This article was originally published on Engineering News Record on 07/15/2013. Co-authored with Richard Korman.
It’s been almost a decade since the groundbreaking at the Foxborough Industrial Park in Victorville, Calif., 85 miles northeast of Los Angeles, where the city’s leaders once made plans based on the fact that Victorville was, at the time, the second-fastest-growing city in the U.S.
Little remains of the grand plans or the small, partly completed powerplant project that was going to be the source for electrical power for two companies that were deciding, in 2004, whether to move operations to Victorville.
Instead, the powerplant project wasted tens of millions of dollars and became a symbol of failed hopes, dismay and recrimination. The city struggled with a bad budget deficit and then the recession hit, but things are better now.
Last February, insurers for the Carter & Burgess unit of Jacobs Engineering Group, the city’s adviser and designer for the work, settled the city’s lawsuit against the firm for $52,116,367, the full amount of the project costs incurred by the city (some sources put the all-in cost of the project much higher.) The city is using the money to patch some of the huge financial holes left by the project.
A San Bernardino County grand-jury report, issued last July, noted that neither Victorville nor Carter & Burgess/Jacobs had done enough risk assessment or used proper controls on the project.
The settlement’s final impact may be felt more broadly in California and elsewhere in the U.S. In winning the settlement, Victorville’s attorneys successfully argued that an engineer’s responsibility to its client can be, at times, much more than the customary standard of care. And Jacobs Engineering may have learned something about the potential liability involved when serving as both adviser and designer to a small, inexperienced but ambitious client.
Soon after the jury verdict in 2010, Karen Erger, director of practice risk management for insurance broker Lockton, wrote that, every once in a while, a case comes along suggesting that engineers owe their clients not the usual standard of care but a fiduciary one, “the very highest.” She called her report on the subject “The Fiduciary Bomb” and advised engineering firms to take defensive measures by avoiding entangling contact terms.
Two years before the settlement, a jury had awarded Victorville the huge damages following seven tumultuous weeks of trial, in 2010, in California Superior Court in nearby Riverside, Calif. There were 203 exhibits admitted, and 28 witnesses testified. While Jacobs appealed the jury verdict, its legal team finally decided not to wait for an appeals-court decision. Each passing day added another $14,000 of interest to the judgment.
Glenn E. Turner III, one of the key attorneys for Victorville, praised the Carter & Burgess/Jacobs attorney for convincing the company and its insurers to settle before the appeals-court ruling was issued. “A difficult job,” says Turner.
According to Victorville’s current city manager, Doug Robertson, the city used $30 million of the settlement to pay project-related debt and another $22 million to pay off debt from the city’s water district. Another $2 million was used to purchase a water boiler for Nutro, a pet-food supplier and one of the companies that, along with ConAgra, started local operations in Victorville around 2005.
Both Carter & Burgess/Jacobs and its outside attorney failed to return ENR calls for comment on the case or the settlement.
Could the company have seen the risk that was evolving? The San Bernardino County grand jury noted that Victorville had been lax in its controls and risk assessment in building—with a development partner—another, bigger generating-plant project that went into service in 2003. But that earlier project wasn’t known at the time.
The Early Conflict Over Payment
The story starts in 2002, when the city wanted to attract investment by establishing cheap energy sources at its own electricity-generating plants. Victorville hired Carter & Burgess to determine the feasibility and design a modest, 17.5-MW powerplant for the two new businesses coming to town. The process started with Carter & Burgess producing a series of economic pro formas, or revenue projections. After delays and cost overruns, each side blamed the other, and Victorville cancelled the project in 2006. The city was stuck for the costs—or so it seemed.
Carter & Burgess then sued the city for a disputed final payment, seeking $106,000, but Victorville struck back with a countersuit for essentially all the costs of the unfinished job.
In the lawsuit, Victorville argued that Carter & Burgess breached its contract and failed to live up to the accepted professional level of care by producing poor-quality designs and failing to supervise the project development. (No legal action was brought against the project’s main contractor, TIC, Englewood, Colo.)
Carter & Burgess’ main attorney, Paul A. Lax, did seek to dismiss the fiduciary duty claim in a motion requesting summary judgment. Then, just before the trial, Carter & Burgess/Jacobs offered $2 million as a settlement.
