Defense Contractor Fraud

By:  Joel M. Androphyi, Rachel L. Grier

The False Claims Act (“FCA”) is particularly important in the area of defense contracts. In fact, the FCA was enacted due to the sever abuses which occurred at the hands of many defense contractors and corrupt officials who fraudulently procured payment for the necessities of war, such as ships, food, supplies, and weapons, to the detriment of the United States military.1At the time of the Civil War, no adequate law existed to guard against such corruption. Thus, the FCA was passed to deter and punish wrongdoers as well as to reimburse the Government for its loses.2 False claim actions involving defense contracts typically fall into two categories: (1) those claiming that the defense contractor provided false information regarding product specifications, such as testing records, in violation of a statute, regulation or the contract terms and (2) those alleging that the defense contractor mischarged the Government for the cost of the supplies or services rendered. The majority of these cases reach a settlement prior to trial.

Some examples include: 

Lockheed Martin (“Lockheed”) and BAE Systems (“BAE”)

  • In 2002, Lockheed and BAE reached a settlement with the United States government as a result of claims that 1,300 Accelerometer Sensor Assemblies manufactured and delivered for installation in Navy aircrafts did not comply with electromagnetic interference contractual requirements.3 Lockheed and BAE settled the lawsuit for $6.2 million.4
  • In 2003, a settlement was reached between Lockheed and the United States government as a result of claims that Lockheed deliberately inflated the cost of four contracts for the purchase of navigation and targeting pods for military jets, in violation of the FCA.5 The relator alleged that Lockheed failed to provide current and accurate cost and pricing data to Air Force contract negotiators as required by the Truth in Negotiations Act.6Lockheed settled the lawsuit for $37.9 million.7

Northrop Grunman (“Northrop”)

  • In 2003, a settlement was reached between Northrop and the United States government as a result of claims that TRW, Inc., which was acquired by Northrop in 2002, fraudulently overcharged the Government on contracts with the Department of Defense and National Aeronautics and Space Administration.8 The relator accused TRW of shifting expenses from commercial jobs to government contracts, and falsely classifying other expenses in an effort to avoid reimbursement caps placed on research and development costs of government contracts.9 Northrop settled the lawsuit for $111.2 million.10
  • In 2009, a settlement was reached between Northrop and the United States government as a result of claims that Northrop, and its predecessor TRW, Inc., supplied and billed the National Reconnaissance Office for defective parts that were integrated into satellites.11 The relator alleged that Northrop made misrepresentations and concealed facts about the reliability of the parts.12 Northrop settled the lawsuit for $325 million, the largest qui tam settlement ever paid out by a defense contractor.13

Boeing

  • In 2000, a settlement was reached between Boeing and the United States government as a result of claims that Boeing placed defective gears in helicopters and then sold them to the Army.14 The relator alleged that Boeing violated the FCA when it sold to the army one hundred and forty helicopters equipped with defective gears.15 Boeing settled the lawsuit for $54 million.16
  • In 2009, a settlement was reached between Boeing and the United States government as a result of claims that Boeing performed defective work for the Air Force on KC-10 aircrafts.17 The relators together alleged that Boeing defectively installed blanket insulation kits in the aircrafts while performing depot maintenance in San Antonio, Texas.18 During the Government’s investigation, it was also discovered that Boeing overcharged for the installation. Boeing settled the lawsuit for $25 million.20

General Dynamics (“General”)

  • In 2008, a settlement was reached between General and the United States government as a result of claims that a subsidiary of General fraudulently billed the Government for parts used in Navy aircrafts and submarines.21 As a result of the investigation, the Government alleged that General Dynamics Armament and Technical Products, Inc. (“GDATP”), failed to properly manufacture or test various component parts made for use in aircrafts and submarines, and that GDATP billed the Navy despite knowing the components did not meet Navy requirements.22 General settled the lawsuit for $4 million.23

Raytheon Company (“Raytheon”)

  • In 2000, a settlement was reached between Hughes Aircraft (“Hughes”), a Raytheon subsidiary, and the United States government as a result of claims that Hughes failed to perform performance and acceptance tests on traveling wave tubes used in aircrafts and inflated labor hours billed to the Government.24 Hughes settled the lawsuit for $2.1 million.25

L-3 Communications (“L-3”)

