F OR P UBLICATION



### UNIT E D ST AT E S CO URT O F APPE AL S FO R T H E NINT H CIRCUIT

C A L T E X P L

A S T I C S , I

N C ., a California corporation,

Plaintiff-Appellant
,

v

.

L O C K H E E D M A R

T I N C O R P O R A T I ON , a California corporation, Defendant-Appellee. No. 14-55768

D.C. No. 2:14-cv-00544-PA-E

OPI NI ON

Appeal from the United States District Court for the Central District of California Percy Anderson, District J udg e, Presiding

Argued and Submitted April 7, 2016 Pasadena, California

F iled J une 8, 2016

B efore: J EROME F ARRI S, DAVI D B RYAN SENTEL L E , * and MI LAN D. SMI TH, J R., Circuit J udg es.

O pinion by

J udg e Milan D. Smith, J r.

* T h e Ho n o rab le Dav id B ry an Sen telle, Sen io r Circu i t J u d g e f o r th e U .S. Co urt o f A

pp eals f o r t h e District o f Co lum

b ia Ci r c u i t , s ittin g b y d esig n atio n

.C A L T E X P L A S T I C S V

. L O C K

H E E D M AR

T I N 2

SUMMARY * *

G overnm ent Contracts

T h e panel affirmed the district court’s dismissal f o r failure to state a claim of a c om p l a i n t broug ht by Caltex Plastics, I nc. a lleg ing breach of contract and unfair competition a g ai n s t L ockheed Martin Corporation, a rising fro m c o ntracts b etween L ockheed and the federal g overnment.

Caltex alleg ed it w as the intended third-party b eneficiary of the c ontracts between L o ckheed and the federal g overnment which r equired L ockheed to use certain materials that only Caltex was authoriz ed to supply

.
The panel held that the issue of whether Cal t e x m a y sue L ockheed based upon L ockheed’s contracts with the federal g overnment is g overned by federal common law, rather than state law, because the uniquely f ederal 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 alleg e that it is a n intended third-party beneficiar y o f the contracts between L ockheed and the federal go v e r n m ent. The panel held that t h e terms of the contract that Caltex p led did not plausibly sug g est an entitlement t o relief, and its alleg ations were insufficient to state a claim.

** T h is su m m ary co n stitu

t es n o p ar t o f t h e o p in io n o f th e co urt. It h as b eenp rep ared b y

co urt staf

f f o r th e co n v en i en ce o f

th e read er.C A L T E X P L A S T I C S V

. L O C K

H E E D M AR

T I N 3

Fi n ally
, the panel held that Caltex failed to state a plausible unlawful- or unfair-competition claim.

COUNSEL

F red A. F enster (arg

ued) and Caroline S. Heindel, Greenberg G lusker F ields Claman & Machting er L L P, L o s Ang eles, California, for Plaintiff-Appellant.

F red A. Rowley
, J r., ( a r gu e d )
, J effrey Y. W u, and Nathan Rehn, Mung e r, Tolles & Olson L L P, L os Ang eles, California; Charles A

. B ird and Matt Carter, McKenna L ong & Aldridg e L L P, San Dieg o, California, for Defendant-Appellee.

OP INION

M. SMI TH, Circuit J udg e :

C a l t ex Plastics, I nc., (Caltex ) broug ht claims f or brea c h of contract and unfair c ompetition ag ainst L ockheed Martin Corp. (L ockheed). Caltex argues that some contracts b etween L ockheed a

nd the U nited States g overnment require L ockheed to use c e r tain materials that only Caltex is authoriz ed to supply
, and that Caltex is therefore the intended third-party b eneficiary of those c ontracts. Caltex also c laims that L o c k h eed’s failure to use such materials is an unfair o r unlawful business practice under California law. The district court d ismissed Caltex ’ s complaint for failure to state a claim. W e h a v e jurisdiction pursuant to 28 U.S.C. § 1291, and we affirm.C A L T E X P L A S T I C S V

