AMERICAN ARBITRATION ASSOCIATION

 

 

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                                                :

IN RE: :

                                                            :

ARBITRATION BETWEEN :

KEANE FEDERAL SYSTEMS, INC.,

: AAA Case No. 16 Y 117 00275 00

Claimant :

-against-

                                                            :

SIGNAL CORPORATION.,

Respondent :

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MEMORANDUM OPINION, ORDER AND AWARD, AND DISSENT

 

 

INTRODUCTION

 

This arbitration was filed by claimant Keane Federal Systems, Inc. (Keane) to recover $9,573,900 in compensatory damages from respondent Signal Corporation (Signal) for alleged wrongful termination of a subcontract, plus treble damages and attorneys’ fees under Virginia’s civil conspiracy statute, Secs. 18.2-499 through 18.2-501 Va. Code (Conspiracy Statute), for an alleged conspiracy between Signal and some of Keane’s former employees.[1] Signal denied the allegations and filed a counterclaim seeking to recover $2,769,314 in compensatory damages from Keane for its alleged breach of the subcontract.

The subcontract in question contains an arbitration clause which reads in part:

Any dispute arising under or related to this Subcontract with respect to the rights, duties or obligations of the parties, which is not disposed of by mutual agreement, shall be submitted to binding arbitration. The dispute shall be arbitrated pursuant to the Commercial Rules of the American Arbitration Association before three (3) arbitrators (unless the parties agree to 1) to be selected by the Buyer, Seller and the selected arbitrators. Any such arbitration shall be held in Fairfax County, Virginia. The decision of the arbitrator(s) shall be final, conclusive and binding upon the parties hereto.

Subcontract, para. B-41.

An arbitration hearing was held in this case in Fairfax County, Virginia for five days (from May 21 through May 25, 2001) before a panel of three neutral arbitrators (the Panel). Testimony of nine witnesses was taken and 139 exhibits were admitted into evidence. The proceedings were transcribed by a court reporter by agreement of the parties. The parties further agreed that the written award of the Panel should contain findings of fact and conclusions of law. Both parties filed pre-hearing and post-hearing briefs. The hearing was closed on July 31, 2001.

The entire Panel concurs in this Memorandum Opinion through Part I—Breach of Contract. A majority of the Panel (Majority) concurs in Part II—Civil Conspiracy, and the Order and Award. The member of the Panel dissenting from Part II—Civil Conspiracy, files a separate dissent from that part of the Memorandum Opinion and from the Order and Award.

FACTS[2]

 

In December 1991 ANSTEC, Inc. (ANSTEC), a company acquired by Keane on December 10, 1999, was awarded a contract by the Department of Transportation’s (DOT) Federal Highway Administration (FHWA) to provide information technology services (ITS) to support the activities of the FHWA, which uses outmoded mainframe computers and software at its offices in the DOT building in Washington, DC. The contract was what is known in the government contracts field as an “8 (a) contract.” That is, it was awarded under the Small Business Administration’s (SBA) 8 (a) program[3], which restricts the companies that can compete for such contracts to small, and small, disadvantaged minority-owned businesses. ANSTEC was owned by a gentleman from India, Mr. Shrivastava, and it was eligible in 1991 to compete for the FHWA’s ITS contract.

The FHWA contract awarded to ANSTEC was a “Cost Plus Award Fee” type contract, meaning that the contractor recovers its costs but is awarded a fee for profits based upon an award fee evaluation plan designed to encourage and reward the contractor for excellence of performance, for cost consciousness, for timeliness of performance, and for effective communication with the FHWA. The FHWA’s payment structure under this plan consists of a base fee and an “award fee pool.” The contractor’s performance is evaluated at four month intervals by a Performance Evaluation Board at FHWA. Utilizing certain criteria this Board awards the contractor a number of points between 75 and 100. The percent of the available award fee pool received by the contractor depends upon the number of points awarded. For example, an award of 96 points (grade of “Superior”) results in the contractor receiving 99 percent of the available award fee pool, while an award of 92 (grade of “Excellent”) results in the receipt of 92 percent of the available fee.

ANSTEC’s contract with the FHWA was for a five year period—a base year and four option years. An 8 (a) contractor will “graduate” from the 8 (a) program if the owner’s net worth exceeds a certain amount, or a fixed period of time has passed and an individual’s eligibility may only be used once. However, an 8 (a) contractor may complete the term of its contract even if it graduates during that term. ANSTEC graduated from the 8 (a) program in June 1996 but continued working on the FHWA contract until the end of its term on February 2, 1997.

A business that has graduated from the 8 (a) program may team with an eligible 8 (a) contractor to enter a joint venture to perform an 8 (a) contract if the SBA approves. The 8 (a) participant must be the managing venturer and perform a significant portion of the contract. In 1993 ANSTEC, realizing that it could not “recompete” for the FHWA contract at the end of its term, sent out a request for information to 17 eligible 8 (a) contractors in an effort to enter such a joint venture. By the winter of 1995-96 ANSTEC had narrowed its search for an 8 (a) partner to three companies, one of which was Signal.

In 1996 Signal was an eligible 8 (a) contractor doing $8-$10 million worth of business, mostly as a subcontractor . Signal had an accounting system that was able to deal with the requirements of government contracts, but it lacked the knowledge in the technology areas of the FHWA’s ITS contract that ANSTEC possessed. In early 1996 ANSTEC and Signal entered into negotiations to form a joint venture to compete for the FHWA contract. These negotiations culminated in a Teaming Agreement being signed by the two companies on April 23, 1996. Pursuant to this Teaming Agreement the parties agreed to submit a joint proposal to the FHWA for its 8 (a) ITS contract and, if Signal was awarded the prime contract from the FHWA, Signal would enter into a subcontract with ANSTEC “for a minimum of 49 percent (49%) of the burdened labor dollars of the Prime Contract.” Teaming Ag., Attach. A, para. II A. Signal agreed to use its best efforts to subcontract to ANSTEC those portions of the Prime Contract that ANSTEC believed it was most capable of performing—such as “data communications, administrative systems, systems integration or incidental services.” Id at para. B. Signal agreed that “ANSTEC shall receive 49% of the award fee.” Id. at para. F.

On September 27, 1996, the FHWA awarded its 8 (a) ITS contract (the Prime Contract) to Signal. As before, the term of the contract was for five years—a base year and four option years. Under the Statement of Work (SOW) in the Prime Contract Signal was to provide information technology services needed by the FHWA to support the activities of its various teams at the DOT’s headquarters in Washington, DC, the required services consisting of “data communications support, computer applications development, maintenance, and systems integration.” Prime Contract, Section C, p. 3 of 37. The Prime Contract was a Cost Plus Award Fee type contract requiring Signal to submit invoices to the FHWA by the 15^th of each month supported by a statement of costs incurred.

The Prime Contract contains a paragraph entitled, “KEY PERSONNEL,” which indicates that Signal had designated Nelson Ebersole (Ebersole), a Signal employee, as the Project Manager (PM) for the contract, and had identified by name eight Signal employees to serve in certain “key positions,” the replacement of whom was subject to prior written approval of the FHWA Contracting Officer (CO). Signal agreed to assign 28 named individuals working for Signal and 22 named individuals working for ANSTEC to staff the contract work at DOT Headquarters. Among the 22 ANSTEC employees listed in the Prime Contract are Arthur Hazel III (Hazel), Jeffrey Desler (Desler), Colton Hall III (Hall), Jeffery Graves (Graves) and Robert Mungin (Mungin), all of whom testified at the hearing in this case. The Prime Contract requires Signal, should it find it necessary to replace any of the individuals named in the KEY PERSONNEL paragraph, to notify the CO in advance of such replacement.

The Prime Contract incorporates by reference certain clauses from the Federal Acquisition Regulations (FARs),[4] including FAR 52.249-6 (Termination), which states in part:

(a) The Government may terminate performance of work under this contract in whole, or from time to time, in part, if—

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(2)  The Contractor [Signal] defaults in performing this contract and fails to cure the default within 10 days (unless extended by the Contracting Officer) after receiving a notice specifying the default. “Default” includes failure to make progress in the work so as to endanger performance.

February 2, 1997 was ANSTEC’s last day as prime contractor on the FHWA’s contract. The next day, February 3, 1997, Signal and ANSTEC signed a subcontract (the Subcontract) pursuant to their Teaming Agreement. The Subcontract provides that ANSTEC, as an independent contractor, shall provide the necessary personnel and do all things necessary to the furnishing and delivery to Signal of supplies and/or services in accordance with the Statement of Work (SOW) and individual purchase orders. Subcontract, para. A-1. The SOW in the Subcontract incorporates by reference the SOW in the Prime Contract and states, “ANSTEC, Inc. shall perform those tasks in the Prime Contract Statement of Work…in accordance with individual Task/Subtask Order SOWs that are issued to ANSTEC on a Purchase Order basis.” Id., Exh. A.

Like the Prime Contract, the Subcontract is a Cost Plus Award Fee type subcontract. The Subcontract provides that ANSTEC “shall receive 49% of award fee,” Id., para. A-9, that is, 49% of the award fee received by Signal from the FHWA under the Prime Contract. This arrangement is known as “pay after pay,” with ANSTEC receiving its money only after Signal has been paid by the FHWA. The Subcontract provides that ANSTEC is to submit its invoices to Signal on a monthly basis, and that ANSTEC’s invoices “shall be due by the 10^th of each month.” Id., para. B-6 (D).

The period of performance of the Subcontract is the same as the Prime Contract—a base year (effective date February 3, 1997), and four option years (each option year having an effective date of February 3 from 1998 through 2001). The Subcontract provides:

It is mutually agreed that in the event of the exercise of any options of the prime contract, Seller [ANSTEC] options shall be exercised accordingly, provided however the Seller [ANSTEC] has continually provided timely, quality, and within cost performance.” Subcontract, para. A-2.

As in the Prime Contract, the Subcontract contains a “KEY PERSONNEL” paragraph which states that ANSTEC shall not, without prior written notice to Signal, change the individuals named in this paragraph except for reasons of resignation, death, or inability to work by reasons of health. This paragraph lists 19 ANSTEC employees by name, including Hazel, Desler, Hall and Mungin.

The Subcontract contains a “NO­-HIRE PROVISION” which states:

During the period of performance of this subcontract, and for a period of one (1) year thereafter, neither party shall solicit or engage the services of any employee of the other party engaged in performance of work related to this subcontract, without expressed written notification to and acceptance by the other party.

Id., para. B-32.

There is a “TERMINATION” clause in The Subcontract which reads in part:

In the event of a breach of a material term or condition of the subcontract, the Buyer [Signal] may terminate this Subcontract in whole or in part for default. If Seller [ANSTEC] fails to cure the default within 10 days after receiving a notice specifying the default, such termination may require the Buyer to reprocure the goods and services and Subcontractor will be liable for Buyer’s costs for such reprocurement, to the extent not reimbursed by the Government.

Id., para. B-26.

The Subcontract contains an Exhibit entitled, “FLOWDOWN CLAUSES” which incorporates by reference the FARs listed in the Prime Contract. One of the FARs incorporated is FAR 52.249-6 regarding Termination. The Subcontract states, “In all instances in the …cited [FAR] clauses the “Contractor” refers to the Seller [ANSTEC], and the term “Government” refers to the Buyer [Signal]….” Id., Exhibit B, para. I.

During the base year of the Prime Contract and the Subcontract Signal issued a blanket Purchase Order (P.O.) to ANSTEC for the Period of Performance 02/03/97-09/30/97. This P.O. states, “Provide Subcontract services on FHWA ITSS contract. Labor/Key Personnel to be provided per para. B28 Subcontract.” P.O. # 01966903. On February 3, 1998 Signal exercised its first option under the Subcontract and ANSTEC began its first option period. One year later, on February 3, 1999, Signal exercised its second option and ANSTEC began its second option period.

In May 1999 Signal graduated from the 8 (a) program but continued as prime contractor on its Prime Contract with the FHWA, which it was permitted to do until the term of the contract expired on February 2, 2002, as long as the FHWA exercised the appropriate options.

In the late summer of 1999 Signal agreed orally to permit ANSTEC to submit its monthly invoices to Signal on the 11^th of each month instead of the 10^th, as required by the Subcontract. The Subcontract was not amended in writing but both parties began to use the 11^th of each month as the date ANSTEC’s invoices were to be received by Signal.

In early November, 1999 Keane’s proposed acquisition of ANSTEC was formally announced, the actual acquisition occurring on December 10, 1999. ANSTEC assigned the Subcontract to Keane after the acquisition. Keane, headquartered in McLean, VA, is a wholly-owned subsidiary of Keane, Inc.(Inc.), a national and international company headquartered in Boston, MA. The parent, Inc., has 10,000 employees and does 1.2 billion dollars a year in various businesses. Its subsidiary, Keane, specializes in government contracts work.

Shortly after Keane acquired ANSTEC, Signal took the position that it was not obligated to exercise its option for option year 3 (February 3, 2000—February 2, 2001) because it had no contractual relationship with Keane. Keane pointed out to Signal that its acquisition of ANSTEC involved only a stock transfer, and that there was nothing in the Subcontract prohibiting such a transfer. Keane took the position that Signal was obligated under the Subcontract to exercise its option for the third year and Signal did not stand on its position.

During the post-acquisition period Keane experienced turnover of the employees in its department that was responsible for submitting monthly invoices to Signal by the 11^th of each month. This turnover resulted in several Keane invoices being received by Signal after the 11^th of the month during 2000. The Keane invoice that was due to be received by Signal on January 11, 2000 for the billing period November 28, 1999 through December 31, 1999 was received by Signal on January 12, 2000, one day late. This was the first time that Signal had received a late invoice from either ANSTEC or Keane. On February 3, 2000 Signal exercised its option and Keane began the third option year on the Subcontract.

In option year three Keane continued to be late submitting its invoices to Signal. The Keane invoice that was due to be received by Signal on February 11, 2000 for the billing period January 1, 2000 through February 5, 2000 was received by Signal on February 24, 2000, 13 days late. The invoice due on March 11, 2000 for the billing period February 6, 2000 through March 5, 2000 was received by Signal on April 12, 2000, one month and one day late. The invoice due on April 11, 2000 for the billing period March 6, 2000 through April 1, 2000 was received on April 17, 2000, 6 days late.

Signal, having received late invoices from Keane for four consequtive months, sent a letter to Keane on May 3, 2000. Referring to three late invoices for the billing periods for January, February and March 2000, the letter said:

Because of these late submissions, SIGNAL in turn has not been able to submit its invoices to FHWA in a timely manner. This deficiency was noted in the latest FHWA Award Fee Report and resulted in a lower award fee score. Fortunately, the lower score did not result in a lower overall award fee for the period. However, if this problem is not immediately corrected we believe it will have a negative impact in the next award fee cycle.

