Supreme Court of California Holds That a Losing Bidder on a Public Works Contract Cannot Sue the Winning Bidder for Intentional Interference with Prospective Economic Advantage

by Pepper Hamilton LLP
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Roy Allan Slurry Seal, Inc. v. American Asphalt South, Inc., 2017 Cal. LEXIS 1024 (Cal. February 16, 2017)

This tort lawsuit relates to a dispute over the bidding process on several public works contracts in California. Between 2009 and 2012, American Asphalt outbid Roy Allan Slurry Seal and Doug Martin Contracting on 23 public works contracts for the application of slurry seal to roadways in five California counties.

Allan and Martin suspected that American illegally underbid them, and they sued American for intentional interference with prospective economic advantage. They alleged that American illegally under-paid its employees to ensure that it won the bid as the lowest “responsible” bidder.  Allan and Martin alleged that but for American’s illegal conduct, they would have been awarded the contracts because they were the second lowest bidders.

The trial court dismissed Allan and Martin’s complaint holding that it failed to state a viable claim for intentional interference with prospective economic advantage. The appellate court reversed the trial court, but American appealed to the Supreme Court of California.  

At issue was whether Allan and Martin could prove the “economic relationship” element of their claim, i.e. whether a losing bidder on a public works contract could prove that it had the requisite economic relationship with the public entity. The Supreme Court reversed the appellate court, concluding that Allan and Martin could not prove this element because they could not prove that they had an economic relationship with the public entity.

Under a claim for intentional interference with prospective economic advantage, the plaintiff must prove that it has an economic relationship with a third party that contains some probability of future economic benefit and that the defendant tortuously interfered with this relationship. The Supreme Court held that the mere fact that Allan and Martin submitted a bid in response to a public entity’s solicitation does not establish an “economic relationship” containing the “probability of future economic benefit.”  The Supreme Court based its decision on the laws governing public works contracts that prohibit a public entity from awarding a contract to any bidder with which it has an existing relationship.  Because these laws require that each bidder be treated “as a stranger to the public entity,” Allan and Martin could not prove that they had existing economic relations with the public entity.

In further support of its holding, the Supreme Court reasoned that Allan and Martin’s alleged economic relationship with the public entity was too uncertain to satisfy the economic relationship element. The Supreme Court held that a public entity’s solicitation for bids is “merely a request for offers from interested parties,” and because public entities have discretion to award no contracts at all, Allan and Martin had “at most a hope for an economic relationship and a desire for future benefit.”  The Supreme Court concluded that a claim for intentional interference requires an “interference with existing noncontractual relations,” and thus Allan and Martin could not rely on the potential outcomes of future events to support its claim.

The Supreme Court also declined to expand tort liability to cover Allan and Martin’s allegations based on public policy grounds because the social benefits were outweighed by the costs and burdens it would impose. The Supreme Court held that expanding tort liability would have little social benefit.  It noted that the public works contract bidding process is extensively regulated and enforced, and thus expansion was unnecessary to deter misconduct in the bidding process.  The Supreme Court also found that expansion of tort liability would be too costly and burdensome, as it could lead to frivolous litigation brought by losing bidders which might, in turn, deter responsible bidders from participating in the bidding process for fear of being sued.  The Supreme Court ultimately concluded that expanding tort liablity would thwart the public policy goals of stimulating competition in the public works contract bidding process.

To view the full text of the court’s decision, courtesy of Lexis®, click here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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