Underbidding and the False Claims Act

Handling Whistleblower Cases Nationwide from Newport News, Virginia

On August 2, 2012, the U.S. Court of Appeals for the Ninth Circuit issued its decision in United States ex rel. Hooper v. Lockheed Martin Corp., holding that underbidding on a $900 million government contract creates liability under the False Claims Act.

The ruling marks the first time a federal court of appeals has considered whether underbidding constitutes a violation under the qui tam provisions of the False Claims Act. In the opinion of the court, “false estimates, defined to include fraudulent underbidding in which the bid is not what the defendant actually intends to charge, can be a source of liability under the FCA, assuming that the other elements of a claim are met.”The Department of Justice filed an amicus brief with the Ninth Circuit, asserting that “there is no reason to insulate from FCA liability a contractor who provides a deliberately understated cost estimate in order to win a contract, but who has no intention of actually fulfilling the contract at that estimated cost.”

Relator Nyle Hooper, a former Lockheed senior project engineer, filed suit in July 2005 alleging that Loral Systems Co. (later purchased by Lockheed) had defrauded the government by falsely informing the U.S. Air Force about cost estimates on a contract to replace hardware and software used in space and missile launches. In 1995, the Air Force selected Loral’s bid of $432.7 million; Hooper was then fired in 2002 after threatening to report contract fraud to the government.

Mark Labaton, Hooper’s attorney, believes the case could be “very, very significant, because our understanding is that underbidding to get contracts occurs quite often, particularly in the defense contracting industry. The implications of this decision beyond our case could be very significant.”

The decision reverses the initial ruling by U.S. District Judge Dale Fischer, who had dismissed the case in January 2011 on a summary judgment motion.

The district court originally ruled that the relator “had not identified any evidence that the contractor had specifically intended to defraud the government by submitting the allegedly fraudulent underbids/false estimates.” Reversing that decision, the appellate court proclaimed that an opinion or estimate “carries with it an implied assertion, not only that the speaker knows no facts which would preclude such an opinion, but that he does know facts which justify it.” Further, the appellate court found that the district court erred by requiring evidence of the defendant’s wrongful intent, stating that “deliberate ignorance and reckless disregard” stood as sufficient evidence to prevent summary judgment and require a trial.

The court also found that Hooper could revive a claim for wrongful termination under Maryland’s statute of limitations.

In a public statement, Lockheed spokesman Chris Williams commented on the ruling: “We’re disappointed in the court’s decision to partially reinstate this claim. We believe the case lacks merit and we will vigorously defend ourselves against this frivolous lawsuit.”

If you have any questions about the False Claims Act, feed free to contact us for a free confidential consultation.

Bronstad, Amanda. “False Claims Act covers contract underbidding, Ninth Circuit Rules.” National Law Journal, August 8, 2012. Web. 13 Aug. 2012.

Axel, Douglas. “Ninth Circuit Holds That “Underbidding” Is Actionable Under The FCA.” Original Source. Sidley Austin LLP, August 09 2012. Web. 13 Aug. 2012.

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Gallagher, James, Susan Mitchell, and Jason Workmaster. “Ninth Circuit Issues Troubling False Claims Act Decision.” JDSupra August 7, 2012. Web. 13 Aug 2012.

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