Friday, August 10, 2012

Underbidding Can be a False Claim?

The U.S. Court of Appeals for the Ninth Circuit issued a decision in US ex rel. Hooper v. Lockheed Martin Corp (No. 11-5528) last week, reversing a lower court decision, in which a "qui tam" whistleblower (Hooper) alleged that the contractor (Lockheed) had fraudulently underbid and/or relied upon false estimates to obtain a government contract. A district court had previously sided with Lockheed and Hooper appealed.

Lockheed argued that allegedly "false" estimates cannot be the basis for liability under the FCA (False Claims Act) because an estimate is a type of opinion or prediction, and thus cannot be said to be a "false statement" within the meaning of the FCA. Specifically, Lockheed argued that "estimates of what costs might be in the future are based on inherently judgmental information, and a piece of purely judgmental information is not actionable as a false statement".

The Ninth Circuit Court felt otherwise. After the Air Force rejected one of Lockheed's bids, Lockheed went back to the drawing table to revise it. The Court noted that Lockheed management had instructed its employees to lower their bids without regard to actual cost. When one employee (Hooper) protested, he was cut out of the bidding process. Ultimately, Lockheed cut its initial bid in half and was awarded the contract. The Court stated that there was a genuine issue as to whether Lockheed had actual knowledge, deliberately ignored the truth, or acted in reckless disregard of the truth when it submitted its allegedly false bid.

The Ninth Circuit reversed and remanded the district court's dismissal of Hooper's claim that Lockheed violated the FCA by knowingly underbidding the contract. "Having determined that FCA liability may be premised on false estimates, we hold that there is genuine issue of material fact whether Lockheed acted either knowingly in a deliberate ignorance of the truth, or in reckless disregard of the truth when it submitted its bid for the ...contract".

This is dangerous ground for contractors.

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