7th Circuit Affirms Dismissal of False Claims Act Claims Against General Dynamics and Lockheed Martin

Posted on August 24, 2011 by Michael J. Maloney

In United States ex rel. Yannacopoulos v. General Dynamics, et al., No. 09-3037, the 7th Circuit affirmed summary judgment dismissal of a case alleging that General Dynamics and Lockheed Martin submitted false claims to the United States for payment in connection with a contract to manufacture and sell F-16 fighter jets and related parts and services to the government of Greece. 

The relator’s primary claims arose from General Dynamics’s submission of claims for payment relating to the Hellenic Business Development and Investment Company, a Greek company created by General Dynamics and in which the government of Greece was a minority shareholder.  The fighter jet contract with Greece required General Dynamics to create this new company and capitalize it with $50 million dollars.  The company’s stated purpose was to provide venture capital to companies in Greece.  However, after fifteen years, the company was to be dissolved with all assets up to $50 million and 50% of assets in excess of that amount reverting to the government of Greece. 

The relator alleged that General Dynamics violated the False Claims Act by billing the United States for the $50 million used to capitalize the new company.  The relator argued that passing these costs on to the United States violated a provision of the contract requiring General Dynamics to “confirm[] that the material for which payment is requested are United States source end products”, among other provisions.  In connection with the submission of requests for payment to the United States, General Dynamics certified its compliance with this and other provisions of the contract. 

The lower court, however, rejected the relator’s argument and granted summary judgment dismissing the relator’s claims relating to the Hellenic Business Development and Investment Company.  The 7th Circuit affirmed, holding that the source end product restriction applied only to “material” to be provided under the contract.  The 7th Circuit held that “material”, as used in the contract, included only physical items or substances such as jet engines or spare parts.  The relator’s arguments based on other terms of the contract requiring the U.S. origin of products or goods failed for similar reasons. 

The relator alternatively argued that requests for payments relating to the Hellenic Business Development and Investment Company violated a provision of the contract preventing General Dynamics from using government funds to purchase services from non-U.S. contractors or individuals not resident in the U.S.  The lower court rejected this claim as well.  The 7th Circuit affirmed, reasoning that General Dynamics’s expenditure of funds on stock in the new company failed to qualify as the purchase of services.
Tags: , , ,

District Court Dismisses FCA Action, Holding FCA is "Not a Strict Liability Statute"

Posted on June 27, 2011 by Sung W. Kim

On June 9, 2011, the District Court of Massachusetts in United States ex rel. Saltzman v. Textron Systems Corp., et al., Civil Action No. 09-cv-11985-RGS (D. Mass. June 9, 2011), dismissed a federal False Claims Act lawsuit alleging that Textron Systems, a defense contractor, submitted false claims for reimbursement for workers’ compensation insurance premiums.  The court held that even if the insurance costs were not in fact reimbursable, the defendant “is not culpable, as the FCA is not a strict liability statute.” The lawsuit was brought by a former employee of the defendant.  The United States declined to intervene.

Textron entered into a contract with the United States Air Force to provide special weapons systems, and the contract contained a provision requiring Textron to provide workers’ compensation insurance until performance of the contract was completed.  Textron inquired internally as to whether the insurance premiums could be passed along to the government and subsequently presented claims for reimbursement for those costs.  The relator contended that these claims were false because the contract in question required the defendant to provide insurance “at its own expense.”  However, the court found no allegations in the complaint of any actual knowledge of falsity.  Rather, the defendant’s internal inquiry suggested to the court that the defendant did not know that the insurance premiums were not reimbursable.  Moreover, the court observed that the same internal inquiry undercut any contention that there was any willful blindness on the defendant’s part.
Tags: , , ,

11th Circuit Affirms Dismissal of FCA Claims Against Lockheed Martin Regarding Allegedly Defective Coatings on F-22 Stealth Aircraft

Posted on June 7, 2011 by Cliff Katz

Former senior engineer at Lockheed Martin Corp., Darrol Olsen, filed a False Claims Act lawsuit against Lockheed, alleging that Lockheed used inferior and defective coatings on F22 aircraft.  The coatings are allegedly critical for the F22s stealth capability. The U.S. Air Force purchased 648 of these F-22s from Lockheed at a cost of about $87 billion. The Government did not intervene in the lawsuit, and the district court dismissed the complaint because Olsen failed to plead the claims with the particularity required by Rule 9(b) of the Federal Rules of Civil Procedure. The 11th Circuit affirmed the district court’s opinion. See United States ex rel. a.k.a. SEAL 1 v. Lockheed Martin Corp., Case No. 10-14763, 2011 WL 2150052 (11th Cir. June 1, 2011).

The 11th Circuit found significant that Olsen did not allege that the misrepresentations made by Lockheed officials played any role in the U.S. Air Force’s decision to make payments on the claims submitted by Lockheed for the F22s.  The particulars of the allegedly false claims missing from the complaint included:

  • the number of claims presented;
  • the dates on when the claims were made; 
  • terms of payment; 
  • what representations were made at the time Lockheed sought payment; and
  • how the representations were false and fraudulent.

The 11 Circuit held, as courts have frequently stated, the failure to allege sufficient specifics of the “who, what, where and when of alleged false statements” is fatal to the FCA complaint.
Tags: , ,

Florida District Court Denies Weapons Contractors' Motion to Dismiss

Posted on June 1, 2011 by Sung W. Kim

In United States ex rel. King v. DSE, Inc., et al., No. 8:08-cv-02416-SDM-EAJ (M.D. Fla. May 17, 2011), the Middle District Court of Florida denied various defense contractors’ motions to dismiss for failure to plead fraud with particularity.  The defendant contractors are weapons manufacturers retained by the government for the supply of grenades.  The relator, a former quality control manager for one of the defendants, alleged that defendants failed to follow proper quality control procedures and shipped defective grenades that failed to meet contract specifications.  Defendants contended that the relator failed to allege the dates and amounts of the false billing or payments, and that relator’s claims were spurious because he worked for only one of the defendants and for only several months at most. 

Nevertheless, the court found that allegations of improper quality control procedures against the contractors were sufficient in this case to satisfy FCA’s heightened pleading requirements.  In so holding, the court distinguished the case from the healthcare fraud context where an FCA plaintiff must allege with particularity a claim or bill for payment submitted to the government.  As the court stated, “in the medical context the harm to the government arises from the act of billing” whereas improper quality control procedures and defective military equipment “distinctly harm the government entirely distinct from any financial impact.”

Tags: , , ,