On November 18, 2010, the Sixth Circuit Court of Appeals affirmed a trial court’s post-trial judgment finding of liability under the FCA against United Technologies, but reversed the portion of the judgment finding no damages as to United Technologies. United States v. United Technologies Corp., No. 08-4256 (6th Cir., Nov. 18, 2010).
Until 1983, Pratt and Whitney (a United Technology subsidiary) was the exclusive supplier of engines for F-15 and F-16 fighter jets to the United States Air Force. In 1983, the Air Force sought to expand its sources for these engines and solicited bids for supply contracts from both Pratt and General Electric, the only firms capable of supplying such engines at the time. Hoping that the Air Force would continue to rely on it exclusively, Pratt made certain false statements about its cost estimates in its bid submissions that were specifically intended to suggest that, the larger the percentage of engine requirements awarded to Pratt, the lower Pratt’s costs would be. After an extensive negotiation process, the Air Force decided to divide its engine requirements between the two firms, and awarded them each 6-year contracts that provided the Air Force with the option – renewable on an annual basis – to purchase a certain number of engines annually from each firm. Pratt’s contract commenced in October 1984. After the initial award, however, the Air Force renegotiated its contract with Pratt several times. For instance, before the contract period even commenced, Pratt lowered the prices to the Air Force on the warranties on the engines. The Air Force also requested improvements on the contract each year before renewing its option. Pratt responded to these requests by offering price concessions and other contract improvements each year throughout the six years of the contract.
Near the end the contractual 6-year period, an Air Force auditor uncovered notes by Pratt executives detailing Pratt’s plans to manipulate the cost figures in its bid submissions to obtain an exclusive contract. However, the Air Force took no further action at that time. The DOJ performed a separate investigation in 1997, in which auditors uncovered the false statements in Pratt’s bid submissions. Even then, however, it waited until March 1999 to commence a False Claims Act case against Pratt and United Technologies. In its suit, the United States only sought damages for FCA violations arising after March 1989.
After a trial on the merits, the district court found that United Technologies was liable for 709 FCA violations, a number that corresponded to number of invoices Pratt submitted to the United States between March 1989 and the end of the contract period. However, the district court found that the United States had not suffered any damages because, as a result of the numerous renegotiations, the amounts the Air Force paid Pratt for engines from March 1989 to the end of the contract were considerably lower than the amounts Pratt had quoted in its original bid submission that contained the false statements. Both United Technologies and the United States appealed.
On appeal, United Technologies argued that the United States’ claims were barred because the only false statements made by Pratt occurred in 1983, sixteen years before the United States filed suit, and that the only “claims” that could possibly be construed as occurring within the statute of limitations were invoices that contained no false statements. The Sixth Circuit rejected this argument. It held that invoices that contained no false statements or representations could still be deemed “false claims” for the purposes of FCA liability if they arose from a government contract that resulted from fraudulent bidding. The Sixth Circuit further held that the United States’ claims for invoices that were submitted within the statute of limitations period were timely, regardless of when the actual false representations were made.
United Technologies also argued that the invoices it submitted from March 1989 until the end of the contractual period were not “false claims” because the prices were not based on the false statements contained in its original bid submission, but were rather the result of extensive renegotiations that occurred each year of the contract before the Air Force exercised its option to renew the contract. The Sixth Circuit rejected this argument as well. It reasoned that reliance was not an element of the False Claims Act so the fact that the Air Force did not rely on the false statements when paying the invoices was not relevant. It further reasoned that the false statements were material because they were capable of affecting the Air Force’s decision to enter into the contract in the first place.
The Sixth Circuit also reversed the trial court’s finding that, because the prices the Air Force paid for the engines were lower than the prices contained in the original bid submission, the United States had not suffered any damages. The Sixth Circuit remanded the damages issue with instructions that the trial court should calculate damages by finding the difference between what the Air Force did pay for Pratt for the engines, and the “fair market value” of the engines. If the prices the Air Force paid were at or below the “fair market value” of the engines, then the trial court could enter a finding of no damages. If, however, they were above the “fair market value” United Technologies would be liable for the difference. Wikipedia reports that between 1976 and today, only approximately 4,400 F-16 fighters were built. Given the small market for jet engines for F-15 and F-16 fighter jets, it will be interesting to see the results of the fair market value calculation on remand.