Knowingly Underbidding For Government Contract May Lead to False Claims Liability

by Sheppard Mullin Richter & Hampton LLP
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Contractors usually assume that the statutory prohibition on submitting “false claims” refers to inflated invoices, phony change order costs, and the like. However the courts are giving the relevant statutes a broader meaning which public works contractors should take into account. For example, the United States Ninth Circuit Court of Appeals recently ruled that a bidder for a government contract that is found to have knowingly underbid the contract may have liability under the federal False Claims Act (“FCA”). In Hooper v. Lockheed Martin Corporation, 688 F.3d 1037 (9th Cir. 2012), Lockheed was the successful bidder for a contract with the Air Force to automate and modernize software and hardware used to support U.S. space launch operations. The contract was structured as a reimbursable cost plus “award fee” contract, where the contractor would be paid its costs of performing the work, plus “award fees” given at periodic intervals based on overall performance, including factors such as “spending less money than estimated.” Id. at 1041. Because the extent of the work required was uncertain, bidders were to submit their estimated costs of performing the work. Lockheed initially submitted a bid of $439.2 million, and later submitted a “Best and Final Offer” of $432.7 million. Id. at 1042. After the award, the government paid Lockheed more than $900 million for its work.

The qui tam (“whistle blower”) plaintiff, Nyle Hooper, filed a false claims action asserting, among other things, that Lockheed had violated the FCA by submitting a fraudulently low bid, which constituted a “false or fraudulent claim” under the FCA. Given that its bid was an estimate of future costs rather than a direct claim for payment, Lockheed moved for summary judgment on the ground that “because an estimate is a type of opinion or prediction, . . . [it] cannot be said to be a ‘false statement’ within the meaning of the FCA.” Id. at 1047.

Relying on Supreme Court precedent holding that contractors may be liable under the FCA for collusive bidding, and Fourth Circuit precedent holding that situations involving fraud-in-the-inducement are sufficient to impose FCA liability, the Ninth Circuit first ruled that a knowing underbid could constitute a “false or fraudulent claim” within the meaning of the FCA. The court explained that “an opinion or estimate carries with it ‘an implied assertion, not only that the speaker knows no facts which preclude such an opinion, but that he does not facts which would justify it.” Id. at 1048. Where these conditions are not met, an opinion or an estimate may form a basis for FCA liability. Id. at 1049.

The court then turned to the question of whether the plaintiff had submitted sufficient evidence that Lockheed had knowingly underbid the contract. Hooper submitted evidence that after the government rejected Lockheed’s initial bid, “Lockheed employees were instructed to lower their bid without regard to actual cost.” Id. at 1050. The evidence included testimony from a Lockheed employee that he was “asked [by management] to simply change the cost” in the bid, “even though the change in cost was not based on any engineering judgment.” Id. The court concluded this evidence was sufficient to create a triable issue of fact, and allow the case to proceed to trial.

Comment: In recent years, numerous commentators have noted that the difficult economic climate has forced contractors to be ever more aggressive in their bids for public contracts. While economic conditions have eased at least to some degree, bidders must continue to be vigilant to ensure that their bids are always tied to verifiable cost figures.

Author: Robert Sturgeon is an associate in Sheppard Mullin’s Los Angeles office and member of its Construction Industry Practice Group.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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