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Friday, February 17, 2017

A tortuous path to nowhere on unfair labor wages claim against low bidder

I have to acknowledge the firm Horvitz & Levy LLP and its blog, At The Lectern, for alerting me to this California Supreme Court case: ROY ALLAN SLURRY SEAL, INC. v AMERICAN ASPHALT SOUTH, INC.

Note that this decision of the California Supreme Court overturns the lower court decision reported in this post below.

To prove the tort of intentional interference with prospective economic advantage, a plaintiff must establish “the existence of an economic relationship with some third party that contains the probability of future economic benefit to the plaintiff.” Here we decide whether such a relationship exists between a bidder for a public works contract and the public entity soliciting bids. Plaintiffs alleged that they had submitted the second lowest bids on several contracts awarded to defendant, and that their bids would have been accepted but for defendant‟s wrongful conduct during the bidding process. Public works contracts are a unique species of commercial dealings. In the contracts at issue here, the public entities retained broad discretion to reject all bids. In these highly regulated circumstances, plaintiffs had “at most a hope for an economic relationship and a desire for future benefit.”

The Riverside complaint alleged that American won six public works contracts2 on which either Allan or Martin was the second lowest bidder. American‟s underbids ranged from $3,842 to $140,794. To support their theory of tortious interference, plaintiffs alleged as follows.

Together, plaintiffs had 60 years of experience handling public works projects for slurry seal repair and maintenance. The cost of materials for these projects is essentially the same for all contractors. American engaged in wrongful, fraudulent, and illegal conduct by submitting deflated bids because it failed to pay prevailing wage and overtime compensation in connection with the named contracts, and with other public works contracts during the same period. Plaintiffs alleged they had both a relationship with the contracting public entities and a reasonable probability of future economic benefit, because they “were the respective second lowest bidder[s] and would have been awarded the contract[s] but for the fraudulent and/or illegal conduct of [American] . . . .” According to the complaint, “[American]‟s bid would have been rejected if [American]‟s conduct in failing to pay its employees properly was made known to the [public entity,] and/or [American] would not have been able to submit a lower bid . . . if [American] was properly paying all of its employees the prevailing wages . . . .” Plaintiffs alleged that the failure to secure the Riverside contracts resulted in estimated lost profits of $168,511 for Allan and $269,830 for Martin.

The Appeals Court found that, implicit in the Plaintiff's claim is the allegation that the various public entities were required to award the contract to the lowest responsible bidder and that plaintiffs satisfied all the requirements necessary to qualify for those contracts. Although plaintiffs here did not submit the lowest bids, that was alleged to be due solely to American‟s violation of its statutory obligation to pay its workers the prevailing wage. It went on to add, “an actionable economic expectancy arises once the public agency awards a contract to an unlawful bidder".

The Supreme Court reasoned that the tort of intentional interference with prospective economic advantage has five elements to be proved, the first being the existence, between the plaintiff and some third party, of an economic relationship that contains the probability of future economic benefit to the plaintiff. We focus on the first element, and consider a question of first impression. Can a disappointed bidder on a public works contract demonstrate the requisite economic relationship with the public entity?

American argues that merely submitting a bid to a public entity does not create an existing relationship but rather the hope of one. It emphasizes that each bidder is considered a stranger to the public entity because the entity is prohibited from favoring bidders with whom it has had past dealings. Additionally, public entities have discretion to reject all of the bids submitted. Under these circumstances, American contends, there is no existing relationship with which to interfere and no reasonable probability that a benefit will be conferred by the awarding of a contract.

A cause of action for tortious interference has been found lacking when either the economic relationship with a third party is too attenuated or the probability of economic benefit too speculative. The tort has traditionally protected the expectancies involved in ordinary commercial dealings—not the "expectancies", whatever they may be, involved in the governmental licensing process. A relationship between a competitor and a City cannot be characterized as an economic relationship. The tort “protects the expectation that the relationship eventually will yield the desired benefit, not necessarily the more speculative expectation that a potentially beneficial relationship will eventually arise.”

In a government contracting bid situation, there could be no existing relationship between plaintiffs and the public entities soliciting bids because public contract law forbids it. Public entities are required by statute to award these contracts to the lowest responsible bidder. Under the law, each bidder must be treated as a stranger to the entity.

A public entity‟s solicitation for bids is merely a request for offers from interested parties. It encourages multiple parties to compete for the contract. The bidding was sealed, and no negotiations took place. Ultimately, the public entities had broad discretion to reject all bids.

The case law recognizes that “the interference tort applies to interference with existing noncontractual relations which hold the promise of future economic advantage.” Here, when American allegedly submitted illegally deflated bids, plaintiffs were only one of several bidders on these public works contracts. No one knew if plaintiffs would be the lowest bidder, and the public entities had not yet decided whether or not to award the contracts. Plaintiffs cannot rely on the outcome of later events to prove that American interfered with an existing economic relationship.

The Court is cautious in defining the interference torts, to avoid promoting speculative claims. California authority requires at least the reasonable probability of an expectancy to establish a cause of action for interference with prospective economic advantage. This requirement is especially appropriate to evaluate a lost economic expectancy where the facts involve a competitive contest of one kind or another. To require less of a showing would open the proverbial floodgates to a surge of litigation based on alleged missed opportunities to win various types of contests, despite the speculative outcome of many of them.