Please take whatever measures are necessary to correct this problem and ensure SIGNAL receives your invoices in a timely manner, i.e., not later than the 11^th of each month.

Exhibit (EX.) K-2.

The FHWA Award Fee Report referred to by Signal in its May 3, 2000 letter to Keane is the FHWA’s Award Fee Determination Report for Evaluation Period 9 covering the 4 month reporting period from October 3, 1999 through February 2, 2000. During that reporting period Keane submitted only one late invoice to Signal, that being the invoice due on January 11, 2000, which was sent one day late. In this Award Fee Report Signal received a total of 96 points (a grade of Superior) from the FHWA’s Performance Evaluation Board, entitling it to 99% of the available award fee ($242,064). Signal received the maximum points available (5) in the category, “Subcontractor management.” The FHWA’s comment in that category was, “The prime contractor has been effectively managing the subcontractor.” EX. K-15, p. 192. It was penalized one point in the category, “Timeliness and quality of financial reports, processing of contract modifications, work orders and compliance with contract clauses.” The FHWA’s comment for that category reads, “The financial reports that accompany the vouchers have continued to be useful in determining if a proper voucher has been submitted. However, since implementation of their new billing system, monthly vouchers have been late.” Id., p. 193. Signal had not implemented a new billing system and, although there was a procedure for Signal to respond in writing to the FHWA’s comments and proposed award fee before the award became final, Signal never notified the FHWA in its response that it had not implemented a new billing system. Had Signal not been penalized one point in this category it would have received a total of 97 points (a grade of Superior), which would have entitled it to the same percent of available award fee that it actually received—99%--and the same amount of money it received--$242,064.

The original of Signal’s May 3, 2000 letter was misplaced during an office move at Keane and no reply to it was sent by Keane at that time. On May 11, 2000 Keane again failed to submit a timely invoice to Signal. Signal received Keane’s invoice for the billing period April 2, 2000 through May 6, 2000 on May 15, 2000, 4 days late. Three days later, on May 18, 2000, Signal sent another letter to Keane (the Cure Letter). It reads in part:

In accordance with FAR Clause 52.249-6, Termination (Cost-Reimbursement), Keane Federal Systems, Inc. (Keane) is hereby notified that SIGNAL Corporation (SIGNAL) considers your failure to submit invoices in a timely fashion a condition that is endangering performance of the contract. Therefore, unless this condition is cured within ten (10) days after receipt of this notice, SIGNAL may terminate the …[Subcontract] for default in accordance with Section B-26, Termination, of the Agreement.

Keane was previously notified of this deficiency via the …[May 3, 2000] correspondence; however, SIGNAL has yet to receive Keane’s invoice which was due on or before 11 May 2000. To reiterate, because of the late submission of Keane’s invoices, SIGNAL has not been able to submit its invoices to FHWA in a timely manner. This deficiency was noted in the latest FHWA Award Fee Report and resulted in a lower award fee score. If this problem is not immediately corrected, we believe it will have a negative impact in the next award fee cycle. SIGNAL will flow down any such impact of this reduction to Keane accordingly.

Any assistance given to Keane will be solely for the purpose of mitigating damages, and it is not the intention of SIGNAL to condone any delinquency or to waive any rights SIGNAL has under law, equity or under the …Subcontract, to include Termination for Default.

Please take whatever measures are necessary to correct this problem within ten 10) days from receipt of this notice…..

EX. K-3.

Upon receiving Signal’s Cure Letter on May 19, 2000, Keane’s program director in charge of overseeing the Subcontract, Wesley Henderson (Henderson), attempted unsuccessfully to locate the original of Signal’s May 3, 2000 letter referenced in the Cure Letter. He contacted Signal and had them fax a copy of that letter to him. On May 19, 2000 Keane sent Signal a letter responding to both its May 3 letter and its May 18 Cure Letter. After apologizing for not responding to Signal’s May 3 letter because it was misplaced, Keane said:

In accordance with the Federal Acquisition Regulation (FAR), Part 49, subpart 49.607 Delinquency Notices, KFSI [Keane] regrettably acknowledges our deficiency to submit invoices in a timely manner to SIGNAL Corporation. For the reasons mentioned above, KFSI has added an additional full-time person in the Accounts Receivable department. This individual will have the primary responsibility of processing Anstec business-line invoices.

KFSI remains committed to providing professional subcontracting support to Signal Corporation. I can assure you the future invoices will be submitted in a timely manner (i.e., received by Signal no latter than the 11^th of each month.

EX. K-4.

In June 2000 Signal received the FHWA’s Award Fee Determination Report for Evaluation Period 10, the 4 month period from February 3, 2000 through June 2, 2000. During that period Keane had submitted four late invoices to Signal. As before, Signal received a total of 96 points (a grade of Superior), entitling it to 99% of the available award fee, or $242,064. Again, Signal received the maximum number of points (5) for management of its subcontractor, but was penalized 1 point in the category, “Effectiveness of cost and business management.” The FHWA’s comment to this category reads:

SIGNAL has done a good job in providing FHWA with accurate vouchers. Any corrections in calculations on prior invoices are properly accounted for in the next invoice. However, since implementation of their new billing system, monthly vouchers have been late.

FHWA is satisfied with this period’s effectiveness of business management by SIGNAL.

Finally, SIGNAL has been effective in cost control. Invoice costs have been consistent and within designated contract limits.

EX. K-16, p. 203.

As before, had Signal not been penalized this one point it would have received a total of 97 points (a grade of Superior) and been entitled to the same percentage of available award fee (99%) and the same amount of money ($242,064) that it actually received. Also as before, Signal did not advise the FHWA that it had not implemented a new billing system. However, in its Performance Self-Appraisal to the FHWA for this period of performance (a report required of Signal under the Prime Contract), under the heading, “Correction of Problems from Previous Period” Signal stated, “The late voucher problem has been due in large part to late voucher submissions by our principal subcontractor. Signal has admonished Keane regarding this problem, and we now expect vouchers to be delivered on time.” EX. K-59, p. 149. Under the paragraph entitled, “Subcontractor Management,” Signal stated to the FHWA, “SIGNAL has continued effective management of subcontractors and consultants on the contract. We believe our counseling of Keane for tardy vouchers has led to a satisfactory resolution of that problem.” Id., p. 174.

On June 11, July 11 and August 11, 2000 Keane submitted its invoices to Signal on time.

During this period Roger Mody (Mody) was chief executive officer of Signal. The number two man in the company was Robert Smith (Smith), chief administrative officer and senior vice president in charge of all of Signal’s contracts. Reporting to Smith was Barry Kane (Kane), vice president with line responsibility for the FHWA Prime Contract. Ray LaFleur (LaFleur), vice president in charge of the FHWA program, reported to Kane. Smith, Kane and LaFleur all had their offices next to each other at Signal’s headquarters in Fairfax, VA. Ebersole was Signal’s vice president and Project Manager (PM) for the FHWA contract on site at FHWA’s offices in the DOT building in Washington, DC. Of these Signal officers, only Smith testified at the hearing in this case.

During the period from May through September, 2000 Signal employees, including Smith, Kane, LaFleur and Ebersole, had numerous conversations among themselves about the termination of the Subcontract. In August and early September these four Signal officers discussed the impact of Keane’s late invoices on Signal’s award fees under the Prime Contract, the termination of the Subcontract, Keane’s ability to cure its late invoice problem pursuant to the statements made in Keane’s May 19, 2000 letter to Signal, and the qualifications of the individuals at Keane working on the Subcontract. During this period Smith, Kane, LaFleur and Ebersole also had numerous conversations with Signal’s outside legal counsel about the legal implications of terminating the Subcontract and recruiting and/or hiring Keane employees who were working on the FHWA contract.

During this period Anthony Martoccia (Martoccia), a Government employee, was the Contracting Officer (CO) for the FHWA on the Prime Contract. Lawrence Neff (Neff), another Government employee, was the Contracting Officer’s Technical Representative (COTR) for FHWA on the Prime Contract and Chairman of the Performance Evaluation Board that awarded Signal points for its award fees. No Government employees testified at the hearing in this case. In early September 2000 LaFleur had conversations with Neff at FHWA concerning the possibility that the Subcontract would be terminated.

On September 11, 2000 Keane failed to submit to Signal its invoice for the billing period August 6, 2000 through September 2, 2000. That invoice was received by Signal on September 12, 2000, one day late. This was the sixth late invoice submitted by Keane during the calendar year 2000. At 10:21 a.m. on September 12 Brigitte Evans (Evans), Ebersole’s administrative assistant who worked on site at the DOT building, sent an e-mail to LaFleur at Signal’s Fairfax office saying, “The Keane invoice has not been delivered to us as of today’s date 9/12/00.” EX. K-70, p. 803. At 2:20 p.m. on that date LaFleur forwarded Evans’s e-mail to Kane with the comment, “FYI.” Id. One minute later, at 2:21 p.m. on that date, Kane forwarded Evans’s e-mail to Smith with the comment, “Do we want to exercise our right to terminate them?” Id.

At 11:55 a.m. the following day, September 13, 2000, LaFleur sent an e-mail to Kane with a copy to Smith. It said:

Larry [Neff, COTR at FHWA] called and gave us the go-ahead on Keane, after he spoke to Tony Martoccia [CO at FHWA]. Martoccia requested the following:

An advance letter stating our intention to terminate, assurances that there will be no disruptions, and the possibility that this may end up being cheaper for FHWA.

The invoice was finally received last evening Sept. 12. The invoice is due on the 10^th of each month. This month, the 10^th was a Sunday, so it would have been due on the 11^th. So, in essence, if we terminate, it would be for being 1 day late.

Id., p. 776.

At 6:01 p.m. on September 13, 2000 Smith sent an e-mail to Mody forwarding LaFleur’s e-mail with the comment, “See below. I will prepare a letter to Tony Martoccia and a letter to Keane effecting the termination on 10/1.” Id. On September 15, 2000 Smith wrote a letter to Martoccia and had it hand delivered to him at FHWA on that date. It reads in part:

This is to advise you of SIGNAL Corporation’s (SIGNAL) intention to terminate our subcontract agreement with Keane Federal Systems, Inc. (formerly ANSTEC) for default effective the close of business on September 30, 2000. This termination is a result of Keane’s failure to comply with material subcontract requirements. This failure has negatively affected SIGNAL’S ability to comply with prime contract requirements and to serve FHWA to our standards.

In good faith, SIGNAL issued Keane a Cure Notice on May 18, 2000. While Keane responded with an acceptable cure plan, they have failed to comply with the tenets of the cure plan. Therefore, SIGNAL is terminating the subcontract in the best interests of SIGNAL and the program.

As a result of this termination the Government will not experience any disruptions or degradation in service and the total cost to the Government for the program may decrease.

Id., p. 780.

On that same day, September 15, 2000, Smith sent a letter (Termination Letter) to Keane by fax and Federal Express. It reads:

As you are aware, SIGNAL Corporation (SIGNAL) issued a Cure Notice to Keane Federal Systems, Inc. (Keane) dated May 18, 2000 as a result of Keane’s failure to submit invoices by the 11^th day of the month as required by the subcontract. That Cure Notice explained that failure to submit invoices on a timely basis was a material deficiency which caused SIGNAL significant harm. Keane responded to the Cure Notice through a May 19, 2000 letter which assured SIGNAL that future invoices would be submitted in a timely manner (i.e. received by SIGNAL no later than the 11^th of each month). In good faith, SIGNAL relied on Keane’s response to the Cure Notice and did not initiate termination action.

SIGNAL did not receive Keane’s invoice for August services by September 11, 2000. Further, Keane did not advise us that the invoice would be late. As you are aware, SIGNAL has already suffered damage for Keane’s delinquency through a material degradation of our award fee.

As a result of Keane’s failure to comply with the billing requirements of the subcontract and to ensure that SIGNAL does not suffer further damage or harm, SIGNAL hereby terminates the referenced subcontract in its entirety, for default in accordance with FAR clause 52.249-6, Termination (Cost-Reimbursement). The attached subcontract modification implements this termination.

Keane is directed to remove all employees and to cease the incurrence of costs under this subcontract effective at midnight on Saturday September 30, 2000. Additionally, as noted in the Cure Notice,, SIGNAL will flow down any reduction of the award fee for this period which is directly attributable to Keane’s failure to submit timely invoices.

EX. K-5.

During this period the Managing Director at Keane responsible for profit and loss, all expenses, business development and delivery of performance on contracts was Sumeet Shrivastava (Shrivastava), the son of the owner of ANSTEC. Henderson reported to Shrivastava. Richard Pelkey (Pelkey), who has a PhD in Clinical Psychology, was Keane’s Professional Development Manager (PDM). Shrivastava, Henderson and Pelkey’s offices are at Keane’s headquarters in McLean, VA. At DOT headquarters in Washington, DC Keane had 25 employees (the Keane 25) working on the Subcontract. They were under the supervision of Hazel, Keane’s Project Manager for the Subcontract. Hazel reported to Henderson. Four of the Keane 25 were “Team Leaders,” each of whom reported to Hazel. Mungin was a Team Leader, as was Garcia Jackson (Jackson) and Michele Rigley (Rigley). Shrivastava, Henderson and Pelkey testified at the hearing in this case, as did Hazel, Mungin, Desler, Hall and Graves, all members of the Keane 25.

Signal had over 100 employees working at DOT headquarters on the Prime Contract at this time. These Signal employees shared cubicle spaces with the Keane 25. In his position as PM on the Subcontract, Hazel reported to Ebersole, Signal’s PM on the Prime Contract. Hazel’s office was located outside Ebersole’s corner office and Hazel saw Ebersole daily, although he did not always speak with him daily. Hazel also interfaced with Neff, FHWA’s COTR on the Prime Contract. It was Hazel’s responsibility, among other things, to see that each of the Keane 25 turned in their time sheets at the end of each week. In addition, Hazel would receive Keane’s monthly invoices from Keane’s McLean headquarters by fax and turn them over to Evans, Ebersole’s administrative assistant.

Henderson first saw Signal’s Termination Letter on Monday, September 18, 2000. He and Shrivastava called Hazel and told him to set up an “All Hands” meeting of the Keane 25 for that day. Shrivastava and Henderson, accompanied by Pelkey and Aimee Mastri (Mastri), Keane’s staffing manager, went to DOT headquarters and met with the Keane 25. They explained that Signal had terminated the Subcontract for default because Keane was one day late with its September invoice. They admitted that Keane had also been late with previous invoices during 2000. They said that Shrivastava was trying to talk to Mody to get Signal to cancel the termination. They told the Keane 25 that Signal probably felt threatened and wanted Keane off the Subcontract so that Keane wouldn’t be an incumbent subcontractor during the recompete process in 2002. They said that the Keane 25 were pawns in this matter and that Keane wanted to buffer them.

