Commercial litigation update: court upholds $330K judgment in contractor’s breach of government defense project bid agreement

by John Chapman

The Air Force maintains its arsenal of laser-guided Paveway II bombs at Hill Air Force Base in Utah. Because the base’s sole Paveway II tester was old and increasingly unreliable, the Air Force decided to upgrade to a new testing system, the TS–217, manufactured by Geotest. The Air Force issued a solicitation for the upgrade project.

The initial solicitation was reserved for small businesses. X Tech, a small-business government contractor with experience in developing test programs for weapons systems, elected to put together a bid.

A functional tester would consist of the TS–217 hardware with modified software and data for the Paveway II’s laser guidance system, which was owned by Raytheon, the Paveway II’s manufacturer. Thus, in order to bid, X Tech had to secure the hardware and gain access to the software and data. X Tech decided to reverse engineer the Raytheon data. It contacted Geotest and negotiated a teaming agreement for the hardware and access to the software (as well as the rights to modify it). After X Tech and Geotest agreed orally, Geotest confirmed the agreement in writing. The relevant portion of this agreement provides:

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.

Pursuant to the agreement, X Tech submitted a bid of $3.2 million with Geotest as a critical subcontractor. X Tech was the only bidder at the close of the solicitation period. USAF rejected the X Tech/Geotest bid because $3.2 million was too high.

Because no “small business” was selected, the Air Force amended the solicitation to “full and open” to open it up to all bidders. X Tech resubmitted its teamed bid with Geotest for $3.2 million. However, Geotest also submitted a bid separately from X Tech for $2.4 million. The Air Force awarded Geotest the contract.

X Tech sued Geotest for breach of contract. X Tech contented that Geotest teamed with Raytheon to make its separate bid in violation of Geotest’s agreement with X Tech. Geotest argued that it was a mere licensee of Raytheon’s data, not a partner with the company itself. Thus, Geotest contended, it merely submitted its own independent bid, which did not breach the agreement.

The case was tried to a jury. The jury found that Geotest and X Technologies did agree to exclusively team to jointly pursue the Solicitation and that Geotest breached the agreement. The jury awarded $336,000 in damages as well as attorney fees and costs to X Tech. Geotest appealed.

Geotest argued that X Tech failed to prove X Tech would have received the Air Force contract but for Geotest’s bid. In short, Geotest argued that the Air Force would not have accepted X Tech’s $3.2 million bid even if it was the only bid. Geotest relied on testimony by Michael Garner, an Air Force contract negotiator. At trial, Geotest’s counsel asked Garner: “Was $3.2 million within the range that you know the government would or would not pay for this project?” Garner responded: “The team would not pay $3.2 million. The [Selection Authority] agreed we would not pay 3.2 million.” Geotest contended that Garner’s statements “foreclose any inference that X Tech would have received the contract.”

X tech responded that, even if the district court was required to take Garner’s testimony as true, there was still enough evidence to support the court’s conclusion that a reasonable jury could find that Geotest’s breach caused X Tech to lose the contract. The Fifth Circuit agreed that the evidence, taken in the light most favorable to X Tech, was sufficient to create an issue of fact for the jury to resolve concerning causation. First, the jury heard evidence that the testing system was important to national defense priorities. Second, it heard that absent Geotest’s bid, X Tech would have been the only bidder in the largest possible pool of bidders (full and open). Third, it was told that X Tech’s proposal met the solicitation’s technical requirements, and USAF gave the company a Satisfactory Confidence rating, indicating it believed X Tech could fulfill the contract. Fourth, Garner speculated that if USAF had not accepted Geotest’s bid, it might have decided to go into formal discussions with bidders, and, if it had decided to do that, it would have negotiated with X Tech. According to X Tech, the jury could infer that these negotiations would be successful and USAF would eventually award X Tech the contract. Finally, the jury heard evidence that USAF did not realize that X Tech’s bid included ownership of the reverse-engineered Raytheon data, and, X Tech argues, the jury could infer that USAF might have been willing to pay $3.2 million if it had received both the new testing system and the Raytheon data.

Geotest also argued that it not breach the agreement with X Tech because it merely submitted its own bid and did not “team” with Raytheon. The question of whether Geotest’s conduct breached the agreement is a question of fact for the jury.

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. The Fifth Circuit found that this evidence is “more than no evidence and is thus sufficient to support the jury’s finding”. Thus, the district court properly entered final judgment in favor of X Tech based on the jury’s verdict.

Commercial Litigation at Heygood, Orr & Pearson

At Heygood, Orr & Pearson, our attorneys have handled literally dozens of commercial litigation cases ranging in value from tens of thousands of dollars to tens of millions. We have successfully represented businesses of all sizes, from small “mom and pop” businesses to some of the largest corporations in the world.

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As a result of their experience, expertise and trial ability, our attorneys have obtained dozens of significant verdicts and settlements for our commercial clients. Among the more notable are the following:

  • Obtained an $18 million verdict in favor of a European entrepreneur in a lawsuit against a subsidiary of a Fortune 500 company involving the sale and distribution of computer products in Europe.
  • Successfully defended an international businessman in a $200 million fraud and breach of contract case arising out of the discovery of the world’s largest nickel deposit in Labrador.
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Michael Heygood, James Craig Orr, Jr. and Eric Pearson are all Board Certified in Personal Injury Trial Law — Texas Board of Legal Specialization.

** Michael Heygood, James Craig Orr, Jr. and Eric Pearson were selected to the Super Lawyers List, a Thomson Reuters publication, for the years 2003 through 2013.