We have previously noted in a case alleging lost profits under a promissory estoppel theory, inherently speculative nature of public works bidding.

Additionally, to be awarded the contracts, plaintiffs were required to meet the criteria for responsible bidders and responsive bids. Determining whether a certain bidder is “responsible” generally entails an evaluation of the bidder's trustworthiness, quality, fitness, capacity, and experience to satisfactorily perform the contract in question. It is a complex matter dependent, often, on information received outside the bidding process and requiring, in many cases, an application of subtle judgment. Given the complex and
external nature of a determination of nonresponsibility, it is speculative for plaintiffs to allege, as a basis for the economic relationship, that they were the second lowest bidder and would have been awarded the contract if not for American's illegal conduct.

For these reasons, the public works bidding process differs from the types of commercial transactions that traditionally have formed the basis for tort liability. In ordinary commercial transactions, there is a background of business experience on the basis of which it is possible to estimate with some fair amount of success both the value of what has been lost and the likelihood that the plaintiff would have received it if the defendant had not interfered. By contrast, in these public works contracts, the bidding was sealed, there were no negotiations, all qualified contractors were on equal footing regardless of past contractual dealings, the public entities were required to determine the bidder‟s responsibility, and they retained discretion to reject all bids. These circumstances counsel against extending a tortious interference claim to the bid process for these public works contracts.

Additionally, we must 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. Courts must act prudently when fashioning damages remedies in an area of law governed by an extensive statutory scheme.

Plaintiffs argue that their lawsuits will protect employees on public works projects by uncovering and deterring wage law violations. The argument fails for two reasons. First, the area is already extensively regulated. Prevailing wages are required by statute to be paid on all public works contracts. Several statutory mechanisms exist to enforce that duty. A public entity may withhold payments to a contractor who violates the prevailing wage laws. The Division of Labor Standards Enforcement may recover wages, interest, and damages on behalf of employees through an administrative hearing process and a civil action. The affected employees also possess private rights of action arising from statute and contract. None of these statutory schemes contemplates damage awards to a disappointed public works bidder who alleges the winning bid was based on prevailing wage violations. The duties created by the wage-and-hour statutes run solely from employer to employee. They do not create any action for civil damages in a competing bidder.

Expanding tort liability to cover wrongful interference with the public contracts bid process would provide little additional benefit in light of the extensive statutory scheme. Conversely, an expansion has potentially significant public policy disadvantages. The possibility of significant monetary gain may encourage frivolous litigation by second lowest bidders for effort they did not make and risks they did not take. That litigation, in turn, may deter responsible bidders from participating in the process, thus undermining the Legislature's goal of stimulating competition in a manner conducive to sound fiscal practices. Such a result would directly contravene the principles underlying the tort of intentional interference with prospective economic advantage: carefully drawing lines of legal liability in a way that maximizes areas of competition free of legal penalties.

The costs of recognizing the tort in this context is just too high.
(Note that I slice and dice, so read the case yourself and do not rely on what is presented here, except as a tease to lure you to the original.)

Wednesday, February 1, 2017

End corruption; adopt the ABA Model Procurement Code

This editorial comes from The Weekly Northside Sun, in Jackson, Mississippi, USA. Of course, I slice and dice articles presented here to make instructional emphasis of procurement issues for my own didactic purposes. Read the article at its link to get the full content and expression of the author.

The time has come for procurement and bidding reform
A recent study claimed Mississippi to be the most corrupt state in the country. The Epps prison scandal is a perfect example. It all stems from Mississippi’s awful bidding and government procurement laws. They are the worst in the nation.

There is a simple solution: Do what 16 progressive states (also including America's Territory in Asia, Guam) have already done. Adopt the American Bar Association’s Model Procurement Law. We just need the political will to do it. It would transform our state from a bastion of corruption to a model of good government. Large companies would cease fearing coming to Mississippi because of our notorious home cooking.

Tupelo Rep. Jerry Turner and Columbia Sen. John Polk are taking a crack at procurement reform as respective chairmen of their chamber’s committees on accountability, efficiency and transparency. A bill is being debated in the state House and Senate that is supported by Turner and Polk. The bill is a step in the right direction, but more decisive action is needed.

Rather than tweak our jumble of existing procurement laws and their infinite loopholes, we need to start from scratch with a new board and a new law. Rather than reinvent the wheel, we need to adopt the ABA’s model procurement law, which has become a national standard for good government.

The first step is to consolidate dozens of governmental entities that currently oversee procurement and bidding. The multiple agencies and governmental units should be consolidated into a single independent agency. Turner’s bill does this in part, but it doesn’t go far enough. For instance, the revamped Public Procurement Review Board still won’t have authority to review public procurement by cities and counties, only state agencies.

Here’s the problem: If our bidding laws are hashed out by the Legislature, there will be political manipulation by contractors and their lobbyists. A better way would be to let an independent board adopt the model procurement law. Such a process would have a better chance at reducing corruption.