That failed. But when Carter & Burgess/Jacobs didn’t make a more substantial offer at a settlement conference with the judge, Victorville’s claims were destined to be tried by a jury in a state court. While juries can provide plaintiffs a major tactical advantage, complex business cases in the U.S. are often decided by a judge who is more familiar with such cases and less likely to be swayed by emotion.
During the trial that started in October 2010, the legal strategies became clearer.
Long, Slow Procurement Described
In his opening statements, Lax emphasized to the jury the long, slow process of choosing to build the powerplant and the numerous choices made by decision-makers in Victorville, including the mayor, to build an islanded cogeneration plant, which was the costliest option.
Early in the process, in 2003, Carter & Burgess originally estimated the cost of the powerplant project at $22 million.
At critical points, from 2004 to 2006, city officials pondered other options outlined by Carter & Burgess, including the least costly in the short run: hooking into the existing regional electrical grid.
Nutro, the pet-food supplier, proved to be an especially tough negotiator, complicating the plans for the powerplant.
Eventually, having chosen the islanded powerplant option, city officials decided to do the work in phases, with steps labeled as “A, B and C,” Lax explained to the jury. However, in March 2005, Victorville informed Carter & Burgess that it wanted an expanded powerplant, said Lax.
“And that affected the time and cost of Carter & Burgess’ services,” Lax told the jury.
In 2007, Pasadena, Calif.-based Jacobs Engineering announced its acquisition of Carter & Burgess, which was based in Fort Worth, Texas, and had 3,200 employees. At the time, Jacobs had 49,000 employees and about $8 billion in annual revenue.
The matter of names was a delicate one. Both sides agreed before the trial, when there were nastily contested preliminary motions regarding evidence and procedures, not to mention Jacobs Engineering during the trial. Although Jacobs Engineering was the guarantor of any possible judgment, Carter and Burgess would be the only defendant the jury would hear about.
The price of the acquisition was not disclosed, but, three years later, the image created in the jurors’ minds by Carter & Burgess’ size and deep experience became an integral part of the presentation by the city’s attorneys. The legal team consisted of Turner, Marion Hack and Victor Luke, all employed at Gibbs Giden Locher Turner Senet & Wittbrodt LLP.
They described a very different situation, arguing that Carter & Burgess was building the powerplant according to an inflated, improperly researched economic pro forma that was provided by Nutro. Instead, they said, Carter & Burgess should have come up with realistic load projections. (They also noted that Carter & Burgess staff went on an all-expense-paid examination trip to Nutro’s Nashville plant.)
Hack, in her opening statements, painted a picture of a formidable corporation, Carter & Burgess, dominating a town more accustomed to building Little League fields than cogeneration plants.
On the one hand, there was diminutive Victorville, with its 160,000 or so inhabitants and inexperienced city government. On the other hand, there was Carter & Burgess/Jacobs, a “corporation with thousands of employees” and a “nationally recognized design-engineering and consulting company,” Hack told the jurors.
A crucial underlying issue was Carter & Burgess/Jacobs’ dual role as Victorville’s adviser and designer. The engineering firm claimed it served only as an “independent contractor,” not the “agent” of the city, and would not have “authority” to bind the city to agreements, according to various court documents.
The agreement between the city and the firm in 2002 was originally worded so that Carter & Burgess was serving as the “city’s engineer.” But Carter & Burgess also executed separate contracts with the city to serve as the project’s design engineer.
City officials testified that Carter & Burgess’ project manager and key witness, E.B Jensen, once said, ”I will wear both hats,” referring to being both the city’s representative and design engineer for the project.
In most instances, designers are responsible for and get covered under their insurance policies only for negligence—that is, violating the traditional standard of care owed a client. That doesn’t specifically include looking out for a client’s economic best interest.
Based on the wordings of the agreement but mostly on the relationship between the city and the firm, Turner, Hack and Luke were able to convince the jury that Carter & Burgess/Jacobs bore a fiduciary responsibility to the city—meaning, the engineering firm was supposed to act and perform in the best interest of the city rather than treat the relationship as an arm’s-distance business transaction. Going beyond standard responsibilities, a fiduciary responsibility is the highest standard of care an engineering firm can provide its client. It is similar to the standard a doctor or attorney is supposed to observe.
