Snell & Wilmer
Under Construction
 

James J. Sienicki
James J. Sienicki
801.257.1838
jsienicki@swlaw.com
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Sean M. Mosman
Sean M. Mosman
801.257.1838
smosman@swlaw.com
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Mark O. Morris
Mark O. Morris
801.257.1904
mmorris@swlaw.com
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Amanda Z. Weaver
Amanda Z. Weaver
602.382.6535
aweaver@swlaw.com
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Walker F. Crowson
Walker F. Crowson
602.382.6298
wcrowson@swlaw.com
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Gerard Morales
Jerry Morales
602.382.6362
jmorales@swlaw.com
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Edward J. Hermes
Edward J. Hermes
602.382.6529
ehermes@swlaw.com
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Jenna Le
Michael J. Baker
714.427.7472 OC
213.929.2644 LA
mjbaker@swlaw.com
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Snell & Wilmer
Past Issues
Construction Practice

     

April 2019

Letter from the Editor

Welcome to the spring edition of our Under Construction newsletter.

In this issue, we start off with an article that discusses the significance and implications of a recent Utah Supreme Court decision affirming the lower court’s ruling that a voter referendum to block a developer’s efforts to build a mixed-use, part-residential and part-commercial development was valid.

Next, we have an article about the Arizona Supreme Court upholding the constitutionality of a provision relating to statutory authority for constructing and operating sports and tourism complexes. The case examined the constitutionality of how the building and operations of sports and tourism-related projects, such as baseball spring training facilities and recreation centers, are funded through taxes, and decided they were constitutional.

With an increase in out-of-state companies working on construction projects in New Mexico, the next article provides a useful overview of New Mexico’s construction law.

Our next two articles focus on labor and employment law. One article discusses employment handbooks and confidentiality and the other article addresses picketing threats, which have affected many construction projects.

We then explore construction in American Indian country and address what you need to know regarding sovereign immunity. Since there are many legal issues to consider when bidding on and building projects on American Indian land, this article discusses if you can bring a lawsuit to enforce a construction contract and, if so, where you would file suit.

Lastly, we point out the danger of a public entity pursuing a claim pursuant to the California False Claims Act and its impact on the construction industry. As noted in the article, public entities are known to assert False Claims actions “to up the ante” to intimidate and aggressively address contractor construction claims. We examine a recent case in which this tactic backfired against the public entity.

We hope you find these articles informative and enlightening. Please let us know if you want us to address a specific construction issue in a future newsletter. Hope you can get outdoors and enjoy the nice springtime weather.

Regards,
James J. Sienicki

Utah Supreme Court Allows Citizens to Block Real Estate Development Project by Voter Referendum

by Sean M. Mosman and Mark O. Morris

The Utah Supreme Court recently decided Baker v. Carlson, 2018 UT 59, which considered a developer’s ongoing effort to build a mixed-use, part-residential and part-commercial development on the site of the long-defunct Cottonwood Mall located in Holladay, Utah. On November 28, 2018, the Supreme Court affirmed the Third District Court’s ruling that a voter referendum to block the development was valid. This ruling calls into question the certainty of investment-backed real estate decisions in Utah and thus could carry negative implications for the Utah construction and real estate development communities.

The Cottonwood Mall opened in the early 1960s, and for several decades was a popular regional shopping destination. But the mall fell on financial hard times in the mid-1990s, and since 2007 the 57-acre lot has sat vacant. Around that time, the owner of the lot made plans to redevelop it, and asked Holladay City to rezone the site to permit mixed uses. In response, the City rezoned the lot as Regional/Mixed-Use (R/M-U). The City also created a process to control the development of an R/M-U zone, requiring prospective builders to first submit a site development master plan—which sets forth guidelines for the overall development and design of the site—to the City for approval. After the City approves a master plan, the developer must enter into a development agreement with the City, giving the developer certain rights and addressing other development-related issues.

In late 2007, the owner of the Cottonwood Mall obtained all required approvals including the rezone. However, in the throes of the 2008 recession, the owner abandoned the development project and the lot sat untouched for nearly a decade.

