Cementech Revisited: Ohio Supreme Court Strikes Down
Money Damages for Wrongly Rejected Low Bidder

By: Maureen P. Taylor

Reprinted from June 2006 ohioconstructionlaw.com

Full text of the Cementech decision

Highlights. Last year, a decision from the Ninth District Court of Appeals (covering Summit, Medina, Lorain, and Wayne Counties) turned public bidding upside down by holding, for the first time in Ohio, that a disappointed low bidder might be entitled to recoup its anticipated lost profits from the public owner. Our lead article in April of 2005 cautioned that “unless the Ohio Supreme Court decides that the Court of Appeals is wrong, this will become the law of Ohio, or at least the law of the Ninth District.” On June 28, the Ohio Supreme Court issued its ruling in the case and did just that: The Court said that the Court of Appeals had erred, and “a rejected bidder is limited to injunctive relief.” Anyone involved in public construction in Ohio will want to know the details of this significant decision.

The Supreme Court Speaks

For the past 14 months, since the appellate court decision in Cementech, Inc. v. City of Fairlawn (Summit App. Apr. 13, 2005), 160 Ohio App.3d 450, 2005-Ohio-1709, those involved in public bidding have been waiting for the other shoe to drop. That appellate court opinion gave contractors the hope—and public owners the fear—that a wrongly rejected low bidder might be awarded its lost profits, dependent on its ability to prove what they were. The “other shoe” was the anticipated ruling on the case from the Ohio Supreme Court, which agreed last August to hear the City’s appeal.

The appeal was argued on February 22, 2006, and the opinion came down June 28. Still called Cementech, Inc. v. City of Fairlawn, the new decision is cited as 109 Ohio St.3d 475.

The syllabus, where the Court announces the rule of the case, is straightforward: “When a municipality violates competitive-bidding laws in awarding a competitively bid project, the rejected bidder cannot recover its lost profits as damages.” The Court reversed the decision of the Court of Appeals, making the law of Ohio once more clear on the options available to a rejected bidder, which now appear to be narrowed to one: injunctive relief.

Some Background

As we explained in The Case Everyone Is Talking About—Cementech, our lead article for April 2005, the dispute arose back in 2001 when the City of Fairlawn opened bids for the construction of a service road. The Instructions to Bidders included an addendum for planting 54 Cleveland Select Pear Trees. Cementech was the apparent low bidder with a bid of almost $600,000. But the City was required by statute (Ohio Revised Code § 735.05) to select the “lowest and best” bidder, and the City Law Director, reviewing the bids on opening day, determined that the Cementech bid apparently omitted the 54 pear trees. The Law Director wrote to Cementech on the same day with the news that its bid had been rejected as non-responsive to the bid specifications.

Cementech protested and received a hearing before the Board of Audit and Review, which agreed with the Law Director. The City Council awarded the service road project to the next lowest bidder, and Cementech filed suit in the Summit County Court of Common Pleas, seeking compensatory damages in excess of $75,000 for the City’s alleged breach of competitive bidding law. Alternatively, the complaint sought injunctive relief (including a temporary restraining order, preliminary injunction, and permanent injunction) that would have required the City either to award the project to Cementech or to order the project to be “relet and rebid,” thereby allowing Cementech another opportunity to be awarded the contract for the project.

The trial court quickly denied the requested injunctive relief, as Cementech had failed to show irreparable harm (a requirement) or that its complaint was likely to succeed on the merits. Cementech never appealed this decision.

The issue of damages remained for trial, unless the City could get a summary judgment deciding the case on purely legal grounds (without the need for a trial). The City argued that there was no basis for liability under the applicable competitive bidding laws, and the trial court agreed, triggering Cementech’s first trip to the Court of Appeals. The first appellate decision came down from the Court of Appeals for Summit County in June of 2003. (That decision is summarized in the June 2003 issue of ohioconstructionlaw.com.)