Other mistakes may have cut the firm’s credibility in the jurors’ eyes.
In addition to the pro forma, the project fell behind schedule because of late plans, Victorville’s legal team claimed. According to the trial brief from Victorville, Jensen advised the city to write a letter to Jeff Duncan, vice president of Carter & Burgess, to demand more staff on the project. Jensen also said the reason for the late design drawings was that the firm had diverted personnel to work on a project for Oregon State.
Multiple mishaps during the trial also seemed to undermine Carter & Burgess’ position.
About halfway through the trial, Jensen was called to testify by Lax and cross-examined by Victorville’s legal team. Jensen testified that key documents could only be found in the project’s Expedition file-sharing database but that these documents could no longer be recovered and were no where else.
Among the problems faced by Carter & Burgess, the project’s Expedition database account was closed and a disk was damaged. How convincing Jensen was remains unclear.
Luke, Hack and Turner seized on this evidence and testimony to create the impression that Carter & Burgess was, at best, unreliable and, at worst, deliberately destroying or mislaying trial evidence.
When Victorville’s attorneys delivered a PowerPoint-assisted summation for the jurors, the troubles with the Expedition database were labeled Jensen’s “Big Lie.”
Settlement Offers Again Fail
After seven weeks of trial, the jury deliberated only two and a half hours before rendering a unanimous verdict for Victorville for the full amount requested.
After the jury verdict for Victorville, Carter & Burgess filed post-trial motions seeking to overturn the verdict or obtain a new trail. Curing the post-trial motions, even the judge in the appeal, Ronald Taylor, seemed to agree that Carter & Burgess at least appeared to be hiding some information.
The counsel for Carter & Burgess said to the judge, “We are entitled to a new trial. We were severely prejudiced. Mr. Jensen’s credibility was blasted.”
The judge replied, “It was blasted. I have to agree with you. But he did a lot of that blasting to himself.”
After the trial court denied Carter & Burgess’ post-trial motions, it filed an appeal. While that appeal played out, the two sides went before a mediator and Jacobs offered $10 million. Victorville said no. Before the appeals court could rule, both sides got together to talk settlement. According to Turner, negotiations started at $30 million and increased in increments to the final amount.
The City Council voted to accept the offer 4-1.
Turner and his colleagues were paid $1.8 million for their work.
Ultimately, five different insurance companies—including London Market Insurers, Lexington, Illinois Union, Liberty International Underwriters and Arch—contributed to the settlement, the Victorville attorneys said. It isn’t clear what insurance coverage and policies were in place.
As Lockton’s Erger noted, “So what happens when a court decides that a design professional owes a fiduciary duty—by definition, the very highest standard of care? Is there coverage? The unsatisfying (but correct) answer is that it depends on the terms and conditions of the policy.”
In this case, insurers appeared to cover the whole settlement.
Turner suggests engineering and design firms try to avoid the dual role that Carter & Burgess/Jacobs was willing to take on. “When you are put in a position where you are watching yourself, the liabilities you face may not be negligence. You’ve knowingly [acted on] their behalf, and that takes away from normal commerce,” Turner said.
“First, make sure your contracts are not [set up] as a fiduciary,” added Lockton’s Erger. “Risk should be borne by the party most able to control the risk.”
As for the plant itself, Robertson, Victorville’s city manager, says it has been essentially abandoned and major parts have been sold off. While Victorville has been in talks with a potential buyer for the site, it has been purchasing electricity from the wholesale market and selling it at retail to companies that were expected to obtain energy from the failed powerplant, Robertson notes. “So, we are out of the powerplant business but still in the power business,” he says.
The lesson the city learned was not to rely solely on outside sources for advice on something as important as building a powerplant.
Says Robertson, “If we are going to do a major project like this again, rather than relying on consultants, [the city should] actually go out and bring in an actual city employee whose only loyalty would be to the city, someone with direct experience in the field.”
Victorville still is eager to build more generating capacity. On June 12, the city announced that it had won an extension of its permit from the California Energy Commission to construct the Victorville 2 Hybrid Power Plant.
The announcement said Victorville will look for a private-equity partner or co-owner to develop the project.