The Contractor's Perspective

Underbidding and faulty estimates may carry FCA liability

Posted in False Claims Act

Under a recent ruling by the U.S. Court of Appeals for the Ninth Circuit, contractors may face False Claims Act liability for the submission of false estimates, including fraudulent underbidding. In United States ex rel. Hooper v. Lockheed Martin Corporation, No. 11-55278 (9th Cir. Aug. 2, 2012) [pdf], the Ninth Circuit joined the First and Fourth Circuits in holding that “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.”

In this case, a former Lockheed Martin employee alleged that the company intentionally underbid its proposal for the Air Force’s Range Standardization and Automation IIA (“RSA IIA”) program. Lockheed was awarded the RSA IIA contract in 1995, and since then it has been paid more than $900 million on a cost-reimbursement plus award fee basis. Hooper, the qui tam relator and former Lockheed employee, alleged that the employees preparing Lockheed’s RSA IIA bid were told to “lower their estimates without regard to actual costs.”

The District Court granted Lockheed’s motion for summary judgment, finding that Hooper had not presented sufficient evidence of fraudulent underbidding to survive summary judgment. The District Court did not address the issue of whether fraudulent underbidding or false estimates can create FCA liability.

On appeal, the Ninth Circuit relied on the Supreme Court’s holding in United States ex rel. Marcus v. Hess, No. 173 (S. Ct. Jan. 18, 1943) and analogized the facts to a bid rigging situation where many courts (the Ninth Circuit included) have applied the FCA. Ultimately, the court held that a contractor’s submission of false estimates, defined to include fraudulent underbidding, can be a source of FCA liability.

The court went on to reverse and remand the District Court’s grant of summary judgment, finding that there is a genuine issue of material fact “as to whether Lockheed engaged in fraudulent underbidding.” The court found that the District Court had applied the wrong legal standard under the “knowledge” element of the FCA by requiring Hooper to prove that Lockheed intended to deceive the Air Force by way of its false estimate. The correct standard under the “knowledge” prong is “whether Lockheed acted either knowingly, in deliberate ignorance of the truth, or in reckless disregard of the truth” when it submitted a false bid for the RSA IIA contract. Under that standard, the Ninth Circuit found that there was a genuine issue of material fact that prevented a ruling on summary judgment, and it reversed and remanded.

The Hooper decision is another example of the ever-expanding scope of the FCA—but the result is still a shock to the contracting community. In the context of a cost reimbursement agreement, cost overruns are not uncommon, bringing actual expenditures over the level anticipated at the proposal stage. So where does contract management end and false claims liability begin? Allowing Hooper’s qui tam complaint to survive summary judgment with relatively little evidentiary support doesn’t provide contractors with any comfort in considering the answer to that question.

UPDATE: Hear my interview discussing this decision on Federal News Radio’s In Depth with Francis Rose.