Predicating False Claims Act Liability On False Cost Estimates May Impact Contractors' Willingness to Take On Projects Involving Next Generation Technologies

by Sheppard Mullin Richter & Hampton LLP

[author: Joseph Barton]

In 1995, the U.S. Air Force awarded Lockheed Martin the RSA II Contract (the “Contract”) for the provision of software and hardware used to support space launch operations at Vandenberg Air Force Base and Cape Kennedy. Importantly, the Contract is a cost-reimbursement type contract whereby a contractor is paid for the allowable expenses it incurs plus an additional payment to allow for a profit.

Lockheed Martin’s initial bid for the Contract was $439.2 million. However, Lockheed Martin reduced its bid to $432.7 million in its Best and Final Offer after receiving word that its initial bid was too high. To date, Lockheed Martin has been paid over $900 million on the Contract.

Nyle Hooper was a Senior Project Engineer on the Contract. He filed suit against Lockheed Martin under the False Claims Act, 31 U.S.C. §§ 3729-3733, (the “FCA”) alleging that Lockheed Martin knowingly underestimated its costs in its Best and Final Offer in order to improve its chances of winning the Contract. At trial, Hooper provided evidence that Lockheed Martin instructed its employees to lower its price for the Contract without regard to the actual costs it expected to incur on the project. One of the Lockheed Martin employees responsible for preparing cost estimates for the Contract testified that after Lockheed Martin learned its initial bid was too high, he was “asked [by management] to change the cost” despite the fact there was no engineering basis for the cost change. The employee further testified that the cost estimates Lockheed Martin submitted as part of its Best and Final Offer were based on “bad, bad guesses.” He clarified, however, that the cost estimates were not “false.”

The U.S. District Court for the Central District of California granted summary judgment in favor of Lockheed Martin on grounds that Hooper failed to present any evidence Lockheed Martin had intended to defraud the government by basing its Best and Final Offer on false cost estimates. In August 2012, the Ninth Circuit Court of Appeals in U.S. rel. Hooper v. Lockheed Martin Corp., No. 11-55278 (9th Cir. 2012), reversed the District Court holding: (1) a claim that a contractor fraudulently underbid or relied upon false cost estimates to obtain a government contract is cognizable under the FCA; (2) the FCA does not require a qui tam relator to identify evidence of specific intent to defraud the government in order to survive a motion for summary judgment as “reckless disregard” or “deliberate ignorance” of the truth is sufficient to establish liability under the FCA; and (3) Hooper had presented sufficient evidence to create a genuine issue as to whether Lockheed Martin acted with “reckless disregard” or “deliberate ignorance” in constructing its Best and Final Offer for the Contract to the Air Force.

The idea that an FCA action involving a cost-reimbursement type contract can be predicated on “fraudulent underbidding” or “false cost estimates” is troublesome because the main reason the government awards cost-reimbursement type contracts is the unpredictability of the costs that might be necessary to accomplish certain tasks. This is especially so when dealing with projects involving next generation technologies such as the communication networks, weather instrumentation, telemetry processing, pre and post-flight analysis tools, and network management capabilities Lockheed Martin has delivered to the Air Force on the Contract. The fact that the Ninth Circuit’s decision in Hooper now makes FCA actions possible whenever the actual costs on a contract exceed the estimated costs, no matter how difficult or unprecedented the contract’s tasks may have been, may well cause contractors to think twice before bidding on these types of contracts.


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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