The Buffalo Billion Case in SCOTUS: Ciminelli v. United States

Once again, Will Baude and Dan Epps' Divided Argument podcast has alerted me to a SCOTUS case with contract implications of which I was previously unaware.  Those of you who are not interested in a listener's phone message featuring a song set to the tune of "Old McDonald" that alleges that Will Baude engages in "unpersuasive scholar trolling" or in the latest news about Justice A-leako (thanks for that one Strict Scrutiny Podcast) can skip to minute 36.  

The SCOTUS case is styled Ciminelli v. United States.  My recitation of the facts is indebted to the Second Circuit opinion in the case, which is styled United States v. Percoco.  The case should be of interest to those of us who cover the bid cases in first-year contracts courses.  The students can really understand those cases only if they understand a little bit about how bids on public construction projects operate.  In order to make it impossible for parties to bid shop, bid chop, or otherwise rig bids on public contracts, subcontractors (subs) are required to submit sealed bids to general contractors (GCs).  The GCs open the bids and often on the same day use the unsealed bids to put together their own bids, which are also sealed.  Bid cases arise when the subs try to retract erroneous bids that the GCs have relied on in putting together their bids.  Following Justice Traynor in Drennan v. Star Paving, unless the bid is obviously the product of a mistake, the Restatement approach treats the subs' bids as irrevocable based on the GC's reliance.  

Did I say that sealed bids make cheating impossible?  Apparently not.  I blogged recently about Victor Goldberg's work, showing that parties can contract around the common law option created by Drennan.  But Ciminelli involves a must more creative (and probably fraudulent) scheme.  Simplifying the facts, the defendants in Ciminelli/Percoco allegedly colluded to rig the bid materials so that preferred contractors would win bids.  The main author of the scheme set up intermediaries that were not a part of the scam.  He then contacted preferred contractors and gathered information about their businesses.  The requests for proposals, (RFPs) one for Syracuse and one for Buffalo (known as the "Buffalo Billion") were then tailored so that only the preferred contractors would qualify.  The scheme worked.  In both Syracuse and Buffalo, the innocent intermediary entity awarded lucrative contracts to the preferred contractors.  

The issue before the Court is whether defendant can be liable for fraud when the state has not proven that it was harmed by the defendant's conduct.  That is, defendants claim that they were indeed the most qualified bidder, and there is no allegation that the state overpaid for the work done or that the work was not competently completed.  The Second Circuit found criminal liability based on defendants' fraudulent interference with the state's "right to control."  Right to control violations occur whenever a scheme denies the victim the right to control its assets by depriving it of information necessary to make discretionary economic decisions.

In his Petition for Certiorari, Ciminelli attempts a frontal assault of on the right to control theory:

Whether the Second Circuit’s “right to control” theory of fraud—which treats the deprivation of complete and accurate information bearing on a person’s economic decision as a species of property fraud— states a valid basis for liability under the federal wire fraud statute, 18 U.S.C. § 1343.

In the appeal to the Second Circuit, defendants argued that the issuer of the RFP was not harmed "because the rigged RFPs merely awarded [defendant-controlled entities] preferred developer status, and did not affect the terms of the separate, subsequently negotiated development contracts."  Defendants also claimed that the government had not identified other parties offering "lower prices, better quality, or better value would have applied and been selected for either the Syracuse or the Buffalo contracts."

As to the first argument, the Second Circuit found that being named preferred developers made it much more likely that they would be awarded contracts, and so the fraud was relevant to an "essential element of the bargain."  That element of the fraud claim is thus satisfied.

As to the second argument, the "right to control" theory requires no showing of economic harm.  The deprivation of the right to control itself entails a violation of a property right.  As the Second Circuit held in Lebedev, "Since a defining feature of most property is the right to control the asset in question, . . . property interests protected by the wire fraud statute include the interest of a victim in controlling his or her own assets." In Finazzo, the Second Circuit clarified that the right-to-control theory requires proof only that "misrepresentations or non-disclosures can or do result in tangible economic harm" (emphasis mine).  

According to Will Baude and Dan Epps, nobody is defending the Second Circuit's "right to control" theory of fraud.  The case is likely to be remanded to see if the government can find an alternative basis for a fraud conviction.

I haven't looked into the law or the briefs on the case, but my instinct is to think that's a shame.  Based on the facts below, fraud has clearly occurred.  Determining whether anybody was harmed would require speculation about what might have happened had the RFPs not been rigged.  The state may have been harmed because there might have been lower bidders.  There is no way to prove that.  Other bidders might have been harmed because, but for the rigged RFPs, they might have bid and won.  But none of them bid, so it is unclear how any of them would have legal standing to allege that they were the victims of defendant's fraudulent misconduct. 

In an era less hamstrung by the Court's commitment to blinkered legal formalism, the government could make the case that, absent a "right to control" theory, there will be no remedy for the kind of fraudulent conduct alleged in this case. Perhaps the Court's expansive view of property rights will motivate it to embrace "right to control" theory sua sponte.   This case clearly involves a fraudulent scheme.  It was successful, and the perpetrators profited substantially.  The public likely paid too high a price for the services provided, but the extent of the harm is not provable with reasonable certainty.  Defendants' competitors were harmed, but they cannot prove it because the carefully crafted RFPs deterred them from bidding.  Who cares? Prophylactic rules may be over-inclusive in order to deter bad behavior.  The Court could uphold a broad rule intended to capture intentional cheating in the competition for public contracts.