The first decision focused on the issue of authority. The three-judge panel agreed that the City Law Director had exceeded his authority when he notified Cementech that its bid had been rejected on the same day the bids were opened, before any bids were even submitted to the City Council. According to the City ordinance, the Law Director could advise the City Council, but the court said he could not make the ultimate decision to remove Cementech’s bid from consideration. So the case went back to the Court of Common Pleas, where just one issue was tried: damages.

But even before trial, the contractor was again disappointed. The trial judge ruled that lost profits were not available to a wrongly rejected bidder. Money damages were available, but they had to be capped at bid preparation costs. So that was the instruction given to the jurors, who returned an award that was even less than that. The $3,725.54 jury award—about half of the requested bid preparation costs—was symbolic. As some jurors explained to Robert Hunt, attorney for the City, in a post-trial briefing, the $25 was for “General Note 25 in the specifications” (the much-debated pear tree clause), and the 54 cents was a penny for each pear tree.

Although Cementech had won, its disappointment with the amount of the award led it to appeal once again. Again, it succeeded in getting the Court of Appeals to reverse the trial court’s decision. The Court of Appeals’ concern was that wrongly rejected bidders should have some meaningful remedy:

Cementech requested injunctive relief and it was denied. When it was determined that Fairlawn abused its discretion and that Cementech was the lowest and best bid and thus, injunctive relief was improperly denied, the project was already complete. With the project complete, injunctive relief wrongfully denied, a determination that Cementech was the lowest and best bid, and a trial court ruling limiting damages to bid preparation costs, Cementech was left with inadequate relief.

The court ruled that Cementech should have been permitted to present evidence of its lost profits and that the trial court had erred in capping the monetary damages at the cost of bid preparation. Before reaching this conclusion, the Court of Appeals considered and rejected the arguments in several earlier decisions. (These are discussed at length in our April 2005 article, but since they played only a minor role in the Supreme Court’s decision, we won’t discuss them here.) It went on to acknowledge that it was “setting a precedent”:

But we find that our decision is necessary to protect the integrity of the bidding process and to ensure that government entities take responsibility for their actions and follow proper procedures and laws, thus properly representing their constituents. We find that Fairlawn must be held accountable for abusing its discretion and that Cementech must be able to present evidence of lost profits.

The Issue Goes to the Supreme Court

The Ninth District Court’s opinion was not the end of the case. This time Fairlawn sought to have the decision overturned.

There are at least two ways that a case can get to the Ohio Supreme Court, and Cementech got there both ways. First, at the City’s request, the Court of Appeals certified that there was a conflict between its decision and the decisions of appellate courts from other districts on one question: Does the availability of injunctive relief if timely filed but denied preclude an award of lost profits in a municipal contract case?

Second, the Supreme Court accepted the case as a discretionary appeal, based on Fairlawn’s argument that the appellate court’s decision had created an issue “of public or great general interest,” warranting further review.

The parties prepared their briefs last fall, joined by five amici curiae (non-parties who believe the Court’s decision will affect them and who file briefs to bring particular points of view before the Court). Here, the Ohio Attorney General and the Ohio Municipal League supported the City and urged the Court to reverse the Court of Appeals’ decision, while the Associated General Contractors of Ohio, Ohio Contractors Association, and National Electrical Contractors Association, Ohio Conference all supported Cementech and asked the Court to affirm the Court of Appeals’ Decision.

A Unanimous Decision

All seven Justices agreed that a rejected bidder cannot recover lost profits from a municipality, as the syllabus of the decision states. Six of them—all but Justice Paul E. Pfeifer, who concurred only in the judgment—even agreed on the reasoning of the opinion, written by Justice Alice Robie Resnick.

The Supreme Court’s decision began, as most decisions do, with a brief summary of what had already happened in the case. When it reached the most recent Court of Appeals’ opinion, the Court particularly noted the appellate court’s rejection of what had previously been a persuasive public policy argument:

Specifically, the [Court of Appeals] held that the interest of protecting the integrity of the bidding process and ensuring that wronged parties receive meaningful relief outweighs the risk of taxpayers’ paying profits twice for the same project. However, the appellate court also noted that the way to avoid awarding lost profits was by granting an injunction pending the outcome of the merits.