In 2016, a new developer began negotiations to purchase and develop the property. In early 2018, after months of public hearings and meetings regarding the new development plan, it submitted a new master plan and a proposed amended development agreement, which contained various concessions to satisfy public concerns about the development, including lowering the maximum building height, reducing the project’s overall density, and extending a trail and park system on the lot. On May 17, 2018, the Holladay City Council unanimously passed Resolutions 2018-16 and 2018-17 approving both amendments.

In response, a group of citizens from Holladay—primarily concerned about the planned development’s population density, which was higher than that of the surrounding neighborhoods of single-family homes—petitioned to subject the Resolutions to a public vote by referendum. The City rejected the citizens’ petition on the basis that the Resolutions were not referable, and the citizens promptly filed suit to contest the City’s decision. The citizens argued that the Resolutions were legislative—not administrative—actions and should therefore be subject to a voter referendum to determine their validity. Holladay City and the developer countered that the Resolutions were passed pursuant to the City’s administrative authority and thus should not be put to a public vote. In a September 2018 ruling, a district court held that, while the City’s approval of the development agreement amendment was administrative in nature and could not be referred for a public vote, Resolution 2018-16—which granted the proposed amendment to the site master plan—was a legislative action and should in fact be subject to public referendum. On appeal, the Supreme Court affirmed the trial court’s ruling.

The Supreme Court’s decision in Baker v. Carlson, and its tacit approval of “zoning by referendum,” has the potential to seriously undermine real estate development and construction in Utah. Good city planning requires a cooperative effort between property owners and cities. During the normal administrative process, a developer submits a proposal that, in its view, puts the property to good use while also making economic sense. Then, the local planning commission, the public, and the city council weigh in, and the resulting series of compromises strikes a balance between the parties’ respective interests. But this exercise is meaningless if voters can, by referendum, compel a property owner to develop her land in a specific way. It is impossible to ensure that the voters will properly consider and address crucial issues, such as traffic or environmental impacts. Most importantly, the Supreme Court’s ruling means voters have a mechanism to override the rights of individual property owners to use their land as they see fit. Land use decision making now enters the realm of the ballot box, rather than a thoughtful and careful administrative process allowing for give and take among competing interests.

This ruling could compromise other large, master-planned communities that are anticipated or under construction in Utah. The general language of the ruling could mean that more regular and typical land use approvals even on one parcel could be sent to the ballot box. If more developments are targeted by citizen referenda, jeopardizing the investments of landowners, real estate developers and municipal governments, certainty about Utah’s land development market is eroded. Baker v. Carlson introduces uncertainty in real estate development, such that another legislative fix may be necessary.

Arizona Supreme Court Upholds Constitutionality of Provision Relating to Statutory Authority for Constructing and Operating Sports and Tourism Complexes

by Amanda Z. Weaver

In an opinion published February 25, 2019, the Arizona Supreme Court held that Maricopa County’s surcharge on car rental agencies to fund a stadium and other sports- and tourism-related projects did not violate either the dormant Commerce Clause of the United States Constitution or the anti-diversion provision of the Arizona Constitution, art. 9, § 14. Saban Rent-a-Car LLC v. Ariz. Dep’t of Revenue.

In 2000, the Arizona Legislature created the Arizona Tourism and Sports Authority (the Authority) to build and/or operate a variety of sports-related facilities, including Major League Baseball spring training facilities, and youth and amateur sports and recreation centers. Taxes and surcharges, approved by voters, are the sole funding for the Authority’s construction projects, including the challenged surcharge in Maricopa County. This surcharge is based on the income from car rental companies leasing vehicles to customers for less than one year, and is the greater of $2.50 per rental or 3.25% of the company’s gross proceeds or income. A.R.S. § 5-839. The state treasurer deposits $2.50 per rental transaction into the Maricopa County Stadium District, as it has since 1991, and the remaining amount of the difference between $2.50 per transaction and 3.25% of the company’s gross income or proceeds is distributed to the Authority. Rental car companies often pass this surcharge on to their customers.

Plaintiff Saban Rent-a-Car, who operates in Maricopa County with mainly local residents for customers, sued the Arizona Department of Revenue (ADOR) in tax court. The Authority intervened as defendant. Saban argued that the surcharge violates both the dormant Commerce Clause of the United States Constitution, as well as the anti-diversion provision of the Arizona Constitution.

