Teaming is not dead.
That said, a recent decision by a US district court judge in Virginia to decline to stop a teammate from becoming a competitor by teaming with another company, should give contractors something to think about. Notably, the decision in A-T Solutions Inc. v. R3 Strategic Support Group Inc., which involved a lawsuit by A-T Solutions against its former teammate R3 Strategic Support Group follows the 2014 Cyberlock Consulting, Inc. v. Information Experts, Inc., decision, also from Virginia, and has some contractors wondering (1) whether teaming agreements (at least in Virginia – a state with many government contractors) are enforceable, (2) whether teaming agreements can be made enforceable, and (3) whether teaming agreements should continue to be used as a tool to facilitate collaborative efforts on government contracts. We advise taking a pause to examine these questions in light of the Virginia cases but also to consider the important role played by team arrangements in government contracts.
The pleadings in the A-T Solutions case are informative. A-T Solutions and R3 entered into a teaming agreement to pursue the Combined Explosive Exploitation Cell (CEXC) program on May 11, 2015. That agreement was exclusive, meaning that “neither party would participate in any manner or undertake any efforts in support of any other teaming efforts that are competitive to this Teaming Agreement.” After signing the teaming agreement both companies commenced their CEXC collaboration but on July 17, 2015, the government cancelled the CEXC solicitation “to allow for a reassessment of the mission requirements and revisions.” A revised CEXC solicitation was issued on December 10, 2015, and bids were due January 11, 2016. However, R3 told A-T that the teaming agreement ceased to be valid as a result of the July solicitation cancellation.
A-T Solutions then sought to prevent its teammate from competing against it and to prevent use of A-T Solutions’ trade secrets. A-T Solutions argued that the teaming agreement should be interpreted as written and that it was entitled to a preliminary injunction compelling R3 to team with A-T Solutions for the CEXC program.
R3’s first argument was that there was no enforceable contract. It argued that binding Virginia precedent made teaming agreements such as its teaming agreement with A-T Solutions an unenforceable “agreement to agree” and noted that its teaming agreement “is indistinguishable from the one held to be unenforceable in Cyberlock Consulting.”
Ruling from the bench on A-T Solutions’ motion, apparently the day after CEXC proposal submission closed, the judge rejected A-T Solutions’ request. It should be noted that on the trade secret issue, R3 contended that it told A-T that it had not shared any of its information with others and that “A-T Solutions does not even allege — much less prove — that R3 has done so.”
The Earlier Cyberlock Case
In Cyberlock, the US District Court for the Eastern District of Virginia held that a teaming agreement without specificity may be unenforceable. That teaming agreement said, in words common to teaming agreements, that the parties would negotiate a subcontract if the team was awarded the contract. The district court found that this negotiation in the future made the teaming agreement just an “agreement to agree” and that it was therefore unenforceable. Because of that finding, Cyberlock, which was to be a subcontractor and receive forty-nine percent of the work, could not bind the prime, Information Experts, to the agreement. Another way of reading Cyberlock is that an agreement that has specificity will be enforceable. That said, getting specificity into a teaming agreement, particularly if entered into early in a competition perhaps before a formal RFP and a definitive scope of work, can be challenging.
It also is worth recalling the 1997 decision of the Virginia Supreme Court, W.J. Schafer Assocs., Inc. v. Cordant, Inc., which involved yet another dispute under a teaming agreement. In W.J. Schafer Assocs., the Virginia Supreme Court held that “agreements to agree in the future” are “too vague and too indefinite to be enforced.” Cyberlock and A-T Solutions follow that reasoning.
Are Teaming Agreements Still Enforceable or Does A-T Solutions Spell Doom for Teaming?
The use of teaming agreements will continue. They are woven into the fabric of government contracting and important to the competitive process. They can facilitate competition by joining complementary capabilities and “offer the government the best combination of performance, cost, and delivery” according to the Federal Acquisition Regulation (FAR).
In addition, competition today, particularly for major programs, is team versus team. As these cases point out, enforceability is an issue when a dispute arises, but most team arrangements are between teammates who share a strong mutual interest and want to work together. Enforceability is an issue, and a big one, when one party is seeking an end to the “marriage of convenience” formed by the teaming agreement or is seeking to require that its teammate meet certain of its obligations.
In fact, for a company seeking to win a contract, the preliminary questions that come up regarding teaming often focus on issues other than enforceability of the agreement. The common questions are whether the teammate improves the team’s ability to win, whether the teammate gives the customer the strongest offering, whether the teammates can work together, and finally, whether there any issues with the teammate that could impair the team’s selection. Teaming agreements are common in government contracting because such arrangements offer the ability to collaborate through both the pursuit and performance of the contract. Indeed, the past performance, experience, and personnel of the teammate may be essential to satisfying the requirements of the RFP.
These Decisions Highlight the Importance of Due Diligence
Due diligence is an important team formation activity. A team arrangement, as noted above, is a “marriage of convenience” between companies for a particular pursuit or pursuits. Parties to this “marriage of convenience” are well-advised to conduct adequate due diligence on the other party before signing the agreement.
