Delivery of Counterfeit Parts to DoD Sufficient to Frame Case as Domestic Application of the FCA, Even Though Fraud Originated in China; U.S. District Court for the Western District of New York No. 19-CV-339V, Charles Shi v. Moog Inc. and Moog Control System (Shanghai) Co. Ltd.

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The district court denied a motion to dismiss by defendants in a retaliation case alleging the company fired the plaintiff when he raised concerns that the firm knowingly used counterfeit, noncompliant parts while manufacturing aircraft for the Department of Defense as a subcontractor to Boeing. The defendants argued that because both the subcontractor and its parts supplier were located in China, the FCA had no extraterritorial effect. However, the court found the subcontractor was owned by a U.S. parent company, that the whistleblower was employed by the U.S. entity, and that the spare parts were ultimately intended for Boeing and DoD. Considering this, the court held the plaintiff had alleged enough domestic connections to frame this case as a domestic application of the FCA. The court also held that the plaintiff’s actions met the definition of protected activity, even though the plaintiff did not file a qui tam case, explaining that an investigation into suspected fraud is protected, even if the plaintiff has no knowledge of the FCA at all. The court found it reasonable to infer that the supplier’s provision of counterfeit parts would result in the defendants, Boeing, and DoD all being overcharged for noncompliant materials, and that DoD would decline to pay for aircraft that used these materials if it were aware of the fraud.

Plaintiff Charles Shi alleged that he was wrongfully terminated by Moog Control System (Shanghai) Co. Ltd. after raising concerns that the company was defrauding the government by falsely certifying that the parts it provided for U.S. military aircraft complied with relevant contractual and regulatory requirements. The defendants moved to dismiss, arguing that Shi had not demonstrated a link between the allegedly poor quality parts and the submission of false claims.

In June 2015, Shi discovered that Moog Shanghai, a Boeing subcontractor, was buying parts for U.S. military airplanes from a Chinese supplier that was cutting corners and hiding the fraud with false documentation. According to the complaint Suzhou New HongJi Precision Parts Co. Ltd. was passing along counterfeit parts to Moog at full price and falsifying documentation to create a false impression the parts met the necessary specifications. Specifically, Shi believed the parts were improperly manufactured, citing a patter of unapproved materials and processes, and a failure to properly document the source of materials used in production.

Concerned that the noncompliant parts could create safety issues, Shi reported the issue to his immediate supervisor, who refused to investigate. Shi then reported the issue to officials with Moog’s parent company, Moog Inc.. An internal investigation partially substantiated Shi’s concerns, but downplayed any impact on aircraft safety. The investigation discovered the false documentation, but suggested that the illegal practice was widespread among Chinese companies and not serious enough to warrant attention. The investigation also characterized the spare parts as minor, with no substantial impact on safety. Shi reported his concerns directly to Moog’s CEO and was fired soon after. As part of the termination, Shi was induced to sign a termination agreement stating that his firing was part of a corporate restructuring. The plaintiff filed this case, alleging he was fired in retaliation for raising his concerns.

Moog moved to dismiss, arguing that Shi had not adequately pled how poor quality parts from a parts supplier in China could lead to a fraudulent claim for payment on the United States. Moog also argued that it could not have retaliated against Shi because he did not adequately inform it of the possibility of litigation under the FCA. According to Moog, the crux of Shi’s complaint related to NHJ’s supposedly illegal and deficient manufacturing processes for commercial airplane parts it was supplying to defendants, and possible collusion between Zou and NHJ. Moog argued Shi was concerned only with the traceability of parts and potentially fraudulent documentation, not with false claims to the government. At most, Moog suggested Shi attempted to expose fraud on the company by NHJ and ensure compliance with FAA regulations, which the defendants argued was not FCA-related conduct.

Moog argued that Shi did not advise the company that he contemplated a qui tam action based on his inquiries, and therefore there could not be a retaliatory intent behind his firing. Finally, Moog argued that all the relevant events occurred in China, and that the FCA has no extraterritorial effect there.

As an initial matter, the court concluded that Shi met the test for a claim for retaliation. The court found no dispute that Shi was an employee of Moog Shanghai or that he was fired. The court also held that the parent-subsidiary relationship between Moog and Moog Shanghai rendered Shi an employee of the U.S. firm for Rule 12 purposes. The court also found no dispute that Shi’s actions addressing his concerns were lawful.

Finally, the court held that Shi’s actions were intended to stop a potential fraud, which is protected activity under the FCA, even absent a violation or qui tam lawsuit. The court noted that an employee doesn’t even need actual knowledge of the FCA for their actions to be considered protected activity. The relevant inquiry is whether an employee reasonably believes, and whether a reasonable employee in the same situation might believe, that a potential fraud was being committed.

In this case, the court found it reasonable to infer from the plaintiff’s allegations that NHJ wanted to be paid full price for substandard work, which would create a cascade effect in which Moog Shanghai, Moog, Boeing, and ultimately the Department of Defense would all pay full price for what they thought were military airplanes that met all required specifications. The court also found it reasonable to infer that if DoD knew about planes containing defective spoiler blocks then it either would not purchase the airplanes at all or would demand repairs and a significantly lower price. The court noted that Moog’s own internal investigation characterized NHJ’s activities as an illegal practice, and held that Shi’s actions to report his concerns fairly put the company on notice that he was aware of potential fraud and efforts to cover it up.

Under these circumstances, the court held that Shi successfully pled that he took steps to prevent fraud that could eventually lead to FCA litigation; that the defendants were aware of plaintiff’s efforts no later than the start of the internal investigation; and that the defendants fired plaintiff because he took his concerns all the way up to the parent company’s CEO.

Next, the court rejected the defendant’s assertion that the FCA did not apply because Moog Shanghai is based in China. To survive the motion to dismiss, Shi had to demonstrate either (1) that the facts alleged in his complaint state a domestic application of the antiretaliation provision of the FCA, or (2) that the antiretaliation provision is intended to apply extraterritorially. The court held that Shi satisfied the former. As the court noted, there was no dispute that Shi worked for Moog Shanghai or that Moog Shanghai is a subsidiary of U.S.-based Moog Inc. Shi reported to Moog’s headquarters in Elma, New York. While the counterfeit parts originated in China, Boeing and the Department of Defense were the ultimate customers. The court reasoned that in an era of increasingly global supply chains, the origin of raw materials or components should not alone decide the territoriality of a claim under the FCA. Some consideration should be given to how the United States government purchases defective finished goods at full price and how those defective goods can have catastrophic consequences in the United States.

The court also noted that the investigation into Shi’s concerns was run out of Moog’s U.S. headquarters and that Shi eventually brought his investigation to the attention of Moog’s U.S. CEO. The court held that Shi had alleged enough domestic connections to frame this case as a domestic application of the FCA.

FCA Charles Shi v Moog