Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca9-14-55768/USCOURTS-ca9-14-55768-0/pdf.json

Parties Involved:
Caltex Plastics, Inc.
Appellant
Lockheed Martin Corporation
Appellee

Document Text:

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

CALTEX PLASTICS, INC., a

California corporation,

Plaintiff-Appellant,

v.

LOCKHEED MARTIN

CORPORATION, a California

corporation,

Defendant-Appellee.

No. 14-55768

D.C. No.

2:14-cv-00544-PA-E

OPINION

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.

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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.

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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.

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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,

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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 liabilityof 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

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6 CALTEX PLASTICS V. LOCKHEED MARTIN

application of state law to the narrow issue of whether a thirdparty 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,

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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 beneficiaryof

the contract, rather than merelyan 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).

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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

beneficiaryof 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 expresslystate, 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

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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 unlawfulor unfair-competition claim.

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10 CALTEX PLASTICS V. LOCKHEED MARTIN

The decision of the district court is

AFFIRMED.

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