A district court has allowed a False Claims Act case against a defense military helicopter manufacturer to proceed, finding the relators adequately alleged the defendants inflated the company’s commercial pricing when negotiating contracts with the Army and knowingly concealed pricing information on numerous occasions. While the relators did not identify specific requests for payment, the court found they had direct knowledge of the submission of false claims through their work. The court agreed the relators did not sufficiently plead their implied certification theory, but granted their request for leave to amend to allege specific representations in claims for payment submitted to the government.
The court also found the relators plausibly alleged the firm was aware of its violations, because it actively withheld or falsified commercial pricing the Army requested and worked to steer a sale to a foreign government through the Army as a foreign military sale, to conceal its commercial price. The court also allowed claims of conspiracy to violate the FCA to proceed, finding the relators adequately alleged the firm’s CEO used an offer of employment to coerce a government employee into helping the company win contracts, conceal its commercial pricing, and negotiate terms that were less than favorable to the government.
Defendants MD Helicopters Inc., Patriarch Partners LLC, Lynn Tilton, and Colonel Norbert Vergez collectively moved to dismiss a qui tam complaint alleging they violated the False Claims Act in relation to five separate contracts to provide helicopters to the Army.
Relators Philip Marsteller and Robert Swisher alleged their former employer submitted false claims and made materially false statements in the process of obtaining the contracts and conspired to violate the FCA. The government declined to intervene and the case was initially dismissed when the district court concluded the relators had not adequately pleaded the defendants had violated an express condition of payment.
However, during the pendency of the relators’ appeal, the Supreme Court issued its decision in Escobar, which rejected the contention that the implied certification theory only applies when a government contract expressly designates a requirement as a condition of payment. In light of Escobar, the Eleventh Circuit vacated this court’s judgment and remanded for further proceedings. The defendants again moved to dismiss.
At issue are five contracts awarded to MD by the Army’s Non-Standard Rotary Aircraft Project Office. The first contract was awarded competitively and the following four were awarded on a sole source basis.
The relators alleged that when MD submitted its proposal for the first contract, it misrepresented its base commercial price for each of its standard helicopters by several hundred thousand dollars. In support, the relators argued that MD’s CFO provided Tilton, the company’s CEO, with a financial statement showing the helicopters cost $2.1 million and that Tilton stated that price was way too low.
During this period, defendant Vergez served as the project manager for NSRWA, where he was involved in issuing, selecting, negotiating, pricing, and awarding the contracts at issue. After Vergez notified MD of the award decision for the first contract, the relators allege Tilton began to cultivate a relationship with Vergez as a potential future employee and to influence him to award future contracts to MD by offering him a lucrative job well before his retirement. The relators allege Vergez knew Tilton intended to offer him employment. After the Army agreed to pay $2.3 million per helicopter, MD sold the same model helicopter to three different commercial customers for the base price of $1.9, $1.9 and $1.55 million. According to the relators, MD continually failed to disclose certain commercial sales to the Army, which prevented the Army from negotiating a lower price.
When MD was awarded the subsequent sole source contracts, it continued to maintain that its base price was based on commercial pricing. The relators alleged that by this time, Vergez had begun to actively promote MD to the Army. During a meeting with Deputy Assistant Secretary of Defense Gary Reid, Tilton gave Reed a model of an MD trainer helicopter worth hundreds of dollars, and Colonel Vergez directed MD to prepare a false invoice showing that the model was valued at $12.99. After the second sole-source contract was awarded, Vergez informed the Army that MD had offered him employment.
The relators alleged MD and Tilton continued to conceal their commercial pricing through various means during the process of obtaining the subsequent sole source contracts. Finally, at the time MD was seeking the final of the five contracts, Marsteller became award that MD was not quoting its accurate commercial pricing to the Army. Marsteller raised his concerns with a sales executive, suggesting that MD was required to provide the Army its best price and that doing otherwise was illegal. The executive raised the issue with Tilton, who affirmed the prices provided to the agency. The relators alleged MD failed to provide the Army with all the necessary historical commercial pricing data and that the Army overlooked this failure due to the close working relationship between Vergez and Tilton. During this period, Vergez retired from the Army and accepted an offer to direct MD’s Civil and Military Programs.
When the Eleventh Circuit sustained the relators’ appeal, it directed the district court to reconsider whether the complaint alleged sufficient facts to support a theory of implied certification as articulated in Escobar.
The relators pled that each of the contracts incorporated FAR 52.203-03 and 13, and that MD violated those provisions by concealing credible evidence of violations of federal law and by failing to make other disclosures required by the FAR.
In response, the defendants argued that the relators failed to allege that MD made any specific misrepresentations in a claim for payment or that MD submitted any invoices or other payment requests. However, the court noted that allegations regarding specific invoices and payment requests are not required to state a plausible FCA claim, and a complaint may satisfy the requirements of Rule 9(b) when the relator alleges direct knowledge of the defendants’ submission of false claims based on her own experiences and on information learned in the course of employment.
In this case, the relators are MD’s former director of sales and marketing and its director of military business development, and they allege that the Army awarded MD specific contracts for defined amounts and that MD received payments. The court explained these allegations supported a reasonable inference that MD submitted a claim for payment under the contracts. Therefore, the court found the relators plausibly alleged the submission of a false claim.
