Construction law alert | Nixon Peabody LLP
February 25, 2015
Bidder Beware: California court recognizes
intentional interference claims for second place
bidders in public works contracts
By Matthew Struhar, Matthew Richards
Introduction and Case Summary
A recent California Court of Appeal decision, Roy Allan Slurry Seal, Inc. v. American Asphalt South,
Inc. (“Roy Allan”), gives second-place bidders on public works projects a new cause of action for
intentional interference with a prospective economic advantage (“intentional interference”) against
ostensible winning bidders, if the low bid was due to the winning contractor’s failure to pay its
workers the prevailing wage or other unlawful conduct.
In Roy Allan, the defendant, American Asphalt South (“American Asphalt”), obtained 23 public
works contracts to perform roadwork in Southern California, but was allegedly only able to do so
because its bids did not meet California’s prevailing-wage law requirements.1 Plaintiffs Roy Allan
Slurry Seal (“Allan”) and Doug Martin Contracting (“Martin”) placed second to American Asphalt
on 17 and 6 of the contracts, respectively.2 Plaintiffs filed multiple cases with similar allegations in
multiple counties, suing American Asphalt on theories that included intentional interference.3
(Plaintiffs sued American Asphalt only, and did not pursue claims against the public entities
directly.) On demurrer, the Riverside County trial court dismissed plaintiffs’ cause of action for
intentional interference on the grounds that they failed to allege a proper economic relationship
between themselves and the public agency, and plaintiffs appealed.4
Key Holdings
On appeal, the Court considered whether Allan and Martin had a relationship with the public
agency that had awarded the contracts sufficient to state an intentional interference cause of
action—an element of an intentional interference claim—and held that the plaintiffs did. The
Roy Allan Slurry Seal, Inc. v. Am. Asphalt S., Inc., No. B255558, 2015 Cal. App. LEXIS 158 at *2 (2d Dist. Feb. 20,
2015).
2
Id.
3
Id. at *3.
4
Id. at *3-4.
1
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majority relied in large part on Korea Supply Co. v. Lockheed Martin Corp.,5 a California Supreme
Court Case involving a bid to supply military equipment to South Korea. In that case, the plaintiff
was an agent of a military contractor that lost its bid to a company that had bribed state officials in
order to obtain the contract. Because of the winning contractor’s unlawful conduct, the agent did
not earn a commission from his principal, which had placed a superior bid. As a result, the winning
contractor was held to have disrupted the agent’s business relationship with the second-place
bidder, and to have been liable to the agent for intentional interference.6
Because the plaintiffs in Roy Allan were the second-lowest bidders on various public works projects,
they implicitly alleged that the public agencies “were required to award the contract to the lowest
responsible bidder and that plaintiffs satisfied all the requirements necessary to qualify for those
contracts.”7 The Court here expanded Korea Supply to apply to any situation in which, but for the
wrongful conduct of the ostensibly lowest bidder, the second-place bidder would have obtained the
contract.8 The Court rejected American Asphalt’s argument “that a disappointed bidder has no
legally protectable expectancy interest in being awarded a contract.”9
The Court focused its analysis less on the existence of a formal economic relationship between the
plaintiffs and the public entity, and more on the actual expectations of the second-place bidders.
Under Korea Supply, “any subcontractor plaintiffs had lined up would have at least as great an
economic expectancy as did the plaintiff-agent in that case.”10 Implicitly, the Court reasoned, a
second-place prime contractor must also have a cause of action for intentional interference against
the wrongful winning contractor due to the fact that it had an economic expectancy from its
relationship with the agency.11
Open Questions for California Public Works Contractors
Although Roy Allan may assist law-abiding contractors seeking to vindicate their rights against less
scrupulous competitors, the decision also leaves open a number of issues, and could have
unintended consequences:
— Risk of increased litigation: The majority cautioned that its holding was limited “to losing bidders
who can show that they were the actual and lawful lowest bidders on a public works contract,”12
and dismissed the dissent’s concerns that this would open the litigation floodgates. However, all
winning bidders must be prepared to defend themselves against intentional interference
complaints by dissatisfied second-place contractors, at least through the pleadings stage,
regardless of the merits of the claim.
— Uncertain pleading standard: Can second-place bidders generally allege that the first-place
bidder’s costs estimates were illegally low (whether due to a prevailing wage violation or other
allegedly illegal act), or must a losing bidder meet a higher pleading standard, and specifically
plead facts detailing the first-place bidder’s allegedly illegal conduct?
5 29 Cal.4th 1134, 1156-57 (2003).
6 Id. at 1162-63.
7 Roy Allan, 2015 Cal. App. LEXIS at *11.
8 Id.
9 Id.
10 Id. at *18.
11 Id.
12 Id. at *18-19.
— Uncertain remedies and measure of damages: Will second-place bidders be able to obtain
temporary or permanent injunctions to prevent public works projects from proceeding until
their rights are adjudicated? What measure of damages will second-place bidders that prevail on
intentional interference claims be able to recover against winning bidders?
Much remains to be clarified about the scope of the intentional interference cause of action now
available to second-place bidders on California public works projects. In the meantime, public
entities and public works contractors alike enter a new era of uncertainty, and will learn together
whether the Roy Allan dissent’s fear of increased litigation is justified.
For more information on the content of this alert, please contact your regular Nixon Peabody
attorney or:
— Matthew T. Struhar at mstruhar@nixonpeabody.com or (415) 984-8252
— Matthew A. Richards at mrichards@nixonpeabody.com or (415) 984-5093