What happens when a protégé rebels against its mentor? In a recent decision from the Eleventh Circuit, Yorktown Sys. Grp. Inc., v. Threat Tec LLC1, the court had to deal with such a question after Threat Tec, the protégé and small business in a joint venture, terminated its mentor, Yorktown, in order to acquire its workshare. In this opinion delivered by Judge Ed Carnes, the Eleventh Circuit affirmed the Northern District of Alabama’s decision to grant Yorktown a preliminary injunction based on its breach of fiduciary duty claim. This blog covers the heavy price government contractors in a JV might pay for not knowing what fiduciary duties are owed to them, what duty they owe others, and if any are owed at all.
Background
“[B]ut companies are run by people and sometimes people don’t get along… [so] litigation followed, as night follows day.” ~ The Honorable Ed Carnes of the Eleventh Circuit.
As briefly touched on, the situation here is that Yorktown and Threat Tec entered the Small Business Administration’s (SBA) mentor-protégé program. Following their entrance into the program, they created a JV to seek government contracts. Threat Tec was the JV’s manager with a 51% interest, while Yorktown possessed the remainder. Once this agreement was in place, the JV bid for a U.S. Army contract (the TRADOC contract) that “involve[d] support for Army intelligence, including IT support and training,” with a total value of about $165 Million.
When the JV was awarded the TRADOC contract in July of 2020, Threat Tec and Yorktown agreed to divide the work in a 50.6%-49.4% split, respectively. As the JV functions as the prime contractor, it entered subcontracts with the two businesses; these subcontracts had a one-year base, with four one-year options, “which the JV has the ‘unilateral right’ to exercise.” Further, and quite importantly, the JV—with a majority ownership held by Threat Tec—had the right to terminate the subcontract for its convenience. On April 19, 2022, Yorktown filed suit against Threat Tec as “the parties’ business relationship hit the rocks.” Threat Tec was granted its motion to extend the deadline to respond to the complaint to May 27, 2022. On May 26, 2022, Threat Tec, as manager of the JV, sent a letter to Yorktown “terminating Yorktown’s subcontract based on the termination for convenience provision.”
Yorktown filed an emergency motion for a temporary restraining order, and then later, in its amended complaint, included two claims: (1) breach of the JV agreement, and (2) breach of fiduciary duty. Yorktown sought relief in the form of “an injunction to prevent Threat Tec from taking its TRADOC workshare.”
The District Court granted the preliminary injunction, finding that Yorktown had shown a likelihood of success on the merits of its claim for breach of fiduciary duty, and that they faced irreparable harm if they lost the TRADOC work. This Eleventh Circuit decision addresses Threat Tec’s interlocutory appeal of that order.
Analysis
As the Eleventh Circuit explained, there are four elements for preliminary injunctive relief to be granted: (1) there is “a substantial likelihood of success on the merits; (2) irreparable injury will be suffered unless the injunction issues; (3) the threatened injury to the movant is greater than any damage the proposed injunction may cause the opposing party; and (4) the injunction, if issued, will not disserve the public interest.”2 Threat Tec, in their appeal to the Eleventh Circuit, claimed that Yorktown failed to prove the first two elements. The Eleventh Circuit disagreed.
Substantial Likelihood
The Eleventh Circuit found that Yorktown provided a substantial likelihood of success on the merits. To come to this conclusion, the court turned to Delaware law, as selected by the JV agreement. Under Delaware law, there are two elements to prove a claim for breach of fiduciary duty: (1) that a fiduciary duty existed and (2) that the defendant breached that duty.
At the district court level, they determined that absent a contrary provision in the JV agreement, “Threat Tec, as manager of the JV, owed Yorktown… the traditional duties of loyalty and care that exist between members of an LLC.” Importantly, Delaware law allows for such a duty to be restricted or eliminated. As there was no provision that did such a thing, the District Court found, and the Eleventh Circuit agreed, that a fiduciary duty existed. Further, the Eleventh Circuit explained that such a duty of loyalty is breached when corporate fiduciaries “‘use their position of trust and confidence to further their private interests.’” The Circuit Court agreed with the lower court that “Threat Tec’s actions were designed to advance their own interest, not the interest of Yorktown or their joint interests or those of the JV itself.” Therefore, Threat Tec likely breached their fiduciary duty. With both elements met, the Eleventh Circuit affirmed on this first element.
Irreparable Injury
The Circuit Court found that the District Court did not abuse its discretion when concluding that Yorktown had shown it would suffer irreparable injury if the injunction was not granted.
An injury is only irreparable “‘if it cannot be undone through monetary remedies.’”3 Here, Yorktown offered evidence that monetary remedies would not help as they lost scientists and “‘high-end military analysts’” that were not easily replaceable. Further, their loss meant “losing institutional knowledge and experience needed to bid on future government contracts.” Finally, the Eleventh Circuit explained that abrupt termination of Yorktown TRADOC workshare “could affect an assessment of Yorktown’s past performance, harming its reputation and impeding its ability to compete for other government contracts in the future.”
For the above reasons, along with the fact that calculating future losses is near impossible, the Eleventh Circuit held that the District Court “did not abuse its considerable discretion when it found that Yorktown had shown irreparable harm,” and monetary damages are likely of no help.
Takeaway
The takeaway here is that contractors need to be aware of what fiduciary duties are owed to them, or what duty they owe others, if any at all. If there was no fiduciary duty owed to Yorktown because state law did not mandate it, or because state law allowed for it to be contracted away, it is entirely possible that Yorktown would have lost their 49.6% workshare of a nearly $165 Million contract that they helped their protégé acquire.
PilieroMazza encourages government contractors negotiating any joint venture to be aware of fiduciary duty owed or if it can be contracted away. As always, the Firm’s Government Contracts Group is happy to assist with any questions surrounding interactions with the federal government. For more information, please contact Cy Alba or another member of the Group.
1No. 22-13598, 2024 WL 3463501 (July 19, 2024).
2Citing Carillon Imps., Ltd. v. Frank Pesce Int’l Grp. Ltd., 112 F.3d 1125, 1126 (11th Cir. 1997).
3Citing Ne. Fla. Chapter of Ass’n of Gen. Contractors of Am. v. City of Jacksonville, 896 F.2d 1283, 1285 (11th Cir. 1990).
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