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Careful Drafting of a Teaming Agreement Can Pay Off

by | Oct 21, 2020 | Government Contracts

The often-heard claim that “a teaming agreement is not legally enforceable” is really a half-truth; the whole truth is that only some of the provisions in a teaming agreement are not enforceable. Because teaming agreements can play such a critical role in winning a multiple-award Indefinite Delivery Indefinite Quantity contract, government contractors need a realistic understanding of the strengths and weaknesses of a teaming agreement. A recent Virginia state court decision deals with four of the most important provisions of a teaming agreement and is, therefore, a decision that government contractors need to know about.

The decision follows established Virginia law concluding that a teaming agreement’s promise of a subcontract to a teaming partner if the team successfully wins the contract is too vague and therefore unenforceable.

Significantly, however, the decision also shows that other provisions in a teaming agreement are enforceable, specifically such important provisions as non-solicitation or non-poaching provisions as well as nondisclosure provisions. Finally, the decision shows the value of correctly drafting clauses limiting a team member’s financial risk.

A.            The Facts of the Case 

Many contractors will find a ring of familiarity to the facts of the case. An 8(a) incumbent contractor, Futrend Technology (“FT”), would be ineligible for the follow-on Department of Health and Human Services contract because it would be graduating from the 8(a) program and ineligible to be a prime contractor on the follow-on contract. So it entered into a teaming agreement with an 8(a) contractor, MetroHealth, LLC (“MH”), to participate as a team in the competition for the follow-on contract.

The teaming agreement had a number of standard teaming agreement clauses. One required both parties, if the team won the work, to negotiate a subcontract consistent with the terms of the successful proposal. Another clause prohibited one party from soliciting or poaching the other party’s employees during the term of the teaming agreement and for 6 months thereafter. Another clause made each party responsible for its own costs and banned the award of lost profits in any breach of contract lawsuit.

The team won the follow-on work but they were unable to negotiate a subcontract.  In addition, while these negotiations were being conducted, FT allowed some of its employees to become MH employees (be “rebadged”) to satisfy the government’s concern about too many FT employees on the contract. Eventually, the negotiations broke down, MH severed its relationship with FT, and FT went to court to enforce the teaming agreement and get breach of contract damages under various provisions in the teaming agreement. FT was unsuccessful on all counts. Futrend Technology, Inc. v. MicroHealth LLC, et al., Fairfax (VA) County Circuit Court, CL-2018-14995, August 21, 2020.

B.            The Take-aways

               1.     Creative drafting of the teaming agreement did not make the promise of a subcontract enforceable. The parties tried, unsuccessfully, to make the teaming agreement’s promise of a subcontract more definite and therefore enforceable. In Virginia, as well as in other jurisdictions, courts typically find these promises of a subcontract “too vague and indefinite” to be enforceable, leaving disappointed teaming partners without a subcontract. In this teaming agreement, the parties tried to carefully phrase the promise of a subcontract in such a way as to try to make the promise enforceable. For example, the teaming agreement had a “fall-back” provision. It stated that, if the parties could not agree on the terms of a subcontract, the prime contractor had an “obligation, at a minimum, to offer and award a subcontract to Subcontractor containing reasonable terms and the workshare and price reflected in Exhibit A.” That workshare was expressly stated to be “approximately 49%.” The teaming agreement also required this fall-back subcontract to include a “period of performance that aligns with the prime contract’s period of performance (inclusive of option awards); and The prime shall not terminate the subcontractor for convenience without sufficient or due cause.”

The court found these attempts to create “definite terms” to be unsuccessful. For example, regarding the term “approximately 49%,” the court said that “the use of the term ‘approximately’ demonstrates a degree of indefiniteness. There is no way to determine, as a matter of law, if a proposed figure is ‘approximately 49% of the workshare,’ It is not a concrete term agreed upon by the parties.” The court concluded that there could be no breach of the teaming agreement because, as an initial matter, that teaming agreement provision was not enforceable and, therefore, could not be breached.

