Type: Law Bulletins
Date: 12/19/2012

Lost Profits Aren't So Lost Anymore?

The Virginia Supreme Court recently awarded damages to a plaintiff (a government contractor) for the expected loss of business rather than the actual loss of business suffered as a result of a breach of a non-compete clause.1 Although Preferred Systems Solutions, LLC v. GP Consulting, LLC is a Virginia case, the decision may be useful to government contractors facing similar situations in other jurisdictions.

The plaintiff, Preferred Systems Solutions (“PSS”), was one of 10 contractors working on a “system solutions” program under a blanket purchase agreement (“BPA”) with the Defense Logistics Agency (“DLA”). The BPA did not guarantee that the DLA would order any work under the agreement; rather, it set up the means through which the DLA could issue task orders for the contractors to perform and be paid. The BPA provided a structure wherein one contractor—in this instance, Accenture—provided some oversight overall while still competing for and performing DLA-issued task orders along with the other nine contractors.

To perform under the BPA, PSS subcontracted with the defendant, GP Consulting (“GP”). The subcontract between PSS and GP included a “covenant not to compete,” which provided that: (1) GP would not enter into a contract with Accenture or the DLA to provide the “same or similar support” that GP provided to PSS in support of the system solutions contract; and (2) GP would not enter into an agreement with a competing business and provide the same or similar services that GP provided to PSS for a period of 12 months following termination of their contract.

GP terminated its subcontract with PSS at the conclusion of the “operational capability” phase of the DLA’s program, at which point the “sustainment” phase began. Three days after termination, GP immediately began working for Accenture in violation of the covenant not to compete. PSS filed suit against GP, alleging breach of contract, misappropriation of trade secrets, and tortious interference with contract. At trial, the circuit court held that GP had breached the subcontract and awarded PSS damages, including lost profits, in the amount of $172,395.96.

On appeal to the Virginia Supreme Court, GP argued that the damages were too speculative because there was no guarantee that PSS would be awarded future contracts or task orders from the DLA. The Virginia Supreme Court disagreed, holding that PSS merely had to prove, by a preponderance of the evidence, that “absent the breach, PSS would have continued to work, bill and to be compensated for work” performed under the DLA BPA. The Supreme Court went so far as to provide guidance on how to calculate the damages. The Court found it rational to take the time billed by GP to Accenture and apply PSS’ “previously established profit margin” under the BPA to determine the amount of profit lost by GP’s work for Accenture.

How does this decision impact government contractors? Calculation of damages is often a critical question in disputes between contractors and subcontractors over a wide array of issues—not just in cases involving non-compete clauses. While it remains to be seen if this decision by the Virginia Supreme Court will have an impact on future litigation, at a minimum it provides a roadmap to contractors, subcontractors and courts in other jurisdictions as to how they could handle similar claims. In addition, it makes lost profits a viable element of damages to be included in breach of contract cases.

1732 S.E.2d 676 (Va. 2012)

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