Let’s take the bidding laws for the Mississippi Department of Corrections. These laws are buried deep in the MDOC state code. As it turns out, unidentified legislators exempted MDOC from competitive bidding and nobody knew about it. It may have been the very legislators who pushed through the exemptions were later involved in the shady contracts.

The same is true of the Mississippi Department of Transportation, the airport authorities and dozens of other agencies. Bidding and procurement laws have been buried in the codes of these specific agencies, making it easy for manipulators to water down without anyone noticing.

A better way is to have a statewide standard for bidding and procurement. All bidding laws should be consolidated in one section of the code. The same code should apply to all agencies and governmental entities. That would make it far harder to manipulate.

Right now we have a hodge podge of agencies and regulations: The Mississippi State Personnel Board, the Personal Services Contract Review Board, the Office of Purchasing, Travel and Fleet Management, the Bureau of Building, Grounds and Real Property Management, the Mississippi State Board of Contractors, MDOT . . . just to mention a few. Each has its own rules and regulations.

Title 31 Chapter 7 of our code has bidding laws that govern cities and counties but the law is weak at best, allowing contracts to go to the “best” bid rather than the “lowest responsive bidder” as most states do.

Making matters worse, the cities and counties, unlike state agencies, have no oversight at all. The only recourse is a lawsuit in which a losing bidder must prove that they were the “best.” Tough to do given such a vague standard.

How much money is on the line? Well the total budget for the state of Mississippi, including special purpose and federal funds, is over $20 billion. Billions of these dollars are paid to private companies contracting with the government. Transparent, competitive procurement laws could save hundreds of millions in lower prices for taxpayers. Imagine how much money is wasted by our cities and counties as the politically connected get sweetheart contracts.

Then there are the exemptions: for service contracts, single-source suppliers and emergencies. There’s so much wiggle room and lack of oversight, it’s just a free for all money grab. The taxpayers lose.

Just look at the city of Jackson. The wastewater treatment sludge removal bidding process has its own unique bidding laws different from any other such laws. Why? Instead, these contracts should have to follow standard bidding practices and get approval from the procurement board. It would have saved Jackson taxpayers millions on just that one contract. It would have prevented crony contracts at inflated prices.

Time and time again, the city of Jackson issues a “Request for Proposal” instead of following a competitive sealed bidding process. The politically connected contractor gets the business in a negotiated contract instead of competitive bidding. This is going on throughout our state, inflating the cost of governmental services by hundreds of millions of dollars.

This type of crony capitalism scares off the legitimate contractors. I know a dozen excellent companies that won’t even bid in Jackson because they know it’s rigged. The Northside Sun hasn’t bid on publication of the legals for 15 years. No point. It’s rigged.

But it’s worse. Not only does this corruption cost taxpayers millions, it gives our state the reputation of corruption, scaring away excellent national companies from locating plants here.

We have got to quit running our state like a private club for the politically connected and embrace open, efficient, transparent government. Only then will we begin to make progress.
The MPC was first adopted in 1979, and its core principles and processes have remain unaltered. It has been revised once, in 2000, and its regulations amended in 2002. Since its initial promulgation, there "has been great experimentation and variation among the state and local governments in the methods by which equipment and services have been procured. The proliferation of “local content” procurement regulations has, in turn, created a multitude of arcane differences among the thousands of jurisdictions buying such equipment and services on an annual basis. The resulting trends were negative, because complex, arcane procurement rules for such acquisitions by numerous jurisdictions discouraged competition by raising the costs to companies of understanding and complying with different rules in each jurisdiction. These costs are recovered in the prices offered by a smaller pool of competitors, resulting in unnecessarily high costs to state and local governments" (See the Introduction to the 2000 ABA MPC.)

And as the Commentators to the 2000 MPC noted, "The 2000 Code revision process has shown that many of the obstacles procuring agencies and officials encounter are those that have been written into the Code by enacting jurisdictions." (§ 2-503, Commentary 1.)

I'm also a true believer in transparent, accountable, uniform procurement laws. Guam adopted its version, falling very close in line with the ABA MPC, in 1982, and I've been witness to it's lifespan. Guam's procurement has also been tinkered and played with, by both the legislature and the executive, sometimes to good effect, others not so much. But, on the whole, from its very specific fundamental principles, the "purposes and policies" of procurement through it structured if not wholly centralized architecture and administrative as well as judicial review processes, the MPC does offer a framework yielding more than usual competition, transparency and integrity.

All that said, it must be understood that no procurement regime will negate dispute nor guarantee efficient satisfaction of government needs, nor immunize the government from corruptible influences or practices. Independent auditing, robust protest procedures and public access to almost all records of procurement (as required under the MPC) have to fill in a lot of the blanks. The public must be vigilant and demanding that exceptions and exemptions are eliminated. For instance, disclosure requirements and outsourced essential government services should not get shielded by tiered layers of contracts and ownership hiding behind LLCs and corporate structures, including "non-profit" entities owned by government agencies.

As the author of the article above reminded us, "We just need the political will to do it." And, "it" is an ongoing and never ending story. Unfortunately, it's part of the dirty work of democratic structures.