Yorktown Sys. Grp. Inc. v. Threat Tec LLC

108 F.4th 1287

YORKTOWN SYSTEMS GROUP INC., Plaintiff-Appellee, v. THREAT TEC LLC, Defendant-Appellant,Patrick Rousey, Defendant.

No. 22-13598

United States Court of Appeals, Eleventh Circuit

Filed: July 19, 2024

Appeal from the United States District Court for the Northern District of Alabama, D.C. Docket No. 5:22-cv-00496-LCB

Walter Brad English, Emily J. Chancey, Robert Goodwin Jones, Maynard Nexsen, PC, Huntsville, AL, Mary Ann Hanke, Polsinelli, PC, Birmingham, AL, Benjamin Lee McArthur, Bradley Arant Boult Cummings, LLP, Huntsville, AL, Matthew Schoonover, Schoonover & Moriarty, LLC, Olathe, KS, for Plaintiff-Appellee.

James S. Christie, Jr., Alyse Nicole Windsor, Dentons Sirote, PC, Birmingham, AL, Scott Burnett Smith, Whitney Paige Lott, Kimberly Bessiere Martin, Hunter Wade Pearce, Bradley Arant Boult Cummings, LLP, Huntsville, AL, Sarah S. Osborne, Bradley Arant Boult Cummings, LLP, Montgomery, AL, for Defendant-Appellant.

Before Grant, Abudu, and Ed Carnes, Circuit Judges.

Ed Carnes, Circuit Judge:

The parties in this case are defense contractors who are involved in the Small Business Administration's mentor-protégé program, which helps smaller businesses compete for government contracts. See generally 13 C.F.R. § 125.9. It does so by enticing larger businesses to partner with and mentor smaller ones. The program is designed so that both companies in the relationship will benefit. The benefits for the protégé are the mentor's greater experience, knowledge, and resources, while the benefit for the mentor is access to some government contracts, set aside for small businesses, that they would not otherwise have. See id. § 125.9(a).

Or at least that is the theory. It is not a perfect theory because it assumes that the companies who agree to a mentor-protégé relationship will get along, but companies are run by people and sometimes people don't get along. They didn't in this case. The business relationship between Yorktown the mentor and Threat Tec the protégé soured. The result was more animosity than agreement, which made the mentoring and protégé-ing dicey, difficult, and doubtful. And litigation followed, as night follows day.

Yorktown filed a lawsuit against Threat Tec. Its amended complaint claimed, among other things, breach of contract and breach of fiduciary duty. It sought, along with other relief, a preliminary injunction to bar Threat Tec from terminating a subcontract and from depriving Yorktown of its rights under the parties' joint venture agreement. Following a hearing, the district court granted the injunction, finding that Yorktown had shown a substantial likelihood of success on the merits of its breach of contract and breach of fiduciary duty claims and that it faced irreparable harm.

In granting the preliminary injunction, the court found that in the proceedings: Threat Tec's CEO Jim Crawford had made false statements in his declarations; his testimony at the preliminary injunction hearing was generally not entitled to much weight; and his lack of candor with the court led it to believe that Threat Tec's motives for terminating one of the parties' agreements were "not entirely ethical." The court also found that it was "the epitome of disloyalty" for a protégé company like Threat Tec to "attempt to use its status as the manager of the [parties' joint venture] to cut its mentor out of the very contracting opportunity the mentor helped the protégé to secure." The court ordered Threat Tec to refrain from taking any action that would deprive Yorktown of its rights and benefits under the parties' joint venture agreement.

Threat Tec filed this interlocutory appeal of that preliminary injunction. For reasons we will explain, we conclude that the district court's factfindings were not clearly erroneous, and it acted within its considerable discretion by granting preliminary injunctive relief to Yorktown based on its breach of fiduciary duty claim. Because that conclusion resolves this appeal, we need not and do not address whether the preliminary injunction was also justified on the breach of contract claim. (The relief Yorktown sought was the same for both claims.)

I. Background Facts and Procedural History

As we have indicated, the SBA's mentor-protégé program enables a larger business to pair with a smaller one so that they can form a joint venture to pursue government contracts. See 13 C.F.R. § 125.9(a) (setting out rules governing the program). Yorktown and Threat Tec entered into an "All Small Mentor-Protégé Program Mentor-Protégé Agreement" (the M-P agreement), which is required before launching the joint venture to seek government contracts. See id. § 125.9(d)(1)(i) (providing that the "SBA must approve the mentor-protégé agreement before the two firms may submit an offer as a joint venture on a particular government prime contract or subcontract"). Yorktown and Threat Tec submitted their M-P agreement to the SBA, and it approved that agreement and accepted them into the program.