The case found its way to the Arizona Supreme Court, which determined that the surcharge did not violate the dormant Commerce Clause as a non-discriminatory law. Similarly, the Arizona Supreme Court determined that the surcharge did not violate the anti-diversion provision of the Arizona Constitution, which prohibits funds derived from “fees, excises, or license taxes relating to registration, operation, or use of vehicles on the public highways or streets” to be “expended for other than highway and street purposes.” Ariz. Const., art. 9, § 14.

The Authority’s boundaries are within any county with a population of more than two million people. A.R.S. § 5-802(A). For practical purposes, this includes only Maricopa County at this time; however, as the populations of other counties continue to grow, the statutory framework composed in part of the provisions upheld as constitutional in Saban may have application elsewhere as well.

Overview of New Mexico Construction Law

by Walker F. Crowson

We’ve seen an uptick in out-of-state companies working on construction projects in New Mexico. The following is an overview of some of the nuances of New Mexico construction law about which companies may want to be aware.

Construction Contract Issues

Limitation of Liability Clauses are usually Enforceable, but Anti-Indemnity Clauses Are Not

New Mexico courts have enforced limitation of liability clauses included in construction contracts. See Fort Knox Self Storage, Inc. v. W. Techs., Inc., 140 N.M. 233, 237 (N.M. Ct. App 2006). New Mexico law recognizes the difference between contracts that insulate a party from any and all liability and those that simply limit liability. Fort Knox Self Storage, Inc., 140 N.M. 233 at 237. An exculpatory clause immunizes a party from liability, whereas a limitation of liability clause merely curtails liability. Id. A limitation of liability clause has been held not to violate New Mexico public policy because the party “still bears substantial responsibility for its actions.” Id.; see also Cowan v. D'Angelico, 2010 WL 11493789, *6 (D. N.M. Apr. 26, 2010).

On the other hand, New Mexico’s Anti-Indemnity Act prohibits parties to a construction contract from requiring one party to indemnify the other party for the indemnitee’s negligence. NMSA § 56-7-1. The Act defines a “construction contract” as a “public, private, foreign or domestic contract or agreement relating to construction, alteration, repair or maintenance of any real property in New Mexico and includes agreements for architectural services, demolition, design services, development, engineering services, excavation or other improvement to real property, including buildings, shafts, wells and structures, whether on, above or under real property.” NMSA § 56-7-1(E). An indemnity agreement violates the Act, and is unenforceable, if it requires “one party to the contract to indemnify, hold harmless, insure or defend the other party to the contract . . . against liability, claims, damages, losses or expenses . . . arising out of bodily injury to persons or damage to property caused by or resulting from, in whole or in part, the negligence, act or omission of the indemnitee.” NMSA § 56-7-1(A). The New Mexico Court of Appeals has held that, to the extent an indemnity agreement violates the Act, only the offending provision will be unenforceable, not the entire agreement. See Holguin v. Fulco Oil Services L.L.C., 149 N.M. 98, 106 (N.M. Ct. App. 2010).

Keep Liquidated Damages Provisions Reasonable

Liquidated damage provisions are generally enforced in New Mexico. Gruschus v. C.R. Davis Contracting Co., 75 N.M. 649, 655 (1965). They are generally only denied when the stipulated amount is “so extravagant or disproportionate as to show fraud, mistake or oppression.” Id. New Mexico courts also hold that an award of actual damages unrelated to delay does not preclude an award of liquidated damages for delay-related damages as long as there is not duplication of damages. Louis Lyster General Contractor, Inc. v. City of Las Vegas, 83 N.M. 138, 146 (1971).

Don’t Expect to Litigate a Construction Dispute Outside of New Mexico

A forum selection clause in a construction contract is void against public policy if it requires venue of any litigation arising out of the contract in a state other than New Mexico or makes the contract subject to the laws of another state. NMSA § 57-28A-1. As with the Anti-Indemnity Act, a “construction contract” is defined as a “public, private, foreign or domestic contract or agreement relating to construction, alteration, repair or maintenance of any real property in New Mexico and includes agreements for architectural services, demolition, design services, development, engineering services, excavation or other improvement to real property including buildings, shafts, wells and structures, whether on, above or under real property.” NMSA § 57- 28A-1(C).

