  10. Id. at *18. [Back to reference]
  11. Id. [Back to reference]
  12. Id. at *18-19. [Back to reference]

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