ROY ALLAN SLURRY SEAL, INC., et al. v. AMERICAN ASPHALT SOUTH, INC.
S225398
IN THE SUPREME COURT OF CALIFORNIA
February 16, 2017
2 Cal.5th 505
Ct.App. 2/8 B255558; Riverside County Super. Ct. No. RIC1308832
I. BACKGROUND
Between 2009 and 2012 defendant American Asphalt South, Inc. (American) outbid the plaintiffs, Roy Allan Slurry Seal, Inc. (Allan) and Doug Martin Contracting, Inc. (Martin) on 23 public works contracts to apply a slurry seal coating on various roadways in Los Angeles, San Bernardino, Riverside, Orange, and San Diego Counties. The total value of the contracts exceeded $14 million. In 2013, Allan and Martin jointly sued American in all five counties for intentional interference with prospective economic advantage (hereafter sometimes referred to as tortious interference).1 Only the Riverside tort action is at issue here.
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. The complaint described the dates and amounts of American‘s bids, but did not include copies of the bids themselves. The actual bids appear nowhere in the appellate record.
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
The trial court sustained American‘s demurrer to the entire cause of action without leave to amend. On appeal, the appellate court majority reversed as to the tortious interference claim, concluding that plaintiffs’ pleading was adequate: “Plaintiffs here alleged that as the second lowest bidders they would have been awarded the contracts but for American‘s interference. Implicit in this 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. As in Korea Supply, absent that alleged misconduct it was plaintiffs who in fact submitted the true and lawful lowest bids.” The majority concluded that, although a public entity retains discretion to reject all bids submitted in response to its solicitation, “an actionable economic expectancy arises once the public agency awards a contract to an unlawful bidder, thereby signaling that the contract would have gone to the second lowest qualifying bidder.”
The dissent urged to the contrary that plaintiffs failed to allege the existence of an economic relationship with the soliciting public entities. The dissent reasoned that the tort was meant to guard against interference with existing relationships. “[I]n the context of public works contracts, it is not possible for such a relationship to exist between the bidder and the public entity soliciting bids because public contract law forbids it.” Moreover, “[i]t is antithetical to the principles of competitive bidding on public works projects that any bidder may expect probable future economic benefit . . . .” Because the award of a government contract is highly discretionary, “none of the bidders has a ‘probability’ of future economic benefit from the contract on which it is bidding.” The dissent pointed out that timing is important. The relationship interfered with must be in existence when defendant‘s allegedly wrongful conduct took place. In the dissent‘s view, the majority went astray
II. DISCUSSION
A demurrer is properly sustained when “[t]he pleading does not state facts sufficient to constitute a cause of action.” (
Intentional interference with prospective economic advantage has 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.)
Here 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? The first element (hereafter the economic relationship element) has two parts: (1) an existing economic relationship that (2) contains the probability of an economic benefit to the plaintiff.
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.
Plaintiffs counter that their act of submitting what would have been the lowest responsible bid but for American‘s wrongful interference in the bidding process demonstrates the existence of an economic relationship with the probability of future economic benefit. They rely on two facts. First, the
Plaintiffs rely heavily on Korea Supply, supra, 29 Cal.4th 1134, but that case is distinguishable. There, the companies MacDonald Dettwiler and Lockheed Martin submitted bids to the Republic of Korea to provide military equipment. The plaintiff, Korea Supply, was a broker who represented MacDonald Dettwiler during the bidding process. The contract was awarded to Lockheed Martin after its agent allegedly bribed Korean officials. (Id. at pp. 1141-1142.) Korea Supply dealt primarily with the intent element of the tort. However, it also held that the economic relationship element had been adequately pled. (Id. at p. 1164.) The plaintiff‘s agreement with MacDonald Dettwiler fixed its commission at 15 percent of the contract price. The plaintiff would have been entitled to a $30 million commission had MacDonald Dettwiler won the contract. The economic relationship allegedly interfered with was not a relationship between the broker and the Republic of Korea, the soliciting entity. Instead, the relationship was that between the broker and MacDonald Dettwiler. That relationship was an existing one that arose before the bidding process began. (Id. at pp. 1141, 1164.) Under the agreement, the broker had a reasonable expectation that it would receive its defined future economic benefit but for Lockheed‘s alleged interference. Thus, the business relationship and corresponding expectancy was sufficiently alleged. (Id. at p. 1164.)