They explained Keane’s “Bench Process” to the Keane 25—a procedure whereby the Keane 25 would not lose their jobs at the time of termination of the Subcontract, but would be placed on Keane’s “Bench” until they could be assigned to another billable contract. While on the Bench they would go to interviews, do administrative work and other tasks at Keane’s McLean offices, all at the same pay that they were presently earning.

They explained to the Keane 25 that their performance on the Subcontract had been exemplary. They discussed the “No Hire” provision in the Subcontract. The Keane 25 were told that Signal could not employ them for one year, and that because their presence on the Subcontract was instrumental to Signal’s performance of the Prime Contract, Signal could not perform the Prime Contract without them. Therefore, they were told, they should stick together as a group and give the FHWA the impression that they would all be leaving DOT on Friday, September 29, 2000. This, they were told, would hopefully cause the FHWA to put pressure on Signal to negotiate with Keane to resolve the dispute and cancel the termination.

This was the first news of the termination of the Subcontract that any of the Keane 25 had received. Their reaction was one of surprise and shock. Some of them had been working on the FHWA’s ITS contract at DOT headquarters in Washington, DC for many years for one employer or another. Hazel, for example, had been working on this contract for 13 years at this location. The Keane 25 asked the Keane corporate employees a considerable number of questions at this first All Hands meeting on September 18.

The next day, Tuesday, September 19, 2000 Keane placed all members of the Keane 25 on its Bench List and set about trying to get interviews for them concerning possible other billable work. Pelkey returned to DOT headquarters on September 19 and met with each of the Keane 25 individually, including Hazel. Pelkey testified that Hazel mentioned to him during his interview that, “someone from the government had assured him that all of his people would be taken care of.” Tr. 24, p. 237. Hazel did not mention the name of the Government employee who had made that statement, and he did not say that anyone from Signal had made that kind of comment. Pelkey stated that during those interviews a good number of the Keane 25 “expressed the thought that they were pretty confident that Signal couldn’t get along without them and that they would get picked up.” Id., at 286. Pelkey testified, “It wasn’t that they were talking to anyone from Signal as much as that seemed to be the word that was filtering down through the [Keane] management team [Hazel and the four Keane Team Leaders].” Id. Pelkey said, “…[T]hey [the Keane 25] would use phrases like, ‘They [the Keane management team] keep telling us that we’re going to have jobs, that we shouldn’t worry.’ They used phrases like, ‘We’ve got to stick together.’” Id. at 287. None of the Keane 25 indicated to Pelkey at these September 19, 2000 interviews that they felt they had to get a letter of resignation on file with Keane that would be effective September 30, 2000, the date the termination of the Subcontract was to become effective.

The next day, Wednesday, September 20, 2000, Hazel called a meeting of the Keane 25 at DOT headquarters during their lunch hour. No Keane corporate officers or employees were present at this meeting of the Keane 25. Hazel ran the meeting. Hazel wanted to stay on the FHWA contract and was looking to see who else wanted to stay on it and what the group’s concerns were. Some were concerned that if they went to work for Signal they still had outstanding loans to Keane for education or 401 (k) loans. There was no discussion at this meeting about the need to give Keane a letter of resignation or of any signing bonus that Signal might pay if they went to work for Signal. At this meeting the Keane 25 was looking as a group at the best way to stay employed on the contract. The team approach to get the FHWA to put pressure on Signal to cancel the termination of the Subcontract “went out the window,” according to Desler. Tr. 23, p. 93.

By Friday, September 22, 2000 Signal had decided to hold an open house on October 1, 2000 (the Open House) to fill positions it had open and “to extend as many immediate job offers as possible (more than 20 positions).” EX. K-70, p. 806. On that date Signal posted an announcement of the Open House on its website. It said in part,[5] “SIGNAL will be hosting an Open House on Sunday, October 1, from 10 AM to 2 PM for the many IT positions we have available in the DC metropolitan area. Hiring managers will be available and immediate offers will be made.” EX. S-9, p. 883.

On September 22, 2000 Hazel saw a Signal notice posted on the bulletin board across from Ebersole’s corner office at DOT headquarters. This bulletin board is near the copiers, fax machines and supplies which everyone, including the Keane 25 uses. The notice referred to the Open House to be held by Signal on October 1, and contained a listing of job positions that Signal would fill at that Open House.[6] These job positions included each job position held at the time by the Keane 25. The Team Leaders also saw the Signal notice and were concerned about seeing their jobs posted. They discussed this with Hazel.

On Sunday, September 24, 2000 Smith sent an e-mail to Kane, LaFleur and Ebersole concerning the Open House. It said:

Pursuant to our subcontract with Anstec [Keane], you are reminded that we are not to solicit any Anstec employees who are employed by Anstec under the FHWA program while they are employees of Anstec. Further, should candidates apply who were employed by Anstec on this program, you are not to extend offers to them unless they have voluntarily resigned from or have been released from Anstec’s employment prior to the offer being made and can produce evidence to that effect upon request.

EX. S-9, p. 876. On September 25, 2000 Ebersole sent an e-mail to Smith with a copy to Kane which states, “Bob, want to assure we are complying—we will not ‘solicit or engage the services of’ any subcontractor [Keane] employees, will not consider any for hire prior to October 1, and will not consider for hire any who are still employed on October 1.” Id.

At 10:00 a.m. on Monday, September 25, 2000 Smith and Kane of Signal met with Government employees Richard Rogers (Rogers), Ron Endicott (Endicott), and Paula Ewing (Ewing) of DOT contracting pursuant to a telephone call from Rogers to Smith on September 22. Endicott asked Smith if Signal intended to place on the Prime Contract as Signal employees those Keane employees then working on the Subcontract. Smith stated that Signal would not discuss employment with Keane employees prior to October 1, 2000 after the Subcontract had terminated, and then only if the Keane employees had voluntarily resigned or been terminated by Keane. Smith advised the Government employees that Signal was having an Open House on October 1. In response to Endicott’s inquiry whether Signal intended to accommodate any former Keane employee with 401 (k) participation, medical and dental coverage, etc., Smith advised the Government employees that it was Signal’s intention to put the Keane employees in positions as good as, or better, than they currently enjoyed with Keane, and that Signal planned to provide each Keane employee with a $1,000 signing bonus and reimburse them for any educational loans due Keane. Endicott expressed to Smith that he was satisfied with Signal’s answers.

Endicott suggested that Kane speak with Neff about which positions being filled by the Keane 25 were critical to fill, and was told by Smith that Kane and LaFleur would work with Neff on this. On September 25, 2000 Kane sent an e-mail to LaFleur, with a copy to Ebersole, in which he indicated that LaFleur and Ebersole were to meet with Neff to determine which of the Keane 25 were critical to the work on the Prime Contract. Kane instructed LaFleur and Ebersole that once the critical persons had been identified, “if they attend the open house, we need to ensure that they leave as SIGNAL employees.” EX. K-70, p. 807.

On September 25, 2000 Shrivastava and Henderson were at DOT headquarters talking with Hazel in the hall when Mungin approached them. He was agitated and upset. He told Shrivastava and Henderson that the Keane 25 were not hearing anything about the status of the termination, and that they should be told by Keane what was going on. As a result of Mungin’s remarks Shrivastava and Henderson called a second “All Hands meeting” of the Keane 25 at DOT headquarters to be held on Tuesday, September 26, 2000.

At the second All Hands meeting on September 26 Shrivastava and Henderson advised the Keane 25 that Shrivastava had talked with a Signal representative; that Signal was not willing to negotiate the termination issue; that Keane was going to court to seek an injunction to maintain the status quo on the Subcontract until an arbitration panel could be convened; that Keane hoped to have a resolution of the matter by Friday, September 29, 2000, the date a hearing on the injunction was scheduled; and that each Keane employee was to begin transitioning work to Signal employees in the event the court did not grant the injunctive relief. They were again informed about the no-hire provision in the Subcontract and of Keane’s desire to have the group stick together in order to have the FHWA put pressure on Signal to rescind its termination decision.

The Keane 25 were very nervous at this second All Hands meeting on September 26, so Shrivastava and Henderson re-emphasized the bench process and Keane’s plan to place the Keane 25 somewhere within the Keane organization. When Henderson asked Bruce Zitzer, a member of Hazel’s team, about the FHWA’s reaction to the upcoming removal of the Keane 25 from the FHWA contract, Zitzer told Henderson that Hazel had instructed him not to say anything about that at this meeting. Mungin told Shrivastava and Henderson on that day that he would not go to any interview for work on another billable contract unless Keane gave him a guarantee that everyone on his team would be given a billable position. Mungin was told that Keane could not give such a guarantee.

While at DOT headquarters on September 26, Shrivastava and Henderson saw the notice that Signal had put on the bulletin board about the Open House on October 1 and the listing of the positions then filled by the Keane 25. Desler told Henderson on that date that he had been told that if he resigned from Keane and went to the Open House he would receive an offer of employment, a signing bonus and a salary increase. Graves told Henderson he felt sure that he would be given employment by Signal. When Henderson asked him why he was so sure, Graves’s response was that Keane’s Team Leaders had assured him of this.

Following the second All Hands meeting Hazel began to meet with the Keane 25 teams and their Team Leaders to discuss issues related to the termination of the Subcontract and issues related to going to work on the Prime Contract as Signal employees. Signal informed Hazel that no communications between Signal and the Keane 25 could take place prior to the termination of the Subcontract and “unless and until proof of resignation could be demonstrated.” EX. K-75, No. 6. Desler testified:

…[A]lmost daily we had an informal meeting where Art Hazel would come in to our group, work through our team leader, Garcia Jackson, and address these issues that we had.

                                    * * *

Art would come into our group and let us know, A, there was a big push to resign from Keane voluntarily prior to that Friday, the 28^th [sic, actually, September 29], and in doing so, if we attended this so-called open house they were having on Sunday, that we were to get a $1500 signing bonus as well as negotiate for a pay raise, and then you are open to negotiate for tuition and educational reimbursement.

                                 * * *

Art had basically a template of a resume already filled out for every employee,…I mean resignation letter….He would come in our office. At one point, he had a stack of papers and he came into my office and asked me, “Are you going to resign? What are your intentions? Why haven’t you resigned?”

Tr. 23, pp. 93-95.

Desler testified that, “…[I]t was complete understanding that Signal was going to do everything they could to keep us happy.” Hazel told Desler, “you [have] to resign to go into that open house to receive that $1500 [signing bonus].” When asked whether Hazel said why he had to resign, Desler said, “ I was under the impression to get around the solicitation clause, the no-hire clause.” Id., at 116, 117.

On Friday, September 29, 2000 Keane learned that it was not going to get an injunction from the court. Keane knew that it had to remove the Keane 25 and their personal effects from the DOT headquarters that day. Shrivastava and Henderson went to the DOT headquarters with boxes to help the Keane 25 move out. When they arrived, Hazel handed them letters of resignation signed by 17 of the Keane 25, and told them that he would return with more resignations. Hazel returned shortly with 5 more resignations, bringing the total to 22 (the Signal 22). Desler, Jenny Chen (Chen) and Wendy Wang (Wang) did not resign. Henderson testified that on September 29 Graves told him that the team leaders had told Graves “that it was all or none, that we had to all stick together…all stay with Keane or all roll over to Signal….” Tr. 21, p. 74. Henderson testified that Anthony Coleman (Coleman), one of the Keane 25, told him that “they had to bond…and their team leaders had emphasized that, they shouldn’t rock the boat with the government and that they should either all stay with Keane or all leave Keane.” Id. at 75.

Hazel’s resignation letter, dated September 28, contains the following paragraphs:

Given the uncertain circumstances currently surrounding the status of the Keane contract at the Federal Highway Administration, I am compelled to take action to safeguard my employment interests. Therefore, it is with regret that I am resigning from my current position as Senior Principal Consultant, effective September 30, 2000.

Generally, I would give two weeks notice prior to leaving, but with the current uncertainty and the pending termination of the contract on September 30^th, I have come to the conclusion that it is in the best interests for my family that I seek employment where I can remain in a billable status. I appreciate the experience and opportunities I have had working for ANSTEC and Keane, and wish you and the corporation continued success.

EX. K-72.

These two paragraphs appear either verbatim, substantially verbatim or paraphrased in 12 of the 22 resignation letters Hazel gave to Shrivastava and Henderson on September 29, 2000. Id. The reason for that is that Hazel either gave a sample resignation letter to the Keane 25, or gave it to the Team Leaders who gave them to the Keane 25, after Hazel was informed by Signal that no communications between Signal and the Keane 25 could take place prior to termination of the Subcontract and “unless and until proof of resignation could be demonstrated.” EX. K-75, No. 6.[7]

On Saturday, September 30, 2000 termination of the Subcontract became effective.

On Sunday, October 1, 2000 at 10:00 a.m. Signal held the Open House at its Fairfax, VA headquarters. At 12:41 p.m. on that date Kane sent an e-mail to Mody and Smith. It reads in part:

We signed up 22 out of the 25 (there were really only 25 slots) incumbent [Keane] employees. One of them is on vacation and we only have a verbal commitment from him. Of the three who did not not resign from Keane:

Jeff Desden [sic, should be Desler] (number 16 out of 25 on the priority list) came to the open house and wants a large bonus to compensate him for 401K vesting. Nelson/David Chandler says he is not that good. One of the NARA people who lost funding can fill in for him starting immediately. Jeff [Desler] is going to call me tomorrow—either he will resign Keane and apply for a job with us, or we will give the slot to the person from NARA.

Jenny Chen (number 23 on the [priority] list) is an HIB visa person—we need to replace her.

Wendy Wang (number 25 on the list) did not resign and did not show up—she has only been on the project for 1 week and is not critical.

I talked to Paula Ewing [FHWA], who is very pleased, and left a voice mail (saying we got 22 out of 25) for Ron Endicott [DOT] at his home.

EX. K-70, p. 795. At 1:07 p.m. on October 1, 2000 Smith e-mailed Kane the message, “Great job!” Id.

Signal had each of the Signal 22 sign an offer letter at the Open House on October 1, 2000. These letters are the same except for position, salary, supervisor, etc. The offer letter Hazel signed is typical. It reads in part:

SIGNAL Corporation is pleased to offer you employment in the position of Task Leader. In this position you will provide support to the FHWA Information Technology Support Service contract, at the client facility in Washington, DC under the direction of Nelson Ebersole, Program Manager….The particulars of your employment arrangement will be as follows:

Compensation:                        $90,300.00 per annum, paid semi-monthly in the amount of $3,762.50.

