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Advance Training Grp. Worldwide, Inc. v. ProActive Techs., Inc., 2022 U.S. Dist. LEXIS 155658, 2022 WL 3718494 (E.D. Va. Aug. 29, 2022)

Advance Training Group Worldwide, Inc. (“ATG”) provides advance tactical training services, but did not have any federal contracting experience. ProActive Technologies, Inc. (“ProActive”) provides engineering services and manufacturing for the United States (“U.S.”) military and its business is in the federal contracting world. In 2011, the U.S. government announced that it was starting the acquisition process for the U.S. Army Special Operations Forces RAPTOR III (“RAPTOR III”). On November 21, 2011, ProActive contacted ATG about ProActive and ATG working together in a joint venture (“JV”) on RAPTOR III. ProActive prepared an initial draft of a Memorandum of Understanding (“MOU”) between ProActive and ATG to create the JV for the purposes of bidding on and performing the RAPTOR III contract, which set forth the membership interests and voting rights in the JV as 67% for ProActive and 33% for ATG. On July 27, 2012, ProActive and ATG executed the MOU, which provided that the JV would be conducted through a Virginia limited liability company (“LLC”) called RAPTOR Training Services (“RTS”).

On February 13, 2014, the U.S. government awarded RTS the RAPTOR III contract and RTS accepted the award, which was an IDIQ task order contract that provided for services but did not specify a quantity. The RAPTOR III contract incorporated Federal Acquisition Regulation (“FAR”) § 52.219-14 Limitations on Subcontracting, which required RTS to perform at least 50% of the labor under the contract (the “51% Rule”). On January 2, 2013, the National Defense Authorization Act for Fiscal Year 2013 was signed into law, which changed the Limitations on Subcontracting to allow employees of small businesses subcontractors to count as “employees of concern” for purposes of compliance with the 51% Rule. During a weekly meeting, the U.S. government raised a concern about RTS’ compliance with the 51% Rule because both ProActive and ATG subcontracted most of their work. The U.S. government confirmed to RTS that the limitations on subcontracting would remain in effect until the changes to the 51% Rule were implemented and there was a modification to the RAPTOR III contract. ProActive suggested to ATG that another company be brought into the JV to satisfy the 51% Rule.

From July 2012 to March 2016, RTS, ProActive, and ATG operated under the MOU, which functioned as the de facto Operating Agreement (“OA”). Given the U.S. government’s warning that RTS needed to come into compliance with the 51% Rule, ProActive believed an OA needed to be executed and Class B members needed to be brought into the JV. The parties exchanged multiple drafts of an Operating Agreement for that purpose. After numerous drafts did not resolve their differences, ProActive sent ATG a letter indicating that ATG was in material breach of the MOU, noting the urgent need for an OA that brought in additional Class B Members and that ATG conditioned its consent to the OA on a change in the membership interests and voting rights of the JV to 50/50 despite the MOU providing for 67% for ProActive and 33% for ATG. On November 8, 2016, ProActive sent ATG a letter terminating ATG from the JV for the reasons stated in its earlier letter, ATG refusal to operate in accordance with the MOU (including its insistence on a 50/50 share of voting rights and membership interest), ATG’s repeated demands for task order lead positions on tasks that ATG did not have the requisite experience, ATG’s poor performance on other tasks where it was the task order lead, and for directly contacting the government customer.

The parties agreed that the MOU was a valid contract, but disagreed on whether there was a breach and, if so, by which party. A breach of contract requires: (1) a legal obligation between the parties; (2) a violation or breach of that obligation; and (3) consequential injury or damage to the complaining party. A party who commits the first material breach of a contract is not entitled to enforce the contract and the breach excuses the nonbreaching party from future performance. A material breach is a failure to do something that is so fundamental to the contract that the failure to perform that obligation defeats an essential purpose of the contract. Under the MOU, the parties had a legally enforceable obligation to work toward the goals of the JV: to (1) secure the RAPTOR III IDIQ; (2) bid on task orders offered under that award; and (3) perform the services required to support successful execution of the award. The Court held that ATG breached the MOU. The Court found that compliance with the requirements of the RAPTOR III contract, including the 51% Rule, was integral to the MOU’s goal and the MOU established membership and voting rights as 67% ProActive and 33% ATG. The Court found that ATG’s actions were done in contravention of the MOU because it frustrated the JV’s purpose. ATG’s delay in signing the OA was unreasonable because the delay was attributable to ATG’s attempts to renegotiate its voting rights and rewrite the core tenant of the MOU, and ATG was aware of the pressing need for the OA and that Class B members could not be added without the existence of an OA. Accordingly, ATG’s unreasonable delay and attempts to overhaul the core structure of the JV’s MOU was a material breach.

Because ATG materially breached the MOU, ATG could be terminated from the JV under the MOU. The MOU, however, did not describe how a member could be terminated, so the Virginia LLC Act governed ProActive’s termination of ATG. The Virginia LLC Act provides that any action required or permitted to be taken by members of a LLC may be taken upon a majority vote of the members. A majority vote consists of the vote or other approval of members having a majority share of the voting power of all members. Because ProActive had 67% voting power, ProActive was authorized to terminate ATG by majority vote. Because ATG materially breached the MOU first, its action for breach of contract against ProActive failed and the Court found in favor of ProActive.

PLDR Law Scott Kowalski 1 PLDR Law Mark Burgin 1

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