Caltex Plastics, Inc. v. Lockheed Martin Corporation ( 2016 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
CALTEX PLASTICS, INC., a No. 14-55768
California corporation,
Plaintiff-Appellant, D.C. No.
2:14-cv-00544-PA-E
v.
LOCKHEED MARTIN OPINION
CORPORATION, a California
corporation,
Defendant-Appellee.
Appeal from the United States District Court
for the Central District of California
Percy Anderson, District Judge, Presiding
Argued and Submitted April 7, 2016
Pasadena, California
Filed June 8, 2016
Before: JEROME FARRIS, DAVID BRYAN
SENTELLE,* and MILAN D. SMITH, JR., Circuit Judges.
Opinion by Judge Milan D. Smith, Jr.
*
The Honorable David Bryan Sentelle, Senior Circuit Judge for the U.S.
Court of Appeals for the District of Columbia Circuit, sitting by
designation.
2 CALTEX PLASTICS V. LOCKHEED MARTIN
SUMMARY**
Government Contracts
The panel affirmed the district court’s dismissal for
failure to state a claim of a complaint brought by Caltex
Plastics, Inc. alleging breach of contract and unfair
competition against Lockheed Martin Corporation, arising
from contracts between Lockheed and the federal
government.
Caltex alleged it was the intended third-party beneficiary
of the contracts between Lockheed and the federal
government which required Lockheed to use certain materials
that only Caltex was authorized to supply.
The panel held that the issue of whether Caltex may sue
Lockheed based upon Lockheed’s contracts with the federal
government is governed by federal common law, rather than
state law, because the uniquely federal interest in the liability
of defense contractors to third parties is sufficiently dominant
to demand a uniform, federal rule.
The panel held that Caltex did not sufficiently allege that
it is an intended third-party beneficiary of the contracts
between Lockheed and the federal government. The panel
held that the terms of the contract that Caltex pled did not
plausibly suggest an entitlement to relief, and its allegations
were insufficient to state a claim.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
CALTEX PLASTICS V. LOCKHEED MARTIN 3
Finally, the panel held that Caltex failed to state a
plausible unlawful- or unfair-competition claim.
COUNSEL
Fred A. Fenster (argued) and Caroline S. Heindel, Greenberg
Glusker Fields Claman & Machtinger LLP, Los Angeles,
California, for Plaintiff-Appellant.
Fred A. Rowley, Jr., (argued), Jeffrey Y. Wu, and Nathan
Rehn, Munger, Tolles & Olson LLP, Los Angeles, California;
Charles A. Bird and Matt Carter, McKenna Long & Aldridge
LLP, San Diego, California, for Defendant-Appellee.
OPINION
M. SMITH, Circuit Judge:
Caltex Plastics, Inc., (Caltex) brought claims for breach
of contract and unfair competition against Lockheed Martin
Corp. (Lockheed). Caltex argues that some contracts between
Lockheed and the United States government require
Lockheed to use certain materials that only Caltex is
authorized to supply, and that Caltex is therefore the intended
third-party beneficiary of those contracts. Caltex also claims
that Lockheed’s failure to use such materials is an unfair or
unlawful business practice under California law. The district
court dismissed Caltex’s complaint for failure to state a
claim. We have jurisdiction pursuant to 28 U.S.C. § 1291,
and we affirm.
4 CALTEX PLASTICS V. LOCKHEED MARTIN
FACTS AND PRIOR PROCEEDINGS
According to Caltex’s complaint, the United States
government contracts with Lockheed to supply certain goods
and services for the armed forces. These contracts require
Lockheed to use a particular type of packaging material,
designated MIL-PRF-81705E, that only Caltex is authorized
to supply. Moreover, the Department of the Navy has issued
a public advisory warning the departments of the armed
forces against using non-qualified packaging. Caltex alleges
that Lockheed does not use MIL-PRF-81705E packaging,
notwithstanding its contractual obligations to the government.
Caltex claims that because of Lockheed’s breach of its
contracts with the government, Caltex has suffered
$5,000,000 in damages. Caltex contends that it is entitled to
sue for and recover those damages because it is an intended
third-party beneficiary of those contracts. Caltex also
contends that Lockheed’s failure to use the contracted-for
materials is an unfair or unlawful business practice pursuant
to California Business & Professions Code § 17200.
The district court dismissed Caltex’s complaint for failure
to state a claim. This appeal followed.