. L O C K

H E E D M AR

T I N 4

F ACTS AND P RIOR P ROCEEDING S
According to Caltex ’s complaint, the U nited States g overnment contracts with L o ckheed to supply certain g oods and services for the armed forces. These contracts re q u i re L ockheed to use a p articular ty pe of packag ing material, desig nated MI L -PRF -81705E, that only Caltex is authoriz ed to supply

. Moreover, the Department of the N avy h as issued

a public advisory warning the d e p a r t m ents of the armed forces ag ainst using non-qualified packag ing . Caltex alleg e s that L ockheed does not use M I L -PRF -81705E packag ing
, no t w i t h s t a n d i n g i t s contractual oblig ations to the g overnment.

Caltex claim s that because of L ockheed’s breach of its contracts with the g overnme n t, Caltex has suffered $5,000,000 in damag es. Caltex contends that it is entitled to

sue for and recover those damag es because it is a n intended third-party b e neficiary of those cont r a cts. Caltex also contends that L ockheed’s failure to u se the contracted-for materials is a

n unfair or unlawful business practice pursuant to California B usiness & Professions Code § 17200.

The district court dismissed Caltex ’s complaint for failure to state a claim. This appeal followed.

D ISCUSSION

A complaint may be dismissed for failure to state a claim only when it fails to state a cog niz able leg al theory or fails to alleg e sufficient f

actual support for its leg al theories. Shroyer

v. New Cingular W

ireless Se r vs

. , I

nc. , 6 22 F .3d 1035, 1041 (9th Cir. 2010). W e must accept all well-pleaded ma t erial facts as true and draw all r easonable inferences in favor of the plaintiff. W

ilson v

. H

ewlett -P ackard Co.
, 668 F .3d 1136,C A L T E X P L A S T I C S V

. L O C K

H E E D M AR

T I N 5

1140 (9th Cir. 20 1 2). However, the c omplaint “must [ provide] sufficient alleg ations of underlying facts to g ive fair notice a nd to enable the opposing party to defe n d itself effectively .” S

tarr v. Baca , 652 F .3d 1202, 1216 (9th Cir. 2011). F urthermore, the u n derlying factual alleg ations must “plausibly

sug g est an entitlement to relief.” Id.

I. Interpretation of

F ederal Def

ense Contracts
Althoug h contract law is usua l l y a matter of state law, a contract entered into pursuant to federal law must sometimes be interpreted using f

ederal law. See S

mith v. Cent. Ariz. W ater Conser v a t i o n Dist. , 4 18 F .3d 1028, 1034 (9th Cir. 2005); see also Miree v

. D eKalb Cty.
, 433 U.S. 25, 28 (1977). F ederal law—includi n g, where necessary , federal common law—g overns questions of contract interpretation where (1) a “uniquely federal interest[ ] ” is inv o l v e d, and (2) “a sig nificant conflict ex ists between [ that int e r es t ] and the operation of state law.” Boyle v. U nited Techs. C o r

p

. , 48 7 U .S. 500, 504, 507 (1988) (quotation marks a nd

a l teration omitted). Under this framework, for ex amp l e, federal law “ex clusively ” g overns interpretive q uestions concerning the “oblig ations to and rig hts of the U nited States under its contracts.” I

d. at 504.

Of r elevance here,“th e l i a

b i l i t y of independent contractors performing w ork f

o r the F ederal G overnment

. . . is an area of uniquely federal interest.” Id. at 505 n.1. F or p r e e m p tion to occur, ho w e v e r, there must additionally be some conflict between state law and the fe d e r a l interest. Id. at 507. I n Miree , for instance, the Supreme Court concluded that even thoug h the operations of the F e deral A viation Administration

were “undoubtedly [ a federal interest ] of considerable mag nitude,” th a t interest was not threatened by theC A L T E X P L A S T I C S V

. L O C K

H E E D M AR

T I N 6
application of state law to the narrow issue of whether a thirdparty beneficiary under an F AA land-g rant contract could sue f o r i t s v iolation. 4 33 U .S. at 30. The Court did, howev e r, carefully reserve the question whether federal law applied to the interpretation of the substantive rig hts and d uties imposed by the contract. I

d. at 31.