Licensing

Contractors in New Mexico generally must be licensed through the New Mexico Regulations and Licensing Department. NMSA § 60-13-1 et seq. A “contractor” is broadly defined and includes general contractors, subcontractors, specialty contractors and even construction managers. NMSA § 60-13-30. Contractors who are not licensed in New Mexico may not file a claim of lien or maintain suit for payment for unlicensed work. Id. Significantly, a contractor may not maintain an action for collection against a customer if the contractor used unlicensed subcontractors to perform any part of the job. Reule Sun Corp. v. Valles, et al., 226 P.3d 611 (N.M. 2009) (general contractor who used unlicensed subcontractor to perform part of stucco job on customer’s house could not maintain action for payment against customer).

Mechanic’s Liens

New Mexico has a mechanics lien claim process for private construction projects codified at NMSA § 48-2-1, et seq. General contractors, meaning a contractor in direct contractual privity with the owner, must file their claim of lien within 120 days of completion of the project. NMSA § 48-2-6. Subcontractors and suppliers, or any other contractor who does not have a contract with the owner of the project, must file a claim of lien within 90 days after substantial completion of the building. Id. The statute does not require a specific form of lien claim to be used and generally sets out only two requirements for the contents of a valid lien: a statement of the nature of the claim against the property owner and a verification under oath. Id. While New Mexico allows a lien claimant some room to substantially comply with the requirements of § 48-2-6, an unverified lien claim is per se invalid. Sonida, LLC v. Spoverlook, LLC, 367 P.3d 854 (N.M. Ct. App. 2016).

In comparison to many other states, New Mexico law does not require prior notice of the intent to claim a lien be sent by the general contractor or any subcontractor or supplier who contracts with the general contractor. NMSA § 48-2-2.1(A). Instead, only "sub-subcontractors," those subcontractors or suppliers who do not contract with the general contractor, are required to perfect a lien claim by first giving written notice of their right to claim a lien in the event of non-payment not more than 60 days after initially furnishing work of materials or both, by either certified mail, return receipt requested, fax with acknowledgment, or personal delivery to (1) the owner or reputed owner of the property upon which the improvements are being constructed or (2) the general contractor, if any. NMSA § 48-2-2.1(B).

Prompt Payment

Generally, an owner must pay a contractor within 21 days of receiving an undisputed request for payment. NMSA § 57-28-5(A). If a submitted invoice is improperly completed, then the owner must notify the sender within seven days, detailing how the invoice was in error. Id. There is no duty to pay on an improper invoice until it is resubmitted as complete. Id.

General contractors and subcontractors must make payment to their downstream subcontractors or suppliers within seven days after receipt of payment by the upstream owner or general contractor. These payment provisions apply to all tiers of contractors, subcontractors and suppliers. NMSA § 57-28-5(C).

Final payment from an owner to contractor must be made within 10 days after a certification of completion upon presentation of (1) a properly executed release and payment voucher, (2) a release, if required, of all claims and claims of lien against the owner except those specifically excepted by the contractor or subcontractor, and (3) proof of completion. NMSA § 57-28-8.

Interest begins to accrue on the day after payment was due at the rate of 1.5% of the undisputed amount per month or fraction of a month until payment is issued. NMSA § 57-28- 5(A)

Significantly, New Mexico does not allow for retainage to be withheld. NMSA § 57-28-5(E) (“When making payments, an owner, contractor or subcontractor shall not retain, withhold, hold back or in any other manner not pay amounts owed for work performed”).

Employment Handbooks and Confidentiality

by Jerry Morales

Employers frequently ask if they can maintain rules requiring employees to keep the contents of their employment handbooks confidential.

In a recent memorandum, the General Counsel (GC) (Division of Advice) of the National Labor Relations Board (NLRB) concludes that such rules are unlawful, as they interfere with the employees’ rights to discuss handbook policies regarding terms and conditions of employment with unions or other third parties.

