Roy Allan Slurry Seal, Inc. v. Am. Asphalt S., Inc., S225398

• Decision Date: 16 February 2017
• Docket Number: S225398
• Citation: 2 Cal.5th 505,213 Cal.Rptr.3d 568,388 P.3d 800
• Court: California Supreme Court
• Parties: ROY ALLAN SLURRY SEAL, INC., et al., Plaintiffs and Appellants, v. AMERICAN ASPHALT SOUTH, INC., Defendant and Respondent.

2 Cal.5th 505

388 P.3d 800

213 Cal.Rptr.3d 568

ROY ALLAN SLURRY SEAL, INC., et al., Plaintiffs and Appellants,

v.AMERICAN ASPHALT SOUTH, INC., Defendant and Respondent.

S225398

Supreme Court of California

Filed February 16, 2017

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

Altshuler Berzon, Scott A. Kronland and Stacey M. Leyton, San Francisco, for State Building and Construction Trades Council of California, AFL-CIO as Amicus Curiae on behalf of Plaintiffs and Appellants.

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

Jarvis, Fay, Doporto & Gibson, Claire M. Gibson and Christine L. Crowl for League of California Cities as Amicus Curiae.

Corrigan, J.

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." (Korea Supply Co. v. Lockheed Martin Corp. (2003) 29 Cal.4th 1134, 1164, 131 Cal.Rptr.2d 29, 63 P.3d 937 (Korea Supply ).) 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. A divided Court of Appeal panel found these allegations sufficient. We reverse. 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. The bids were sealed, and there were no postsubmission negotiations. In awarding the contracts, the public entities could give no preference to any bidder based on past dealings, and were required to accept the lowest responsible bid. In these highly regulated circumstances, plaintiffs had "at most a hope for an economic relationship and a desire for future benefit." (Blank v. Kirwan (1985) 39 Cal.3d 311, 331, 216 Cal.Rptr. 718, 703 P.2d 58 (Blank ).) Accordingly, plaintiffs' allegations were insufficient; the demurrer was properly sustained.

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 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 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 by relying on plaintiffs' subsequently discovered placement as the second-lowest bidder to posit a relationship that did not, and could not, have existed during the bidding process.

II. DISCUSSION

A demurrer is properly sustained when "[t]he pleading does not state facts sufficient to constitute a cause of action." (Code Civ. Proc., § 430.10, subd. (e).) On appeal, a resulting judgment of dismissal is reviewed independently. (McCall v. PacifiCare of Cal., Inc. (2001) 25 Cal.4th 412, 415, 106 Cal.Rptr.2d 271, 21 P.3d 1189.) " ‘ "[W]e accept as true all the material allegations of the complaint" ’ " (Korea Supply , supra , 29 Cal.4th at p. 1141, 131 Cal.Rptr.2d 29, 63 P.3d 937 ), but do not "assume the truth of contentions, deductions or conclusions of law" (Aubry v. Tri – City Hospital Dist. (1992) 2 Cal.4th 962, 967, 9 Cal.Rptr.2d 92, 831 P.2d 317 ).

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, 131 Cal.Rptr.2d 29, 63 P.3d 937.)

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 public entities were required to award the contracts to the lowest responsible bidder. Second, in each instance the entities actually awarded a contract rather than rejecting all bids. Accordingly, plaintiffs contend, their expectation was not unduly speculative. Defendant has the better argument.

Plaintiffs rely heavily on Korea Supply , supra , 29 Cal.4th 1134, 131 Cal.Rptr.2d 29, 63...