Occasi o n a l l y , a “federal interest [ is] so dominant a s to preclude e n forcement of state laws on the same subject.” Sherwood Partners, Inc. v. Lycos, Inc. , 394 F .3d 1198, 1201 (9th Ci r

. 2 005) (quotation marks omitted). I n such matters, the n eed for a uniform f

ederal rule can “suppl[ y ] the requisite ‘conflict’ for federal preemption.” New SD, Inc. v. Rockwell Int’l Corp.
, 7 9 F. 3 d 953, 955 (9th Cir. 1996) (citing Boyle
, 487 U.S. at 508); see Miree , 433 U.S. at 29. F or ex ample, we have held that “[ c] ontracts impleme n ting federally-funded water reclamation projects” are s u c h a subject, Smith
, 418 F .3d at 1034, as a

r e q uestions concerning

“resolution of the affairs o f failed banks.” GECCMC 2005-C1 Plummer St. Office Ltd. P’ship v. JPMorgan Chase Bank, Nat’ l A ss’n
, 671 F .3d 1027, 1032 (9th Cir. 2012). O f s p e c ial importance in this case, so are “ g o vernment contract matters having to do with national security .” New SD
, 79 F

. 3d a t 9 5 5 ; s ee also Sherwood Partners , 394 F .3d at 1 201. In such c ases, even the question whether a third-party beneficiary may sue under the contract—the same issue for which state law was held to g overn in M

iree

— is g overned by federal common law

. See JP Morgan , 671 F .3d at 1032–33; Smith , 418 F .3d at 1034.

The c ontracts at issue here undisputedly deal with national security

. They concern, inter alia
, the “ d e s i gn,
man u f acture, a nd support” of “military aircraft,” “missiles

an d guided weapons,” “missile defense products,” “naval sy stems,” a

nd “unmanned [ weapons] sy stems.” Cf. New SD
,C A L T E X P L A S T I C S V

. L O C K

H E E D M AR

T I N 7

79 F .3d a t 9 5 4 (describing the contract at issue, which concerned the production of a “navig ational component” for

a “space-based an t i-ballistic missile”). I f, under such contracts, the liability o f d e fense contractors to third parties

were to vary on a state-by -state b a s i s , the resultant uncertainty would doubtless raise “ the c ost of n ational security .” New S

D , 79 F

. 3d at 955. Th e uniquely federal interest in the liability of defense c o n tractors to third parties is sufficient l y d o minant to d emand a uniform, federal rule. Thus, w hether Caltex may sue L ockheed based u p on L ockheed’s contracts with the federal g overnment is g overned by

federal common law.

II. Third-P arty Benef

iciary Claim

A third party that wishes to sue un d er a g overnment contract must d emonstrate that it is an intended beneficiary o f the contract, rather than merely an incidental one. JP Morgan , 671 F .3d at 1033. This is “ a comparatively difficult t a s k”: a party that benefits from a g overnment 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. 20 0 9 ) (quotation marks and emphasis omitted),

r e v ’ d o n other grounds by Astra USA, Inc. v. S anta Clara Cty.
, 563 U.S. 110 (2011). The clear-intent hurdle is a hig h bar: “e v en a showing that the contract operates to the third parties’ b enefit and was entered into with them in mind” may not suffice. I

d. (quotation m a r k s and alteration omitted). I nstead, a putative third-party beneficiary must dem o n strate

an in t ent on the part of the contracting parties to “g rant [ it] enforceable rights .” Orff v. United States
, 358 F

