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Reflections on a Defense Giant’s Derelictions

Defense contractors have been shielded from whistleblower actions in the US. Until recently, that is, says Reuben Guttman.

Rarely does the United States hold its defense contractors accountable in noticeable ways. Though there has been a lot of action under the Federal False Claims Act (FCA), the statute that allows whistleblowers to bring suit against wrongdoers in the name of the government, many of the big dollar recoveries in recent years have been against pharmaceutical companies. Yet, after years of litigation, on June 17, the United States District Court for the Southern District of Ohio awarded the United States over $473 million in damages against United Technologies Corporation (UTC).

False statements

The Court previously found that UTC’s predecessor in interest, Pratt and Whitney (Pratt), violated the False Claims Act (FCA) when it made three false statements in its multiyear contract offer to produce F-15 and F-16 fighter jet engines. Yet, the Court held that the government suffered no damages as a result of this violation and that the government’s common law claims were precluded by previous litigation in front of the Board of Contract Appeals. The United States Court of Appeals for the Sixth Circuit upheld the finding of liability, but ordered the District Court to re-evaluate its damages calculation and held that the common law claims were not precluded.

Evaluating damages

When re-evaluating its damages calculation, the District Court undertook a three step process. First, it determined what the government eventually paid each year of the Fighter Engine Contract.

Secondly, to determine what the government should have paid each year, the District Court determined the market to be a government-regulated market and adopted the government’s accounting expert’s testimony that the Court should remove the amounts the government proved it paid as a result of UTC’s fraud in each of the contract years and add back any amounts UTC proved in each year as an offset.

Finally, the District Court determined whether the total amount of damages should be reduced by the reductions in the price of the warranty on the engines that were made in Pratt’s best and final offer.

The District Court held that United Technologies could not prove any offsets and so it accepted the government expert’s analysis of the amounts the government paid as a result of the fraud. It also held that the total amount of damages should not be reduced by the warranty price reductions because the warranty price was arrived at through an arms-length negotiation.

Statute of limitations

As a consequence of the FCA’s statute of limitations, six years from the date of government knowledge of the elements of the claim but in no event more than 10 years, the District Court calculated the damages for the first three and a half years as common law damages and applied the interest rates published by the Treasury in the Current Value of Funds Rate. As for the years that were not barred by the FCA’s statute of limitations, the District Court accepted the government’s election of the FCA’s remedy of treble damages plus penalties.

The tolling rule

And what about the tolling rule? In 2013, in a case US ex rel. Carter v. Halliburton Co, the United States Court of Appeals for the Fourth Circuit held that the Wartime Suspension of Limitations Act (WSLA) applied to cases brought under the False Claims Act. The WSLA tolls the statute of limitations during times at which the United States is at war. If the WSLA were applied to this case, it is possible that the FCA’s treble damages could apply to all of the years in the Fighter Engine Contract, but this is unlikely.

The Supreme Court has held that the WLSA applies only to offenses committed after the triggering clause and before the termination of hostilities in another case United States v. Smith. The Fighter Engine Contract covered the years 1985 to 1990 and FCA treble damages were applied to all violations after March 3, 1989. The violations that occurred between 1985 and March 1989 occurred prior to a WSLA “triggering event” – such as the Gulf War that started in 1991; as a result the WSLA tolling provisions likely do not apply.

Notwithstanding that the WSLA was not applied, the District Court’s damage awards follow the Sixth Circuit’s instruction that “damages under the [FCA] typically are liberally calculated to ensure that they ‘afford the government complete indemnity for the injuries done it.’’

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