The employees’ protected right to discuss handbook rules and policies dealing with terms and conditions of employment with third parties outweighs the employer’s business justification that the confidentiality restriction was necessary in order to prevent the policies in the handbook from falling into the hands of competitors.

In the memorandum, the GC notes that to the extent that the handbook contains confidential or proprietary information, the employer could tailor a rule to protect such information without interfering with the employees’ protected rights to discuss terms and conditions of employment with third parties.

Picketing Threats

by Jerry Morales

Letters from unions to owners, general contractors and other contractors informing them of the union’s dispute with one or more of the subcontractors, working at a common construction project site (or common situs), and of the union’s plans to engage in “public informational campaigns” at the site, in furtherance of the dispute, may constitute unlawful threats of secondary boycott.

Unions often send letters to various employers that share a common construction project site, informing them that the union has a dispute with one or more of the subcontractors working or scheduled to work at the same site. In labor law, the employers that do not have a dispute with the union are referred to as “neutral employers,” in contrast with the employers with which the union has the dispute, referred to as “primary employers.”

In the letters, the unions typically describe the reason for the labor dispute (e.g., alleged failure to pay “area standards”), request that the neutrals use their “managerial discretion” not to allow the primary employers to perform work at the project site until the dispute is resolved, and inform that the union will engage in public information campaigns against the primary employer at the common situs. The “public information campaign” is described in the union’s letter as including banner displays, distribution of handbills, picketing and other demonstration activity.

Such union letters to neutral employers are unlawful under NLRB law, unless the letter includes assurances that the union will comply with legal limitations on such picketing, so as to not entangle the neutral employers in the dispute.

The NLRB has held that limitations on common situs picketing must include the following: (a) the picketing must be strictly limited to times when the primary employer is engaged in its normal business at the situs; (b) the picketing must be limited to places reasonably close to the situs; and (c) the picketing must disclose clearly that the dispute is with the primary employer. Employers that receive the above described letters from unions should consider consulting with legal counsel before taking any action in response to the letters.

Construction in Indian Country – What You Need To Know About Sovereign Immunity

by Edward J. Hermes

There are many legal issues to consider when bidding on and building projects in American Indian Country. Which labor and employment laws apply? Are there contracting or hiring preferences that apply? Do the Prompt Pay Act and other state laws apply? Can I bring a lawsuit to enforce the contract and, if so, where would I file suit? This article addresses the final question, which is often the most important question when contracting with a tribal entity.

Many of the construction projects in American Indian Country are with tribes or entities wholly owned or by a tribe, such as housing authorities, casinos, hospitals, schools or other economic enterprises. Like the state and federal government, tribes (and their tribally—owned enterprises) enjoy sovereign immunity from any lawsuit, meaning they cannot be sued unless the tribe expressly agrees to waive its sovereign immunity. Sovereign immunity poses a unique issue for contractors that does not typically arise in other projects, but it need not be a deterrent to doing business with tribes. It is usually in the best interest of both the contractor and tribe to negotiate an acceptable waiver of sovereign immunity. Absent such a waiver, the tribe or tribal entity cannot be sued and the resulting forfeiture of remedies can be devastating for the contractor.

To waive sovereign immunity, the tribe must make it clear in the contract that it can be sued in a specific jurisdiction. Oklahoma Tax Comm'n v. Citizen Band Potawatomi tribe of Okla., 498 U.S. 505, 509 (1991). It does not matter whether the tribe is operating on or off its lands—if there is no express contractual waiver of sovereign immunity, a contractor will have no recourse in the event of non-payment or other breach of contract. See Kiowa tribe of Okla. v. Manufacturing Technologies, Inc., 523 U.S. 751, 118 S.Ct. 1700, 140 L.Ed.2d 981 (1998).

In C & L Enters. v. Citizen Band Patawatomi Indian Tribe, 121 S. Ct. 1589 (2001), the U.S. Supreme Court considered whether a standard construction arbitration agreement – agreeing to arbitrate a dispute and enforcement of the arbitration by the state – waived the tribe’s sovereign immunity. In C & L Enters., a tribe hired a contractor to install a roof on the tribe-owned commercial structure. The tribe and contractor used the standard agreement from the American Institute of Architects (AIA). When a dispute arose, the contractor demanded arbitration, but the Tribe refused to participate, claiming sovereign immunity. When the contractor sought to confirm the arbitration award, the case went all the way to the U.S. Supreme Court, which held that the choice-of-law provision (choosing state law) and the arbitration agreement in the standard AIA agreement worked as a “clear” waiver of sovereign immunity.

