Virginia Supreme Court Awards Lost Profits for Breach of Non-Compete Provision in Government Subcontract

by Holland & Knight LLP

For the first time, the Supreme Court of Virginia has provided specific guidance on how to calculate damages for the breach of a non-compete/exclusivity provisions of a contract where the breach resulted in the loss of a business expectancy for a government contractor. (See Preferred Systems Solutions, LLC v. GP Consulting, LLC, 732 S.E.2d 676 (Va. 2012). This case may be relevant to government contractors and subcontractors faced with breach of a similar provision in a subcontract or teaming agreement.

The Court found that PSS was entitled to damages even though there was no evidence that future work with the government customer was "guaranteed," but where PSS had instead proved by a preponderance of the evidence that it would have received future work from the government customer. The Court concluded that in calculating the exact amount of damages it was acceptable to utilize the hours that the breaching party billed to the customer multiplied by PSS's own established profit margin.

In this case, PSS was one of a handful of contractors providing systems solutions for the Defense Logistic Agency's "Business Systems Modernization ("BSM") Program." Accenture was another contractor working on DLA's BSM project. In furtherance of its work with DLA, PSS entered into a subcontract with Defendant GP Consulting to assist in the systems solutions. As part of the parties' subcontract, it included an exclusivity/non-compete clause that stated that during the term of the agreement and for a period of 12 months thereafter GP agreed: (1) not to enter into an agreement with Accenture or the DLA to provide the same or similar services in support of the DLA BSM program; or (2) enter into a contract with any other competing business to provide the same or similar work in support of the DLA BSM program.

After giving the required two-week notice of contract termination to PSS, GP immediately went to work for Accenture providing similar work on DLA's BSM project. PSS promptly filed suit against GP alleging, among other things, breach of the subcontract’s non-compete/exclusivity provision.  In defense, GP argued that because there was no certainty or "guarantee" that PSS would receive any future DLA tasking, any alleged damages were speculative and not enforceable. The Supreme Court disagreed and held that a plaintiff need not prove that it was guaranteed future work, but instead must prove by a preponderance of the evidence (more likely than not) that it would have continued to receive work from DLA. Ultimately, the Court provided guidance that in calculating PSS's damages for lost profits from expected work it was reasonable to use the hours that were actually billed by Accenture/GP and combine that with PSS's established profit margin.

What does this mean for Government contractors and subcontractors? These types of questions often come up with Government contractors in connection with subcontractor disputes, teaming agreements and former employees attempting to solicit work on behalf of competitors. This decision provides guidance and authority to contractors as to the type of damages that can be obtained for breach of a non-compete or exclusivity provision in a government subcontract, teaming agreement or employment agreement, even if the future government work that is not necessarily guaranteed.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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