Service Engineering Co. v. Southwest Marine, Inc.

• Decision Date: 08 August 1989
• Docket Number: No. C-86-6096 SAW.,C-86-6096 SAW.
• Citation: 719 F. Supp. 1500
• Parties: SERVICE ENGINEERING COMPANY, a corporation; The Jonathan Corporation, a Virginia corporation; and Triple A Machine Shop, Inc., a California corporation, Plaintiffs, v. SOUTHWEST MARINE, INC., a California corporation; Southwest Marine of San Francisco, Inc., a California corporation; Arthur E. Engel and Herbert Engel, individuals; and Does One through Twenty, Inclusive, Defendants.
• Court: U.S. District Court — Northern District of California

719 F. Supp. 1500

SERVICE ENGINEERING COMPANY, a corporation; The Jonathan Corporation, a Virginia corporation; and Triple A Machine Shop, Inc., a California corporation, Plaintiffs, v. SOUTHWEST MARINE, INC., a California corporation; Southwest Marine of San Francisco, Inc., a California corporation; Arthur E. Engel and Herbert Engel, individuals; and Does One through Twenty, Inclusive, Defendants.

No. C-86-6096 SAW.

United States District Court, N.D. California.

August 8, 1989.

Khourie, Crew & Jaeger, Eugene Crew and William L. Jaeger, San Francisco, Cal., for plaintiffs.

M. Laurence Popofsky and Monika Lee, Heller, Ehrman, White & McAuliffe, San Francisco, Cal., for defendants.

MEMORANDUM AND ORDER

WEIGEL, District Judge.

Plaintiffs, ship repair contractors, allege that defendants falsely certified to the United States Navy and Small Business Administration (SBA) that they were a small business, allowing them to obtain "small business set aside" contracts from the Navy that otherwise would have gone to plaintiffs.

Plaintiffs assert claims for violations of the Sherman Act, 15 U.S.C. § 2, the Racketeering Influenced and Corrupt Practices Act (RICO), 18 U.S.C. §§ 1961 et seq., the California Business and Professions Code, § 16720, and also allege fraud, unfair business practices, interference with prospective business relations, malicious prosecution and abuse of process.

The parties bring cross-motions for summary judgment.

I. Background.

This litigation presents three major issues: (1) Did the defendants act fraudulently by certifying themselves as "small" to SBA and the Navy; (2) If so, which, if any of the plaintiffs, was damaged; (3) What is the amount of any damages. The following facts are not in dispute.

From 1976 until 1983, plaintiffs and defendants competed for contracts to repair Navy vessels. The set-aside contracts they sought were designated for "small businesses" pursuant to the Small Business Act of 1958, 15 U.S.C. § 631 et seq. The definition of "small business" is set forth in regulations of SBA. For the category of contracts involved in this lawsuit, a business is "small" if it has fewer than 1000 employees.

Prior to 1976, SBA regulations allowed a business to calculate total employees under a "quarterly method", based on the number of persons employed during the pay period ending nearest the last day of each of the past four calendar quarters. If the average of the four most recent quarterly tallies of employees exceeded 1000, the employer was not considered a small business.

SBA became aware that businesses were understating their true size under the quarterly method by firing employees immediately before the last pay period of the quarter and rehiring them shortly thereafter. 40 Fed.Reg. 55868 (Dec. 2, 1975). To eliminate this practice, SBA in March, 1976, amended its regulations for size determinations by introducing a "pay period method" of counting employees. Under this method, an employer's "number of employees" for purposes of determining small business status is defined as the average of the number of employees during each and every pay period of the preceding year. 13 C.F.R. § 121.2(b) (1988), formerly at 13 C.F.R. § 121.3-2(t). Amending the regulations, SBA declared

"There should be no flexibility in the computation of a concern's number of employees. We do not consider it desirable for concerns to be able to adjust their employment practices to produce a `number of employees' figure that does not accurately reflect their normal size in terms of employment."

41 Fed.Reg. 9297 (March 4, 1976).

A separate regulation, however, conferred "small" status on businesses in accordance with "Schedule B" to that provision. For the category "Shipbuilding and repairing," Schedule B set the maximum as 1000 employees. Footnote 1 to Schedule B, which was adopted prior to 1976 regulation amendments and inadvertently left in place thereafter, defined "number of employees" using the old quarterly method. Thus, there was some ambiguity in SBA regulations regarding the proper method of calculating business size.

