Government Contracts Monitor

Be Careful What You Say In Your Teaming Agreements About Exclusivity

July 2, 2013

In a rare federal appellate decision involving the interpretation of a government contractor teaming agreement, the U.S. Court of Appeals for the Fifth Circuit upheld the agreement’s exclusivity requirements in X Technologies Inc. v. Marvin Test Systems, Inc., No. 12-50230 (5th Cir. June 11, 2013).

The U.S. Air Force (“USAF”) issued a small business set-aside solicitation for new testing equipment for the laser-guided Paveway II bomb. The new testing equipment the USAF wanted was manufactured by only one source, Marvin Test Systems, Inc. (“Geotest”). X Technologies, Inc. (“X Tech”), a small business with experience in developing test programs for weapons systems, decided to put together a bid. X Tech and Geotest negotiated a teaming agreement for Geotest to provide the hardware and grant X Tech access to the software and data, as well as rights to modify them. X Tech would then reverse engineer the necessary software from the data to be made available by Geotest, and prepare the bid.

The teaming agreement the parties negotiated stated, in relevant part:

This is an exclusive agreement between X-Tech and Geotest. X-Tech will submit Geotest’s workshare as part of X-Tech’s proposal as a response to this RFP. Geotest will not team up with any other company for solicitation FA8224-09-R-0104 except that Geotest may provide prices for the TS-217 tester only (without any software licenses, support or training) to other potential bidders.

X Tech submitted two bids for the solicitation: a conforming bid with Geotest listed as a critical subcontractor and an alternative non-conforming bid proposing testing equipment other than the TS-217 tester and without listing Geotest. X Tech was the only bidder, but the USAF rejected X Tech’s non-conforming bid and, because X Tech’s conforming bid was significantly higher than the Government’s cost estimate, the USAF amended the solicitation to “full and open” competition from all potential bidders. In response to the amended solicitation, X Tech resubmitted its original teamed bid with Geotest. Geotest, however, submitted its own bid (and there was conflicting evidence at trial as to whether Geotest submitted the bid on its own or whether it teamed with Raytheon). Geotest’s separate bid was lower than the teamed bid with X Tech by approximately $800,000, and USAF awarded Geotest the contract.

X Tech sued Geotest for breach of contract. A jury found for X Tech and awarded it $336,000 in damages, plus attorneys’ fees. Geotest appealed, arguing that X Tech’s “solo” nonconforming bid in response to the set-aside solicitation was a prior material breach of the teaming agreement that voided the teaming agreement. Alternatively, Geotest argued that it did not breach the teaming agreement because it did not team with any other company.

The Fifth Circuit applied the plain language of the teaming agreement to the appeal. It held that the teaming agreement “explicitly restricts one party’s ability to team but is silent as to the converse ability of the other party suggest[ing] that the restriction is unilateral. . . X Tech is bound to submit Geotest’s workshare only in ‘a’ response to the solicitation. X Tech fulfilled its obligation.” Op. at 11-12. In other words, the agreement only restricted Geotest’s ability to team, not X Tech’s.

On the issue of Geotest’s breach of contract, the Fifth Circuit affirmed the jury’s verdict noting that “the jury was presented with evidence that Geotest teamed with Raytheon, including Geotest’s use of the term ‘team’ in its technical proposal to USAF to describe its relationship with Raytheon, as well as internal Raytheon emails in which Raytheon characterizes its affiliation with Geotest on the bid as teaming.” Op. at 13. Because there was “some evidence” to support the jury’s finding, the appellate court could not overturn the verdict.

The moral of this story is to read teaming agreements very carefully before submitting bids that exclude parties to your teaming agreement or involve anyone other than parties to your teaming agreement. Even more importantly, make sure your teaming agreement covers all possible bid submission scenarios and addresses each party’s rights and responsibilities.

Michael J. Schrier is the attorney responsible for the content of this article.