Teaming Agreements - Are They Enforceable? Negotiating and Drafting Pointers

1. Teaming Agreements - Are They Enforceable? Negotiating and Drafting Pointers National 8(a) Association Anchorage, Alaska June 18, 2014 Presented by: Walter T. Featherly, Esq.

2. Introduction • This session will: • Review and analyze recent Cyberlock Consulting v. Information Experts decision (4th Cir. Va.). • Compare Virginia legal standard to the legal standard in Alaska regarding these issues. • Provide pointers for negotiating and drafting teaming agreements to be enforceable under Alaska law.

3. Teaming Agreements - Definition • Teaming Agreement: • Under the Federal Acquisition Regulation (FAR) 9.601 “means an arrangement in which: • (1) Two or more companies form a partnership or joint venture to act as a potential prime contractor; or • (2) A potential prime contractor agrees with one or more other companies to have them act as its subcontractors under a specified Government contract or acquisition program.” • The agreement by which parties pursue work, and that will lead to a performance agreement (subcontract, JV, etc.) if successful.

4. Teaming Agreements • Teaming agreements are very tricky. • If the agreement is not carefully drafted, it is very easy for • the parties to agree to less or to more than they intend or expect. • the agreement’s terms to be unenforceable.

5. Cyberlock Consultingv.Information Experts Analysis and Implications

6. Cyberlock Consulting v. Information Experts Cyberlock Consulting and Information Experts executed a Second Teaming Agreement to seek out a contract with the Office of Public Management. • Second Teaming Agreement Purposes: • To set forth the arrangement between Information Experts and Cyberlock to obtain an Information Experts’ prime contract. • To set forth the basis for a subcontract between Information Experts and Cyberlock.

7. Cyberlock Consulting v. Information Experts (cont’d) • Each party will exert reasonable efforts to obtain an Information Experts’ prime contract and negotiate a subcontract between the parties. • Work performance: • Information Experts performs 51%; Cyberlock performs 49% (as subcontractor). • Information Experts had the responsibility to "exert reasonable efforts to obtain Client approval for the proposed Subcontractor for the Program." • Agreement terminates if the parties fail to reach agreement on a subcontract after a reasonable period of good faith negotiations.

8. Cyberlock Consulting v. Information Experts (cont’d) • Information Experts was awarded the prime contract, but did not execute a subcontract with Cyberlock at that time. • The parties negotiated a subcontract for about a month until Information Experts concluded the negotiations due to continuing differences between the parties regarding the terms of the proposed subcontract. • Cyberlock brought claims for fraud (dismissed), unjust enrichment, and breach of contract. • Information Experts moved for summary judgment on Cyberlock's breach of contract and unjust enrichment claims. • Cyberlock moved for partial summary judgment on its breach of contract claim.

9. Cyberlock Consulting v. Information Experts (cont’d) The Court granted Information Experts’ Motion for Summary Judgment, denied Cyberlock's Motion for Partial Summary Judgment, and granted Information Experts’ Motion to Strike. • The post-prime contract award obligations in the Second Teaming Agreement are unambiguous and constitute an unenforceable agreement to agree.

10. Cyberlock Consulting v. Information Experts (cont’d) • Numerous terms in the Second Teaming Agreement demonstrate that: • (1) the parties contemplated that a future, formal subcontract would have to be negotiated and potentially executed; and • (2) that they contemplated the possibility that the future transaction discussed therein might not ever come to fruition. • The reference to the execution of a future subcontract could be read to indicate that the Second Teaming Agreement was not meant to function as the actual binding subcontract since the parties intended a formal subcontract to be drawn up. • The agreement expressly acknowledged the possibility that subcontract negotiations would fail, causing the agreement to terminate.

11. Cyberlock & Alaska Law A Comparison of the Virginia Court Ruling with Alaska Law

12. Legal Standard Applied in Cyberlock Virginia Law: • For a contract to be enforceable, “there must be mutual assent of the contracting parties to terms reasonably certain under the circumstances." • Teaming Agreements are not special arrangements under Virginia law, and as such are held to the same standard to find mutual assent. • The elements for a breach of contract claim are: • (1) a legally enforceable obligation of a defendant to a plaintiff; • (2) the defendant's violation or breach of the obligation; and • (3) an injury or harm to the plaintiff caused by the defendant's breach.

13. Legal Standard Applied in Cyberlock (cont’d) Virginia Law: • Agreements to agree in the future are too vague and too indefinite to be enforced. • Any writing in which the terms of a future transaction are left to be set out in a more formal agreement is presumed to be an agreement to agree rather than a binding contract. • Agreements to negotiate at some point in the future are unenforceable. • An agreement to negotiate open issues in good faith to reach a contractual objective will be construed as an agreement to agree, not a valid contract.

14. Legal Standard Applied in Cyberlock (cont’d) Virginia Law: • Calling an agreement something other than a contract or subcontract, such as a teaming agreement or letter of intent, implies that the parties intend it to be a nonbinding expression in contemplation of a future contract. • The parties’ intention for a formal contract to be drawn up is strong evidence that they did not intend the previous negotiations to amount to a binding agreement. • The central principal underlying the Cyberlock decision, that an “agreement to agree in the future” is unenforceable, is mirrored in Alaska case law.