Employment Status:               Exempt/ Full-Time, Regular

Benefit Status:                        Standard Benefits

Expected Start Date:               October 1, 2000

Signal Corporation has agreed to provide a signing bonus of $1,500.00, which will be payable on your first day of employment.

EX. K-90, p. 228.

Signal paid each of the Signal 22 a signing bonus of $1500. Some of the Signal 22 also received salary increases. If Signal had not been able to get the Signal 22 to sign offer letters at the October 1 Open House it would have had to use personnel recruiters (“headhunters”) to fill the positions vacated by the Keane 25. Signal would have had to pay those recruiters a fee based on a sliding scale of the employee’s first year’s salary. Smith testified that that fee was 10 to 20 percent of the first year’s salary. He said, “Say you hired a $60,000-a-year person. It [the fee] might be anywhere from 6-to $12,000 that’s payable in part when you hire them and in part after they have been in your employ for six months….” Tr. 23, p. 183.

After starting work at DOT headquarters on Monday, October 2, 2000, each member of the Signal 22 was required to sign an employment agreement with Signal. Hazel’s agreement is typical. It reads in part:

Covenant Not to Compete: In recognition of the value of project training provided by Employer [Signal], and exposure to proprietary information such as employee lists, customer lists, trade secrets, and marketing plans, Employee agrees not to accept employment on the same project(s) with another company, within 100 miles of the last employment site with the Employer, competing with the Employer on a project(s) the Employee worked on during the twelve (12) month period preceding termination of employment with the Employer, for a period of twelve (12) months following said termination. Employee further agrees not to allow his/her resume or name to be used in any proposal wherein the Employer is not a party, including any proposal competing with the Employer’s proposal.

EX. K-91, p. 229.

In early October, 2000 Signal received the FHWA’s Award Fee Determination Report for Evaluation Period 11—from June 3, 2000 through October 2, 2000. During that period Keane had submitted one invoice to Signal one day late, and during that period Signal had terminated the Subcontract. Signal received a total of 92 points for Evaluation Period 11entitling it to 92 percent of the Available Award Fee, or $279,517. Signal was penalized one point in the category entitled, “Effectiveness of cost and business management.” The FHWA’s comment in that category reads in part, “…[S]ince implementation of their new billing system, monthly invoices have been late.” EX. K-17, p. 185. It was also penalized one point in the category entitled, “Subcontractor management.” The comment to that category reads in part, “The termination of the subcontract with Keane caused the loss of productivity for several weeks as well as several people leaving the project.” Id., at 184.

For the eleven months from January through November 2000 Signal never sent any Signal invoices to the FHWA by the 15^th day of the month, as required by the Prime Contract. The table below shows for that period (1) the date Keane’s monthly invoice was received by Signal; (2) the number of days after the 11^th of the month that Keane’s invoice was received by Signal; and (3) the date Signal sent its invoice to the FHWA:

 

 

 

Date Keane’s Invoice Received by Signal	Number of days after the 11th of the Month	Date Signal Sent Its Invoice to the FHWA
January 12, 2000	One	January 24, 2000
February 24, 2000	Thirteen	February 19, 2000
April 12, 2000	One month and one day	March 17, 2000
April 17, 2000	Six	April 24, 2000
May 15, 2000	Four	May 22, 2000
June 11, 2000	Zero	June 21, 2000
July 11, 2000	Zero	July 26, 2000
August 11, 2000	Zero	August 23, 2000
September 12, 2000	One	September 22, 2000
Subcontract Terminated	N.A.	October 25, 2000
Subcontract Terminated	N.A.	November 16, 2000

EX. S-24 through S-34.

During this January-November 2000 period Signal would, after receiving Keane’s invoice, verify the invoice and “roll up” Keane’s invoice into Signal’s invoice, most of which had been prepared before Keane’s invoice was due. If Keane’s invoice could not be verified, or if it was not received by Signal by the time Signal submitted its invoice to the FHWA, Signal would submit its invoice to the FHWA with Keane’s labor and cost information omitted. Signal would then include the corrections or the missing Keane information in the invoice Signal would submit to the FHWA the following month. This was acceptable to the FHWA, but not desirable. Signal lost no money as a result of such a submission and Keane only lost the use of its money during the period of delay. At no time during the Prime Contract did the FHWA send a cure notice to Signal for not submitting its invoices by the 15^th of the month, nor did it ever threaten Signal that it would terminate for default the Prime Contract under FAR 52.249-6 for failure to submit its invoices by the 15^th of the month. The only action taken by the FHWA for Signal’s late invoices was the deduction of points under the FHWA’s award fee evaluation plan.

At the time Signal terminated the Subcontract for default there was one award fee period remaining on the third option year of the Subcontract (from October 2, 2000 through February 2, 2001). Had the Subcontract not been terminated, the third option year would have ended on February 2, 2001. Had Signal exercised the option for the fourth option year on February 3, 2001, there would have been three additional award fee periods during that option year, ending on February 2, 2002.

 

PART I—BREACH OF CONTRACT

A.    Applicable Law

1. Substantive Law Governing This Case. The Arbitration Clause in the Subcontract does not specify what jurisdiction’s substantive law should be applied to disputes arising under the Subcontract. It does specify Fairfax County, Virginia as the venue for the arbitration hearing. The Subcontract was entered into in Virginia and was to be performed in Washington, DC and in Virginia. The parties have submitted pre-hearing and post-hearing briefs that cite Virginia law and federal law concerning government contracts and the FARs.

The Panel concludes that the general law of contracts and the substantive law of Virginia should govern this case, and has looked to the FARs and federal cases concerning government contracts for guidance and analogy.

2. Interpretation of Contracts. This case involves the interpretation of a term in a written integrated agreement. The issue is whether the parties intended that paragraph B-6 (D) in the Subcontract, which states, “Invoices shall be submitted on a monthly basis, in accordance with the Seller’s [ANSTEC] accounting calendar, but shall be due by the 10^th of each month,” was a material term, the breach of which would amount to a material breach of the Subcontract.

Interpretation is "the process whereby one person gives a meaning to the symbols of expression used by another person." Corbin on Contracts, sec. 532 (1952) (Corbin). "Interpretation of…a term is…the ascertainment of its meaning." Rest. 2d Contracts sec. 300. It differs from "construction of a contract." By "interpretation of language" we determine what ideas that language induces in other persons; by "construction of the contract" we determine its legal operation. Corbin sec. 534; Restatement of the Law, Contracts Second (1979) sec. 200, comment c (Rest. 2d Contracts). "A question of interpretation of an integrated agreement is to be determined by the trier of fact if it depends on the credibility of extrinsic evidence or on a choice among reasonable inferences to be drawn from extrinsic evidence"; otherwise it is a question of law. Rest. 2d Contracts sec. 212. This case involves a disputed issue of fact because the Panel must determine the credibility of conflicting extrinsic evidence and choose among reasonable inferences to be drawn from the extrinsic evidence.

The process of interpretation of a term in an integrated written contract does not involve the court, or an arbitrator, attempting to divine what was in the parties' minds at the time of contracting. As Judge Cahn observed in Mellon Bank, N.A. v. Aetna Business Credit, Inc., 619 F. 2d 1001, 1009 (3d Cir. 1980):

It would be helpful if judges were psychics who could delve into the parties' minds to ascertain their original intent. However, courts neither claim nor possess psychic power. Therefore, in order to interpret contracts with some consistency, and in order to provide contracting parties with a legal framework which provides a measure of predictability, the courts must eschew the ideal of ascertaining the parties' subjective intent and instead bind parties by the objective manifestations of their intent. As justice Homes observed:

[T]he making of a contract depends not on the agreement of two minds, in one intention, but on the agreement of two sets of external signs--not on the parties having meant the same thing but on their having said the same thing.

Holmes, The Path of the Law, in Collected Legal Papers, 178, as quoted by Judge Friendly in Frigaliment Importing Co. v. B.N.S. International Sales Corp., 190 F. Supp. 116, 17 (S.D.N.Y. 1960) (emphasis in the original). See also Gilmore, the Death of Contract (1974).

Courts, and arbitrators, are aided in their efforts when interpreting terms in written agreements by certain rules in aid of interpretation and rules of preference, often called "canons of construction." Several of those rules, summarized below, are applicable here. Those rules are:

1.     The principal purpose of the parties is of particular importance in determining meanings. "If the principal purpose of the parties is ascertainable it is given great weight." Rest. 2d Contracts sec. 202 (1) and comment c; 3 Corbin sec. 545.

2.     A writing must be interpreted as a whole and no part should be ignored. All writings that are part of the same transaction are interpreted together and, if possible, harmonized. Rest. 2d Contracts sec. 202 (2); 3 Corbin sec. 549.

3.     Where an agreement involves repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other, any course of performance accepted or acquiesced in without objection is given great weight in the interpretation of the agreement. Rest. 2d Contracts sec. 202 (4) and comment g.

4.     A course of dealing between the parties, which involves conduct prior to the agreement, gives meaning to their agreement, and there is no requirement that an agreement be ambiguous before evidence of a course of dealing can be shown. Rest. 2d sec. 223 and comment b.

5.     In the interpretation of a term in a written agreement a course of performance, which involves conduct by the parties after the agreement has been made, is given greater weight than course of dealing, which relates to conduct prior to the agreement. Rest. 2d Contracts sec. 203 (b); Calamari & Perillo, The Law of Contracts, 4^th ed. (1998) sec. 3.17 (Calamari & Perillo).

6.     Evidence of prior or contemporaneous agreements and negotiations are admissible in evidence to establish the meaning of an integrated writing. Rest. 2d Contracts sec. 214 (c) and comment b.

3. Partial and Material Breach. Where a party fails to perform a promise, if the breach is material and no cure is forthcoming, the aggrieved party may cancel the contract and sue for total breach. If the breach is immaterial the aggrieved party may not cancel the contract, the contract continues, but the aggrieved party may recover damages that were caused by the partial breach. Calamari & Perillo sec. 11.18, pp. 413, 414; Rest. 2d Contracts sec. 236. If the contract continues because the breaching party’s breach was immaterial but the aggrieved party nonetheless cancels the contract, the breaching party has a claim against the aggrieved party for total breach of contract, subject to a claim by the aggrieved party against the breaching party for partial breach. Rest. 2d Contracts sec. 242 comment b, illustration 1.

A “material breach” is a breach that justifies the suspension of performance by the aggrieved party, but the breaching party may cure the breach by remedying the defect. If the defect is not cured there is a “total breach,” permitting the aggrieved party to cancel the contract. Calamari & Perillo sec. 11.18, p. 414; Rest. 2d Contracts sec. 237.

Materiality of breach is ordinarily a question of fact. In determining whether or not a breach is material certain circumstances are significant. These are: (1) the extent to which the aggrieved party will be deprived of the benefit he reasonably expected; (2) the extent to which the contract has been performed at the time of the breach (an early breach is more likely to be regarded as material); (2) whether the breach was willful (a willful breach is more likely to be regarded as material than one caused by negligence or by fortuitous circumstances); (3) the degree of hardship on the breaching party (an important consideration when considered in conjunction with the extent to which the aggrieved party has received a substantial benefit from performance); (4) the adequacy of damages to compensate the aggrieved party for partial breach; and (5) the extent to which the behavior of the breaching party comports with standards of good faith and fair dealing. Calamari & Perillo sec. 11.18, pp. 414, 415; Rest. 2d Contracts sec. 241.

A frequent issue arising in this area is whether delay in performance constitutes a material breach. A party need not perform on the precise day stated in the contract unless time is made of the essence. If time is not of the essence, reasonable delay in performance does not constitute a material breach. The easiest way to make time of the essence is to state in the contract that “time is of the essence.” Where that is not done the trier of fact must determine the intention of the parties in light of the contract and the surrounding circumstances, including the parties’ actions. Calamari & Perillo sec. 11.18, p. 415, 416; Rest. 2d Contracts sec. 242 and comment b.

Virginia law is in accord with the above-stated principles. In Horton v. Horton, 254 Va. 111, 487 S.E.2d 200 (1997), the Supreme Court of Virginia had occasion to consider whether the breach of a contract was a material breach. In that case a husband and wife entered into a contract to sign a joint venture dissolution agreement and to execute a power of attorney. The wife signed the dissolution agreement but refused to execute the power of attorney. The husband stopped making payments into an escrow account and the estranged wife sued him alleging a material breach of the contract. Her husband counterclaimed, alleging that the wife’s refusal to execute the power of attorney resulted in loss of sales and profits. The wife contended that her failure to execute the power of attorney was not a material breach of the contract. The husband argued that the purpose of the contract was to facilitate lot sales and to avoid the wife’s interference in the settlement proceedings, and that her refusal to execute the power of attorney defeated the purpose of the contract. The court agreed with the husband. It said:

Generally, a party who commits the first breach of a contract is not entitled to enforce the contract. [citations omitted] An exception to this rule arises when the breach did not go to the “root of the contract” but only to a minor part of the consideration. [citations omitted].

If the first breaching party committed a material breach, however, that party cannot enforce the contract. [citations omitted]. A material breach is a failure to do something that is so fundamental to the contract that the failure to perform that obligation defeats an essential purpose of the contract. [citations omitted]. If the initial breach is material, the other party to the contract is excused from performing his contractual obligations. [citations omitted].

254 Va. at 115 (emphasis added).

4. Implied Covenant of Good Faith and Fair Dealing. In every contract there exists an implied covenant of good faith and fair dealing. Calamari & Perrillo, sec. 11.38, p. 458. “Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.” Rest. 2d Contracts sec. 205. A violation of the duty of good faith and fair dealing is normally treated as a breach of contract. Calamari & Perrillo, sec. 11.38, p. 458. Good faith performance of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party; it excludes a variety of types of conduct characterized as involving “bad faith” because they violate community standards of decency, fairness or reasonableness. Rest. 2d Contracts sec. 205, comment a. Subterfuges and evasions violate the obligation of good faith in performance even though the actor believes his conduct to be justified. Id., comment d. What is or is not good faith is a question of fact. Calamari & Perrillo, sec. 11.38, p. 460.

