Recently, in the case of Nyle J. Hooper v. Lockheed Martin Corp., the U.S. Court of Appeals for the Ninth Circuit ruled for the first time that underbidding or making false estimates in bids or proposals submitted in response to federal government solicitations may constitute violations of the False Claims Act. The agencies administering Federal contracts are in-creasingly insistent on enforcement of the requirement. The stated rationale is to assure the general contractor’s "adequate interest and supervision of the work."
In the Hooper case – a qui tam action filed by a former Lockheed Martin senior project engineer – Lockheed Martin allegedly defrauded the U.S. Air Force by intentionally underbidding on a cost reimbursement plus award fee contract that required it to install hardware and software to support space launch operations at Cape Kennedy in Florida and Vandenberg Air Force Base in California. Specifically, Hooper claimed that Lockheed Martin instructed its employees to lower Lockheed Martin’s bids by almost half to improve its chances of winning the contract. Lockheed Martin was awarded the contract based on a bid of $432.7 million. By the time the court case was instituted, it had requested and been reimbursed over $900 million for its work on the contract, according to the Ninth Circuit’s opinion.
Lockheed Martin argued that "[e]stimates of what costs might be in the future are based on inherently judgmental information, and a piece of purely judgmental information is not actionable as a false statement." The Ninth Circuit disagreed, stating that "[a]s a matter of first impression, we conclude 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 [False Claims Act], assuming that the other elements of a [False Claims Act] claim are met."
Having determined that False Claims Act liability may be premised on false estimates, the Ninth Circuit held that "there is a genuine issue of material fact whether Lockheed acted either knowingly, in deliberate ignorance of the truth or in reckless disregard of the truth when it submitted its bid." The Ninth Circuit’s holding was based on testimony of Lockheed Martin employees who said that they were instructed to lower their estimate of costs, without regard to actual estimated costs, and that Lockheed Martin was "dishonest" in the productivity rates used to estimate costs for the contract. In addition, the Ninth Circuit cited the Air Force’s own analysis of Lockheed Martin’s bid which stated that the bid was "optimistic about some of its inputs . . . , resulting in an overstated potential for cost savings."
Contractors should heed the warning of the Hooper case: false statements and representations made in connection with bids or proposals may – in the right circumstances, such as the extreme allegations by the Hooper qui tam plaintiff – form the basis for liability under the False Claims Act, despite the lack of a formal contract with the governmental entity at the time such statements or representations are made.