15. Cyberlock Outcome & Alaska Law Alaska law: • Alaska law does not specifically address enforceability of teaming agreements. • Create a valid & enforceable contract. • A valid contract requires: • (1) an offer encompassing all essential terms, • (2) unequivocal acceptance by the offeree, • (3) consideration, and • (4) an intent to be bound. • An agreement is unenforceable if its terms are not reasonably certain.

16. Cyberlock Outcome & Alaska Law (cont’d) Alaska law: • Agreements to negotiate are unenforceable because they do not provide a basis for determining whether a breach has occurred or basis for a remedy.   • The hallmark of negotiation is bargaining. • The parties ultimately may be unable to resolve their dispute without outside help from the courts or ADR. • Without agreeing on a more specific way of resolving their differences, any agreement to negotiate is too indefinite to enforce. • An agreement to negotiate is not an agreement to agree. • In theory, an agreement to negotiate is an enforceable contract. • Parties who have merely agreed to negotiate have retained the ability to say “no” to the terms proposed by the other party. • But a court can never enforce an agreement to negotiate so as to bind one party to the ultimate agreement that the parties sought, but failed to negotiate.

17. Post CyberlockTeaming Agreements Negotiating and Drafting Enforceable Teaming Agreements Under Alaska Law

18. Negotiation & Drafting:Key Issues

19. Key Issues to Consider • Remember the purpose of the Teaming Agreement: • To define how the parties will pursue prime contracts together. • To provide a commitment for what will happen if they are awarded the prime contract. • Title the Teaming Agreement a “Teaming Contract.” – The term “agreement” indicates the document is NOT a “contract.” – The FAR’s definition of “contract” does not include “agreement” and FAR 16.702(a)(2) and 16.703(a)(3) state that agreements are not contracts.

20. Key Issues to Consider (cont’d) • Define the opportunity(ies) being pursued. • Define the obligations in proposal preparation. • Discussions with the government. • Address how the parties will be referenced in the proposal to the government. • Addressed by name. • Spell out their respective scopes of work (for subs, vital to be referenced by name and have role spelled out). • Include terms requiring cooperation to obtain government approval of team members. • Good pre-teaming due diligence is vital to avoid approval problems.

21. Key Issues to Consider (cont’d) Exclusivity: • A key element for both the proposal and contract performance. • Sample language: “The parties agree to team on an exclusive basis for the purpose of competing for the award and performing the Prime Contract resulting from the RFP.” • What else can parties do regarding the “opportunity”? • Important to have defined the “opportunity” as precisely as possible – be wary of broad definitions, particularly if they speak to a “customer” as opposed to a particular requirement. • For what period of time does the exclusivity apply post termination?

22. Key Issues to Consider (cont’d) Termination: When does the teaming arrangement end? • Typically, • When solicitation is cancelled. • When award is made to another party. • Who decides whether to protest? • When award is made to the team. • Teaming Agreement is then replaced by a subcontract or JV agreement. • PERHAPS, upon notice by either party, but likely want to spell out consequences. • Can the parties still pursue the opportunity in other ways? • Consider time frames (e.g., no termination within XX days of proposal submission). • AND keep in mind, a unilateral right to terminate may undermine the “agreement.”

23. Key Issues to Consider (cont’d) Other Key Issues Include: • Protection of proprietary and confidential information. • Will intellectual property be contributed to, or developed in, the course of the relationship? • Non-solicitation of employees. • Dispute resolution provisions.

24. Negotiation & Drafting: Pointers & Checklists Prime Contractors Subcontractors Joint Venture Partners

25. Prime Contractors • A teaming agreement must contain sufficiently definite terms to be enforceable. • Purpose: Clearly indicate a two-fold objective • For the parties to work collaboratively in the preparation, drafting and submission of a proposal that is responsive to the RFP; and • For the parties to perform the contract, with one party acting as the Prime Contractor and the other party as its Subcontractor. • Avoid terms that undermine the “agreement.” • “Neither party is bound until execution of a subcontract.” • “This agreement is subject to the parties negotiating acceptable subcontract terms.”

26. Prime Contractors (cont’d) • Avoid provisions that create a partnership or other relationship among the parties, binding the parties to one another in ways they neither intended nor expected. • Caution: Watch out for “Affiliation” under the SBA small business regulations. • A teaming agreement may result in the teaming partners being considered affiliates, that could make one or both ineligible for the procurement opportunity.

27. Prime Contractors (cont’d) • “Good Faith and Fair Dealing” & “Best Efforts” • Necessary terms for future negotiations of any terms not already agreed to in Teaming Contract. • Define terms in Teaming Contract. • Couple with specific timeline to reach agreement. • Specify that failure to reach final agreement under definition and timeline shall be resolved via arbitration.

28. Subcontractors • Under the Worker’s Compensation statutes of many states, a subcontractor is defined as “a person to whom a contractor sublets all or part of the initial undertaking” (a person can be an entity as well as a natural person).