 

 

 

B.    Discussion

1. Keane’s Breach of the Subcontract. By submitting six late invoices to Signal during the year 2000, Keane breached paragraph B-6 (D) (the invoicing requirement) of the Subcontract, which requires Keane to submit monthly invoices to Signal by the 10^th of each month. Signal argues that this was a material breach by Keane because the invoicing requirement was a material term of the Subcontract. Signal points to the following factors in support of its argument: (1) ANSTEC, as a former prime contractor on the FHWA’s ITS contract, was aware of the importance the FHWA placed on timely invoices; (2) in its May 19, 2000 letter to Signal, Keane acknowledged the materiality of the invoicing requirement; (3) the timely submission of invoices was an evaluation factor by the FHWA in its award fee determinations; (4) Signal’s award fee scores were lowered as a result of Keane’s late invoices; (5) Shrivastava admitted that Keane personnel understood that invoicing was an important aspect of running the business; and (6) Keane fired or reassigned its billing personnel as a result of Keane’s late invoices. Signal’s Post-Hearing Brief (S’s Post-Hrg. Br.), p. 10 The Panel disagrees.

Interpreting the Subcontract as a whole, looking at the prior and contemporaneous Teaming Agreement and Prime Contract, reviewing the course of performance and course of dealing of the parties, and drawing reasonable inferences from the extrinsic evidence, the Panel finds as a fact that the principal purpose of the parties, and the essential purpose of the Subcontract, was for ANSTEC employees (later Keane employees), together with Signal employees, to support the FHWA’S computer operations at DOT headquarters in Washington, DC during the term of the Prime Contract. The Panel gives great weight to this essential purpose.

The invoicing requirement does not contain the term, “Time is of the essence.” Furthermore, the parties engaged in a course of performance whereby Signal acquiesced in ANSTEC submitting its invoices to Signal on the 11^th of each month, even though the invoicing clause required them to be submitted on the 10^th. This course of performance indicates that the parties did not consider time to be of the essence insofar as the submission of Keane’s invoices to Signal was concerned. The Panel gives great weight to this conduct of the parties that occurred after the Subcontract was executed.

The contemporaneous Prime Contract requires Signal to submit its invoices to the FHWA by the 15^th of each month, and it contains a termination clause that permits the Government to terminate the Prime Contract for default if Signal defaults in performing the Prime Contract and fails to cure the default within 10 days. Signal had the ability to submit its invoices to the FHWA by the 15^th of each month even if those invoices did not include Keane’s labor costs, because Signal could include Keane’s costs in Signal’s next invoice. Despite that fact, during the eleven month period from January through November, 2000, Signal submitted all of its invoices to the FHWA after the 15^th of the month. It continued to submit late invoices to the FHWA even after it terminated the Subcontract. Yet not once during this period did the FHWA send a cure notice to Signal indicating that Signal had breached a material term in the Prime Contract by submitting late invoices and calling upon Signal to cure the defect within 10 days or be terminated for default. The only action taken by the FHWA for Signal’s late invoices was to penalize Signal one award point during any given award period, indicating that the FHWA did not consider the invoicing requirement in the Prime Contract to be a material term. It is difficult to understand Signal’s argument that the invoicing requirement in the Subcontract is a material term if the invoicing requirement in the Prime Contract is an immaterial term and the SOW in the Subcontract incorporates by reference the SOW in the Prime Contract.

The Panel does not agree with Signal’s argument that Keane’s May 19, 2000 letter constitutes an admission by Keane that the invoicing requirement was a material term in the Subcontract. It is true that in a perfect world Keane, upon receiving Signal’s May 18, 2000 Cure Letter, probably should have responded to Signal that its reference to a termination for default in accordance with Section B-26 of the Subcontract (the termination clause) was inapplicable because Keane’s late invoices amounted to no more than a partial breach of the Subcontract entitling Signal to damages for partial breach, but not permitting it to cancel the Subcontract. But there is nothing in Keane’s May 19, 2000 letter which can be construed as an admission by Keane that the invoicing requirement is a material term in the Subcontract. The same is true of Shrivastava’s testimony and of Keane’s reassignment of billing personnel.

Keane’s breach did not come early in the performance of the Subcontract. It was not a willful breach. Money damages are adequate to compensate Signal for the breach. Keane’s breach did not involve behavior that did not comport with standards of good faith and fair dealing. A considerable degree of hardship befell Keane as a result of Signal’s conclusion that the Invoicing Provision was a material term in the contract, an important consideration in view of the substantial benefit Signal received during ANSTEC/Keane’s prior performance under the Subcontract.

Finally, Keane’s submission of six late invoices to Signal in 2000 was not a failure to do something that was so fundamental to the Subcontract that the failure to perform that obligation defeated an essential purpose of the Subcontract. Accordingly, the Panel finds as a fact that the invoicing requirement in the Subcontract was not a material term of the Subcontract, and that Keane’s breach of the Subcontract by submitting late invoices was a partial breach.

2. Signal’s Breach of the Subcontract. Keane’s partial breach of the Subcontract entitles Signal to recover damages caused by the partial breach. However, because the breach was immaterial, the Subcontract continued and Signal was not entitled to cancel the contract. A cure notice was not applicable here because there was no “breach of a material term or condition of the Subcontract,” which Section B-32 of the Subcontract (the Termination Clause) requires if a cure notice is to be sent and if there is to be a subsequent termination for default if there is no cure within 10 days.

Accordingly, the Panel finds as a fact that Signal’s termination for default on September 15, 2000 (effective September 30, 2000) was wrongful and constituted a breach of the Subcontract by Signal, entitling Keane to a claim against Signal for total breach of contract, subject to a claim by Signal against Keane for damages for partial breach because of the delays.

Because the Subcontract continued after Keane’s partial breach when Keane submitted its invoice to Signal one day late on September 12, 2000, the Panel finds as a fact that Signal’s offer letters to the Signal 22 on October 1, 2000 at the Open House, and its subsequent employment contracts with those persons, breached Section B-32 of the Subcontract (the No-Hire Provision), which prohibited Signal from soliciting or engaging the services of the Keane 25 during the period of performance of the Subcontract and for one year thereafter.

The Panel finds as a matter of law that the No-Hire provision is not an unreasonable restraint of trade and/or injurious to the public, as Signal argues. S’s Post-Hrg. Br., p. 17. The Supreme Court of Virginia considered the enforceability of a similar no-hire provision in Therapy Services, Inc. v. Crystal City Nursing Center, Inc., 239 Va. 385, 389 S.E.2d 710 (1990). In that case a company providing the services of physical therapists entered into a contract with a nursing facility to provide therapists employed by it to provide rehabilitation services to patients of the nursing facility. The contract contained a provision whereby the nursing facility agreed not to hire any of the therapists employed by the therapy company for the duration of the contract period and for six months thereafter. The nursing company terminated the contract and then began employment negotiations with the therapists, who were unaware of the no-hire provision. The nursing company argued that the provision was unenforceable because it was against public policy in that it affected the rights of third parties without their consent or knowledge.

The Supreme Court of Virginia held that the provision was enforceable. It distinguished the no-hire provision from covenants not to compete and restrictive covenants between employer and employee. It noted that the no-hire provision was a contract between two businesses wherein one business agreed to forego the ability to hire certain people who were not parties to the contract. “As such,” the court said, “it is a contract in restraint of trade and will be void as against public policy if it is unreasonable as between the parties or is injurious to the public.” 239 Va. at 388.

The court said that the reasonableness of the restraint was to be determined by considering “whether it is such only as to afford a fair protection to the interests of the party in favor of whom it is given, and not so large as to interfere with the interests of the public.” Id. The court found that the therapy services company had a legitimate interest in protecting its ability to maintain professional personnel in its employ in order for it to provide therapy services to health care facilities, and that the no-hire provision in its contract afforded fair protection to that interest.

As to whether the no-hire provision was “so large as to interfere with the interests of the public,” the court noted that, while the right to earn a livelihood is embraced in the constitutional concept of “liberty,” individuals had no right to “employment by an employer of their choice or by any specific employers.” Id., at 389. The court found that, should the therapists leave the therapy service company, they could secure like positions in the area from employers other than the nursing company. The court also found that the no-hire provision had no adverse impact on the public at large since the availability of therapists’ services was not diminished in the affected area.

Applying these tests to the facts in this case the Panel finds from the evidence that Keane had a legitimate interest in protecting its ability to maintain personnel in its employ who were skilled in providing information technology services needed by the FHWA to support the activities of the FHWA’s various teams using outdated mainframe computers and software. The Panel further finds that the No-Hire Provision in the Subcontract afforded fair protection to that interest.

As to whether the No-Hire Provision in the Subcontract was “so large as to interfere with the interest of the public,” the Panel finds from the evidence that the Keane 25 did not have a right to employment by Signal, and that if the Keane 25 had left the employ of Keane they could have secured positions in the area from employers other than Signal that needed skilled information technology computer specialists, including the Government where computer specialists able to work with ancient technology were in high demand. The Panel also finds that the No-Hire Provision in the Subcontract had no adverse impact on the public at large because the availability of information technology computer specialists was not diminished since the Keane 25 were not precluded from working in the metropolitan DC-Virginia-Maryland area for employers other than Signal.

Because the Subcontract continued after Keane’s partial breach, the Panel finds as a fact that Signal breached Section A-2 of the Subcontract (the Option Provision) when it failed on February 3, 2001 to exercise the option in the Subcontract in Keane’s favor for option year four (from February 3, 2001 to February 2, 2002) after the FHWA exercised its option in the Prime Contract for option year four in Signal’s favor. Signal argues that it had a unilateral right not to exercise the Option Provision if Keane failed to provide “timely, quality and within cost performance,” and that Signal would not have exercised the option for option year four on February 3, 2001 because of Keane’s submission of late and inaccurate invoices, and because of its failure to fill vacancies related to the transition of the FHWA’s computing center to Austin, Texas (the Austin Migration). S’s Post-Hrg. Br., p. 26. The Panel disagrees.

The Option Provision of the Subcontract obligates Signal to exercise the option for the four option years of the contract term if the FHWA exercises the option in the Prime Contract in Signal’s favor, provided “the Seller [ANSTEC] has continually provided timely, quality, and within cost performance.” Subcontract para. A-2. The Panel finds as a fact from the evidence that the parties intended that Signal would exercise the options for the various option years so long as ANSTEC [later Keane] was performing the essential purpose of the Subcontract—that ANSTEC employees, together with Signal employees, would support the FHWA’s computer operations at DOT headquarters in Washington, DC, during the term of the Prime Contract—in a timely, quality and within cost manner. The Panel finds as a fact that ANSTEC [later Keane] performed that essential purpose in a timely, quality and within cost manner.

As explained, supra, Keane’s late invoices in 2000 did not affect the performance of that essential purpose in a material way and cannot be a proper basis for Signal’s failure to exercise the option for option year four. Similarly, any inaccurate[8] Keane invoices cannot support Signal’s failure to exercise the option. It was acceptable to the Government if Signal submitted Keane’s corrected information in the following month’s invoice from Signal to the FHWA. As for Signal’s Austin Migration argument, the Panel has found no clause in the Subcontract—and Signal has identified none—making it a contractual duty on Keane to assist Signal in its efforts to fill billets at Signal because of the Austin Migration. Accordingly, this cannot be a proper basis for Signal’s failure to exercise the option for option year four.

The Panel finds as a fact from the evidence that Signal breached the Subcontract’s implied covenant of good faith and fair dealing. In wrongfully terminating the Subcontract on the ground that Keane’s late invoices were jeopardizing Signal’s relations with its Prime Contractor, and in following that wrongful termination almost immediately with the recruitment of the Keane 25 and the hiring of the Signal 22, Signal violated community standards of decency, fairness and reasonableness.

It is not difficult to see the reasons behind Signal’s actions. If Signal could get Keane off the FHWA’s ITS work and employ the Keane 25 to do that work as Signal employees, Signal could (1) receive 100 percent of the FHWA’s award fee instead of 51 percent for the remainder of the term of the Prime Contract; (2) service the Prime Contract immediately after termination with a minimum loss of productivity to the FHWA; (3) save tens of thousands of dollars in headhunter fees; and (4) be in a superior position in 2002 to partner with an 8 (a) contractor for the recompete of the FHWA’s ITS contract. By having the Signal 22 sign contracts of employment containing covenants not to compete, Signal assured itself that the Signal 22 would be on Signal’s Key Personnel roster at the time of the recompete, putting it ahead of its competitor Keane, who would also be trying to partner with an 8 (a) contractor at the time of the recompete for the FHWA work.

Signal began looking for ways to avoid the Subcontract as early as late 1999 when Keane announced its acquisition of ANSTEC. Signal’s first attempt was to announce to Keane in early 2000 that it had no obligation to exercise the option for option year three because it had no contractual relationship with Keane. When that met with opposition from Keane, Signal backed off its position and exercised the option. Signal then began to focus on Keane’s late invoices as grounds for terminating the Subcontract. Throughout the three-month period (June, July and August 2000) when Keane submitted timely invoices after receiving Signal’s Cure Letter, Signal’s officers discussed with outside legal counsel the legal implications of terminating the subcontract. During that period Signal’s officers also discussed with outside legal counsel the legal implications of Signal recruiting and/or hiring the Keane 25 after termination.

When it received Keane’s one day late invoice on September 12, 2000, Signal’s officers were primed and ready to execute Signal’s termination/ recruitment plan. Signal went first to the FHWA to make sure that its client approved the plan. Shortly after sending the Termination Letter to Keane, Signal began preparations for its Open House. It was fully aware that the majority of the Keane 25 did not want to leave their jobs at DOT headquarters in Washington, DC, and would be anxious to explore ways to stay at their jobs, albeit under a new employer. Signal’s plan was to adhere strictly to a policy of “no communication with the Keane 25 until they had resigned.” In furtherance of that policy Signal advised Hazel, the PM of the Keane 25, that Signal would not discuss future employment of the Keane 25 with Signal until two events had occurred: (1) the Subcontract had terminated on September 30, 2000, and (2) each member of the Keane 25 could show evidence that he or she had voluntarily resigned from Keane. Signal was correct in its assessment that the great majority of the Keane 25, when offered a $1500 signing bonus and in some cases a salary increase, would sign offers of employment with Signal at its Open House on October 1, 2000.

Smith, Signal’s senior vice president in charge of contract matters with 21 years experience in the government contracts field, knew at the time he sent the Termination Letter to Keane on September 15, 2000 that the FHWA had not sent a cure notice to Signal or threatened to terminate the Prime Contract for default when Signal had submitted all of its invoices to the FHWA after the 15^th of the month between January and August, 2000. Yet Smith insisted that a one day late invoice from Keane in September 2000 was proper grounds for terminating the Subcontract for default.

The Panel finds as a fact from the evidence that Signal breached the Subcontract’s implied covenant of good faith and fair dealing when it wrongfully terminated the Subcontract for default and almost immediately began preparations for the recruitment and employment of the Keane 25.