DISCUSSION
A complaint may be dismissed for failure to state a claim
only when it fails to state a cognizable legal theory or fails to
allege sufficient factual support for its legal theories. Shroyer
v. New Cingular Wireless Servs., Inc., 622 F.3d 1035, 1041
(9th Cir. 2010). We must accept all well-pleaded material
facts as true and draw all reasonable inferences in favor of the
plaintiff. Wilson v. Hewlett-Packard Co., 668 F.3d 1136,
CALTEX PLASTICS V. LOCKHEED MARTIN 5
1140 (9th Cir. 2012). However, the complaint “must
[provide] sufficient allegations of underlying facts to give fair
notice and to enable the opposing party to defend itself
effectively.” Starr v. Baca, 652 F.3d 1202, 1216 (9th Cir.
2011). Furthermore, the underlying factual allegations must
“plausibly suggest an entitlement to relief.” Id.
I. Interpretation of Federal Defense Contracts
Although contract law is usually a matter of state law, a
contract entered into pursuant to federal law must sometimes
be interpreted using federal law. See Smith v. Cent. Ariz.
Water Conservation Dist., 418 F.3d 1028, 1034 (9th Cir.
2005); see also Miree v. DeKalb Cty., 433 U.S. 25, 28 (1977).
Federal law—including, where necessary, federal common
law—governs questions of contract interpretation where (1) a
“uniquely federal interest[]” is involved, and (2) “a
significant conflict exists between [that interest] and the
operation of state law.” Boyle v. United Techs. Corp.,
487 U.S. 500, 504, 507 (1988) (quotation marks and
alteration omitted). Under this framework, for example,
federal law “exclusively” governs interpretive questions
concerning the “obligations to and rights of the United States
under its contracts.” Id. at 504.
Of relevance here,“the liability of independent contractors
performing work for the Federal Government . . . is an area
of uniquely federal interest.” Id. at 505 n.1. For preemption
to occur, however, there must additionally be some conflict
between state law and the federal interest. Id. at 507. In
Miree, for instance, the Supreme Court concluded that even
though the operations of the Federal Aviation Administration
were “undoubtedly [a federal interest] of considerable
magnitude,” that interest was not threatened by the
6 CALTEX PLASTICS V. LOCKHEED MARTIN
application of state law to the narrow issue of whether a third-
party beneficiary under an FAA land-grant contract could sue
for its violation. 433 U.S. at 30. The Court did, however,
carefully reserve the question whether federal law applied to
the interpretation of the substantive rights and duties imposed
by the contract. Id. at 31.
Occasionally, a “federal interest [is] so dominant as to
preclude enforcement of state laws on the same subject.”
Sherwood Partners, Inc. v. Lycos, Inc., 394 F.3d 1198, 1201
(9th Cir. 2005) (quotation marks omitted). In such matters,
the need for a uniform federal rule can “suppl[y] the requisite
‘conflict’ for federal preemption.” New SD, Inc. v. Rockwell
Int’l Corp., 79 F.3d 953, 955 (9th Cir. 1996) (citing Boyle,
487 U.S. at 508); see Miree, 433 U.S. at 29. For example, we
have held that “[c]ontracts implementing federally-funded
water reclamation projects” are such a subject, Smith,
418 F.3d at 1034, as are questions concerning “resolution of
the affairs of failed banks.” GECCMC 2005-C1 Plummer St.
Office Ltd. P’ship v. JPMorgan Chase Bank, Nat’l Ass’n,
671 F.3d 1027, 1032 (9th Cir. 2012). Of special importance
in this case, so are “government contract matters having to do
with national security.” New SD, 79 F.3d at 955; see also
Sherwood Partners, 394 F.3d at 1201. In such cases, even the
question whether a third-party beneficiary may sue under the
contract—the same issue for which state law was held to
govern in Miree—is governed by federal common law. See
JP Morgan, 671 F.3d at 1032–33; Smith, 418 F.3d at 1034.
The contracts at issue here undisputedly deal with
national security. They concern, inter alia, the “design,
manufacture, and support” of “military aircraft,” “missiles
and guided weapons,” “missile defense products,” “naval
systems,” and “unmanned [weapons] systems.” Cf. New SD,
CALTEX PLASTICS V. LOCKHEED MARTIN 7
79 F.3d at 954 (describing the contract at issue, which
concerned the production of a “navigational component” for
a “space-based anti-ballistic missile”). If, under such
contracts, the liability of defense contractors to third parties
were to vary on a state-by-state basis, the resultant
uncertainty would doubtless raise “the cost of national
security.” New SD, 79 F.3d at 955. The uniquely federal
interest in the liability of defense contractors to third parties
is sufficiently dominant to demand a uniform, federal rule.
Thus, whether Caltex may sue Lockheed based upon
Lockheed’s contracts with the federal government is
governed by federal common law.
