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Roy Allan Slurry Seal, Inc. v. American Asphalt South, Inc.

California Court of Appeals, Second District, Eighth Division

February 20, 2015

ROY ALLAN SLURRY SEAL, INC., et al., Plaintiffs and Appellants.
v.
AMERICAN ASPHALT SOUTH, INC., Defendant and Respondent.

[REVIEW GRANTED BY CAL. SUPREME COURT]

APPEAL from a judgment of the Superior Court of Riverside County. Super. Ct. No. RIC1308832 Richard J. Oberholzer, Judge.[*]

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COUNSEL

Doyle & Schafer, Daniel W. Doyle and David Klehm for Plaintiffs and Appellants.

Atkinson, Andelson, Loya, Ruud & Romo, Scott K. Dauscher, Paul G. Szumiak and Jennifer D. Cantrell, for Defendant and Respondent.

OPINION

RUBIN, Acting P. J.

INTRODUCTION

May the second-place bidder on a public works contract state a cause of action for intentional interference with prospective economic advantage against the winning bidder if the winner was only able to obtain lowest bidder status by illegally paying its workers less than the prevailing wage? We hold that the answer is yes if the plaintiff alleges it was the second lowest bidder and therefore would have otherwise been awarded the contract, because that fact gives rise to a relationship with the public agency that made plaintiff’s award of the contract reasonably probable.

FACTS AND PROCEDURAL HISTORY

Between 2009 and 2012 American Asphalt South, Inc. (American), outbid either Roy Allan Slurry Seal, Inc. (Allan), or Doug Martin Contracting, Inc. (

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(Martin), on 23 public works contracts totaling more than $14.6 million to apply a slurry seal protective coating to various roadways throughout Los Angeles, San Bernardino, Riverside, Orange, and San Diego Counties.[1]

Allan and Martin jointly sued American in those five counties for intentional interference with prospective economic advantage and other torts, alleging that American had only been able to submit the lowest bid by paying its workers less than the statutorily required prevailing wage. (Lab. Code, §§ 1770, 1771 [contractors on public works projects must pay the prevailing wage, as determined by the Department of Industrial Relations].) Allan and Martin alleged that each was the second lowest bidder, as to, respectively, 17 and 6 of the contracts and would have been awarded those contracts as the lowest bidder had American’s bid included labor costs based on the prevailing wage.[2] Plaintiffs alleged that each contractor’s material costs were effectively the same and that the only substantial difference in their bids came from American’s unlawfully deflated labor costs. Plaintiffs also alleged a cause of action for predatory pricing under the Unfair Practices Act (Bus. & Prof. Code, §§ 17000 et seq., 17043 (UPA)) and sought an injunction to enjoin American’s bidding practices under the unfair competition law. (Bus. & Prof. Code, § 17200 UCL.)

American demurred to the complaints, contending that plaintiffs did not have the required existing relationship and reasonable probability of being awarded the contracts that was required to show intentional interference with prospective economic advantage. American also contended that the unfair practices and unfair competition claims were defective on grounds we discuss in detail below.

These demurrers led to conflicting rulings from three trial courts. In July 2013, the Los Angeles Superior Court overruled American’s demurrers to the intentional interference with economic advantage and UCL claims, but sustained the demurrer as to the UPA claim with leave to amend. On November 5, 2013, the Riverside Superior Court sustained without leave to amend American’s entire demurrer. On November 15, 2013, the San Diego Superior Court overruled American’s entire demurrer. Plaintiffs appealed

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from the Riverside judgment in January 2014, and one week later our Supreme Court ordered all five matters coordinated for trial in Los Angeles Superior Court and for appellate purposes in the Second District Court of Appeal.

Plaintiffs contend that the Riverside trial court erred because their bid submissions created the required economic relationship for the intentional interference with economic advantage tort.

STANDARD OF REVIEW

In reviewing a judgment of dismissal after a demurrer is sustained without leave to amend, we assume the truth of all facts properly pleaded by the plaintiff-appellant. Regardless of the label attached to the cause of action, we examine the complaint’s factual allegations to determine whether they state a cause of action on any available legal theory. (Doe v. Doe 1 (2012) 208 Cal.App.4th 1185, 1188 [146 Cal.Rptr.3d 215].) We do not assume the truth of contentions, deductions, or conclusions of law or fact and may disregard allegations that are contrary to the law or to a fact that may be judicially noticed. (Ibid.)

To the extent issues of statutory construction are raised, we apply the rules of statutory construction and exercise our independent judgment. Our first task in construing a statute is to ascertain the Legislature’s intent in order to carry out the purpose of the law. If the statutory language is clear and unambiguous, no judicial construction is required. If the statute is ambiguous, the words must be construed in context and in light of the statutory purpose. (Doe v. Doe 1, supra, 208 Cal.App.4th at p. 1189.)