3. Keane’s Damages Resulting From Signal’s Total Breach. Keane seeks as compensatory damages the amounts set forth below. Signal argues that Keane has suffered no damages. The Panel finds as a fact that Keane has suffered damages as a result of Signal’s total breach of the Subcontract, agrees with some of Keane’s damage claims but disagrees with the amount Keane claims as damages for lost business opportunity. The damages Keane seeks are:

Damages Resulting From Signal’s Wrongful Termination

Lost Award Fee for Period 12 (October 2, 2000-February 2, 2001)             $137,012

Damages Resulting From Signal’s Failure to Exercise Option

            Lost Award Fees for Periods 13-15 (February 3, 2001-February 2, 2002) 411,036

Damages Resulting From Signal’s Breach of the No-Hire Provision

            1. Lost hours less Chen, Desler and Wang                                                    335, 894

            2. New hire recruitment costs for 22 hires                                                    91,344

            3. Ramp Up Costs for 22 hires                                                                     34,057

Lost Business Opportunity Resulting From Signal’s Wrongful Termination

(Utilizing a win rate of 30%, a lost profit percentage of 20%

and the gross number of dollars in Keane’s pipeline as of

October 1, 2000. See EX. K-61) 8,564,557

                                                                                                            _________

                                                                        Total Damages Sought $9,573,900

The Panel finds as a fact that Keane suffered the following damages as a result of Signal’s total breach of the Subcontract:

Damages Resulting From Signal’s Wrongful Termination

Lost Award Fee for Period 12 (October 2, 2000-February 2, 2001)             $137,012

Damages Resulting From Signal’s Failure to Exercise Option

            Lost Award Fees for Periods 13-15 (February 3, 2001-February 2, 2002) 411,036

Damages Resulting From Signal’s Breach of the No-Hire Provision

            1. Lost hours less Chen, Desler and Wang                                                    335, 894

            2. New hire recruitment costs for 22 hires                                                    91,344

            3. Ramp Up Costs for 22 hires                                                                     34,057

Lost Business Opportunity Resulting From Signal’s Wrongful Termination

(Utilizing a win rate of 10%, a lost profit percentage of 9%

and the gross number of dollars in Keane’s pipeline as of

October 1, 2000. See EX. K-61) 1,285,000

                                                                                                            _________

                                                                        Total Damages Found $2,294,343

4. Signal’s Damages Resulting From Keane’s Partial Breach. The Panel finds as a fact that Signal suffered no damages as a result of Keane’s partial breach of the Subcontract. The FHWA’s Award Fee Reports for Evaluation Periods 9 and 10, during which periods Keane was late with 5 invoices to Signal, show that Signal lost no money as a result of the one point penalty per Evaluation Period that the FHWA imposed in the relevant category, and that Signal received the same grade of Superior that it would have received if that penalty had not been imposed. For Evaluation Period 11, during which period Keane was one day late with one invoice and Signal was late submitting all four of its invoices to the FHWA, Signal was penalized one point for late invoices and one point for the loss of productivity caused by Signal’s wrongful termination of the Subcontract, a self-imposed penalty. The Panel finds as a fact that Signal suffered no loss of award fee funds as a result of receiving six Keane invoices after the 11^th of the month.

Signal seeks $2,745,000 as damages allegedly suffered as a result of Keane’s partial breach of the Subcontract. Signal argues that, “Keane’s [partial] breach of the Subcontract was a direct cause of the reduction of SIGNAL’S award fee scores, the effect of which is to diminish SIGNAL’s ability to optimally utilize the FHWA as a past performance reference on future opportunities.” S’s Post-Hrg. Br., p. 33. The Panel finds as a fact the Signal has failed to prove these damages. As noted above, for two of the three Evaluation Periods involved Signal received a grade of Superior even after being penalized one point per period for late invoices. For the third Evaluation Period Signal was penalized only one point for late invoices. As to all three Evaluation Periods Signal was late submitting its invoices to the FHWA, which invoices could have been submitted on time without Keane’s labor cost information, which could have been added to Signal’s invoice the following month. Any penalties incurred by Signal because of loss of productivity due to the wrongful termination of the Subcontract were self-imposed.

5. Conclusions. In summary, the Panel finds the following contested issues of fact concerning the breach of contract claims and counterclaims in this case:

1.     Keane’s submission of six late invoices in 2000 constituted a partial breach of the Subcontract;

2.     Signal’s termination of the Subcontract was wrongful, resulting in a total breach of the Subcontract by Signal;

3.     Signal breached the No-Hire Provision in the Subcontract;

4.     Signal breached the Option Provision in the Subcontract;

5.     Signal breached the Subcontract’s implied covenant of good faith and fair dealing;

6.     Keane suffered damages as a result of Signal’s total breach of the Subcontract in the amount of $2,294,343; and

7.     Signal suffered no damages as a result of Keane’s partial breach of the Subcontract.

The Panel finds the following conclusion of law:

1.     The No-Hire Provision in the Subcontract is enforceable because it is not an unreasonable restraint of trade and is not injurious to the public.

PART II—CIVIL CONSPIRACY

Findings of Fact

            The technical mainframe computer skills which the 25 Keane employees provided to FHWA under the subcontract were scarce and unusual because of the obsolescence of the equipment and software installed at FHWA.[9] FHWA summoned Signal to a meeting to ascertain how Signal could provide the technical support required under its prime contract.[10] Signal assured FHWA that they would hire employees with the rare skills and experience of the Keane employees.[11] Signal then posted the job descriptions of the 25 Keane employees on the Signal website as job vacancies.[12] Printed Signal job vacancy notices were posted outside the Signal project manager’s office at FHWA, in the work area.[13] A Notice of a Job Fair to fill the vacancies was posted, to be held on Sunday, October 1, 2000, at Signal headquarters in McLean, VA.[14] With its termination of Keane, Signal stood to gain 49% of the fixed fee for the remainder of its FHWA prime contract.[15] Keane attempted unsuccessfully to contact the president of Signal.[16] There was no response except a rejection of any negotiations from a lower-level Signal employee.[17]

            Hazel, the Keane PM at FHWA,[18] was at first unresponsive when contracted by Keane management to get his support through his daily contacts with FHWA personnel by emphasizing the value of the Keane 25 technicians.[19] Hazel’s job was one of those which had been posted as vacant.[20] Later, Hazel had a secret meeting with the other Keane technicians, and it became “common knowledge” through Hazel that Signal would give Keane employees who resigned from Keane prior to September 30, 2000, their present job assignments, a signing bonus of $1,500, negotiated raises, reimbursements of educational expenses owed to Keane, and other benefits.[21] Hazel relayed these offers through the team leaders; carried draft resignation letters for each Keane employee to the various team locations and repeatedly followed up on each Keane employee who had not given him a signed resignation letter.[22] During this period, Hazel told Keane management that he would not support Keane in discussions with FHWA because he “did not want to rock the boat”.[23] Meanwhile, Hazel negotiated details of Signal offers to individual Keane employees.[24]

            On September 28, 2000, Hazel surprised his Keane superiors by handing them 21 (later 22) resignation letters, containing wording which was either identical or closely similar, including his own.[25] On October 1, 2000, all 22 were hired by Signal at the Job Fair Open House, given $1,500 bonuses, negotiated raises and other benefits.[26] At the hearings, details of the campaign to arrange mass transfers of Keane technicians to Signal were established by the testimony of a number of witnesses and the identical or strikingly similar text of the resignation letters.[27] Signal admitted that the jobs of the Keane 25 technicians had been advertised as vacant on the Signal website well before the contract terminated,[28] and Hazel emphatically described the printed vacancy notices (including his) posted near the office of Signal PM Ebersole.[29] While Hazel denied his activity in soliciting resignations and negotiating details of benefits,[30] Hazel’s testimony in this regard was directly contradicted by the testimony of Desler,[31] who refused to resign and received no money.[32] Other employees who resigned from Keane and were hired by Signal, and who agreed with parts and disagreed with parts of Desler’s testimony, were paid at least $1,500 by Signal and briefed on their testimony by Signal counsel.[33] Further, Hazel denied receiving the $1,500 signing bonus.[34] When confronted with his signature on the Signal offer letter, listing the $1,500 payment, he lamely claimed that he thought the $1,500 was compensation, not a bonus.[35] Hazel’s demeanor undermined his denials.

Conclusions of Law

We find that Signal and Hazel, while a Keane employee, by clear and convincing evidence, violated Sections 18.2-499 and -500 of the Code of Virginia on civil conspiracy in that their conduct was intentional, purposeful and without legal justification and that their conspiracy caused injury to Keane. The bonuses paid and higher compensation to ex-Keane employees, as well as the timing and lack of material reason for the termination for default, all support a finding to apply the sanctions of Sections 18.2-499 and -500. In calculating damages, we adjusted Keane’s fiscal year 2000 profit performance to 9.0 percent.[36]

            The argument by Signal, that Keane’s invoices when submitted after the eleventh of the month were causing Signal’s invoices to be submitted late, proved to be entirely spurious. The 15^th of the month is the deadline in the prime contract for submission of invoices, and the dates of Signal’s late invoices do not match at all with the delays of Keane invoices. Moreover, the government never issued letters of concern or cure notices to Signal.

            The Supreme Court of Virginia considered the standards of conduct required for violations of Code of Virginia Sections18.2 - 499 and 500 in Commercial Business Systems, Inc. V BellSouth Services Inc. 249 Va.39, 453 S. E. 2d 261 (1995) and Advanced Marine Enterprises, Inc. et al. (“AME”) V PRC, Inc. (“PRC”) 501 S.E. 2d 148 (Va. 1998). There the standard was defined as legal malice, proof that the defendant acted intentionally, purposefully and without legal justification Id. 155.

            The AME case is quite similar to the case under consideration here. There, a group of 21 employees submitted letters resigning their employment from PRC effective immediately. The terms of their employment with AME had been secretly negotiated while they were employed at PRC. In Keane V Signal, 22 employees of Keane submitted letters resigning immediately to join Signal, with many of the job benefits offered having been negotiated while they were Keane employees. By this scheme, Signal was able to terminate subcontractor Keane on a major FHWA contract with absolute assurance that the critical skills of the Keane employees would remain available, and Signal would gain 49% of the award fee for the duration of the contract.

The conduct of Signal in posting the jobs of the 22 Keane employees on the Signal website and on the bulletin board outside the Signal project manager’s office, before terminating the Keane subcontract, was clearly intentional and absolutely purposeful, being for the purpose of hiring people who worked in the area where the job vacancies were posted.

The subcontract between Signal and Keane dealt with the issue of one of the parties hiring employees of the other. Such actions were absolutely prohibited for the duration of the subcontract and for one year thereafter. To have breached that term of a valid contract during an agreed extension is clearly an action without legal justification. Therefore, we find that Signal’s actions were direct violations of the Code of Virginia, Section 18.1 - 499 and 500 as interpreted in the Commercial Business Systems and AME cases.

Keane’s evidence was plainly sufficient to meet this requirement. As stated earlier in this opinion, Signal advertised the 22 Keane employees’ jobs before the termination of Keane was effective. Signal planned a series of dollar incentives, a $1,500 signing bonus, increases in salary compensation, and reimbursement of training fee obligations to Keane, before the effective date of the termination of the subcontract. There was no legal justification for those actions, which amounted to buying up critical skills in direct violation of a legal contract. The Majority finds that the $1500 checks were nothing more than bribes.

Moreover, the 22 Keane employees had confidential and proprietary technical information at their workstations which came into Signal’s possession by hiring the 22 Keane employees, without Keane’s knowledge and consent. In fact, Keane management went to the job site with boxes to pack up the documentation and belongings of the 22 employees, and the employees refused to cooperate, having already signed letters of resignation with the knowledge that Signal would hire replacements at a job fair within 48 hours and that they were the only experienced applicants.

Finally, at all relevant times, Hazel was an employee and project manager for Keane Federal Systems, Inc. As such, he engaged in a pattern of activity in secrecy to move almost the entire Keane project team to Signal Corporation. He refused to support Keane in its efforts to reverse an unjustified termination. He held secret meetings with the project team to suggest that they resign from Keane and accept the hiring bonuses and other incentives to join Signal Corporation at the Signal job fair; negotiated certain financial problems of team members; circulated draft letters of resignation; gathered the signed resignation letters; and presented the resignations to Keane management. The Majority finds that Hazel’s actions precisely fit Signal’s strategy.

Virginia law requires employees to honor their fiduciary duties of loyalty owed to their employers. In Sperry Rand Corp., v. Electronic Concepts Inc., 525 F. Supp. 1209, 1218 (1970), the court considered violations of an employee’s duty of loyalty, fidelity and responsibility to the employer. The court found in Sperry Rand Corp., that the employee’s conduct of removing certain documents and materials of confidential and secret nature of the employer and conveying them to the defendant constituted breach of loyalty and found that the defendant engaged in unfair competition. Id. at 1218. Additionally, the court found that the acts of the defendant were willful deliberate and were committed with the knowledge that they were unlawful and were calculated to result in substantial harm to the plaintiff. Id.

Similarly the Majority finds that Hazel committed violations that constituted breach of his duty of loyalty, fidelity and responsibility to his employer, when he failed to support Keane management’s efforts in discussions with FHWA, secretly negotiated Signal’s offers of employment to members of his staff, carried draft resignation letters of each employee, followed up on employees who signed resignation letter and finally presenting the seemingly identical resignation letters to his superiors.

The majority further finds that Hazel’s violations were in response to the written and web site communications from Signal; that Hazel knew the purpose of Signal’s scheme was to appropriate the twenty-five Keane technicians, and with such knowledge, Hazel actively engaged in conduct in furtherance of that scheme. We find that Hazel repeatedly violated his duty of loyalty to Keane, and his actions were clearly without lawful justification. Therefore, we find the evidence is clear and convincing that Signal and Hazel, acting in concert, have violated Sections 18.2 - 499 and -500 of the Code of Virginia.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ORDER AND AWARD

We, the undersigned Arbitrators, having been designated in accordance with the Arbitration Clause in the Subcontract dated February 3, 1997, and having given due consideration to the allegations of the parties, the pre-hearing and post-hearing briefs submitted by the parties, the applicable law, the entire record in this case, including the transcript of the arbitration hearing and all exhibits admitted into evidence at the hearing, and based upon the findings of fact and conclusions of law stated in the memorandum opinion dated August 30, 2001, AWARD as follows:

1. Keane Federal Systems, Inc. (Keane) is awarded from Signal Corporation (Signal); three-fold its compensatory damages of two million two hundred ninety-four thousand, three hundred forty-three dollars ($2,294,343), or the sum of six million eight hundred eighty-three thousand, twenty-nine dollars ($6,883,029).