II. Third-Party Beneficiary Claim
A third party that wishes to sue under a government
contract must demonstrate that it is an intended beneficiary of
the contract, rather than merely an incidental one. JP Morgan,
671 F.3d at 1033. This is “a comparatively difficult task”: a
party that benefits from a government contract is presumed to
be an incidental beneficiary, and that presumption may not be
overcome without showing “a clear intent to the contrary.”
Cty. of Santa Clara v. Astra USA, Inc., 588 F.3d 1237, 1244
(9th Cir. 2009) (quotation marks and emphasis omitted),
rev’d on other grounds by Astra USA, Inc. v. Santa Clara
Cty., 563 U.S. 110 (2011). The clear-intent hurdle is a high
bar: “even a showing that the contract operates to the third
parties’ benefit and was entered into with them in mind” may
not suffice. Id. (quotation marks and alteration omitted).
Instead, a putative third-party beneficiary must demonstrate
an intent on the part of the contracting parties to “grant [it]
enforceable rights.” Orff v. United States, 358 F.3d 1137,
1147 (9th Cir. 2004) (emphasis added).
8 CALTEX PLASTICS V. LOCKHEED MARTIN
Applying these principles here, it is clear that Caltex has
not sufficiently alleged that it is an intended third-party
beneficiary of the contracts between Lockheed and the federal
government. Caltex alleges that (a) Lockheed is required to
use “Mil-Spec” materials, including MIL-PRF-81705E
packaging; (b) Caltex is the only manufacturer approved by
the Navy to supply such packaging; (c) its roll stock and bags
made from MIL-PRF-81705E are the only such items on a
“Qualified Products List” maintained by the Department of
Defense; and (d) the Navy has warned the departments of the
armed forces against using non-qualified packaging. Caltex
also asserts in conclusory fashion that it “is the fully intended
third party beneficiary [of Lockheed’s defense contracts]
since it is the sole manufacturer that has been authorized and
approved to manufacture MIL-PRF-81705E material.”
These allegations do not expressly state, nor even suggest,
that Lockheed or the federal government intended to grant
Caltex enforceable rights under their contracts. They also do
not suggest that either party had Caltex in mind when drafting
their contracts. Under Caltex’s own allegations, the contracts
at issue refer to Caltex only obliquely, by requiring the use of
MIL-PRF-81705E. Caltex has alleged, at most, that by virtue
of being the exclusive supplier of the allegedly contracted-for
material, it ought to benefit from Lockheed’s contracts with
the government. That is the archetype of an incidental benefit.
Under federal common law, an incidental third-party
beneficiary of a contract has no enforceable rights under that
contract. See Orff, 358 F.3d at 1147.
Caltex argues that the district court erred because it did
not have the terms of the contract before it, and therefore
could not have examined the language of the contracts to
determine whether Caltex was an intended third-party
CALTEX PLASTICS V. LOCKHEED MARTIN 9
beneficiary. This argument is without merit. Caltex, not
Lockheed, bears the burden of sufficiently alleging that the
parties intended to grant it enforceable rights. See Santa
Clara, 588 F.3d at 1244. Caltex protests that it cannot obtain
the contracts without discovery, and that it cannot undertake
discovery if its claim is dismissed. While that may be true in
part, a litigant in Caltex’s position can plead, upon
information and belief, the content of the terms purportedly
giving it enforceable rights. In fact, Caltex tried to do just
that. Unfortunately for Caltex, the terms it pled do not
plausibly suggest an entitlement to relief. Its allegations are
therefore insufficient to state a claim.
III. Unfair Competition Claim
California Business and Professions Code § 17200
prohibits “unlawful, unfair or fraudulent business act[s] or
practice[s].” Caltex asserts that Lockheed’s alleged breaches
of contract are both unlawful and unfair behavior. Caltex’s
claims fail for two reasons. First, Caltex is prohibited from
“bootstrap[ping]” an unfair-competition claim using a failed
breach-of-contract claim, because “[p]ermitting such
recovery would completely destroy the principle that a third
party cannot sue on a contract to which he or she is merely an
incidental beneficiary.” Berryman v. Merit Prop. Mgmt., Inc.,
62 Cal. Rptr. 3d 177, 185 (Cal. Ct. App. 2007). Second, to the
extent Caltex alleges a violation of 18 U.S.C. § 2156 as the
predicate “unlawful” act, it has not alleged facts to support an
inference that Lockheed acted with “intent to injure, interfere
with, or obstruct the national defense of the United States.”
§ 2156. Thus, Caltex has failed to state a plausible unlawful-
or unfair-competition claim.
10 CALTEX PLASTICS V. LOCKHEED MARTIN
The decision of the district court is
AFFIRMED.