Fifth Circuit Affirms Jury Verdict Awarding Damages for Breach of “Exclusive Teaming Agreement” for USAF Procurement

By Lynn Patton Thompson

The Fifth Circuit’s recent decision in X Technologies, Inc. v. Marvin Test Systems, Inc., 2013 U.S.App. LEXIS 11739 proves the power of a single-letter word. It also proves that even the most reasonable commercial expectations should not color one’s perception of what is actually written in a contract. This focuses on that portion of the X Technologies decision showing that "exclusive teaming" does not mean "mutually exclusive teaming". One partner may have to dance with the one that brung him, but the other partner does not!

The United States Air Force (USAF) sought to purchase a new testing system for its Paveway II Bombs, which are manufactured by Raytheon. The testing system sought by the USAF was the TS-217, which is manufactured by Geotest. However, the hardware and software for the TS-217 are owned by Raytheon. A successful bid for the new TS-217 testing system would require access to the hardware and software (and the right to modify it) for Raytheon’s Paveway II bombs.

The USAF solicitation was initially set-aside for small businesses. X Tech, a small business contractor, decided it would bid on the procurement and reverse-engineer the Raytheon data. X Tech contacted Geotest and negotiated a teaming agreement for the TS-217 hardware, software, and modification rights. X Tech confirmed its oral agreement with Geotest in writing. The portion of that agreement relevant to the litigation stated:

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 only (without any software licenses, support or training) to other potential bidders.

X Tech then submitted 2 bids. One of its bids was on the specified equipment and used Geotest as a critical subcontractor. This "conforming bid" was for $3.2 million. X Tech’s second bid ("non-conforming bid") was based on test equipment other than the TS-217 specified in the Solicitation, and was substantially lower-priced than its confirming bid. X Tech was the only bidder.

The USAF rejected X Tech’s non-conforming bid and its conforming bid because the government cost estimate was substantially lower than $3.2 million. The solicitation was amended to open it up to "full and open" competition. In response to the "full and open" solicitation, X Tech submitted its teamed bid with Geotest. However, Geotest also submitted a bid separately from X Tech for $2.4 million. The USAF awarded to Geotest.

X Tech sued Geotest in Texas state court (it was subsequently removed to federal court on diversity grounds), claiming that Geotest breached the exclusive teaming agreement by teaming with Raytheon in a separate bid. Geotest argued it had not teamed with Raytheon and that it submitted its own, independent bid as merely a licensee of Raytheon data. Geotest also argued that when X Tech submitted its separate, non-conforming bid on the procurement when it was a set-aside for small business, that act constituted a prior material breach of the "exclusive teaming agreement". The jury’s verdict was for X Tech, and the district court entered a final judgment awarding X Tech $336,000 plus attorney’s fees.

One of Geotest’s issues on appeal was the district court’s determination that X Tech did not commit a prior material breach by submitting its separate bid using other than Geotest-manufactured equipment. X Tech argued that the unambiguous language of the teaming agreement only limited Geotest’s ability to team with another contractor and that it did not limit X Tech’s ability to submit a bid that did not include Geotest equipment.

Refusing to imply any mutuality of obligation, the Fifth Circuit sided with X Tech and upheld the verdict against Geotest, in part, on the express terms of the "exclusive teaming agreement", finding that explicitly restricting one party’s ability to team but remaining silent as to the other’s "suggests that the restriction is unilateral". Further, as the teaming agreement required that X Tech submit "a" response including Geotest as its teaming partner, X Tech was not restricted from submitting more than one response to the solicitation. Thus, X Tech’s submission of a competing bid that did not include Geotest did not constitute a "prior material breach" that would have freed Geotest to submit its own bid with Raytheon in response to the amended solicitation.