Even though the U.S. Supreme Court stated that standard arbitration and choice of law clauses waive a tribe’s sovereign immunity, if possible, an even better practice would be for the parties to nevertheless address the issue head on and specifically include a clause in the contract that addresses and waives the tribe’s sovereign immunity. Furthermore, in the wake of C & L Enters., many tribes have become wary of agreeing to state-court choice of law provisions to enforce arbitration awards because tribes often feel that state law and state courts are antagonistic to tribal interests. Instead, some tribes try to insist upon only limited waivers of sovereign immunity (e.g. capping the damages amount) or enforcement of an arbitration award via tribal law and the tribal court system. To this end, several tribes have passed statutes akin to the Uniform Arbitration Act to affirmatively allow their tribal courts to enforce arbitration awards. See e.g., Gila River Indian Community Code, § 4.317; Navajo Nation Code 7 § 1104. Before a contractor agrees to the application of tribal laws and enforcement of an arbitration award in tribal court, an attorney familiar with the tribe’s codes and court system should be consulted to determine whether any issues might exist in enforcing a potential arbitration award against the tribe.

Furthermore, upon negotiating a mutually agreeable waiver of sovereign immunity, the parties should confirm that the proper tribal authority has signed or otherwise approved the contract and provision waiving sovereign immunity. Many tribes have passed statutes that set forth exactly who must sign an agreement to effectuate a waiver of sovereign immunity (usually the tribal council or tribal chairman) and stating that any waiver not appropriately approved is ineffective. Each tribe is different and has the authority to pass its own laws; therefore, attorneys familiar with the tribe’s laws should be consulted to ensure that the waiver of sovereign immunity is clear and valid.

In conclusion, when contracting with a tribal entity, it typically is prudent to ensure that the arbitration clause and choice of law provisions of the contract clearly waive the tribe’s sovereign immunity and afford the ability to enforce a potential arbitration award. Because the failure to have a sufficiently clear waiver may result in forfeiting all remedies, it may be worth the extra time and effort to negotiate an unambiguous waiver acceptable to all parties.

Warning! Danger Ahead for Public Entities

by Michael J. Baker

Public entities are known to assert False Claims actions “to up the ante” to intimidate and aggressively address contractor construction claims. This strategy in the case of John Ross of Industrial Sheet Metal, Inc. (JRI) V. City of Los Angeles Department of Airports (LAWA), 29 Cal. App. 5th 378 (2018), backfired on the public entity, LAWA, in a big way and should serve as a warning to public entities about expanding claims to include False Claim actions. In this case, LAWA was awarded $1 in contract damages, its California False Claims Act (CFCA) claim was rejected by the jury as were JRI’s claims against LAWA. Despite losing on the substantive contract claims, the trial court found that JRI “prevailed in the action” under the relevant CFCA fee provision, Government Code 12652, subd. (g)(9)(B), regardless of JRI’s failure to prevail in the action as a whole. The California Appellate Court (hereinafter “Court”) affirmed the trial court’s finding.

The CFCA is analogous to the federal False Claims Act (FFCA; 31 U.S.C. 3729 et seq.). Since the CFCA is patterned on similar federal legislation, it was appropriate for the Court to look to precedent construing this similar federal act in interpreting the CFCA provisions. Accordingly, the Court looked at the False Claims Act cases for guidance in upholding the trial court’s decision in its determination that JRI was the “prevailing party” for determining an attorney’s fees award against LAWA.