29. Subcontractors (cont’d) • Include language in “objectives” provision stating that the subcontract is for the performance of specific work. • Include a “Scope of Work” description as an attachment, with pricing. • Describe subcontractor’s rights to participate in the teaming contract. • Describe subcontractor’s rights to participate in contract performance via subcontract. • State at the outset of the Teaming Contract that it is the intent of the parties that the Prime Contractor will award a subcontract to the Subcontractor.

30. Subcontractors (cont’d) • Exclusivity is a key element. • i.e., “the parties agree to team on an exclusive basis for the purpose of competing for the award and performing the Prime Contract resulting from the RFP.” • Include exclusivity language for proposal and contract performance. • Require prime contractor to fully identify subcontractor in communications with awarding agency.

31. Subcontractors (cont’d) • Pre-negotiate all essential subcontract terms to be adopted upon award of prime contract and subsequent execution of subcontract. • Especially Scope of Work & Pricing. • Any changes to pre-negotiated terms must be by mutual agreement. • Include provision that parties will enter into good faith and fair dealing discussions to finalize the wording of the terms and conditions of the Subcontract so that they are consistent with the proposal submitted to the Government, and include “flow-down” terms and conditions and FAR clauses. • Incorporate standard terms and conditions and FAR clauses by reference.

32. Subcontractors (cont’d) • Avoid references to a future subcontract to be entered into by the parties: • Courts read this to mean that the agreement is not meant to function as a binding contract since the parties intended a formal subcontract to be executed later. • Termination: • Avoid any terms acknowledging possibility that subcontract negotiations would fail, causing the agreement to terminate.

33. Joint Venture Partners • A Joint Venture, as defined in the FAR (Section 19.101(7)), is an association: • of persons or concerns • with interests in any degree or proportion • by way of contract, express or implied • consorting to engage in and carry out a single specific business venture for joint profit • for which purpose they combine their efforts, property, money, skill, or knowledge • but not on a continuing or permanent basis for conducting business generally • Note: The FAR definition of a joint venture fits the definition of a “partnership” under the Uniform Partnership Act.

34. Joint Venture Partners (cont’d) • A greater level of knowledge and trust is required for joint venture relationships. As such, a greater level of scrutiny is required in negotiating and drafting Teaming Contracts for joint ventures. • Teaming Contract for Joint Venture Partners should incorporate: • each of the provisions discussed above regarding subcontractors, AND • each of the additional SBA regulations unique to Joint Venture Partnerships.

35. Joint Venture Partners, SBA Considerations Include a provision addressing affiliation between the Teaming Contract parties. • Are the parties affiliated? • How does this impact their eligibility for the contract? • Affiliation rules. Joint ventures create affiliation, except: • Between two small businesses for certain larger contracts, and • Between mentors and protégés approved by the SBA.

36. Joint Venture Partners, SBA Considerations (cont’d) Include a provision addressing affiliation between the Teaming Contract parties. • In general, prime and sub are not affiliates, but • The “Ostensible subcontractor” rule (previously discussed). • An ostensible subcontractor is a subcontractor that performs primary and vital requirements of a contract or a subcontractor upon which the prime contractor is unusually reliant, causing the parties to be treated as joint venturers and affiliates for size determination purposes. 13 CFR 121.103(h)(4). • Remember that the “Self performance” rule applies to all set aside procurements.

37. Joint Venture Partners, SBA Considerations (cont’d) Identify and agree to work performance requirements: • For an unpopulated joint venture, or a joint venture populated only with one or more administrative personnel, the 8(a) partner must perform at least 40% of the work (more than administrative or ministerial functions). 13 CFR 124.513(d). • In an unpopulated joint venture where both the 8(a) and non-8(a) partners are technically subcontractors, the amount of work done by the partners will be aggregated and the work done by the 8(a) partner must be at least 40% of the total done by all partners. 13 CFR 124.513(d)(2)(i).

38. Joint Venture Partners, SBA Considerations (cont’d) • For a joint venture populated with individuals intended to perform contracts awarded to the joint venture, each 8(a) participant to the joint venture must demonstrate what it will gain from performance of the contract and how such performance will assist in its business development. 13 CFR 124.513(d).

39. References: Case Law Cyberlock Consulting, Inc. v. Information Experts, Inc., 939 F. Supp. 2d 572 (E.D. Va. 2013) Davis v. Dykman, 938 P.2d 1002, 1006 (Alaska 1997) Fernandez v. Fernandez, 312 P.3d 1098, 1104 (Alaska 2013) Valdez Fisheries Dev. Ass 'n Inc. v. Alyeska Pipeline Serv. Co., 45 P.3d 657, 667 (Alaska 2002) Schultz v. Travelers Indem. Co., 754 P.2d 265 (Alaska 1988) Regulatory FAR 16.702-703 13 CFR 121 FAR 9.601 13 CFR 124 FAR 52.219-14 13 CFR 125

40. Questions or Comments? Thank you for attending. If you have any questions or comments about today’s session, please feel free to contact: Walter T. Featherly (907) 263-6395 Walter.Featherly@hklaw.com