The Supreme Court of California recently granted a petition to review a California Court of Appeal decision holding that the second-lowest bidders for public works contracts can state a claim against the lowest bidder for intentional interference with prospective economic advantage. Because the court of appeal’s holding rests on bedrock common law principles, the supreme court’s ultimate ruling will be of national interest.

The key issue decided by the court of appeal in Roy Allan Slurry Seal, Inc. v. American Asphalt South, Inc.1 was whether the second-lowest bidder for a competitively bid public works contract has a sufficient economic relationship with the awarding authority to support a claim against the lowest bidder for intentional interference. The court of appeal held that, as alleged in the plaintiffs’ complaints, the second-lowest bidder had legally protectable interests in the award of the contracts in question.

In Roy Allan Slurry Seal, the plaintiffs, two paving contractors, sued a competitor for intentional interference with prospective economic advantage on the grounds that the competitor was able to underbid the plaintiffs on 23 public works contracts by paying its workers less than the statutorily required prevailing wage.2 Specifically, the plaintiffs alleged that the plaintiffs’ and defendant’s material costs for each of the projects were essentially the same and that the only substantial difference in their bids came from the defendant’s unlawfully low labor costs. The plaintiffs further alleged that, but for the defendant’s unlawful conduct, they would have been awarded the contracts for the projects.

The defendant demurred to the plaintiffs’ complaints in each of the five counties, the trial courts issued conflicting rulings, and the California Supreme Court coordinated the five cases for appellate purposes and for trial.

The court of appeal held that, as a matter of law, a second-place bidder on a public works contract can state a claim against the lowest bidder for intentional interference with prospective economic advantage sufficient to overcome a challenge at the pleadings stage if the second-place bidder alleges that the winner was only able to submit the lowest bid by illegally paying its workers less than the prevailing wage. In particular, the court of appeal held that the allegation by the second-place bidder that it would have otherwise been awarded the contract is sufficient to satisfy the requirement that there exists an economic relationship with some third party that makes it reasonably probable the plaintiff (here, the second-lowest bidder) will gain some future economic benefit.

In reaching its ruling, the court of appeal relied heavily on the California Supreme Court’s opinion in Korea Supply Company v. Lockheed Martin Corporation.3 In Korea Supply, the supreme court held that the agent of the losing bidder for a contract to supply military radar to the government of South Korea could state a claim for intentional interference with prospective economic advantage where 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. In reaching its ruling in the Korea Supply case, the supreme court held that when the lowest bidder’s action is independently wrongful (e.g., illegal), the second-lowest bidder need not allege that the lowest bidder specifically intended to interfere with the second-lowest bidder’s opportunity – the general intent to engage in the wrongful conduct is enough.

The California Supreme Court granted review in Roy Allan Slurry Seal to consider the following issues: “(1) In the context of competitive bidding on a public works contract, may the second lowest bidder state a claim for intentional interference with prospective economic advantage against the winning bidder based on an allegation that the winning bidder did not fully comply with California’s prevailing wage law after the contract was awarded? (2) To state a cause of action for intentional interference with prospective economic advantage, must the plaintiff allege that it had a preexisting economic relationship with a third party with probable future benefit that preceded or existed separately from defendant’s interference, or is it sufficient for the plaintiff to allege that its economic expectancy arose at the time the public agency awarded the contract to the low bidder?”4

The supreme court in Roy Allan Slurry Seal granted the petition for review on June 10, 2015, and extended the deadline for the defendants to file their opening briefs to August 10, 2015. The average time from grant of review to decision in the California Supreme Court is about two years.

Bidders for government contracts at the federal, state, and local levels should keep a close watch on the outcome of this case because if the court of appeal’s decision is upheld, it will provide an avenue for disappointed bidders to seek common law tort relief directly from the recipients of government contracts.