DISCUSSION

1. The Tort of Intentional Interference With Prospective Economic Advantage

The tort of intentional interference with prospective economic advantage (intentional interference) provides a remedy to those “who suffer[] the loss of an advantageous relationship” due to the actions of “a malicious interloper.” (Zimmerman v. Bank of America (1961) 191 Cal.App.2d 55, 57 [12 Cal.Rptr. 319].) "[T]he 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.” (Buckaloo v. Johnson (1975) 14 Cal.3d 815, 827 [122 Cal.Rptr. 745, 537 P.2d 865] (Buckaloo), disapproved on other grounds in Della Penna v. Toyota Motor Sales, U.S.A., Inc. (1995) 11 Cal.4th 376, 393, fn. 5 [45 Cal.Rptr.2d 436, 902 P.2d 740].) The tort is

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considerably more inclusive than actions for interference with contract, and therefore does not depend on the existence of a valid contract. (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1157 [131 Cal.Rptr.2d 29, 63 P.3d 937] (Korea Supply).)

In order to state a cause of action for this tort, a plaintiff must allege five elements. First, the existence of an economic relationship with some third party that makes it reasonably probable the plaintiff will gain some future economic benefit. This protects the expectation that the relationship will eventually produce the desired benefit, not the speculative expectation that a potentially beneficial relationship will arise. (Korea Supply, supra, 29 Cal.4th at p. 1164.)

Second, the defendant must have knowledge of the plaintiff’s economic relationship. (Korea Supply, supra, 29 Cal.4th at p. 1164.)

Third, the defendant must have engaged in wrongful acts designed to disrupt the plaintiff’s relationship. This requires allegations that the defendant engaged in an independently unlawful act separate and apart from the acts of interference and that the defendant either intended to interfere or acted with the knowledge that interference was certain or substantially certain to occur. (Korea Supply, supra, 29 Cal.4th at pp. 1164-1165.) This does not require that the plaintiff have been identified by name, however, and it is enough that the defendant was aware its actions would frustrate the legitimate expectations of a specific, albeit unnamed, party. (Ramona Manor Convalescent Hospital v. Care Enterprises (1986) 177 Cal.App.3d 1120, 1132-1133 [225 Cal.Rptr. 120].)

Fourth, the plaintiffs’ economic relationship was actually disrupted. (Korea Supply, supra, 29 Cal.4th at p. 1165.)

Fifth, the plaintiffs suffered economic harm that was proximately caused by the defendant’s interference. (Korea Supply, supra, 29 Cal.4th at p. 1165.)

2. Plaintiffs, as the Lawful And Second Lowest Bidders, Had a Reasonably Probable Economic Expectancy that They Would be Awarded the Contracts

The competitive bidding laws for public works contracts are designed to protect the public, not bidders. (See Konica Business Machines U.S.A., Inc. v. Regents of University of California (1988) 206 Cal.App.3d 449, 456 [253 Cal.Rptr. 591]; Universal By-Products, Inc. v. City of Modesto (1974) 43 Cal.App.3d 145, 152 [117 Cal.Rptr. 525].) Therefore while public agencies are generally expected to accept the bid of the lowest responsible bidder, they

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still have discretion to reject all bids or accept one of multiple bids that have tied as the lowest.[3] (Pub. Contract Code, §§ 10122, subd. (d), 20166, 22038, subd. (b).)

Based on appellate decisions applying this principle in various contexts, which we discuss post, American contends that losing bidders are barred from suing their successful competitors for intentional interference because there was no existing relationship with which to interfere and no reasonable probability that any contract would ever have been awarded.

No reported California decision has reached this issue. We turn for guidance to two decisions of the California Supreme Court: Korea Supply, supra, 29 Cal.4th 1134, and Buckaloo, supra, 14 Cal.3d 815. The Buckaloo court, which first articulated the elements of the intentional interference tort, noted that the tort could be established by showing interference with a contract “which is certain to be consummated.” (Buckaloo, at p. 823, fn. 6, quoting Builders Corp. of America v. U.S. (N.D. Cal. 1957) 148 F.Supp. 482, 484, fn. 1, revd. on other grounds (9th Cir. 1958) 259 F.2d 766.)

Drawing upon this principle, the Korea Supply court considered the pleading requirements of an intentional interference cause of action brought by the agent of the losing bidder on a contract to supply military radar equipment to the government of South Korea. The agent alleged that the winning bidder obtained the contract by providing bribes and sexual favors to key Korean officials, in violation of the federal Foreign Corrupt Practices Act of 1977. (15 U.S.C. § 78dd-2.) The agent alleged that its principal’s product was superior and its bid was significantly lower than the defendant’s bid, that but for the defendant’s misconduct its principal would have been awarded the contract, and that as a result the agent lost the commission it would have otherwise obtained.