What should due diligence include? One important aspect is the identification of any issues that could reduce the team's chances of being selected for award. For example, legal problems and ethical lapses or other issues that could raise responsibility concerns or potentially lead to suspension or debarment would make a company a risky teammate and could prevent the team's selection. Likewise, performance problems on prior contracts, contract terminations, or the existence of claims against the potential partner could also be cause for concern. Ensuring that your partner will provide the level of resources and management commitment necessary to assure success is not merely an issue of contract draftsmanship or possible legal recourse. It is an important business issue that needs to be examined during the due diligence inquiry. Finally, one important lesson from these cases on enforceability is the need to assess whether your teammate is committed to this team or whether the teammate may be looking for greener pastures. Such a situation would not make for a good “marriage of convenience.”
Some Considerations for Enforceability
A typical teaming agreement for a government contract may be entered into before the RFP has been issued and may not have many of the provisions that would be in a subcontract. It may rely on boilerplate from past team arrangements. That is an issue that can impact enforceability because the cases point out that specificity of terms is a critical in determining whether the agreement is an enforceable agreement or merely an (unenforceable) “agreement to agree.” Achieving specificity in terms can be difficult if the program’s requirements are not finalized at the time the parties negotiate the teaming agreement. The reality is that early in the pursuit, under the time pressures of competition, it is often difficult to negotiate a definite agreement that will be legally enforceable.
- Work Share
For a team arrangement to be successful, it should be accompanied by an agreement as to how the work will be divided if the team is awarded the contract. A team member that is vital to winning the award but replaceable thereafter may be concerned that it will be left at the altar when it comes time to negotiate the subcontract’s work. However, if a teaming partner is critical to performing the contract successfully, it may move into the driver’s seat upon award.
The Cyberlock decision that is the precedent for the A-T Solutions ruling provides a lesson. Government contractors that rely on a generic term to negotiate work later when the parties negotiate the subcontract do so at their peril. In Cyberlock, the work to be subcontracted was described as “work anticipated to be performed;” a description that the court held lacked sufficient specificity to pass muster for enforceability. The challenge for contractors is to make the teaming agreement as specific as possible. If substantial specificity is not practical at the outset, a contractor must ensure through due diligence that its teammate will stay with it and accept the risk that the teaming agreement may not be enforceable.
Price is a material term for any contract and the parties to a teaming agreement need to address price to have an enforceable agreement. At the same time the scope of work may not be clear because the customer may not have defined its requirements with specificity. In this situation, consider having the teaming agreement reference the teammate’s standard or usual pricing for its products or services. The parties should clearly manifest willingness and a plan to negotiate based upon that pricing once the government requirements are more clearly known. It is also advisable to update the pricing through a teaming agreement amendment if the proposed scope of work changes.
- Choice of Law and Venue
Companies might also consider whether changing the teaming agreement’s choice of law and venue provisions and choosing a state law and venue that might be more supportive of finding an enforceable teaming agreement. However, regardless of what the agreement provides for choice of law or venue, companies should remember that the wheels of justice may not move as quickly as the competition for which the team was formed. For example, the judge ruled in the A-T Solutions case the day after the CECX proposal due date.
- Mirror the Subcontract Terms Where Possible
To attempt to achieve an enforceable teaming agreement, the teammates should seek to create terms and conditions in the teaming agreement that would mirror those in the future subcontract and clearly state that the parties intend to use these terms in any resultant subcontract. These terms and conditions would not be the generic “standard” boilerplate terms but would clearly specify each party’s work scope tailored to the specific program. It is worth noting that the Cyberlock case discussed two teaming agreements; one with great specificity, which was not the subject of the decision but clearly set a standard that the court noted, and one that was the subject of the dispute and was not as specific. In Cyberlock, the court noted that detailed agreements where the parties clearly describe the duties, responsibilities, and specific requirements of the parties make enforceability more likely.
- Option: Pass the Teaming Stage and Proceed to the Subcontract
After the Cyberlock and AT Solutions decisions, some contractors might consider moving directly to a subcontract and skip the preliminary step of a teaming agreement. This might be appropriate for the most important subcontractors, but is not likely to be practical for all potential suppliers because of the amount of work required. Of course, such a subcontract would have to contain express terms to serve as required conditions precedent to the effectivity of the subcontract. The award of the contract to the prime contractor and survival of any protests, as well as any required customer approval of the subcontract are examples of such conditions.
Contractor team arrangements are part of the fabric of government contracting and, as the FAR states a teaming agreement can “offer the government the best combination of performance, cost, and delivery for the system or product being acquired.” Successful team formation often is important to a federal contractor and it may be a critical aspect to a contract pursuit strategy. Recent decisions from Virginia indicate that enforceability requires specificity in crafting teaming agreements. That places a premium on effective due diligence in the selection of teammates and in careful crafting of tailored teaming agreements.