Tomato, Tomahto … Let’s Call the Whole Thing Off: Virginia District Court Decision Shows Perils of Federal Contractor Teaming Arrangements

14 min

Teaming agreements are a common, beneficial, and sometimes necessary way for industry to come together and meet the federal government’s needs. But the devil is in the details. A recent decision from the U.S. District Court for the Eastern District of Virginia demonstrates the dangers teaming can pose to contractors as they transition from the rosy proposal phase of the teaming relationship to the post-award realities of contract performance. Even small missteps can lead to expensive litigation and loss of government business.

Further complicating matters, the Federal Acquisition Regulation (“FAR”) and the U.S. General Services Administration (“GSA”) define the exact same term — “contractor team arrangement” — differently. The FAR definition may include a traditional prime/subcontractor relationship, but the GSA’s definition for its Multiple Award Schedule (“MAS,” formerly the Federal Supply Schedule or “FSS”) program does not. As this case demonstrates, knowing the difference and understanding the legal and operational relationships between the team members and with the government are critical to a successful contract relationship.

Background on FAR Subpart 9.6 vs. GSA Schedule Contractor Team Arrangements

While the FAR identifies two broad categories of contractor team arrangements, the GSA defines the term differently in relation to its MAS program.

“Under the FAR, a contractor team arrangement means an arrangement in which” either “[t]wo or more companies form a partnership or joint venture to act as a potential prime contractor,” or 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.” FAR 9.601. A traditional prime/sub relationship is therefore a contractor team arrangement under the FAR.

By contrast, the GSA’s policy is that “FAR 9.6, Contractor Team Arrangements, does not apply to GSA Schedules teaming.” Within the GSA’s MAS program, “[t]he Schedules CTA does not create a separate legal entity, but allows Schedule contractors to meet buyer’s requirements by combining the supplies and/or services from each team member’s separate Schedule contract in response to a buyer’s Request for Quote.” Importantly, a Schedule CTA “differs from a partnership between a prime contractor and subcontractor in that all members of the team are equal parties to the contract.” According to the GSA’s MAS Desk Reference, “[u]nder [Schedule] CTAs, each contractor has privity of contract with the buying agency” and the “CTA document must not create a joint venture or separate subsidiary” because “[e]ach Team Member is operating as a ‘prime’ for the portion of work they are performing” (emphasis added). Because each Schedule CTA member is a prime, each “may utilize a subcontractor,” so long as the subcontractor “utilize[s] the items/labor categories/prices/rates of the GSA Schedule prime they are subcontracting under.” Thus, GSA’s policy provides that in Schedule CTAs, each team member “must have a GSA Schedule contract” such that the “buying entity is invoiced at each team member’s unit prices or hourly rates as agreed in the task or delivery order or GSA Schedule BPA.”

In Schedule CTAs, there may be a “team leader” and one or more “team members.” With respect to Schedule CTA invoicing practices, the GSA’s Office of the Inspector General has advised against a team lead billing on behalf of its team members as though they were mere subcontractors:

In two orders, the invoices submitted by the team lead listed charges for subcontractors, when in fact they were charges for team member(s). As stated previously, team arrangement members are not subcontractors but equal prime contractors. This billing practice could cause confusion, as team members are allowed to use subcontractors. It also indicates a misunderstanding of team arrangements and how they should be administered.

The GSA’s publication “Contractor Team Arrangements (CTAs) and the GSA MAS Program: Student Guide” permits a team leader to bill on behalf of its team members, but advises CTA members to clarify roles and resolve disputes regarding payments among themselves:

Invoicing and payment. The CTA document should designate team responsibilities for invoicing and payment. While the team leader may submit an invoice on behalf of all team members, GSA recommends that payment be made to each team member. GSA recognizes, however, that there may be instances where it is advantageous to design the CTA document so that payment is made to the team leader who pays each team member. Under such circumstances, the CTA document should clearly indicate that all team members agree to this method of payment. The CTA document should acknowledge that the team members, without any involvement by the Government, would resolve any dispute involving the distribution of payment between the team leader and the team members.