In May, 1981, defendants used the pay period method to calculate its employee totals. In October, 1981, defendants sought the advice of their attorney, Peter Jones, regarding the appropriate method for calculating size. In his letter, Jones reviewed both the pay period and quarterly methods, but advised that defendants use the quarterly method as provided in footnote 1 to Schedule B. Jones also advised that if defendants were required to submit a SBA Form 355 (Application for Small Business Size Determination), they should be aware that the form defines "number of employees" according to the pay period method.¹ Thus, he advised, "to ensure candor and avoid misunderstanding, you should annotate any such form that you may execute to indicate that number of employees is `calculated per Schedule B, Note 1.'" Letter of October 14, 1981.

Defendants in February, 1982, followed their attorney's advice when SBA, in response to a protest, requested that they file a Form 355. Defendants submitted the form to SBA with a cover letter stating "in calculating the number of employees on the enclosed Form 355, we have used the Schedule B method ..." Letter of February 18, 1982. On March 31, 1982, the SBA regional administrator issued a "size determination" which upheld defendants' status as a small business under the quarterly method.

Between February, 1982, and September, 1983, it is undisputed that defendants periodically fired and then rehired employees to stay below an average of 1000 employees using the quarterly method. In one such instance, defendants fired 513 employees during the last week of 1982, then rehired 559 employees one week later. Defendants concede that "the sole purpose of quarter end layoffs was to maintain small business status." Defendants' Memorandum in Support of Summary Judgment at 3, n. 4. Defendants never informed SBA of this practice.

In September, 1983, defendants' status as a small business was challenged by plaintiff Triple A. In its letter dated September 29, 1983, SBA attached Triple A's letter of protest, which alleged that defendants, using the quarterly method, manipulated its number of employees by firing and rehiring them. SBA required that defendants complete Form 355, adding "attach any additional evidence you might wish to submit to support your position as a small business." In response, defendants submitted the form on October 4, 1989, stating "we believe that the Form 355 information adequately resolves Triple A's allegations." Defendants did not disclose that their calculation of size was based on the quarterly method, nor did they disclose that they had fired and rehired employees to maintain their "small" status.

There is no ambiguity in Form 355. Under "Applicants number of employees" there is a referral, "See `Instructions' for definition of the term `number of employees.'" The Instructions define that term using the pay period method. The form on its face also provides

"Section 16(a) of the Small Business Act, as amended, makes it a criminal offense punishable by fine of not more than $5000 and imprisonment for not more than two years, or both, to make a willfully false statement or misrepresentation to the Small Business Administration for the purpose of influencing in any way the action of the Administration."

The form provides in the Certification section, immediately above the signature line, that

"I hereby certify that all information contained above and in exhibits and attachments hereto are true and complete to the best knowledge and belief of the applicant ..."

On October 5, 1989, in response to a call from SBA's local counsel, defendants mailed an additional letter to SBA certifying that the "total employee" information on Form 355 includes all employees "as defined in the Small Business Size Standards of the SBA Rules and Regulations (13CFR Part 121)." Again, defendants failed to disclose (1) that they calculated size using the quarterly method rather than the pay period method specified in Form 355, and (2) that they periodically fired and then rehired employees. Finally, on October 24, 1983, SBA wrote defendants requiring that they complete a prepared Declaration specifying number of employees to be calculated using the pay period method. By letter dated November 7, 1983, defendants declined to execute the Declaration, stating they could not complete it because they calculated number of employees using the quarterly method.

On December 6, 1983, SBA's regional administrator reversed her March, 1982, determination and found that defendants were not a small business. SBA decertified defendants from obtaining further set-aside contracts.

Meanwhile, in May, 1983, the Navy had sought bids from small businesses for a contract for repair and modernization of four vessels on the West Coast (the "AOR contract"). This contract was the largest West Coast procurement by the Navy at the time, scheduled to be performed over five years at an estimated cost of approximately $135-150 million.

Plaintiffs and defendants submitted bids on the contract, certifying under penalty of perjury that they were small businesses. On October 12, 1983 — while SBA was investigating defendants' small business status—the Navy requested that defendants submit a Second Best and Final Offer as part of the process of evaluating defendants' bid on the AOR contract. On November 2, 1983, the Navy awarded the contract to defendants.

II. Collateral Estoppel.

Three courts and an agency already have considered aspects of this ongoing controversy. This Court will not revisit issues that have been decided by the courts. See Hernandez v. City of Los Angeles, 624 F.2d 935, 937 (9th Cir.1980) (collateral estoppel bars party from relitigating issues actually and necessarily decided in prior proceeding); Lockwood v. Superior Court, 160 Cal.App.3d 667, 671, 206...