Here, JRI and LAWA entered into a contract for JRI to build and provide four aircraft rescue and firefighting vehicles for airports owned and operated by LAWA. JRI provided and LAWA accepted and paid in full for trucks #3 and #4. Thereafter, LAWA terminated the contract and refused to pay for trucks #1 and #2 before they were physically delivered to LAWA. At that time, trucks #1 and #2 were substantially completed, and therefore JRI sought contractual payments of approximately $2 million from LAWA. However, LAWA filed a lawsuit against JRI for breach of contract demanding the return of the more than $2 million it had paid for trucks #3 and #4. JRI filed a separate breach of contract lawsuit against LAWA. LAWA amended its complaint to add causes of action against JRI, including a claim for violation of the CFCA, and LAWA asserted that when JRI submitted its invoices for progress payments and final payments on the trucks, JRI knew that it was not in compliance with contract and sought to defraud the government entity into making payments.

LAWA’s CFCA claim was based on two theories: (1) JRI fraudulently induced LAWA to enter into the contract, thereby making all subsequent claims for payments violation of the CFCA; and (2) JRI impliedly and falsely certified compliance with applicable contract requirements when it requested progress and final payments. LAWA survived multiple pre-verdict motions including a motion to dismiss (demurrer) and summary judgment on the CFCA claims. LAWA ultimately prevailed only on its cross claims for breach of contract and enforcement of performance bond and the jury only awarded LAWA $1 on those claims, thus reflecting the conclusion that JRI did not have to give back to LAWA any of the progress payments or final payments LAWA made. JRI was unsuccessful on all its claims against LAWA. After entry of judgment, JRI sought attorney’s fees under the relevant defendant’s attorney’s fees provision of CFCA on the ground that LAWA’s CFCA claim was frivolous and harassing. The trial court granted the motion but reduced the amount of the fees.

Under the CFCA, the court may award the defendant its reasonable attorney’s fees and expenses against the public entity that proceeded with the action if the defendant prevails in the action and the court finds that the claim was clearly frivolous, vexatious or brought primarily for the purpose of harassment. The CFCA incentivizes plaintiffs to pursue potentially meritorious claims for fraud on government entities but penalizes clearly frivolous claims.

The Court ruled that the CFCA claim had been “a junk claim all along”. The trial court noted the evidence was overwhelming and uncontradicted that LAWA knew that truck #3 was not built exactly as the contract terms required. However, LAWA desperately insisted it needed the truck to avoid a federal shutdown and LAWA was willing to take the nonconforming truck—which LAWA inspected before delivery and prior to full payment. LAWA then used truck #3 at its airports for years—without bringing any claim against JRI. As for truck #4, it was the subject of a predelivery inspection by LAWA prior to progress payments and final payment and was used at the airports too. In the end, the LAWA firefighters did not like the new model of the trucks and wanted to have their configuration changed before any acceptance of trucks #1 and #2.

The Court stated that the fortuity of whether frivolous, vexatious or harassing CFCA claims have been joined with non-CFCA claims, whether meritorious or non-meritorious, in a single civil action has no logical relevance to determining the prevailing party under the CFCA. Therefore, it should have no effect on a defendant’s statutory entitlement to fees. It made no sense to the Court that statutory fees would not be awarded based upon the outcome of other non-CFCA claims.

The Court also looked at what constitutes a “frivolous” claim for purposes of the CFCA. In short, a frivolous claim is “meritless”, which means one that is groundless or without foundation, rather than simply that the plaintiff has ultimately lost its case. The Court endorsed the notion that it was important that a trial court resist the temptation to engage in post hoc reasoning by concluding that, because a plaintiff did not ultimately prevail, its actions must have been unreasonable or without foundation. The Court warned against this kind of hindsight logic noting that it could discourage all but the most airtight claims, since prospective plaintiff can seldom be sure of ultimate success. The takeaway here: there must be substantial evidence to support a False Claim introduced at trial. Here, that was the acceptance of the trucks at delivery and regarding the two trucks that were not delivered, the inspection of the trucks and approval of progress payments. It was not enough to argue that the False Claims action survived pre-verdict motions to show that a claim was not frivolous, vexing or harassing.

The holding in this case should give a public entity pause in pursuing False Claims actions. While a public entity may be in a strong position to assert contract claims, “upping the ante” to pressure or extract leverage against the contractor, should not be taken without serious consideration that such aggressive tactics, without support of substantial evidence, could result in a costly backfire. At the end of the day, while the public entity won the battle, it lost the war of the fees.

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