Infotech and the Law

Exclusive Teaming Deals Not Dead Yet

James Fontana

By James Fontana

One of the major challenges in today's high-tech federal marketplace is forming the right team when it comes to contracts involving multiple competencies.

Government contractors are familiar with teaming arrangements: Many, if not most, agreements contain so-called exclusivity clauses that essentially preclude the teaming partners from joining with others on the same procurement.

Some industry officials, however, fear that the federal government, or at least the Defense Department, may curtail exclusive teaming arrangements.

In a Jan. 5 memorandum from Jacques Gansler, undersecretary of defense for acquisition and technology, Defense Department procuring agencies were instructed to more closely scrutinize exclusive teaming agreements. Gansler said that such arrangements "have the potential of resulting in inadequate competition for our contracts."

He encouraged agencies to address the issue at meetings with potential competitors, and even suggested that the teaming arrangement should be dissolved if the agency objects to it.

Used widely in public procurements, teaming agreements are arrangement between two or more contractors to work together, usually in connection with a particular government procurement. The arrangement reflects the parties' mutual intent to bid on a certain program (with one contractor acting as the prime and the others as subcontractor) with the understanding that they will later negotiate a more detailed subcontract.

Within most teaming arrangements is the exclusivity clause. This clause states that one party, usually the intended subcontractor, cannot team with other parties to provide similar products or services to the same customer on the same procurement. In essence, the exclusivity clause limits the parties from competing against each other on the procurement for which they are supposed to be partners, while allowing competition between the teaming partners on other procurements. Exclusivity affords the prime contractor a comfort level in knowing that its teaming partner will not join another competing team.

Conversely, some subcontractors fret about losing their option to jump on other prime contractor bandwagons. Some subcontractors may have leverage in arguing against exclusivity by possessing special skills or products favored by the government customer.

Some in the industry believe that Gansler issued his memo as a way to silently criticize recent major defense industry consolidations. Others have suggested that he is declaring war on exclusive teaming arrangements.

The Defense Contract Audit Agency, in a recent memorandum, announced that it, too, will examine more closely exclusive teaming arrangements. The agency, which is not an expert in anti-competition analysis, seems to take a broad approach in looking for ways to determine whether a teaming agreement may be anti-competitive, including relying on "company employees" and "disgruntled participants."

Between the Gansler and audit agency memos, some industry veterans surmise that exclusivity in teaming arrangements now is an endangered species.

But let's not overreact. The Gansler memo should not be viewed as anti-teaming or anti-exclusivity. Procuring agencies, and especially the Defense Contract Audit Agency, should not be quick to presume that every exclusivity clause automatically qualifies for the anti-competitive dump.

Rather, the test is whether the exclusive arrangement is anti-competitive from the standpoint of affecting competition for a particular product or service in a particular market.

The question is not whether the arrangement may affect the particular competitive position of the teaming partners. If that were the standard, every exclusive teaming arrangement would be deemed anti-competitive, since the clause limits the purported subcontractor's competitive options, at least for that one procurement.

Not to insult my brethren antitrust experts, the legal standard for anti-competitive behavior is much more complex in various state and federal laws.

But even in an industry rampant with consolidations, a teaming scenario that creates a de facto sole source situation is more the exception than the rule. The vast majority of teaming partners, especially in the information technology industry, enjoy robust competition despite the widespread use of exclusive teaming arrangements.

The exclusivity clause can be a valuable tool in teaming arrangements. It has its potential limits on subcontractor options, but they are, in many cases, considered the glue that holds the competitive team together.

James Fontana is vice president and corporate counsel of Wang Government Services Inc. in McLean, Va. His e-mail address is David Dempsey contributed to this article.

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