United States: When JV Partners Disagree About Whether To Protest

These days, government contractors are pursuing federal work through joint ventures with increasing frequency. Among the reasons for this are that joint ventures allow contractors to combine resources and share risk. Not surprisingly, many joint ventures, upon formation, focus primarily on the details of proposal preparation and (hopefully) eventual contract performance. One important consideration that often is not given much beforehand attention is how, specifically, the JV will decide whether or not to file a bid protest in the event that it does not win a given contract. Neglecting this important consideration could result in a situation where one JV partner wants to pursue a protest, but the other JV partner does not, and the two partners are unable to resolve their disagreement within the short window of time before a protest must be filed. The Government Accountability Office's recent decision in InSpace 21 LLC--Recon., B-410852.4, brings to light this very real conundrum and reminds us that an ounce of prevention is worth a pound of cure.

InSpace 21 Decision

The Underlying Protest

InSpace 21, a limited liability company JV comprised of a majority member and a minority member, submitted a proposal in response to a solicitation that was issued by the Air Force. After evaluating proposals, the Air Force selected another contractor for award. Upon receiving notice of the award to another contractor, InSpace 21's management board met to discuss whether or not it should pursue a bid protest in connection with the Air Force's contract award. The board members, however, reportedly could neither agree on whether to file a protest nor on whether InSpace 21's operating agreement required a majority vote or a unanimous vote to authorize filing a protest.

Thereafter, the president of InSpace 21, who also is a vice president at the majority-member company, filed a bid protest at the GAO, using InSpace 21's letterhead. In response, the minority member sent a letter to the GAO, stating that, under InSpace 21's operating agreement, the decision to protest must be approved by a unanimous vote of the management board and that the majority member did not receive unanimous-vote approval to file the protest. Accordingly, the minority member claimed in the letter to the GAO that the majority member was not authorized to file the protest in the name of InSpace 21.

By published decision dated Dec. 8, 2014, the GAO dismissed the protest because it concluded that the disagreement regarding whether the InSpace 21 operating agreement authorized the majority member to file the protest on behalf of InSpace 21 was a dispute between private parties that the GAO would not resolve.

Request for Reconsideration

Subsequently, InSpace 21 filed with the GAO a request for reconsideration in which it argued that the GAO erred in determining that InSpace 21 was not an interested party for purposes of filing the protest because, among other things, the GAO mischaracterized the position of the individual who signed the protest as being a board member when, in actuality, he is the president of InSpace 21. InSpace 21 also argued that the GAO should reconsider its decision based on a recent resolution of the dispute over the majority member's authority to file the protest. More specifically, InSpace 21 asked that the GAO reconsider its dismissal of the protest in light of a recent judicial resolution of the dispute between the members as to the interpretation of the subject operating agreement.¹

After considering InSpace 21's arguments, the GAO concluded that InSpace 21 had not set forth sufficient legal and factual grounds upon which reversal or modification of the GAO's decision was warranted. In particular, the GAO stated that, to the extent the president of the JV (operating as a limited liability company) is not a board member of the JV, the GAO acknowledges the error but declines to find that this warrants reversal or modification of the GAO's decision.

With respect to the recent judicial resolution of the parties' disagreement, the GAO found that this did not constitute information that the GAO failed to previously consider; instead, this is information that arises from events that took place after the GAO issued its decision. Moreover, the GAO noted that it did not specifically find in its earlier decision that InSpace 21 was not an interested party. The GAO clarified that it found, under the circumstances of this specific case, that it could not conclude InSpace 21 had met its burden to establish its status as an interested party. Accordingly, the GAO denied InSpace 21's request for reconsideration.

Lessons Learned

InSpace 21 brings to light a conundrum that appears to be occurring with increasing frequency — i.e., the problem of when JV partners disagree about whether to file a bid protest. In order to avoid a situation like the one present in InSpace 21, potential JV partners should make a point to discuss early on their respective philosophies concerning, and corporate approaches to, bid protests.

JVs also should discuss early on whether and under what circumstances they might file a bid protest. Similarly, JV partners should discuss beforehand how legal fees and costs associated with a potential protest will be apportioned between the partners.

Last but not least, JVs should take great care when drafting their operating agreements so as to ensure that there is no ambiguity regarding the criteria for gaining formal approval and authority for filing a bid protest in the name of the JV. For instance, operating agreements should make crystal clear whether a majority vote or a unanimous vote is required for formal approval and authority to file a bid protest.

Footnote

1 On December 23, 2014, the majority member filed suit with the Circuit Court for Fairfax County, Virginia, seeking a judicial interpretation of the InSpace 21 operating agreement with regard to authorization to file a bid protest. On January 22, 2015, the Court concluded that only a majority vote was required to authorize a bid protest.

Republished with Permission. This article first appeared in Government Contracts Law360 on April 13, 2015.

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