The program also required Threat Tec and Yorktown to enter into a joint venture agreement that met certain regulatory requirements. See 13 C.F.R. § 125.8. They did so, entering into what we'll call "the JV agreement" and forming a limited liability company that we'll call "the JV."

The JV agreement is a contract governed by Delaware law. In accordance with regulatory requirements, as the protégé Threat Tec is the JV's manager with a 51% interest, and Yorktown is a member of the JV with a 49% interest. See 13 C.F.R. § 125.8(b)(2)(ii), (iii). The JV itself, however, is in regulatory speak "unpopulated," meaning that it has no employees. See id. § 121.103(h)(1)(i). The JV agreement meets regulatory requirements by dividing the work (the "source of labor" in regulatory speak) and the responsibilities for contract performance between the two companies. Id. § 125.8(b)(2)(i)-(xii).

The JV bid on the United States Army's Training and Doctrine Command G-2 Contact (the TRADOC contract). The TRADOC work involves support for Army intelligence, including IT support and training. The total value of the TRADOC contract is about $165 million.

The JV was awarded the TRADOC contract in July 2020. In an addendum that became part of their JV agreement (the Addendum), Threat Tec and Yorktown agreed to a "joint venture workshare," dividing the work on the TRADOC contract. Under the Addendum, Threat Tec was "allocated" 50.6% of the TRADOC work and Yorktown 49.4% of it. That allocation was in keeping with the regulatory requirement that "a protégé must perform at least 40% of the work performed by a joint venture." 13 C.F.R. § 125.8(c)(4).

Because the JV itself functions as the prime contractor on the TRADOC contract and has no employees, it entered subcontracts with Yorktown and with Threat Tec for them to perform the TRADOC work. The subcontract between the JV and Yorktown was for twelve months, beginning on August 9, 2020. But there are four one-year option periods for renewal, which the JV has the "unilateral right" to exercise. The end of the fourth and final option period is August 8, 2025. The subcontract also has a provision that allows the JV (as the prime contractor) to terminate the subcontract with Yorktown "for its convenience." That provision states:

[The JV] shall have the right, in addition to any other rights set forth in this Agreement, to terminate this Agreement and Orders issued hereunder, in whole or in part, for its convenience by delivering to Subcontractor [Yorktown] a Notice of Termination specifying the extent of termination and the effective date.

The JV exercised the first option period, extending the subcontract to August 8, 2022. But before that first option period ended, the parties' business relationship hit the rocks.

On April 19, 2022, Yorktown filed this lawsuit against Threat Tec. Threat Tec filed an unopposed motion to extend its deadline to respond to the complaint until May 27, 2022, which the district court granted. The day before that deadline, on May 26, 2022, Threat Tec's CEO Crawford sent Yorktown a letter on the JV's letterhead, signed by Crawford as manager of the JV. The letter stated that the JV was terminating Yorktown's subcontract based on the termination for convenience provision in the subcontract. The termination would be effective just hours later, at one minute after midnight. And, through Crawford, the JV directed Yorktown to stop all work on the $165 million TRADOC contract by 12:01 a.m. EST.

Understandably upset, Yorktown filed an emergency motion for a temporary restraining order that same day. It asked the district court to enjoin Threat Tec and anyone acting along with it from terminating Yorktown's subcontract for the TRADOC work and from depriving Yorktown of its rights and benefits under the JV agreement, including its workshare for the TRADOC contract.

In an order issued the next day, the court entered the TRO, granting the relief that Yorktown sought. The order stated that Threat Tec's actions, taken the Friday before Memorial Day week-end, left "Yorktown virtually no time to obtain relief." The court also noted that Yorktown had alleged that Threat Tec "was, at that very moment, attempting to lure away Yorktown's employees to come and work for Threat Tec" and that those employees were "not easily replaceable [by Yorktown] due to their very specific skill sets."

Yorktown later amended its complaint. The amended complaint included two claims related to its contention that Threat Tec was attempting to steal its TRADOC workshare. Those claims were for breach of the JV agreement and breach of fiduciary duty. Among other things, Yorktown sought specific enforcement of its rights under the JV agreement, including an injunction to prevent Threat Tec from taking its TRADOC workshare.

After an evidentiary hearing, the district court entered a preliminary injunction. It found that Yorktown had shown a likelihood of success on the merits of its claims for breach of contract and...