               2.     The teaming agreement’s non-solicitation provision was enforceable but did not cause FT damages, even if breached.

FT also argued that it suffered damages when MH poached FT employees in violation of the teaming agreement’s non-solicitation provision.

This argument was also unsuccessful. Of the three legal elements of a breach of contract – an enforceable agreement, a breach of that agreement, and damages resulting from the breach – the court here found no breach and no damages, implicitly finding the non-solicitation provision to be enforceable.

There had been no breach because FT’s employees had not been poached by MH to the contract; FT had agreed to let its employees be rebadged at the government’s insistence.

Moreover, even if FT’s employees had been poached, FT could not prove it had suffered monetary damages. A court cannot award damages that are “contingent, speculative, or uncertain.” When FT claimed it was entitled to lost profits for option years, the court found those damages contingent because the “lost profits” argument assumed that the government would exercise those options, which might not have been the case.

Important here is the exact language of any non-solicitation provision. The one in this teaming agreement did not mention the availability of other types of relief for a breach, apparently causing FT to ask the court for money damages that were found to be speculative. A better approach would be to draft a non-solicitation provision that would make available relief other than money damages, specifically relief such as specific performance of the non-solicitation provision or an injunction against poaching.

               3.     A Non-Disclosure Agreement in a teaming agreement might well be enforceable. FT also argued that MH and its employees misappropriated FT trade secrets in violation of Virginia law. The court did not agree; the alleged trade secrets were either government documents developed during performance of the prior contract or FT documents that “were either outdated or were unnecessary” for MH to perform the new work.

The decision makes no mention of a non-disclosure provision being included in the teaming agreement. However, it is reasonable to conclude that a teaming agreement provision preventing one party from disclosing the information obtained from the other party – so-called Non-Disclosure Agreements (NDA) – would also be enforceable. Moreover, contractors might find inclusion of a carefully drafted NDA in a teaming agreement to be more useful than the provisions in a statute because the parties could decide what documents were to be protected. In addition, the parties could include another remedy: violations would be subject to money damages as well as injunctions and specific performance of the NDA.

               4.     A teaming agreement clause precluded an unjust enrichment claim. A provision found in many teaming agreements put a quick end to FT’s claim of unjust enrichment. In FT’s final argument, it claimed that MH was unjustly enriched when MH misappropriated FT’s trade secrets, poached FT’s employees, and refused to award FT a subcontract. At this point in the decision, FT has lost all these arguments so the court finding no basis for FT’s unjust enrichment claim is no surprise.

The take-away here is that one of the bases for the court’s finding was a clause that should be in every teaming agreement.  That clause said the following: “Each party shall bear all costs, risks and liabilities incurred by it arising out of its performance of this Agreement.” According to the court, “As each party, at minimum, agreed to individually shoulder the risks of negotiating with and teaming with the other, FT’s claim for unjust enrichment” was not valid.

In a footnote, the court quoted a similar clause cited in another decision that went beyond this provision. That clause added the phrase that the parties “were precluded from recovering lost profits for a breach.”

C.            Conclusion

When a contractor hears that a teaming agreement “is not enforceable,” the contractor might be tempted to put little or no thought into drafting a teaming agreement. “Why bother,” however, is not a wise approach. Granted, a teaming agreement cannot guarantee that the parties will successfully negotiate and sign a subcontract if the solicitation process ends up successfully for the team. But a teaming agreement can help guarantee that the contractor’s personnel and intellectual property are protected and that effective remedies are provided for breach of these protections. through use of Non-solicitation and Non-disclosure provisions in the teaming agreement. A teaming agreement should also limit a team member’s risk through the use of provisions that limit its financial liability.

A well-drafted teaming agreement is not a fool’s errand.

Terry O’Connor is a Partner and Director of Government Contracts at Berenzweig Leonard.