The parties had an SBA-approved mentor-protege arrangement. But while performing a contract, the mentor-protege relationship soured. The mentor sued the protege. The protege terminated the mentor’s subcontract with the JV. The Eleventh Circuit held that by trying to exclude the mentor, the protege may have breached its fiduciary duty.
Yorktown Systems Group, Inc. v. Threat Tec LLC, 11th Cir. No. 22-13598
- Mentor-Protege Arrangement – A small business, Threat Tec, entered an SBA-approved mentor-protege arrangement with a large business, Yorktown. As part of the arrangement, the two companies formed a joint venture. The protege, Threat Tec, was the manager of the joint venture.
- Government Contract – The joint venture received an IT support contract. Because the joint venture had no employees, it entered subcontracts with both Threat Tec and Yorktown to perform the contract
- Litigation – While performing, the relationship between Threat Tec and Yorktown soured. Yorktown sued Threat Tec. Threat Tec then terminated Yorktown’s subcontract with the joint venture under the termination for convenience clause in their JV agreement.
- Injunction – Yorktown asked the federal district court to enter a preliminary injunction to halt the termination. The district court granted Yorktown’s request, enjoining the termination of the subcontract. Threat Tec appealed to the Eleventh Circuit.
- Likelihood of Success on the Merits – The Eleventh Circuit affirmed the district court. The appellate court agreed that Yorktown would likely prevail on its claim that Treat Tec breached its fiduciary duty as a joint venture partner when it terminated the subcontract. The court reasoned that Treat Tec had essentially turned on its mentor, using the subcontract’s termination clause, to cut Yorktown out of the contract. The court opined that in doing so, Threat Tec (and its manager) were acting in their interest and not in the interests of the joint venture.
- Irreparable Harm – The Eleventh Circuit also held that Yorktown would suffer irreparable harm absent in injunction. Yorktown would lose the profits it expected from the subcontract. Additionally, Threat Tec was attempting to poach Yorktown employees, who were not easily replaceable. Finally, the court held that if Yorktown were terminated, it could impact a future assessment of the company’s past performance and its ability to obtain federal contracts.
–Case summary by Craig LaChance, Editor in Chief
