The Line Between Extortion and Hard Bargaining

THE LINE BETWEEN EXTORTION AND HARD BARGAINING

By: Larry Leiby, Esq. and Robert S. Tanner, Esq.

About the Author: Larry Leiby, Esq. was the founder and first chairman of the Florida Bar Construction Law Committee in 1976. He is the author of the Florida Construction Law Manual. He is Board Certified in Construction Law and was on the Construction Law Certification Committee that creates and grades the tests for construction law board certification. He was awarded the lifetime achievement award by the Florida Bar Construction Law Committee and teaches construction law at the Florida International University College of Law. He can be reached at leiby@mkpalaw.com. For more information, please visit www.mkpalaw.com.

In Hi-Shear Technology Corp. v. United Space Alliance, LLC, 1 So. 2d 3d (Fla. 5 th DCA 2008), Hi-Shear Technology Corp. ("Subcontractor") had a long-standing relationship supplying parts to United Space Alliance, LLC ("Contractor") in connection with the space shuttle. In 1999, Subcontractor was the low bidder on a contract to supply bonnet thrusters. At the time of that bid, Subcontractor was under three separate contracts to supply aft separation bolts, forward separation bolts, and reefing line cutters. Contractor did not award Subcontractor the bonnet thruster contract because, initially, it was ineligible due to deficiencies in its quality plan. Contractor amended the solicitation. Subcontractor submitted a bid and was determined eligible. However, Contractor did not immediately award the contract to Subcontractor.

The relationship between Contractor and Subcontractor had been deteriorating. Subcontractor was worried that Contractor intended to involve other suppliers and thus reduce Subcontractor's role. Contractor was demanding performance from Subcontractor under the reefing line cutters contract. Subcontractor told Contractor that it would accelerate delivery of the reef line cutters if Contractor awarded the bonnet thruster contract to Subcontractor. Contractor was against awarding the contract to Subcontractor due to its deficient performance of the other contracts. Contractor rejected Subcontractor's conditional offer and authorized Subcontractor to deliver the reefing line cutters before they were certified for use in the space shuttle. Instead, Contractor reported the situation to NASA's inspector general ("IG"), which opened a criminal investigation.

Pursuant to the IG's direction, Contractor had a meeting with Subcontractor at which Subcontractor made clear that it would deliver the reef line cutters only if Contractor awarded the bonnet thruster contract and execute a non-disclosure agreement. Contractor awarded the contract and signed the agreement. Within the next few days, Subcontractor delivered both the aft separation bolts and reef line cutters that had been withheld. Contractor accepted delivery, terminated all of the previous contracts and disclaimed the validity of the bonnet thruster contract and the non-disclosure agreement. Subcontractor filed suit for breach of contract, fraud in the inducement, theft, and misappropriation, among other things.

One of Contractor's main defenses was based on the federal Hobbs Act. The Hobbs Act prohibits obstructing, delaying, or affecting interstate commerce by robbery or extortion. Under that defense, Contractor had to prove that it was wrongfully induced to part with property through fear, which adversely affected interstate commerce. Wrongful inducement can occur in a lawful business activity when the lawful activity is used to obtain property to which the party has no lawful claim. To prove the "fear" element, one must show that the extorting party had "the power to harm the victim and would exploit that power to the victim's detriment." Fear of non-compliance or non-payment of a contract is insufficient. In situations where the victim parts with property but receives something of value in return, extortion rather than hard bargaining still may be found if the victim had a right to pursue its business interests free of the fear of being suppressed by receiving something of value in exchange for its property.

Applying those elements, the court reasoned that, based upon the fact that Subcontractor was not offering any additional value to Contractor when it said it would deliver the aft separation bolts and reef line cutters in exchange for an award of the bonnet thruster contract (because Subcontractor was already under a contractual obligation to provide those things), a jury could find that Subcontractor unlawfully conditioned its performance of the aft separation bolt and reefing line cutter contracts. Thus, Subcontractor could be found to have committed a wrongful inducement. Second, just because Subcontractor was the low bidder on the bonnet thruster contract did not confer a legal right to Subcontractor to an award of that contract. Thus, because Contractor actually awarded that contract to Subcontractor, Subcontractor could be found to have received "property" to which it did not have a lawful claim. The court concluded that Subcontractor could be found to have committed extortion in violation of the Hobbs Act.

Interestingly, the dissenting judge focused on the lack of a persuasive basis for Contractor to claim that it awarded the bonnet thruster contract out of fear. The judge wrote that when Contractor had superior size and economic strength, and that when it awarded the sole-source contracts to Subcontractor for the aft separation bolts and reef line cutters, Contractor assumed the risk that Subcontractor would not perform, and therefore Subcontractor's threat of not delivering did not create any greater risk to Contractor just because the threat was tied to the demand for an award of the bonnet thruster contract.

The Hobbs Act is not a typical angle in construction disputes and probably should not be. However, in the right circumstances, it may be applied to good benefit. In any event, when it's not clear whether the negotiation tactics involve extortion versus hard bargaining, the relationship is probably quickly coming to an end.