August 16, 2012

Appeals Court Rules that "False Estimates" and "Fraudulently Low Bids" Are Basis for False Claims Act Liability

Holland & Knight Government Contracts Blog
Terry L. Elling

In a decision issued earlier this month (Hooper v. Lockheed Martin Corporation, D.C. No. 2:08-cv-00561-DSF-FMO, __ F.3d __ (9th Cir., August 2, 2012), the U.S. Court of Appeals for the Ninth Circuit held that "false estimates" or "fraudulently low bids" that are alleged to have induced the government to award a contract can be a basis for liability under the False Claims Act (“FCA”).  The Ninth Circuit reversed a district court decision granting summary judgment in the contractor's favor, even though the information available indicates that: the contractor's cost proposal was not the lowest the government received; the contractor reduced its cost proposal in response to government direction that the proposed cost was too high; the government's detailed cost realism analysis questioned some aspects of the cost estimates but ultimately found the proposal to be realistic; and, a contractor employee with direct knowledge of the circumstances did not believe the estimates were false.

The decision highlights the importance of ensuring that contractors document and are able to support the data and assumptions upon which cost or price proposals are based, and that they may face liability under the FCA if they are unable to do so in response to allegations that their data or estimates are false or misleading.  The decision is both concerning and instructive for government contractors who are under pressure to submit cost and price proposals that are as competitive (i.e., as low cost/price) as possible to procure new work.

Before the district court, Lockheed Martin had argued that the estimates that supported its proposal for software and hardware services to support space launch operations at Vandenberg Air Force Base and Cape Kennedy under a cost-plus award fee contract could not, as a matter of law, serve as a basis for FCA liability because estimates are by their nature only a form of opinion or judgment and, as such, cannot be said to be false statements.  The district court did not address Lockheed Martin's argument, but instead found that the relator had presented insufficient evidence to create an issue of material fact concerning the falsity of the estimates. 

On appeal, the Ninth Circuit reversed and found that estimates supporting bids or proposals may afford a basis for FCA liability where they are submitted with either knowledge of, or reckless disregard for, their inaccuracy under a "fraud in the inducement" theory.  The Ninth Circuit further found that the district court had applied an incorrect legal standard with regard the FCA's knowledge element and that were sufficient issues of fact to preclude summary judgment.

The Ninth Circuit reached its decision based on its finding that the relator's allegations indicating that Lockheed Martin personnel were instructed to arbitrarily reduce certain cost estimates as sufficient to raise an issue of fact, notwithstanding that the record apparently contained uncontradicted evidence that:

  • Lockheed Martin was not the lowest cost offeror, and reduced its cost proposal after being told by the Air Force that its original proposal was too high.  Further, Lockheed Martin reduced its estimated cost of $439.2 million in its original proposal to $432.7 million in its Best and Final Offer, a reduction of only about 1.5%.  
  • The Air Force's extensive cost realism analysis, conducted in part with independent contractors, questioned a number of Lockheed Martin's cost estimating assumptions but ultimately found that its proposed costs were fair and reasonable.
  • A Lockheed Martin employee who worked on the cost estimates at the time they were submitted stated that the inputs used to determine the final cost proposal represented "bad, bad guesses," but were not false.  The relator was not even employed by Lockheed Martin at time the initial and final proposals were submitted in 1995.

This decision highlights for government contractors the importance of ensuring (and documenting) the accuracy of cost and price submissions to the government, as well as the importance of clearly documenting any assumptions or judgments upon which cost estimates are based.

Although Hooper involved the submission of allegedly false estimates submitted to the government to support a below-cost proposal under a cost-type contract, the "fraud in the inducement" theory embraced by the Ninth Circuit, as well as by the U.S. Supreme Court and other appellate courts whose decisions are cited in Hooper, has potentially broad application. 

For example, contractors could conceivably face potential FCA liability for submitting inflated cost or price estimates in order to negotiate a higher price under a fixed-price contract.  Under the Hooper court’s analysis, the fact that the government agency directed or influenced the contractor to reduce its price or proposed costs will likely be irrelevant if the contractor can be shown to have submitted false estimates or fraudulently low (or high) bids.  Moreover, under the civil FCA, it is not required that the contractor have any specific intent to defraud the government -- all that need be shown is that the contractor acted with reckless disregard for the accuracy of the cost or price information that it submitted to the government. 

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