. 3d 1137, 1147 (9th Cir. 2004) (emphasis added).C A L T E X P L A S T I C S V

. L O C K

H E E D M AR

T I N 8
Apply ing these principles h ere, it is clear that Caltex has not sufficiently alleg ed that it i s a n intended third-party beneficiary of the contracts between L ockheed and the federal g overnment. Caltex a lleg es t hat (a) L ockheed is required to

use “Mil-Spec” materials, i ncluding MI L -PRF -81705E p ackag ing ; (b) Caltex is the only manufacturer appro v e d b y the Navy to supply such packag ing ; ( c) its roll stock a nd b ag s made fro m M I L

- PRF -81705E are the only such items on a “Qualified Products L ist” ma i n t ained by the Department o f Defense; and (d) the Navy has w arned the departments of the armed forces ag ainst using non-qualified packagi n g

. Caltex also asserts in c onclusory fashion that it “is the fully intended third party beneficiary [ of L ock h e e d’s defense contracts] since it is the sole manufacturer that has been authoriz ed a nd approved to manufacture MI L

- PRF -81705E material.”

These alleg ations do not e x pressly state, nor even sug g est, that L ockheed or the f

e d eral g overnme n t intended to g rant Caltex enforceable rig hts under their c ontracts. They a lso do not sug g est that either party had Caltex in mind when drafting their contracts. Under Caltex ’s own a lleg ations, the contracts at issue refer to Caltex only obliquely
, by requiring the u se o f MI L -PRF -81705E. Caltex has alleg e d, at most, that by v irtue of b eing the ex clusive supplier of the alleg edly contracted-for material, it oug h t t o b enefit from L ockheed’s contracts with the g overnment. That is the archety pe of a n incidental benefit. Under federal common law, an incidental third-party beneficiary of a c ontract has n o enforceable rig hts under that contract. See Orff

, 358 F .3d at 1147.

Caltex a rg ues that the dist rict court erred because it did not h a v e the terms o f the contract before it, and therefore could not have e x amined t h e l a n guag e of the contracts to determine whether Ca l t e x was an intended third-partyC A L T E X P L A S T I C S V

. L O C K

H E E D M AR

T I N 9
beneficiary

. This argument is without mer i t. Caltex
, not L ockheed, b ears the burden of sufficiently alleg ing that the parties intended to g rant it enforceable rig hts. See Sa n ta 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. W hile that may b e true in p a rt, a litig ant in Caltex ’s position can plead, upo n information and belief, the c ontent of the terms purportedly g iving it enforceable rig hts. I n f act, Caltex tried to do just that. Unfortu n a t e ly f

or Caltex
, the terms it pled do not plausibly sug g est an e n titlement to r e l i e f. I ts alleg ations a re therefore insufficient to state a claim.

III. Unf

air Com petition Claim

California B us i n ess and Professions Code § 17200 p r o hibits “unlawful, unfair or f raudulent business act[ s] o r practice[ s] .” Caltex asserts that L ockheed’s alleg ed breaches of contract are both unlawful and unfair b e h a vior. Caltex ’s claims f ail f or two reasons. F irst, Caltex is p r o h ibited from “bootstrap[ ping ] ” a

n unfair-competition claim using a failed breach-of-contract c laim, because “[ p] ermitting such recovery would completely d es t r oy the principle that a third party c annot sue on a contract to which he or she is merely an incidental beneficiary .” B erryman v. Merit Prop. Mgmt., Inc. , 62 Cal. Rptr. 3d 177, 185 (Cal. Ct. App. 2007). Second, to the

ex tent Caltex a lleg es a v iolation of 18 U.S.C. § 2156 a s the predicate “unlawful” act, it has not alleg ed facts to support an inference that L ockheed a c ted w ith “intent to injure, interfere with, or obstruct the national defense o f t h e United States.” § 2156. Thus, Caltex has failed to state a plausible unlawfulor unfair-competition claim.C A L T E X P L A S T I C S V

. L O C K

H E E D M AR

T I N 10

The decision of the district court is

AF F IRMED.