The trial court sustained the defendant’s demurrer without leave to amend, but the Court of Appeal reversed, in part because it concluded the plaintiff did not have to plead and prove that the defendant acted with the specific intent to interfere with the plaintiff’s business expectancy. Korea Supply dealt primarily with that issue, agreeing with the Court of Appeal that specific intent to disrupt a plaintiff’s business expectancy was not an element of the intentional interference tort. (Korea Supply, supra, 29 Cal.4th at pp. 1156-1157.)

The Korea Supply court went on to discuss the elements of the intentional interference tort and how they limit the class of potential plaintiffs. In regard

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to the existence of an economic expectancy, the Korea Supply court held that one existed even though the plaintiff agent did not allege that it had a contractual agreement with its principal, and instead “merely alleged that it had an economic expectancy in that it was acting as [the principal’s broker] and it expected a commission if the contract was awarded....” (Korea Supply, supra, 29 Cal.4th at p. 1157.) In regard to proximate cause, the Korea Supply court recounted the plaintiffs allegations that its principal would have been awarded the contract absent the defendant’s misconduct, leading directly to the plaintiff’s lost commission. Those allegations were sufficient to establish proximate cause. (Id. at pp. 1165-1166.)

Elsewhere in the decision, the Korea Supply court recognized that the plaintiff was an indirect victim of the defendant’s alleged misconduct. (Korea Supply, supra, 29 Cal.4th at pp. 1162-1163.) This makes sense because in order to interfere with the plaintiff-agent’s expectation of receiving a commission, the defendant had to first derail acceptance of the principal’s superior bid. Essential to Korea Supply’s proximate cause discussion, therefore, is the notion that the defendant intentionally interfered with the losing bidder’s viable contractual expectancy.[4]

We see little functional difference between the allegations concerning the unsuccessful bidder in Korea Supply and those made by plaintiffs in this case. 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.[5] 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.

Citing Pacific Architects Collaborative v. State of California (1979) 100 Cal.App.3d 110, 121-122 [166 Cal.Rptr. 184] (Pacific Architects), Swinerton & Walberg Co. v. City of Inglewood-L.A. County Civic Center Authority (1974) 40 Cal.App.3d 98, 101 [114 Cal.Rptr. 834] (Swinerton), Rubino v. Lolli (1970) 10 Cal.App.3d 1059, 1062 [89 Cal.Rptr. 320] (Rubino), and Charles L. Harney, Inc. v. Durkee (1951) 107 Cal.App.2d 570, 580 [237 P.2d 561]

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(Harney), American contends that a disappointed bidder has no legally protectable expectancy interest in being awarded a contract. We first summarize the four cases and then conclude they are inapplicable here.

The plaintiff in Pacific Architects, supra, 100 Cal.App.3d 110, sued the state to recover its bid preparation costs and lost profits when it submitted the lowest bid, but the state rejected all bids after discovering it had insufficient funds for the project. Based on the state’s discretion to reject all bids, the appellate court affirmed a summary judgment for the state, holding that government immunity protected it from tort liability and that promissory estoppel was not available as a remedy either. (Id. at pp. 121-122, 124.)

The plaintiff in Rubino, supra, 10 Cal.App.3d 1059, submitted the lowest bid on a state project and sued the director of the agency after the contract was awarded to another bidder. The Rubino court held that the ability to reject and award bids vested the director with discretion, and that his abuse of that discretion qualified for government immunity in a tort action for damages. (Id. at p. 1062.) Even so, the Rubino court noted that a mandate action might have been available to restrain the agency from awarding the contract if the agency abused its discretion. (Ibid., citing Baldwin-Lima-Hamilton Corp. v. Superior Court (1962) 208 Cal.App.2d 803, 824-826 [25 Cal.Rptr. 798].)

The plaintiff in Swinerton, supra, 40 Cal.App.3d 98, was the lowest bidder on a project and sued the public agency in tort and for promissory estoppel when the contract was awarded to someone else. Although Rubino’s government immunity principles applied to the tort claim against the public agency (id. at pp. 101-102), promissory estoppel was held available to compensate the plaintiff for its bid preparation costs. (Id. at pp. 103-105.) In particular, the Swinerton court noted, despite the public agency’s discretion to reject all bids, allowing recovery under a promissory estoppel theory was important to prevent making the agency’s promise to award the contract to the lowest bidder illusory and “render the whole competitive bidding process ...


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