Small business subcontractors sometimes feel taken advantage of by larger businesses who use the small business as part of their proposal to bid on a federal project, but then fail to award an actual subcontract to the small business after award.

The case of L’Garde, Inc. v. Raytheon Space and Airborne Systems, 805 F.Supp.2d 932 (July 26, 2011) is one such dispute. L’Garde apparently signed a Letter Subcontract with a division of Raytheon to perform future work on a government airship contract.

L’Garde, Inc. alleges that Raytheon used its small business status in order to win a bid from Lockheed Martin, the prime contractor, then failed to negotiate a future definitive subcontract in good faith — and L’Garde alleges that Raytheon breached its contract and committed fraud because it never intended to honor its agreement with L’Garde.

L’Garde, Inc. sued Raytheon Space and Airborne Systems (a business of Raytheon Company) in
Los Angeles Superior Court. Defendant Raytheon Space and Airborne Systems filed a notice moving the case to federal court. The Court’s July 2011 decision affirmed that the case should properly be in federal court based on “diversity jurisdiciton “. Even though Raytheon has highly visible business activities in California, Raytheon Space and Airborne Systems is an unincorporated business division of Raytheon Company, which has its “nerve center” (the actual center of direction, control, and coordination) in Waltham, Massachusetts. Thus, with a California plaintiff and a Massachusetts defendant, federal court diversity jurisdiction of citizenship is met. The case will stay in federal court.

Another question in this case is whether state law (California) or federal common law will be applied to the case. Raytheon tried to establish that there are unique federal interests requiring the application of federal common law to the case; but the Court found that “federal question” jurisdiction did not exist, and California law would be applied to resolve the dispute in federal court. The court found that plaintiff L’Garde’s allegations of fraud were sufficient under California law to go forward with the case. L’Garde alleged in its complaint facts indicating that “Defendant made material misrepresentations as to its intent to contract with Plaintiff a long term definitive subcontract and that Plaintiff reasonably relief on these misrepresentations to its detriment.”

Thus, Raytheon succeeded in moving the case from California state court to California federal court – but as of this decision, failed to have the fraud claim dismissed. For more information or for a case evaluation, contact government contracts attorney Karen Hindson.