Plaintiffs argue that Korea Supply is quintessentially a case about losing bidders and that plaintiffs have an even stronger claim here because “Korea Supply Company was once removed from the bidding process and its stake in the matter was completely dependent upon the fortunes of MacDonald Dettwiler.” Significantly, however, there is no indication that the bidding process between MacDonald Dettwiler and the Republic of Korea, upon which the broker‘s commission depended, was constrained in a manner similar to the statutory rules that govern California public works contracts. As explained below, the public works bidding process differs significantly from the commercial transactions that traditionally formed the basis for tort liability. Korea Supply does not stand for the proposition that a public contract bidder has an existing relationship with the entity soliciting the bid.
Buckaloo v. Johnson (1975) 14 Cal.3d 815 (Buckaloo) is another case in which the economic relationship element
Buckaloo held the tort had been adequately pled even though the open listing was not a contract enforceable against the seller because of the statute of
frauds.4 (Buckaloo, supra, 14 Cal.3d at pp. 821-822.) As Buckaloo explained, “the mere fact that a prospective economic relationship has not attained the dignity of a legally enforceable agreement does not permit third parties to interfere with performance.” (Id. at p. 827.) The plaintiff had pled a “prospective contractual relationship” because the seller posted an open listing offering to pay brokers a commission. Plaintiff reasonably understood this action to constitute an invitation to find a buyer. (Id. at p. 828.) The plaintiff alleged he had “completed the unilateral, albeit unenforceable, contract” with the seller by providing the necessary buyer. (Id. at p. 829.) The seller‘s posting of an open listing and the offer of a commission, on which Buckaloo relied in procuring a buyer, was sufficient to demonstrate an existing economic relationship between Buckaloo and the seller. The complaint further alleged tortious interference: the buyer knew of the seller‘s promise to pay, and intentionally interfered with the prospective commission by approaching the seller directly and inducing her to sell the property while intentionally excluding Buckaloo‘s participation. (
By contrast, 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. In Blank, supra, 39 Cal.3d 311, the plaintiff alleged that the defendant had interfered with his application for a city license to operate a poker club. Blank held the plaintiff‘s pleading failed to satisfy the economic relationship element. “First, ‘[t]he relationship between [plaintiff] and the City cannot be characterized as an economic relationship. It was [plaintiff‘s] relationship to a class of as yet unknown [patrons] which was the prospective business relationship.’ [Citation.]” (Id. at p. 330.) “Second, even if the relationship between the plaintiff and the city could be so characterized, it would make little difference. 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.” (Ibid.) Third, the city council‘s discretion to grant or deny a poker club license application was “so broad as to negate the existence of the requisite ‘expectancy’ as a matter of law. Thus, ‘no facts are alleged . . . showing that the plaintiff had any reasonable expectation of economic advantage which would otherwise have accrued to him . . . .’ [Citation.]” (Ibid.)
