Second Place Bidder on Public Works Contract May Sue Winning Bidder for Intentional Interference with Prospective Economic Advantage

In a case of first impression, the California Court of Appeal - 2nd District has ruled in Roy Allan Slurry Seal, Inc., et al., v. American Asphalt South, Inc. (February 20, 2015) 2015 DJDAR 2014 that a second place bidder on public works contract may sue the winning bidder for Intentional Interference with Prospective Economic Advantage.

Roy Allan Slurry Seal, Doug Martin Contracting and American Asphalt South are competitors each bidding on the same public works contracts to apply slurry seal coatings to various roadways. During 2009 through 2012, contracts were awarded to American Asphalt South in Los Angeles, San Bernardino, Riverside, Orange and San Diego Counties. Roy Allen Slurry Seal and Doug Martin Contacting jointly sue American Asphalt South for Intentional Interference with Prospective Economic Advantage among other causes of action. The two plaintiffs alleged that they were the 2nd lowest bidders on 23 different projects and that the American Asphalt South's bids were the lowest only because they American Asphalt South's labor costs were lower due to its failure to pay its workers the prevailing wage as required by Labor Code §1770 and 1771. American Asphalt South demurred and that ruling was overturned.

There are five elements that have to be met for a claim of intentional interference with prospective economic advantage. A plaintiff must allege, 1) the existence of an economic relationship with some third party that contains the probability of future economic benefit to the plaintiff, 2) defendant must have knowledge of the plaintiff's economic relationship, 3) that the defendant engaged in an independently wrongful act, and that the defendant acted either with the desire to interfere or the knowledge that interference was certain or substantially certain to occur as a result of its action, 4) actual disruption of their economic relationship, and 5), establish that the economic harm suffered was proximately caused by the acts of the defendant.

American Asphalt South's demurrer rested on the grounds that plaintiffs did not have the required economic relationship and business expectancy to fulfill the first element of the claim of intentional interference with prospective economic advantage. The 2nd District Disagreed and based its decision on Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134. In Korea Supply, the plaintiff agent alleged that Lockheed Martin Corp only secured the contract by providing bribes and sexual favors to Korean officials in violation of the federal Foreign Corrupt Practices Act. The Court in Korea recognized that Lockheed Martin Corporation was only awarded the contract due to its wrongful acts. The 2nd District stated that they see little distinction between Korea and Supply and the actions of American Asphalt South.

The 2nd District has ruled that plaintiffs Roy Allan Slurry Seal, Doug Martin Contracting do have the requisite economic relationship and business expectancy because as the 2nd place bidders, but for American Asphalt South's submission of a bid with labor costs based on its violation of the prevailing wage laws, plaintiffs would have been the lowest bidder and as such would have been awarded the contracts. This is a first of its kind ruling in which a 2nd place bidder has been held to have an economic relationship and business expectancy with a public agency based on their 2nd place bid and the action of the lowest bidder.

This case will likely be applicable in only very similar circumstances. Had the case not been that the public agencies were required to accept the lowest bid, plaintiffs in this case would not have had an expectancy of a contract based on the fact that they had the lowest lawful bid. The majority decision and the concurrence (which dissents to this holding) both suggest that had the public agencies retained the right to deny all of the bids then the result of this case would have been different.

This article, ©2015, was written by Patrick J. Whitehorn. Mr. Whitehorn is an associate with Last & Faoro and works closely with William C. Last, Jr. Mr. Last is an attorney who has been specializing in Construction Law for over 30 years. In addition to belonging to a number of construction trade associations, Mr. Last holds a California "A" and "B" license. He can be contacted at 415-764-1990 or 650-696-8350. A number of his past articles can be found on his website (lhfconstructlaw.com). This bulletin is published periodically to provide general information about current legal issues. The articles are not intended to be a substitute for the advice of an attorney as to a specific problem. If you have a specific legal question or need legal advice, you should contact an attorney.