Government contractors frequently use Virginia law when forming team arrangements to pursue US government business. Recently, in Navar, Inc. v. Federal Business Council, the Virginia Supreme Court put an exclamation point on the principle that teaming agreements that lack specificity will be treated as mere “agreements to agree” under Virginia law.

As we recently observed, team arrangements are an important part of the fabric of government contracting. (See our advisory Rumors that Teaming is Dead are Premature – But Contractors Should Heed Decisions on Enforceability). Decisions such as Navar that address enforceability issues should be considered by contractors.

Background to the Dispute

Navar involved a contract for event planning services competed by the United States Defense Threat Reduction Agency (DTRA). Because the RFP required that the awardee be an Alaska Native Corporation (ANC), neither of the plaintiffs in Navar, Federal Business Council (FBC) nor Worldwide Solutions, Inc. (WSI), could bid on the contract as a prime contractor. They identified Navar, Inc., a qualified ANC, and the parties executed a non-disclosure agreement (NDA) and the three parties then attended a meeting with DTRA to discuss their proposal. After that meeting, the parties executed a teaming agreement. The teaming agreement provided that if Navar won the DTRA contract, it would negotiate in good faith with the plaintiffs and, “upon arriving at prices, terms and conditions acceptable to the parties,” would enter into subcontracts with them. That is common teaming agreement language.

DTRA awarded a $55 million contract to Navar and Navar commenced negotiations with FBC and WSI. However, negotiations broke down and no subcontracts were awarded. FBC and WSI then filed a lawsuit seeking damages (lost profits) for breach of the teaming agreement and the non-disclosure agreement and for violation of the Virginia Trade Secrets Act.

What Happened in Navar?

A jury found in favor of the two aggrieved teammates and awarded each of them $500,000 for breach of the teaming agreement and awarded one teammate an additional $250,000 for breach of a non-disclosure agreement. Navar then filed a motion for reconsideration, which the trial court granted in part and denied in part. On the breach of the teaming agreement claim, the trial court entered judgment for Navar notwithstanding the verdict on the ground that the teaming agreement was unenforceable as a matter of law. However, the trial court also denied Navar’s motion as it related to the jury’s finding of breach of the non-disclosure agreement and violation of the Virginia Trade Secrets Act.

The Virginia Supreme Court affirmed the trial court’s judgment for Navar notwithstanding the verdict on the breach of the teaming agreement claim. However, it reversed the trial court’s ruling denying Navar's motion on the alleged breach of the non-disclosure agreement and violation of the Virginia Trade Secrets Act counts, and entered judgment for Navar on both of them.

Why was the Trial Court’s Holding on the Teaming Agreement Affirmed?

In affirming the trial court’s ruling in favor of Navar on the teaming agreement claim, the Virginia Supreme Court discussed its 1997 decision in W.J. Schafer Assocs., Inc. v. Cordant, Inc., which also involved a dispute under a teaming agreement. There, it held that “agreements to agree in the future” are “too vague and too indefinite to be enforced.” The Virginia Supreme Court noted that W.J. Schaefer had been applied by the United States District Court for the Eastern District of Virginia in Cyberlock Consulting, Inc. v. Info. Experts, Inc., where the District Court said “agreements to negotiate at some point in the future are unenforceable.” Explaining that in W. J. Schafer and in Cyberlock the teaming agreements were found to be unenforceable because they merely set out agreements to negotiate future subcontracts in good faith, the Virginia Supreme Court found that the Navar teaming agreement “does not contain a sum, or any reasonably certain method for determining a sum, or any requirement that … Plaintiffs and Navar mutually agreed that Plaintiffs would be the actual subcontractors hired by Navar once the prime contract was awarded.” The Court then essentially concluded that the teaming agreement at issue was not an enforceable contract but merely an agreement to agree and that plaintiffs were therefore not entitled to recover damages for its breach.

Why was the Trial Court’s Holding on the Non-Disclosure Agreement Reversed?

The Virginia Supreme Court noted that the plaintiffs argued that Navar breached the non-disclosure agreement by using the plaintiff’s confidential information to obtain the prime contract for itself without awarding subcontracts after the award of the prime contract. It found that the plaintiffs “failed to show at trial how Navar misused their confidential information under the [non-disclosure agreement]” to get the award of the prime contract without subsequently awarding them subcontracts. In that regard, the Court held that plaintiffs had failed to show how the terms of the NDA required Navar to use them as subcontractors. As a result, the Court held that Navar could not be found liable for breach of contract and that the trial court erred in denying Navar’s motion to reconsider. (Pouring salt in the wound, the Court also found that Navar had not violated the Virginia Trade Secrets Act, as it was authorized to use plaintiff’s information under the NDA.)

Navar as a CautionaryTale?

On both the NDA and teaming agreement issues the Court was repeatedly critical of the plaintiffs’ failure to present evidence on key elements of their case. This included failure to identify or describe the documents with specificity that Navar allegedly improperly used; to present expert testimony in support of their damages claims; or to support their claim that under industry practice, they were entitled to a full 49% work share. Wholly apart from the uncertainty regarding the enforceability of teaming agreements under Virginia law, Navar also illustrates the importance of assessing the evidentiary support for breach claims before initiating litigation and ensuring that sufficient evidence to support such claims is presented at trial.

What About Using Bid & Proposal Costs as a Measure of Damages?

The Navar decision raises some interesting questions. In Navar, the Virginia Supreme Court said that the teaming agreement at issue provided no sum or method for determining the amount payable as damages and “[a]s the agreement provided no reasonable basis for affording a remedy for its breach, it is too vague and indefinite to be enforced.” Does a basis for affording a remedy for a breach of a teaming agreement exist?

One possible basis could be to use bid and proposal costs incurred pursuant to a teaming agreement. Such expenses likely will be much less than the expectation damages associated with not receiving the anticipated subcontract, but bid and proposal expenses constitute a potential measure of actual, incurred damages. We are aware of bid and proposal expenses being used by the parties to negotiate the settlement of an alleged breach of a teaming agreement. However, this measure of damages was neither at issue nor discussed in Navar.

Enhancing the Specificity of Teaming Agreements

An earlier Advisory noted that the typical teaming agreement for a government contract may be entered into before the RFP has been issued and therefore may lack many of the provisions that would be in an eventual subcontract. Further, early in the pursuit of a government contract it can be difficult to negotiate an agreement that contains the required specificity to be enforceable under Virginia law. That Advisory included suggestions for addressing key terms in a teaming agreement to increase the chances of the agreement being found enforceable. Those suggestions included work share (how the work will be divided if the team is awarded the contract), price (a material term for any contract), and the mirroring of expected subcontract terms that address the RFP (to address key terms and avoid reliance on boilerplate).

Conclusion

Government contractors will continue to use teaming agreements. The teaming process is woven into the fabric of government contracting and can facilitate competition by joining complementary capabilities to “offer the government the best combination of performance, cost, and delivery,” as mentioned in the FAR. As stated in Navar, Virginia law requires specificity in order to find a teaming agreement is more than an unenforceable “agreement to agree.”