2. Keane is awarded attorney’s fees for in the amount of one hundred twenty-nine thousand forty-four dollars ($129,044).

3. Signal’s counterclaim is dismissed with prejudice for failure to prove damages.

 

4. The administrative fees and expenses of the American Arbitration Association (AAA) totaling TWENTY-SEVEN THOUSAND DOLLARS AND NO CENTS ($27,000.00) shall be borne equally by the parties. Therefore, RESPONDENT shall pay to CLAIMANT the sum of TWO THOUSAND FIVE HUNDRED DOLLARS AND NO CENTS ($2,500.00) for that portion of its share of administrative fees and expenses previously advanced by CLAIMANT to the Association.

 

5. The compensation of the Arbitrator totaling EIGHTY-SEVEN THOUSAND SIX HUNDRED SEVENTEEN DOLLARS AND SEVENTY-ONE CENTS ($87,617.71) shall be borne equally by the parties.

 

6.     The amounts shall be paid within thirty (30) days of the date of this signed award.

            This Award is in full settlement of all claims submitted to this arbitration.

 

_________________________ ___________________________                                                     

William S. Taylor        08/ / 01                               Laurence Schor 08/ /01

Arbitrator                                                        Arbitrator

 

 

DISSENT

Phillip Bostwick, Concurring in Part and Dissenting in Part

I concur in all the findings of fact and conclusions of law stated in this opinion from the Introduction through and including Part I—Breach of Contract. I respectfully dissent from my colleagues’ findings of fact and conclusions of law stated in Part II—Civil Conspiracy, and from the Award trebling Keane’s compensatory damages and awarding it attorneys’ fees.

I find as a fact that Keane failed to prove by clear and convincing evidence that Signal and the Keane 25, or any of them including Hazel, “combined, associated, agreed, or acted in concert together for the purpose of willfully and maliciously injuring” Keane in its business “by any means whatever,” the prima facie case that must be proved by a plaintiff claiming treble damages, attorneys’ fees and costs of suit under Virginia’s Civil Conspiracy Statute, Va. Code secs. 18.2-499, 18.2-500, according to the Supreme Court of Virginia in Advanced Marine Enterprises, Inc., 256 Va. 106, 501 S.E.2d 148 (1998) (Advanced Marine).

Applicable Law Concerning Civil Conspiracy

Conspiracy, both criminal and civil, has been defined as a combination of two or more parties to accomplish by concerted action a criminal or unlawful object, or a lawful object by criminal or unlawful means. See, Ross v. Peck Iron and Metal Co., 264 F.2d 262, 268 (4^th Cir. 1959) (Virginia law). The law generally treats joint activity more stringently than individual conduct. Conduct that is permissible if done alone may become wrongful if performed by several actors. In the criminal law the agreement itself is condemned. The tort of civil conspiracy is not actionable unless acts performed pursuant to the agreement cause injury to the plaintiff. The rationale behind conspiracy, both criminal and civil, is that mere force of numbers often increases the impact of group action, thereby expanding the opportunities for abuse. It has been said that conspiracy rests upon the deeply-held notion that there is a fear of group activity because an organized body of people can produce results more oppressive or dangerous than the results produced by a single person. See, generally, Ulrich, Joseph E.; Howard, Killis T., INJURIES TO BUSINESS UNDER THE VIRGINIA CONSPIRACY STATUTE: A SLEEPING GIANT, 38 Washington and Lee Law Review n. 2 pp. 337-412 and n. 4 pp. 1147-1169 (1981). (Ulrich & Killis).

Virginia recognizes the tort of civil conspiracy. Gallop v. Sharp, 179 Va. 335, 338, 19 S.E.2d 84, 86 (1942). In addition, Virginia has a statue that expressly forbids two different types of joint conduct: (1) joint conduct to injure another in his trade, reputation, business or profession (“Injuries to Business”), Va. Code sec. 18.2-499 (A) (i); and (2) joint conduct to compel another to either perform an unlawful act or to prevent another from doing a lawful act against his will (“Conspiracies to Compel or Constrain Another”), Va. Code sec. 18.2-499 (A) (ii); Ulrich & Killis, p. 378. Keane’s claim against Signal is an Injuries to Business claim under sec. 18.2-499 (A) (i) (the Conspiracy Statute), which reads:

A. Any two or more persons who combine, associate, agree, mutually undertake or concert together for the purpose of (i) willfully and maliciously injuring another in his reputation, trade, business or profession by any means whatever…shall be jointly and severally guilty of a Class 1 misdemeanor. Such punishment shall be in addition to any civil relief recoverable under sec. 18.2-500.

Section 18.2-500 gives a person injured by reason of a violation of the Injuries to Business portion of the Virginia Conspiracy Statute a civil cause of action, and permits him to recover “three-fold the damages by him sustained, and the costs of suit, including a reasonable fee to plaintiff’s counsel….”

The Virginia Legislature passed the Virginia Conspiracy Statute in 1962. There is no recorded legislative history concerning the statute. By 1981 the Virginia Supreme Court had not decided a case involving it. In that year two commentators wrote an article concerning the statute. See, Ulrich & Killis, supra. They noted that the substantive provisions of the statute are identical to an 1887 Wisconson Statute,[37] except that the Wisconsin statute contains no treble damage and attorneys’ fee provisions. They also noted that many attorneys in Virginia referred to it as the “Anti-Sit-In Act” because in 1962 the Virginia Legislature was following a policy of massive resistance to racial integration and several other Southern States during this period, such as Alabama and Mississippi, had passed similar statutes. It was commonly understood that tort actions constituted one of the gravest menaces to the civil rights movement. These commentators called the Virginia Conspiracy Statue, with its triple damage remedy and it criminal sanction, “a menacing statute” and called for its repeal. Ulrich & Killis, p. 379.

It was not repealed, however, and in 1984 the Conspiracy Statute came before the Virginia Supreme Court for the first time. In Allen Realty Corporation v. Holbert, 227 Va. 441; 318 S.E.2d 592 (1984) the court held only that the trial court had erred in sustaining a demurrer where the plaintiff had alleged a conspiracy to harm his business in violation of the statute. The court said, “To recover in an action for conspiracy to harm a business, the plaintiff must prove (1) a combination of two or more persons for the purpose of willfully and maliciously injuring plaintiff in his business, and resulting damage to plaintiff.” 227 Va. at 449.

The following year, 1985, the statute came before the court again. In Hechler Chevrolet, Inc. v. General Motors Corporation, et al, 230 Va. 396, 337 S.E.2d 744 (1985), the plaintiff, a franchised motor vehicle dealer, sued an auto manufacturer alleging wrongful termination of his franchise and a conspiracy between the manufacturer and a competing dealer to interfere with his business. Again, the trial court sustained a demurrer to the allegations but this time the court upheld the trial court’s ruling. In finding that the plaintiff failed to allege unlawful conduct or unlawful purposes on the part of the defendants, the court said:

A criminal conspiracy is an agreement to commit a crime. [citations omitted]. A civil conspiracy is a combination of two or more persons, by some concerted action, to accomplish some criminal or unlawful purpose, or to accomplish some purpose, not in itself criminal or unlawful, by criminal or unlawful means. [citations omitted]. There can be no conspiracy to do an act which the law allows.

                                    * * *

If a competitor is in fact about to cease marketing a competing product, it is not unlawful to state that fact truthfully to customers. Neither is it unlawful to entice an employee of a competitor to leave his employment provided no wrongful means are used, and the employment is terminable at will.

230 Va. at 402.

One year later, in 1986, the court reviewed another case involving the Conspiracy Statute. In Greenspan v. Osheroff, 232 Va. 388, 351 S.E.2d 28 (1986), a doctor was sued for allegedly conspiring with others to willfully and maliciously injure another doctor in his business and profession. The trial court found that the defendant had violated the Conspiracy to Compel or Constrain Another part of the Statute, but had not violated the Injury to Business portion because he did not “conspire or combine with any other person to accomplish this end….” 232 Va. at 396. On appeal the defendant doctor argued that he could not be found to have violated the Statute because (1) the evidence was insufficient to support a finding of actual malice, and (2) even if malice was found the evidence showed that the defendant was also motivated in part by the legitimate purposes of caring for his patients and promoting his own practice. In rejecting these arguments the Virginia Supreme Court said, “…[W]hen the fact-finder is satisfied from the evidence that the defendant’s primary and overriding purpose is to injure his victim in his reputation, trade, business or profession, motivated by hatred, spite, or ill-will, the element of malice required by Code section 18.2-499 is established, notwithstanding any additional motives entertained by the defendant to benefit himself or persons other than the victim.” Id. at 398-399.

The Conspiracy Statute did not come before the Virginia Supreme Court again until 1992. In Tazewell Oil Co. v. United Virginia Bank, 243 Va. 94, 413 S.E.2d 611 (1992) the court found that the evidence produced at trial by a petroleum dealership that two banks had “agreed, associated, or combined” to forestall a chapter 11 filing by the dealership was sufficient to support the jury’s finding of a violation of the Conspiracy Statute. The court said that the defendant bank’s “protestations that it was ‘merely attempting to collect its debts’ ring hollow in light of the extensive and unusual actions it undertook in concert with M & M [a second bank] to eliminate any ability of Tazewell [the dealership plaintiff] to continue operating or to file a reorganization plan under chapter 11 by removing Tazewell’s access to cash flow, inventory and other financing.” 243 Va. at 109.

In Tazewell Oil the Virginia Supreme Court affirmed the trial court’s instruction to the jury that a finding in favor of the dealership on the conspiracy claims required “clear and convincing evidence.” Id. at 108. In Virginia, as elsewhere, clear and convincing evidence is most often applied in fraud cases. It has been defined by the Virginia Supreme Court as, “the measure or degree of proof that will produce in the mind of the trier of facts a firm belief or conviction upon the allegations sought to be established; it is intermediate, being more than a mere preponderance, but not to the degree of proof beyond a reasonable doubt as in criminal cases, and does not mean clear and unequivocal.” Bottoms v. Bottoms, 249 Va. 410, 457 S.E.2d 102 (1995).

In 1995 the Virginia Supreme Court issued another opinion concerning the Conspiracy Statute. In Commercial Business Systems, Inc. v. Bellsouth Services, Inc., 249 Va. 39, 453 S.E.2d 261 (1995) Commercial Business Systems, Inc. (CBS), a computer repair company, had an 18 month contract with Bellsouth to repair its computer equipment. Bellsouth’s contract negotiator was satisfied with CBS’s performance and said it could reasonably expect renewal of the contract. However, that negotiator was replaced with another Bellsouth employee, Jerry Waldrop, before the contract was renewed. Waldrop, while an employee of Bellsouth, established his own company in order to do business with Halifax, one of CBS’s competitors. Waldrop told CBS he was concerned about their warranty problems and their financial problems and awarded the repair contract to Halifax. The substance of Waldrop’s statements to CBS were false, and it became known that Waldrop was receiving bribes from Halifax in the form of “kickbacks.” Bellsouth fired Waldrop and terminated the contract with Halifax, but CBS sued Bellsouth alleging a violation of the Conspiracy Statute.

The trial court granted summary judgment in favor of Bellsouth on CBS’s conspiracy claim on the ground that the Conspiracy Statute requires proof of actual malice and there was no evidence that Waldrop harbored personal hatred or ill-will toward CBS. In reversing this ruling and holding that the conspiracy claim was a matter for the jury, the court said:

We reject Bellsouth’s contention that the conspiracy statutes require proof of actual malice. Although a jury reasonably could conclude that Waldrop harbored personal spite against CBS, we think the statutes merely require proof of legal malice, i.e., that Waldrop acted intentionally, purposely, and without lawful justification. [citations omitted].

249 Va. 47.

In 1998 the Virginia Supreme Court decided Advanced Marine, supra. In that case PRC, a marine engineering services company, had a service contract with the Navy and other marine engineering contracts. PRC required its employees to sign an employment contract which contained, among other things, a “non-compete” clause. PRC employees agreed in these contracts not to compete with PRC for a period of eight months following their termination of employment, not to disclose proprietary information outside the company and not to solicit any customer of PRC within 50 miles of a PRC office.

PRC, due to the loss of some marine engineering contracts, informed some of its marine engineering employees that PRC would be sold to Litton Industries, Inc. and that they should look for other employment. A senior manager in PRC’s marine engineering department, Michael Pirrera, contacted Advance Marine Enterprises, Inc. (AME), a marine engineering competitor of PRC that also had service contracts with the Navy, and asked them whether they would be interested in employing all seven of the managers in PRC’s marine engineering department (the PRC Managers). AME expressed interest and AME and the PRC Managers, led by Pirrera, formed a plan (the Plan). Under the Plan AME would attempt to hire every employee in PRC’s marine engineering department, including the PRC Managers, and all customer relationships at PRC and all existing PRC contracts would be transferred to AME. The Plan called for AME to agree to make secret job offers to all employees in PRC’s marine engineering department, which employees would be required to resign on the same day without complying with PRC’s requirement that employees give two weeks’ notice of their intent to leave. As one PRC manager testified at trial, the idea was “to put together an entity that the [PRC] customer can’t live without.” 256 Va. at 112.

AME was aware of the covenant not to compete in the PRC employment contracts and was aware that it faced a potential lawsuit to enforce those contracts that could include other causes of action such as tortious interference with contract. Nonetheless, the evidence at trial was that, “After projecting the nature and amount of damages that might result from a lawsuit by PRC, AME decided that the benefits of the Plan outweighed the potential consequences of a lawsuit.” Id. Accordingly, AME prepared offer letters to the PRC marine engineering department employees and authorized Pirrera to negotiate salaries with each of them. The PRC Managers delivered the offer letters to each PRC employee personally, emphasizing the need to keep PRC from gaining knowledge of the Plan prior to the date set for the mass resignation.

On that date all 26 of the employees and managers in the PRC engineering department submitted letters of resignation to PRC effective immediately. Before leaving PRC these employees copied their client files and sent them to sites where they would be available when they began working at AME. Many of the PRC Managers made “back-up” copies of PRC computer documents and files, which they removed from PRC without PRC’s knowledge. Some removed various documents pertaining to ongoing projects and work in progress at PRC. In some cases no similar documents were left at PRC. All of this information contained confidential and proprietary information of PRC.