What Was the Case About?

AB Staffing Solutions, LLC v. ASEFI Capital, Inc. “arises out of an agreement between three entities to provide medical staffing services to the states of Idaho and Washington to alleviate hospital staffing and supply shortages caused by COVID-19.” No. 3:22CV32 (DJN), 2022 WL 16555707, at *1 (E.D. Va. Oct. 31, 2022). The parties “dispute[d] the scope and terms of that agreement, with each having a different view of the nature of the arrangement and who bears the blame for issues with invoicing and receiving payment from the States.” Id.

Near the beginning of the COVID-19 pandemic, the GSA pre-positioned hospital support service providers in four states, with the providers to compete to perform this work in task orders issued off their Schedule contracts. Specifically, as GSA summarized in February 2021, “[i]n support of the U.S. Department of Homeland Security’s (DHS) Federal Emergency Management Agency (FEMA) in April 2020,” the GSA “established four Basic Ordering Agreements (BOA) to provide emergency hospital support services in Alaska, Idaho, Oregon, and Washington states.” A BOA “is not a contract” but “a written instrument of understanding … that contains (1) terms and clauses applying to future contracts (orders) between the parties during its term, (2) a description, as specific as practicable, of supplies or services to be provided, and (3) methods for pricing, issuing, and delivering future orders under the basic ordering agreement.” FAR 16.703.

According to the solicitation, the “intent” was “for specific order requirements to be competed among BOA holders using FAR 8.4 ordering procedures,” and “[o]nly contractors with current GSA Schedules and/or VA [Department of Veterans Affairs] MAS shall be considered” for award of a BOA. The solicitation permitted CTAs to submit a proposal, provided that the proposal identified “the structure of the agreement to include the main integrator and subordinate team members.” In a “Q & A” document, the GSA stated that “a CTA is strongly encouraged for this requirement, but it is not a requirement.” The GSA also confirmed that “all members of the CTA must have a GSA or VA Schedule Contract to participate in this requirement.”

GSA awarded one of the four BOAs to a contractor team arrangement of three companies. That BOA identified ACI Federal (“ACI”) as the “Team Lead,” and AB Staffing Solutions, LLC (“ABSS”) and Bay Area Anesthesia, d/b/a World Wide Medical (“WWM”), as “Team Member[s].” The ACI Federal BOA stated that each task order solicitation “will need to identify the specific GSA or VA Schedule for each pricing element.”

What Were the Parties’ Allegations?

The two non-lead team members (ABSS and WWM) were the plaintiffs, while the team lead (ACI) was the defendant. The parties’ fundamental disagreement concerned whether ABSS and WWM were performing as prime contractors or as ACI’s subcontractors, and which entities should invoice and collect from the government for that performance. Both sides moved to dismiss various claims in the other’s complaints.

ABSS and WWM alleged that ACI had “insisted on invoicing for all Team Members and refused to relinquish those duties,” but then prevented ABSS’s and WWM’s receipt of payment for millions of dollars’ worth of services rendered to state government buyers through ACI’s faulty billing practices. See 2022 WL 16555707, at *2-*3.

In a counterclaim, ACI responded that the states of Idaho and Washington had “issued the task orders only to ACI and did not direct them to ABSS or WWM, nor did the task orders specifically request services from ABSS or WWM,” such that “ACI determined how to fulfill the requirements, often using its own employees and other times subcontracting some of the work to other companies, including ABSS and WWM.” Id. at *4. Thus, for those task orders, ACI alleged that the parties had “entered into a traditional prime-subcontractor agreement,” albeit one that was only “implied-in-fact,” “with ACI as the prime and ABSS and WWM as the subcontractors.” Id. at *5. ACI further asserted that the parties’ agreement “did not address services that one company might provide to another company under a task order issued to the other company.” Id.