Youst v. Longo (1987) 43 Cal.3d 64 (Youst), held that the outcome of a sporting contest involving harness horseracing was too speculative to support a tortious interference claim. (Id. at p. 74.) The plaintiff alleged that the defendant had driven his horse into the path of the plaintiff‘s horse during a race and had struck plaintiff‘s horse with a whip, causing it to break stride and finish in sixth place. The plaintiff sought damages based on the purse for first, second, or third place, with the ultimate placement to be determined by the jury, along with punitive damages. (Id. at p. 68.) The trial court sustained defendant‘s demurrer without leave to amend. Youst affirmed, observing: “the true source of the modern law on interference with prospective relations is the principle that tort liability exists for interference with existing contractual relations. [Citation.] ‘For the most part the “expectancies” thus protected have been those of future contractual relations . . . . In such cases 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.’ ” (Id. at p. 75, quoting Prosser & Keeton, Torts (5th ed. 1984) § 130, p. 1006, italics added by Youst.) By contrast, the tort “traditionally has not protected speculative expectancies such as the particular outcome of a contest.” (Youst, at pp. 74-75.) The defendant‘s demurrer was therefore properly sustained
In Westside Center Associates v. Safeway Stores 23, Inc. (1996) 42 Cal.App.4th 507 (Westside Center), the Court of Appeal interpreted our holdings in Youst and Blank to require proof that the defendant had disrupted a particular relationship with a known third party. There, the plaintiff purchased a shopping center containing several small stores. An “anchor” building in the center was separately owned and leased to Safeway. Safeway vacated the premises, but executed an option to renew its lease for five years. Business at the rest of the center suffered while the anchor premises stood vacant, and the plaintiff ultimately sold its property interest at a claimed loss of more than $2 million. (Id. at pp. 510-515.) The plaintiff sued Safeway for tortious interference with prospective economic advantage, alleging that Safeway interfered, not with a particular sale, but with the relationship between plaintiff and the class of all potential buyers for the property, thereby reducing its market value. (Id. at p. 523.) The Court of Appeal upheld the trial court‘s dismissal of the claim.6 It reasoned that an “ ‘interference with the market’ ” or “ ‘lost opportunity’ ” claim (Westside Center, at p. 527) was unduly speculative: “It assumes what normally must be proved, i.e., that it is reasonably probable the plaintiff would have received the expected benefit had it not been for the defendant‘s interference.” (Id. at p. 523.) Emphasizing the requirement of an existing relationship, the court held that 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.” (Id. at p. 524.) The court concluded that the plaintiff‘s theory “fails to provide any factual basis upon which to determine whether the plaintiff was likely to have actually received the expected benefit. Without an existing relationship with an identifiable buyer, [plaintiff]‘s expectation of a future sale was ‘at most a hope for an economic relationship and a desire for future benefit.’ ” (Id. at p. 527, quoting Blank, supra, 39 Cal.3d at p. 331.)
These authorities counsel against recognizing an “economic relationship” containing the “probability of future economic benefit” (Korea Supply, supra, 29 Cal.4th at p. 1164), solely because plaintiffs submitted a bid in response to a public entity‘s solicitation. First, as the dissent below observed, there could be no existing relationship between plaintiffs and the public entities soliciting bids “because public contract law forbids it.” The various public entities named in the Riverside County action were required by statute
Second, plaintiffs “ha[ve] pleaded and can plead no protectible ‘expectancy.’ ” (Blank, supra, 39 Cal.3d at p. 331.) 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. (Domar Electric, supra, 9 Cal.4th at p. 173; Konica Business Machines U.S.A., Inc. v. Regents of the University of California (1988) 206 Cal.App.3d 449, 456.) Here, the bidding was sealed, and no negotiations took place. (See
In reaching a contrary conclusion, the Court of Appeal majority reasoned that “an actionable economic expectancy arises once the public agency awards a contract to an unlawful bidder, thereby signaling that the contract would have gone to the second lowest qualifying bidder.” (Italics added.) The court found “implicit” in plaintiffs’ allegations “that plaintiffs satisfied all the requirements necessary to qualify for those contracts.” It further concluded that, “[a]lthough 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 observed that “[w]hether a plaintiff was in fact the second lowest bidder and would have been awarded a contract had the winning bidder complied with the prevailing wage law is a factual issue susceptible to standard civil discovery practices and is amenable to proof at trial.”
