A recent federal appellate court held that there may be situations in which a contractor’s intentionally low bid for a federal contract could give rise to liability under the False Claims Act (FCA).

At issue in Hooper v. Lockheed Martin Corp., 2012 WL 3124970 (9th Cir) was the bid of Lockheed in 1995 to provide software and hardware support for space launch operations.  The contract was a cost reimbursement plus award fee contract.  Thus, Lockheed would be reimbursed its costs and would be paid a fee depending on the quality of its performance.  In evaluating Lockheed’s proposal the Air Force analyzed Lockheed’s proposed costs.  It found that while Lockheed’s proposal presented some “risks” that may lead to “cost growth beyond the target costs” outlined in the proposal, Lockheed’s proposal presented the best overall value to the Air Force.

The plaintiff whistleblower brought suit after being terminated by Lockheed in 2002.  He alleged, in relevant part, that Lockheed defrauded the government because it allegedly knowingly underestimated its costs in order to improve its chances of being awarded the contract.  Lockheed moved for summary judgment arguing that cost estimates could not be “false” under the FCA because, as statements of what costs might be in the future, they were inherently judgmental in nature.  Accordingly, they could not be “false statements” that would provide the basis for FCA liability.  The trial court agreed and granted Lockheed summary judgment.

The Ninth Circuit reversed this decision.  The court first found that a bidder could be liable under the FCA based upon a “fraud-in-the-inducement” theory, e.g. – the government was convinced to enter into an agreement based upon some fraud.  The cases creating this theory, as pointed out by the court, dealt primarily with bid rigging or other collusion between bidders.  The court then pointed to decisions from two other federal appeals courts holding the FCA should be broadly construed and, therefore, the statutory terms “false or fraudulent claim” should include cost estimates contained in solicitation responses.  The court noted that “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.’”  Given this analysis, the court concluded as a matter of first impression 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, assuming the other elements of an FCA claim are met.”

Having established this rule the court held that the trial court used the incorrect legal standard under the “knowledge” prong of FCA liability.  The court held that a jury must decide whether Lockheed had “actual” knowledge the information in its proposal was false or whether it acted with “deliberate ignorance” or “reckless disregard” regarding the truth of the information.  The record contained testimony from a Lockheed employee (not the plaintiff) that, after the Air Force initially stated Lockheed’s costs were too high, management asked the employee to lower the cost and resubmit the proposal even though from the employee’s perspective the reduction was not based upon any engineering judgment.  From the court’s perspective, this testimony may provide an issue of fact that Lockheed “knowingly” provided false information to the government. The court notably did not address how the government could have been fraudulently induced to award the contract to Lockheed.  The Air Force evaluated Lockheed’s revised cost proposal, noted that there was problems with some of its assumptions and that these could lead to cost escalation.  The government report also noted Lockheed’s proposal was not the lowest bid.  Despite all of this the government still concluded Lockheed provided the best value and awarded it the contract.  In this circumstance it is difficult to conclude how the government was defrauded into entering an agreement with Lockheed.

Hooper shows that a contractor may not be able to rely on the cost realism analysis performed by the government.  Moving forward, contractors should be careful to document the reasoning behind cost estimates submitted to the government in responding to a proposal.  This should include the business justification for the costs provided since there may be adequate reasons for proposing a lower cost.  Indeed, the Government recognized as such in amicus brief (a “bidder might believe that performing a certain project will lead to future, profitable business opportunities; or a contractor might decide it is in its interests to do a project at a loss in order to keep its employees employed, rather than have to lay them off.”) Thus, with the possibility of FCA liability based upon a “fraudulent inducement” theory, contractors must be diligent at the outset of an RFP response to document its justifications.