As such, ACI claimed that the parties had agreed that ACI “would consolidate their invoices with other subcontractors’ invoices and send them to” the state government buyers. Id. According to ACI, ABSS and WWM “submitted thousands of jumbled invoices and supporting documentation that forced ACI to spend enormous efforts to evaluate and consolidate,” and that their “invoices had numerous errors, including erroneous calculations or lack of supporting documentation.” Id. ACI also alleged a “campaign” by ABSS and WWM “to discredit ACI with GSA,” including “misrepresent[ing] to GSA officials that ACI spent their money on boats rather than paying Plaintiffs.” Id. at *6.

ABSS and WWM said in reply that ACI “misrepresented that ‘Team ACI’ had been awarded a contract by the State of Washington despite [ACI’s] subsequent claim that it entered into a prime contract with the State with [ABSS and WWM] acting as subcontractors and not CTA team partners.” Id. at *15. ABSS and WWM therefore argued that they “understood that they would be paid on a ‘pass through’ pricing basis as CTA Team Members, rather than [ACI] adding and collecting a markup on Plaintiffs’ invoices.” Id.

What Did the Parties’ Teaming Agreement Say?

Even though the BOA anticipated issuance of orders off each teammate’s Schedule contract (implying that GSA’s policies on Schedule CTAs apply), the teaming agreement stated “the Team Members desire to combine their respective capabilities and team their FSS Schedule Contracts pursuant to the provisions of the Federal Acquisition Regulations (FAR) subpart 9.6[.]” See No. 3:22-cv-00032-DJN, ECF 1-1. The agreement also provided that ABSS and WWM “will assist” ACI “in obtaining a Hospital Support Services BOA award and will participate in pursuing work in support of the Hospital Support Services BOA,” and that as “Team Lead,” ACI’s “delivery responsibilities” included “managing the overall contract and project management; providing consolidated status reporting to FEMA with support from the Team Members; providing a single point of contact to Hospital Support Services BOA to resolve technical and performance issues.” Similarly, ACI’s “individual primary delivery responsibilities” included “overall contract management,” while ABSS and WWM’s “individual primary delivery responsibilities” included “providing [ACI] with any information required for joint reporting.”

Yet other terms in the agreement appeared consistent with the GSA’s policies for Schedule CTAs, rather than a FAR Subpart 9.6 arrangement. For example, the agreement stated that the “[t]erms and conditions of any purchase order issued by the Government to [ACI], [ABSS] or [WWM] will be subject to the terms and conditions of their respective FSS, incorporated herein by reference.” The agreement further provided that “each party shall have privity of contract directly with the Government” and that “[i]ndividual purchase orders will be issued by the Government which will specify the precise quantities and types of products/labor to be ordered pursuant to the Hospital Support Services BOA contract.” Each team member “will individually and separately be responsible for providing services associated with purchase order awards made to them individually,” and “[i]nvoices will be generated separately to the Government by [ACI], [ABSS] and [WWM] for the work for which they have been individually awarded, which clearly indicates the services rendered from each parties’ [sic] respective FSS Schedule Contract.” The agreement also stated that “[n]othing in this Teaming Agreement shall constitute or create a joint venture or separate subsidiary of any Team Member.”

What Did the Court Say?

The Court’s decision did not determine the exact nature and scope of the parties’ contracting relationships with each other and the federal and state governments. Instead, the Court ruled on whether multiple of the parties’ claims and counterclaims could proceed under Federal Rule of Civil Procedure 12(b)(6) (i.e., whether each claim was supported by sufficiently plausible allegations of fact such that relief could, at a later phase, be granted at law).

The Court’s holdings reflect the wide variety of potential legal claims that can arise when a contractor team arrangement winds up in litigation:

  • The teaming agreement was a valid and enforceable contract. See 2022 WL 16555707, at *8-*9. The holding is important because Virginia courts often hold instead that teaming agreements are unenforceable agreements-to-agree, such that neither party may sue the other for breach of the teaming agreement.
  • ABSS and WWM could plausibly allege that ACI had violated the teaming agreement (and the implied covenant of good faith and fair dealing) by preventing them from invoicing state government buyers themselves, but not by failing to forward their invoices to the states and to remit the payment to ABSS and WWM. See id. at *9-*11. This was because the teaming agreement required each party to invoice separately, but included no requirement for ACI to invoice or collect on behalf of ABSS or WWM.
  • ABSS and WWM failed to allege facts sufficient to move forward with their claim that ACI had breached a fiduciary duty owed them. See id. at *11-*12.
  • ABSS and WWM alleged sufficient facts to state a claim for conversion, or that “the States paid Defendant for work performed by Plaintiffs, and that Defendant failed to remit that payment to Plaintiffs,” such that “Defendant withheld money that rightfully belonged to Plaintiffs.” See id. at *12-*13.
  • ABSS and WWM properly stated “claims for fraud based on Defendant’s false representations that it would invoice the States and remit the payments to Plaintiffs,” including ACI’s alleged misrepresentations “that it had the administrative capacity, competency, experience and capability to perform its administrative and managerial duties under the CTA” and regarding “their status as co-equal team members rather than subcontractors.” See id. at *14-*16. The latter allegation was that ACI had “misrepresented that the States had awarded orders to ‘Team ACI’ in the same manner as provided in the CTA,” such that ABSS and WWM “performed work ‘under false pretenses’ that they had direct privity with the States and the ability to invoice them directly.” Id.
  • ACI failed to state a valid breach of contract claim against ABSS and WWM because the Court agreed that ACI had failed to allege facts sufficient to show the existence of any implied-in-fact subcontracts between the parties. See id. at *16.
  • ACI did state a claim for tortious interference with an existing contract — specifically, that ABSS and WWM interfered with ACI’s contracts with the state of Washington “by falsely accusing [ACI] of not paying their invoices, by directly invoicing [Washington state] for the work that they performed on the purported subcontracts and by performing work that [Washington state] had already ordered from [ACI].” Id. at *17-*18. The Court agreed that the conduct ACI alleges ABSS and WWM engaged in was “improper” because it allegedly involved “false representations to the States” regarding ACI. Id.
  • ACI stated a claim for tortious interference with business expectancy because ACI alleged that, had ABSS and WWM “not lied to” the state government about ACI, ACI “unquestionably would have received the work” that was instead awarded to ABSS and WWM under a “Follow-On Contract.” Id. at *18-*19.
  • ACI’s claim for defamation could proceed because ACI “alleges numerous false statements made by Plaintiffs to the States and GSA,” including that “ACI was mismanaging the processing and payment of invoices,” “ACI Federal was misspending funds that it should have paid them, even once falsely suggesting to them that ACI Federal was spending their money on boats,” and that “ABSS ‘repeatedly told GSA, [Washington] and [Idaho] that they were on the verge of having to withdraw nurses from hospitals if they did not receive immediate payments directly from the States rather than through ACI Federal…’” Id. at *19-*21 (emphasis in original).
  • ACI failed to properly state a claim for business conspiracy under Virginia law because ACI failed to contest “that Virginia’s business conspiracy statute does not apply to extraterritorial conduct that gave rise to the alleged conspiracy.” Id. at *21.

What Is the Takeaway for Contractors?

Federal contractors negotiating teaming agreements need to make sure that they have a clear understanding of, and then memorialize in detail, the roles and responsibilities of every team member, including for tasks that seem administrative and bureaucratic, such as invoicing and collecting payment from the government. They should know the differences between FAR-based and GSA-based contractor team arrangements and ask the tough questions up front, including:

  • What happens when the government awards the base contract? Who will be the awardee: the team or one or more team members?
  • What happens when the government awards a task order off the base contract? Who will be the awardee: the team or one or more team members?
  • What entity or entities will be in privity of contract with the government for the base contract and for each task order?
  • What entity will be responsible for invoicing the government and collecting payments for performance under the task orders, and more important, how and when will these funds be distributed?
  • What entity will perform which aspects of performance, and what contractual vehicle(s) will apply to each of those elements of performance?
  • When multiple entities are performing, what are their legal relationships with one another? Prime contractor/subcontractor? Co-primes?

If necessary, contractors should engage experienced counsel to address these matters early in the acquisition process.