The majority‘s analysis puts the cart before the horse. The case law recognizes that “the interference tort applies to interference with existing
The majority‘s probable benefit analysis is also speculative. The tort of intentional interference with prospective economic advantage “traditionally has not protected speculative expectancies” (Youst, supra, 43 Cal.3d at pp. 74-75), usually because “ ‘there is no sufficient degree of certainty that the plaintiff ever would have received the anticipated benefits’ ” (id. at p. 74, quoting Prosser & Keeton, Torts, supra, § 130, p. 1006, italics added by Youst.) Accordingly, “[w]e have been cautious in defining the interference torts, to avoid promoting speculative claims.” (Pacific Gas & Electric Co. v. Bear Sterns & Co. (1990) 50 Cal.3d 1118, 1136-1137.) Buckaloo, supra, 14 Cal.3d 815, stated that the tort lies “ ‘when a contract would, with certainty, have been consummated but for the conduct of the tortfeasor . . . .’ ” (Id. at p. 823, fn. 6, quoting Builders Corporation of America v. U.S. (N.D.Cal. 1957) 148 F.Supp. 482, 484, fn. 1.) Youst stated a slightly lower threshold: California authority “requir[es] at least the reasonable probability of an expectancy to establish a cause of action for interference with prospective economic advantage . . . .” (Youst, at pp. 71-72; accord, Korea Supply, supra, 29 Cal.4th at p. 1164 [plaintiff must “demonstrate an economic relationship with a probable future economic benefit”].) Youst emphasized that 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.” (Youst, at p. 74.)
We have previously noted, in a different context, the inherently speculative nature of public works bidding. (Kajima/Ray Wilson v. Los Angeles County Metropolitan Transportation Authority (2000) 23 Cal.4th 305, 315-316 (Kajima).) In denying recovery against a government entity for lost profits under a promissory estoppel theory, Kajima stated: “Because the [public entity] was authorized to reject all bids, [the plaintiff] did not know at [the time its bid was submitted] whether the contract would even be awarded. Nor, because of the secrecy of the bidding process, did [the plaintiff] know whether it was indeed the lowest responsible bidder. Therefore, given these uncertainties which are inherent in competitive bidding, bid preparation costs, not lost profits, were the only costs reasonably incurred.” (Ibid.)
Plaintiffs’ allegations of tortious interference likewise hinge on a high degree of uncertainty. Contrary to the majority‘s reasoning below, the award of contracts to American does not “signal[] that the contract would have gone to the second lowest qualifying bidder.” As amicus curiae League of California Cities observes, even if a public entity accepts the lowest bid, it retains discretion to reject all remaining bids if the contract is not consummated with the low bidder. (See
Additionally, to be awarded the contracts, plaintiffs were required to meet the criteria for responsible bidders and responsive bids. (
For these reasons, the public works bidding process differs from the types of commercial transactions that traditionally have formed the basis for
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.” (Cedars-Sinai Medical Center v. Superior Court (1998) 18 Cal.4th 1, 8.) Courts must act prudently when fashioning damages remedies “in an area of law governed by an extensive statutory scheme.” (Kajima, supra, 23 Cal.4th at p. 317.) In California, public contract bidding is largely governed by statute. (Id. at p. 313.) As noted, the public entity is required to determine whether a bidder is responsible and the bid is responsive. (
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. (See
Second, the competitive bidding laws were enacted for the benefit of the public, “ ‘not for the benefit or enrichment of bidders, and should be so construed and administered as to accomplish such purpose fairly and reasonably with sole reference to the public interest.’ ” (Kajima, supra, 23 Cal.4th at pp. 316-317.) “The duties created by the wage-and-hour statutes run solely from employer to employee.” (Castillo v. Toll Bros., Inc. (2011) 197 Cal.App.4th 1172, 1210.) They “do not create any action for civil damages in a competing bidder.” (Settimo, supra, 14 Cal.App.4th at p. 846.)
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. (See Youst, supra, 43 Cal.3d at pp. 77-78.) 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.’ ” (Kajima, supra, 23 Cal.4th at p. 317, quoting City of Atlanta v. J.A. Jones Const. Co. (Ga. 1990) 398 S.E.2d 369, 371.) 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.” (