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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.
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.)

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