The Supreme Court of Virginia affirmed the trial court’s finding that AME violated the Conspiracy Statute. AME argued that PRC was required to prove that AME acted with the purpose of injuring PRC, and that there was no evidence of such action by AME. The court rejected that argument saying, “To prevail in its business conspiracy claim, PRC was required to prove that the defendants combined, associated, agreed, or acted in concert together for the purpose of willfully and maliciously injuring PRC in its business ‘by any means whatever.’” Id. at 124. The court pointed out that in Commercial Business Systems, supra, it held that proof of actual malice was not required, and that “these statutes merely require proof of legal malice, that is, proof that the defendant acted intentionally, purposefully, and without lawful justification.” Id. at 117. The court continued:

PRC’s evidence was plainly sufficient to meet this standard of proof. The individuals in the business conspiracy participated in a scheme to take the entire marine engineering department from PRC and relocate the department at AME….AME and the PRC Managers and employees planned and implemented this scheme in secrecy while the PRC Managers and employees were still employed by PRC. The PRC Managers and employees planned and executed a mass resignation without notice to PRC. They took from PRC original client documents and copies of documents containing confidential and proprietary information without PRC’s permission or knowledge. Thus, we conclude the evidence supports the chancellor’s finding that AME conspired to injure PRC in its business in violation of Code sections 18.2-499 and –500.

Id. at 118.

Plaintiffs who have filed actions in federal court seeking treble damages under the Conspiracy Statute for alleged Injury to Business claims have not fared well under the federal judiciary’s strict construction of the statute. See, e.g., Peterson v. Cooley, 142 F.3d 181 (4^th Cir. 1998) (defendants’ motion for summary judgment aff’d.); Saliba v. Exxon Corp., 865 F. Supp. 306 (W.D. VA. 1994), aff’d, 52 F.3d 322 (4^th Cir. 1995) (defendant’s motion for summary judgment aff’d.); Petra Int’l Banking Corp. v. First American Bank of Virginia, 758 F. Supp. 1120 (E.D. VA. 1991), aff’d sub nom 953 F. 2d 1383 (4^th Cir. 1992) (defendants’ motion for summary judgment affirmed); Meadow Ltd. Partnership v. Heritage S&L Assn., 639 F. Supp. 643 (E.D. VA. 1986) (defendants’ motion for summary judgment granted); Nationwide Mutual Fire Ins. Co. v. Jones, 577 F. Supp. 968 (W.D. VA. 1984) (defendants’ motion for judgment notwithstanding verdict granted).

Discussion

The above-stated law makes it clear that joint conduct is at the heart of every conspiracy claim, and failure to prove such group activity by clear and convincing evidence will be fatal to the plaintiff’s conspiracy claim. It matters not how outrageous or unlawful an individual defendant’s actions may be, or what civil and criminal liability those actions may visit upon him; if that defendant does not engage in joint conduct with a co-conspirator, no liability for conspiracy will found. I find as a fact that in this case Keane has failed to prove by clear and convincing evidence that Signal engaged in such joint conduct with any of the Keane 25, including Hazel. Accordingly, I respectfully dissent from the Majority’s finding that Signal violated the Conspiracy Statute, and from its award of treble damages and attorneys’ fees in Keane’s favor against Signal.

The Majority finds joint conduct between Signal and Hazel from (1) the evidence in the record concerning Hazel’s activities at DOT headquarters in Washington, DC between the first All Hands Meeting on September 18, 2000 and the date of termination of the Subcontract on September 30, 2000; (2) from Signal’s posting of a notice of its Open House and a listing of the job vacancies at FHWA on the internet and on the bulletin board outside Ebersole’s office at DOT headquarters; and (3) from Signal’s recruitment of the Keane 25 and its hiring of the Signal 22 at the Open House on October 1, 2000 when Signal paid each of them $1500 signing bonuses and pay raises.

As a trier of fact, the evidence relied upon by the Majority does not produce in my mind a firm belief or conviction upon Keane’s allegations that Signal and the Keane 25 “combined, associated, agreed, mutually undertook or concerted together” for the purpose of willfully and maliciously injuring Keane in its business, the allegations that Keane seeks to establish here. Since that is the burden that Keane must carry in an Injury to Business claim brought under the Conspiracy Statute, I find against Keane on that claim.

Keane has not presented a scintilla of evidence, much less clear and convincing evidence, that Signal engaged in joint conduct with the Keane 25 to terminate the Subcontract. The Keane 25 first learned about Signal’s Termination Letter at the All Hands Meeting on September 18, 2000. At that time they were shocked and surprised to learn that, despite their exemplary individual performances on the Subcontract, they were about to lose their jobs at DOT headquarters and would have to go on the Bench at Keane, requiring them to commute from their homes in Maryland and the District of Columbia to Keane’s offices in McLean, Virginia. However wrongful that termination was, and despite the fact that Signal breached the implied covenant of good faith and fair dealing in the Subcontract, it was all Signal’s doing. There was no joint conduct between Signal and the Keane 25 that resulted in a wrongful termination of the Subcontract that could make Signal liable under the Conspiracy Statute. Therefore, Keane’s claim under the Conspiracy Statute is limited to a claim that Signal and the Keane 25 conspired to injure Keane in its business by recruiting and hiring the Keane 25 after September 18, 2000.

The Majority’s finding of joint conduct between Signal and the Keane 25 Team Leaders, including Hazel, to recruit and hire the Keane 25 must necessarily be conduct that occurred during the two week period between the first All Hands meeting on September 18, 2000 and the effective termination of the Subcontract on September 30, 2000. A close review of the evidence concerning the conduct that occurred during that period requires the trier of fact to speculate that Signal and members of the Keane 25 “combined, associated, agreed, mutually undertook or concerted together” to injure Keane in its business by recruiting and hiring the Keane 25. A trier of fact could just as reasonably infer from that evidence that Signal engaged in joint conduct with employees of the FHWA to recruit and hire the Keane 25, and that the plan of Signal and the FHWA was communicated by Neff of the FHWA to Hazel, who communicated it to his Team Leaders.

At the September 18, 2000 All Hands Meeting it was Keane officials who told the Keane 25 that their presence on the Subcontract was instrumental to Signal’s performance of the Prime Contract, and that they should stick together as a group. At the Keane interviews of the Keane 25 the next day, September 19, Hazel told Pelkey that, “someone from the government had assured him that all of his people would be taken care of.” Pelkey testified that it wasn’t that the Keane 25 “were talking to anyone from Signal as much as that seemed to be the word that was filtering down through the management team,” who kept telling the Keane 25 that they shouldn’t worry and used phrases like, “We’ve got to stick together.”

At the September 20 meeting of the Keane 25 called by Hazel, there was no discussion of (1) the need to resign voluntarily from Keane by Friday, September 29, (2) of a Signal Open House on October 1, or (3) of any signing bonus that Signal might pay to the Keane 25 if they accepted employment from Signal. It was not until Friday, September 22 that Hazel learned about Signal’s planned open house and the posting by Signal of the Keane 25’s job positions on the bulletin board outside Ebersole’s office. That notice, and Signal’s internet announcement of the Open House, apprised the Keane 25 that Signal would recruit persons for their jobs on October 1. On September 24 Smith instructed Ebersole that he was not to solicit the Keane 25 while they were Keane employees and that Signal would not extend offers to the Keane 25 at the Open House unless they could produce evidence that they had voluntarily resigned from Keane prior to October 1. Signal has admitted in its answers to interrogatories that it communicated to Hazel that no communications between Signal and the Keane 25 could take place prior to the termination of the Subcontract and “unless and until proof of resignation could be demonstrated.”

There can be no doubt that, once Hazel learned of the Open House and was told by Signal that none of the Keane 25 would receive job offers at the Open House unless they had voluntarily resigned from Keane prior to it, Hazel and his Team Leaders gave a sample resignation letter to the Keane 25, urged them to resign voluntarily from Keane by Friday, September 29 and told them about Signal’s $1500 signing bonus. That fact, however, does not prove joint conduct between Signal and the Keane 25.

During the period May through early September, 2000, officers at Signal discussed among themselves and with Signal’s outside legal counsel the legal implications of Signal recruiting and hiring the Keane 25 after termination of the Subcontract. In early September LaFleur, a Signal officer, had conversations with Neff about the possibility of the Subcontract being terminated. After Keane was one day late with its September invoice, Signal officers contacted the FHWA and discussed termination of the Subcontract with Government employees. On September 13, Neff of the FHWA called Signal and gave it the “go-ahead” on Signal’s termination of the Subcontract. The FHWA was interested in the possibility that Signal’s termination of the Subcontract would “end up being cheaper for FHWA.” Prior to sending the Letter of Termination to Keane, Smith wrote a letter to Martoccia of the FHWA explaining Signal’s intention to terminate the Subcontract and advising the FHWA that as a result of the termination “the total cost to the Government for the program may decrease.”

On Monday, September 25, officers of Signal met with contracting officers of the Government and, in response to the FHWA’s concerns about how the Prime Contract would be staffed after termination of the Subcontract, and about how Signal would treat the Keane 25, Signal assured the FHWA that it was Signal’s intention to put the Keane 25 in as good a position as they were in before termination; that Signal was holding an Open House on October 1 and planned to offer each member of the Keane 25 a $1,000 signing bonus at that time; but that Signal could not discuss employment with the Keane 25 until after the Subcontract had terminated and until after each member of the Keane 25 voluntarily resigned from Keane. The FHWA approved Signal’s plan and suggested that Neff get together with Signal’s officers to determine those positions being filled by the Keane 25 that were “critical to fill” for continuing performance of the Prime Contract. Neff worked with Signal officers to establish a “priority list” that rated the Keane 25 members from 1 to 25 for purposes of Signal making offers to the Keane 25 at the Open House. Shortly after Signal had received signed offer letters from the Signal 22 at the Open House a Signal officer telephoned an FHWA official to advise her of those results. She was “very pleased.”

None of the Keane 25 were present at any of the aforesaid discussions and they took no part in the plan for recruitment and hiring of the Keane 25 designed by Signal and approved by the FHWA. It is completely reasonable for the trier of fact to infer from this uncontradicted evidence that any joint conduct concerning recruiting and hiring of the Keane 25 by Signal occurred between Signal and the FHWA, and that Hazel, his Team Leaders and the rest of the Keane 25 did no more than learn that they could apply for their same jobs on October 1 and receive a $1500 signing bonus, and perhaps a raise in salary, if they voluntarily resigned from Keane by Friday, September 29. Keane alleged such conspiracy theories between Signal and the FHWA, and between Signal and FHWA employees, in its original Demand for Arbitration. The Panel unanimously granted Signal’s motion to dismiss those claims and Keane was put on notice that, if it wished to pursue a claim against FHWA employees it would have to file an action against them in state or federal court and give them the opportunity to turn their defense over to the Attorney General of the United States. To this Arbitrator’s knowledge, Keane has not filed such a suit. In any event, Keane can prevail in this arbitration on a claim against Signal under the Conspiracy Statute only if it proves by clear and convincing evidence that there was joint conduct between Signal and the Keane 25. In my view it has failed to do this.

Of the six cases concerning the Conspiracy Statute to be decided by the Supreme Court of Virgina, two were decided on demurrers and give no guidance about joint conduct. See, Allen Realty, supra and Hechler Chevrolet, supra. In Greenspan v. Osheroff, supra, the plaintiff failed to prove joint conduct in an Injury to Business claim. In Tazewell Oil, supra, there was clear and convincing evidence of joint conduct by the two bank defendants. In Commercial Business Systems, supra, there was clear and convincing evidence of joint conduct between the employee who received kickbacks and the service company he awarded the contract to. In my view, it is Advanced Marine, supra, the case relied upon the Majority here, that is the most instructive in reaching a finding of fact that Keane failed to prove by clear and convincing evidence joint conduct between Signal and the Keane 25.

The evidence concerning joint conduct produced by the plaintiff in Advanced Marine graphically illustrates why Keane has failed to prove that element here. In Advanced Marine Pirrera, a PRC Manager who had signed an employment contract containing a covenant not to compete, approached AME to see if it was interested in employing all seven of the managers in PRC’s marine engineering department. AME and the PRC Managers, led by Pirrera, formulated “the Plan,” whereby AME would make secret job offers to all PRC employees in the marine engineering department and all existing PRC contracts and proprietary and confidential information would be transferred by those employees to AME following their mass resignation. AME prepared offer letters to the PRC employees and authorized Pirrera to negotiate salaries with each of them on AME’s behalf. The PRC Managers delivered the AME offer letters to each PRC employee individually. It is difficult to imagine more clear and convincing evidence of joint conduct between AME and the PRC Managers and Pirrera than the plaintiff produced in Advanced Marine. The evidence produced by Keane in this case of joint conduct between Signal and the Keane 25, discussed above, does not just pale by comparison; the comparison literally compels the trier of fact to conclude that Keane has failed to prove joint conduct here by clear and convincing evidence.

The Majority finds that the standard of conduct required for violations of the Conspiracy Statute has been defined by the Supreme Court of Virginia “as legal malice, proof that the defendant acted intentionally, purposefully and without legal justification,” citing Commercial Business Systems and Advanced Marine, and concludes that Signal’s actions violated the Conspiracy Statute because they were “intentional, purposeful and without legal justification.” My finding of fact that Keane has failed to prove joint conduct between Signal and the Keane 25 by clear and convincing evidence disposes of Keane’s claim for Business Injury under the Conspiracy Statute without reaching the issue of legal malice. A defendant does not violate the Conspiracy Statute simply by acting “intentionally, purposefully and without legal justification” where joint conduct has not been proved.

The Majority also finds that by his conduct Hazel breached a fiduciary duty of loyalty to his employer, Keane, citing Sperry Rand Corp. v. Electronics Concepts, Inc., 525 F. Supp. 1209 (1970), a case that did not involve the Conspiracy Statute. It may be that Hazel breached such a duty, but that finding does not provide Keane with the missing clear and convincing evidence of joint conduct between Signal and the Keane 25 that is required by the Conspiracy Statute to obtain treble damages and attorneys’ fees. If Keane has a cause of action against Hazel for breach of a fiduciary duty owed to it as his employer, Keane must file an action against Hazel in state or federal court because that is not an issue that is arbitrable under the Subcontract.

An award of treble damages and attorneys’ fees is a punitive award and the law does not favor such awards, as evidenced by the fact that the law requires a higher degree of proof to recover such damages than it does to recover compensatory damages. There is little in the Virginia Conspiracy Statute to recommend its easy application. That appears to be the attitude of the judiciary, especially the federal judiciary. I believe that to be the proper construction of the Conspiracy Statute. Signal’s actions here have been found by the Panel to be in bad faith and they are certainly not commendable. But a finding of a violation of the Conspiracy Statute where Keane has failed to prove joint conduct by clear and convincing evidence is, in my view, an inappropriate reaction to Signal’s actions. I would award Keane the compensatory damages stated in Part I of the Panel’s opinion, and order Signal to pay all of the AAA’s administrative charges and all of the fees of the arbitration Panel, reimbursing Keane for any amounts of those fees and costs it has paid to date.

 

 

_____________________________________

                                                            Phillip D. Bostwick 08/ /01

                                                            Chairman