A New Jersey district court granted L3 Harris Technologies’ motion to dismiss a qui tam complaint alleging that L3 billed the government for independent research and development work performed for a different customer. The case turned on the cost accounting standards governing IR&D and whether anyone at L3 knew that certain work was specifically requested by a customer.
United States District Court for the District of New Jersey, No. 11-cv-3385; U.S. ex rel. James Steuert v. L3 Harris Technologies F/K/A L-3 Communications Corporation
In brief
A New Jersey district court granted L3 Harris Technologies’ motion to dismiss a qui tam complaint alleging that L3 billed the government for independent research and development work performed for a different customer. The court began its analysis with a review of federal regulations and cost accounting standards regarding IR&D, finding that they allow contractors to bill certain IR&D work across multiple contracts and customers. The relator alleged that the work billed to the government was specifically required by the other customer and therefore was not properly designated as indirect IR&D costs, but the court found the relator had not demonstrated scienter. The court found no evidence that anyone at L3 knew both elements of the alleged fraud: that the work billed to the U.S. was specifically required by the other customer and that the submission of related billings would be fraudulent. While the relator alleged that internal reviews “should have” occurred and that certain executives “would have” known the billings were improper, the court found these allegations fell well below the standard needed to demonstrate scienter.
The complaint
Relator James Steuert filed a qui tam case alleging that L3 Harris Technologies defrauded the United States in connection with a contract with the Royal Australian Navy. L3 moved to dismiss, challenging the complaint on the scienter element.
Steuert worked for L3 as a software engineer, developing ship-based radio systems for the U.S. Navy. In January 2008, L3 received a subcontract from the Royal Australian Navy to provide a modified version of this system. Steuert worked on the modifications for the RAN contract. According to the relator, an L3 software manager directed staff to bill the related work to an unrelated project, which was then billed to the United States government as independent research and development work. The relator alleged that L3 billed the government more than $10 million for devices and customization work used exclusively for the RAN contract.
The relator provided internal documentation showing that RAN was the requesting customer, even though the work would be billed to the project assigned to the federal government. He also provided the names of the manager who directed the allegedly fraudulent billings and of the employees who billed RAN contract work to the U.S. government. He also alleged that the scheme could not have been implemented without the approval of the vice president of engineering, who would have consulted with L3’s compliance office before making such a decision.
Independent Research and Development costs
To determine whether L3 fraudulently billed the government for its research and development of the modification work needed to fulfill the RAN contract, the court first examined the nature of IR&D work. Under standard IR&D procedures, contractors can charge their clients for R&D that is likely to benefit multiple clients and to spread those costs across multiple contracts. For example, if a contractor produces an item that requires modification for each distinct client, the contractor may charge a customer IR&D costs for both the customization work and a portion of the work developing the standard components. This prevents a scenario in which the first customer pays for the entirety of research and development that benefits multiple future customers.
The FAR and the federal Cost Accounting Standards define IR&D as excluding costs that are required in the performance of a contract. The Federal Circuit has interpreted this language as meaning “costs that are specifically required by the contract.”
The scienter element
L3 argued the relator had not alleged scienter, because he had not shown that L3 knew that the work billed to the U.S. government was “specifically required” by the RAN contract.
While the relator argued that L3 falsely billed the U.S. government for work performed for the RAN, the court explained that the IR&D regulations—not the relator’s belief—governed the issue. According to the court, L3’s IR&D claims to the government were not “false” simply because the RAN informally requested or benefitted from the work underlying the claims. Instead, the question was whether the worked that generated the IR&D bills to the government was “specifically required by” the RAN Contract. Therefore, the question of scienter turned on whether L3 knew that the work billed to the government was specifically required by the RAN contract, or whether it reasonably believed that the work was covered by IR&D standards that allowed for billing across multiple contracts.
The court’s conclusion
The court found that the relator had not adequately alleged scienter. The court found that the complaint did not identify anyone at L3 who knew that the company billed the government for RAN work and that the billing was improper. The court found no specific evidence that the vice president of engineering approved the billing procedures or that the compliance office had been consulted on the issue. While L3 policy suggests this consultation and approval is required, the relator did not show that it actually happened. The court found it insufficient for the relator to allege that the vice president “must have known” about the billing based merely on his corporate position. The complaint also did not show that the compliance office knew that the work billed to the U.S. government was “required by” the RAN contract, which would render the billings false.
Second, while the relator alleged that a manager directed staff to bill in this manner, the complaint did not allege that the manager knew that this billing would result in false claims. The court found no direct or circumstantial evidence that would permit this inference.
Finally, the court held that the internal presentation identifying RAN as the requesting customer did not support the claims. The complaint did not say who drafted, approved, or saw the presentation. Without any circumstantial information about the creation or distribution of the presentation, the court could not impute knowledge of the work to be performed for the RAN to L3.
The court dismissed the case, but granted the relator leave to amend.