The issue of an injunction, and more particularly a possible appeal of the injunction’s denial, had been a big concern of the Supreme Court during the oral argument, with many questions focusing on the need for a contractor to post a bond in order to appeal that denial. But the question of a bond never came up in the Supreme Court’s opinion. The Court noted that “unfortunately, [Cementech] did not appeal the trial court’s denial of its motion for injunctive relief.” Period. The lesson for disappointed bidders is clear: Seek an injunction, and if that is denied, appeal.

What primarily concerned the Court was the purpose of competitive bidding and finding the best way to fulfill that purpose. Turning to one of its earlier opinions, Danis Clarkco Landfill Co. v. Clark County Solid Waste Management Dist. (1995), 73 Ohio St.3d 590, the Court said this:

The intent of competitive bidding is to protect the taxpayer, prevent excessive costs and corrupt practices, and provide open and honest competition in bidding for public contracts. . . . While allowing lost-profit damages in municipal-contract cases would protect bidders from corrupt practices, it also would harm the taxpayers by forcing them to bear the extra cost of lost profits to rejected bidders. Thus, the purposes of competitive bidding clearly militate against allowing lost-profit damages to rejected bidders.

What remedy did the Court think a wrongly rejected bidder should have? Apparently not even reimbursement of its bid preparation costs. “A rejected bidder is limited to injunctive relief,” the Court said.

What about the Court of Appeals’ opinion that if governments did not have to pay damages when they ignored the public bidding laws, they would go unpunished? The Court remarked on that reasoning but found it unconvincing: “Punishing government entities through lost-profit damages to rejected bidders in effect punishes the very persons competitive bidding is intended to protect—the taxpayers. This court has long prohibited the assessment of punitive damages against a municipal corporation, except when specifically permitted by statute.”

The Effect of the Opinion

The immediate effect of the Supreme Court’s ruling is only to reverse the Court of Appeals’ decision. The Supreme Court did not return the case to the trial court for further proceedings, nor did it disturb the jury’s award. Thus, Cementech should still be entitled to the jury award of $3,725.54 in damages (approximately half of its alleged costs of bid preparation).

Although this award is directly contrary to the Supreme Court’s statement that “a rejected bidder is limited to injunctive relief,” nothing in the Supreme Court’s opinion indicates that this award should be vacated. Nor is there anything in the syllabus that discusses any monetary award other than lost profits, which are prohibited. Since the damages award was not at issue in the appeal before it, the Supreme Court was not called upon to decide whether Cementech’s damages award should stand.

Can the disappointed bidders of the future still seek an award of their bid preparation costs? Probably, as the limitation to injunctive relief, while stated in the opinion, is not truly the Court’s holding (as is the opinion’s syllabus). But any such award would almost surely be appealed, with the quotation from Cementech looming large on appeal. Still, it may take another case and other trips to various Courts of Appeals before this ghost is laid to rest.

What about the fact that the decision addressed only municipal bidding? (“When a municipality violates competitive-bidding laws in awarding a competitively bid project, the rejected bidder cannot recover its lost profits as damages.”)

The reasoning of the Court quite clearly applies to all public owners involved in competitive bidding, but it is possible that some contractor may still challenge a contract awarded to another bidder by a county, school district or other public entity other than a municipality. It is difficult to imagine how such a plaintiff could distinguish the bidding situation in any particular case from the bidding in Cementech, however. The reasoning should apply, regardless of the public entity.

For now, the holding that lost profits are not available to disappointed bidders should enable public owners to breathe a collective sigh of relief. As for contractors, they now know what they need to do if they feel they have been wrongly rejected: Seek an injunction, and appeal if that injunction is denied.

While this process may mean that the start of several public projects will be delayed, the threat of having to pay double for the construction—once to the contractor who does the job and once to a second contractor who shows that it should have gotten the job—no longer looms over every bid opening.