Next, the defendants argued the complaint failed to allege any specific representations MD made in a claim for payment. In response, the relators argued that every invoice for payment would have referenced MD’s contractor number and the government’s contract number, which was inherently a representation that MD met all requirements for payment under the contract. The relators also argued that MD’s representation was a half-truth because it omitted and failed to disclose that MD and Tilton had violated certain statutory and/or contractual provisions bearing on the essence of the government’s bargains.
The court agreed with the defendants that the complaint lacked an allegation that MD submitted such invoices. However, the court granted the relators’ request for leave to amend to allow them to replead. To ensure that amendment would not be futile, the court the defendants’ remaining arguments.
Next, the defendants argued the relators failed to adequately allege a violation of FAR 52.203-13, which governs ethical conduct and requires a contractor to disclose to the government credible evidence of fraud or criminal activity. The defendants argued that Vergez was not an employee at the relevant time and therefore no conflict of interest existed. They also argued that failing to disclose instances of providing transportation to Vergez or the gift of the model helicopter do not rise to the level of a FAR violation.
However, the court found this argument ignored the fact that Tilton offered Vergez lucrative employment to coerce him into acting in MD’s interests while employed by the Army, that Vergez knew Tilton intended to hire him, and that Tilton bragged to MD employee’s that Vergez “got us this contract.” In addition, the relators alleged MD knowingly submitted inflated pricing information and bids, which could be materially false statements. The court held the relators plausibly alleged violations of FAR § 52.203-13 in connection with the contracts and alleged payments at issue.
Next, the defendants argued the alleged violations were not material to the Army’s decision to pay its invoices, because there was no evidence the Army halted payments to other contractors under similar circumstances or stopped payments to MD after learning of the allegations. However, the court explained that these factors are relevant but not required for a finding of materiality. As the relators argued, the allegations go to the essence of the government’s bargain, and compliance with the laws and the relevant provisions are a condition of payment. Other courts have found that price is an unambiguously material condition under the FCA. Moreover, the government’s decision to pursue criminal charges against Vergez indicated that the government considers the allegations material.
The court also explained that it must examine the government’s choice to continue payments in context. MD had already delivered some of the helicopters when the Army learned of the alleged violations and the extent to which the government could have ceased payments under such circumstances is not clear. Further, while the government exercised an option for additional helicopters under one contract, neither party cited evidence regarding the price per helicopter, or whether MD and the government may have negotiated a different, lower price than they agreed to in the initial contract.
Because amending the complaint to correct the deficiencies noted above would not be futile, the court granted the relators leave to amend.
Next, the relators argued the defendants fraudulently induced the government to enter into the contracts. The Eleventh Circuit found the complaint could support multiple theories of fraud in the inducement, explaining that the allegations could be read to support a view that MD’s promises to comply with various laws and regulations were false. The complaint also supported a finding that the incomplete pricing data submitted by MD induced the government to enter into contracts for which it could have received better pricing and terms, had it been provided complete information. The complaint also alleged MD withheld information even after the Army requested it and knowingly submitted false pricing. Therefore, the court held the relators had plausibly pleaded that MD fraudulently induced the government to pay more than it would have.
The relator also alleged MD knew its agreement to comply with that provision was material to the government’s payment decision under the contracts, that a refusal to comply would have rendered MD’s bid or proposal ineligible for a contract award, and that MD had no intent of complying with the FAR provision. The defendants argued the pleading was insufficient, but the court disagreed. While MD was correct that the alleged violations of § 52.203-13 are not sufficient to establish that it never intended not to comply with the provision when it entered into the contracts, the court noted MD overlooked relevant allegations, including that MD knowingly submitted inflated bids and incomplete pricing, groomed Vergez as a future employee, and bragged that Vergez “got the contract” for MD. Further, Vergez actively promoted MD and worked with MD to conceal the actual commercial price of the helicopters. The court found these allegations sufficient.
Next, the defendants argued the relators did not adequately allege MD knowingly violated the FCA but again the court disagreed. The relators alleged Tilton herself said MD’s initial price to the Army was too low because it failed to reflect an upcharge and that MD continued to misrepresent its pricing. The relators also alleged that MD and Vergez worked to ensure that a sale to Costa Rica was processed through the Army as a foreign military sale in order to conceal the commercial price of the aircraft. The relators also plausibly argued Vergez’s conflicts of interest. The court held the relators plausibly alleged MD violated laws regarding bribery and false statements and failed to disclose them.
Next, the court considered whether the relators had adequately pled the defendants conspired to violate the FCA. The court noted the complaint failed to allege that Patriarch had any involvement with the contracts or the submission of any claim, and therefore dismissed claims against Patriarch. The defendants argued that Tilton could not conspire with MD because she served as its CEO, but the court noted the conspiracy was between MD and Tilton and Vergez, while he was still employed by the Army. The court also held the relators pled sufficient facts as to the relationship between Tilton and Vergez prior to his retirement and Vergez’s failure to disclose this relationship.FCA US v Tilton