  • In 2008, a settlement was reached between L-3 Vertex Aerospace, a subsidiary of L-3, and the United States government as a result of claims that L-3 submitted false and inflated claims to the Army for hours worked by employees on United States military operations in Iraq.26 The relator alleged that L-3 submitted false and inflated worked hour claims for employees at Camp Tiji, Iraq, from March 2004 through August 2005.27 L-3 settled the lawsuit for $4 million.28

Science Applications International Corporation (“SAIC”)

  • In 2005, a settlement was reached between SAIC and the United States government as a result of claims that SAIC submitted false claims and engaged in defective pricing on delivery orders with the Air Force for environmental clean-up at Kelly Air Force Base in San Antonio, Texas.29 The Government realleged the relator’s claim that SAIC padded cost estimates during contract negotiations with the Air Force by utilizing hidden management reserves to inflate its estimates on labor hours.30 SAIC settled the lawsuit for 2.5 million.

 

  1. Cong. Globe, 37th Cong., 3d Sess. 952 (1863).
  2. Id.
  3. Press Release, United States Department of Justice, Lockheed Martin & BAE Systems Controls to pay U.S. 6.2 Million to Settle False Claims Act Case (Sept. 18, 2002), available at http://www.justice.gov/opa/pr/2002/September/02_civ_533.htm.
  4. Id. 
  5. Press Release, United States Department of Justice, United States Announces Settlement of Lockheed Martin Case Alleging Mischarging on Government Contracts (Aug. 27, 2003), available at http://www.justice.gov/opa/pr/2003/August/03_civ_475.htm.
  6. Id. 
  7. Id.
  8. United States ex rel. Bagley v. TRW, Inc., 2000 WL 33400196, at *1-2 (C.D. Cal. Dec. 12, 2000).
  9. Press Release, United States Department of Justice, TRW Successor Firm to Pay United States $111 Million to Settle False Claims Act Case (June 9, 2003), available at http://www.justice.gov/opa/pr/2003/June/03_civ_343.htm.
  10. Id.
  11. Press Release, United States Department of Justice, Northrop Grumman Corp. Settles False Claims Act Case for Defective Satellite Parts (Apr. 2, 2009), available at http://www.justice.gov/opa/pr/2009/April/09-ag-305.html.
  12. Id. 
  13. Id. 
  14. Press Release, United States Department of Justice, Boeing to Pay U.S. for Selling Army Defective Helicopters (Aug. 3, 2000), available athttp://www.justice.gov/opa/pr/2000/August/450civ.htm.
  15. Id. 
  16. Id. 
  17. Press Release, United States Department of Justice, Boeing Company to Pay U.S. $25 Million to Resolve Allegations Related to Defective Work on KC-10 Aerial Refueling Aircraft (Aug. 13, 2009), available at http://www.justice.gov/opa/pr/2009/August/09-civ-798.html.
  18. Id.
  19. Id. 
  20. Id.
  21. Press Release, United States Attorney’s Office, The United States and General Dynamics Settle Civil Fraud Claims for Over $4 Million (Aug. 18, 2008), available at http://www.justice.gov/usao/nye/pr/2008/2008aug18.html.
  22. Id.
  23. Id. 
  24. Federal Contractor Misconduct Database, Raytheon Company, F-14 and F-15 Aircraft Contract False Claims Act Violationshttp://www.contractormisconduct.org/index.cfm/1,73,222,html?CaseID=209 (last visited Sept. 13, 2011); See also Department of Defense Inspector General Semiannual Report to the Congress (October 1, 1999 to March 31, 2000), p. 27, available at http://www.contractormisconduct.org/index.cfm/1,73,222,html?CaseID=209.
  25. Id.
  26. Press Release, United States Department of Justice, L-3 Communications Corp. Pays U.S. $4 Million to Settle Overbilling Allegations on Iraq War Contract (Dec. 8, 2008), available at http://www.usdoj.gov/opa/pr/2008/December/08-civ-1069.html.
  27. Id.
  28. Id. 
  29. Press Release, United States Department of Justice, Science Applications International Corp. to Pay $2.5 Million to Settle False Claims at Kelly Air Force Base in Texas (Apr. 27, 2005), available at http://www.usdoj.gov/opa/pr/2005/April/05_civ_224.htm.
  30. Id.
  31. Id. 

iAuthor of treatise, Federal False Claims Act and Qui Tam Litigation, Law Journal Press (2010), research source of the issues discussed in this article.

 

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