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Underbidding By Government Contractors Can Give Rise To Whistleblower Lawsuits Under The False Claims Act

In a groundbreaking case of first impression, the United States Court of Appeals for the Ninth Circuit decided Hooper v. Lockheed Martin Corp. on August 2, 2012, reversing the lower court and holding that cost estimates submitted by government contractor Lockheed Martin Corp. (“Lockheed”) could be “false claims” for purposes of the federal False Claims Act. In doing so, the Night Circuit flatly rejected Lockheed’s contention that the allegedly false estimates were “purely judgmental information” or opinions that were not actionable as false statements of fact. The Ninth Circuit’s decision reaffirms that the FCA should be broadly interpreted and warns contractors that a strategy of winning government work by knowingly underbidding contracts can lead to costly liability.

Whistleblower Nyle Hooper sued his former employer, Lockheed, under the False Claims Act, accusing the company of, among other things, knowingly underbidding for a contract concerning the United States Air Force’s Range Standardization and Automation (“RSA”) IIA program. The RSA IIA program was intended to “automate, standardize, and modernize software and hardware used to support our nation’s space launch operations.” The RSA IIA program contract was a “cost reimbursement, plus award fee” contract, and the Air Force issued a RFP for bids on the contract. Three companies, including Lockheed, submitted bids. Lockheed’s best and final offer was $432.7 million, but it was not the lowest bid. However, after analyzing all three bids, the Air Force determined that Lockheed’s proposal provided the “best overall value” to the government and awarded it the contract. The government made this decision despite findings by independent consultants that Lockheed “employed realistic methods” in making its cost estimates but “overstated [the] potential for cost savings” and understated the total risk associated with the project.

Hooper, a Senior Research Operations Engineer and, later, a Senior Project Engineer, was assigned to work on the RSA IIA program but did not work on the proposal for the project. However, another Lockheed insider who did work on the proposal testified that “employees were instructed to lower their estimates without regard to actual costs” and that the calculations used to compute the final bid were “bad, bad guesses,” but not false. He also testified that he was instructed to lower the estimated costs “even though the change in cost was not based on any engineering judgment.” When he resisted, he was ignored, and Lockheed subsequently lowered the cost estimates significantly. Taking into account this evidence, the Ninth Circuit held 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 for the RSA IIA contract[.]”

On the key issue of whether underbids were “false claims” under the Act, the Ninth Circuit relied upon similar decisions in the First and Fourth Circuits that were based on a “fraud in the inducement” theory. Specifically, under that theory, “FCA liability may attach where there is fraud surrounding the efforts to obtain the contract or benefit status, or the payments thereunder.” Citing the Fourth Circuit’s earlier decision in U.S. ex rel. Harrison v. Westinghouse Savannah River Co., the Ninth Circuit rejected Lockheed’s argument that its cost estimates were merely predictions or opinions because “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.”

The Ninth Circuit’s opinion is an important milestone in combatting fraud by government contractors. Per Hooper, government contractors must think past the short-term goal of winning the contract by any means necessary, including by knowingly submitting underbids. Hooper reinforces the principle that the government contracting process should be transparent, fair, and honest and that government contractors who do not abide by those standards may be held accountable for their actions, including through qui tam cases brought under the False Claims Act by company whistleblowers.