Under the Small Business Administration’s (SBA) mentor-protégé program, smaller businesses are afforded the tools to compete for government contracts by partnering with larger businesses that serve as mentors to the small businesses. In theory, both the mentor and the protégé benefit under the program, with the mentor gaining access to set-aside small business contracts that it would not otherwise be eligible for and the protégé receiving the advantages of the mentor’s experience, knowledge, and resources. But what happens when the two businesses do not get along, and one company is ready to give the boot to the other? The case between Yorktown Systems Group, Inc. and Threat Tec provides some helpful insight.
After entering into an SBA-approved mentor-protégé agreement, Yorktown and Threat Tec formed a limited liability company and executed a joint venture agreement under applicable SBA regulations. The JV was unpopulated (had no employees), with Threat Tec as the protégé and managing member owning 51% of the JV, and Yorktown owning the remaining 49%.
In July 2020, the JV was awarded the U.S. Army’s Training and Doctrine Command G-2 Contract (TRADOC contract), valued at approximately $165 million and involved supporting Army intelligence operations, including IT support and training. In an addendum to the JV agreement, 50.6% of the TRADOC contract work was allocated to Threat Tec, with the remaining 49.4% to Yorktown. As the prime contractor, the JV entered into subcontracts with both Yorktown and Threat Tec to perform the TRADOC work. The JV’s subcontract with Yorktown was for 12 months and included four one-year option periods, which the JV had the unilateral right to exercise. The subcontract included a clause that allowed the JV to terminate Yorktown’s subcontract for the JV’s convenience.
The JV exercised the first option period of Yorktown’s subcontract, but before the option period ran, Yorktown sued Threat Tec. The day before Threat Tec had to respond to Yorktown’s suit, the managing member of the JV, who was Threat Tec’s CEO, informed Yorktown that the JV was terminating its subcontract under the convenience termination provision. Yorktown then filed for a temporary restraining order in federal district court preventing Threat Tec from terminating Yorktown’s subcontract and depriving Yorktown of the rights and benefits of the JV agreement, including its share of the TRADOC work. The district court granted Yorktown’s request, and Yorktown subsequently amended its complaint to allege that Threat Tec had, among other things, breached its fiduciary duty to Yorktown as the JV’s manager. Accordingly, Yorktown requested an injunction preventing Threat Tec from taking its TRADOC work away. The district court agreed with Yorktown and entered an injunction against Threat Tec, which Threat Tec appealed to the 11th Circuit Court of Appeals.
On appeal, the Eleventh Circuit upheld the district court’s decision, affirming that the lower court did not err in finding that Threat Tec, as the JV’s manager, was not acting in the JV members’ interests when it sought, by using the subcontract’s convenience termination provision, to unilaterally disassociate Yorktown from the TRADOC contract. In short, “the protégé turned on the mentor,” with the district court calling Threat Tec’s attempt to cut Yorktown out of the very contract it helped Threat Tec secure the “epitome of disloyalty.” Beyond a breach of its fiduciary duty, Threat Tec’s effort to excise Yorktown from the TRADOC work likely did not comply with the terms of Yorktown’s subcontract, which, as both the district court and the court of appeals noted, was subject to controlling SBA regulations. While these regulations allow for the termination of a mentor-protégé agreement or the withdrawal of a JV member, there are necessary perquisites that apply in such circumstances, none of which were present here.
The Eleventh Circuit then looked at whether the lower court erred in concluding that, absent injunctive relief, Yorktown would be irreparably injured. On this point, the appeals court found that the district court did not abuse its discretion in concluding that damage to Yorktown’s business reputation and past performance history, the loss of two key Yorktown employees, the likelihood of home office lay-offs stemming from the loss of the TRADOC work, and the potential loss of Yorktown’s ability to staff the company’s Intelligence Surveillance Reconnaissance government contracts portfolio, which was identified as the future of Yorktown’s business, amounted to irreparable harm.
In sum, the Eleventh Circuit held that Threat Tec had failed to show the district court abused its discretion in granting a preliminary injunction on Yorktown’s breach of fiduciary duty claim, specifically, that the record below supported Yorktown’s likelihood of success on the merits of its claim and the damage to Yorktown may be irreparable if Threat Tec was not prohibited from its actions.
If you are involved in a mentor-protégé agreement and related joint venture, remember there are several regulatory requirements that must be complied with, including those that involve terminating the mentor-protégé relationship (as well as requirements routinely spelled out in the mentor-protégé and joint venture agreements). For example, under 13 C.F.R. §125.9(e)(4), either the protégé or the mentor may terminate the mentor-protégé agreement with 30 days advance notice to the other party to the agreement and the SBA. In the case above, Threat Tec did not provide such notice that was consistent with the regulation, the mentor-protégé agreement or the joint venture agreement.
